Exhibit 99.1
FSP Forest Park IV Corp.
Financial Statements
May 31, 2003, December 31, 2002, 2001 and 2000
Table of Contents
Page
----
Financial Statements
Independent Auditor's Report................................................. 1
Balance Sheets as of May 31, 2003, December 31, 2002 and 2001................ 2
Statements of Operations for the period ended May 31, 2003 and the
years ended December 31, 2002, 2001 and 2000........................... 3
Statements of Changes in Partners' Capital/Stockholders' Equity for the
period ended May 31, 2003 and the years ended
December 31, 2002, 2001 and 2000....................................... 4
Statements of Cash Flows for the period ended May 31, 2003 and the
years ended December 31, 2002, 2001 and 2000........................... 5
Notes to Financial Statements............................................. 6-13
Schedule of Real Estate and Accumulated Depreciation..................... 14-15
[LETTERHEAD OF BRAVER AND COMPANY, P.C.]
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
FSP Forest Park IV Corp.
(a Delaware Corporation)
We have audited the accompanying balance sheets of FSP Forest Park IV Corp. (a
Delaware Corporation) as of May 31, 2003, December 31, 2002 and 2001, and the
related statements of operations, changes in partners' capital/stockholders'
equity and cash flows, as well as the financial statement schedule listed in the
accompanying index, for the period ended May 31, 2003 and each of the three
years in the period ended December 31, 2002. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements and financial statement schedule are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements and financial statement schedule. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial statement schedule
referred to above present fairly, in all material respects, the financial
position of FSP Forest Park IV Corp. as of May 31, 2003, December 31, 2002 and
2001, and the results of its operations and its cash flows for the period ended
May 31, 2003 and each of the three years in the period ended December 31, 2002,
2001 and 2000 in conformity with accounting principles generally accepted in the
United States of America.
As described in Note 3 to the Financial Statements, effective June 1, 2003, the
Company merged with Franklin Street Properties Corp., the sole shareholder of
the Company's common stock.
/s/ Braver and Company, P.C.
Newton, Massachusetts
July 11, 2003
1
FSP Forest Park IV Corp.
Balance Sheets
May 31, December 31, December 31,
(in thousands, except shares and par value amounts) 2003 2002 2001
=====================================================================================================
(REIT) (REIT) (REIT)
Assets:
Real estate investments, at cost:
Land $ 1,210 $ 1,210 $ 1,210
Buildings and improvements 5,171 5,171 5,171
- -----------------------------------------------------------------------------------------------------
6,381 6,381 6,381
Less accumulated depreciation 498 443 310
- -----------------------------------------------------------------------------------------------------
Real estate investments, net 5,883 5,938 6,071
Cash and cash equivalents 261 347 199
Cash-funded reserve 650 656 656
Step rent receivable -- 138 111
Prepaid expenses and other assets 6 6 5
Deferred leasing commissions,
net of accumulated amortization of $23, $19 and $9 24 28 37
- -----------------------------------------------------------------------------------------------------
Total assets $ 6,824 $ 7,113 $ 7,079
=====================================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses $ 165 $ 172 $ 35
Dividends payable 102 134 143
- -----------------------------------------------------------------------------------------------------
Total liabilities 267 306 178
- -----------------------------------------------------------------------------------------------------
Commitments and Contingencies:
Stockholders' Equity:
Preferred Stock, $.01 par value; 78 shares
authorized, issued and outstanding -- -- --
Common Stock, $.01 par value; 1 share
authorized, issued and outstanding -- -- --
Additional paid-in capital 7,006 7,006 7,006
Retained deficit and dividends in excess of earnings (449) (199) (105)
- -----------------------------------------------------------------------------------------------------
Total Stockholders' Equity 6,557 6,807 6,901
- -----------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 6,824 $ 7,113 $ 7,079
=====================================================================================================
See accompanying notes to financial statements.
2
FSP Forest Park IV Corp.
Statements of Operations
For the For the
Period Ended Years Ended
May 31, December 31,
(in thousands, except shares and per share amounts) 2003 2002 2001 2000
==================================================================================================================
(REIT) (REIT) (REIT) (Limited
Partnership)
Revenue:
Rental $ 228 $ 863 $ 852 $ 661
- ------------------------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 133 181 175 155
Depreciation and amortization 59 142 139 124
Real estate taxes and insurance 40 70 63 57
- ------------------------------------------------------------------------------------------------------------------
Total expenses 232 393 377 336
- ------------------------------------------------------------------------------------------------------------------
(Loss) income before interest income (4) 470 475 325
Interest income 3 17 33 69
- ------------------------------------------------------------------------------------------------------------------
Net (loss) income $ (1) $ 487 $ 508 $ 394
==================================================================================================================
Weighted average number of preferred shares outstanding,
basic and diluted 78 78 78 78
==================================================================================================================
Net income per preferred share, basic and diluted $ (13) $6,244 $6,513 $5,051
==================================================================================================================
See accompanying notes to financial statements.
3
FSP Forest Park IV Corp.
Statements of Changes in
Partners' Capital/Stockholders' Equity
For the Period Ended May 31, 2003 and the
Years Ended December 31, 2002, 2001 and 2000
Retained Deficit Total
Additional and Dividends Partners' Capital/
Preferred Common Paid in in Excess of Stockholders'
(in thousands, except shares) Stock Stock Capital Earnings Equity
==========================================================================================================================
Balance, December 31, 1999 $ -- $ -- $ -- $ -- $ 7,178
Distributions -- -- -- -- (566)
Net Income -- -- -- -- 394
- --------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 $ -- $ -- $ -- $ -- $ 7,006
==========================================================================================================================
January 1, 2001 $ -- $ -- $ -- $ -- $ --
Exchange Partnership Units for Shares -- -- 7,006 -- 7,006
Dividends -- -- -- (613) (613)
Net Income -- -- -- 508 508
- --------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 -- -- 7,006 (105) 6,901
Dividends -- -- -- (581) (581)
Net Income -- -- -- 487 487
- --------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 -- -- 7,006 (199) 6,807
Dividends -- -- -- (249) (249)
Net Income -- -- -- (1) (1)
- --------------------------------------------------------------------------------------------------------------------------
Balance, May 31, 2003 $ -- $ -- $ 7,006 $ (449) $ 6,557
==========================================================================================================================
In connection with the conversion to a corporation, 78 limited partnership units
were converted into preferred stock of the company on a one-for-one basis.
See accompanying notes to financial statements.
4
FSP Forest Park IV Corp.
Statements of Cash Flows
For the For the
Period Ended Years Ended
May 31, December 31,
(in thousands) 2003 2002 2001 2000
=========================================================================================================================
(REIT) (REIT) (REIT) (Limited
Partnership)
Cash flows from operating activities:
Net (loss) income $ (1) $ 487 $ 508 $ 394
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization 59 142 139 124
Changes in operating assets and liabilities
Cash-funded reserve 6 -- 468 (57)
Step rent receivable 138 (27) (35) (68)
Prepaid expenses and other assets -- (1) (3) 14
Accounts payable and accrued expenses (7) 137 (50) 22
Payment of deferred leasing commissions -- -- -- (47)
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 195 738 1,027 382
- ------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets -- -- (353) --
- ------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities -- -- (353) --
- ------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Dividends to stockholders (281) (590) (586) (450)
- ------------------------------------------------------------------------------------------------------------------------
Net cash used for financing activities (281) (590) (586) (450)
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (86) 148 88 (68)
Cash and cash equivalents, beginning 347 199 111 179
- ------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end $ 261 $ 347 $ 199 $ 111
========================================================================================================================
Supplemental disclosure of cash flow information:
Disclosure of non-cash financing activities:
Dividends declared but not paid $ 102 $ 134 $ 143 $ 116
See accompanying notes to financial statements.
5
FSP Forest Park IV Corp.
Notes to Financial Statements
1. Organization
FSP Forest Park IV Corp. (the "Company") was organized on March 29, 1999 as a
Limited Partnership under the laws of the Commonwealth of Massachusetts to
purchase, own and operate a commercial office building located in Charlotte,
North Caroline (the "Property"). The Property consists of a single-story modern
office building that contains approximately 60,000 square feet of space situated
on approximately 7.52 acres of land. The Company acquired the Property on July
8, 1999. The Company subsequently reorganized as a corporation under the laws of
the State of Delaware effective January 1, 2001 and operates in a manner
intended to qualify as a real estate investment trust ("REIT") for Federal
income tax purposes.
2. Summary of Significant Accounting Policies
ESTIMATES AND ASSUMPTIONS
The Company prepares its financial statements and related notes in conformity
with accounting principles generally accepted in the United States of America
("GAAP"). These principles require management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
RECLASSIFICATIONS
Certain balances in the 2002, 2001 and 2000 financial statements have been
reclassified to conform to the 2003 presentation.
REAL ESTATE AND DEPRECIATION
Real estate assets are stated at the lower of cost or fair value, as
appropriate, less accumulated depreciation.
Costs related to property acquisition and improvements are capitalized. Typical
capital items include new roofs, site improvements, various exterior building
improvements and major interior renovations. Funding for capital improvement
typically is provided by cash set aside at the time the property was purchased.
Routine replacements and ordinary maintenance and repairs that do not extend the
life of the asset are expensed as incurred. Typical expense items include
interior painting, landscaping and minor carpet replacements. Funding for
repairs and maintenance items typically is provided by cash flows from operating
activities.
Depreciation is computed using the straight line method over the assets'
estimated useful lives as follows:
Category Years
-------- -----
Building - Commercial 39
Building Improvements 15-39
Furniture and equipment 5-7
6
FSP Forest Park IV Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
REAL ESTATE AND DEPRECIATION (continued)
The following schedule reconciles the cost of the property as shown in the
Offering Memorandum as to the amounts shown on the Company's Balance Sheet:
(in thousands)
Price per Offering Memorandum $ 6,215
Plus: Acquisition fees 117
Plus: Other 49
------------------------------------------------------------------
Total Acquistion Costs $ 6,381
==================================================================
These costs are reported in the Company's Balance Sheet as follows:
Land $ 1,210
Building 5,171
------------------------------------------------------------------
Total reported in Balance Sheet $ 6,381
==================================================================
The Company evaluates its assets used in operations by identifying indicators of
impairment and by comparing the sum of the estimated undiscounted future cash
flows for each asset to the asset's carrying value. When indicators of
impairment are present and the sum of the undiscounted future cash flows is less
than the carrying value of such asset, an impairment loss is recorded equal to
the difference between the asset's current carrying value and its fair value
based on discounting its estimated future cash flows. At May 31, 2003, December
31, 2002, 2001 and 2000 no such indicators of impairment were identified.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an initial
maturity of three months or less to be cash equivalents.
CASH-FUNDED RESERVES
The Company has set aside funds in anticipation of future capital needs of the
property. Although these funds typically are used for the payment of real estate
assets and deferred leasing commissions, there is no legal restriction on their
use and they may be used for any company purpose.
MARKETABLE SECURITIES
The Company accounts for investments in debt securities under the provisions of
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". The Company typically has classified its debt securities as
available-for-sale.
There were no investments in marketable securities at May 31, 2003, December 31,
2002, 2001 and 2000.
CONCENTRATION OF CREDIT RISKS
Cash, cash equivalents and short-term investments are financial instruments that
potentially subject the Company to a concentration of credit risk. The Company
maintains its cash balances and short-term investments principally in one bank
which the Company believes to be creditworthy. The Company periodically assesses
the financial condition of the bank and believes that the risk of loss is
minimal. Cash balances held with various financial institutions frequently
exceed the insurance limit of $100,000 provided by the Federal Deposit Insurance
Corporation.
7
FSP Forest Park IV Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
CONCENTRATION OF CREDIT RISKS (Continued)
For the period ended May 31, 2003, The American Red Cross and Verizon accounted
for 72% and 18% of rent respectively, while 10% was vacant. For the years ended
December 31, 2002, 2001 and 2000, rental income was derived from two tenants,
The American Red Cross at 81% and Verizon at 19%. For the year ended December
31, 2000, rental income consisted solely of income received from The American
Red Cross. As such, future receipts are dependent upon the financial strength of
the lessees and their ability to perform under the lease agreements.
FINANCIAL INSTRUMENTS
The Company estimates that the carrying value of cash and cash equivalents,
cash-funded reserves and restricted cash approximate their fair values based on
their short-term maturity and prevailing interest rates.
STEP RENT RECEIVABLE
Certain leases provide for fixed increases over the life of the lease. Rental
revenue is recognized on the straight-line basis over the related lease term;
however, billings by the Company are based on required minimum rentals in
accordance with the lease agreements. Step rent receivable, which is the
cumulative revenue recognized in excess of amounts billed by the Company, is $0,
$138,000, $111,000 and $68,000 at May 31, 2003, December 31, 2002, 2001 and
2000, respectively.
DEFERRED LEASING COMMISSIONS
Deferred leasing commissions represent external leasing costs incurred in the
leasing of commercial space. These costs are capitalized and are amortized on a
straight-line basis over the weighted-average remaining life of the related
leases. Amortization expense of approximately $4,000, $9,300, $9,300 and $0 is
included in the Company's Statement of Operations for the period ended May 31,
2003 and the years ended December 31, 2002, 2001 and 2000, respectively.
Payments for deferred leasing commissions in 2000 amounted to $47,000, which is
being amortized over five years in respect of the lease. Details of the deferred
leasing commissions are as follows:
For the For the For the
Period Ended Years Ended Year Ended
May 31, December 31, December 31,
2003 2002 2001 2000
=================================================================================================
(REIT) (REIT) (REIT) (Limited
Partnership)
Cost $47,000 $47,000 $47,000 $ 47,000
Accumulated amortization 22,600 18,600 9,300 --
-------------------------------------------------------------------------------------------------
Book value $24,400 $28,400 $37,700 $ 47,000
=================================================================================================
The estimated annual amortization expense for the periods succeeding May 31,
2003 are as follows:
2003 $ 5,400
2004 $ 9,300
2005 $ 9,300
2006 $ 400
SYNDICATION FEES
Syndication fees are selling commissions and other costs associated with the
initial offering of the Company's preferred shares. Such costs, in the amount of
$685,000 have been reported as a reduction in the Partners'
Capital/Stockholders' Equity in the Company's Balance Sheets.
8
FSP Forest Park IV Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
REVENUE RECOGNITION
The Company has retained substantially all of the risks and benefits of
ownership of the Company's commercial property and accounts for its leases as
operating leases. Rental income from leases, which may include rent concession
(including free rent and tenant improvement allowances) and scheduled increases
in rental rates during the lease term, is recognized on a straight-line basis.
The Company does not have any percentage rent arrangements with its commercial
property tenants. Reimbursable costs are included in rental income in the period
earned. A schedule showing the components of rental revenue is shown below.
For the For the For the
Period Ended Years Ended Year Ended
May 31, December 31, Decembr 31,
(in thousands) 2003 2002 2001 2000
==========================================================================================
(REIT) (REIT) (REIT) (Limited
Partnership)
Income from leases $ 344 $780 $764 $ 608
Straight-line rent adjustment (138) 27 43 45
Reimbursable expenses 22 56 45 8
------------------------------------------------------------------------------------------
Total $ 228 $863 $852 $ 661
==========================================================================================
INTEREST AND OTHER
Interest income and other income are recognized when the related services are
performed and the earnings process is complete.
INCOME TAXES
The Company has elected to be taxed as a REIT under the Internal Revenue Code of
1986, as amended. As a REIT, the Company generally is entitled to a tax
deduction for dividends paid to its shareholders, thereby effectively subjecting
the distributed net income of the Company to taxation at the shareholder level
only. The Company must comply with a variety of restrictions to maintain its
status as a REIT. These restrictions include the type of income it can earn, the
type of assets it can hold, the number of shareholders it can have and the
concentration of their ownership, and the amount of the Company's taxable income
that must be distributed annually.
NET INCOME PER SHARE
The Company follows Statement of Financial Accounting Standards No. 128
"Earnings per Share", which specifies the computation, presentation and
disclosure requirements for the Company's net income per share. Basic net income
per share is computed by dividing net income by the weighted average number of
shares outstanding during the period. Diluted net income per share reflects the
potential dilution that could occur if securities or other contracts to issue
shares were exercised or converted into shares. There were no potential dilutive
shares outstanding at May 31, 2003, December 31, 2002, 2001 and 2000. Subsequent
to the completion of the offering of preferred shares, the holders of common
stock are not entitled to share in any income. The denominator used for
calculating basic and diluted net income per share is shown for preferred shares
only and is as follows:
For the For the For the
Period Ended Years Ended Year Ended
May 31, December 31, December 31,
2003 2002 2001 2000
==================================================================================================
(REIT) (REIT) (REIT) (Limited
Partnership)
Weighted average number of preferred shares
outstanding 78 78 78 78
9
FSP Forest Park IV Corp.
Notes to Financial Statements
3. Related Party Transactions
On January 10, 2003, the Board of Directors of the Company and twelve other
companies (the "Target REITS"), whose common stock is owned by Franklin Street
Properties Corp. ("FSP"), resolved to enter into an Agreement and Plan of Merger
(the "Merger Agreement") with FSP. On May 30, 2003, a majority of the preferred
stockholders of the Company and the Target REITS, as well as a majority of the
common stockholders of FSP approved the merger. The effect of the merger is that
the stockholders of the Company and the Target REITS exchanged their stock for
common stock of FSP effective June 1, 2003.
The Company executed a management agreement with FSP Property Management LLC, an
affiliate of FSP, that provides for a management fee equal to 1% of collected
revenues and is cancelable with 30 days notice by either party. For the period
ended May 31, 2003 and the years ended December 31, 2002, 2001 and 2000 fees
incurred under the agreement were $3,500, $7,800, $5,700 and $6,000,
respectively.
4. Recent Accounting Standards
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations," which addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This Statement requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable estimate of the fair value
can be made. The associated asset retirement costs are capitalized as part of
the carrying amount of the long-lived asset. This Statement was effective at the
beginning of 2003. The impact of adoption did not have a material impact on the
Company's financial position, results of operations and cash flows.
In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets". This Statement supersedes SFAS No. 121 and
requires that long-lived assets that are to be disposed of by sale be measured
at the lower of book value or fair value less costs to sell. SFAS No. 144
retains the fundamental provisions of SFAS 121 for (a) recognition and
measurement of the impairment of long-lived assets to be held and used, and (b)
measurement of long-lived assets to be disposed of by sale, but broadens the
definition of what constitutes a discontinued operation and how the results of a
discontinued operation are to be measured and presented. This Statement was
effective at the beginning of 2002. The impact of adoption did not have a
material impact on the Company's financial position, results of operations and
cash flows. The Company does not have any real estate assets that it considers
"held for sale" at May 31, 2003.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements Nos.
4, 44, and 64, Amendment of SFAS 13, and Technical Corrections". This Statement
rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt",
and an amendment of that Statement, SFAS No. 64, "Extinguishments of Debt Made
to Satisfy Sinking-Fund Requirements". This Statement amends SFAS No. 13,
"Accounting for Leases". This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings or
describe their applicability under changed conditions. This statement was
effective for the Company's fiscal year ending December 31, 2003. The impact of
adoption did not have a material impact on the Company's financial position,
results of operations and cash flows.
In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities". This statement was effective January 1, 2003. SFAS
No. 146 replaces current accounting literature and requires the recognition of
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. The impact of
adoption did not have a material impact on the Company's financial position,
results of operations and cash flows.
5. Income Taxes
The Company files as a REIT under Sections 856-860 of the Internal Revenue Code
of 1986, as amended. In order to qualify as a REIT, the Company is required to
distribute at least 90% of its taxable income to shareholders and to meet
certain asset and income tests as well as certain other requirements. The
Company will generally not be liable for federal income taxes, provided it
satisfies their requirements. Even as a qualified REIT, the Company is subject
to certain state and local taxes on its income and property.
10
FSP Forest Park IV Corp.
Notes to Financial Statements
5. Income Taxes (continued)
At May 31, 2003, December 31, 2002, 2001 and 2000, the Company's net tax basis
of its real estate assets approximates the amount set forth in the Company's
Balance Sheet.
The following schedule reconciles GAAP Net Income to Taxable Income subject to
dividend requirements:
For the For the For the
Period Ended Years Ended Year Ended
May 31, December 31, December 31,
(in thousands) 2003 2002 2001 2000
===================================================================================================================
(REIT) (REIT) (REIT) (Limited
Partnership)
GAAP net income $ (1) $ 487 $ 508 $ 394
Add: Book depreciation and amortization 59 142 139 124
Deferred rent (124) 124 -- --
Less: Tax depreciation and amortization (58) (138) (136) (124)
Straight-line rents 138 (27) (43) (45)
- -------------------------------------------------------------------------------------------------------------------
Taxable income (loss) subject to dividend requirement $ 14 $ 588 $ 468 $ 349
===================================================================================================================
The following schedule reconciles cash dividends paid or accrued to the
dividends paid deduction:
For the For the For the
Period Ended Years Ended Year Ended
May 31, December 31, December 31,
(in thousands) 2003 2002 2001 2000
========================================================================================================================
(REIT) (REIT) (REIT) (Limited
Partnership)
Cash dividends paid or accrued $ 383 $590 $ 586 $ 450
Plus: Dividends designated from following year -- -- -- --
Less: Portion designated capital gain distribution -- -- -- --
Less: Return of Capital (369) (2) (118) (450)
- ------------------------------------------------------------------------------------------------------------------------
Dividends paid deduction $ 14 $588 $ 468 $ --
========================================================================================================================
6. Cash Available for Distribution
The Company evaluates its performance based on Cash Available for Distribution
("CAD") as management believes that CAD represents the most accurate measure of
the Company's activity. CAD is the basis for distributions paid to equity
holders.
The Company defines CAD as: net income as computed in accordance with accounting
principles generally accepted in the United States of America ("GAAP"); plus
certain non-cash items included in the computation of net income (depreciation
and amortization, certain non-cash compensation expenses and straight line rent
adjustments); plus funds raised by the issuance of shares; plus the net proceeds
from the sale of land; less purchases of real estate assets, property and
equipment ("Capital Expenditures") payments for deferred leasing commissions and
payments for deferred lease origination costs; plus (less) proceeds from
(payments to) cash reserves established at the acquisition date of the property
(cash-funded reserves). Depreciation and amortization, non-cash compensation and
straight-line rents are an adjustment to CAD, as these are non-cash items
included in net income. Capital Expenditures, payments of deferred leasing
commissions and payments for deferred lease origination costs and the proceeds
from (payments to) the funded reserve are an adjustment to CAD, as they
represent cash items not reflected in income. CAD should not be considered as an
alternative to net income (determined in accordance with GAAP), as an indicator
of the Company's financial performance, nor as an alternative to cash flows from
operating activities (determined in accordance with GAAP), nor as a measure of
the Company's liquidity, nor is it necessarily indicative of sufficient cash
flow to fund all of the Company's needs. Other real estate companies may define
CAD in a different manner.
11
FSP Forest Park IV Corp.
Notes to Financial Statements
6. Cash Available for Distribution (continued)
It is at the Company's discretion to retain a portion of CAD for operational
needs. The Company believes that in order to facilitate a clear understanding of
the results of the Company, CAD should be examined in connection with net income
and cash flows from operating, investing and financing activities in the
financial statements.
The calculation of CAD is shown in the following table:
For the For the For the
Period Ended Years Ended Year Ended
May 31, December 31, December 31,
(in thousands) 2003 2002 2001 2000
============================================================================================================
(REIT) (REIT) (REIT) (Limited
Partnership)
Net (loss) income $ (1) $ 487 $ 508 $ 394
Depreciation and amortization 59 142 139 124
Straight line rent 138 (27) (43) (45)
Purchase of land and building and improvements -- -- (353) --
Establish funded reserve -- -- 468 (57)
Payment of deferred leasing commissions -- -- -- (47)
------------------------------------------------------------------------------------------------------------
Cash Available for Distribution $ 196 $ 602 $ 719 $ 369
============================================================================================================
The Company's distributions are summarized as follows:
For the For the For the
Period Ended Years Ended Year Ended
May 31, December 31, December 31,
Quarter Paid (in thousands) 2003 2002 2001 2000
==============================================================================================================
(REIT) (REIT) (REIT) (Limited
Partnership)
First Quarter $ 134 $ 143 $ 116 $ 111
Second Quarter 147 145 161 103
Third Quarter 102 156 154 114
Fourth Quarter -- 146 155 122
--------------------------------------------------------------------------------------------------------------
Dividends paid or accrued $ 383 $ 590 $ 586 $ 450
==============================================================================================================
The Company declared a dividend payable to stockholders of record as of May 31,
2003, December 31, 2002 and 2001 of $102,000, $134,000 and $143,000,
respectively.
Cash distributions are declared and paid based on the total outstanding shares
as of the record date and are typically paid in the quarter following the
quarter that CAD is generated.
7. Capital Stock
PREFERRED STOCK
Generally, each holder of Shares of Preferred Stock is entitled to receive
ratably all income and dividends, if any, declared by the Board of Directors out
of funds legally available. The right to receive dividends shall be
non-cumulative, and no right to dividends shall accrue by reason of the fact
that no dividend has been declared in any prior year. Each holder of Shares will
be entitled to receive, to the extent that funds are available therefore,
$100,000 per Share, before any payment to the holder of Common Stock, out of
distributions to stockholders upon liquidation, dissolution or the winding up of
the Company; the balance of any such funds available for distribution will be
distributed among the holders of Shares and the holder of Common Stock, pro rata
based on the number of shares held by each; provided, however, that for these
purposes, one share of Common Stock will be deemed to equal one-tenth of a share
of Preferred Stock.
12
FSP Forest Park IV Corp.
Notes to Financial Statements
7. Capital Stock (continued)
PREFERRED STOCK (continued)
In addition to certain voting rights provided in the corporate agreements, the
holder of Shares, acting by consent of at least 51%, shall have the further
right to approve or disapprove a proposed sale of the Property, the merger of
the Company with any other entity and amendments to the corporate charter. A
vote of the holders of 66.67% of the Shares is required for the issue of any
additional shares of capital stock. Holders of Shares have no redemption or
conversion rights.
COMMON STOCK
Franklin Street Properties Corp. (FSP), is the sole holder of the Company's
Common Stock. FSP has the right, as one class together with the holders of
Preferred Stock, to vote to elect the directors of the Company and to vote on
all matters except those voted by the holders of Shares of Preferred Stock.
Subsequent to the completion of the offering of the preferred shares the holders
of common shares are not entitled to receive any income, nor shall the Company
declare or pay any cash dividends on shares of Common Stock.
8. Commitments and Contingencies
The Company, as lessor, has future minimum rentals due under non-cancelable
operating leases as follows:
Period/Year Ended
December 31, Amount
------------------------- ---------
(in thousands)
2003 $ 464
2004 813
2005 830
2006 678
2007 691
Thereafter 763
---------
$ 4,239
=========
In addition, the lessees are liable for real estate taxes and certain operating
expenses of the property.
Upon acquiring the commercial rental property in July, 1999, the Company was
assigned the lease agreement between the seller of the Property and the existing
tenant. The Company has also signed a new lease since the purchase of the
property. The original lease periods range from five to ten years with renewal
options.
13
SCHEDULE III
FSP FOREST PARK IV CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
May 31,2003
(in thousands)
Initial Cost
-----------------------------------
Costs
Capitalized
(Disposals)
Subsequent
Encumbrances Buildings & to
Description (1) Land Improvements Acquisition
- ----------- ------------ ---- ------------ -----------
Forest Park IV, Corp.,
Charlotte, North Carolina -- $ 1,210 $ 5,171 $ --
=========== ======== ========== =========
(in thousands)
Historical Costs
------------------------------------------------------------
Total Costs,
Net of Depreciable
Buildings & Accumulated Accumulated Life Date of
Description Land Improvements Total(2) Depreciation Depreciation Years Acquisition
- ----------- ---- ------------ -------- ------------ ------------ ----- -----------
Forest Park IV, Corp.,
Charlotte, North Carolina $ 1,210 $ 5,171 $ 6,381 $ 498 $ 5,883 15-39 July, 1999
======== =========== ======== =========== ===========
(1) There are no encumbrances on the above property.
(2) The aggregate cost for Federal Income Tax purposes approximates total
historical costs
14
FSP FOREST PARK IV CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
The following table summarizes the changes in the Company's real estate
investment and accumulated depreciation:
For the For the For the
Period Ended Years Ended Year Ended
May 31, December 31, December 31,
(in thousands) 2003 2002 2001 2000
=============================================================================================
(REIT) (REIT) (REIT) (Limited
Partnership)
Real estate investments, at cost:
Balance, beginning of period $6,381 $6,381 $6,028 $6,028
Acquisitions -- -- -- --
Improvements -- -- 353 --
Dispositions -- -- -- --
---------------------------------------------------------------------------------------------
Balance, end of period $6,381 $6,381 $6,381 $6,028
=============================================================================================
Accumulated depreciation:
Balance, beginning of period $ 443 $ 310 $ 180 $ 56
Depreciation 55 133 130 124
Dispositions -- -- -- --
---------------------------------------------------------------------------------------------
Balance, end of period $ 498 $ 443 $ 310 $ 180
=============================================================================================
15
FSP Gael Apartments Corp.
Financial Statements
May 31, 2003, December 31, 2002, 2001 and 2000
Table of Contents
Page
----
Financial Statements
Independent Auditor's Report................................................. 1
Balance Sheets as of May 31, 2003, December 31, 2002 and 2001................ 2
Statements of Operations for the period ended May 31, 2003, the years ended
December 31, 2002 and 2001 and for the period May 30, 2000
(date of inception) to December 31, 2000............................... 3
Statements of Change in Stockholders' Equity for the period ended
May 31, 2003, the years ended December 31, 2002 and 2001and for the
period May 30, 2000 (date of inception) to December 31, 2000........... 4
Statements of Cash Flows for the period ended May 31, 2003, the years ended
December 31, 2002 and 2001 and for the period May 30, 2000
(date of inception) to December 31, 2000............................... 5
Notes to Financial Statements............................................. 6-12
Schedule of Real Estate and Accumulated Depreciation..................... 13-14
[LETTERHEAD OF BRAVER AND COMPANY, P.C.]
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
FSP Gael Apartments Corp.
(a Delaware Corporation)
We have audited the accompanying balance sheets of FSP Gael Apartments Corp. (a
Delaware Corporation) as of May 31, 2003, December 31, 2002 and 2001, and the
related statements of operations, changes in stockholders' equity and cash
flows, as well as the financial statement schedule listed in the accompanying
index, for the period ended May 31, 2003, the years ended December 31, 2002 and
2001, and for the period from May 30, 2000 (date of inception) to December 31,
2000. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements and financial statement schedule are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements and financial statement schedule. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial statement schedule
referred to above present fairly, in all material respects, the financial
position of FSP Gael Apartments Corp. as of May 31, 2003, December 31, 2002 and
2001, and the results of its operations and its cash flows for period ended May
31, 2003, the years ended December 31, 2002 and 2001, and for the initial period
ended December 31, 2000 in conformity with accounting principles generally
accepted in the United States of America.
As described in Note 3 to the Financial Statements, effective June 1, 2003, the
Company merged with Franklin Street Properties Corp., the sole shareholder of
the Company's common stock.
/s/ Braver and Company, P.C.
Newton, Massachusetts
July 11, 2003
1
FSP Gael Apartments Corp.
Balance Sheets
May 31, December 31, December 31,
(in thousands, except shares and par value amounts) 2003 2002 2001
===========================================================================================================
Assets:
Real estate investments, at cost:
Land $ 3,312 $ 3,312 $ 3,312
Buildings and improvements 14,789 14,789 14,789
- -----------------------------------------------------------------------------------------------------------
18,101 18,101 18,101
Less accumulated depreciation 1,546 1,322 784
- -----------------------------------------------------------------------------------------------------------
Real estate investments, net 16,555 16,779 17,317
Cash and cash equivalents 433 399 429
Cash-funded reserve 575 574 581
Restricted cash 58 61 66
Prepaid expenses and other assets 50 41 28
- -----------------------------------------------------------------------------------------------------------
Total assets $ 17,671 $ 17,854 $ 18,421
===========================================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses $ 262 $ 85 $ 58
Dividends payable 221 356 399
Tenant security deposits 58 61 66
- -----------------------------------------------------------------------------------------------------------
Total liabilities 541 502 523
- -----------------------------------------------------------------------------------------------------------
Commitments and contingencies:
Stockholders' Equity:
Preferred Stock, $.01 par value per share, 212.5 shares
authorized, issued and outstanding -- -- --
Common Stock, $.01 par value per share, 1 share
authorized, issued and outstanding -- -- --
Additional paid-in capital 19,435 19,435 19,435
Retained deficit and dividends in excess of earnings (2,305) (2,083) (1,537)
- -----------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 17,130 17,352 17,898
- -----------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 17,671 $ 17,854 $ 18,421
===========================================================================================================
See accompanying notes to financial statements.
2
FSP Gael Apartments Corp.
Statements of Operations
For the Period
For the For the May 30, 2000
Period Ended Years Ended (date of inception)
May 31, December 31, to December 31,
(in thousands, except shares and per share amounts) 2003 2002 2001 2000
===================================================================================================================================
Revenue:
Rental $ 1,086 $ 2,628 $ 2,582 $ 1,033
- -----------------------------------------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 255 604 574 281
Depreciation 224 538 538 246
Real estate taxes and insurance 224 532 510 202
Interest -- -- -- 792
- -----------------------------------------------------------------------------------------------------------------------------------
Total expenses 703 1,674 1,622 1,521
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before interest income 383 954 960 (488)
Interest income 7 23 46 28
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 390 $ 977 $ 1,006 $ (460)
===================================================================================================================================
Weighted average number of preferred shares outstanding,
basic and diluted 212.5 212.5 212.5 212.5
===================================================================================================================================
Net income (loss) per preferred share, basic and diluted $ 1,835 $ 4,598 $ 4,734 $(2,165)
===================================================================================================================================
See accompanying notes to financial statements.
3
FSP Gael Apartments Corp.
Statements of Changes in Stockholders' Equity
For the Period Ended May 31, 2003, the
Years Ended December 31, 2002 and
2001 and For the Period May 30, 2000 (date of
inception) to December 31, 2000
Retained Deficit
Additional and Dividends Total
Preferred Common Paid in in Excess of Stockholders'
(in thousands, except shares) Stock Stock Capital Earnings Equity
======================================================================================================================
Private offering of 212.5 shares, net $ -- $ -- $ 19,435 $ -- $ 19,435
Dividends -- -- -- (530) (530)
Net Loss -- -- -- (460) (460)
- ------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 -- -- 19,435 (990) 18,445
Dividends -- -- -- (1,553) (1,553)
Net Income -- -- -- 1,006 1,006
- ------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 -- -- 19,435 (1,537) 17,898
Dividends -- -- -- (1,523) (1,523)
Net Income -- -- -- 977 977
- ------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 -- -- 19,435 (2,083) 17,352
Dividends -- -- -- (612) (612)
Net Income -- -- -- 390 390
- ------------------------------------------------------------------------------------------------------------------
Balance, May 31, 2003 $ -- $ -- $ 19,435 $ (2,305) $ 17,130
==================================================================================================================
See accompanying notes to financial statements.
4
FSP Gael Apartments Corp.
Statements of Cash Flows
For the Period
For the For the May 30, 2000
Period Ended Years Ended (date of inception)
May 31, December 31, to December 31,
(in thousands) 2003 2002 2001 2000
=================================================================================================================================
Cash flows from operating activities:
Net income (loss) $ 390 $ 977 $ 1,006 $ (460)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation 224 538 538 246
Changes in operating assets and liabilities
Cash-funded reserve (1) 7 34 (616)
Restricted cash 3 5 20 (86)
Prepaid expenses and other assets (9) (13) 1 (28)
Accounts payable and accrued expenses 177 27 (439) 496
Tenant security deposits (3) (5) (20) 86
- --------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 781 1,536 1,140 (362)
- --------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets -- -- -- (18,101)
- --------------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities -- -- -- (18,101)
- --------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock -- -- -- 21,250
Syndication costs -- -- -- (1,815)
Dividends to stockholders (747) (1,566) (1,526) (157)
Proceeds from long-term debt -- -- -- 17,500
Principal payments on long-term debt -- -- -- (17,500)
- --------------------------------------------------------------------------------------------------------------------------------
Net cash (used for) provided by financing activities (747) (1,566) (1,526) 19,278
- --------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents 34 (30) (386) 815
Cash and cash equivalents, beginning 399 429 815 --
- --------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end $ 433 $ 399 $ 429 $ 815
================================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ -- $ -- $ -- $ 792
Disclosure of non-cash financing activities:
Dividends declared but not paid $ 221 $ 356 $ 399 $ 372
See accompanying notes to financial statements.
5
FSP Gael Apartments Corp.
Notes to Financial Statements
1. Organization
FSP Gael Apartments Corp. (the "Company") was organized on May 30, 2000 as a
Corporation under the laws of the State of Delaware to purchase, own and operate
a luxury apartment complex located in Houston, Texas (the "Property"). The
Property consists of 210 luxury apartments that total 187,000 square feet. The
company took title to the Property on July 28, 2000 through a newly-formed
limited partnership of which the Company is the sole limited partner, and a
limited liability company wholly-owned by the Company is the sole general
partner. Accordingly, the Company will own, directly or indirectly, all of the
beneficial interest in the limited partnership and operates in a manner intended
to qualify as a real estate investment trust ("REIT") for Federal income tax
purposes.
2. Summary of Significant Accounting Policies
ESTIMATES AND ASSUMPTIONS
The Company prepares its financial statements and related notes in conformity
with accounting principles generally accepted in the United States of America
("GAAP"). These principles require management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
RECLASSIFICATIONS
Certain information in the 2002, 2001 and 2000 financial statements have been
reclassified to conform to the 2003 presentation.
REAL ESTATE AND DEPRECIATION
Real estate assets are stated at the lower of cost or fair value, as
appropriate, less accumulated depreciation.
Costs related to property acquisition and improvements are capitalized. Typical
capital items include new roofs, site improvements, various exterior building
improvements and major interior renovations. Funding for capital improvement
typically is provided by cash set aside at the time the property was purchased.
Routine replacements and ordinary maintenance and repairs that do not extend the
life of the asset are expensed as incurred. Typical expense items include
interior painting, landscaping and minor carpet replacements. Funding for
repairs and maintenance items typically is provided by cash flows from operating
activities.
Depreciation is computed using the straight-line method over the assets'
estimated useful lives as follows:
Category Years
-------- -----
Building - Apartments 27.5
Building Improvements 15-27.5
Furniture and equipment 5-7
6
FSP Gael Apartments Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an initial
maturity of three months or less to be cash equivalents.
CASH-FUNDED RESERVES
The Company has set aside funds in anticipation of future capital needs of the
property. Although these funds typically are used for the payment of real estate
assets and deferred leasing commissions, there is no legal restriction on the
use and they may be used for any company purpose.
RESTRICTED CASH
Restricted cash consists of tenant security deposits.
MARKETABLE SECURITIES
The Company accounts for investments in debt securities under the provisions of
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". The Company typically has classified its debt securities as
available-for-sale.
There were no investments in marketable securities at May 31, 2003, December 31,
2002 and 2001.
CONCENTRATION OF CREDIT RISKS
Cash, cash equivalents and short-term investments are financial instruments that
potentially subject the Company to a concentration of credit risk. The Company
maintains its cash balances and short-term investments principally in one bank
which the Company believes to be creditworthy. The Company periodically assesses
the financial condition of the bank and believes that the risk of loss is
minimal. Cash balances held with various financial institutions frequently
exceed the insurance limit of $100,000 provided by the Federal Deposit Insurance
Corporation.
FINANCIAL INSTRUMENTS
The Company estimates that the carrying value of cash and cash equivalents,
cash-funded reserves and restricted cash approximate their fair values based on
their short-term maturity and prevailing interest rates.
SYNDICATION FEES
Syndication fees are selling commissions and other costs associated with the
initial offering of the Company's preferred shares. Such costs, in the amount of
$1,815,000 have been reported as a reduction in the Stockholders' Equity in the
Company's Balance Sheets.
REVENUE RECOGNITION
The Company's residential property leases are generally for terms of one year or
less. Rental income from tenants of residential apartment properties is
recognized in the period earned. Rent concessions, including free rent and
leasing commissions are charged as a reduction of rental revenue.
INTEREST AND OTHER
Interest income and other income are recognized when the related services are
performed and the earnings process is complete.
7
FSP Gael Apartments Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
INCOME TAXES
The Company has elected to be taxed as a REIT under the Internal Revenue Code of
1986, as amended. As a REIT, the Company generally is entitled to a tax
deduction for dividends paid to its shareholders, thereby effectively subjecting
the distributed net income of the Company to taxation at the shareholder level
only. The Company must comply with a variety of restrictions to maintain its
status as a REIT. These restrictions include the type of income it can earn, the
type of assets it can hold, the number of shareholders it can have and the
concentration of their ownership, and the amount of the Company's taxable income
that must be distributed annually.
NET INCOME PER SHARE
The Company follows Statement of Financial Accounting Standards No. 128
"Earnings per Share", which specifies the computation, presentation and
disclosure requirements for the Company's net income per share. Basic net income
per share is computed by dividing net income by the weighted average number of
shares outstanding during the period. Diluted net income per share reflects the
potential dilution that could occur if securities or other contracts to issue
shares were exercised or converted into shares. There were no potential dilutive
shares outstanding at May 31, 2003. The denominator used for calculating basic
and diluted net income per share is as follows:
For the For the For the
Period Ended Years Ended Period Ended
May 31, December 31, December 31,
2003 2002 2001 2000
==============================================================================================
Weighted average number of
preferred shares outstanding 212.5 212.5 212.5 212.5
3. Related Party Transactions
On January 10, 2003, the Board of Directors of the Company and twelve other
companies (the "Target REITS"), whose common stock is owned by Franklin Street
Properties Corp. ("FSP"), resolved to enter into an Agreement and Plan of Merger
(the "Merger Agreement") with FSP. On May 30, 2003, a majority of the preferred
stockholders of the Company and the Target REITS, as well as a majority of the
common stockholders of FSP approved the merger. The effect of the merger is that
the stockholders of the Company and the Target REITS exchanged their stock for
common stock of FSP effective June 1, 2003.
The Company executed a management agreement with FSP Property Management LLC, an
affiliate of FSP, that provides for a management fee equal to 1% of collected
revenues and is cancelable with 30 days notice by either party. For the period
ended May 31, 2003 and the years ended December 31, 2002 and 2001 and the period
ended December 31, 2000, fees incurred under the agreement were $11,000,
$27,000, $26,000 and $10,000, respectively.
An acquisition fee of $425,000 and other costs totaling $141,000 were paid in
2000 to an affiliate of the Common Shareholder. Such fees were included in the
cost of the real estate.
Syndication fees of $1,700,000 were paid in 2000 to an affiliate of the Common
Shareholder for services related to syndication of the Company's preferred
stock.
During 2000, the Company borrowed and repaid in full:
Note payable to FSP, principal of $17,500,000 with interest equal to the
Citizens Bank base rate (9.5%). Interest paid to the affiliate was
$101,000.
A commitment fee of $691,000 was paid for obtaining the first mortgage
loan. Such amount is included in interest expense on the Statement of
Operations.
8
FSP Gael Apartments Corp.
Notes to Financial Statements
4. Recent Accounting Standards
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations," which addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This Statement requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable estimate of the fair value
can be made. The associated asset retirement costs are capitalized as part of
the carrying amount of the long-lived asset. This Statement was be effective at
the beginning of 2003. The impact of adoption did not have a material impact on
the Company's financial position, results of operations and cash flows.
In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets". This Statement supersedes SFAS No. 121 and
requires that long-lived assets that are to be disposed of by sale be measured
at the lower of book value or fair value less costs to sell. SFAS No. 144
retains the fundamental provisions of SFAS 121 for (a) recognition and
measurement of the impairment of long-lived assets to be held and used, and (b)
measurement of long-lived assets to be disposed of by sale, but broadens the
definition of what constitutes a discontinued operation and how the results of a
discontinued operation are to be measured and presented. This Statement was
effective at the beginning of 2002. The impact of adoption did not have a
material impact on the Company's financial position, results of operations and
cash flows. The Company does not have any real estate assets that it considers
"held for sale" at May 31, 2003.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements Nos.
4, 44, and 64, Amendment of SFAS 13, and Technical Corrections". This Statement
rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt",
and an amendment of that Statement, SFAS No. 64, "Extinguishments of Debt Made
to Satisfy Sinking-Fund Requirements". This Statement amends SFAS No. 13,
"Accounting for Leases". This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings or
describe their applicability under changed conditions. This statement was be
effective for the Company's fiscal year ending December 31, 2003. The impact of
adoption did not have a material impact on the Company's financial position,
results of operations and cash flows.
In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities". This statement was effective January 1, 2003. SFAS
No. 146 replaces current accounting literature and requires the recognition of
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. The impact of
adoption did not have a material impact on the Company's financial position,
results of operations and cash flows.
5. Income Taxes
The Company files as a REIT under Sections 856-860 of the Internal Revenue Code
of 1986, as amended. In order to qualify as a REIT, the Company is required to
distribute at least 90% of its taxable income to shareholders and to meet
certain asset and income tests as well as certain other requirements. The
Company will generally not be liable for federal income taxes, provided it
satisfies their requirements. Even as a qualified REIT, the Company is subject
to certain state and local taxes on its income and property.
For the period ended December 31, 2000, the Company incurred a net operating
loss for income tax purposes of approximately $416,000 that can be carried
forward until it expires in the year 2020. The amount of the net operating loss
that may be used annually, if any, is limited.
At May 31, 2003, December 31, 2002 and 2001, the Company's net tax basis of its
real estate assets approximates the amount set forth in the Company's Balance
Sheet.
9
FSP Gael Apartments Corp.
Notes to Financial Statements
5. Income Taxes (continued)
The following schedule reconciles GAAP Net Income to Taxable Income subject to
dividend requirements:
For the For the For the
Period Ended Years Ended Period Ended
May 31, December 31, December 31,
(in thousands) 2003 2002 2001 2000
=================================================================================================================
GAAP net income (loss) $ 390 $ 977 $ 1,006 $ (460)
Add: Book depreciation 224 538 538 246
Deferred rents -- 25 -- 21
Less: Tax depreciation and amortization (154) (369) (370) (143)
Deferred rents (34) -- (12) --
Other book/tax differences, net -- (12) -- --
- -----------------------------------------------------------------------------------------------------------------
Taxable income (loss) subject to dividend requirement * $ 426 $ 1,159 $ 1,162 $ (336)
=================================================================================================================
* A tax loss is not subject to a dividend requirement.
The following schedule reconciles cash dividends paid or accrued to the
dividends paid deduction:
For the For the For the
Period Ended Years Ended Period Ended
May 31, December 31, December 31,
(in thousands) 2003 2002 2001 2000
=================================================================================================================
Cash dividends paid or accrued $ 968 $ 1,566 $ 1,526 $ 157
Plus: Dividends designated from following year -- -- -- --
Less: Portion designated capital gain distribution -- -- -- --
Less: Return of Capital (542) (407) (364) (157)
- ----------------------------------------------------------------------------------------------------------------
Dividends paid deduction $ 426 $ 1,159 $ 1,162 $ --
================================================================================================================
6. Cash Available for Distribution
The Company evaluates its performance based on Cash Available for Distribution
("CAD") as management believes that CAD represents the most accurate measure of
the Company's activity. CAD is the basis for distributions paid to equity
holders.
The Company defines CAD as: net income as computed in accordance with accounting
principles generally accepted in the United States of America ("GAAP"); plus
certain non-cash items included in the computation of net income (depreciation
and certain non-cash compensation expenses); plus funds raised by the issuance
of shares; plus the net proceeds from the sale of land; less purchases of real
estate assets, property and equipment ("Capital Expenditures"), plus (less)
proceeds from (payments to) cash reserves established at the acquisition date of
the property (cash funded reserves). Depreciation and non-cash compensation are
an adjustment to CAD, as these are non-cash items included in net income.
Capital Expenditures and the proceeds from (payments to) the funded reserve are
an adjustment to CAD, as they represent cash items not reflected in income. CAD
should not be considered as an alternative to net income (determined in
accordance with GAAP), as an indicator of the Company's financial performance,
nor as an alternative to cash flows from operating activities (determined in
accordance with GAAP), nor as a measure of the Company's liquidity, nor is it
necessarily indicative of sufficient cash flow to fund all of the Company's
needs. Other real estate companies may define CAD in a different manner. It is
at the Company's discretion to retain a portion of CAD for operational needs.
The Company believes that in order to facilitate a clear understanding of the
results of the Company, CAD should be examined in connection with net income and
cash flows from operating, investing and financing activities in the financial
statements.
10
FSP Gael Apartments Corp.
Notes to Financial Statements
6. Cash Available for Distribution (continued)
The calculation of CAD is shown in the following table:
For the For the For the
Period Ended Years Ended Period Ended
May 31, December 31, December 31,
(in thousands) 2003 2002 2001 2000
============================================================================================================
Net income (loss) $ 390 $ 977 $ 1,006 $ (460)
Depreciation 224 538 538 246
Net proceeds from offering of shares -- -- -- 19,435
Purchase of land and building and improvements -- -- -- (18,101)
Payments from (establish) funded reserve (1) 7 34 (616)
- ------------------------------------------------------------------------------------------------------------
Cash Available for Distribution $ 613 $ 1,522 $ 1,578 $ 504
============================================================================================================
The Company's distributions are summarized as follows:
For the For the For the
(in thousands) Period Ended Years Ended Period Ended
May 31, December 31, December 31,
Quarter Paid 2003 2002 2001 2000
================================================================================
First Quarter $ 356 $ 400 $ 372 $ --
Second Quarter 391 406 370 --
Third Quarter 221 390 384 --
Fourth Quarter -- 370 400 157
- --------------------------------------------------------------------------------
Dividends paid or accrued $ 968 $1,566 $1,526 $ 157
================================================================================
The Company declared a dividend payable to stockholders of record as of May 31,
2003, December 31, 2002, 2001 and 2000 of $221,000, $356,000, $399,000 and
$372,000, respectively.
Cash distributions are declared and paid based on the total outstanding shares
as of the record date and are typically paid in the quarter following the
quarter that CAD is generated.
7. Capital Stock
PREFERRED STOCK
Generally each holder of Shares of Preferred Stock is entitled to receive
ratably all income and all dividends, if any, declared by the Board of Directors
out of funds legally available. The right to receive dividends shall be
non-cumulative, and no right to dividends shall accrue by reason of the fact
that no dividend has been declared in any prior year. Each holder of Shares will
be entitled to receive, to the extent that funds are available therefore,
$100,000 per Share, before any payment to the holder of Common Stock, out of
distributions to stockholders upon liquidation, dissolution or the winding up of
the Company; the balance of any such funds available for distribution will be
distributed among the holders of Shares and the holder of Common Stock, pro rata
based on the number of shares held by each; provided, however, that for these
purposes, one share of Common Stock will be deemed to equal one-tenth of a share
of Preferred Stock.
In addition to certain voting rights provided in the corporate agreements, the
holder of Shares, acting by consent of at least 51%, shall have the further
right to approve or disapprove a proposed sale of the Property, the merger of
the Company with any other entity and amendments to the corporate charter. A
vote of the holders of 66.67% of the Shares is required for the issue of any
additional shares of capital stock. Holders of Shares have no redemption or
conversion rights.
11
FSP Gael Apartments Corp.
Notes to Financial Statements
7. Capital Stock (continued)
COMMON STOCK
Franklin Street Properties Corp. ("FSP"), is the sole holder of the Company's
Common Stock. FSP has the right, as one class together with the holders of
Preferred Stock, to vote to elect the directors of the Company and to vote on
all matters except those voted by the holders of Shares of Preferred Stock.
Subsequent to the completion of the offering of the preferred shares the holders
of common shares are not entitled to receive any income, nor shall the Company
declare or pay any cash dividends on shares of Common Stock.
12
SCHEDULE III
FSP GAEL APARTMENTS CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
May 31, 2003
(in thousands)
Initial Cost
-----------------------------------
Costs
Capitalized
(Disposals)
Subsequent
Encumbrances Buildings & to
Description (1) Land Improvements Acquisition
- ----------- ------------ ---- ------------ -----------
Gael, Houston, Texas -- $ 3,312 $ 14,789 $ --
========== ======== ========= ==========
(in thousands)
Historical Costs
------------------------------------------------------------
Total Costs,
Net of Depreciable
Buildings & Accumulated Accumulated Life Date of
Description Land Improvements Total(2) Depreciation Depreciation Years Acquisition
- ----------- ---- ------------ -------- ------------ ------------ ----- -----------
Gael, Houston, Texas $ 3,312 $ 14,789 $ 18,101 $ 1,546 $ 16,555 15-27.5 July, 2000
======== ========== ======== =========== ==========
(1) There are no encumbrances on the above property.
(2) The aggregate cost for Federal Income Tax purposes approximates total
historical costs.
13
FSP GAEL APARTMENTS CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
The following table summarizes the changes in the Company's real estate
investment and accumulated depreciation:
For the For the For the
Period Ended Years Ended Period Ended
May 31, December 31, December 31,
(in thousands) 2003 2002 2001 2000
=======================================================================================
Real estate investments, at cost:
Balance, beginning of period $18,101 $18,101 $18,101 $ --
Acquisitions -- -- -- 18,101
Improvements -- -- -- --
Dispositions -- -- -- --
---------------------------------------------------------------------------------------
Balance, end of period $18,101 $18,101 $18,101 $18,101
=======================================================================================
Accumulated depreciation:
Balance, beginning of period $ 1,322 $ 784 $ 246 $ --
Depreciation 224 538 538 246
Dispositions -- -- -- --
---------------------------------------------------------------------------------------
Balance, end of period $ 1,546 $ 1,322 $ 784 $ 246
=======================================================================================
14
FSP Goldentop Technology Center Corp.
Financial Statements
May 31, 2003, December 31, 2002, 2001 and 2000
Table of Contents
Page
----
Financial Statements
Independent Auditor's Report................................................. 1
Balance Sheets as of May 31, 2003, December 31, 2002 and 2001................ 2
Statements of Operations for the period ended May 31, 2003, the years
ended December 31, 2002 and 2001 and for the period August 16, 2000
(date of inception) to December 31, 2000............................... 3
Statements of Changes in Stockholders' Equity for the period ended
May 31, 2003, the years ended December 31, 2002 and 2001 and for the
period August 16, 2000 (date of inception) to December 31, 2000........ 4
Statements of Cash Flows for the period ended May 31, 2003, the years ended
December 31, 2002 and 2001 and for the period August 16, 2000
(date of inception) to December 31, 2000............................... 5
Notes to Financial Statements............................................. 6-13
Schedule of Real Estate and Accumulated Depreciation..................... 14-15
[LETTERHEAD OF BRAVER AND COMPANY, P.C.]
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
FSP Goldentop Technology Center Corp.
(a Delaware Corporation)
We have audited the accompanying balance sheets of FSP Goldentop Technology
Center Corp. (a Delaware Corporation) as of May 31, 2003, December 31, 2002 and
2001, and the related statements of operations, changes in stockholders' equity
and cash flows, as well as the financial statement schedule listed in the
accompanying index, for the period ended May 31, 2003, the years ended December
31, 2002 and 2001, and for the period from August 16, 2000 (date of inception)
to December 31, 2000. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements and financial statement schedule are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements and financial statement schedule. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial statement schedule
referred to above present fairly, in all material respects, the financial
position of FSP Goldentop Technology Center Corp. as of May 31, 2003, December
31, 2002 and 2001, and the results of its operations and its cash flows for the
period ended May 31, 2003, the years ended December 31, 2002 and 2001, and for
the initial period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America.
As described in Note 3 to the Financial Statements, effective June 1, 2003, the
Company merged with Franklin Street Properties Corp., the sole shareholder of
the Company's common stock.
/s/ Braver and Company, P.C.
Newton, Massachusetts
July 11, 2003
1
FSP Goldentop Technology Center Corp.
Balance Sheets
May 31, December 31, December 31,
(in thousands, except shares and par value amounts) 2003 2002 2001
===========================================================================================================
Assets:
Real estate investments, at cost:
Land $ 4,427 $ 4,427 $ 4,427
Buildings and improvements 15,183 15,183 15,183
- --------------------------------------------------------------------------------------------------------
19,610 19,610 19,610
Less accumulated depreciation 1,054 892 503
- --------------------------------------------------------------------------------------------------------
Real estate investments, net 18,556 18,718 19,107
Cash and cash equivalents 268 512 534
Cash-funded reserve 850 841 852
Tenant receivables 28 13 --
Step rent receivable -- 289 193
Prepaid expenses and other assets 48 20 15
- --------------------------------------------------------------------------------------------------------
Total assets $ 19,750 $ 20,393 $ 20,701
========================================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses $ 25 $ 25 $ 45
Dividends payable 317 497 480
- --------------------------------------------------------------------------------------------------------
Total liabilities 342 522 525
- --------------------------------------------------------------------------------------------------------
Commitments and contingencies:
Stockholders' Equity:
Preferred Stock, $.01 par value per share, 231.5 shares
authorized, issued and outstanding -- -- --
Common Stock, $.01 par value per share, 1 share
authorized, issued and outstanding -- -- --
Additional paid-in capital 21,221 21,221 21,221
Retained deficit and dividends in excess of earnings (1,813) (1,350) (1,045)
- --------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 19,408 19,871 20,176
- --------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 19,750 $ 20,393 $ 20,701
========================================================================================================
See accompanying notes to financial statements.
2
FSP Goldentop Technology Center Corp.
Statements of Operations
For the Period
For the For the August 16, 2000
Period Ended Years Ended (date of inception)
May 31, December 31, to December 31,
(in thousands, except shares and per share amounts) 2003 2002 2001 2000
==========================================================================================================================
Revenue:
Rental $ 707 $ 2,410 $ 2,439 $ 670
- --------------------------------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 55 89 96 64
Depreciation 162 389 389 113
Real estate taxes and insurance 146 332 297 81
Interest -- -- -- 809
- --------------------------------------------------------------------------------------------------------------------------
Total expenses 363 810 782 1,067
- --------------------------------------------------------------------------------------------------------------------------
Income (loss) before interest income 344 1,600 1,657 (397)
Interest income 7 27 54 15
- --------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 351 $ 1,627 $ 1,711 $ (382)
==========================================================================================================================
Weighted average number of preferred shares outstanding,
basic and diluted 231.5 231.5 231.5 231.5
==========================================================================================================================
Net income (loss) per preferred share, basic and diluted $ 1,516 $ 7,028 $ 7,391 $(1,650)
==========================================================================================================================
See accompanying notes to financial statements.
3
FSP Goldentop Technology Center Corp.
Statements of Changes in Stockholders' Equity
For the Period Ended May 31, 2003, the
Years Ended December 31, 2002 and 2001 and
For the Period August 16, 2000 (date of inception)
to December 31, 2000
Retained Deficit
Additional and Dividends Total
Preferred Common Paid in in Excess of Stockholders'
(in thousands, except shares) Stock Stock Capital Earnings Equity
===============================================================================================================
Private offering of 231.5 shares, net $ -- $ -- $ 21,221 $ -- $ 21,221
Dividends -- -- -- (473) (473)
Net Loss -- -- -- (382) (382)
- ---------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 -- -- 21,221 (855) 20,366
Dividends -- -- -- (1,901) (1,901)
Net Income -- -- -- 1,711 1,711
- ---------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 -- -- 21,221 (1,045) 20,176
Dividends -- -- -- (1,932) (1,932)
Net Income -- -- -- 1,627 1,627
- ---------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 -- -- 21,221 (1,350) 19,871
Dividends -- -- -- (814) (814)
Net Income -- -- -- 351 351
- ---------------------------------------------------------------------------------------------------------------
Balance, May 31, 2003 $ -- $ -- $ 21,221 $ (1,813) $ 19,408
===============================================================================================================
See accompanying notes to financial statements.
4
FSP Goldentop Technology Center Corp.
Statements of Cash Flows
For the Period
For the For the August 16, 2000
Period Ended Years Ended (date of inception)
May 31, December 31, to December 31,
(in thousands) 2003 2002 2001 2000
==================================================================================================================================
Cash flows from operating activities:
Net income (loss) $ 351 $ 1,627 $ 1,711 $ (382)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation 162 389 389 113
Changes in operating assets and liabilities
Cash-funded reserve (9) 11 (16) (834)
Tenant receivables (15) (13) -- --
Step rent receivable 289 (96) (151) (42)
Prepaid expenses and other assets (28) (5) 17 (32)
Accounts payable and accrued expenses -- (20) (48) 94
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 750 1,893 1,902 (1,083)
- -----------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets -- -- -- (19,610)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities -- -- -- (19,610)
- -----------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock -- -- -- 23,150
Syndication costs -- -- -- (1,929)
Dividends to stockholders (994) (1,915) (1,896) --
Proceeds from long-term debt -- -- -- 18,900
Principal payments on long-term debt -- -- -- (18,900)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash (used for) provided by financing activities (994) (1,915) (1,896) 21,221
- -----------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (244) (22) 6 528
Cash and cash equivalents, beginning 512 534 528 --
- -----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end $ 268 $ 512 $ 534 $ 528
=============================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ -- $ -- $ -- $ 809
Disclosure of non-cash financing activities:
Dividends declared but not paid $ 317 $ 497 $ 480 $ 474
See accompanying notes to financial statements.
5
FSP Goldentop Technology Center Corp.
Notes to Financial Statements
1. Organization
FSP Goldentop Technology Center Corp. (the "Company") was organized on August
16, 2000 as a Corporation under the laws of the State of Delaware to purchase,
own and operate an existing commercial office building located in San Diego,
California (the "Property"). The Property consists of a two-story
R&D/Office/Corporate Headquarters facility containing 141,000 total square feet
of space situated on 8 acres of land. The Company acquired the Property on
September 22, 2000.
2. Summary of Significant Accounting Policies
ESTIMATES AND ASSUMPTIONS
The Company prepares its financial statements and related notes in conformity
with accounting principles generally accepted in the United States of America
("GAAP"). These principles require management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
RECLASSIFICATIONS
Certain information in the 2002, 2001 and 2000 financial statements have been
reclassified to conform to the 2003 presentation.
REAL ESTATE AND DEPRECIATION
Real estate assets are stated at the lower of cost or fair value, as
appropriate, less accumulated depreciation.
Costs related to property acquisition and improvements are capitalized. Typical
capital items include new roofs, site improvements, various exterior building
improvements and major interior renovations. Funding for capital improvement
typically is provided by cash set aside at the time the property was purchased.
Routine replacements and ordinary maintenance and repairs that do not extend the
life of the asset are expensed as incurred. Typical expense items include
interior painting, landscaping and minor carpet replacements. Funding for
repairs and maintenance items typically is provided by cash flows from operating
activities.
Depreciation is computed using the straight-line method over the assets'
estimated useful lives as follows:
Category Years
-------- -----
Building - Commercial 39
Building Improvements 15-39
Furniture and equipment 5-7
6
FSP Goldentop Technology Center Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
REAL ESTATE AND DEPRECIATION (continued)
The following schedule reconciles the cost of the property as shown in the
Offering Memorandum as to the amounts shown on the Company's Balance Sheet:
(in thousands)
Price per Offering Memorandum $ 18,900
Plus: Acquisition fees 463
Plus: Other acquisition costs 247
---------------------------------------------------------------------
Total Acquisition Costs $ 19,610
=====================================================================
These costs are reported in the Company's Balance Sheet as follows:
Land $ 4,427
Building 15,183
---------------------------------------------------------------------
Total reported in Balance Sheet $ 19,610
=====================================================================
The Company evaluates its assets used in operations by identifying indicators of
impairment and by comparing the sum of the estimated undiscounted future cash
flows for each asset to the asset's carrying value. When indicators of
impairment are present and the sum of the undiscounted future cash flows is less
than the carrying value of such asset, an impairment loss is recorded equal to
the difference between the asset's current carrying value and its fair value
based on discounting its estimated future cash flows. At May 31, 2003, December
31, 2002, 2001 and 2000, no such indicators of impairment were identified.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an initial
maturity of three months or less to be cash equivalents.
CASH-FUNDED RESERVES
The Company has set aside funds in anticipation of future capital needs of the
property. Although these funds typically are used for the payment of real estate
assets and deferred leasing commissions, there is no legal restriction on their
use and they may be used for any company purpose.
MARKETABLE SECURITIES
The Company accounts for investments in debt securities under the provisions of
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". The Company typically has classified its debt securities as
available-for-sale.
There were no investments in marketable securities at May 31, 2003, December 31,
2002 and 2001.
7
FSP Goldentop Technology Center Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
CONCENTRATION OF CREDIT RISKS
Cash, cash equivalents and short-term investments are financial instruments that
potentially subject the Company to a concentration of credit risk. The Company
maintains its cash balances and short-term investments principally in one bank
which the Company believes to be creditworthy. The Company periodically assesses
the financial condition of the bank and believes that the risk of loss is
minimal. Cash balances held with various financial institutions frequently
exceed the insurance limit of $100,000 provided by the Federal Deposit Insurance
Corporation.
For the period ended May 31, 2003, the years ended December 31, 2002 and 2001
and the period ended December 31, 2000, rental income was derived from one
tenant, Northrup Grumman. As such, future receipts are dependent upon the
financial strength of the lessee and its ability to perform under the lease
agreement.
FINANCIAL INSTRUMENTS
The Company estimates that the carrying value of cash and cash equivalents, and
cash-funded reserves approximate their fair values based on their short-term
maturity and prevailing interest rates.
STEP RENT RECEIVABLE
The lease provides for fixed increases over the life of the lease. Rental
revenue is recognized on the straight-line basis over the related lease term;
however, billings by the Company are based on required minimum rentals in
accordance with the lease agreement. Step rent receivable, which is the
cumulative revenue recognized in excess of amounts billed by the Company, is $0,
$289,000 and $193,000 at May 31, 2003, December 31, 2002 and 2001, respectively.
SYNDICATION FEES
Syndication fees are selling commissions and other costs associated with the
initial offering of the Company's preferred shares. Such costs, in the amount of
$1,929,000 have been reported as a reduction in the Stockholders' Equity in the
Company's Balance Sheets.
REVENUE RECOGNITION
The Company has retained substantially all of the risks and benefits of
ownership of the Company's commercial property and accounts for its lease as an
operating lease. Rental income from the lease, which may include rent
concessions (including free rent and tenant improvement allowances) and
scheduled increases in rental rates during the lease term, is recognized on a
straight-line basis. The Company does not have any percentage rent arrangements
with its commercial property tenant. Reimbursable costs are included in rental
income in the period earned.
For the For the For the
Period Ended Years Ended Period Ended
May 31, December 31, December 31,
(in thousands) 2003 2002 2001 2000
==================================================================================================
Income from leases $ 857 $ 2,002 $ 1,947 $ 534
Straight-line rent adjustment (289) 96 151 42
Reimbursable expenses 139 312 341 94
--------------------------------------------------------------------------------------------------
Total $ 707 $ 2,410 $ 2,439 $ 670
==================================================================================================
INTEREST AND OTHER
Interest income and other income are recognized when the related services are
performed and the earnings process is complete.
8
FSP Goldentop Technology Center Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
INCOME TAXES
The Company has elected to be taxed as a REIT under the Internal Revenue Code of
1986, as amended. As a REIT, the Company generally is entitled to a tax
deduction for dividends paid to its shareholders, thereby effectively subjecting
the distributed net income of the Company to taxation at the shareholder level
only. The Company must comply with a variety of restrictions to maintain its
status as a REIT. These restrictions include the type of income it can earn, the
type of assets it can hold, the number of shareholders it can have and the
concentration of their ownership, and the amount of the Company's taxable income
that must be distributed annually.
NET INCOME PER SHARE
The Company follows Statement of Financial Accounting Standards No. 128
"Earnings per Share", which specifies the computation, presentation and
disclosure requirements for the Company's net income per share. Basic net income
per share is computed by dividing net income by the weighted average number of
shares outstanding during the period. Diluted net income per share reflects the
potential dilution that could occur if securities or other contracts to issue
shares were exercised or converted into shares. There were no potential dilutive
shares outstanding at May 31, 2003, December 31, 2002, 2001 and 2000. The
denominator used for calculating basic and diluted net income per share is as
follows:
For the For the For the
Period Ended Years Ended Period Ended
May 31, December 31, December 31,
2003 2002 2001 2000
==============================================================================================
Weighted average number of
preferred shares outstanding 231.5 231.5 231.5 231.5
3. Related Party Transactions
On January 10, 2003, the Board of Directors of the Company and twelve other
companies (the "Target REITS"), whose common stock is owned by Franklin Street
Properties Corp. ("FSP"), resolved to enter into an Agreement and Plan of Merger
(the "Merger Agreement") with FSP. On May 30, 2003, a majority of the preferred
stockholders of the Company and the Target REITS, as well as a majority of the
common stockholders of FSP approved the merger. The effect of the merger is that
the stockholders of the Company and the Target REITS exchanged their stock for
common stock of FSP effective June 1, 2003.
The Company executed a management agreement with FSP Property Management LLC, an
affiliate of FSP, that provides for a management fee equal to 1% of collected
revenues and is cancelable with 30 days notice by either party. For the period
ended May 31, 2003 and the years ended December 31, 2002 and 2001, and the
period ended December 31, 2000, fees incurred under the agreement were $8,000,
$20,000, $19,000 and $6,000, respectively.
An acquisition fee of $463,000 and other costs totaling $199,000 were paid in
2000 to an affiliate of the Common Shareholder. Such fees were included in the
cost of the real estate.
Syndication fees of $1,852,000 were paid in 2000 to an affiliate of the Common
Shareholder for services related to syndication of the Company's preferred
stock.
During 2000, the Company borrowed and repaid in full:
Note payable to FSP, principal of $18,900,000 with interest equal to the
Citizens Bank base rate. Interest paid to FSP was $57,000. The average
interest rate during the time the loan was outstanding was 9.50%.
A commitment fee of $752,000 was paid to FSP for obtaining the first
mortgage loan. Such amount is included in interest expense on the
Statement of Operations.
9
FSP Goldentop Technology Center Corp.
Notes to Financial Statements
4. Recent Accounting Standards
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations," which addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This Statement requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable estimate of the fair value
can be made. The associated asset retirement costs are capitalized as part of
the carrying amount of the long-lived asset. This Statement was effective at the
beginning of 2003. The impact of adoption did not have a material impact on the
Company's financial position, results of operations and cash flows.
In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets". This Statement supersedes SFAS No. 121 and
requires that long-lived assets that are to be disposed of by sale be measured
at the lower of book value or fair value less costs to sell. SFAS No. 144
retains the fundamental provisions of SFAS 121 for (a) recognition and
measurement of the impairment of long-lived assets to be held and used, and (b)
measurement of long-lived assets to be disposed of by sale, but broadens the
definition of what constitutes a discontinued operation and how the results of a
discontinued operation are to be measured and presented. This Statement was
effective at the beginning of 2002. The impact of adoption did not have a
material impact on the Company's financial position, results of operations and
cash flows. The Company does not have any real estate assets that it considers
"held for sale" at May 31, 2003.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements Nos.
4, 44, and 64, Amendment of SFAS 13, and Technical Corrections". This Statement
rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt",
and an amendment of that Statement, SFAS No. 64, "Extinguishments of Debt Made
to Satisfy Sinking-Fund Requirements". This Statement amends SFAS No. 13,
"Accounting for Leases". This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings or
describe their applicability under changed conditions. This statement was
effective for the Company's fiscal year ending December 31, 2003. The impact of
adoption did not have a material impact on the Company's financial position,
results of operations and cash flows.
In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities". This statement was effective January 1, 2003. SFAS
No. 146 replaces current accounting literature and requires the recognition of
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. The impact of
adoption did not have a material impact on the Company's financial position,
results of operations and cash flows.
5. Income Taxes
The Company files as a REIT under Sections 856-860 of the Internal Revenue Code
of 1986, as amended. In order to qualify as a REIT, the Company is required to
distribute at least 90% of its taxable income to shareholders and to meet
certain asset and income tests as well as certain other requirements. The
Company will generally not be liable for federal income taxes, provided it
satisfies their requirements. Even as a qualified REIT, the Company is subject
to certain state and local taxes on its income and property.
For the period ended December 31, 2000, the Company incurred a net operating
loss for income tax purposes of approximately $358,000 that can be carried
forward until it expires in the year 2020. The amount of the net operating loss
that may be used annually, if any, is limited.
At May 31, 2003, December 31, 2002 and 2001, the Company's net tax basis of its
real estate assets approximates the amount set forth in the Company's Balance
Sheets.
10
FSP Goldentop Technology Center Corp.
Notes to Financial Statements
5. Income Taxes (continued)
The following schedule reconciles GAAP Net Income to Taxable Income subject to
dividend requirements:
For the For the For the
Period Ended Years Ended Period Ended
May 31, December 31, December 31,
(in thousands) 2003 2002 2001 2000
====================================================================================================================
GAAP net income (loss) $ 351 $ 1,627 $ 1,711 $ (382)
Add: Book depreciation 162 389 389 113
Less: Tax depreciation (158) (442) (422) (41)
Straight-line rents 289 (96) (151) (42)
- --------------------------------------------------------------------------------------------------------------------
Taxable income (loss) subject to dividend requirement * $ 644 $ 1,478 $ 1,527 $ (352)
====================================================================================================================
* A tax loss is not subject to a dividend requirement.
The following schedule reconciles cash dividends paid or accrued to the
dividends paid deduction:
For the For the For the
Period Ended Years Ended Period Ended
May 31, December 31, December 31,
(in thousands) 2003 2002 2001 2000
========================================================================================================================
Cash dividends paid or accrued $1,311 $1,915 $1,896 $ --
Plus: Dividends designated from following year -- -- -- --
Less: Portion designated capital gain distribution -- -- -- --
Less: Return of Capital (667) (437) (369) --
Dividends paid deduction $ 644 $1,478 $1,527 $ --
========================================================================================================================
6. Cash Available for Distribution
The Company evaluates its performance based on Cash Available for Distribution
("CAD") as management believes that CAD represents the most accurate measure of
the Company's activity. CAD is the basis for distributions paid to equity
holders.
The Company defines CAD as: net income as computed in accordance with accounting
principles generally accepted in the United States of America ("GAAP"); plus
certain non-cash items included in the computation of net income (depreciation
and amortization, certain non-cash compensation expenses and straight line rent
adjustments); plus funds raised by the issuance of shares; plus the net proceeds
from the sale of land; less purchases of real estate assets, property and
equipment ("Capital Expenditures"), payments for deferred leasing commissions
and payments for deferred lease origination costs; plus (less) proceeds from
(payments to) cash reserves established at the acquisition date of the property
(cash funded reserve). Depreciation and amortization, non-cash compensation and
straight-line rents are an adjustment to CAD, as these are non-cash items
included in net income. Capital Expenditures, payments of deferred leasing
commissions and payments for deferred lease origination costs and the proceeds
from (payments to) the funded reserve are an adjustment to CAD, as they
represent cash items not reflected in income. CAD should not be considered as an
alternative to net income (determined in accordance with GAAP), as an indicator
of the Company's financial performance, nor as an alternative to cash flows from
operating activities (determined in accordance with GAAP), nor as a measure of
the Company's liquidity, nor is it necessarily indicative of sufficient cash
flow to fund all of the Company's needs. Other real estate companies may define
CAD in a different manner. It is at the Company's discretion to retain a portion
of CAD for operational needs. The Company believes that in order to facilitate a
clear understanding of the results of the Company, CAD should be examined in
connection with net income and cash flows from operating, investing and
financing activities in the financial statements.
11
FSP Goldentop Technology Center Corp.
Notes to Financial Statements
6. Cash Available for Distribution (continued)
The calculation of CAD is shown in the following table:
For the For the For the
Period Ended Years Ended Period Ended
May 31, December 31, December 31,
(in thousands) 2003 2002 2001 2000
===================================================================================================================
Net income (loss) $351 $1,627 $1,711 $ (382)
Depreciation 162 389 389 113
Straight line rent 289 (96) (151) (42)
Net proceeds from offering of shares -- -- -- 21,221
Purchase of land and building and improvements -- -- -- (19,610)
Establish funded reserve (9) 11 (16) (835)
- -------------------------------------------------------------------------------------------------------------------
Cash Available for Distribution $793 $1,931 $1,933 $ 465
===================================================================================================================
The Company's distributions are summarized as follows:
For the For the For the
(in thousands) Period Ended Years Ended Period Ended
May 31, December 31, December 31,
Quarter Paid 2003 2002 2001 2000
====================================================================================================================
First Quarter $ 497 $ 480 $ 467 $ --
Second Quarter 497 471 482 --
Third Quarter 317 467 468 --
Fourth Quarter -- 497 479 --
- --------------------------------------------------------------------------------------------------------------------
Dividends paid or accrued $1,311 $1,915 $1,896 $ --
====================================================================================================================
The Company declared a dividend payable to stockholders of record as of May 31,
2003, December 31, 2002, 2001 and 2000 of $317,000, $497,000, $480,000 and
$467,000, respectively.
Cash distributions are declared and paid based on the total outstanding shares
as of the record date and are typically paid in the quarter following the
quarter that CAD is generated.
7. Capital Stock
PREFERRED STOCK
Generally, each holder of Shares of Preferred Stock is entitled to receive
ratably all income and all dividends, if any, declared by the Board of Directors
out of funds legally available. The right to receive dividends shall be
non-cumulative, and no right to dividends shall accrue by reason of the fact
that no dividend has been declared in any prior year. Each holder of Shares will
be entitled to receive, to the extent that funds are available therefore,
$100,000 per Share, before any payment to the holder of Common Stock, out of
distributions to stockholders upon liquidation, dissolution or the winding up of
the Company; the balance of any such funds available for distribution will be
distributed among the holders of Shares and the holder of Common Stock, pro rata
based on the number of shares held by each; provided, however, that for these
purposes, one share of Common Stock will be deemed to equal one-tenth of a share
of Preferred Stock.
In addition to certain voting rights provided in the corporate agreements, the
holder of Shares, acting by consent of at least 51%, shall have the further
right to approve or disapprove a proposed sale of the Property, the merger of
the Company with any other entity and amendments to the corporate charter. A
vote of the holders of 66.67% of the Shares is required for the issue of any
additional shares of capital stock. Holders of Shares have no redemption or
conversion rights.
12
FSP Goldentop Technology Center Corp.
Notes to Financial Statements
7. Capital Stock (continued)
COMMON STOCK
Franklin Street Properties Corp. ("FSP"), is the sole holder of the Company's
Common Stock. FSP has the right, as one class together with the holders of
Preferred Stock, to vote to elect the directors of the Company and to vote on
all matters except those voted by the holders of Shares of Preferred Stock. The
holders of common shares are not entitled to receive any income, nor shall the
Company declare or pay any cash dividends on shares of Common Stock.
8. Commitments and Contingencies
The Company, as lessor, has future minimum rentals due under a non-cancelable
operating lease as follows:
Period/Year Ended
(in thousands) December 31, Amount
------------------- ---------
2003 $ 1,200
2004 2,115
2005 2,174
2006 2,235
2007 1,149
---------
$ 8,873
=========
In addition, the lessee is liable for real estate taxes and operating expenses
as direct expenses to the lessee.
Upon acquiring the commercial rental property in September 2000, the Company was
assigned the lease agreement between the seller of the Property and the existing
tenant. The original lease period is seven years with renewal options.
13
SCHEDULE III
FSP GOLDENTOP TECHNOLOGY CENTER CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
May 31, 2003
(in thousands)
Initial Cost
-----------------------------------
Costs
Capitalized
(Disposals)
Subsequent
Encumbrances Buildings & to
Description (1) Land Improvements Acquisition
- ----------- ------------ ---- ------------ -----------
Goldentop, San Diego, CA -- $ 4,427 $ 15,183 $ --
=========== ======== ========== =========
(in thousands)
Historical Costs
------------------------------------------------------------
Total Costs,
Net of Depreciable
Buildings & Accumulated Accumulated Life Date of
Description Land Improvements Total(2) Depreciation Depreciation Years Acquisition
- ----------- ---- ------------ -------- ------------ ------------ ----- -----------
Goldentop, San Diego, CA $ 4,427 $ 15,183 $ 19,610 $ 1,054 $ 18,556 15-39 September, 2000
======== =========== ======== =========== ===========
(1) There are no encumbrances on the above property.
(2) The aggregate cost for Federal Income Tax purposes approximates total
historical costs.
14
FSP GOLDENTOP TECHNOLOGY CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
The following table summarizes the changes in the Company's real estate
investment and accumulated depreciation:
For the For the For the
Period Ended Years Ended Period Ended
May 31, December 31, December 31,
(in thousands) 2003 2002 2001 2000
=============================================================================================
Real estate investments, at cost:
Balance, beginning of period $19,610 $19,610 $19,610 $ --
Acquisitions -- -- -- 19,610
Improvements -- -- -- --
Dispositions -- -- -- --
---------------------------------------------------------------------------------------------
Balance, end of period $19,610 $19,610 $19,610 $19,610
=============================================================================================
Accumulated depreciation:
Balance, beginning of period $ 892 $ 503 $ 114 $ --
Depreciation 162 389 389 114
Dispositions -- -- -- --
---------------------------------------------------------------------------------------------
Balance, end of period $ 1,054 $ 892 $ 503 $ 114
=============================================================================================
15
FSP Centennial Technology Center Corp.
Financial Statements
May 31, 2003, December 31, 2002, 2001 and 2000
Table of Contents
Page
----
Financial Statements
Independent Auditor's Report................................................. 1
Balance Sheets as of May 31, 2003, December 31, 2002 and 2001................ 2
Statements of Operations for the period ended May 31, 2003,
years ended December 31, 2002 and 2001 and for the Period
August 15, 2000 (date of inception) to December 31, 2000............... 3
Statements of Changes in Stockholders' Equity for the period ended
May 31, 2003, years ended December 31, 2002 and 2001 and for the
Period August 15, 2000 (date of inception) to December, 31, 2000....... 4
Statements of Cash Flows for the period ended May 31, 2003, years ended
December 31, 2002 and 2001 and for the Period August 15, 2000
(date of inception) to December, 31, 2000.............................. 5
Notes to Financial Statements............................................. 6-13
Schedule of Real Estate and Accumulated Depreciation..................... 14-15
[LETTERHEAD OF BRAVER AND COMPANY, P.C.]
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
FSP Centennial Technology Center Corp.
(a Delaware Corporation)
We have audited the accompanying balance sheets of FSP Centennial Technology
Center Corp. (a Delaware Corporation) as of May 31, 2003, December 31, 2002 and
2001, and the related statements of operations, changes in stockholders' equity
and cash flows, as well as the financial statement schedule listed in the
accompanying index, for the period ended May 31, 2003, the years ended December
31, 2002 and 2001, and for the period from August 15, 2000 (date of inception)
to December 31, 2000. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements and financial statement schedule are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements and financial statement schedule. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial statement schedule
referred to above present fairly, in all material respects, the financial
position of FSP Centennial Technology Center Corp. as of May 31, 2003 and
December 31, 2002 and 2001, and the results of its operations and its cash flows
for the period ended May 31, 2003, the years ended December 31, 2002 and 2001,
and for the initial period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States of America.
As described in Note 3 to the financial statements, effective June 1, 2003, the
Company merged with Franklin Street Properties Corp., the sole shareholder of
the Company's common stock.
/s/ Braver and Company, P.C.
Newton, Massachusetts
July 11, 2003
1
FSP Centennial Technology Center Corp.
Balance Sheets
May 31, December 31, December 31,
(in thousands, except shares and par value amounts) 2003 2002 2001
=====================================================================================================
Assets:
Real estate investments, at cost:
Land $ 1,305 $ 1,305 $ 1,305
Buildings and improvements 12,152 12,152 12,152
- --------------------------------------------------------------------------------------------------
13,457 13,457 13,457
Less accumulated depreciation 844 714 403
- --------------------------------------------------------------------------------------------------
Real estate investments, net 12,613 12,743 13,054
Cash and cash equivalents 385 540 535
Cash-funded reserve 475 470 470
Restricted cash 13 13 13
Step rent receivable -- 210 131
Prepaid expenses and other assets 11 9 19
- --------------------------------------------------------------------------------------------------
Total assets $ 13,497 $ 13,985 $ 14,222
==================================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses $ 184 $ 152 $ 173
Dividends payable 212 338 329
Tenant security deposits 13 13 13
- --------------------------------------------------------------------------------------------------
Total liabilities 409 503 515
- --------------------------------------------------------------------------------------------------
Commitments and contingencies:
Stockholders' Equity:
Preferred Stock, $.01 par value, 158 shares
authorized, issued and outstanding -- -- --
Common Stock, $.01 par value, 1 share
authorized, issued and outstanding -- -- --
Additional paid-in capital 14,459 14,459 14,459
Retained deficit and dividends in excess of earnings (1,371) (977) (752)
- --------------------------------------------------------------------------------------------------
Total Stockholders' Equity 13,088 13,482 13,707
- --------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 13,497 $ 13,985 $ 14,222
==================================================================================================
See accompanying notes to financial statements.
2
FSP Centennial Technology Center Corp.
Statements of Operations
For the Period
For the For the August 15, 2000
Period Ended Years Ended (date of inception)
May 31, December 31, to December 31,
(in thousands, except shares and per share amounts) 2003 2002 2001 2000
=========================================================================================================================
Revenue:
Rental $ 532 $1,832 $1,817 $ 414
- ------------------------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 145 262 237 81
Depreciation 130 311 312 91
Real estate taxes and insurance 103 146 137 27
Interest -- -- -- 698
- ------------------------------------------------------------------------------------------------------------------
Total expenses 378 719 686 897
- ------------------------------------------------------------------------------------------------------------------
Income (loss) before interest income 154 1,113 1,131 (483)
Interest income 6 16 37 5
- ------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 160 $1,129 $1,168 $ (478)
==================================================================================================================
Weighted average number of preferred shares outstanding,
basic and diluted 158 158 158 158
==================================================================================================================
Net income (loss) per preferred share, basic and diluted $1,013 $7,146 $7,392 $(3,025)
==================================================================================================================
See accompanying notes to financial statements.
3
FSP Centennial Technology Center Corp.
Statements of Changes in Stockholders' Equity
For the Period Ended May 31, 2003, the
Years Ended December 31, 2002 and 2001 and
For the Period August 15, 2000 (date of inception) to
December 31, 2000
Retained Deficit
Additional and Dividends Total
Preferred Common Paid in in Excess of Stockholders'
(in thousands, except shares) Stock Stock Capital Earnings Equity
================================================================================================================
Private offering of 158 shares, net $ -- $ -- $14,459 $ -- $ 14,459
Dividends -- -- -- (124) (124)
Net Loss -- -- -- (478) (478)
- ---------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 -- -- 14,459 (602) 13,857
Dividends -- -- -- (1,318) (1,318)
Net Income -- -- -- 1,168 1,168
- ---------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 -- -- 14,459 (752) 13,707
Dividends -- -- -- (1,354) (1,354)
Net Income -- -- -- 1,129 1,129
- ---------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 -- -- 14,459 (977) 13,482
Dividends -- -- -- (554) (554)
Net Income -- -- -- 160 160
- ---------------------------------------------------------------------------------------------------------------
Balance, May 31, 2003 $ -- $ -- $14,459 $(1,371) $ 13,088
===============================================================================================================
See accompanying notes to financial statements.
4
FSP Centennial Technology Center Corp.
Statements of Cash Flows
For the Period
For the For the August 15, 2000
Period Ended Years Ended (date of inception)
May 31, December 31, to December 31,
(in thousands) 2003 2002 2001 2000
==============================================================================================================================
Cash flows from operating activities:
Net income (loss) $ 160 $ 1,129 $ 1,168 $ (478)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation 130 311 312 91
Changes in operating assets and liabilities:
Cash-funded reserve (5) -- -- (470)
Restricted cash -- -- -- (13)
Step rent receivable 210 (79) (131) --
Prepaid expenses and other assets (2) 10 (16) (3)
Accounts payable and accrued expenses 32 (21) 85 88
Tenant security deposits -- -- -- 13
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 525 1,350 1,418 (772)
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets -- -- -- (13,457)
- --------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities -- -- -- (13,457)
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock -- -- -- 15,800
Syndication costs -- -- -- (1,340)
Dividends to stockholders (680) (1,345) (1,114) --
Proceeds from long-term debt -- -- -- 13,000
Principal payments on long-term debt -- -- -- (13,000)
- --------------------------------------------------------------------------------------------------------------------------
Net cash (used for) provided by financing activities (680) (1,345) (1,114) 14,460
- --------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (155) 5 304 231
Cash and cash equivalents, beginning 540 535 231 --
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end $ 385 $ 540 $ 535 $ 231
==========================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ -- $ -- $ -- $ 698
Disclosure of non-cash financing activities:
Dividends declared but not paid $ 212 $ 338 $ 329 $ 124
See accompanying notes to financial statements.
5
FSP Centennial Technology Center Corp.
Notes to Financial Statements
1. Organization
FSP Centennial Technology Center Corp. ("the "Company") was organized on August
15, 2000 as a Corporation under the laws of the State of Delaware to purchase,
own and operate commercial buildings located in Colorado Springs, Colorado (the
"Property"). The Property consists of two single story office buildings
containing 110,730 total square feet of space situated on approximately 9 acres
of land. The Company acquired the Property on September 28, 2000 and operates in
a manner intended to qualify as a real estate investment trust ("REIT") for
federal income tax purposes.
2. Summary of Significant Accounting Policies
ESTIMATES AND ASSUMPTIONS
The Company prepares its financial statements and related notes in conformity
with accounting principles generally accepted in the United States of America
("GAAP"). These principles require management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
RECLASSIFICATIONS
Certain information in the 2002, 2001 and 2000 financial statements have been
reclassified to conform to the 2003 presentation.
REAL ESTATE AND DEPRECIATION
Real estate assets are stated at the lower of cost or fair value, as
appropriate, less accumulated depreciation.
Costs related to property acquisition and improvements are capitalized. Typical
capital items include new roofs, site improvements, various exterior building
improvements and major interior renovations. Funding for capital improvement
typically is provided by cash set aside at the time the property was purchased.
Routine replacements and ordinary maintenance and repairs that do not extend the
life of the asset are expensed as incurred. Typical expense items include
interior painting, landscaping and minor carpet replacements. Funding for
repairs and maintenance items typically is provided by cash flows from operating
activities.
Depreciation is computed using the straight-line method over the assets'
estimated useful lives as follows:
Category Years
-------- -----
Building - Commercial 39
Building Improvements 15-39
Furniture and equipment 5-7
6
FSP Centennial Technology Center Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
REAL ESTATE AND DEPRECIATION (continued)
The Company evaluates its assets used in operations by identifying indicators of
impairment and by comparing the sum of the estimated undiscounted future cash
flows for each asset to the asset's carrying value. When indicators of
impairment are present and the sum of the undiscounted future cash flows is less
than the carrying value of such asset, an impairment loss is recorded equal to
the difference between the asset's current carrying value and its fair value
based on discounting its estimated future cash flows. At May 31, 2003, no such
indicators of impairment were identified.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an initial
maturity of three months or less to be cash equivalents.
CASH-FUNDED RESERVES
The Company has set aside funds in anticipation of future capital needs of the
property. Although these funds typically are used for the payment of real estate
assets and deferred leasing commissions, there is no legal restriction on their
use and they may be used for any company purpose.
RESTRICTED CASH
Restricted cash consists of tenant security deposits.
MARKETABLE SECURITIES
The Company accounts for investments in debt securities under the provisions of
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". The Company typically has classified its debt securities as
available-for-sale.
There were no investments in marketable securities at May 31, 2003, December 31,
2002 and 2001.
CONCENTRATION OF CREDIT RISKS
Cash, cash equivalents and short-term investments are financial instruments that
potentially subject the Company to a concentration of credit risk. The Company
maintains its cash balances and short-term investments principally in one bank
which the Company believes to be creditworthy. The Company periodically assesses
the financial condition of the bank and believes that the risk of loss is
minimal. Cash balances held with various financial institutions frequently
exceed the insurance limit of $100,000 provided by the Federal Deposit Insurance
Corporation.
For the period ended May 31, 2003, the years ended December 31, 2002 and 2001
and the period ended December 31, 2000, rental income was derived from various
tenants. As such, future receipts are dependent upon the financial strength of
the lessees and their ability to perform under the lease agreements.
The following tenants represent greater than 10% of total revenue:
2003 2002 2001 2000
-----------------------------------
Hewlett Packard 81% 81% 74% 78%
Starkey Laboratories, Inc. 12% 12% 11% 12%
FINANCIAL INSTRUMENTS
The Company estimates that the carrying value of cash and cash equivalents,
cash-funded reserves and restricted cash approximate their fair values based on
their short-term maturity and prevailing interest rates.
7
FSP Centennial Technology Center Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
STEP RENT RECEIVABLE
Certain leases provide for fixed increases over the life of the lease. Rental
revenue is recognized on the straight-line basis over the related lease term;
however, billings by the Company are based on required minimum rentals in
accordance with the lease agreements. Step rent receivable, which is the
cumulative revenue recognized in excess of amounts billed by the Company, is $0,
$210,000 and $131,000 at May 31, 2003, December 31, 2002 and 2001, respectively.
SYNDICATION FEES
Syndication fees are selling commissions and other costs associated with the
initial offering of the Company's preferred shares. Such costs, in the amount of
$1,340,489 have been reported as a reduction in the Stockholders' Equity in the
Company's Balance Sheet.
REVENUE RECOGNITION
The Company has retained substantially all of the risks and benefits of
ownership of the Company's commercial property and accounts for its leases as
operating leases. Rental income from leases, which may include rent concessions
(including free rent and tenant improvement allowances) and scheduled increases
in rental rates during the lease term, is recognized on a straight-line basis.
The Company does not have any percentage rent arrangements with its commercial
property tenants. Reimbursable costs are included in rental income in the period
earned. A schedule showing the components of rental revenue is shown below.
For the For the For the
Period Ended Years Ended Period Ended
May 31, December 31, December 31,
(in thousands) 2003 2002 2001 2000
================================================================================
Income from leases $ 578 $ 1,375 $ 1,323 $ 396
Straight-line rent adjustment (210) 79 131 -
Reimbursable expenses 164 378 363 18
--------------------------------------------------------------------------------
Total $ 532 $ 1,832 $ 1,817 $ 414
================================================================================
INTEREST AND OTHER
Interest income and other income are recognized when the related services are
performed and the earnings process is complete.
INCOME TAXES
The Company has elected to be taxed as a REIT under the Internal Revenue Code of
1986, as amended. As a REIT, the Company generally is entitled to a tax
deduction for dividends paid to its shareholders, thereby effectively subjecting
the distributed net income of the Company to taxation at the shareholder level
only. The Company must comply with a variety of restrictions to maintain its
status as a REIT. These restrictions include the type of income it can earn, the
type of assets it can hold, the number of shareholders it can have and the
concentration of their ownership, and the amount of the Company's taxable income
that must be distributed annually.
8
FSP Centennial Technology Center Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
NET INCOME PER SHARE
The Company follows Statement of Financial Accounting Standards No. 128
"Earnings per Share", which specifies the computation, presentation and
disclosure requirements for the Company's net income per share. Basic net income
per share is computed by dividing net income by the weighted average number of
shares outstanding during the period. Diluted net income per share reflects the
potential dilution that could occur if securities or other contracts to issue
shares were exercised or converted into shares. There were no potential dilutive
shares outstanding at May 31, 2003. Subsequent to the completion of the offering
of preferred shares, the holders of common stock are not entitled to share in
any income. The denominator used for calculating basic and diluted net income
per share is shown for preferred shares only and is as follows:
For the Period For the For the
Ended Years Ended Period Ended
May 31, December 31, December 31,
2003 2002 2001 2000
=======================================================================================
Weighted average number of
preferred shares outstanding 158 158 158 158
3. Related Party Transactions
On January 10, 2003, the Board of Directors of the Company and twelve other
companies (the "Target REITS"), whose common stock is owned by Franklin Street
Properties Corp. ("FSP"), resolved to enter into an Agreement and Plan of Merger
(the "Merger Agreement") with FSP. On May 30, 2003, a majority of the preferred
stockholders of the Company and the Target REITS, as well as a majority of the
common stockholders of FSP approved the merger. The effect of the merger is that
the stockholders of the Company and the Target REITS exchanged their stock for
common stock of FSP effective June 1, 2003.
The Company executed a management agreement with FSP Property Management LLC, an
affiliate of FSP, that provides for a management fee equal to 1% of collected
revenues and is cancelable with 30 days notice by either party. For the period
ended May 31, 2003, years ended December 31, 2002, 2001 and period ended
December 31, 2000, fees incurred under the agreement were $7,500, $17,886,
$21,638 and $4,304, respectively
An acquisition fee of $316,000 and other costs totaling $51,356 were paid in
2000 to an affiliate of the Common Shareholder. Such fees were included in the
cost of the real estate.
Syndication fees of $1,264,000 were paid in 2000 to an affiliate of the Common
Shareholder for services related to syndication of the Company's preferred
stock.
During 2000, the Company borrowed and repaid in full:
Note payable to FSP, principal of $13,000,000 with interest equal to the
Citizens Bank base rate. Interest paid to FSP was $172,744. The average
interest rate during the time the loan was outstanding was 7.87%.
A commitment fee of $513,500 was paid to FSP for obtaining the first
mortgage loan. Such amount is included in interest expenses on the
Statement of Operations.
4. Recent Accounting Standards
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations," which addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This Statement requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable estimate of the fair value
can be made. The associated asset retirement costs are capitalized as part of
the carrying amount of the long-lived asset. This Statement was effective at the
beginning of 2003. The impact of adoption did not have a material impact on the
Company's financial position, results of operations and cash flows.
9
FSP Centennial Technology Center Corp.
Notes to Financial Statements
4. Recent Accounting Standards (continued)
In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets". This Statement supersedes SFAS No. 121 and
requires that long-lived assets that are to be disposed of by sale be measured
at the lower of book value or fair value less costs to sell. SFAS No. 144
retains the fundamental provisions of SFAS 121 for (a) recognition and
measurement of the impairment of long-lived assets to be held and used, and (b)
measurement of long-lived assets to be disposed of by sale, but broadens the
definition of what constitutes a discontinued operation and how the results of a
discontinued operation are to be measured and presented. This Statement was
effective at the beginning of 2002. The impact of adoption did not have a
material impact on the Company's financial position, results of operations and
cash flows. The Company does not have any real estate assets that it considers
"held for sale" at May 31, 2003.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements Nos.
4, 44, and 64, Amendment of SFAS 13, and Technical Corrections". This Statement
rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt",
and an amendment of that Statement, SFAS No. 64, "Extinguishments of Debt Made
to Satisfy Sinking-Fund Requirements". This Statement amends SFAS No. 13,
"Accounting for Leases". This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings or
describe their applicability under changed conditions. This statement was
effective for the Company's fiscal year ending December 31, 2003. The impact of
adoption did not have a material impact on the Company's financial position,
results of operations and cash flows.
In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities". This statement was effective January 1, 2003. SFAS
No. 146 replaces current accounting literature and requires the recognition of
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. The impact of
adoption did not have a material impact on the Company's financial position,
results of operations and cash flows.
5. Income Taxes
The Company files as a REIT under Sections 856-860 of the Internal Revenue Code
of 1986, as amended. In order to qualify as a REIT, the Company is required to
distribute at least 90% of its taxable income to shareholders and to meet
certain asset and income tests as well as certain other requirements. The
Company will generally not be liable for federal income taxes, provided it
satisfies their requirements. Even as a qualified REIT, the Company is subject
to certain state and local taxes on its income and property.
For the period ended December 31, 2000, the Company incurred a net operating
loss for income tax purposes of approximately $461,000 that can be carried
forward until it expires in the year 2020. The amount of the net operating loss
that may be used annually, if any, is limited.
At May 31, 2003, December 31, 2002, 2001 and 2000 the Company's net tax basis of
properties approximates the amount set forth in the Company's Balance Sheet.
The following schedule reconciles GAAP net income to taxable income subject to
dividend requirements:
For the For the For the
Period Ended Years Ended Period Ended
May 31, December 31, December 31,
(in thousands) 2003 2002 2001 2000
==================================================================================================================
GAAP net income (loss) $ 160 $ 1,129 $ 1,168 $ (478)
Add: Book depreciation 130 311 312 91
Less: Tax depreciation and amortization (127) (303) (304) (70)
Straight-line rents 210 (79) (131) --
- ------------------------------------------------------------------------------------------------------------------
Taxable income (loss) subject to dividend requirement * $ 373 $ 1,058 $ 1,045 $ (457)
==================================================================================================================
* A tax loss is not subject to a dividend requirement.
10
FSP Centennial Technology Center Corp.
Notes to Financial Statements
5. Income Taxes (continued)
The following schedule reconciles cash dividends paid or accrued to the
dividends paid deduction:
For the For the For the
Period Ended Years Ended Period Ended
May 31, December 31, December 31,
(in thousands) 2003 2002 2001 2000
===========================================================================================================================
Cash dividends paid or accrued $ 892 $ 1,345 $ 1,114 $ --
Less: Dividends designated to prior year -- -- -- --
Plus: Dividends designated from following year -- -- -- --
Less: Portion designated capital gain distribution -- -- -- --
Less: Return of Capital (519) (287) (69) --
- ---------------------------------------------------------------------------------------------------------------------------
Dividends paid deduction $ 373 $ 1,058 $ 1,045 $ --
===========================================================================================================================
6. Cash Available for Distribution
The Company evaluates its performance based on Cash Available for Distribution
("CAD") as management believes that CAD represents the most accurate measure of
the Company's activity. CAD is the basis for distributions paid to equity
holders.
The Company defines CAD as: net income as computed in accordance with accounting
principles generally accepted in the United States of America ("GAAP"); plus
certain non-cash items included in the computation of net income (depreciation
and amortization, certain non-cash compensation expenses and straight line rent
adjustments); plus funds raised by the issuance of shares; plus the net proceeds
from the sale of land; less purchases of real estate assets, property and
equipment ("Capital Expenditures") payments for deferred leasing commissions and
payments for deferred lease origination costs; plus (less) proceeds from
(payments to) cash reserves established at the acquisition date of the property
(cash-funded reserves). Depreciation and amortization, non-cash compensation and
straight-line rents are an adjustment to CAD, as these are non-cash items
included in net income. Capital Expenditures, payments of deferred leasing
commissions and payments for deferred lease origination costs and the proceeds
from (payments to) the funded reserve are an adjustment to CAD, as they
represent cash items not reflected in income. CAD should not be considered as an
alternative to net income (determined in accordance with GAAP), as an indicator
of the Company's financial performance, nor as an alternative to cash flows from
operating activities (determined in accordance with GAAP), nor as a measure of
the Company's liquidity, nor is it necessarily indicative of sufficient cash
flow to fund all of the Company's needs. Other real estate companies may define
CAD in a different manner. It is at the Company's discretion to retain a portion
of CAD for operational needs. The Company believes that in order to facilitate a
clear understanding of the results of the Company, CAD should be examined in
connection with net income and cash flows from operating, investing and
financing activities in the financial statements.
11
FSP Centennial Technology Center Corp.
Notes to Financial Statements
6. Cash Available for Distribution (continued)
The calculation of CAD is shown in the following table:
For the For the For the
Period Ended Years Ended Period Ended
May 31, December 31, December 31,
(in thousands) 2003 2002 2001 2000
=======================================================================================================
Net income (loss) $ 160 $ 1,129 $ 1,168 $ (478)
Depreciation and amortization 130 312 312 91
Straight line rent 210 (79) (131) --
Net proceeds from offering of shares -- -- -- 14,460
Purchase of land and building -- -- -- (13,457)
Payments from (establish) funded reserve (5) -- -- (470)
- -------------------------------------------------------------------------------------------------------
Cash Available for Distribution $ 495 $ 1,362 $ 1,349 $ 146
=======================================================================================================
The Company's distributions are summarized as follows:
For the For the For the
Period Ended Years Ended Period Ended
May 31, December 31, December 31,
(in thousands) 2003 2002 2001 2000
========================================================================================================
First Quarter $ 338 $ 329 $ 124 $--
Second Quarter 342 331 330 --
Third Quarter 212 341 330 --
Fourth Quarter -- 344 330 --
- --------------------------------------------------------------------------------------------------------
Dividends paid or accrued $ 892 $ 1,345 $ 1,114 $--
========================================================================================================
The Company declared a dividend payable to stockholders of record as of May 31,
2003, December 31, 2002, 2001 and 2000 of $212,000, $338,000, $329,000 and
$124,000, respectively.
Cash distributions are declared and paid on the total outstanding shares as of
the record date and are typically paid in the quarter following the quarter that
CAD is generated.
7. Capital Stock
PREFERRED STOCK
Generally, each holder of Shares of Preferred Stock is entitled to receive
ratably all dividends, if any, declared by the Board of Directors out of funds
legally available. The right to receive dividends shall be non-cumulative, and
no right to dividends shall accrue by reason of the fact that no dividend has
been declared in any prior year. Each holder of Shares will be entitled to
receive, to the extent that funds are available therefore, $100,000 per Share,
before any payment to the holder of Common Stock, out of distributions to
stockholders upon liquidation, dissolution or the winding up of the Company; the
balance of any such funds available for distribution will be distributed among
the holders of Shares and the holder of Common Stock, pro rata based on the
number of shares held by each; provided, however, that for these purposes, one
share of Common Stock will be deemed to equal one-tenth of a share of Preferred
Stock.
12
FSP Centennial Technology Center Corp.
Notes to Financial Statements
7. Capital Stock (continued)
PREFERRED STOCK
In addition to certain voting rights provided in the corporate agreements, the
holder of Shares, acting by consent of at least 51%, shall have the further
right to approve or disapprove a proposed sale of the Property, the merger of
the Company with any other entity and amendments to the corporate charter. A
vote of the holders of 66.67% of the Shares is required for the issue of any
additional shares of capital stock. Holders of Shares have no redemption or
conversion rights.
COMMON STOCK
Franklin Street Properties Corp. ("FSP"), is the sole holder of the Company's
Common Stock. FSP has the right, as one class together with the holders of
Preferred Stock, to vote to elect the directors of the Company and to vote on
all matters except those voted by the holders of Shares of Preferred Stock.
Subsequent to the completion of the offering of the preferred shares the holders
of common shares are not entitled to receive any income, nor shall the Company
declare or pay any cash dividends on shares of Common Stock.
8. Commitments and Contingencies
The Company, as lessor, has future minimum rentals due under non-cancelable
operating leases as follows:
For the
Period/Year Ended
(in thousands) December 31, Amount
----------------- ------
2003 $ 813
2004 1,305
2005 1,177
2006 1,226
2007 1,236
Thereafter 2,802
-------
$ 8,559
=======
In addition, the lessees are liable for real estate taxes and certain operating
expenses of the property.
Upon acquiring the commercial rental property in September, 2000, the Company
was assigned the lease agreements between the seller of the Property and the
existing tenants. The original lease periods range from four to ten years with
renewal options.
13
SCHEDULE III
FSP CENTENNIAL TECHNOLOGY CENTER CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
May 31, 2003
(in thousands)
Initial Cost
-----------------------------------
Costs
Capitalized
(Disposals)
Subsequent
Encumbrances Buildings & to
Description (1) Land Improvements Acquisition
- ----------- ------------ ---- ------------ -----------
Centennial Technology Center
Colorado Springs, CO -- $ 1,305 $ 12,152 $ --
========= ======== ========== =========
Historical Costs
------------------------------------------------------------
Total Costs,
Net of Depreciable
Buildings & Accumulated Accumulated Life Date of
Description Land Improvements Total(2) Depreciation Depreciation Years Acquisition
- ----------- ---- ------------ -------- ------------ ------------ ----- -----------
Centennial Technology Center
Colorado Springs, CO $ 1,305 $ 12,152 $ 13,457 $ 844 $ 12,613 15-39 September, 2000
======= ========== ======== ========== ===========
(1) There are no encumbrances on the above property.
(2) The aggregate cost for Federal Income Tax purposes approximates total
historical costs.
14
FSP CENTENNIAL TECHNOLOGY CENTER CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
The following table summarizes the changes in the Company's real estate
investment and accumulated depreciation:
For the For the For the
Period Ended Years Ended Period Ended
May 31, December 31, December 31,
(in thousands) 2003 2002 2001 2000
========================================================================================
Real estate investments, at cost:
Balance, beginning of period $13,457 $13,457 $13,457 $ --
Acquisitions -- -- -- 13,457
Improvements -- -- -- --
Dispositions -- -- -- --
----------------------------------------------------------------------------------------
Balance, end of period $13,457 $13,457 $13,457 $13,457
========================================================================================
Accumulated depreciation:
Balance, beginning of period $ 714 $ 403 $ 91 $ --
Depreciation 130 311 312 91
Dispositions -- -- -- --
----------------------------------------------------------------------------------------
Balance, end of period $ 844 $ 714 $ 403 $ 91
========================================================================================
15
FSP Meadow Point Corp.
Financial Statements
May 31, 2003, December 31, 2002 and 2001
Table of Contents
Page
----
Financial Statements
Independent Auditor's Report................................................. 1
Balance Sheets as of May 31, 2003, December 31, 2002 and 2001................ 2
Statements of Operations for the period ended May 31, 2003, the year
ended December 31, 2002 and for the period January 24, 2001
(date of inception) to December 31, 2001............................... 3
Statements of Changes in Stockholders' Equity for the period ended
May 31, 2003, the year ended December 31, 2002 and for the period
January 24, 2001 (date of inception) to December 31, 2001.............. 4
Statements of Cash Flows for the period ended May 31, 2003, the year
ended December 31, 2002 and for the period January 24, 2001
(date of inception) to December 31, 2001............................... 5
Notes to Financial Statements............................................. 6-13
Schedule of Real Estate and Accumulated Depreciation..................... 14-15
[LETTERHEAD OF BRAVER AND COMPANY, P.C.]
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
FSP Meadow Point Corp.
(a Delaware Corporation)
We have audited the accompanying balance sheets of FSP Meadow Point Corp. (a
Delaware Corporation) as of May 31, 2003, December 31, 2002 and 2001, and the
related statements of operations, changes in stockholders' equity and cash
flows, as well as the financial statement schedule listed in the accompanying
index, for the period ended May 31, 2003, the year ended December 31, 2002, and
for the period from January 24, 2001 (date of inception) to December 31, 2001.
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements and financial statement schedule are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements and financial statement schedule. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial statement schedule
referred to above present fairly, in all material respects, the financial
position of FSP Meadow Point Corp. as of May 31, 2003, December 31, 2002 and
2001, and the results of its operations and its cash flows for the period ended
May 31, 2003, the year ended December 31, 2002, and for the initial period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States of America.
As described in Note 3 to the financial statements, effective June 1, 2003, the
Company merged with Franklin Street Properties Corp., the sole shareholder of
the Company's common stock.
/s/ Braver and Company, P.C.
Newton, Massachusetts
July 11, 2003
1
FSP Meadow Point Corp.
Balance Sheets
May 31, December 31, December 31,
(in thousands, except shares and par value amounts) 2003 2002 2001
===========================================================================================================
Assets:
Real estate investments, at cost:
Land $ 2,126 $ 2,126 $ 2,126
Buildings and improvements 19,625 19,625 19,625
- -----------------------------------------------------------------------------------------------------------
21,751 21,751 21,751
Less accumulated depreciation 1,111 902 398
- -----------------------------------------------------------------------------------------------------------
Real estate investments, net 20,640 20,849 21,353
Cash and cash equivalents 613 771 607
Cash-funded reserve 900 896 896
Restricted cash 271 271 268
Tenant receivables -- 5 1
Step rent receivable -- 525 267
Prepaid expenses and other assets 16 22 25
- -----------------------------------------------------------------------------------------------------------
Total assets $ 22,440 $ 23,339 $ 23,417
===========================================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses $ 276 $ 183 $ 130
Dividends payable 354 562 511
Tenant security deposits 271 271 268
- -----------------------------------------------------------------------------------------------------------
Total liabilities 901 1,016 909
- -----------------------------------------------------------------------------------------------------------
Commitments and contingencies:
Stockholders' Equity:
Preferred Stock, $.01 par value per share, 257.5 shares
authorized, issued and outstanding -- -- --
Common Stock, $.01 par value per share, 1 share
authorized, issued and outstanding -- -- --
Additional paid-in capital 23,624 23,624 23,624
Retained deficit and dividends in excess of earnings (2,085) (1,301) (1,116)
- -----------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 21,539 22,323 22,508
- -----------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 22,440 $ 23,339 $ 23,417
===========================================================================================================
See accompanying notes to financial statements.
2
FSP Meadow Point Corp.
Statements of Operations
For the Period
For the For the January 24, 2001
Period Ended Year Ended (date of inception)
May 31, December 31, to December 31,
(in thousands, except shares and per share amounts) 2003 2002 2001
=====================================================================================================================
Revenue:
Rental $ 919 $3,617 $2,788
- ---------------------------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 456 863 707
Real estate taxes and insurance 113 334 255
Depreciation 209 504 398
Interest -- -- 1,047
- ---------------------------------------------------------------------------------------------------------------------
Total expenses 778 1,701 2,407
- ---------------------------------------------------------------------------------------------------------------------
Income before interest income 141 1,916 381
Interest income 8 30 37
- ---------------------------------------------------------------------------------------------------------------------
Net income before common dividends 149 1,946 418
Dividends paid to common shareholders prior to
syndication of preferred shares -- -- 13
- ---------------------------------------------------------------------------------------------------------------------
Net income attributable to preferred shareholders $ 149 $1,946 $ 405
=====================================================================================================================
Weighted average number of preferred shares outstanding,
basic and diluted 257.5 257.5 257.5
=====================================================================================================================
Net income per preferred share, basic and diluted $ 579 $7,557 $1,573
=====================================================================================================================
See accompanying notes to financial statements.
3
FSP Meadow Point Corp.
Statements of Changes in Stockholders' Equity
For the Period Ended May 31, 2003, the
Year Ended December 31, 2002 and
For the Period January 24, 2001 (date of inception) to
December 31, 2001
Retained Deficit
Additional and Dividends Total
Preferred Common Paid in in Excess of Stockholders'
(in thousands, except shares) Stock Stock Capital Earnings Equity
========================================================================================================================
Private offering of 257.5 shares, net $ -- $ -- $ 23,624 $ -- $ 23,624
Dividends -- -- -- (1,534) (1,534)
Net Income -- -- -- 418 418
- ------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 -- -- 23,624 (1,116) 22,508
Dividends -- -- -- (2,131) (2,131)
Net Income -- -- -- 1,946 1,946
- ------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 -- -- 23,624 (1,301) 22,323
Dividends -- -- -- (933) (933)
Net Income -- -- -- 149 149
- ------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 $ -- $ -- $ 23,624 $ (2,085) $ 21,539
========================================================================================================================
See accompanying notes to financial statements.
4
FSP Meadow Point Corp.
Statements of Cash Flows
For the Period
For the For the January 24, 2001
Period Ended Year Ended (date of inception)
May 31, December 31, to December 31,
(in thousands) 2003 2002 2001
==============================================================================================================================
Cash flows from operating activities:
Net income $ 149 $ 1,946 $ 418
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation 209 504 398
Changes in operating assets and liabilities
Cash-funded reserve (4) -- (896)
Restricted cash -- (3) (268)
Tenant receivables 5 (4) (1)
Step rent receivable 525 (258) (267)
Prepaid expenses and other assets 6 3 (25)
Accounts payable and accrued expenses 93 53 130
Tenant security deposits -- 3 268
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 983 2,244 (243)
- ------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets -- -- (21,751)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities -- -- (21,751)
- ------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock -- -- 25,750
Syndication costs -- -- (2,126)
Dividends to stockholders (1,141) (2,080) (1,023)
Proceeds from long-term debt -- -- 21,000
Principal payments on long-term debt -- -- (21,000)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities (1,141) (2,080) 22,601
- ------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (158) 164 607
Cash and cash equivalents, beginning 771 607 --
- ------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end $ 613 $ 771 $ 607
=======================================================================================================================-======
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ -- $ -- $ 1,047
Disclosure of non-cash financing activities:
Dividends declared but not paid $ 354 $ 562 $ 511
See accompanying notes to financial statements.
5
FSP Meadow Point Corp.
Notes to Financial Statements
1. Organization
FSP Meadow Point Corp. (the "Company") was organized on January 24, 2001 as a
Corporation under the laws of the State of Delaware to purchase, own and operate
a commercial office building located in Chantilly, Virginia (the "Property").
The Property consists of a five-story Class "A" suburban office building
containing approximately 135,000 square feet located on approximately 6.3 acres
of land. The company acquired the Property on March 15, 2001. The Company
operates in a manner intended to qualify as a real estate investment trust
("REIT") for Federal income tax purposes.
2. Summary of Significant Accounting Policies
ESTIMATES AND ASSUMPTIONS
The Company prepares its financial statements and related notes in conformity
with accounting principles generally accepted in the United States of America
("GAAP"). These principles require management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
RECLASSIFICATIONS
Certain balances in the 2002 and 2001 financial statements have been
reclassified to conform to the 2003 presentation.
REAL ESTATE AND DEPRECIATION
Real estate assets are stated at the lower of cost or fair value, as
appropriate, less accumulated depreciation.
Costs related to property acquisition and improvements are capitalized. Typical
capital items include new roofs, site improvements, various exterior building
improvements and major interior renovations. Funding for capital improvements
typically is provided by cash set aside at the time the property was purchased.
Routine replacements and ordinary maintenance and repairs that do not extend the
life of the asset are expensed as incurred. Typical expense items include
interior painting, landscaping and minor carpet replacements. Funding for
repairs and maintenance items typically is provided by cash flows from operating
activities.
Depreciation is computed using the straight-line method over the assets'
estimated useful lives as follows:
Category Years
-------- -----
Building - Commercial 39
Building Improvements 15-39
Furniture and equipment 5-7
6
FSP Meadow Point Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
REAL ESTATE AND DEPRECIATION (continued)
The following schedule reconciles the cost of the property as shown in the
Offering Memorandum as to the amounts shown on the Company's Balance Sheet:
(in thousands)
Price per Offering Memorandum $21,000
Plus: Acquisition fees paid to FSP 515
Plus: Other acquisition costs 236
-----------------------------------------------------------------------
Total Acquisition Costs $21,751
=======================================================================
These costs are reported in the Company's Balance Sheet as follows:
Land $ 2,126
Building 19,625
-----------------------------------------------------------------------
Total reported in Balance Sheet $21,751
=======================================================================
The Company evaluates its assets used in operations by identifying indicators of
impairment and by comparing the sum of the estimated undiscounted future cash
flows for each asset to the asset's carrying value. When indicators of
impairment are present and the sum of the undiscounted future cash flows is less
than the carrying value of such asset, an impairment loss is recorded equal to
the difference between the asset's current carrying value and its fair value
based on discounting its estimated future cash flows. At May 31, 2003, no such
indicators of impairment were identified.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an initial
maturity of three months or less to be cash equivalents.
CASH-FUNDED RESERVES
The Company has set aside funds in anticipation of future capital needs of the
property. Although these funds typically are used for the payment of real estate
assets and deferred leasing commissions, there is no legal restriction on their
use and they may be used for any company purpose.
RESTRICTED CASH
Restricted cash consists of tenant security deposits.
MARKETABLE SECURITIES
The Company accounts for investments in debt securities under the provisions of
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". The Company typically has classified its debt securities as
available-for-sale.
There were no investments in marketable securities at May 31, 2003, December 31,
2002 and 2001.
7
FSP Meadow Point Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
CONCENTRATION OF CREDIT RISKS
Cash, cash equivalents and short-term investments are financial instruments that
potentially subject the Company to a concentration of credit risk. The Company
maintains its cash balances and short-term investments principally in one bank
which the Company believes to be creditworthy. The Company periodically assesses
the financial condition of the bank and believes that the risk of loss is
minimal. Cash balances held with various financial institutions frequently
exceed the insurance limit of $100,000 provided by the Federal Deposit Insurance
Corporation.
For the period ended May 31, 2003 rental income was derived principally from one
tenant, CACI, Inc. As such, future receipts are dependent upon the financial
strength of the lessee and its ability to perform under the lease agreement.
FINANCIAL INSTRUMENTS
The Company estimates that the carrying value of cash and cash equivalents,
cash-funded reserves and restricted cash approximate their fair values based on
their short-term maturity and prevailing interest rates.
STEP RENT RECEIVABLE
Certain leases provide for fixed increases over the life of the lease. Rental
revenue is recognized on the straight-line basis over the related lease term;
however, billings by the Company are based on required minimum rentals in
accordance with the lease agreements. Step rent receivable, which is the
cumulative revenue recognized in excess of amounts billed by the Company, is $0,
$525,000 and $267,000 at May 31, 2003, December 31, 2002 and 2001, respectively.
SYNDICATION FEES
Syndication fees are selling commissions and other costs associated with the
initial offering of the Company's preferred shares. Such costs, in the amount of
$2,126,000 have been reported as a reduction in the Stockholders' Equity in the
Company's Balance Sheets.
REVENUE RECOGNITION
The Company has retained substantially all of the risks and benefits of
ownership of the Company's commercial property and accounts for its leases as
operating leases. Rental income from leases, which may include rent concession
(including free rent and tenant improvement allowances) and scheduled increases
in rental rates during the lease term, is recognized on a straight-line basis.
The Company does not have any percentage rent arrangements with its commercial
property tenants. Reimbursable costs are included in rental income in the period
earned. A schedule showing the components of rental revenue is shown below.
For the For the For the
Period Ended Year Ended Period Ended
May 31, December 31, December 31,
(in thousands) 2003 2002 2001
=========================================================================================
Income from leases $1,370 $3,214 $2,496
Straight-line rent adjustment (525) 258 267
Reimbursable expenses 74 145 25
-----------------------------------------------------------------------------------------
Total $ 919 $3,617 $2,788
=========================================================================================
INTEREST AND OTHER
Interest income and other income are recognized when the related services are
performed and the earnings process is complete.
8
FSP Meadow Point Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
INCOME TAXES
The Company has elected to be taxed as a REIT under the Internal Revenue Code of
1986, as amended. As a REIT, the Company generally is entitled to a tax
deduction for dividends paid to its shareholders, thereby effectively subjecting
the distributed net income of the Company to taxation at the shareholder level
only. The Company must comply with a variety of restrictions to maintain its
status as a REIT. These restrictions include the type of income it can earn, the
type of assets it can hold, the number of shareholders it can have and the
concentration of their ownership, and the amount of the Company's taxable income
that must be distributed annually.
NET INCOME PER SHARE
The Company follows Statement of Financial Accounting Standards No. 128
"Earnings per Share", which specifies the computation, presentation and
disclosure requirements for the Company's net income per share. Basic net income
per share is computed by dividing net income by the weighted average number of
shares outstanding during the period. Diluted net income per share reflects the
potential dilution that could occur if securities or other contracts to issue
shares were exercised or converted into shares. There were no potential dilutive
shares outstanding at May 31, 2003. Subsequent to the completion of the offering
of preferred shares, the holders of common stock are not entitled to share in
any income. The denominator used for calculating basic and diluted net income
per share is shown for preferred shares only and is as follows:
For the For the For the
Period Ended Year Ended Period Ended
May 31, December 31, December 31,
2003 2002 2001
======================================================================================
Weighted average number of preferred
shares outstanding 257.5 257.5 257.5
3. Related Party Transactions
On January 10, 2003, the Board of Directors of the Company and twelve other
companies (the "Target REITS"), whose common stock is owned by Franklin Street
Properties Corp. ("FSP"), resolved to enter into an Agreement and Plan of Merger
(the "Merger Agreement") with FSP. On May 30, 2003, a majority of the preferred
stockholders of the Company and the Target REITS, as well as a majority of the
common stockholders of FSP approved the merger. The effect of the merger is that
the stockholders of the Company and the Target REITS exchanged their stock for
common stock of FSP effective June 1, 2003.
The Company executed a management agreement with FSP Property Management LLC, an
affiliate of FSP, that provides for a management fee equal to 1% of collected
revenues and is cancelable with 30 days notice by either party. For the period
ended May 31, 2003, the year ended December 31, 2002 and the period ended
December 31, 2001, fees incurred under the agreement were $8,000, $37,000 and
$26,000, respectively.
An acquisition fee $515,000 and other costs totaling $108,000 were paid in 2001
to an affiliate of the Common Shareholder. Such fees were included in the cost
of the real estate.
Syndication fees of $2,060,000 were paid in 2001 to an affiliate of the Common
Shareholder for services related to syndication of the Company's preferred
stock.
During 2001, the Company borrowed and repaid in full:
Note payable to FSP, principal of $21,000,000 with interest equal to the
Citizens Bank base rate. Interest paid to FSP was $81,000. The average
interest rate during the time the loan was outstanding was 8.25%.
A commitment fee of $966,000 was paid for obtaining the first mortgage
loan. Such amount is included in interest expense on the Statement of
Operations.
The Company paid a dividend of $13,000 in 2001 to the common shareholder
relating to earnings of the Company prior to the completion of the offering of
preferred shares.
9
FSP Meadow Point Corp.
Notes to Financial Statements
4. Recent Accounting Standards
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations," which addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This Statement requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable estimate of the fair value
can be made. The associated asset retirement costs are capitalized as part of
the carrying amount of the long-lived asset. This Statement was effective at the
beginning of 2003. The impact of adoption did not have a material impact on the
Company's financial position, results of operations and cash flows.
In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets". This Statement supersedes SFAS No. 121 and
requires that long-lived assets that are to be disposed of by sale be measured
at the lower of book value or fair value less costs to sell. SFAS No. 144
retains the fundamental provisions of SFAS 121 for (a) recognition and
measurement of the impairment of long-lived assets to be held and used, and (b)
measurement of long-lived assets to be disposed of by sale, but broadens the
definition of what constitutes a discontinued operation and how the results of a
discontinued operation are to be measured and presented. This Statement was
effective at the beginning of 2002. The impact of adoption did not have a
material impact on the Company's financial position, results of operations and
cash flows. The Company does not have any real estate assets that it considers
"held for sale" at May 31, 2003.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements Nos.
4, 44, and 64, Amendment of SFAS 13, and Technical Corrections". This Statement
rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt",
and an amendment of that Statement, SFAS No. 64, "Extinguishments of Debt Made
to Satisfy Sinking-Fund Requirements". This Statement amends SFAS No. 13,
"Accounting for Leases". This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings or
describe their applicability under changed conditions. This statement was
effective for the Company's fiscal year ending December 31, 2003. The impact of
adoption did not have a material impact on the Company's financial position,
results of operations and cash flows.
In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities". This statement was effective January 1, 2003. SFAS
No. 146 replaces current accounting literature and requires the recognition of
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. The impact of
adoption did not have a material impact on the Company's financial position,
results of operations and cash flows.
5. Income Taxes
The Company files as a REIT under Sections 856-860 of the Internal Revenue Code
of 1986, as amended. In order to qualify as a REIT, the Company is required to
distribute at least 90% of its taxable income to shareholders and to meet
certain asset and income tests as well as certain other requirements. The
Company will generally not be liable for federal income taxes, provided it
satisfies their requirements. Even as a qualified REIT, the Company is subject
to certain state and local taxes on its income and property.
For the period ended December 31, 2001, the Company incurred a net operating
loss for income tax purposes of approximately $12,000 that can be carried
forward until it expires in the year 2021. The amount of the net operating loss
that may be used annually, if any, is limited.
The Company's net tax basis of its real estate assets approximates the amount
set forth in the Company's Balance Sheets at May 31, 2003, December 31, 2002 and
2001.
10
FSP Meadow Point Corp.
Notes to Financial Statements
5. Income Taxes (continued)
The following schedule reconciles GAAP Net Income to Taxable Income subject to
dividend requirements:
For the For the For the
Period Ended Year Ended Period Ended
May 31, December 31, December 31,
(in thousands) 2003 2002 2001
=================================================================================================================
GAAP net income $ 149 $1,946 $ 418
Add: Book depreciation 209 504 398
Other book/tax differences, net -- -- 12
Less: Tax depreciation (203) (491) (388)
Straight-line rents 525 (258) (267)
- -----------------------------------------------------------------------------------------------------------------
Taxable income subject to dividend requirement $ 680 $1,701 $ 173
=================================================================================================================
The following schedule reconciles cash dividends paid or accrued to the
dividends paid deduction:
For the For the For the
Period Ended Year Ended Period Ended
May 31, December 31, December 31,
(in thousands) 2003 2002 2001
================================================================================================================
Cash dividends paid or accrued $1,495 $2,080 $1,023
Plus: Dividends designated from following year -- -- --
Less: Portion designated capital gain distribution -- -- --
Less: Return of Capital (815) (379) (850)
- ----------------------------------------------------------------------------------------------------------------
Dividends paid deduction $ 680 $1,701 $ 173
================================================================================================================
6. Cash Available for Distribution
The Company evaluates its performance based on Cash Available for Distribution
("CAD") as management believes that CAD represents the most accurate measure of
the Company's activity. CAD is the basis for distributions paid to equity
holders.
The Company defines CAD as: net income as computed in accordance with accounting
principles generally accepted in the United States of America ("GAAP"); plus
certain non-cash items included in the computation of net income (depreciation
and amortization, certain non-cash compensation expenses and straight line rent
adjustments); plus funds raised by the issuance of shares; plus the net proceeds
from the sale of land; less purchases of real estate assets, property and
equipment ("Capital Expenditures"), payments for deferred leasing commissions
and payments for deferred lease origination costs; plus (less) proceeds from
(payments to) cash reserves established at the acquisition date of the property
(cash-funded reserves). Depreciation and amortization, non-cash compensation and
straight-line rents are an adjustment to CAD, as these are non-cash items
included in net income. Capital Expenditures, payments of deferred leasing
commissions and payments for deferred lease origination costs and the proceeds
from (payments to) the funded reserve are an adjustment to CAD, as they
represent cash items not reflected in income. CAD should not be considered as an
alternative to net income (determined in accordance with GAAP), as an indicator
of the Company's financial performance, nor as an alternative to cash flows from
operating activities (determined in accordance with GAAP), nor as a measure of
the Company's liquidity, nor is it necessarily indicative of sufficient cash
flow to fund all of the Company's needs. Other real estate companies may define
CAD in a different manner. It is at the Company's discretion to retain a portion
of CAD for operational needs. We believe that in order to facilitate a clear
understanding of the results of the Company, CAD should be examined in
connection with net income and cash flows from operating, investing and
financing activities in the financial statements.
11
FSP Meadow Point Corp.
Notes to Financial Statements
6. Cash Available for Distribution (continued)
The calculation of CAD is shown in the following table:
For the For the For the
Period Ended Year Ended Period Ended
May 31, December 31, December 31,
(in thousands) 2003 2002 2001
=========================================================================================================
Net income $149 $1,946 $ 418
Depreciation 209 504 398
Straight line rent 525 (258) (267)
Net proceeds from offering of shares -- -- 23,624
Purchase of land and building and improvements -- -- (21,751)
Payments from (establish) funded reserves (4) -- (896)
---------------------------------------------------------------------------------------------------------
Cash Available for Distribution $879 $2,192 $ 1,526
=========================================================================================================
The Company's distributions are summarized as follows:
For the For the For the
Period Ended Year Ended Period Ended
May 31, December 31, December 31,
(in thousands) 2003 2002 2001
=========================================================================================================
First Quarter $ 562 $ 511 $ --
Second Quarter 579 523 --
Third Quarter 354 524 518
Fourth Quarter -- 522 505
---------------------------------------------------------------------------------------------------------
Dividends paid or accrued $1,495 $2,080 $1,023
=========================================================================================================
The Company declared a dividend payable to stockholders of record as of May 31,
2003, December 31, 2002 and 2001 of $354,000, $562,000 and $511,000,
respectively.
Cash distributions are declared and paid based on the total outstanding shares
as of the record date and are typically paid in the quarter following the
quarter that CAD is generated.
7. Capital Stock
PREFERRED STOCK
Generally, each holder of Shares of Preferred Stock is entitled to receive
ratably all income and all dividends, if any, declared by the Board of Directors
out of funds legally available. The right to receive dividends shall be
non-cumulative, and no right to dividends shall accrue by reason of the fact
that no dividend has been declared in any prior year. Each holder of Shares will
be entitled to receive, to the extent that funds are available therefore,
$100,000 per Share, before any payment to the holder of Common Stock, out of
distributions to stockholders upon liquidation, dissolution or the winding up of
the Company; the balance of any such funds available for distribution will be
distributed among the holders of Shares and the holder of Common Stock, pro rata
based on the number of shares held by each; provided, however, that for these
purposes, one share of Common Stock will be deemed to equal one-tenth of a share
of Preferred Stock.
In addition to certain voting rights provided in the corporate agreements, the
holder of Shares, acting by consent of at least 51%, shall have the further
right to approve or disapprove a proposed sale of the Property, the merger of
the Company with any other entity and amendments to the corporate charter. A
vote of the holders of 66.67% of the Shares is required for the issue of any
additional shares of capital stock. Holders of Shares have no redemption or
conversion rights.
12
FSP Meadow Point Corp.
Notes to Financial Statements
7. Capital Stock (continued)
COMMON STOCK
Franklin Street Properties Corp. (FSP), is the sole holder of the Company's
Common Stock. FSP has the right, as one class together with the holders of
Preferred Stock, to vote to elect the directors of the Company and to vote on
all matters except those voted by the holders of Shares of Preferred Stock.
Subsequent to the completion of the offering of the preferred shares the holders
of common shares are not entitled to receive any income, nor shall the Company
declare or pay any cash dividends on shares of Common Stock.
8. Commitments and Contingencies
The Company, as lessor, has future minimum rentals due under non-cancelable
operating leases as follows:
Period/Year Ended
(in thousands) December 31, Amount
------------------- --------
2003 $ 1,924
2004 3,376
2005 3,461
2006 3,547
2007 3,636
Thereafter 7,230
----------
$ 23,174
==========
In addition, the lessees are liable for real estate taxes and certain operating
expenses.
Upon acquiring the commercial rental property in March 2001, the Company was
assigned the lease agreements between the seller of the Property and the
existing tenants. The original lease periods range from five to ten years with
renewal options.
The lease periods expire in 2009 and 2010 with renewal options.
13
SCHEDULE III
FSP MEADOW POINT CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
May 31, 2003
(in thousands)
Initial Cost
-----------------------------------
Costs
Capitalized
(Disposals)
Subsequent
Encumbrances Buildings & to
Description (1) Land Improvements Acquisition
- ----------- ------------ ---- ------------ -----------
Meadow Point,
Chantilly, Virginia -- $ 2,126 $ 19,625 $ --
========== ======== ========== =========
(in thousands)
Historical Costs
------------------------------------------------------------
Total Costs,
Net of Depreciable
Buildings & Accumulated Accumulated Life Date of
Description Land Improvements Total(2) Depreciation Depreciation Years Acquisition
- ----------- ---- ------------ -------- ------------ ------------ ----- -----------
Meadow Point,
Chantilly, Virginia $ 2,126 $ 19,625 $ 21,751 $ 1,111 $ 20,640 15-39 March 2001
======== =========== ======== =========== ===========
(1) There are no encumbrances on the above property.
(2) The aggregate cost for Federal Income Tax purposes approximates total
historical costs.
14
FSP MEADOW POINT CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
The following table summarizes the changes in the Company's real estate
investment and accumulated depreciation:
For the For the For the
Period Ended Year Ended Period Ended
May 31, December 31, December 31,
(in thousands) 2003 2002 2001
=====================================================================================
Real estate investments, at cost:
Balance, beginning of period $21,751 $21,751 $ --
Acquisitions -- -- 21,751
Improvements -- -- --
Dispositions -- -- --
-------------------------------------------------------------------------------------
Balance, end of period $21,751 $21,751 $21,751
=====================================================================================
Accumulated depreciation:
Balance, beginning of period $ 902 $ 398 $ --
Depreciation 209 504 398
Dispositions -- -- --
-------------------------------------------------------------------------------------
Balance, end of period $ 1,111 $ 902 $ 398
=====================================================================================
15
FSP Timberlake Corp.
Financial Statements
May 31, 2003, December 31, 2002 and 2001
Table of Contents
Page
----
Financial Statements
Independent Auditor's Report................................................. 1
Balance Sheets as of May 31, 2003, December 31, 2002 and 2001................ 2
Statements of Operations for the period ended May 31, 2003, the
year ended December 31, 2002 and for the period April 16, 2001
(date of inception) to December 31, 2001............................... 3
Statements of Changes in Stockholders' Equity for the period ended
May 31, 2003, the year ended December 31, 2002 and for the period
April 16, 2001 (date of inception) to December 31, 2001................ 4
Statements of Cash Flows for the year period ended May 31, 2003, the
ended December 31, 2002 and for the period April 16, 2001
(date of inception) to December 31, 2001............................... 5
Notes to Financial Statements............................................. 6-14
Schedule of Real Estate and Accumulated Depreciation..................... 15-16
[LETTERHEAD OF BRAVER AND COMPANY, P.C.]
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
FSP Timberlake Corp.
(a Delaware Corporation)
We have audited the accompanying balance sheets of FSP Timberlake Corp. (a
Delaware Corporation) as of May 31, 2003, December 31, 2002 and 2001, and the
related statements of operations, changes in stockholders' equity and cash
flows, as well as the financial statement schedule listed in the accompanying
index, for the period ended May 31, 2003, the year ended December 31, 2002, and
for the period from April 16, 2001 (date of inception) to December 31, 2001.
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements and financial statement schedule are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements and financial statement schedule. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial statement schedule
referred to above present fairly, in all material respects, the financial
position of FSP Timberlake Corp. as of May 31, 2003, December 31, 2002 and 2001,
and the results of its operations and its cash flows for the period ended May
31, 2003, the year ended December 31, 2002, and for the initial period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States of America.
As described in Note 3 to the Financial Statements, effective June 1, 2003, the
Company merged with Franklin Street Properties Corp., the sole shareholder of
the Company's common stock.
/s/ Braver and Company, P.C.
Newton, Massachusetts
July 11, 2003
1
FSP Timberlake Corp.
Balance Sheets
May 31, December 31,
(in thousands, except shares and par value amounts) 2003 2002 2001
====================================================================================================
Assets:
Real estate investments, at cost:
Land $ 2,831 $ 2,831 $ 2,831
Buildings and improvements 40,714 40,714 40,714
- ----------------------------------------------------------------------------------------------------
43,545 43,545 43,545
Less accumulated depreciation 2,131 1,696 652
- ----------------------------------------------------------------------------------------------------
Real estate investments, net 41,414 41,849 42,893
Cash and cash equivalents 1,495 1,201 948
Cash funded reserves 1,725 1,759 1,787
Restricted cash 8 8 8
Tenant rent receivable -- 64 149
Step rent receivable -- 470 185
Prepaid expenses and other assets 23 7 13
Deferred leasing commissions
net of accumulated amortization of $7, $4 and $0 26 24 --
- ----------------------------------------------------------------------------------------------------
Total assets $ 44,691 $ 45,382 $ 45,983
====================================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses $ 700 $ 92 $ 80
Dividends payable 749 1,129 1,021
Tenant security deposits 8 8 8
- ----------------------------------------------------------------------------------------------------
Total liabilities 1,457 1,229 1,109
- ----------------------------------------------------------------------------------------------------
Commitments and Contingencies:
Stockholders' Equity:
Preferred Stock, $.01 par value, 515 shares -- -- --
authorized, issued and outstanding
Common Stock, $.01 par value, 1 share -- -- --
authorized, issued and outstanding
Additional paid-in capital 47,253 47,253 47,253
Retained deficit and dividends in excess of earnings (4,019) (3,100) (2,379)
- ----------------------------------------------------------------------------------------------------
Total Stockholders' Equity 43,234 44,153 44,874
- ----------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 44,691 $ 45,382 $ 45,983
====================================================================================================
See accompanying notes to financial statements.
2
FSP Timberlake Corp.
Statements of Operations
For the Period
For the For the April 16, 2001
Period Ended Year Ended (date of inception)
May 31, December 31, to December 31,
(in thousands, except shares and per share amounts) 2003 2002 2001
========================================================================================================================
Revenue:
Rental $ 2,162 $ 6,155 $ 3,641
- -----------------------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 413 896 546
Real estate taxes and insurance 363 804 479
Depreciation and amortization 438 1,048 652
Interest -- -- 2,060
- -----------------------------------------------------------------------------------------------------------------
Total expenses 1,214 2,748 3,737
- -----------------------------------------------------------------------------------------------------------------
Net income (loss) before interest income 948 3,407 (96)
Interest income 13 43 45
- -----------------------------------------------------------------------------------------------------------------
Net income (loss) before common dividends 961 3,450 (51)
Dividends paid to common shareholders prior to
syndication of preferred shares -- -- 90
- -----------------------------------------------------------------------------------------------------------------
Net income (loss) attributable to preferred shareholders $ 961 $ 3,450 $ (141)
=================================================================================================================
Weighted average number of preferred shares outstanding,
basic and diluted 515 515 515
=================================================================================================================
Net income (loss) per preferred share, basic and diluted $ 1,866 $ 6,699 $ (274)
=================================================================================================================
See accompanying notes to financial statements.
3
FSP Timberlake Corp.
Statements of Changes in Stockholders' Equity
for the Period Ended May 31, 2003,
for the Year Ended December 31, 2002 and
for the Period April 16, 2001 (date of inception)
to December 31, 2001
Retained Deficit
Additional and Dividends Total
Preferred Common Paid in in Excess of Stockholders'
(in thousands, except shares) Stock Stock Capital Earnings Equity
============================================================================================================================
Private offering of 515 shares, net $ -- $ -- $ 47,253 $ -- $ 47,253
Dividends -- -- -- (2,328) (2,328)
Net Loss -- -- -- (51) (51)
- ------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 -- -- 47,253 (2,379) 44,874
Dividends -- -- -- (4,171) (4,171)
Net Income -- -- -- 3,450 3,450
- ------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 -- -- 47,253 (3,100) 44,153
Dividends -- -- -- (1,880) (1,880)
Net Income -- -- -- 961 961
- ------------------------------------------------------------------------------------------------------------------------
Balance, May 31, 2003 $ -- $ -- $ 47,253 $ (4,019) $ 43,234
========================================================================================================================
See accompanying notes to financial statements.
4
FSP Timberlake Corp.
Statements of Cash Flows
For the Period
For the For the April 16, 2001
Period Ended Year Ended (date of inception)
(in thousands) May 31, 2003 December 31, 2002 to December 31, 2001
==================================================================================================================================
Cash flows from operating activities:
Net income (loss) $ 961 $ 3,450 $ (51)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization 438 1,048 652
Changes in operating assets and liabilities:
Cash-funded reserve 34 28 (1,787)
Restricted cash -- -- (8)
Tenant rent receivable 64 85 (149)
Step rent receivable 470 (285) (185)
Prepaid expenses and other assets (16) 6 (13)
Payment of deferred lease commissions (5) (28) --
Accounts payable and accrued expenses 608 12 80
Tenant security deposits -- -- 8
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 2,554 4,316 (1,453)
- -------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets -- -- (43,545)
- -------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities -- -- (43,545)
- -------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock -- -- 51,500
Syndication costs -- -- (4,247)
Dividends to stockholders (2,260) (4,063) (1,307)
Proceeds from long-term debt -- -- 42,150
Principal payments on long-term debt -- -- (42,150)
- -------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities (2,260) (4,063) 45,946
- -------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 294 253 948
Cash and cash equivalents, beginning 1,201 948 --
- -------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end $ 1,495 $ 1,201 $ 948
=========================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ -- $ -- $ 2,060
Disclosure of non-cash financing activities
Dividends declared but not paid $ 749 $ 1,129 $ 1,021
See accompanying notes to financial statements.
5
FSP Timberlake Corp.
Notes to Financial Statements
1. Organization
FSP Timberlake Corp. (the "Company") was organized on April 16, 2001 as a
Corporation under the laws of the State of Delaware to purchase, own and operate
a commercial office building located in Chesterfield, Missouri (the "Property").
The Property consists of two five-story Class "A" suburban office buildings that
contains approximately 233,000 square feet of space situated on approximately
11.5 acres of land. The Company acquired the Property on May 24, 2001 and
operates in a manner intended to qualify as a real estate investment trust
("REIT") for Federal income tax purposes.
2. Summary of Significant Accounting Policies
ESTIMATES AND ASSUMPTIONS
The Company prepares its financial statements and related notes in conformity
with accounting principles generally accepted in the United States of America
("GAAP"). These principles require management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
RECLASSIFICATIONS
Certain balances in the 2002 and 2001 financial statements have been
reclassified to conform to the 2003 presentation.
REAL ESTATE AND DEPRECIATION
Real estate assets are stated at the lower of cost or fair value, as
appropriate, less accumulated depreciation.
Costs related to property acquisition and improvements are capitalized. Typical
capital items include new roofs, site improvements, various exterior building
improvements and major interior renovations. Funding for capital improvement
typically is provided by cash set aside at the time the property was purchased.
Routine replacements and ordinary maintenance and repairs that do not extend the
life of the asset are expensed as incurred. Typical expense items include
interior painting, landscaping and minor carpet replacements. Funding for
repairs and maintenance items typically is provided by cash flows from operating
activities.
Depreciation is computed using the straight line method over the assets'
estimated useful lives as follows:
Category Years
-------- -----
Building - Commercial 39
Building Improvements 15-39
Furniture and equipment 5-7
6
FSP Timberlake Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
REAL ESTATE AND DEPRECIATION (continued)
The following schedule reconciles the cost of the property as shown in the
Offering Memorandum as to the amounts shown on the Company's Balance Sheet:
(in thousands)
Price per Offering Memorandum $ 42,150
Plus: Acquisition fees 1,030
Plus: Other acquisition costs 365
-------------------------------------------------------------------
Total Acquisition Costs $ 43,545
===================================================================
These costs are reported in the Company's Balance Sheet as follows :
Land $ 2,831
Building 40,714
-------------------------------------------------------------------
Total reported in Balance Sheet $ 43,545
===================================================================
The Company evaluates its assets used in operations by identifying indicators of
impairment and by comparing the sum of the estimated undiscounted future cash
flows for each asset to the asset's carrying value. When indicators of
impairment are present and the sum of the undiscounted future cash flows is less
than the carrying value of such asset, an impairment loss is recorded equal to
the difference between the asset's current carrying value and its fair value
based on discounting its estimated future cash flows. At May 31, 2003, no such
indicators of impairment were identified.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an initial
maturity of three months or less to be cash equivalents.
CASH-FUNDED RESERVES
The Company has set aside funds in anticipation of future capital needs of the
property. Although these funds typically are used for the payment of real estate
assets and deferred leasing commissions, there is no legal restriction on their
use and they may be used for any company purpose.
RESTRICTED CASH
Restricted cash consists of tenant security deposits.
MARKETABLE SECURITIES
The Company accounts for investments in debt securities under the provisions of
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". The Company typically has classified its debt securities as
available-for-sale.
There were no investments in marketable securities at May 31, 2003, December 31,
2002 and 2001.
7
FSP Timberlake Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
CONCENTRATION OF CREDIT RISKS
Cash, cash equivalents and short-term investments are financial instruments that
potentially subject the Company to a concentration of credit risk. The Company
maintains its cash balances and short-term investments principally in one bank
which the Company believes to be creditworthy. The Company periodically assesses
the financial condition of the bank and believes that the risk of loss is
minimal. Cash balances held with various financial institutions frequently
exceed the insurance limit of $100,000 provided by the Federal Deposit Insurance
Corporation.
For the period ended May 31, 2003, the year ended December 31, 2002 and period
ended December 31, 2001 rental income was derived from various tenants. As such,
future receipts are dependent upon the financial strength of the lessees and
their ability to perform under the lease agreements.
The following tenants represent greater than 10% of total revenue:
For the For the For the
Period Ended Year Ended Period Ended
May 31, 2003 December 31, 2002 May 31, 2003
-----------------------------------------------------
AMDOCS, Inc. 57% 57% 51%
Reimnsurance Group of America, Inc. 41% 41% 41%
FINANCIAL INSTRUMENTS
The Company estimates that the carrying value of cash and cash equivalents,
cash-funded reserves and restricted cash approximate their fair values based on
their short-term maturity and prevailing interest rates.
STEP RENT RECEIVABLE
Certain leases provide for fixed increases over the life of the lease. Rental
revenue is recognized on the straight-line basis over the related lease term;
however, billings by the Company are based on required minimum rentals in
accordance with the lease agreements. Step rent receivable, which is the
cumulative revenue recognized in excess of amounts billed by the Company, is $0,
$470,000 and $185,000 at May 31, 2003, December 31, 2002 and 2001, respectively.
DEFERRED LEASING COMMISSIONS
Deferred leasing commissions represent external leasing costs incurred in the
leasing of commercial space. These costs are capitalized and are amortized on a
straight-line basis over the remaining life of the related lease. Amortization
expense was approximately $3,000, $4,000 and $0 for the period ended May 31,
2003, the year ended December 31, 2002 and the period ended December 31, 2001,
respectively.
Payments for deferred leasing commission in 2003 and 2002 amounted to $33,000,
which is being amortized over the weighted-average period of four years in
respect of the leases. Details of the deferred leasing commissions:
For the For the For the
Period Ended Year Ended Period Ended
May 31, December 31, December 31,
2003 2002 2001
-------------------------------------------
Cost $ 33,000 $ 28,000 $ --
Accumulated amortization 7,000 4,000 --
-------------------------------------------
Book value $ 26,000 $ 24,000 $ --
===========================================
8
FSP Timberlake Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
DEFERRED LEASING COMMISSIONS (continued)
The estimated annual amortization expense for the periods succeeding May 31,
2003 are as follows:
2003 $ 4,000
2004 $ 7,000
2005 $ 7,000
2006 $ 3,000
SYNDICATION FEES
Syndication fees are selling commissions and other costs associated with the
initial offering of the Company's preferred shares. Such costs, in the amount of
$4,247,000 have been reported as a reduction in the Stockholders' Equity in the
Company's Balance Sheets.
REVENUE RECOGNITION
The Company has retained substantially all of the risks and benefits of
ownership of the Company's commercial property and accounts for its leases as
operating leases. Rental income from leases, which may include rent concessions
(including free rent and tenant improvement allowances) and scheduled increases
in rental rates during the lease term, is recognized on a straight-line basis.
The Company does not have any percentage rent arrangements with its commercial
property tenants. Reimbursable costs are included in rental income in the period
earned. A schedule showing the components of rental revenue is shown below.
For the For the For the
Period Ended Year Ended Period Ended
May 31, December 31, December 31,
(in thousands) 2003 2002 2001
=========================================================================================
Income from leases $2,209 $4,989 $ 2,937
Straight-line rent adjustment (470) 285 185
Reimbursable expenses and other 423 881 519
-----------------------------------------------------------------------------------------
Total $2,162 $6,155 $ 3,641
=========================================================================================
INTEREST AND OTHER
Interest income and other income are recognized when the related services are
performed and the earnings process is complete.
INCOME TAXES
The Company has elected to be taxed as a REIT under the Internal Revenue Code of
1986, as amended. As a REIT, the Company generally is entitled to a tax
deduction for dividends paid to its shareholders, thereby effectively subjecting
the distributed net income of the Company to taxation at the shareholder level
only. The Company must comply with a variety of restrictions to maintain its
status as a REIT. These restrictions include the type of income it can earn, the
type of assets it can hold, the number of shareholders it can have and the
concentration of their ownership, and the amount of the Company's taxable income
that must be distributed annually.
9
FSP Timberlake Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
NET INCOME PER SHARE
The Company follows Statement of Financial Accounting Standards No. 128
"Earnings per Share", which specifies the computation, presentation and
disclosure requirements for the Company's net income per share. Basic net income
per share is computed by dividing net income by the weighted average number of
shares outstanding during the period. Diluted net income per share reflects the
potential dilution that could occur if securities or other contracts to issue
shares were exercised or converted into shares. There were no potential dilutive
shares outstanding at May 31, 2003, December 31, 2002 and 2001. Subsequent to
the completion of the offering of preferred shares, the holders of common stock
are not entitled to share in any income. The denominator used for calculating
basic and diluted net income per share is shown for preferred shares only and is
as follows:
For the For the For the
Period Ended Year Ended Period Ended
May 31, December 31, December 31,
(in thousands) 2003 2002 2001
========================================================================================
Weighted average number of preferred
shares outstanding 515 515 515
3. Related Party Transactions
On January 10, 2003, the Board of Directors of the Company and twelve other
companies (the "Target REITS"), whose common stock is owned by Franklin Street
Properties Corp. ("FSP"), resolved to enter into an Agreement and Plan of Merger
(the "Merger Agreement") with FSP. On May 30, 2003, a majority of the preferred
stockholders of the Company and the Target REITS, as well as a majority of the
common stockholders of FSP approved the merger. The effect of the merger is that
the stockholders of the Company and the Target REITS exchanged their stock for
common stock of FSP effective June 1, 2003.
The Company executed a management agreement with FSP Property Management LLC, an
affiliate of FSP, that provides for a management fee equal to 1% of collected
revenues and is cancelable with 30 days notice by either party. For the period
ended May 31, 2003, the year ended December 31, 2002 and period ended December
31, 2001, fees incurred under the agreement were $27,000, $60,000 and $33,000,
respectively.
An acquisition fee of $1,030,000 and other costs totaling $240,000 were paid in
2001 to an affiliate of the Common Shareholder. Such fees were included in the
cost of the real estate.
Syndication fees of $4,120,000 were paid in 2001 to an affiliate of the Common
Shareholder for services related to syndication of the Company's preferred
stock.
During 2001, the Company borrowed and repaid in full:
Note payable to FSP, principal of $42,150,000 with interest equal to the
Citizens Bank base rate. Interest paid to FSP was $128,000. The average
interest rate during the time the loan was outstanding was 6.25%.
A commitment fee of $1,931,000 was paid for obtaining the first mortgage
loan. Such amount is included in interest expense on the Statement of
Operations.
The Company paid dividends of $90,000 in 2001 to the Common Shareholder,
relating to earnings of the Company prior to the completion of the offering of
preferred shares.
10
FSP Timberlake Corp.
Notes to Financial Statements
4. Recent Accounting Standards
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations," which addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This Statement requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable estimate of the fair value
can be made. The associated asset retirement costs are capitalized as part of
the carrying amount of the long-lived asset. This Statement was effective at the
beginning of 2003. The impact of adoption did not have a material impact on the
Company's financial position, results of operations and cash flows.
In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets". This Statement supersedes SFAS No. 121 and
requires that long-lived assets that are to be disposed of by sale be measured
at the lower of book value or fair value less costs to sell. SFAS No. 144
retains the fundamental provisions of SFAS 121 for (a) recognition and
measurement of the impairment of long-lived assets to be held and used, and (b)
measurement of long-lived assets to be disposed of by sale, but broadens the
definition of what constitutes a discontinued operation and how the results of a
discontinued operation are to be measured and presented. This Statement was
effective at the beginning of 2002. The impact of adoption did not have a
material impact on the Company's financial position, results of operations and
cash flows. The Company does not have any real estate assets that it considers
"held for sale" at May 31, 2003.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements Nos.
4, 44, and 64, Amendment of SFAS 13, and Technical Corrections". This Statement
rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt",
and an amendment of that Statement, SFAS No. 64, "Extinguishments of Debt Made
to Satisfy Sinking-Fund Requirements". This Statement amends SFAS No. 13,
"Accounting for Leases". This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings or
describe their applicability under changed conditions. This statement was
effective for the Company's fiscal year ending December 31, 2003. The impact of
adoption did not have a material impact on the Company's financial position,
results of operations and cash flows.
In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities". This statement was effective January 1, 2003. SFAS
No. 146 replaces current accounting literature and requires the recognition of
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. The impact of
adoption did not have a material impact on the Company's financial position,
results of operations and cash flows.
5. Income Taxes
The Company has elected to be taxed as a REIT under Sections 856-860 of the
Internal Revenue Code of 1986, as amended. In order to qualify as a REIT, the
Company is required to distribute at least 90% of its taxable income to
shareholders and to meet certain asset and income tests as well as certain other
requirements. The Company will generally not be liable for federal income taxes,
provided it satisfies these requirements. Even as a qualified REIT, the Company
is subject to certain state and local taxes on its income and property.
For the period ended December 31, 2001, the Company incurred a net operating
loss for income tax purposes of approximately $216,000 that can be carried
forward until it expires in the year 2021. The amount of the net operating loss
that may be used annually, if any, is limited.
The Company's net tax basis of its real estate assets approximates the amount
set forth in the Company's Balance Sheet at May 31, 2003, December 31, 2002 and
2001.
11
FSP Timberlake Corp.
Notes to Financial Statements
5. Income Taxes (continued)
The following schedule reconciles GAAP Net Income to Taxable Income subject to
dividend requirements:
For the For the For the
Period Ended Year Ended Period Ended
May 31, December 31, December 31,
(in thousands) 2003 2002 2001
=======================================================================================================
GAAP net income (loss) $ 961 $ 3,450 $ (51)
Add: Book depreciation and amortization 438 1,048 652
Other book/tax differences, net -- -- 23
Less: Tax depreciation and amortization (429) (1,021) (636)
Straight-line rents 470 (285) (185)
-------------------------------------------------------------------------------------------------------
Taxable income (loss) subject to dividend requirement * $1,440 $ 3,192 $(197)
=======================================================================================================
* A tax loss is not subject to a dividend requirement.
The following schedule reconciles cash dividends paid or accrued to the
dividends paid deduction:
For the For the For the
Period Ended Year Ended Period Ended
May 31, December 31, December 31,
(in thousands) 2003 2002 2001
======================================================================================================
Cash dividends paid or accrued $ 3,009 $ 4,063 $ 1,307
Plus: Dividends designated from following year -- -- --
Less: Portion designated capital gain distribution -- -- --
Less: Return of Capital (1,569) (871) (1,307)
------------------------------------------------------------------------------------------------------
Dividends paid deduction $ 1,440 $ 3,192 $ --
======================================================================================================
6. Cash Available for Distribution
The Company evaluates its performance based on Cash Available for Distribution
("CAD") as management believes that CAD represents the most accurate measure of
the Company's activity. CAD is the basis for distributions paid to equity
holders.
The Company defines CAD as: net income as computed in accordance with accounting
principles generally accepted in the United States of America ("GAAP"); plus
certain non-cash items included in the computation of net income (depreciation
and amortization, certain non-cash compensation expenses and straight line rent
adjustments); plus funds raised by the issuance of shares; plus the net proceeds
from the sale of land; less purchases of real estate assets, property and
equipment ("Capital Expenditures") payments for deferred leasing commissions and
payments for deferred lease origination costs; plus (less) proceeds from
(payments to) cash reserves established at the acquisition date of the property
(cash-funded reserves). Depreciation and amortization, non-cash compensation and
straight-line rents are an adjustment to CAD, as these are non-cash items
included in net income. Capital Expenditures, payments of deferred leasing
commissions and payments for deferred lease origination costs and the proceeds
from (payments to) the funded reserve are an adjustment to CAD, as they
represent cash items not reflected in income. CAD should not be considered as an
alternative to net income (determined in accordance with GAAP), as an indicator
of the Company's financial performance, nor as an alternative to cash flows from
operating activities (determined in accordance with GAAP), nor as a measure of
the Company's liquidity, nor is it necessarily indicative of sufficient cash
flow to fund all of the Company's needs. Other real estate companies may define
CAD in a different manner. It is at the Company's discretion to retain a portion
of CAD for operational needs. The Company believes that in order to facilitate a
clear understanding of the results of the Company, CAD should be examined in
connection with net income and cash flows from operating, investing and
financing activities in the financial statements.
12
FSP Timberlake Corp.
Notes to Financial Statements
6. Cash Available for Distribution (continued)
The calculation of CAD is shown in the following table:
For the For the For the
Period Ended Year Ended Period Ended
May 31, December 31, December 31,
(in thousands) 2003 2002 2001
==========================================================================================================
Net income (loss) $ 961 $3,450 $ (51)
Depreciation and amortization 438 1,048 652
Straight line rent 470 (285) (185)
Net proceeds from offering of shares -- -- 47,253
Purchase of land and building and improvements -- -- (43,545)
Payment of deferred leasing commissions (5) (28) --
Proceeds from (establish) funded reserve 34 28 (1,787)
----------------------------------------------------------------------------------------------------------
Cash Available for Distribution $1,898 $4,213 $ 2,337
==========================================================================================================
The Company's distributions are summarized as follows:
For the For the For the
(in thousands) Period Ended Year Ended Period Ended
May 31, December 31, December 31,
Quarter Paid 2003 2002 2001
====================================================================================
First Quarter $1,129 $1,021 $ --
Second Quarter 1,131 1,008 --
Third Quarter 749 989 295
Fourth Quarter -- 1,045 1,012
------------------------------------------------------------------------------------
Dividends paid or accrued $3,009 $4,063 $1,307
====================================================================================
The Company declared a dividend payable to stockholders of record as of May 31,
2003, December 31, 2002 and 2001 of $749,000, $1,129,000 and $1,021,000,
respectively.
Cash distributions are declared and paid based on the total outstanding shares
as of the record date and are typically paid in the quarter following the
quarter that CAD is generated.
7. Capital Stock
PREFERRED STOCK
Generally, each holder of Shares of Preferred Stock is entitled to receive
ratably all income and all dividends, if any, declared by the Board of Directors
out of funds legally available. The right to receive dividends shall be
non-cumulative, and no right to dividends shall accrue by reason of the fact
that no dividend has been declared in any prior year. Each holder of Shares will
be entitled to receive, to the extent that funds are available therefore,
$100,000 per Share, before any payment to the holder of Common Stock, out of
distributions to stockholders upon liquidation, dissolution or the winding up of
the Company; the balance of any such funds available for distribution will be
distributed among the holders of Shares and the holder of Common Stock, pro rata
based on the number of shares held by each; provided, however, that for these
purposes, one share of Common Stock will be deemed to equal one-tenth of a share
of Preferred Stock.
13
FSP Timberlake Corp.
Notes to Financial Statements
7. Capital Stock (continued)
PREFERRED STOCK (continued)
In addition to certain voting rights provided in the corporate agreements, the
holder of Shares, acting by consent of at least 51%, shall have the further
right to approve or disapprove a proposed sale of the Property, the merger of
the Company with any other entity and amendments to the corporate charter. A
vote of the holders of 66.67% of the Shares is required for the issue of any
additional shares of capital stock. Holders of Shares have no redemption or
conversion rights.
COMMON STOCK
Franklin Street Properties Corp. ("FSP"), is the sole holder of the Company's
Common Stock. FSP has the right, as one class together with the holders of
Preferred Stock, to vote to elect the directors of the Company and to vote on
all matters except those voted by the holders of Shares of Preferred Stock.
Subsequent to the completion of the offering of the preferred shares the holders
of common shares are not entitled to receive any income, nor shall the Company
declare or pay any cash dividends on shares of Common Stock.
8. Commitments and Contingencies
The Company, as lessor, has future minimum rentals due under non-cancelable
operating leases as follows:
Period/Year Ended
(in thousands) December 31, Amount
------------------- --------
2003 $ 3,070
2004 5,263
2005 5,318
2006 3,580
2007 2,307
Thereafter 3,947
----------
$ 23,485
==========
In addition, the lessees are liable for real estate taxes and certain operating
expenses of the property.
Upon acquiring the commercial rental property in May, 2001, the Company was
assigned the lease agreements between the seller of the Property and the
existing tenants. The original lease periods expire from 2004 through 2009 with
renewal options.
14
SCHEDULE III
FSP TIMBERLAKE CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
May 31, 2003
(in thousands)
Initial Cost
-----------------------------------
Costs
Capitalized
(Disposals)
Subsequent
Encumbrances Buildings & to
Description (1) Land Improvements Acquisition
- ----------- ------------ ---- ------------ -----------
Timberlake,
Chesterfield, Missouri -- $ 2,831 $ 40,714 $ --
========== ======== ========== =========
(in thousands)
Historical Costs
------------------------------------------------------------
Total Costs,
Net of Depreciable
Buildings & Accumulated Accumulated Life Date of
Description Land Improvements Total(2) Depreciation Depreciation Years Acquisition
- ----------- ---- ------------ -------- ------------ ------------ ----- -----------
Timberlake,
Chesterfield, Missouri $ 2,831 $ 40,714 $ 43,545 $ 2,131 $ 41,414 15-39 May, 2001
======== =========== ======== ========== ===========
(1) There are no encumbrances on the above property.
(2) The aggregate cost for Federal Income Tax purposes approximates the total
historical cost.
15
FSP TIMBERLAKE CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
The following table summarizes the changes in the Company's real estate
investment and accumulated depreciation:
For the For the For the
Period Ended Year Ended Period Ended
May 31, December 31, December 31,
(in thousands) 2003 2002 2001
===================================================================================
Real estate investments, at cost:
Balance, beginning of period $43,545 $43,545 --
Acquisitions -- -- 43,545
Improvements -- -- --
Dispositions -- -- --
-----------------------------------------------------------------------------------
Balance, end of period $43,545 $43,545 $43,545
===================================================================================
Accumulated depreciation:
Balance, beginning of period $ 1,696 $ 652 --
Depreciation 435 1,044 652
Dispositions -- -- --
-----------------------------------------------------------------------------------
Balance, end of period $ 2,131 $ 1,696 $ 652
===================================================================================
16
FSP Federal Way Corp.
Financial Statements
May 31, 2003, December 31, 2002 and 2001
Table of Contents
Page
----
Financial Statements
Independent Auditor's Report............................................. 1
Balance Sheets as of May 31, 2003, December 31, 2002 and 2001............ 2
Statements of Operations for the period ended May 31, 2003, the year
ended December 31, 2002 and for the period July 26, 2001
(date of inception) to December 31, 2001.......................... 3
Statements of Changes in Stockholders' Equity for the period ended
May 31, 2003, the year ended December 31, 2002 and for the
period July 26, 2001 (date of inception) to December 31, 2001..... 4
Statements of Cash Flows for the period ended May 31, 2003, the year
ended December 31, 2002 and for the period July 26, 2001
(date of inception) to December 31, 2001.......................... 5
Notes to Financial Statements............................................ 6-13
Schedule of Real Estate and Accumulated Depreciation..................... 14-15
[LETTERHEAD OF BRAVER AND COMPANY, P.C.]
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
FSP Federal Way Corp.
(a Delaware Corporation)
We have audited the accompanying balance sheets of FSP Federal Way Corp. (a
Delaware Corporation) as of May 31, 2003, December 31, 2002 and 2001, and the
related statements of operations, changes in stockholders' equity and cash
flows, as well as the financial statement schedule listed in the accompanying
index, for the period ended May 31, 2003, the year ended December 31, 2002, and
for the period from July 26, 2001 (date of inception) to December 31, 2001.
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements and financial statement schedule are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements and financial statement schedule. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial statement schedule
referred to above present fairly, in all material respects, the financial
position of FSP Federal Way Corp. as of May 31, 2003, December 31, 2002 and
2001, and the results of its operations and its cash flows for the period ended
May 31, 2003, the year ended December 31, 2002, and for the initial period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States of America.
As described in Note 3 to the Financial Statements, effective June 1, 2003, the
Company merged with Franklin Street Properties Corp., the sole shareholder of
the Company's common stock.
/s/ Braver and Company, P.C.
Newton, Massachusetts
July 11, 2003
1
FSP Federal Way Corp.
Balance Sheets
May 31, December 31, December 31,
(in thousands, except shares and par value amounts) 2003 2002 2001
=====================================================================================================
Assets:
Real estate investments, at cost:
Land $ 2,509 $ 2,509 $ 2,509
Buildings and improvements 13,141 13,141 13,141
- -----------------------------------------------------------------------------------------------------
15,650 15,650 15,650
Less accumulated depreciation 579 439 98
- -----------------------------------------------------------------------------------------------------
Real estate investments, net 15,071 15,211 15,552
Cash and cash equivalents 386 558 560
Cash-funded reserve 1,050 1,038 1,038
Step rent receivable -- 142 26
Prepaid expenses and other assets 5 2 1
Deferred lease origination costs, net of
accumulated amortization of $140, $99 and $4 321 362 457
- -----------------------------------------------------------------------------------------------------
Total assets $ 16,833 $ 17,313 $ 17,634
=====================================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses $ 159 $ 161 $ 173
Dividends payable 249 412 405
- -----------------------------------------------------------------------------------------------------
Total liabilities 408 573 578
- -----------------------------------------------------------------------------------------------------
Commitments and contingencies:
Stockholders' Equity:
Preferred Stock, $.01 par value, 200 shares
authorized, issued and outstanding -- -- --
Common Stock, $.01 par value, 1 share
authorized, issued and outstanding -- -- --
Additional paid-in capital 18,329 18,329 18,329
Retained deficit and dividends in excess of earnings (1,904) (1,589) (1,273)
- -----------------------------------------------------------------------------------------------------
Total Stockholders' Equity 16,425 16,740 17,056
- -----------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 16,833 $ 17,313 $ 17,634
=====================================================================================================
See accompanying notes to financial statements.
2
FSP Federal Way Corp.
Statements of Operations
For the Period
For the For the July 26, 2001
Period Ended Year Ended (date of inception)
May 31, December 31, to December 31,
(in thousands, except shares and per share amounts) 2003 2002 2001
================================================================================================================
Revenue:
Rental $ 578 $1,810 $ 528
- ----------------------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 32 39 43
Depreciation and amortization 181 436 102
Real estate taxes and insurance 23 49 16
Interest -- -- 1,166
- ----------------------------------------------------------------------------------------------------------------
Total expenses 236 524 1,327
- ----------------------------------------------------------------------------------------------------------------
Income (loss) before interest income 342 1,286 (799)
Interest income 7 25 8
- ----------------------------------------------------------------------------------------------------------------
Net income (loss) before common dividends 349 1,311 (791)
Dividends paid to common shareholders prior to
syndication of preferred shares -- -- 15
- ----------------------------------------------------------------------------------------------------------------
Net income (loss) attributable to preferred shareholders $ 349 $1,311 $ (806)
================================================================================================================
Weighted average number of preferred shares outstanding,
basic and diluted 200 200 200
Net income (loss) per preferred share, basic and diluted $1,745 $6,555 $(4,030)
================================================================================================================
See accompanying notes to financial statements.
3
FSP Federal Way Corp.
Statements of Changes in Stockholders' Equity
For the Period ended May 31, 2003,
Year Ended December 31, 2002 and for
the Period July 26, 2001 (date of inception)
to December 31, 2001
Retained Deficit
Additional and Dividends Total
Preferred Common Paid in in Excess of Stockholders'
(in thousands, except shares) Stock Stock Capital Earnings Equity
======================================================================================================================
Private offering of 200 shares, net $ -- $ -- $18,329 $ -- $ 18,329
Dividends -- -- -- (482) (482)
Net Loss -- -- -- (791) (791)
- ----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 -- -- 18,329 (1,273) 17,056
Dividends -- -- -- (1,627) (1,627)
Net Income -- -- -- 1,311 1,311
- ----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 -- -- 18,329 (1,589) 16,740
Dividends -- -- -- (664) (664)
Net Income -- -- -- 349 349
- ----------------------------------------------------------------------------------------------------------------------
Balance, May 31, 2003 $ -- $ -- $18,329 $(1,904) $ 16,425
======================================================================================================================
See accompanying notes to financial statements.
4
FSP Federal Way Corp.
Statements of Cash Flows
For the Period
For the For the July 26, 2001
Period Ended Year Ended (date of inception)
May 31, December 31, to December 31,
(in thousands) 2003 2002 2001
=====================================================================================================================
Cash flows from operating activities:
Net income (loss) $ 349 $ 1,311 $ (791)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization 181 436 102
Changes in operating assets and liabilities
Cash-funded reserve (12) -- (1,038)
Step rent receivable 142 (116) (26)
Prepaid expenses and other assets (3) (1) (1)
Accounts payable and accrued expenses (2) (12) 173
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 655 1,618 (1,581)
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets -- -- (15,650)
Purchase of deferred lease origination costs -- -- (461)
- ---------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities -- -- (16,111)
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock -- -- 20,000
Syndication costs -- -- (1,671)
Dividends to stockholders (827) (1,620) (77)
Proceeds from long-term debt -- -- 16,000
Principal payments on long-term debt -- -- (16,000)
- ---------------------------------------------------------------------------------------------------------------------
Net cash (used for) provided by financing activities (827) (1,620) 18,252
- ---------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (172) (2) 560
Cash and cash equivalents, beginning 558 560 --
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end $ 386 $ 558 $ 560
=====================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ -- $ -- $ 1,166
Disclosure of non-cash financing activities:
Dividends declared but not paid $ 249 $ 412 $ 405
See accompanying notes to financial statements.
5
FSP Federal Way Corp.
Notes to Financial Statements
1. Organization
FSP Federal Way Corp. (the "Company") was organized on July 26, 2001 as a
Corporation under the laws of the State of Delaware to purchase, own and operate
commercial office buildings located in Federal Way, Washington (the "Property").
The Property consists of two Class "A" suburban office buildings containing
117,000 square feet. The company acquired the Property on September 14, 2001 and
operates in a manner intended to qualify as a real estate investment trust
("REIT") for Federal income tax purposes.
2. Summary of Significant Accounting Policies
ESTIMATES AND ASSUMPTIONS
The Company prepares its financial statements and related notes in conformity
with accounting principles generally accepted in the United States of America
("GAAP"). These principles require management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
RECLASSIFICATIONS
Certain information in the 2002 and 2001 financial statements have been
reclassified to conform to the 2003 presentation.
REAL ESTATE AND DEPRECIATION
Real estate assets are stated at the lower of cost or fair value, as
appropriate, less accumulated depreciation.
Costs related to property acquisition and improvements are capitalized. Typical
capital items include new roofs, site improvements, various exterior building
improvements and major interior renovations. Funding for capital improvement
typically is provided by cash set aside at the time the property was purchased.
Routine replacements and ordinary maintenance and repairs that do not extend the
life of the asset are expensed as incurred. Typical expense items include
interior painting, landscaping and minor carpet replacements. Funding for
repairs and maintenance items typically is provided by cash flows from operating
activities.
Depreciation is computed using the straight-line method over the assets'
estimated useful lives as follows:
Category Years
-------- -----
Building - Commercial 39
Building Improvements 15-39
Furniture and equipment 5-7
6
FSP Federal Way Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
REAL ESTATE AND DEPRECIATION (continued)
The following schedule reconciles the cost of the property as shown in the
Offering Memorandum as to the amounts shown on the Company's Balance Sheet:
(in thousands)
Price per Offering Memorandum $ 16,000
Plus: Acquisition fees 111
------------------------------------------------------------------------
Total Acquisition Costs $ 16,111
========================================================================
These costs are reported in the Company's Balance Sheet as follows :
Land $ 2,509
Building 13,141
Deferred lease origination costs 461
------------------------------------------------------------------------
Total reported in Balance Sheet $ 16,111
========================================================================
The Company evaluates its assets used in operations by identifying indicators of
impairment and by comparing the sum of the estimated undiscounted future cash
flows for each asset to the asset's carrying value. When indicators of
impairment are present and the sum of the undiscounted future cash flows is less
than the carrying value of such asset, an impairment loss is recorded equal to
the difference between the asset's current carrying value and its fair value
based on discounting its estimated future cash flows. At May 31, 2003, December
31, 2002 and 2001, no such indicators of impairment were identified.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an initial
maturity of three months or less to be cash equivalents.
CASH-FUNDED RESERVES
The Company has set aside funds in anticipation of future capital needs of the
property. Although these funds typically are used for the payment of real estate
assets and deferred leasing commissions, there is no legal restriction on their
use and they may be used for any company purpose.
MARKETABLE SECURITIES
The Company accounts for investments in debt securities under the provisions of
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". The Company typically has classified its debt securities as
available-for-sale.
There were no investments in marketable securities at May 31, 2003, December 31,
2002 and 2001.
7
FSP Federal Way Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
CONCENTRATION OF CREDIT RISKS
Cash, cash equivalents and short-term investments are financial instruments that
potentially subject the Company to a concentration of credit risk. The Company
maintains its cash balances and short-term investments principally in one bank
which the Company believes to be creditworthy. The Company periodically assesses
the financial condition of the bank and believes that the risk of loss is
minimal. Cash balances held with various financial institutions frequently
exceed the insurance limit of $100,000 provided by the Federal Deposit Insurance
Corporation.
For the period ended May 31, 2003, year ended December 31, 2002 and the period
ended December 31, 2001, 100% of the rental income was derived from one lessee.
As such, future receipts are dependent upon the financial strength of the lessee
and its ability to perform under the lease agreement.
FINANCIAL INSTRUMENTS
The Company estimates that the carrying value of cash and cash equivalents and
cash-funded reserves, approximate their fair values based on their short-term
maturity and prevailing interest rates.
STEP RENT RECEIVABLE
The lease provides for fixed increases over the life of the lease. Rental
revenue is recognized on the straight-line basis over the related lease term;
however, billings by the Company are based on required minimum rentals in
accordance with the lease agreements. Step rent receivable, which is the
cumulative revenue recognized in excess of amounts billed by the Company, is $0,
$142,000 and $26,000 at May 31, 2003, December 31, 2002 and 2001, respectively.
DEFERRED LEASE ORIGINATION COSTS
Deferred lease origination costs are the estimated value of legal and leasing
costs related to the acquired lease that were included in the purchase price
when the Company acquired the property. Under Statement of Financial Accounting
Standards No. 141 "Business Combination" ("SFAS 141"), which was approved by the
Financial Accounting Standards Board in June 2001, the Company is required to
segregate these costs from its investment in real estate. The Company
subsequently amortizes these costs on a straight-line basis over the
weighted-average remaining life of the related lease. Amortization expense of
approximately $41,000, $95,000 and $4,000 is included in Depreciation and
Amortization in the Company's Statements of Operations for the period ended May
31, 2003, year ended December 31, 2002 and the period ended December 31, 2001,
respectively.
Deferred lease origination costs included in the purchase price of the property
were $461,000 and are being amortized over the weighted-average period of five
years in respect of the lease assumed. Details of the deferred lease origination
costs as of December 31:
For the For the For the
Period Ended Year Ended Period Ended
May 31, 2003 December 31, 2002 December 31, 2001
----------------------------------------------------
Cost $ 461,000 $ 461,000 $ 461,000
Accumulated amortization 140,000 99,000 4,000
----------------------------------------------------
Book Value $ 321,000 $ 362,000 $ 457,000
====================================================
The estimated annual amortization expense for the periods succeeding May 31,
2003 are as follows:
2003 $ 58,000
2004 $ 99,000
2005 $ 99,000
2006 $ 65,000
8
FSP Federal Way Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
SYNDICATION FEES
Syndication fees are selling commissions and other costs associated with the
initial offering of the Company's preferred shares. Such costs, in the amount of
$1,671,000 have been reported as a reduction in the Stockholders' Equity in the
Company's Balance Sheets.
REVENUE RECOGNITION
The Company has retained substantially all of the risks and benefits of
ownership of the Company's commercial property and accounts for its lease as an
operating lease. Rental income from the lease, which may include rent
concessions (including free rent and tenant improvement allowances) and
scheduled increases in rental rates during the lease term, is recognized on a
straight-line basis. The Company does not have any percentage rent arrangements
with its commercial property tenant. Reimbursable costs are included in rental
income in the period earned. A schedule showing the components of rental revenue
is shown below.
For the For the For the
Period Ended Year Ended Period Ended
May 31, December 31, December 31,
(in thousands) 2003 2002 2001
==========================================================================
Income from lease $ 701 $ 1,653 $ 488
Straight-line rent adjustment (142) 116 26
Reimbursable expense 19 41 14
--------------------------------------------------------------------------
Total $ 578 $ 1,810 $ 528
==========================================================================
INTEREST AND OTHER
Interest income and other income are recognized when the related services are
performed and the earnings process is complete.
INCOME TAXES
The Company has elected to be taxed as a REIT under the Internal Revenue Code of
1986, as amended. As a REIT, the Company generally is entitled to a tax
deduction for dividends paid to its shareholders, thereby effectively subjecting
the distributed net income of the Company to taxation at the shareholder level
only. The Company must comply with a variety of restrictions to maintain its
status as a REIT. These restrictions include the type of income it can earn, the
type of assets it can hold, the number of shareholders it can have and the
concentration of their ownership, and the amount of the Company's taxable income
that must be distributed annually.
NET INCOME PER SHARE
The Company follows Statement of Financial Accounting Standards No. 128
"Earnings per Share", which specifies the computation, presentation and
disclosure requirements for the Company's net income per share. Basic net income
per share is computed by dividing net income by the weighted average number of
shares outstanding during the period. Diluted net income per share reflects the
potential dilution that could occur if securities or other contracts to issue
shares were exercised or converted into shares. There were no potential dilutive
shares outstanding at May 31, 2003, December 31, 2002 and 2001. Subsequent to
the completion of the offering of preferred shares, the holders of common stock
are not entitled to share in any income. The denominator used for calculating
basic and diluted net income per share is shown for preferred shares only and is
as follows:
For the For the For the
Period Ended Year Ended Period Ended
May 31, December 31, December 31,
2003 2002 2001
================================================================================
Weighted average number of preferred
shares outstanding 200 200 200
9
FSP Federal Way Corp.
Notes to Financial Statements
3. Related Party Transactions
On January 10, 2003, the Board of Directors of the Company and twelve other
companies (the "Target REITS"), whose common stock is owned by Franklin Street
Properties Corp. ("FSP"), resolved to enter into an Agreement and Plan of Merger
(the "Merger Agreement") with FSP. On May 30, 2003, a majority of the preferred
stockholders of the Company and the Target REITS, as well as a majority of the
common stockholders of FSP approved the merger. The effect of the merger is that
the stockholders of the Company and the Target REITS exchanged their stock for
common stock of FSP effective June 1, 2003.
The Company executed a management agreement with FSP Property Management LLC, an
affiliate of FSP, that provides for a management fee equal to 1% of collected
revenues and is cancelable with 30 days notice by either party. For the period
ended May 31, 2003, year ended December 31, 2002 and the period ended December
31, 2001, fees incurred under the agreement were $7,000, $17,000 and $5,000,
respectively.
An acquisition fee of $50,000 was paid in 2001 to an affiliate of the Common
Shareholder. Such fees were included in the cost of the real estate.
Syndication fees of $1,600,000 were paid in 2001 to an affiliate of the Common
Shareholder for services related to syndication of the Company's preferred
stock.
During 2001, the Company borrowed and repaid in full:
Note payable to FSP, principal of $16,000,000 with interest equal to the
Citizens Bank base rate. Interest paid to FSP was $16,000. The average
interest rate during the time the loan was outstanding was 4.75%
A commitment fee of $1,150,000 was paid to FSP for obtaining the first
mortgage loan. Such amount is included in interest expense on the
Statement of Operations.
The Company paid a dividend of $15,000 to the Common Shareholder relating to
earnings of the Company prior to the completion of the offering of preferred
shares.
4. Recent Accounting Standards
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations," which addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This Statement requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable estimate of the fair value
can be made. The associated asset retirement costs are capitalized as part of
the carrying amount of the long-lived asset. This Statement was effective at the
beginning of 2003. The impact of adoption did not have a material impact on the
Company's financial position, results of operations and cash flows.
In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets". This Statement supersedes SFAS No. 121 and
requires that long-lived assets that are to be disposed of by sale be measured
at the lower of book value or fair value less costs to sell. SFAS No. 144
retains the fundamental provisions of SFAS 121 for (a) recognition and
measurement of the impairment of long-lived assets to be held and used, and (b)
measurement of long-lived assets to be disposed of by sale, but broadens the
definition of what constitutes a discontinued operation and how the results of a
discontinued operation are to be measured and presented. This Statement was
effective at the beginning of 2002. The impact of adoption did not have a
material impact on the Company's financial position, results of operations and
cash flows. The Company does not have any real estate assets that it considers
"held for sale" at May 31, 2003.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements Nos.
4, 44, and 64, Amendment of SFAS 13, and Technical Corrections". This Statement
rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt",
and an amendment of that Statement, SFAS No. 64, "Extinguishments of Debt Made
to Satisfy Sinking-Fund Requirements". This Statement amends SFAS No. 13,
"Accounting for Leases". This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings or
describe their applicability under changed conditions. This statement was
effective for the Company's fiscal year ending December 31, 2003. The impact of
adoption did not have a material impact on the Company's financial position,
results of operations and cash flows.
10
FSP Federal Way Corp.
Notes to Financial Statements
4. Recent Accounting Standards (continued)
In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities". This statement was effective January 1, 2003. SFAS
No. 146 replaces current accounting literature and requires the recognition of
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. The impact of
adoption did not have a material impact on the Company's financial position,
results of operations and cash flows.
5. Income Taxes
The Company files as a REIT under Sections 856-860 of the Internal Revenue Code
of 1986, as amended. In order to qualify as a REIT, the Company is required to
distribute at least 90% of its taxable income to shareholders and to meet
certain asset and income tests as well as certain other requirements. The
Company will generally not be liable for federal income taxes, provided it
satisfies their requirements. Even as a qualified REIT, the Company is subject
to certain state and local taxes on its income and property.
For the period ended December 31, 2001, the Company incurred a net operating
loss for income tax purposes of approximately $662,000 that can be carried
forward until it expires in the year 2021. The amount of the net operating loss
that may be used annually, if any, is limited.
The Company's net tax basis of its real estate assets is higher than the amount
set forth in the Company's Balance Sheet by approximately $444,000.
The following schedule reconciles GAAP Net Income to Taxable Income subject to
dividend requirements:
For the For the For the
Period Ended Year Ended Period Ended
May 31, December 31, December 31,
(in thousands) 2003 2002 2001
==================================================================================================
GAAP net income (loss) $ 349 $ 1,311 $ (791)
Add: Book depreciation and amortization 181 436 102
Deferred rent (142) -- 136
Less: Tax depreciation and amortization (140) (335) (84)
Straight-line rents 142 (117) (26)
--------------------------------------------------------------------------------------------------
Taxable income (loss) subject to dividend requirement * $ 390 $ 1,295 $ (663)
==================================================================================================
* A tax loss is not subject to a dividend requirement.
The following schedule reconciles cash dividends paid or accrued to the
dividends paid deduction:
For the For the For the
Period Ended Year Ended Period Ended
May 31, December 31, December 31,
(in thousands) 2003 2002 2001
=================================================================================================
Cash dividends paid or accrued $ 1,076 $ 1,620 $ 77
Plus: Dividends designated from following year -- -- --
Less: Portion designated capital gain distribution -- -- --
Less: Return of Capital (686) (325) (77)
-------------------------------------------------------------------------------------------------
Dividends paid deduction $ 390 $ 1,295 $ --
=================================================================================================
11
FSP Federal Way Corp.
Notes to Financial Statements
6. Cash Available for Distribution
The Company evaluates its performance based on Cash Available for Distribution
("CAD") as management believes that CAD represents the most accurate measure of
the Company's activity. CAD is the basis for distributions paid to equity
holders.
The Company defines CAD as: net income as computed in accordance with accounting
principles generally accepted in the United States of America ("GAAP"); plus
certain non-cash items included in the computation of net income (depreciation
and amortization, certain non-cash compensation expenses and straight line rent
adjustments); plus funds raised by the issuance of shares; plus the net proceeds
from the sale of land; less purchases of real estate assets, property and
equipment ("Capital Expenditures"), payments for deferred leasing commissions
and payments for deferred lease origination costs; plus (less) proceeds from
(payments to) cash reserves established at the acquisition date of the property
(cash-funded reserves). Depreciation and amortization, non-cash compensation and
straight-line rents are an adjustment to CAD, as these are non-cash items
included in net income. Capital Expenditures, payments of deferred leasing
commissions and payments for deferred lease origination costs and the proceeds
from (payments to) the funded reserve are an adjustment to CAD, as they
represent cash items not reflected in income. CAD should not be considered as an
alternative to net income (determined in accordance with GAAP), as an indicator
of the Company's financial performance, nor as an alternative to cash flows from
operating activities (determined in accordance with GAAP), nor as a measure of
the Company's liquidity, nor is it necessarily indicative of sufficient cash
flow to fund all of the Company's needs. Other real estate companies may define
CAD in a different manner. It is at the Company's discretion to retain a portion
of CAD for operational needs. The Company believes that in order to facilitate a
clear understanding of the results of the Company, CAD should be examined in
connection with net income and cash flows from operating, investing and
financing activities in the financial statements.
The calculation of CAD is shown in the following table:
For the For the For the
Period Ended Year Ended Period Ended
May 31, December 31, December 31,
(in thousands) 2003 2002 2001
==============================================================================================
Net income (loss) $ 349 $ 1,311 $ (791)
Depreciation and amortization 181 436 102
Straight line rent 142 (117) (26)
Net proceeds from offering of shares -- -- 18,329
Purchase of land and building -- -- (15,650)
Payments from (establish) funded reserve (12) -- (1,038)
Payment of deferred lease origination costs -- -- (461)
----------------------------------------------------------------------------------------------
Cash Available for Distribution $ 660 $ 1,630 $ 465
==============================================================================================
The Company's distributions are summarized as follows:
For the For the For the
Period Ended Year Ended Period Ended
May 31, December 31, December 31,
(in thousands) 2003 2002 2001
========================================================================================
First Quarter $ 412 $ 405 --
Second Quarter 415 405 --
Third Quarter 249 403 --
Fourth Quarter -- 407 77
----------------------------------------------------------------------------------------
Dividends paid or accrued $ 1,076 $ 1,620 $ 77
========================================================================================
12
FSP Federal Way Corp.
Notes to Financial Statements
6. Cash Available for Distribution (continued)
The Company declared a dividend payable to stockholders of record as of May 31,
2003, December 31, 2002 and 2001 of $249,000, $412,000 and $405,000.
Cash distributions are declared and paid based on the total outstanding shares
as of the record date and are typically paid in the quarter following the
quarter that CAD is generated.
7. Capital Stock
PREFERRED STOCK
Generally, each holder of Shares of Preferred Stock is entitled to receive
ratably all income and all dividends, if any, declared by the Board of Directors
out of funds legally available. The right to receive dividends shall be
non-cumulative, and no right to dividends shall accrue by reason of the fact
that no dividend has been declared in any prior year. Each holder of Shares will
be entitled to receive, to the extent that funds are available therefore,
$100,000 per Share, before any payment to the holder of Common Stock, out of
distributions to stockholders upon liquidation, dissolution or the winding up of
the Company; the balance of any such funds available for distribution will be
distributed among the holders of Shares and the holder of Common Stock, pro rata
based on the number of shares held by each; provided, however, that for these
purposes, one share of Common Stock will be deemed to equal one-tenth of a share
of Preferred Stock.
In addition to certain voting rights provided in the corporate agreements, the
holder of Shares, acting by consent of at least 51%, shall have the further
right to approve or disapprove a proposed sale of the Property, the merger of
the Company with any other entity and amendments to the corporate charter. A
vote of the holders of 66.67% of the Shares is required for the issue of any
additional shares of capital stock. Holders of Shares have no redemption or
conversion rights.
COMMON STOCK
Franklin Street Properties Corp. ("FSP"), is the sole holder of the Company's
Common Stock. FSP has the right, as one class together with the holders of
Preferred Stock, to vote to elect the directors of the Company and to vote on
all matters except those voted by the holders of Shares of Preferred Stock.
Subsequent to the completion of the offering of the preferred shares the holders
of common shares are not entitled to receive any income, nor shall the Company
declare or pay any cash dividends on shares of Common Stock.
8. Commitments and Contingencies
The Company, as lessor, has future minimum rentals due under a non-cancelable
operating lease as follows:
Period/Year Ended
(in thousands) December 31, Amount
----------------- ----------
2003 $ 995
2004 1,739
2005 1,782
2006 1,207
----------
$ 5,723
==========
In addition, the lessee is liable for real estate taxes and certain operating
expenses of the property.
Upon acquiring the commercial rental property in September 2001, the Company was
assigned the lease agreement between the seller of the Property and the existing
tenant. The original lease period is five years with renewal options.
13
FEDERAL WAY CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
May 31, 2003
(in thousands)
Initial Cost
-----------------------------------
Costs
Capitalized
(Disposals)
Subsequent
Encumbrances Buildings & to
Description (1) Land Improvements Acquisition
- ----------- ------------ ---- ------------ -----------
Federal Way, Federal Way,
Washington -- $2,509 $ 13,141 $ --
============ ====== ========== =========
Historical Costs
------------------------------------------------------------
Total Costs,
Net of Depreciable
Buildings & Accumulated Accumulated Life Date of
Description Land Improvements Total(2) Depreciation Depreciation Years Acquisition
- ----------- ---- ------------ -------- ------------ ------------ ----- -----------
Federal Way, Federal Way,
Washington $ 2,509 $ 13,141 $ 15,650 $ 579 $ 15,071 15-39 September, 2001
======= ======== ======== ========== ==========
(1) There are no encumbrances on the above property.
(2) The aggregate cost for Federal Income Tax purposes is greater than the
total historical cost by approximately $461,000.
14
FSP FEDERAL WAY CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
The following table summarizes the changes in the Company's real estate
investment and accumulated depreciation:
For the For the For the
Period Ended Year Ended Period Ended
May 31, December 31, December 31,
(in thousands) 2003 2002 2001
=====================================================================================
Real estate investments, at cost:
Balance, beginning of year/period $15,650 $15,650 $ --
Acquisitions -- 15,650
Improvements -- -- --
Dispositions -- -- --
-------------------------------------------------------------------------------------
Balance, end of year/period $15,650 $15,650 $15,650
=====================================================================================
Accumulated depreciation:
Balance, beginning of year/period $ 439 $ 98 $ --
Depreciation 140 341 98
Dispositions -- -- --
-------------------------------------------------------------------------------------
Balance, end of year/period $ 579 $ 439 $ 98
=====================================================================================
15
FSP Fair Lakes Corp.
Financial Statements
May 31, 2003, December 31, 2002 and 2001
Table of Contents
Page
----
Financial Statements
Independent Auditor's Report................................................. 1
Balance Sheets as of May 31, 2003, December 31, 2002 and 2001................ 2
Statements of Operations for the period ended May 31, 2003, the year
ended December 31, 2002 and for the period July 24, 2001
(date of inception) to December 31, 2001............................... 3
Statements of Changes in Stockholders' Equity for the period ended
May 31, 2003, the year ended December 31, 2002 and for the
period July 24, 2001 (date of inception) to December 31, 2001.......... 4
Statements of Cash Flows for the period ended May 31, 2003, the year
ended December 31, 2002 and for the period July 24, 2001
(date of inception) to December 31, 2001............................... 5
Notes to Financial Statements............................................. 6-14
Schedule of Real Estate and Accumulated Depreciation..................... 15-16
[LETTERHEAD OF BRAVER AND COMPANY, P.C.]
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
FSP Fair Lakes Corp.
(a Delaware Corporation)
We have audited the accompanying balance sheets of FSP Fair Lakes Corp. (a
Delaware Corporation) as of May 31, 2003, December 31, 2002 and 2001, and the
related statements of operations, changes in stockholders' equity and cash
flows, as well as the financial statement schedule listed in the accompanying
index, for the period ended May 31, 2003, the year ended December 31, 2002, and
for the period from July 24, 2001 (date of inception) to December 31, 2001.
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements and financial statement schedule are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements and financial statement schedule. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial statement schedule
referred to above present fairly, in all material respects, the financial
position of FSP Fair Lakes Corp. as of May 31, 2003, December 31, 2002 and 2001,
and the results of its operations and its cash flows for period ended May 31,
2003, the year ended December 31, 2002, and for the initial period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States of America.
As described in Note 3 to the financial statements, effective June 1, 2003, the
Company merged with Franklin Street Properties Corp., the sole shareholder of
the Company's common stock.
/s/ Braver and Company, P.C.
Newton, Massachusetts
July 11, 2003
1
FSP Fair Lakes Corp.
Balance Sheets
May 31, December 31,
(in thousands, except shares and par value amounts 2003 2002 2001
==================================================================================================
Assets:
Real estate investments, at cost:
Land $ 4,183 $ 4,183 $ 4,183
Buildings and improvements 33,891 33,791 33,791
- --------------------------------------------------------------------------------------------------
38,074 37,974 37,974
Less accumulated depreciation 1,491 1,130 253
- --------------------------------------------------------------------------------------------------
Real estate investments, net 36,583 36,844 37,721
Cash and cash equivalents 1,105 1,200 1,050
Cash funded reserves 1,700 1,801 1,801
Tenant rent receivable 152 20 99
Step rent receivable -- 599 154
Prepaid expenses and other assets 113 49 6
Deferred lease origination costs,
net of accumulated amortization of $273, $195 and $11 1,213 1,291 1,475
- --------------------------------------------------------------------------------------------------
Total assets $ 40,866 $ 41,804 $ 42,306
==================================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses $ 670 $ 250 $ 285
Dividends payable 700 955 924
- --------------------------------------------------------------------------------------------------
Total liabilities 1,370 1,205 1,209
- --------------------------------------------------------------------------------------------------
Commitments and Contingencies:
Stockholders' Equity:
Preferred Stock, $.01 par value, 480 shares -- -- --
authorized, issued and outstanding
Common Stock, $.01 par value, 1 share -- -- --
authorized, issued and outstanding
Additional paid-in capital 44,045 44,045 44,045
Retained deficit and dividends in excess of earnings (4,549) (3,446) (2,948)
- --------------------------------------------------------------------------------------------------
Total Stockholders' Equity 39,496 40,599 41,097
- --------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 40,866 $ 41,804 $ 42,306
==================================================================================================
See accompanying notes to financial statements.
2
FSP Fair Lakes Corp.
Statements of Operations
For the Period
For the For the July 24, 2001
Period Ended Year Ended (date of inception)
May 31, December 31, to December 31,
(in thousands, except shares and per share amounts) 2003 2002 2001
====================================================================================================================
Revenue:
Rental $ 2,085 $ 6,514 $ 1,831
- --------------------------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 824 1,606 493
Depreciation and amortization 439 1,061 264
Real estate taxes and insurance 217 504 148
Interest -- 13 2,941
- --------------------------------------------------------------------------------------------------------------------
Total expenses 1,480 3,184 3,846
- --------------------------------------------------------------------------------------------------------------------
Income (loss) before interest income 605 3,330 (2,015)
Interest income 14 48 14
- --------------------------------------------------------------------------------------------------------------------
Net income (loss) before common dividends 619 3,378 (2,001)
Dividends paid to common shareholders prior to
syndication of preferred shares -- -- 111
- --------------------------------------------------------------------------------------------------------------------
Net income (loss) attributable to preferred shareholders $ 619 $ 3,378 $ (2,112)
====================================================================================================================
Weighted average number of preferred shares outstanding,
basic and diluted 480 480 480
- --------------------------------------------------------------------------------------------------------------------
Net income (loss) per preferred share, basic and diluted $ 1,290 $ 7,038 $ (4,400)
====================================================================================================================
See accompanying notes to financial statements.
3
FSP Fair Lakes Corp.
Statements of Changes in Stockholders' Equity
For the Period Ended May 31, 2003, the
Year Ended December 31, 2002
and For the Period July 24, 2001 (date of
inception) to December 31, 2001
Retained Deficit
Additional and Dividends Total
Preferred Common Paid in in Excess of Stockholders'
(in thousands, except shares) Stock Stock Capital Earnings Equity
=============================================================================================================
Private offering of 480 shares, net $ -- $ -- $44,045 $ -- $ 44,045
Dividends -- -- -- (947) (947)
Net Loss -- -- -- (2,001) (2,001)
- --------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 -- -- 44,045 (2,948) 41,097
Dividends -- -- -- (3,876) (3,876)
Net Income -- -- -- 3,378 3,378
- --------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 -- -- 44,045 (3,446) 40,599
Dividends -- -- -- (1,722) (1,722)
Net Income -- -- -- 619 619
- --------------------------------------------------------------------------------------------------------------
Balance, May 31, 2003 $ -- $ -- $44,045 $(4,549) $ 39,496
==============================================================================================================
See accompanying notes to financial statements.
4
FSP Fair Lakes Corp.
Statements of Cash Flows
For the Period
For the For the July 24, 2001
Period Ended Year Ended (date of inception)
(in thousands) May 31, 2003 December 31, 2002 to December 31, 2001
=================================================================================================================================
Cash flows from operating activities:
Net income (loss) $ 619 $ 3,378 $ (2,001)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization 439 1,061 264
Changes in operating assets and liabilities:
Cash-funded reserve 101 -- (1,801)
Tenant rent receivable (132) 79 (99)
Step rent receivable 599 (445) (154)
Prepaid expenses and other assets (64) (43) (6)
Accounts payable and accrued expenses 420 (35) 285
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 1,982 3,995 (3,512)
- ---------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets (100) -- (37,974)
Purchase of deferred lease origination costs -- -- (1,486)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (100) -- (39,460)
- ---------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock -- -- 48,000
Syndication costs -- -- (3,955)
Dividends to stockholders (1,977) (3,845) (23)
Proceeds from long-term debt -- -- 39,000
Principal payments on long-term debt -- -- (39,000)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities (1,977) (3,845) 44,022
- ---------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (95) 150 1,050
Cash and cash equivalents, beginning 1,200 1,050 --
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end $ 1,105 $ 1,200 $ 1,050
=================================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ -- $ 13 $ 2,941
Disclosure of non-cash financing activities
Dividends declared but not paid $ 700 $ 955 $ 924
See accompanying notes to financial statements.
5
FSP Fair Lakes Corp.
Notes to Financial Statements
1. Organization
FSP Fair Lakes Corp. (the "Company") was organized on July 24, 2001 as a
Corporation under the laws of the State of Delaware to purchase, own and operate
a commercial office building located in Fairfax, Virginia (the "Property"). The
Property consists of a six-story Class "A" suburban office building that
contains approximately 211,000 square feet of space situated on approximately
5.8 acres of land. The Company acquired the Property on September 17, 2001 and
operates in a manner intended to qualify as a real estate investment trust
("REIT") for Federal income tax purposes.
2. Summary of Significant Accounting Policies
ESTIMATES AND ASSUMPTIONS
The Company prepares its financial statements and related notes in conformity
with accounting principles generally accepted in the United States of America
("GAAP"). These principles require management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
RECLASSIFICATIONS
Certain balances in the 2002 and 2001 financial statements have been
reclassified to conform to the 2003 presentation.
REAL ESTATE AND DEPRECIATION
Real estate assets are stated at the lower of cost or fair value, as
appropriate, less accumulated depreciation.
Costs related to property acquisition and improvements are capitalized. Typical
capital items include new roofs, site improvements, various exterior building
improvements and major interior renovations. Funding for capital improvements
typically is provided by cash set aside at the time the property was purchased.
Routine replacements and ordinary maintenance and repairs that do not extend the
life of the asset are expensed as incurred. Typical expense items include
interior painting, landscaping and minor carpet replacements. Funding for
repairs and maintenance items typically is provided by cash flows from operating
activities.
Depreciation is computed using the straight line method over the assets'
estimated useful lives as follows:
Category Years
-------- -----
Building - Commercial 39
Building Improvements 15-39
Furniture and equipment 5-7
6
FSP Fair Lakes Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
REAL ESTATE AND DEPRECIATION (continued)
The following schedule reconciles the cost of the property as shown in the
Offering Memorandum as to the amounts shown on the Company's Balance Sheet:
(in thousands)
Price per Offering Memorandum $ 39,000
Plus: Acquisition fees --
Plus: Other acquisition costs 460
---------------------------------------------------------------
Total Acquisition Costs $ 39,460
===============================================================
These costs are reported in the Company's Balance Sheet as follows:
Land $ 4,183
Building 33,791
Deferred lease origination costs 1,486
---------------------------------------------------------------
Total reported in Balance Sheet $ 39,460
===============================================================
The Company evaluates its assets used in operations by identifying indicators of
impairment and by comparing the sum of the estimated undiscounted future cash
flows for each asset to the asset's carrying value. When indicators of
impairment are present and the sum of the undiscounted future cash flows is less
than the carrying value of such asset, an impairment loss is recorded equal to
the difference between the asset's current carrying value and its fair value
based on discounting its estimated future cash flows. At May 31, 2003, no such
indicators of impairment were identified.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an initial
maturity of three months or less to be cash equivalents.
CASH-FUNDED RESERVES
The Company has set aside funds in anticipation of future capital needs of the
property. Although these funds typically are used for the payment of real estate
assets and deferred leasing commissions, there is no legal restriction on their
use and they may be used for any company purpose.
MARKETABLE SECURITIES
The Company accounts for investments in debt securities under the provisions of
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". The Company typically has classified its debt securities as
available-for-sale.
There were no investments in marketable securities at May 31, 2003, December 31,
2002 and 2001.
7
FSP Fair Lakes Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
CONCENTRATION OF CREDIT RISKS
Cash, cash equivalents and short-term investments are financial instruments that
potentially subject the Company to a concentration of credit risk. The Company
maintains its cash balances and short-term investments principally in one bank
which the Company believes to be creditworthy. The Company periodically assesses
the financial condition of the bank and believes that the risk of loss is
minimal. Cash balances held with various financial institutions frequently
exceed the insurance limit of $100,000 provided by the Federal Deposit Insurance
Corporation.
For the period ended May 31, 2003, the year ended December 31, 2002 and period
ended December 31, 2001 rental income was derived from a single tenant. As such,
future receipts are dependent upon the financial strength of the lessee and its
ability to perform under the lease agreement.
The property was originally leased to PricewaterhouseCoopers LLP ("PWC"). In
2002, PWC sold its consulting practice and assigned the lease to IBM
Corporation. However, PWC still remains obligated under the lease in the event
IBM Corporation fails to meet the terms of the lease.
FINANCIAL INSTRUMENTS
The Company estimates that the carrying value of cash and cash equivalents and
cash-funded reserves approximate their fair values based on their short-term
maturity and prevailing interest rates.
STEP RENT RECEIVABLE
Certain leases provide for fixed increases over the life of the lease. Rental
revenue is recognized on the straight-line basis over the related lease term;
however, billings by the Company are based on required minimum rentals in
accordance with the lease agreements. Step rent receivable, which is the
cumulative revenue recognized in excess of amounts billed by the Company, is $0,
$599,000 and $154,000 at May 31, 2003, December 31, 2002 and 2001, respectively.
DEFERRED LEASE ORIGINATION COSTS
Deferred lease origination costs are the estimated value of legal and leasing
costs related to the acquired lease that was included in the purchase price when
the Company acquired the property. Under Statement of Financial Accounting
Standards No. 141 "Business Combinations" ("SFAS 141"), which was approved by
the Financial Accounting Standards Board in June 2001, the Company is required
to segregate these costs from its investment in real estate. The Company
subsequently amortizes these costs on a straight-line basis over the remaining
life of the related lease. Amortization expense of approximately $78,000,
$184,000 and $11,000 is included in Depreciation and Amortization in the
Company's Statements of Operations for the period ended May 31, 2003, the year
ended December 31, 2002 and the period ended December 31, 2001, respectively.
Deferred lease origination costs included in the purchase price of the property
were $1,486,000 and are being amortized over the weighted-average period of
eight years in respect of the lease assumed. Details of the deferred lease
origination costs as of December 31:
For the For the For the
Period Ended Year Ended Period Ended
May 31, December 31, December 31,
2003 2002 2001
--------------------------------------------
Cost $ 1,486,000 $ 1,486,000 $ 1,486,000
Accumulated amortization 273,000 195,000 11,000
--------------------------------------------
Book value $ 1,213,000 $ 1,291,000 $ 1,475,000
============================================
8
FSP Fair Lakes Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
DEFERRED LEASE ORIGINATION COSTS (continued)
The estimated annual amortization expense for the five years succeeding May 31,
2003 are as follows:
2003 $ 106,000
2004 $ 184,000
2005 $ 184,000
2006 $ 184,000
2007 $ 184,000
SYNDICATION FEES
Syndication fees are selling commissions and other costs associated with the
initial offering of the Company's preferred shares. Such costs, in the amount of
$3,955,000 have been reported as a reduction in the Stockholders' Equity in the
Company's Balance Sheets.
REVENUE RECOGNITION
The Company has retained substantially all of the risks and benefits of
ownership of the Company's commercial property and accounts for its lease as
operating lease. Rental income from leases, which may include rent concessions
(including free rent and tenant improvement allowances) and scheduled increases
in rental rates during the lease term, is recognized on a straight-line basis.
The Company does not have any percentage rent arrangements with its commercial
property tenant. Reimbursable costs are included in rental income in the period
earned. A schedule showing the components of rental revenue is shown below.
For the For the For the
Period Ended Year Ended Period Ended
May 31, December 31, December 31,
(in thousands) 2003 2002 2001
==========================================================================
Income from leases $ 1,703 $ 3,877 $ 1,117
Straight-line rent adjustment (599) 445 154
Reimbursable expenses 981 2,192 560
--------------------------------------------------------------------------
Total $ 2,085 $ 6,514 $ 1,831
==========================================================================
INTEREST AND OTHER
Interest income and other income are recognized when the related services are
performed and the earnings process is complete.
INCOME TAXES
The Company has elected to be taxed as a REIT under the Internal Revenue Code of
1986, as amended. As a REIT, the Company generally is entitled to a tax
deduction for dividends paid to its shareholders, thereby effectively subjecting
the distributed net income of the Company to taxation at the shareholder level
only. The Company must comply with a variety of restrictions to maintain its
status as a REIT. These restrictions include the type of income it can earn, the
type of assets it can hold, the number of shareholders it can have and the
concentration of their ownership, and the amount of the Company's taxable income
that must be distributed annually.
9
FSP Fair Lakes Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
NET INCOME PER SHARE
The Company follows Statement of Financial Accounting Standards No. 128
"Earnings per Share", which specifies the computation, presentation and
disclosure requirements for the Company's net income per share. Basic net income
per share is computed by dividing net income by the weighted average number of
shares outstanding during the period. Diluted net income per share reflects the
potential dilution that could occur if securities or other contracts to issue
shares were exercised or converted into shares. There were no potential dilutive
shares outstanding at May 31, 2003, December 31, 2002 and 2001. Subsequent to
the completion of the offering of preferred shares, the holders of common stock
are not entitled to share in any income. The denominator used for calculating
basic and diluted net income per share is shown for preferred shares only and is
as follows:
For the For the For the
Period Ended Year Ended Period Ended
May 31, December 31, December 31,
2003 2002 2001
================================================================================
Weighted average number of preferred
shares outstanding 480 480 480
3. Related Party Transactions
On January 10, 2003, the Board of Directors of the Company and twelve other
companies (the "Target REITS"), whose common stock is owned by Franklin Street
Properties Corp. ("FSP"), resolved to enter into an Agreement and Plan of Merger
(the "Merger Agreement") with FSP. On May 30, 2003, a majority of the preferred
stockholders of the Company and the Target REITS, as well as a majority of the
common stockholders of FSP approved the merger. The effect of the merger is that
the stockholders of the Company and the Target REITS exchanged their stock for
common stock of FSP effective June 1, 2003.
The Company executed a management agreement with FSP Property Management LLC, an
affiliate of FSP, that provides for a management fee equal to 1% of collected
revenues and is cancelable with 30 days notice by either party. For the period
ended May 31, 2003, the year ended December 31, 2002 and the period ended
December 31, 2001, fees incurred under the agreement were $21,000, $66,000 and
$17,000, respectively.
An acquisition fee and other costs totaling $280,000 were paid in 2001 to an
affiliate of the Common Shareholder. Such fees were included in the cost of the
real estate.
Syndication fees of $3,840,000 were paid in 2001 to an affiliate of the Common
Shareholder for services related to syndication of the Company's preferred
stock.
During 2001, the Company borrowed and repaid in full:
Note payable to FSP, principal of $39,000,000 with interest equal to the
Citizens Bank base. Interest paid to FSP was $181,000. The average
interest rate during the time the loan was outstanding was 6.0%.
A commitment fee of $2,760,000 was paid to FSP for obtaining the first
mortgage loan. Such amount is included in interest expense on the
Statement of Operations.
The Company paid dividends of $88,000 and $23,000 in 2002 and 2001,
respectively, to the Common Shareholder relating to earnings of the Company
prior to the completion of the offering of preferred shares.
10
FSP Fair Lakes Corp.
Notes to Financial Statements
4. Recent Accounting Standards
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations," which addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This Statement requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable estimate of the fair value
can be made. The associated asset retirement costs are capitalized as part of
the carrying amount of the long-lived asset. This Statement was effective at the
beginning of 2003. The impact of adoption did not have a material impact on the
Company's financial position, results of operations and cash flows.
In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets". This Statement supersedes SFAS No. 121 and
requires that long-lived assets that are to be disposed of by sale be measured
at the lower of book value or fair value less costs to sell. SFAS No. 144
retains the fundamental provisions of SFAS 121 for (a) recognition and
measurement of the impairment of long-lived assets to be held and used, and (b)
measurement of long-lived assets to be disposed of by sale, but broadens the
definition of what constitutes a discontinued operation and how the results of a
discontinued operation are to be measured and presented. This Statement was
effective at the beginning of 2002. The impact of adoption did not have a
material impact on the Company's financial position, results of operations and
cash flows. The Company does not have any real estate assets that it considers
"held for sale" at May 31, 2003.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements Nos.
4, 44, and 64, Amendment of SFAS 13, and Technical Corrections". This Statement
rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt",
and an amendment of that Statement, SFAS No. 64, "Extinguishments of Debt Made
to Satisfy Sinking-Fund Requirements". This Statement amends SFAS No. 13,
"Accounting for Leases". This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings or
describe their applicability under changed conditions. This statement was
effective for the Company's fiscal year ending December 31, 2003. The impact of
adoption did not have a material impact on the Company's financial position,
results of operations and cash flows.
In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities". This statement was effective January 1, 2003. SFAS
No. 146 replaces current accounting literature and requires the recognition of
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. The impact of
adoption did not have a material impact on the Company's financial position,
results of operations and cash flows.
5. Income Taxes
The Company files as a REIT under Sections 856-860 of the Internal Revenue Code
of 1986, as amended. In order to qualify as a REIT, the Company is required to
distribute at least 90% of its taxable income to shareholders and to meet
certain asset and income tests as well as certain other requirements. The
Company will generally not be liable for federal income taxes, provided it
satisfies these requirements. Even as a qualified REIT, the Company is subject
to certain state and local taxes on its income and property.
For the period ended December 31, 2001, the Company incurred a net operating
loss for income tax purposes of approximately $2,137,000 that can be carried
forward until it expires in the year 2021. The amount of the net operating loss
that may be used annually, if any, is limited.
The Company's net tax basis of its real estate assets is higher than the amount
set forth in the Company's Balance Sheet by approximately $1,432,000 at May 31,
2003, December 31, 2002 and 2001.
11
FSP Fair Lakes Corp.
Notes to Financial Statements
5. Income Taxes (continued)
The following schedule reconciles GAAP Net Income to Taxable Income subject to
dividend requirements:
For the For the For the
Period Ended Year Ended Period Ended
May 31, December 31, December 31,
(in thousands) 2003 2002 2001
=========================================================================================================
GAAP net income (loss) $ 619 $ 3,378 $ (2,001)
Add: Book depreciation and amortization 439 1,061 264
Less: Tax depreciation and amortization (368) (881) (239)
Straight-line rents 599 (445) (154)
---------------------------------------------------------------------------------------------------------
Taxable income (loss) subject to dividend requirement * $ 1,289 $ 3,113 $ (2,130)
=========================================================================================================
* A tax loss is not subject to a dividend requirement.
The following schedule reconciles cash dividends paid or accrued to the
dividends paid deduction:
For the For the For the
Period Ended Year Ended Period Ended
May 31, December 31, December 31,
(in thousands) 2003 2002 2001
====================================================================================================
Cash dividends paid or accrued $ 2,677 $ 3,845 $ 23
Plus: Dividends designated from following year -- -- --
Less: Portion designated capital gain distribution -- -- --
Less: Return of Capital (1,388) (732) (23)
----------------------------------------------------------------------------------------------------
Dividends paid deduction $ 1,289 3,113 --
====================================================================================================
6. Cash Available for Distribution
The Company evaluates its performance based on Cash Available for Distribution
("CAD") as management believes that CAD represents the most accurate measure of
the Company's activity. CAD is the basis for distributions paid to equity
holders.
The Company defines CAD as: net income as computed in accordance with accounting
principles generally accepted in the United States of America ("GAAP"); plus
certain non-cash items included in the computation of net income (depreciation
and amortization, certain non-cash compensation expenses and straight line rent
adjustments); plus funds raised by the issuance of shares; plus the net proceeds
from the sale of land; less purchases of real estate assets, property and
equipment ("Capital Expenditures"), payments for deferred leasing commissions
and payments for deferred lease origination costs; plus (less) proceeds from
(payments to) cash reserves established at the acquisition date of the property
(Cash-funded reserves). Depreciation and amortization, non-cash compensation and
straight-line rents are an adjustment to CAD, as these are non-cash items
included in net income. Capital Expenditures, payments of deferred leasing
commissions and payments for deferred lease origination costs and the proceeds
from (payments to) the funded reserve are an adjustment to CAD, as they
represent cash items not reflected in income. CAD should not be considered as an
alternative to net income (determined in accordance with GAAP), as an indicator
of the Company's financial performance, nor as an alternative to cash flows from
operating activities (determined in accordance with GAAP), nor as a measure of
the Company's liquidity, nor is it necessarily indicative of sufficient cash
flow to fund all of the Company's needs. Other real estate companies may define
CAD in a different manner. It is at the Company's discretion to retain a portion
of CAD for operational needs. The Company believes 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.
12
FSP Fair Lakes Corp.
Notes to Financial Statements
6. Cash Available for Distribution (continued)
The calculation of CAD is shown in the following table:
For the For the For the
Period Ended Year Ended Period Ended
May 31, December 31, December 31,
(in thousands) 2003 2002 2001
==================================================================================================
Net income (loss) $ 619 $3,378 $ (2,001)
Depreciation and amortization 439 1,061 264
Straight line rent 599 (445) (154)
Net proceeds from offering of shares -- -- 44,045
Purchase of land and building and improvements (100) -- (37,974)
Payments from (establish) funded reserve 101 -- (1,801)
Payment of deferred lease origination costs -- -- (1,486)
--------------------------------------------------------------------------------------------------
Cash Available for Distribution $1,658 $3,994 $ 893
==================================================================================================
The Company's distributions are summarized as follows:
For the For the For the
(in thousands) Period Ended Year Ended Period Ended
May 31, December 31, December 31,
Quarter Paid 2003 2002 2001
=================================================================================================
First Quarter $ 955 $ 924 --
Second Quarter 1,022 999 --
Third Quarter 700 953 --
Fourth Quarter -- 969 23
-------------------------------------------------------------------------------------------------
Dividends paid or accrued $2,677 $3,845 $ 23
=================================================================================================
The Company declared a dividend payable to stockholders of record as of May 31,
2003, December 31, 2002 and 2001 of $700,000, $955,000 and $924,000,
respectively.
Cash distributions are declared and paid based on the total outstanding shares
as of the record date and are typically paid in the quarter following the
quarter that CAD is generated.
7. Capital Stock
PREFERRED STOCK
Generally, each holder of Shares of Preferred Stock is entitled to receive
ratably all income and all dividends, if any, declared by the Board of Directors
out of funds legally available. The right to receive dividends shall be
non-cumulative, and no right to dividends shall accrue by reason of the fact
that no dividend has been declared in any prior year. Each holder of Shares will
be entitled to receive, to the extent that funds are available therefore,
$100,000 per Share, before any payment to the holder of Common Stock, out of
distributions to stockholders upon liquidation, dissolution or the winding up of
the Company; the balance of any such funds available for distribution will be
distributed among the holders of Shares and the holder of Common Stock, pro rata
based on the number of shares held by each; provided, however, that for these
purposes, one share of Common Stock will be deemed to equal one-tenth of a share
of Preferred Stock.
In addition to certain voting rights provided in the corporate agreements, the
holder of Shares, acting by consent of at least 51%, shall have the further
right to approve or disapprove a proposed sale of the Property, the merger of
the Company with any other entity and amendments to the corporate charter. A
vote of the holders of 66.67% of the Shares is required for the issue of any
additional shares of capital stock. Holders of Shares have no redemption or
conversion rights.
13
FSP Fair Lakes Corp.
Notes to Financial Statements
7. Capital Stock (continued)
COMMON STOCK
Franklin Street Properties Corp. ("FSP"), is the sole holder of the Company's
Common Stock. FSP has the right, as one class together with the holders of
Preferred Stock, to vote to elect the directors of the Company and to vote on
all matters except those voted by the holders of Shares of Preferred Stock.
Subsequent to the completion of the offering of the preferred shares the holders
of common shares are not entitled to receive any income, nor shall the Company
declare or pay any cash dividends on shares of Common Stock.
8. Commitments and Contingencies
The Company, as lessor, has future minimum rentals due under a non-cancelable
operating lease as follows:
Period/Year Ended
(in thousands) December 31, Amount
----------------- ------------
2003 $ 2,384
2004 4,190
2005 4,294
2006 4,402
2007 4,512
Thereafter 9,364
---------
$ 29,146
=========
In addition, the lessee is liable for real estate taxes and certain operating
expenses of the property.
Upon acquiring the commercial rental property in September, 2001, the Company
was assigned the lease agreement between the seller of the Property and the
existing tenant.
The original lease expires December 31, 2009 with two five-year options to
renew.
14
SCHEDULE III
FSP FAIR LAKES CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
May 31, 2003
(in thousands)
Initial Cost
-----------------------------------
Costs
Capitalized
(Disposals)
Subsequent
Encumbrances Buildings & to
Description (1) Land Improvements Acquisition
- ----------- ------------ ---- ------------ -----------
Fair Lakes, Fairfax, VA -- $ 4,183 $ 33,791 $ 100
=========== ======== ========== =========
(in thousands)
Historical Costs
------------------------------------------------------------
Total Costs,
Net of Depreciable
Buildings & Accumulated Accumulated Life Date of
Description Land Improvements Total(2) Depreciation Depreciation Years Acquisition
- ----------- ---- ------------ -------- ------------ ------------ ----- -----------
Fair Lakes, Fairfax, VA $ 4,183 $ 33,891 $ 38,074 $ 1,491 $ 36,583 15-39 September, 2001
======== =========== ======== =========== ===========
(1) There are no encumbrances on the above property.
(2) The aggregate cost for Federal Income Tax purposes is greater than the
total historical cost by approximately $1,486,000.
15
FSP FAIR LAKES CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
The following table summarizes the changes in the Company's real estate
investment and accumulated depreciation:
For the For the For the
Period Ended Year Ended Period Ended
May 31, December 31, December 31,
(in thousands) 2003 2002 2001
=======================================================================================================
Real estate investments, at cost:
Balance, beginning of period $ 37,974 $ 37,974 $ --
Acquisitions -- -- 37,974
Improvements 100 -- --
Dispositions -- -- --
-------------------------------------------------------------------------------------------------------
Balance, end of year $ 38,074 $ 37,974 $ 37,974
=======================================================================================================
Accumulated depreciation:
Balance, beginning of period $ 1,130 $ 253 $ --
Depreciation 361 877 253
Dispositions -- -- --
-------------------------------------------------------------------------------------------------------
Balance, end of period $ 1,491 $ 1,130 $ 253
=======================================================================================================
16
FSP Northwest Point Corp.
Financial Statements
May 31, 2003, December 31, 2002 and 2001
Table of Contents
Page
----
Financial Statements
Independent Auditor's Report................................................. 1
Balance Sheets as of May 31, 2003, December 31, 2002 and 2001................ 2
Statements of Operations for the period ended May 31, 2003, the year
ended December 31, 2002 and for the period October 17, 2001
(date of inception) to December 31, 2001............................... 3
Statements of Changes in Stockholders' Equity for the period ended
May 31, 2003, the year ended December 31, 2002 and for the period
October 17, 2001 (date of inception) to December 31, 2001.............. 4
Statements of Cash Flows for the period ended May 31, 2003, the year
ended December 31, 2002 and for the period October 17, 2001
(date of inception) to December 31, 2001............................... 5
Notes to Financial Statements............................................. 6-13
Schedule of Real Estate and Accumulated Depreciation..................... 14-15
[LETTERHEAD OF BRAVER AND COMPANY, P.C.]
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
FSP Northwest Point Corp.
(a Delaware Corporation)
We have audited the accompanying balance sheets of FSP Northwest Point Corp. (a
Delaware Corporation) as of May 31, 2003, December 31, 2002 and 2001, and the
related statements of operations, changes in stockholders' equity and cash
flows, as well as the financial statement schedule listed in the accompanying
index, for the year period ended May 31, 2003, the ended December 31, 2002, and
for the period from October 17, 2001 (date of inception) to December 31, 2001.
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements and financial statement schedule are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements and financial statement schedule. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial statement schedule
referred to above present fairly, in all material respects, the financial
position of FSP Northwest Point Corp. as of May 31, 2003, December 31, 2002 and
2001, and the results of its operations and its cash flows for the period ended
May 31, 2003, the year ended December 31, 2002, and for the initial period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States of America.
As described in Note 3 to the Financial Statements, effective June 1, 2003, the
Company merged with Franklin Street Properties Corp., the sole shareholder of
the Company's common stock.
/s/ Braver and Company, P.C.
Newton, Massachusetts
July 11, 2003
1
FSP Northwest Point Corp.
Balance Sheets
May 31, December 31, December 31,
(in thousands, except shares and par value amounts) 2003 2002 2001
========================================================================================================
Assets:
Real estate investments, at cost:
Land $ 3,242 $ 3,242 $ 3,242
Buildings and improvements 26,555 26,555 26,555
- --------------------------------------------------------------------------------------------------------
29,797 29,797 29,797
Less accumulated depreciation 994 711 28
- --------------------------------------------------------------------------------------------------------
Real estate investments, net 28,803 29,086 29,769
Cash and cash equivalents 1,833 1,492 657
Cash-funded reserve 1,500 1,498 1,498
Step rent receivable -- 339 --
Prepaid expenses and other assets 35 49 37
Deferred lease origination costs,
net of accumulated amortization of $241, $170 and $2 1,159 1,230 1,398
- --------------------------------------------------------------------------------------------------------
Total assets $ 33,330 $ 33,694 $ 33,359
========================================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses $ 2,105 $ 1,623 $ 1,181
Dividends payable 454 716 132
- --------------------------------------------------------------------------------------------------------
Total liabilities 2,559 2,339 1,313
- --------------------------------------------------------------------------------------------------------
Commitments and contingencies:
Stockholders' Equity:
Preferred Stock, $.01 par value per share, 372.5 shares
authorized, issued and outstanding -- -- --
Common Stock, $.01 par value per share, 1 share
authorized, issued and outstanding -- -- --
Additional paid-in capital 34,186 34,186 34,186
Retained deficit and dividends in excess of earnings (3,415) (2,831) (2,140)
- --------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 30,771 31,355 32,046
- --------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 33,330 $ 33,694 $ 33,359
========================================================================================================
See accompanying notes to financial statements.
2
FSP Northwest Point Corp.
Statements of Operations
For the Period
For the For the October 17, 2001
Period Ended Year Ended (date of inception)
May 31, December 31, to December 31,
(in thousands, except shares and per share amounts) 2003 2002 2001
=================================================================================================================
Revenue:
Rental $1,690 $5,127 $ 351
- -----------------------------------------------------------------------------------------------------------------
Rental operating expenses 158 628 89
Depreciation and amortization 354 851 30
Real estate taxes and insurance 595 1,435 60
Interest -- -- 2,187
- -----------------------------------------------------------------------------------------------------------------
Total expenses 1,107 2,914 2,366
- -----------------------------------------------------------------------------------------------------------------
Income (loss) before interest income 583 2,213 (2,015)
Interest income 13 40 7
- -----------------------------------------------------------------------------------------------------------------
Net income (loss) before common dividends 596 2,253 (2,008)
Dividends paid to common shareholders prior to
syndication of preferred shares -- -- 26
- -----------------------------------------------------------------------------------------------------------------
Net income (loss) attributable to preferred shareholders $ 596 $2,253 $(2,034)
=================================================================================================================
Weighted average number of preferred shares outstanding,
basic and diluted 372.5 372.5 372.5
=================================================================================================================
Net income (loss) per preferred share, basic and diluted $1,600 $6,048 $(5,460)
=================================================================================================================
See accompanying notes to financial statements.
3
FSP Northwest Point Corp.
Statements of Changes in Stockholders' Equity
For the Period Ended May 31, 2003, the
Year Ended December 31, 2002 and for
the period October 17, 2001 (date of inception)
to December 31, 2001
Retained Deficit
Additional and Dividends Total
Preferred Common Paid in in Excess of Stockholders'
(in thousands, except shares) Stock Stock Capital Earnings Equity
===========================================================================================================
Private offering of 372.5 shares, net $ -- $ -- $34,186 $ -- $ 34,186
Dividends -- -- -- (132) (132)
Net Loss -- -- -- (2,008) (2,008)
- ----------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 -- -- 34,186 (2,140) 32,046
Dividends -- -- -- (2,944) (2,944)
Net Income -- -- -- 2,253 2,253
- ----------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 -- -- 34,186 (2,831) 31,355
Dividends -- -- -- (1,180) (1,180)
Net Income -- -- -- 596 596
- ----------------------------------------------------------------------------------------------------------
Balance, May 31, 2003 $ -- $ -- $34,186 $(3,415) $ 30,771
==========================================================================================================
See accompanying notes to financial statements.
4
FSP Northwest Point Corp.
Statements of Cash Flows
For the Period
For the For the October 17, 2001
Period Ended Year Ended (date of inception)
May 31, December 31, to December 31,
(in thousands) 2003 2002 2001
=======================================================================================================================
Cash flows from operating activities:
Net income (loss) $ 596 $ 2,253 $ (2,008)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization 354 851 30
Changes in operating assets and liabilities
Cash-funded reserve (2) -- (1,498)
Prepaid expenses and other assets 14 (12) (37)
Step rent receivable 339 (339) --
Accounts payable and accrued expenses 482 442 1,181
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 1,783 3,195 (2,332)
- -----------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets -- -- (29,797)
Purchase of deferred lease origination costs -- -- (1,400)
- -----------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities -- -- (31,197)
- -----------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock -- -- 37,250
Syndication costs -- -- (3,064)
Dividends to stockholders (1,442) (2,360) --
Proceeds from long-term debt -- -- 30,150
Principal payments on long-term debt -- -- (30,150)
- -----------------------------------------------------------------------------------------------------------------------
Net cash (used for) provided by financing activities (1,442) (2,360) 34,186
- -----------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 341 835 657
Cash and cash equivalents, beginning 1,492 657 --
- -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end $ 1,833 $ 1,492 $ 657
=======================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ -- $ -- $ 2,187
Disclosure of non-cash financing activities:
Dividends declared but not paid $ 454 $ 716 $ 132
See accompanying notes to financial statements.
5
FSP Northwest Point Corp.
Notes to Financial Statements
1. Organization
FSP Northwest Point Corp. (the "Company") was organized on October 17, 2001 as a
Corporation under the laws of the State of Delaware to purchase, own and operate
a commercial office building located in Elk Grove, Illinois (the "Property").
The Property consists of a six-story Class "A" suburban office building that
contains approximately 177,000 square feet of space situated on approximately
5.3 acres of land. The Company acquired the Property on December 5, 2001 and
operates in a manner intended to qualify as a real estate investment trust
("REIT") for Federal income tax purposes.
2. Summary of Significant Accounting Policies
ESTIMATES AND ASSUMPTIONS
The Company prepares its financial statements and related notes in conformity
with accounting principles generally accepted in the United States of America
("GAAP"). These principles require management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
RECLASSIFICATIONS
Certain information in the 2002 and 2001 financial statements have been
reclassified to conform to the 2003 presentation.
REAL ESTATE AND DEPRECIATION
Real estate assets are stated at the lower of cost or fair value, as
appropriate, less accumulated depreciation.
Costs related to property acquisition and improvements are capitalized. Typical
capital items include new roofs, site improvements, various exterior building
improvements and major interior renovations. Funding for capital improvements
typically is provided by cash set aside at the time the property was purchased.
Routine replacements and ordinary maintenance and repairs that do not extend the
life of the asset are expensed as incurred. Typical expense items include
interior painting, landscaping and minor carpet replacements. Funding for
repairs and maintenance items typically is provided by cash flows from operating
activities.
Depreciation is computed using the straight-line method over the assets'
estimated useful lives as follows:
Category Years
-------- -----
Building - Commercial 39
Building Improvements 15-39
Furniture and equipment 5-7
6
FSP Northwest Point Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
REAL ESTATE AND DEPRECIATION (continued)
The following schedule reconciles the cost of the property as shown in the
Offering Memorandum as to the amounts shown on the Company's Balance Sheet:
(in thousands)
Price per Offering Memorandum $ 30,150
Plus: Acquisition fees 186
Plus: Other acquisition costs 861
----------------------------------------------------------------
Total Acquisition Costs $ 31,197
================================================================
These costs are reported in the Company's Balance Sheet as follows:
Land $ 3,242
Building 26,555
Deferred lease origination costs 1,400
----------------------------------------------------------------
Total reported in Balance Sheet $ 31,197
================================================================
The Company evaluates its assets used in operations by identifying indicators of
impairment and by comparing the sum of the estimated undiscounted future cash
flows for each asset to the asset's carrying value. When indicators of
impairment are present and the sum of the undiscounted future cash flows is less
than the carrying value of such asset, an impairment loss is recorded equal to
the difference between the asset's current carrying value and its fair value
based on discounting its estimated future cash flows. At May 31, 2003, December
31, 2002 and 2001, no such indicators of impairment were identified.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an initial
maturity of three months or less to be cash equivalents.
CASH-FUNDED RESERVES
The Company has set aside funds in anticipation of future capital needs of the
property. Although these funds typically are used for the payment of real estate
assets and deferred leasing commissions, there is no legal restriction on their
use and they may be used for any company purpose.
MARKETABLE SECURITIES
The Company accounts for investments in debt securities under the provisions of
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". The Company typically has classified its debt securities as
available-for-sale.
There were no investments in marketable securities at May 31, 2003, December 31,
2002 and 2001.
CONCENTRATION OF CREDIT RISKS
Cash, cash equivalents and short-term investments are financial instruments that
potentially subject the Company to a concentration of credit risk. The Company
maintains its cash balances and short-term investments principally in one bank
which the Company believes to be creditworthy. The Company periodically assesses
the financial condition of the bank and believes that the risk of loss is
minimal. Cash balances held with various financial institutions frequently
exceed the insurance limit of $100,000 provided by the Federal Deposit Insurance
Corporation.
7
FSP Northwest Point Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
CONCENTRATION OF CREDIT RISKS (continued)
For the period ended May 31, 2003, the year ended December 31, 2002 and the
period ended December 31, 2001, 100% of the rental income was derived from one
tenant, Motorola. As such, future receipts are dependent upon the financial
strength of the lessee and its ability to perform under the lease agreement.
FINANCIAL INSTRUMENTS
The Company estimates that the carrying value of cash and cash equivalents and
cash-funded reserves approximate their fair values based on their short-term
maturity and prevailing interest rates.
STEP RENT RECEIVABLE
Certain leases provide for fixed increases over the life of the lease. Rental
revenue is recognized on the straight-line basis over the related lease term;
however, billings by the Company are based on required minimum rentals in
accordance with the lease agreements. Step rent receivable, which is the
cumulative revenue recognized in excess of amounts billed by the Company, is $0,
$339,000 and $0 at May 31, 2003, December 31, 2002 and 2001, respectively.
DEFERRED LEASE ORIGINATION COSTS
Deferred lease origination costs are the estimated value of legal and leasing
costs related to acquired leases that were included in the purchase price when
the Company acquired the property. Under Statement of Financial Accounting
Standards No. 141 "Business Combinations" ("SFAS 141"), which was approved by
the Financial Accounting Standards Board in June 2001, the Company is required
to segregate these costs from its investment in real estate. The Company
subsequently amortizes these costs on a straight-line basis over the
weighted-average remaining life of the related lease. Amortization expense of
approximately $71,000, $168,000 and $2 is included in Depreciation and
Amortization in the Company's Statements of Operations for the period ended May
31, 2003 and the year ended December 31, 2002 and the period ended December 31,
2001, respectively.
Deferred lease origination costs included in the purchase price of the property
were $1,400,000 and are being amortized over the weighted-average period of six
years in respect of the lease assumed. Details of the deferred lease origination
costs are as follows:
For the For the For the
Period Ended Year Ended Period Ended
May 31, December 31, December 31,
2003 2002 2001
--------------------------------------------------------------------------
Cost $ 1,400,000 $ 1,400,000 $ 1,400,000
Accumulated amortization 241,000 170,000 2,000
--------------------------------------------------------------------------
Book value $ 1,159,000 $ 1,230,000 $ 1,398,000
==========================================================================
The estimated annual amortization expense for the periods succeeding May 31,
2003 are as follows:
2003 $ 99,000
2004 $ 170,000
2005 $ 170,000
2006 $ 170,000
2007 $ 170,000
SYNDICATION FEES
Syndication fees are selling commissions and other costs associated with the
initial offering of the Company's preferred shares. Such costs, in the amount of
$3,064,000 have been reported as a reduction in the Stockholders' Equity in the
Company's Balance Sheets.
8
FSP Northwest Point Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
REVENUE RECOGNITION
The Company has retained substantially all of the risks and benefits of
ownership of the Company's commercial property and accounts for its lease as an
operating lease. Rental income from the lease, which may include rent concession
(including free rent and tenant improvement allowances) and scheduled increases
in rental rates during the lease term, is recognized on a straight-line basis.
The Company does not have any percentage rent arrangements with its commercial
property tenants. Reimbursable costs are included in rental income in the period
earned. A schedule showing the components of rental revenue is shown below:
For the For the For the
Period Ended Year Ended Period Ended
May 31, December 31, December 31,
(in thousands) 2003 2002 2001
==========================================================================
Income from lease $ 1,255 $ 2,956 $ 210
Straight-line rent adjustment (339) 339 --
Reimbursable expense 774 1,832 141
--------------------------------------------------------------------------
Total $ 1,690 $ 5,127 $ 351
==========================================================================
INTEREST AND OTHER
Interest income and other income are recognized when the related services are
performed and the earnings process is complete.
INCOME TAXES
The Company has elected to be taxed as a REIT under the Internal Revenue Code of
1986, as amended. As a REIT, the Company generally is entitled to a tax
deduction for dividends paid to its shareholders, thereby effectively subjecting
the distributed net income of the Company to taxation at the shareholder level
only. The Company must comply with a variety of restrictions to maintain its
status as a REIT. These restrictions include the type of income it can earn, the
type of assets it can hold, the number of shareholders it can have and the
concentration of their ownership, and the amount of the Company's taxable income
that must be distributed annually.
NET INCOME PER SHARE
The Company follows Statement of Financial Accounting Standards No. 128
"Earnings per Share", which specifies the computation, presentation and
disclosure requirements for the Company's net income per share. Basic net income
per share is computed by dividing net income by the weighted average number of
shares outstanding during the period. Diluted net income per share reflects the
potential dilution that could occur if securities or other contracts to issue
shares were exercised or converted into shares. There were no potential dilutive
shares outstanding at May 31, 2003, December 31, 2002 and 2001. Subsequent to
the completion of the offering of preferred shares, the holders of the common
stock are not entitled to share in any income. The denominator used for
calculating basic and diluted net income per share is shown for preferred shares
only and is as follows:
For the For the For the
Period Ended Year Ended Period Ended
May 31, December 31, December 31,
2003 2002 2001
==========================================================================
Weighted average number of
preferred shares outstanding 372.5 372.5 372.5
9
FSP Northwest Point Corp.
Notes to Financial Statement
3. Related Party Transactions
On January 10, 2003, the Board of Directors of the Company and twelve other
companies (the "Target REITS"), whose common stock is owned by Franklin Street
Properties Corp. ("FSP"), resolved to enter into an Agreement and Plan of Merger
(the "Merger Agreement") with FSP. On May 30, 2003, a majority of the preferred
stockholders of the Company and the Target REITS, as well as a majority of the
common stockholders of FSP approved the merger. The effect of the merger is that
the stockholders of the Company and the Target REITS exchanged their stock for
common stock of FSP effective June 1, 2003.
The Company executed a management agreement with FSP Property Management LLC, an
affiliate of FSP, that provides for a management fee equal to 1% of collected
revenues and is cancelable with 30 days notice by either party. For the period
ended May 31, 2003, the year ended December 31, 2002 and the period ended
December 31, 2001, fees incurred under the agreement were $20,000, $50,000 and
$3,400, respectively.
An acquisition fee of $186,000 was paid in 2001 to an affiliate of the Common
Shareholder. Such fees were included in the cost of the real estate.
Syndication fees of $2,980,000 were paid in 2001 to an affiliate of the Common
Shareholder for services related to syndication of the Company's preferred
stock.
During 2001, the Company borrowed and repaid in full:
Note payable to FSP, principal of $30,150,000 with interest equal to the
Citizens Bank base rate. Interest paid to FSP was $45,000. The average
interest rate during the time the loan was outstanding was 4.75%.
A commitment fee of $2,142,000 was paid to FSP for obtaining the first
mortgage loan. Such amount is included in interest expense on the
Statement of Operations.
The Company paid a dividend of $26,000 in 2001 to the common shareholder
relating to earnings of the Company prior to the completion of the offering of
preferred shares.
4. Recent Accounting Standards
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations," which addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This Statement requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable estimate of the fair value
can be made. The associated asset retirement costs are capitalized as part of
the carrying amount of the long-lived asset. This Statement was effective at the
beginning of 2003. The impact of adoption did not have a material impact on the
Company's financial position, results of operations and cash flows.
In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets". This Statement supersedes SFAS No. 121 and
requires that long-lived assets that are to be disposed of by sale be measured
at the lower of book value or fair value less costs to sell. SFAS No. 144
retains the fundamental provisions of SFAS 121 for (a) recognition and
measurement of the impairment of long-lived assets to be held and used, and (b)
measurement of long-lived assets to be disposed of by sale, but broadens the
definition of what constitutes a discontinued operation and how the results of a
discontinued operation are to be measured and presented. This Statement was
effective at the beginning of 2002. The impact of adoption did not have a
material impact on the Company's financial position, results of operations and
cash flows. The Company does not have any real estate assets that it considers
"held for sale" at May 31, 2003.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements Nos.
4, 44, and 64, Amendment of SFAS 13, and Technical Corrections". This Statement
rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt",
and an amendment of that Statement, SFAS No. 64, "Extinguishments of Debt Made
to Satisfy Sinking-Fund Requirements". This Statement amends SFAS No. 13,
"Accounting for Leases". This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings or
describe their applicability under changed conditions. This statement was
effective for the Company's fiscal year ending December 31, 2003. The impact of
adoption did not have a material impact on the Company's financial position,
results of operations and cash flows.
10
FSP Northwest Point Corp.
Notes to Financial Statement
4. Recent Accounting Standards (continued)
In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities". This statement was effective January 1, 2003. SFAS
No. 146 replaces current accounting literature and requires the recognition of
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. The impact of
adoption did not have a material impact on the Company's financial position,
results of operations and cash flows.
5. Income Taxes
The Company files as a REIT under Sections 856-860 of the Internal Revenue Code
of 1986, as amended. In order to qualify as a REIT, the Company is required to
distribute at least 90% of its taxable income to shareholders and to meet
certain asset and income tests as well as certain other requirements. The
Company will generally not be liable for federal income taxes, provided it
satisfies their requirements. Even as a qualified REIT, the Company is subject
to certain state and local taxes on its income and property.
For the period ended December 31, 2001, the Company incurred a net operating
loss for income tax purposes of approximately $1,593,000 that can be carried
forward until it expires in the year 2021. The amount of the net operating loss
that may be used annually, if any, is limited.
The Company's net tax basis of its real estate assets is higher than the amount
set forth in the Company's Balance Sheet by approximately $1,349,000.
The following schedule reconciles GAAP Net Income to Taxable Income subject to
dividend requirements:
For the For the For the
Period Ended Year Ended Period Ended
May 31, December 31, December 31,
(in thousands) 2003 2002 2001
==================================================================================================
GAAP net income (loss) $ 596 $ 2,253 $(2,008)
Add: Book depreciation and amortization 354 851 30
Other book/tax differences, net -- -- 415
Less: Tax depreciation and amortization (290) (683) (31)
Straight-line rents 339 (339) --
Deferred rent (407) -- --
- --------------------------------------------------------------------------------------------------
Taxable income (loss) subject to dividend requirement * $ 592 $ 2,082 $(1,594)
==================================================================================================
* A tax loss is not subject to a dividend requirement.
The following schedule reconciles cash dividends paid or accrued to the
dividends paid deduction:
For the For the For the
Period Ended Year Ended Period Ended
May 31, December 31, December 31,
(in thousands) 2003 2002 2001
==================================================================================================
Cash dividends paid or accrued $ 1,896 $ 2,360 $ --
Plus: Dividends designated from following year -- -- --
Less: Portion designated capital gain distribution -- -- --
Less: Return of Capital (1,304) (278) --
- --------------------------------------------------------------------------------------------------
Dividends paid deduction $ 592 $ 2,082 $ --
==================================================================================================
11
FSP Northwest Point Corp.
Notes to Financial Statements
6. Cash Available for Distribution
The Company evaluates its performance based on Cash Available for Distribution
("CAD") as management believes that CAD represents the most accurate measure of
the Company's activity. CAD is the basis for distributions paid to equity
holders.
The Company defines CAD as: net income as computed in accordance with accounting
principles generally accepted in the United States of America ("GAAP"); plus
certain non-cash items included in the computation of net income (depreciation
and amortization, certain non-cash compensation expenses and straight line rent
adjustments); plus funds raised by the issuance of shares; plus the net proceeds
from the sale of land; less purchases of real estate assets, property and
equipment ("Capital Expenditures"), payments for deferred leasing commissions
and payments for deferred lease origination costs; plus (less) proceeds from
(payments to) cash reserves established at the acquisition date of the property
(cash-funded reserve). Depreciation and amortization, non-cash compensation and
straight-line rents are an adjustment to CAD, as these are non-cash items
included in net income. Capital Expenditures, payments of deferred leasing
commissions and payments for deferred lease origination costs and the proceeds
from (payments to) the funded reserve are an adjustment to CAD, as they
represent cash items not reflected in income. CAD should not be considered as an
alternative to net income (determined in accordance with GAAP), as an indicator
of the Company's financial performance, nor as an alternative to cash flows from
operating activities (determined in accordance with GAAP), nor as a measure of
the Company's liquidity, nor is it necessarily indicative of sufficient cash
flow to fund all of the Company's needs. Other real estate companies may define
CAD in a different manner. It is at the Company's discretion to retain a portion
of CAD for operational needs. The Company believes that in order to facilitate a
clear understanding of the results of the Company, CAD should be examined in
connection with net income and cash flows from operating, investing and
financing activities in the financial statements.
The calculation of CAD is shown in the following table:
For the For the For the
Period Ended Year Ended Period Ended
May 31, December 31, December 31,
(in thousands) 2003 2002 2001
=============================================================================================
Net income (loss $ 596 $ 2,253 $ (2,008)
Depreciation and amortization 354 851 30
Straight line rent 339 (339) --
Net proceeds from offering of shares -- -- 34,186
Purchase of land and building and improvements -- -- (29,797)
Payments from (establish) funded reserve (2) -- (1,498)
Payment of deferred origination costs -- -- (1,400)
---------------------------------------------------------------------------------------------
Cash Available for Distribution $ 1,287 $ 2,765 $ (487)
=============================================================================================
The Company's distributions are summarized as follows:
For the For the For the
Period Ended Year Ended Period Ended
May 31, December 31, December 31,
Quarter Paid (in thousands) 2003 2002 2001
==============================================================================================
First Quarter $ 716 $ 132 $ --
Second Quarter 726 745 --
Third Quarter 454 739 --
Fourth Quarter -- 744 --
----------------------------------------------------------------------------------------------
Dividends paid or accrued $1,896 $2,360 $ --
==============================================================================================
12
FSP Northwest Point Corp.
Notes to Financial Statements
5. Cash Available for Distribution (continued)
The Company declared a dividend payable to stockholders of record as of May 31,
2003, December 31, 2002 and 2001 of $454,000, $716,000 and $132,000,
respectively.
Cash distributions are declared and paid based on the total outstanding shares
as of the record date and are typically paid in the quarter following the
quarter that CAD is generated.
7. Capital Stock
PREFERRED STOCK
Generally each holder of Shares of Preferred Stock is entitled to receive
ratably all dividends, if any, declared by the Board of Directors out of funds
legally available. The right to receive dividends shall be non-cumulative, and
no right to dividends shall accrue by reason of the fact that no dividend has
been declared in any prior year. Each holder of Shares will be entitled to
receive, to the extent that funds are available therefore, $100,000 per Share,
before any payment to the holder of Common Stock, out of distributions to
stockholders upon liquidation, dissolution or the winding up of the Company; the
balance of any such funds available for distribution will be distributed among
the holders of Shares and the holder of Common Stock, pro rata based on the
number of shares held by each; provided, however, that for these purposes, one
share of Common Stock will be deemed to equal one-tenth of a share of Preferred
Stock.
In addition to certain voting rights provided in the corporate agreements, the
holder of Shares, acting by consent of at least 51%, shall have the further
right to approve or disapprove a proposed sale of the Property, the merger of
the Company with any other entity and amendments to the corporate charter. A
vote of the holders of 66.67% of the Shares is required for the issue of any
additional shares of capital stock. Holders of Shares have no redemption or
conversion rights.
COMMON STOCK
Franklin Street Properties Corp. (FSP), is the sole holder of the Company's
Common Stock. FSP has the right, as one class together with the holders of
Preferred Stock, to vote to elect the directors of the Company and to vote on
all matters except those voted by the holders of Shares of Preferred Stock.
Subsequent to the completion of the offering of the preferred shares, the
holders of common shares are not entitled to receive any income, nor shall the
Company declare or pay any cash dividends on shares of Common Stock.
8. Commitments and Contingencies
The Company, as lessor, has future minimum rentals due under a non-cancelable
operating lease as follows:
Period/Year Ended
(in thousands) December 31, Amount
------------------------- ----------
2003 $ 1,775
2004 3,112
2005 3,206
2006 3,302
2007 3,401
Thereafter 8,019
----------
$ 22,815
==========
In addition, the lessee is liable for real estate taxes and certain operating
expenses of the property.
Upon acquiring the commercial rental property in December 2001, the Company was
assigned the lease agreement between the seller of the Property and the existing
tenant. The original lease period is ten years with renewal options.
13
SCHEDULE III
FSP NORTHWEST POINT CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
May 31, 2003
(in thousands)
Initial Cost
-----------------------------------
Costs
Capitalized
(Disposals)
Subsequent
Encumbrances Buildings & to
Description (1) Land Improvements Acquisition
- ----------- ------------ ---- ------------ -----------
Northwest Point, Elk Grove,
Illinois -- $ 3,242 $ 26,555 $ --
========= ======== ========== =========
(in thousands)
Historical Costs
------------------------------------------------------------
Total Costs,
Net of Depreciable
Buildings & Accumulated Accumulated Life Date of
Description Land Improvements Total(2) Depreciation Depreciation Years Acquisition
- ----------- ---- ------------ -------- ------------ ------------ ----- -----------
Northwest Point, Elk Grove,
Illinois $ 3,242 $ 26,555 $ 29,797 $ 994 $ 28,803 15-39 December, 2001
======= ========== ======== ========== ===========
(1) There are no encumbrances on the above properties.
(2) The aggregate cost for Federal Income Tax purposes is greater than the
total historical cost by approximately $1,400,000.
14
FSP NORTHWEST POINT CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
The following table summarizes the changes in the Company's real estate
investment and accumulated depreciation.
For the For the For the
Period Ended Year Ended Period Ended
May 31, December 31, December 31,
(in thousands) 2003 2002 2001
=================================================================================
Real estate investments, at cost:
Balance, beginning of period $29,797 $29,797 --
Acquisitions -- -- 29,797
Improvements -- -- --
Dispositions -- -- --
---------------------------------------------------------------------------------
Balance, end of period $29,797 $29,797 $29,797
=================================================================================
Accumulated depreciation:
Balance, beginning of period $ 711 $ 28 $ --
Depreciation 283 683 28
Dispositions -- -- --
---------------------------------------------------------------------------------
Balance, end of period $ 994 $ 711 $ 28
=================================================================================
15
FSP Timberlake East Corp.
Financial Statements
May 31, 2003 and December 31, 2002
Table of Contents
Page
----
Financial Statements
Independent Auditor's Report................................................. 1
Balances Sheet as of May 31, 2003 and December 31, 2002...................... 2
Statements of Operations for the period ended May 31, 2003 and the period
January 10, 2002 (date of inception) to December 31, 2002.............. 3
Statements of Changes in Stockholders' Equity for the period ended
May 31, 2003 and the period January 10, 2002 (date of inception)
to December 31, 2002................................................... 4
Statements of Cash Flows for the period ended May 31, 2003 and the period
January 10, 2002 (date of inception) to December 31, 2002.............. 5
Notes to Financial Statements............................................. 6-14
Schedules of Real Estate and Accumulated Depreciation.................... 15-16
[LETTERHEAD OF BRAVER AND COMPANY, P.C.]
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
FSP Timberlake East Corp.
(a Delaware Corporation)
We have audited the accompanying balance sheets of FSP Timberlake East Corp. ( a
Delaware Corporation) as of May 31, 2003 and December 31, 2002, and the related
statements of operations, changes in stockholders' equity and cash flows, as
well as the financial statement schedules listed in the accompanying index, for
the period ended May 31, 2003 and the period from January 10, 2002 (date of
inception) to December 31, 2002. These financial statements and financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements and financial statement schedules are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements and financial statement schedule. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial statement schedules
referred to above present fairly, in all material respects, the financial
position of FSP Timberlake East Corp. as of May 31, 2003 and December 31, 2002,
and the results of its operations and its cash flows for the periods then ended
in conformity with accounting principles generally accepted in the United States
of America.
As described in Note 3 to the Financial Statements, effective June 1, 2003, the
Company merged with Franklin Street Properties Corp., the sole shareholder of
the Company's common stock.
/s/ Braver and Company, P.C.
Newton, Massachusetts
July 11, 2003
1
FSP Timberlake East Corp.
Balance Sheets
May 31, December 31,
(in thousands, except shares and par value amounts) 2003 2002
==================================================================================================================
Assets:
Real estate investments, at cost:
Land $ 2,931 $ 2,931
Buildings and improvements 16,525 16,525
- ---------------------------------------------------------------------------------------------------------------
19,456 19,456
Less accumulated depreciation 511 334
- ---------------------------------------------------------------------------------------------------------------
Real estate investments, net 18,945 19,122
Cash and cash equivalents 622 868
Cash funded reserves 1,000 778
Restricted cash 17 17
Tenant rent receivable 23 73
Step rent receivable -- 108
Prepaid expenses and other assets 24 4
Deferred lease origination costs, net of accumulated amortization of $168 and $112 537 593
Deferred leasing commissions, net of accumulated amortization of $8 and $5 32 30
- ---------------------------------------------------------------------------------------------------------------
Total assets $ 21,200 $ 21,593
===============================================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses $ 338 $ 131
Dividends payable 332 500
Tenant security deposits 17 17
- ---------------------------------------------------------------------------------------------------------------
Total liabilities 687 648
- ---------------------------------------------------------------------------------------------------------------
Commitments and Contingencies:
Stockholders' Equity:
Preferred Stock, $.01 par value, 250 shares -- --
authorized, issued and outstanding
Common Stock, $.01 par value, 1 share -- --
authorized, issued and outstanding
Additional paid-in capital 22,892 22,892
Retained deficit and dividends in excess of earnings (2,379) (1,947)
- ---------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 20,513 20,945
- ---------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 21,200 $ 21,593
===============================================================================================================
See accompanying notes to financial statements.
2
FSP Timberlake East Corp.
Statements of Operations
For the Period
For the January 10, 2002
Period Ended (date of inception)
May 31, to December 31,
(in thousands, except shares and per share amounts) 2003 2002
====================================================================================================================
Revenue:
Rental $1,129 $ 2,403
- --------------------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 303 531
Depreciation and amortization 236 451
Real estate taxes and insurance 192 307
Interest -- 1,457
- --------------------------------------------------------------------------------------------------------------
Total expenses 731 2,746
- --------------------------------------------------------------------------------------------------------------
Income (loss) before interest income 398 (343)
Interest income 7 42
- --------------------------------------------------------------------------------------------------------------
Net income (loss) before common dividends 405 (301)
Dividends paid to common shareholders prior to syndication of preferred shares -- 15
- --------------------------------------------------------------------------------------------------------------
Net income (loss) attributable to preferred shareholders $ 405 $ (316)
==============================================================================================================
Weighted average number of preferred shares outstanding, basic and diluted 250 250
==============================================================================================================
Net income (loss) per preferred share, basic and diluted $1,620 $(1,264)
==============================================================================================================
See accompanying notes to financial statements.
3
FSP Timberlake East Corp.
Statements of Changes in Stockholders' Equity
For the Period Ended May 31, 2003 and the Period January 10, 2002
(date of inception) to December 31, 2002
Retained Deficit
Additional and Dividends Total
Preferred Common Paid in in Excess of Stockholders'
(in thousands, except shares) Stock Stock Capital Earnings Equity
==================================================================================================================
Private offering of 250 shares, net $ -- $ -- $ 22,892 $ -- $ 22,892
Dividends -- -- -- (1,646) (1,646)
Net Loss -- -- -- (301) (301)
- ----------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 -- -- 22,892 (1,947) 20,945
Dividends -- -- -- (837) (837)
Net Income -- -- -- 405 405
- ----------------------------------------------------------------------------------------------------------------
Balance, May 31, 2003 $ -- $ -- $ 22,892 $ (2,379) $ 20,513
================================================================================================================
See accompanying notes to financial statements.
4
FSP Timberlake East Corp.
Statements of Cash Flows
For the Period
For the January 10, 2002
Period Ended (date of inception) to
May 31, December 31,
(in thousands) 2003 2002
=================================================================================================================
Cash flows from operating activities:
Net income (loss) $ 405 $ (301)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization 236 451
Changes in operating assets and liabilities:
Cash-funded reserve (222) (778)
Restricted cash -- (17)
Tenant rent receivable 50 (73)
Step rent receivable 108 (108)
Prepaid expenses and other assets (20) (4)
Accounts payable and accrued expenses 207 131
Tenant security deposits -- 17
Payment of deferred lease commissions (5) (35)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 759 (717)
- ----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets -- (19,456)
Purchase of deferred lease origination costs -- (705)
- ----------------------------------------------------------------------------------------------------------
Net cash used for investing activities -- (20,161)
- ----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock -- 25,000
Syndication costs -- (2,108)
Dividends to stockholders (1,005) (1,146)
Proceeds from long-term debt -- 20,360
Principal payments on long-term debt -- (20,360)
- ----------------------------------------------------------------------------------------------------------
Net cash (used for) provided by financing activities (1,005) 21,746
- ----------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (246) 868
Cash and cash equivalents, beginning of period 868 --
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 622 $ 868
==========================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ -- $ 1,457
Disclosure of non-cash financing activities
Dividends declared but not paid $ 332 $ 500
See accompanying notes to financial statements.
5
FSP Timberlake East Corp.
Notes to Financial Statements
1. Organization
FSP Timberlake East Corp. (the "Company") was organized on January 10, 2002 as a
Corporation under the laws of the State of Delaware to purchase, own and operate
a commercial office building located in Chesterfield, Missouri (the "Property").
The Property consists of a five-story Class "A" suburban office building that
contains approximately 116,000 square feet of space situated on approximately
8.6 acres of land. The Company acquired the Property on March 4, 2002 and
operates in a manner intended to qualify as a real estate investment trust
("REIT") for Federal income tax purposes.
2. Summary of Significant Accounting Policies
ESTIMATES AND ASSUMPTIONS
The Company prepares its financial statements and related notes in conformity
with accounting principles generally accepted in the United States of America
("GAAP"). These principles require management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
RECLASSIFICATIONS
Certain information in the 2002 financial statements have been reclassified to
conform to the 2003 presentation.
REAL ESTATE AND DEPRECIATION
Real estate assets are stated at the lower of cost or fair value, as
appropriate, less accumulated depreciation.
Costs related to property acquisition and improvements are capitalized. Typical
capital items include new roofs, site improvements, various exterior building
improvements and major interior renovations. Funding for capital improvement
typically is provided by cash set aside at the time the property was purchased.
Routine replacements and ordinary maintenance and repairs that do not extend the
life of the asset are expensed as incurred. Typical expense items include
interior painting, landscaping and minor carpet replacements. Funding for
repairs and maintenance items typically is provided by cash flows from operating
activities.
Depreciation is computed using the straight-line method over the assets'
estimated useful lives as follows:
Category Years
-------- -----
Building - Commercial 39
Building Improvements 15-39
Furniture and equipment 5-7
6
FSP Timberlake East Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
REAL ESTATE AND DEPRECIATION (continued)
The following schedule reconciles the cost of the property as shown in the
Offering Memorandum as to the amounts shown on the Company's Balance Sheet:
(in thousands)
Price per Offering Memorandum $ 20,360
Plus: Acquisition fees 125
Plus: Other acquisition costs 76
Less: Purchase price adjustments from seller (535)
-----------------------------------------------------------------------
Total Acquisition Costs $ 20,026
=======================================================================
These costs are reported in the Company's Balance Sheet as follows :
Land $ 2,931
Building, less improvements of $135 16,390
Deferred lease origination costs 705
-----------------------------------------------------------------------
Total reported in Balance Sheet $ 20,026
=======================================================================
The Company evaluates its assets used in operations by identifying indicators of
impairment and by comparing the sum of the estimated undiscounted future cash
flows for each asset to the asset's carrying value. When indicators of
impairment are present and the sum of the undiscounted future cash flows is less
than the carrying value of such asset, an impairment loss is recorded equal to
the difference between the asset's current carrying value and its fair value
based on discounting its estimated future cash flows. At May 31, 2003 no such
indicators of impairment were identified.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an initial
maturity of three months or less to be cash equivalents.
CASH-FUNDED RESERVES
The Company has set aside funds in anticipation of future capital needs of the
property. Although these funds typically are used for the payment of real estate
assets and deferred leasing commissions, there is no legal restriction on their
use and they may be used for any company purpose.
RESTRICTED CASH
Restricted cash consists of tenant security deposits.
MARKETABLE SECURITIES
The Company accounts for investments in debt securities under the provisions of
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". The Company typically has classified its debt securities as
available-for-sale.
There were no investments in marketable securities at May 31, 2003 and December
31, 2002.
7
FSP Timberlake East Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
CONCENTRATION OF CREDIT RISKS
Cash, cash equivalents and short-term investments are financial instruments that
potentially subject the Company to a concentration of credit risk. The Company
maintains its cash balances and short-term investments principally in one bank
which the Company believes to be creditworthy. The Company periodically assesses
the financial condition of the bank and believes that the risk of loss is
minimal. Cash balances held with various financial institutions frequently
exceed the insurance limit of $100,000 provided by the Federal Deposit Insurance
Corporation.
For the periods ended May 31, 2003 and December 31, 2002 rental income was
derived from various tenants. As such, future receipts are dependent upon the
financial strength of the lessees and their ability to perform under the lease
agreements.
The following tenants represent greater than 10% of total revenue:
For the For the
Period Ended Period Ended
May 31, December 31,
2003 2002
----------------------------
Quest Software, Inc. 23% 22%
Computer Associates International, Inc. 23% 21%
Prudential Securities Incorporated 13% 13%
Reinsurance Group of America, Inc. 14% 12%
Metropolitan Life Insurance Company, Inc. 11% 9%
FINANCIAL INSTRUMENTS
The Company estimates that the carrying value of cash and cash equivalents,
cash-funded reserves and restricted cash approximate their fair values based on
their short-term maturity and prevailing interest rates.
STEP RENT RECEIVABLE
Certain leases provide for fixed increases over the life of the lease. Rental
revenue is recognized on the straight-line basis over the related lease term;
however, billings by the Company are based on required minimum rentals in
accordance with the lease agreements. Step rent receivable, which is the
cumulative revenue recognized in excess of amounts billed by the Company, is $0
and $108,000 at May 31, 2003 and December 31, 2002, respectively.
DEFERRED LEASE ORIGINATION COSTS
Deferred lease origination costs are the estimated value of legal and leasing
costs related to acquired leases that were included in the purchase price when
the Company acquired the property. Under Statement of Financial Accounting
Standards No. 141 "Business Combinations" ("SFAS 141"), which was approved by
the Financial Accounting Standards Board in June 2001, the Company is required
to segregate these costs from its investment in real estate. The Company
subsequently amortizes these costs on a straight-line basis over the
weighted-average remaining life of the related leases. Amortization expense of
approximately $56,000 and $112,000 is included in Depreciation and Amortization
in the Company's Statements of Operations for the periods ended May 31, 2003 and
December 31, 2002, respectively.
8
FSP Timberlake East Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
DEFERRED LEASE ORIGINATION COSTS (continued)
Deferred lease origination costs included in the purchase price of the property
were $705,000 and are being amortized over the weighted-average period of six
years in respect of the leases assumed. Details of the deferred lease
origination costs are as follows:
For the For the
Period Ended Period Ended
May 31, December 31,
2003 2002
---------------------------------
Cost $ 705,000 $ 705,000
Accumulated amortization 168,000 112,000
---------------------------------
Book value $ 537,000 $ 593,000
=================================
The estimated annual amortization expense for the five periods succeeding May
31, 2003 are as follows:
2003 $ 78,000
2004 $ 134,000
2005 $ 134,000
2006 $ 134,000
2007 $ 57,000
DEFERRED LEASING COMMISSIONS
Deferred leasing commissions represent external leasing costs incurred in the
leasing of commercial space. These costs are capitalized and are amortized on a
straight-line basis over the weighted-average remaining life of the related
leases. Amortization expense of approximately $3,500 and $5,000 is included in
Depreciation and Amortization in the Company's Statements of Operations for the
periods ended May 31, 2003 and December 31, 2002, respectively.
Payments for deferred leasing commissions in 2003 and 2002 amounted to $5,000
and $35,000, respectively, which is being amortized over the weighted-average
period of seven years in respect of the leases. Details of the deferred leasing
commissions as of are as follows:
For the For the
Period Ended Period Ended
May 31, December 31,
2003 2002
----------------------------------
Cost $ 40,000 $ 35,000
Accumulated amortization 8,000 5,000
----------------------------------
Book value $ 32,000 $ 30,000
==================================
The estimated annual amortization expense for the five periods succeeding May
31, 2003 are as follows:
2003 $ 2,500
2004 $ 6,000
2005 $ 6,000
2006 $ 6,000
2007 $ 6,000
SYNDICATION FEES
Syndication fees are selling commissions and other costs associated with the
initial offering of the Company's preferred shares. Such costs, in the amount of
$2,108,000 have been reported as a reduction in the Stockholders' Equity in the
Company's Balance Sheet.
9
FSP Timberlake East Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
REVENUE RECOGNITION
The Company has retained substantially all of the risks and benefits of
ownership of the Company's commercial property and accounts for its leases as
operating leases. Rental income from leases, which may include rent concessions
(including free rent and tenant improvement allowances) and scheduled increases
in rental rates during the lease term, is recognized on a straight-line basis.
The Company does not have any percentage rent arrangements with its commercial
property tenants. Reimbursable costs are included in rental income in the period
earned. A schedule showing the components of rental revenue is shown below.
For the For the
Period Ended Period Ended
May 31, December 31,
(in thousands) 2003 2002
==========================================================================
Income from leases $1,090 $2,076
Straight-line rent adjustment (108) 108
Reimbursable expense 147 219
--------------------------------------------------------------------------
Total $1,129 $2,403
==========================================================================
INTEREST AND OTHER
Interest income and other income are recognized when the related services are
performed and the earnings process is complete.
INCOME TAXES
The Company has elected to be taxed as a REIT under the Internal Revenue Code of
1986, as amended. As a REIT, the Company generally is entitled to a tax
deduction for dividends paid to its shareholders, thereby effectively subjecting
the distributed net income of the Company to taxation at the shareholder level
only. The Company must comply with a variety of restrictions to maintain its
status as a REIT. These restrictions include the type of income it can earn, the
type of assets it can hold, the number of shareholders it can have and the
concentration of their ownership, and the amount of the Company's taxable income
that must be distributed annually.
NET INCOME PER SHARE
The Company follows Statement of Financial Accounting Standards No. 128
"Earnings per Share", which specifies the computation, presentation and
disclosure requirements for the Company's net income per share. Basic net income
per share is computed by dividing net income by the weighted average number of
shares outstanding during the period. Diluted net income per share reflects the
potential dilution that could occur if securities or other contracts to issue
shares were exercised or converted into shares. There were no potential dilutive
shares outstanding at May 31, 2003 and December 31, 2002. Subsequent to the
completion of the offering of preferred shares, the holders of common stock are
not entitled to share in any income. The denominator used for calculating basic
and diluted net income per share is shown for preferred shares only and is as
follows:
For the For the
Period Ended Period Ended
May 31, December 31,
2003 2002
=========================================================================
Weighted average number of perferred
shares outstanding 250 250
10
FSP Timberlake East Corp.
Notes to Financial Statements
3. Related Party Transactions
On January 10, 2003, the Board of Directors of the Company and twelve other
companies (the "Target REITS"), whose common stock is owned by Franklin Street
Properties Corp. ("FSP"), resolved to enter into an Agreement and Plan of Merger
(the "Merger Agreement") with FSP. On May 30, 2003, a majority of the preferred
stockholders of the Company and the Target REITS, as well as a majority of the
common stockholders of FSP approved the merger. The effect of the merger is that
the stockholders of the Company and the Target REITS exchanged their stock for
common stock of FSP effective June 1, 2003.
The Company executed a management agreement with FSP Property Management LLC, an
affiliate of FSP, that provides for a management fee equal to 1% of collected
revenues and is cancelable with 30 days notice by either party. For the period
ended May 31, 2003 and the period ended December 31, 2002, fees incurred under
the agreement were $13,000 and $22,000, respectively.
An acquisition fee of $125,000 and other costs totaling $11,000 were paid in
2002 to an affiliate of the Common Shareholder. Such fees were included in the
cost of the real estate.
Syndication fees of $2,000,000 were paid in 2002 to an affiliate of the Common
Shareholder for services related to syndication of the Company's preferred
stock.
During 2002, the Company borrowed and repaid in full:
Note payable to FSP, principal of $20,360,000 with interest equal to the
Citizens Bank base rate. Interest paid to FSP was $17,000. The average
interest rate during the time the loan was outstanding was 4.75%.
A commitment fee of $1,437,000 was paid to FSP for obtaining the first
mortgage loan. Such amount is included in interest expense on the
Statement of Operations.
The Company paid a dividend of $15,000 to the common shareholder relating to
earnings of the Company prior to the completion of the offering of preferred
shares.
4. Recent Accounting Standards
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations," which addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This Statement requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable estimate of the fair value
can be made. The associated asset retirement costs are capitalized as part of
the carrying amount of the long-lived asset. This Statement was effective at the
beginning of 2003. The impact of adoption did not have a material impact on the
Company's financial position, results of operations and cash flows.
In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets". This Statement supersedes SFAS No. 121 and
requires that long-lived assets that are to be disposed of by sale be measured
at the lower of book value or fair value less costs to sell. SFAS No. 144
retains the fundamental provisions of SFAS 121 for (a) recognition and
measurement of the impairment of long-lived assets to be held and used, and (b)
measurement of long-lived assets to be disposed of by sale, but broadens the
definition of what constitutes a discontinued operation and how the results of a
discontinued operation are to be measured and presented. This Statement was
effective at the beginning of 2002. The impact of adoption did not have a
material impact on the Company's financial position, results of operations and
cash flows. The Company does not have any real estate assets that it considers
"held for sale" at May 31, 2003.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements Nos.
4, 44, and 64, Amendment of SFAS 13, and Technical Corrections". This Statement
rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt",
and an amendment of that Statement, SFAS No. 64, "Extinguishments of Debt Made
to Satisfy Sinking-Fund Requirements". This Statement amends SFAS No. 13,
"Accounting for Leases". This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings or
describe their applicability under changed conditions. This statement was
effective for the Company's fiscal year ending December 31, 2003. The impact of
adoption did not have a material impact on the Company's financial position,
results of operations and cash flows.
11
FSP Timberlake East Corp.
Notes to Financial Statements
4. Recent Accounting Standards (continued)
In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities". This statement was effective January 1, 2003. SFAS
No. 146 replaces current accounting literature and requires the recognition of
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. The impact of
adoption did not have a material impact on the Company's financial position,
results of operations and cash flows.
5. Income Taxes
The Company files as a REIT under Sections 856-860 of the Internal Revenue Code
of 1986, as amended. In order to qualify as a REIT, the Company is required to
distribute at least 90% of its taxable income to shareholders and to meet
certain asset and income tests as well as certain other requirements. The
Company will generally not be liable for federal income taxes, provided it
satisfies their requirements. Even as a qualified REIT, the Company is subject
to certain state and local taxes on its income and property.
For the period ended December 31, 2002, the Company incurred a net operating
loss for income tax purposes of approximately $300,000 that can be carried
forward until it expires in the year 2022. The amount of the net operating loss
that may be used annually, if any, is limited.
At May 31, 2003 and December 31, 2002 the Company's net tax basis of its real
estate assets is higher than the amount set forth in the Company's Balance Sheet
by approximately $683,000 and $691,000, respectively.
The following schedule reconciles GAAP Net Income to Taxable Income subject to
dividend requirements:
For the For the
Period Ended Period Ended
May 31, December 31,
(in thousands) 2003 2002
============================================================================================
GAAP net income (loss) $ 405 $(301)
Add: Book depreciation and amortization 236 451
Other book/tax differences, net -- 3
Less: Tax depreciation and amortization (183) (345)
Straight-line rents 108 (108)
--------------------------------------------------------------------------------------------
Taxable income (loss) subject to dividend requirement * $ 566 $(300)
============================================================================================
* A tax loss is not subject to a dividend requirement.
The following schedule reconciles cash dividends paid or accrued to the
dividends paid deduction:
For the For the
Period Ended Period Ended
May 31, December 31,
(in thousands) 2003 2002
=============================================================================================
Cash dividends paid or accrued $1,337 $ 1,146
Plus: Dividends designated from following year -- --
Less: Portion designated capital gain distribution -- --
Less: Return of Capital (771) (1,146)
---------------------------------------------------------------------------------------------
Dividends paid deduction $ 566 $ --
=============================================================================================
12
FSP Timberlake East Corp.
Notes to Financial Statements
6. Cash Available for Distribution
The Company evaluates its performance based on Cash Available for Distribution
("CAD") as management believes that CAD represents the most accurate measure of
the Company's activity. CAD is the basis for distributions paid to equity
holders.
The Company defines CAD as: net income as computed in accordance with accounting
principles generally accepted in the United States of America ("GAAP"); plus
certain non-cash items included in the computation of net income (depreciation,
certain non-cash compensation expenses and straight line rent adjustments); plus
funds raised by the issuance of shares; plus the net proceeds from the sale of
land; less purchases of real estate assets, property and equipment ("Capital
Expenditures") payments for deferred leasing commissions and payments for
deferred lease origination costs; plus (less) proceeds from (payments to) cash
reserves established at the acquisition date of the property (cash funded
reserves). Depreciation and amortization, non-cash compensation and
straight-line rents are an adjustment to CAD, as these are non-cash items
included in net income. Capital Expenditures, payments of deferred leasing
commissions and payments for deferred lease origination costs and the proceeds
from (payments to) the funded reserve are an adjustment to CAD, as they
represent cash items not reflected in income. CAD should not be considered as an
alternative to net income (determined in accordance with GAAP), as an indicator
of the Company's financial performance, nor as an alternative to cash flows from
operating activities (determined in accordance with GAAP), nor as a measure of
the Company's liquidity, nor is it necessarily indicative of sufficient cash
flow to fund all of the Company's needs. Other real estate companies may define
CAD in a different manner. It is at the Company's discretion to retain a portion
of CAD for operational needs. The Company believes that in order to facilitate a
clear understanding of the results of the Company, CAD should be examined in
connection with net income and cash flows from operating, investing and
financing activities in the financial statements.
The calculation of CAD is shown in the following table:
For the For the
Period Ended Period Ended
May 31, December 31,
(in thousands) 2003 2002
==================================================================================
Net income (loss) $ 405 $ (301)
Depreciation and amortization 236 451
Straight line rent 108 (108)
Net proceeds from offering of shares -- 22,892
Purchase of land and building and improvments -- (19,456)
Payments from (establish) funded reserve (222) (778)
Payment of deferred leasing commissions (5) (35)
Payment of deferred lease origination costs -- (705)
----------------------------------------------------------------------------------
Cash Available for Distribution $ 522 $ 1,960
==================================================================================
The Company's distributions are summarized as follows:
For the For the
Period Ended Period Ended
May 31, December 31,
(in thousands) 2003 2002
==========================================================================
First Quarter $ 500 $ --
Second Quarter 505 128
Third Quarter 332 520
Fourth Quarter -- 498
--------------------------------------------------------------------------
Dividends paid or accrued $1,337 $1,146
==========================================================================
13
FSP Timberlake East Corp.
Notes to Financial Statements
6. Cash Available for Distribution (continued)
The Company declared a dividend payable to stockholders of record as of May 31,
2003 and December 31, 2002 of $332,000 and $500,000, respectively.
Cash distributions are declared and paid based on the total outstanding shares
as of the record date and are typically paid in the quarter following the
quarter that CAD is generated.
7. Capital Stock
PREFERRED STOCK
Generally, each holder of Shares of Preferred Stock is entitled to receive
ratably all income and all dividends, if any, declared by the Board of Directors
out of funds legally available. The right to receive dividends shall be
non-cumulative, and no right to dividends shall accrue by reason of the fact
that no dividend has been declared in any prior year. Each holder of Shares will
be entitled to receive, to the extent that funds are available therefore,
$100,000 per Share, before any payment to the holder of Common Stock, out of
distributions to stockholders upon liquidation, dissolution or the winding up of
the Company; the balance of any such funds available for distribution will be
distributed among the holders of Shares and the holder of Common Stock, pro rata
based on the number of shares held by each; provided, however, that for these
purposes, one share of Common Stock will be deemed to equal one-tenth of a share
of Preferred Stock.
In addition to certain voting rights provided in the corporate agreements, the
holder of Shares, acting by consent of at least 51%, shall have the further
right to approve or disapprove a proposed sale of the Property, the merger of
the Company with any other entity and amendments to the corporate charter. A
vote of the holders of 66.67% of the Shares is required for the issue of any
additional shares of capital stock. Holders of Shares have no redemption or
conversion rights.
COMMON STOCK
Franklin Street Properties Corp. ("FSP"), is the sole holder of the Company's
Common Stock. FSP has the right, as one class together with the holders of
Preferred Stock, to vote to elect the directors of the Company and to vote on
all matters except those voted by the holders of Shares of Preferred Stock.
Subsequent to the completion of the offering of the preferred shares the holders
of common shares are not entitled to receive any income, nor shall the Company
declare or pay any cash dividends on shares of Common Stock.
8. Commitments and Contingencies
The Company, as lessor, has future minimum rentals due under non-cancelable
operating leases as follows:
Period/Year Ended
(in thousands) December 31, Amount
------------------ --------
2003 $ 1,541
2004 2,706
2005 2,345
2006 1,559
2007 894
Thereafter 1,971
----------
$ 11,016
==========
In addition, the lessees are liable for real estate taxes and certain operating
expenses of the property.
Upon acquiring the commercial rental property in March, 2002, the Company was
assigned the lease agreements between the seller of the Property and the
existing tenants. The original lease periods range from four to eleven years
with renewal options.
14
SCHEDULE III
FSP TIMBERLAKE EAST CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
May 31, 2003
(in thousands)
Initial Cost
-----------------------------------
Costs
Capitalized
(Disposals)
Subsequent
Encumbrances Buildings & to
Description (1) Land Improvements Acquisition
- ----------- ------------ ---- ------------ -----------
Timberlake East,
Chesterfield, MO -- $ 2,931 $ 16,390 $ 135
======== ======== ========= ========
(in thousands)
Historical Costs
------------------------------------------------------------
Total Costs,
Net of Depreciable
Buildings & Accumulated Accumulated Life Date of
Description Land Improvements Total(2) Depreciation Depreciation Years Acquisition
- ----------- ---- ------------ -------- ------------ ------------ ----- -----------
Timberlake East,
Chesterfield, MO $ 2,931 $ 16,525 $ 19,456 $ 511 $ 18,945 15-39 March, 2002
======= =========== ========= ========== ==========
(1) There are no encumbrances on the above property.
(2) The aggregate cost for Federal Income Tax purposes is greater than the
total historical cost by approximately $705,000.
15
FSP TIMBERLAKE EAST CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
The following table summarizes the changes in the Company's real estate
investment and accumulated depreciation:
For the For the
Period Ended Period Ended
May 31, December 31,
(in thousands) 2003 2002
==========================================================================
Real estate investments, at cost:
Balance, beginning of period $19,456 $ --
Acquisitions -- 19,321
Improvements -- 135
Dispositions -- --
--------------------------------------------------------------------------
Balance, end of period $19,456 $19,456
==========================================================================
Accumulated depreciation:
Balance, beginning of period $ 334 $ --
Depreciation 177 334
Dispositions -- --
--------------------------------------------------------------------------
Balance, end of period $ 511 $ 334
==========================================================================
16
FSP Merrywood Apartments Corp.
Financial Statements
May 31, 2003 and December 31, 2002
Table of Contents
Page
----
Financial Statements
Independent Auditor's Report................................................. 1
Balance Sheets as of May 31, 2003 and December 31, 2002 ..................... 2
Statements of Operations for the period ended May 31, 2003 and the
period March 1, 2002 (date of inception) to December 31, 2002 ......... 3
Statements of Changes in Stockholders' Equity for the period ended
May 31, 2003 and the period March 1, 2002 (date of inception)
to December 31, 2002................................................... 4
Statements of Cash Flows for the period ended May 31, 2003 and the
period March 1, 2002 (date of inception) to December 31, 2002.......... 5
Notes to Financial Statements............................................. 6-12
Schedule of Real Estate and Accumulated Depreciation..................... 13-14
[LETTERHEAD OF BRAVER AND COMPANY, P.C.]
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
FSP Merrywood Apartments Corp.
(a Delaware Corporation)
We have audited the accompanying balance sheets of FSP Merrywood Apartments
Corp. (a Delaware Corporation) as of May 31, 2003 and December 31, 2002, and the
related statements of operations, changes in stockholders' equity and cash
flows, as well as the financial statement schedules listed in the accompanying
index, for the period ended May 31, 2003 and the period from March 1, 2002 (date
of inception) to December 31, 2002. These financial statements and financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements and financial statement schedules are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements and financial statement schedules.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial statement schedules
referred to above present fairly, in all material respects, the financial
position of FSP Merrywood Apartments Corp. as of May 31, 2003 and December 31,
2002, and the results of its operations and its cash flows for the periods then
ended in conformity with accounting principles generally accepted in the United
States of America.
As described in Note 3 to the Financial Statements, effective June 1, 2003, the
Company merged with Franklin Street Properties Corp., the sole shareholder of
the Company's common stock.
/s/ Braver and Company, P.C.
Newton, Massachusetts
July 11, 2003
1
FSP Merrywood Apartments Corp.
Balance Sheets
May 31, December 31,
(in thousands, except shares and par value amounts) 2003 2002
=============================================================================================
Assets:
Real estate investments, at cost:
Land $ 2,318 $ 2,318
Buildings and improvements 14,867 14,867
- ---------------------------------------------------------------------------------------------
17,185 17,185
Less accumulated depreciation 608 383
- ---------------------------------------------------------------------------------------------
Real estate investments, net 16,577 16,802
Cash and cash equivalents 376 499
Cash-funded reserve 500 500
Restricted cash 77 79
Prepaid expenses and other assets 70 25
- ---------------------------------------------------------------------------------------------
Total assets $ 17,600 $ 17,905
=============================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses $ 248 $ 208
Dividends payable 197 323
Tenant security deposits 77 79
- ---------------------------------------------------------------------------------------------
Total liabilities 522 610
- ---------------------------------------------------------------------------------------------
Commitments and contingencies:
Stockholders' Equity:
Preferred Stock, $.01 par value per share, 206 shares
authorized, issued and outstanding -- --
Common Stock, $.01 par value per share, 1 share
authorized, issued and outstanding -- --
Additional paid-in capital 18,892 18,892
Retained deficit and dividends in excess of earnings (1,814) (1,597)
- ---------------------------------------------------------------------------------------------
Total Stockholders' Equity 17,078 17,295
- ---------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 17,600 $ 17,905
=============================================================================================
See accompanying notes to financial statements.
2
FSP Merrywood Apartments Corp.
Statements of Operations
For the Period
For the March 1, 2002
Period Ended (date of inception)
May 31, to December 31,
(in thousands, except shares and per share amounts) 2003 2002
=======================================================================================================
Revenue:
Rental $ 1,072 $ 1,811
- -------------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 295 483
Depreciation 225 383
Real estate taxes and insurance 232 365
Interest -- 1,203
- -------------------------------------------------------------------------------------------------------
Total expenses 752 2,434
- -------------------------------------------------------------------------------------------------------
Income (loss) before interest income 320 (623)
Interest income 5 10
- -------------------------------------------------------------------------------------------------------
Net income (loss) before common dividends 325 (613)
Dividends paid to common shareholders prior to
syndication of preferred shares -- 26
- -------------------------------------------------------------------------------------------------------
Net income (loss) attributable to preferred shareholders $ 325 $ (639)
=======================================================================================================
Weighted average number of preferred shares outstanding,
basic and diluted 206 206
=======================================================================================================
Net income (loss) per preferred share, basic and diluted $ 1,578 $(3,102)
=======================================================================================================
See accompanying notes to financial statements.
3
FSP Merrywood Apartments Corp.
Statements of Changes in Stockholders' Equity
For the Period Ended May 31, 2003 and
For the Period March 1, 2002 (date of inception)
to December 31, 2002
Retained Defict
Additional and Dividends Total
Preferred Common Paid in in Excess of Stockholders'
(in thousands, except shares) Stock Stock Capital Earnings Equity
=====================================================================================================================
Private offering of 206 shares, net $ -- $ -- $ 18,892 $ -- $ 18,892
Dividends -- -- -- (984) (984)
Net Loss -- -- -- (613) (613)
- ---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 -- -- 18,892 (1,597) 17,295
Dividends -- -- -- (542) (542)
Net Income -- -- -- 325 325
- ---------------------------------------------------------------------------------------------------------------------
Balance, May 31, 2003 $ -- $ -- $ 18,892 $ (1,814) $ 17,078
=====================================================================================================================
See accompanying notes to financial statements.
4
FSP Merrywood Apartments Corp.
Statements of Cash Flows
For the Period
For the March 1, 2002
Period Ended (date of inception)
May 31, to December 31,
(in thousands) 2003 2002
=============================================================================================================
Cash flows from operating activities:
Net income (loss) $ 325 $ (613)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation 225 383
Changes in operating assets and liabilities
Cash-funded reserve -- (500)
Restricted cash 2 (79)
Prepaid expenses and other assets (45) (25)
Accounts payable and accrued expenses 40 208
Tenant security deposits (2) 79
- -------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 545 (547)
- -------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets -- (17,185)
- -------------------------------------------------------------------------------------------------------------
Net cash used for investing activities -- (17,185)
- -------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock -- 20,601
Syndication costs -- (1,709)
Dividends to stockholders (668) (661)
Proceeds from note payable on long-term debt -- 17,000
Principal payments on long-term debt -- (17,000)
- -------------------------------------------------------------------------------------------------------------
Net cash (used for) provided by financing activities (668) 18,231
- -------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (123) 499
Cash and cash equivalents, beginning of period 499 --
- -------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 376 $ 499
=============================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ -- $ 1,203
Disclosure of non-cash financing activities:
Dividends declared but not paid $ 197 $ 323
See accompanying notes to financial statements.
5
FSP Merrywood Apartments Corp.
Notes to Financial Statements
1. Organization
FSP Merrywood Apartments Corp. (the "Company") was organized on March 1, 2002 as
a Corporation under the laws of the State of Delaware to purchase, own and
operate a newly constructed 228 unit luxury apartment complex in Katy, Texas
(the "Property"). The Property consists of thirteen two-story apartment
buildings situated on approximately 14.4 acres of land. The company acquired the
Property on April 24, 2002 and operates in a manner intended to qualify as a
real estate investment trust ("REIT") for Federal income tax purposes.
2. Summary of Significant Accounting Policies
ESTIMATES AND ASSUMPTIONS
The Company prepares its financial statements and related notes in conformity
with accounting principles generally accepted in the United States of America
("GAAP"). These principles require management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
RECLASSIFICATIONS
Certain information in the 2002 financial statements have been reclassified to
conform to the 2003 presentation.
REAL ESTATE AND DEPRECIATION
Real estate assets are stated at the lower of cost or fair value, as
appropriate, less accumulated depreciation.
Costs related to property acquisition and improvements are capitalized. Typical
capital items include new roofs, site improvements, various exterior building
improvements and major interior renovations. Funding for capital improvement
typically is provided by cash set aside at the time the property was purchased.
Routine replacements and ordinary maintenance and repairs that do not extend the
life of the asset are expensed as incurred. Typical expense items include
interior painting, landscaping and minor carpet replacements. Funding for
repairs and maintenance items typically is provided by cash flows from operating
activities.
Depreciation is computed using the straight-line method over the assets'
estimated useful lives as follows:
Category Years
-------- -----
Building - Apartments 27.5
Building Improvements 15-27.5
Furniture and equipment 5-7
6
FSP Merrywood Apartments Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an initial
maturity of three months or less to be cash equivalents.
CASH-FUNDED RESERVES
The Company has set aside funds in anticipation of future capital needs of the
property. Although these funds typically are used for the payment of real estate
assets and deferred leasing commissions, there is no legal restriction on their
use and they may be used for any company purpose.
RESTRICTED CASH
Restricted cash consists of tenant security deposits.
MARKETABLE SECURITIES
The Company accounts for investments in debt securities under the provisions of
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". The Company typically has classified its debt securities as
available-for-sale.
There were no investments in marketable securities at May 31, 2003 and December
31, 2002.
CONCENTRATION OF CREDIT RISKS
Cash, cash equivalents and short-term investments are financial instruments that
potentially subject the Company to a concentration of credit risk. The Company
maintains its cash balances and short-term investments principally in one bank
which the Company believes to be creditworthy. The Company periodically assesses
the financial condition of the bank and believes that the risk of loss is
minimal. Cash balances held with various financial institutions frequently
exceed the insurance limit of $100,000 provided by the Federal Deposit Insurance
Corporation.
FINANCIAL INSTRUMENTS
The Company estimates that the carrying value of cash and cash equivalents,
cash-funded reserves and restricted cash approximate their fair values based on
their short-term maturity and prevailing interest rates.
SYNDICATION FEES
Syndication fees are selling commissions and other costs associated with the
initial offering of the Company's preferred shares. Such costs, in the amount of
$1,709,000 have been reported as a reduction in the Stockholders' Equity in the
Company's Balance Sheet.
REVENUE RECOGNITION
The Company's residential property leases are generally for terms of one year or
less. Rental income from tenants of residential apartment properties is
recognized in the period earned. Rent concessions, including free rent and
leasing commissions are charged as a reduction of rental revenue.
INTEREST AND OTHER
Interest income and other income are recognized when the related services are
performed and the earnings process is complete.
7
FSP Merrywood Apartments Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
INCOME TAXES
The Company has elected to be taxed as a REIT under the Internal Revenue Code of
1986, as amended. As a REIT, the Company generally is entitled to a tax
deduction for dividends paid to its shareholders, thereby effectively subjecting
the distributed net income of the Company to taxation at the shareholder level
only. The Company must comply with a variety of restrictions to maintain its
status as a REIT. These restrictions include the type of income it can earn, the
type of assets it can hold, the number of shareholders it can have and the
concentration of their ownership, and the amount of the Company's taxable income
that must be distributed annually.
NET INCOME PER SHARE
The Company follows Statement of Financial Accounting Standards No. 128
"Earnings per Share", which specifies the computation, presentation and
disclosure requirements for the Company's net income per share. Basic net income
per share is computed by dividing net income by the weighted average number of
shares outstanding during the period. Diluted net income per share reflects the
potential dilution that could occur if securities or other contracts to issue
shares were exercised or converted into shares. There were no potential dilutive
shares outstanding at May 31, 2003 and December 31, 2002. The denominator used
for calculating basic and diluted net income per share is shown for preferred
shares only and is as follows:
Period Ended Period Ended
May 31, December 31,
2003 2002
=========================================================================
Weighted average number of preferred
shares outstanding 206 206
3. Related Party Transactions
On January 10, 2003, the Board of Directors of the Company and twelve other
companies (the "Target REITS"), whose common stock is owned by Franklin Street
Properties Corp. ("FSP"), resolved to enter into an Agreement and Plan of Merger
(the "Merger Agreement") with FSP. On May 30, 2003, a majority of the preferred
stockholders of the Company and the Target REITS, as well as a majority of the
common stockholders of FSP approved the merger. The effect of the merger is that
the stockholders of the Company and the Target REITS exchanged their stock for
common stock of FSP effective June 1, 2003.
The Company executed a management agreement with FSP Property Management LLC, an
affiliate of FSP, that provides for a management fee equal to 1% of collected
revenues and is cancelable with 30 days notice by either party. For the periods
ended May 31, 2003 and December 31, 2002, fees earned under the agreement were
$11,000 and $18,000, respectively.
An acquisition fee of $107,000 was paid in 2002 to an affiliate of the Common
Shareholder. Such fees were included in the cost of the real estate.
Syndication fees of $1,648,000 were paid in 2002 to an affiliate of the Common
Shareholder for services related to syndication of the Company's preferred
stock.
During 2002, the Company borrowed and repaid in full:
Note payable to FSP, principal of $17,000,000 with interest equal to the
Citizens Bank base rate (4.75%). Interest paid to the affiliate was
$18,000.
A commitment fee of $1,184,500 was paid for obtaining the first mortgage
loan. Such amount is included in interest expense on the Statement of
Operations.
The Company paid a dividend of $26,000 to the common shareholder relating to
earnings of the Company prior to the completion of the offering of preferred
shares.
8
FSP Merrywood Apartments Corp.
Notes to Financial Statements
4. Recent Accounting Standards
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations," which addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This Statement requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable estimate of the fair value
can be made. The associated asset retirement costs are capitalized as part of
the carrying amount of the long-lived asset. This Statement was effective at the
beginning of 2003. The impact of adoption did not have a material impact on the
Company's financial position, results of operations and cash flows.
In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets". This Statement supersedes SFAS No. 121 and
requires that long-lived assets that are to be disposed of by sale be measured
at the lower of book value or fair value less costs to sell. SFAS No. 144
retains the fundamental provisions of SFAS 121 for (a) recognition and
measurement of the impairment of long-lived assets to be held and used, and (b)
measurement of long-lived assets to be disposed of by sale, but broadens the
definition of what constitutes a discontinued operation and how the results of a
discontinued operation are to be measured and presented. This Statement was
effective at the beginning of 2002. The impact of adoption did not have a
material impact on the Company's financial position, results of operations and
cash flows. The Company does not have any real estate assets that it considers
"held for sale" at May 31, 2003.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements Nos.
4, 44, and 64, Amendment of SFAS 13, and Technical Corrections". This Statement
rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt",
and an amendment of that Statement, SFAS No. 64, "Extinguishments of Debt Made
to Satisfy Sinking-Fund Requirements". This Statement amends SFAS No. 13,
"Accounting for Leases". This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings or
describe their applicability under changed conditions. This statement was
effective for the Company's fiscal year ending December 31, 2003. The impact of
adoption did not have a material impact on the Company's financial position,
results of operations and cash flows.
In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities". This statement was effective January 1, 2003. SFAS
No. 146 replaces current accounting literature and requires the recognition of
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. The impact of
adoption did not have a material impact on the Company's financial position,
results of operations and cash flows.
5. Income Taxes
The Company files as a REIT under Sections 856-860 of the Internal Revenue Code
of 1986, as amended. In order to qualify as a REIT, the Company is required to
distribute at least 90% of its taxable income to shareholders and to meet
certain asset and income tests as well as certain other requirements. The
Company will generally not be liable for federal income taxes, provided it
satisfies their requirements. Even as a qualified REIT, the Company is subject
to certain state and local taxes on its income and property.
For the period ended December 31, 2002, the Company incurred a net operating
loss for income tax purposes of approximately $565,000 that can be carried
forward until it expires in the year 2022. The amount of the net operating loss
that may be used annually, if any, is limited.
At May 31, 2003 and December 31, 2002 the Company's net tax basis of its real
estate assets approximates the amount set forth in the Company's Balance Sheet.
9
FSP Merrywood Apartments Corp.
Notes to Financial Statements
5. Income Taxes (continued)
The following schedule reconciles GAAP Net Income to Taxable Income subject to
dividend requirements:
For the For the
Period Ended Period Ended
May 31, December 31,
(in thousands) 2003 2002
============================================================================================
GAAP net income (loss) $ 325 $(613)
Add: Book depreciation 225 383
Less: Tax depreciation and amortization (154) (242)
Deferred rent (30) 30
--------------------------------------------------------------------------------------------
Taxable income (loss) subject to dividend requirement * $ 366 $(442)
============================================================================================
* A tax loss is not subject to a dividend requirement.
The following schedule reconciles cash dividends paid or accrued to the
dividends paid deduction:
For the For the
Period Ended Period Ended
May 31, December 31,
(in thousands) 2003 2002
===============================================================================================
Cash dividends paid or accrued $ 865 $ 661
Plus: Dividends designated from following year -- --
Less: Portion designated capital gain distribution -- --
Less: Return of Capital (499) (661)
-----------------------------------------------------------------------------------------------
Dividends paid deduction $ 366 $ --
===============================================================================================
6. Cash Available for Distribution
The Company evaluates the performance of its reportable segments based on Cash
Available for Distribution ("CAD") as management believes that CAD represents
the most accurate measure of the reportable segment's activity and is the basis
for distributions paid to equity holders.
The Company defines CAD as: net income as computed in accordance with accounting
principles generally accepted in the United States of America ("GAAP"); plus
certain non-cash items included in the computation of net income (depreciation
and certain non-cash compensation expenses); plus funds raised by the issuance
of shares; plus the net proceeds from the sale of land; less purchases of real
estate assets and property and equipment ("Capital Expenditures") plus (less)
proceeds from (payments to) cash reserves established at the acquisition date of
the property (Cash-funded reserves). Depreciation and non-cash compensation are
an adjustment to CAD, as these are non-cash items included in net income.
Capital Expenditures and the proceeds from (payments to) the funded reserve are
an adjustment to CAD, as they represent cash items not reflected in income. CAD
should not be considered as an alternative to net income (determined in
accordance with GAAP), as an indicator of the Company's financial performance,
nor as an alternative to cash flows from operating activities (determined in
accordance with GAAP), nor as a measure of the Company's liquidity, nor is it
necessarily indicative of sufficient cash flow to fund all of the Company's
needs. Other real estate companies may define CAD in a different manner. It is
at the Company's discretion to retain a portion of CAD for operational needs.
The Company believes that in order to facilitate a clear understanding of the
results of the Company, CAD should be examined in connection with net income and
cash flows from operating, investing and financing activities in the financial
statements.
10
FSP Merrywood Apartments Corp.
Notes to Financial Statements
6. Cash Available for Distribution (continued)
The calculation of CAD is shown in the following table:
For the For the
Period Ended Period Ended
May 31, December 31,
(in thousands) 2003 2002
===================================================================================
Net income (loss) $325 $ (613)
Depreciation 225 383
Net proceeds from offering of shares - 18,892
Purchase of land and building - (17,185)
Establish funded reserve - (500)
-----------------------------------------------------------------------------------
Cash Available for Distribution $550 $ 977
===================================================================================
The Company's distributions are summarized as follows:
For the For the
Period Ended Period Ended
May 31, December 31,
(in thousands) 2003 2002
==========================================================================
First Quarter $323 $ --
Second Quarter 345 --
Third Quarter 197 264
Fourth Quarter -- 397
--------------------------------------------------------------------------
Dividends paid or accrued $865 $661
==========================================================================
The Company declared a dividend payable to stockholders of record as of May 31,
2003 and December 31, 2002 of $197,000 and $323,000, respectively.
Cash distributions are declared and paid based on the total outstanding shares
as of the record date and are typically paid in the quarter following the
quarter that CAD is generated.
7. Capital Stock
PREFERRED STOCK
Generally, each holder of Shares of Preferred Stock is entitled to receive
ratably all income and all dividends, if any, declared by the Board of Directors
out of funds legally available. The right to receive dividends shall be
non-cumulative, and no right to dividends shall accrue by reason of the fact
that no dividend has been declared in any prior year. Each holder of Shares will
be entitled to receive, to the extent that funds are available therefore,
$100,000 per Share, before any payment to the holder of Common Stock, out of
distributions to stockholders upon liquidation, dissolution or the winding up of
the Company; the balance of any such funds available for distribution will be
distributed among the holders of Shares and the holder of Common Stock, pro rata
based on the number of shares held by each; provided, however, that for these
purposes, one share of Common Stock will be deemed to equal one-tenth of a share
of Preferred Stock.
In addition to certain voting rights provided in the corporate agreements, the
holder of Shares, acting by consent of at least 51%, shall have the further
right to approve or disapprove a proposed sale of the Property, the merger of
the Company with any other entity and amendments to the corporate charter. A
vote of the holders of 66.67% of the Shares is required for the issue of any
additional shares of capital stock. Holders of Shares have no redemption or
conversion rights.
11
FSP Merrywood Apartments Corp.
Notes to Financial Statements
7. Capital Stock (continued)
COMMON STOCK
Franklin Street Properties Corp. ("FSP"), is the sole holder of the Company's
Common Stock. FSP has the right, as one class together with the holders of
Preferred Stock, to vote to elect the directors of the Company and to vote on
all matters except those voted by the holders of Shares of Preferred Stock.
Subsequent to the completion of the offering of the preferred shares the holders
of common shares are not entitled to receive any income, nor shall the Company
declare or pay any cash dividends on shares of Common Stock.
12
SCHEDULE III
FSP MERRYWOOD APARTMENTS CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
May 31, 2003
(in thousands)
Initial Cost
-----------------------------------
Costs
Capitalized
(Disposals)
Subsequent
Encumbrances Buildings & to
Description (1) Land Improvements Acquisition
- ----------- ------------ ---- ------------ -----------
Merrywood Apartments,
Katy, TX -- $ 2,318 $ 14,867 $ --
========== ========= ========= ==========
(in thousands)
Historical Costs
------------------------------------------------------------
Total Costs,
Net of Depreciable
Buildings & Accumulated Accumulated Life Date of
Description Land Improvements Total(2) Depreciation Depreciation Years Acquisition
- ----------- ---- ------------ -------- ------------ ------------ ----- -----------
Merrywood Apartments,
Katy, TX $ 2,318 $ 14,867 $ 17,185 $ 608 $ 16,577 15-27.5 April, 2002
======== =========== ======== ========== =========
(1) There are no encumbrances on the above property.
(2) The aggregate cost for federal income tax purposes approximates total
historical costs.
13
FSP MERRYWOOD APARTMENTS CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
The following table summarizes the changes in the Company's real estate
investment and accumulated depreciation:
For the For the
Period Ended Period Ended
May 31, December 31,
(in thousands) 2003 2002
==========================================================================
Real estate investments, at cost:
Balance, beginning of period $17,185 $ --
Acquisitions -- 17,185
Improvements -- --
Dispositions -- --
--------------------------------------------------------------------------
Balance, end of period $17,185 $17,185
==========================================================================
Accumulated depreciation:
Balance, beginning of period $ 383 $ --
Depreciation 225 383
Dispositions -- --
--------------------------------------------------------------------------
Balance, end of period $ 608 $ 383
==========================================================================
14
FSP Plaza Ridge Corp.
Financial Statements
May 31, 2003 and December 31, 2002
Table of Contents
Page
----
Financial Statements
Independent Auditor's Report................................................. 1
Balance Sheets as of May 31, 2003 and December 31, 2002...................... 2
Statements of Operations for the period ended May 31, 2003 and the period
February 28, 2002 (date of inception) to December 31, 2002............. 3
Statements of Changes in Stockholders' Equity for the period ended
May 31, 2003 and the period February 28, 2002 (date of inception)
to December 31, 2002................................................... 4
Statements of Cash Flows for the period ended May 31, 2003 and the period
February 28, 2002 (date of inception) to December 31, 2002............. 5
Notes to Financial Statements............................................. 6-15
Schedules of Real Estate and Accumulated Depreciation.................... 16-17
[LETTERHEAD OF BRAVER AND COMPANY, P.C.]
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
FSP Plaza Ridge Corp.
(a Delaware Corporation)
We have audited the accompanying balance sheets of FSP Plaza Ridge Corp. (a
Delaware Corporation) as of May 31, 2003 and December 31, 2002, and the related
statements of operations, changes in stockholders' equity and cash flows, as
well as the financial statement schedules listed in the accompanying index, for
the period ended May 31, 2003 and the period from February 28, 2002 (date of
inception) to December 31, 2002. These financial statements and financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audit.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements and financial statement schedules are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements and financial statement schedules.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial statement schedules
referred to above present fairly, in all material respects, the financial
position of FSP Plaza Ridge Corp. as of May 31, 2003 and December 31, 2002, and
the results of its operations and its cash flows for the periods then ended in
conformity with accounting principles generally accepted in the United States of
America.
As described in Note 3 to the Financial Statements, effective June 1, 2003, the
Company merged with Franklin Street Properties Corp., the sole shareholder of
the Company's common stock.
/s/ Braver and Company, P.C.
Newton, Massachusetts
July 11, 2003
1
FSP Plaza Ridge Corp.
Balance Sheets
May 31, December 31,
(in thousands, except shares and par value amounts) 2003 2002
==================================================================================================================
Assets:
Real estate investments, at cost:
Land $ 4,055 $ 4,055
Buildings and improvements 25,386 25,210
- ---------------------------------------------------------------------------------------------------------------
29,441 29,265
Less accumulated depreciation 678 404
- ---------------------------------------------------------------------------------------------------------------
Real estate investments, net 28,763 28,861
Cash and cash equivalents 1,376 1,506
Cash-funded reserves 1,725 1,729
Tenant rent receivable 30 37
Step rent receivable -- 299
Prepaid expenses and other assets 24 106
Deferred lease origination costs, net of accumulated amortization of $203 and $119 1,534 1,618
Provisions for favorable leases, net of accumulated amortization of $235 and $137 1,411 1,509
- ---------------------------------------------------------------------------------------------------------------
Total assets $ 34,863 $ 35,665
===============================================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses $ 686 $ 324
Dividends payable 740 872
- ---------------------------------------------------------------------------------------------------------------
Total liabilities 1,426 1,196
- ---------------------------------------------------------------------------------------------------------------
Commitments and Contingencies:
Stockholders' Equity:
Preferred Stock, $.01 par value, 400 shares -- --
authorized, issued and outstanding
Common Stock, $.01 par value, 1 share -- --
authorized, issued and outstanding
Additional paid-in capital 36,690 36,690
Retained deficit and dividends in excess of earnings (3,253) (2,221)
- ---------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 33,437 34,469
- ---------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 34,863 $ 35,665
===============================================================================================================
See accompanying notes to financial statements.
2
FSP Plaza Ridge Corp.
Statements of Operations
For the Period
For the February 28, 2002
Period Ended (date of inception)
May 31, to December 31,
(in thousands, except share and per share amounts) 2003 2002
========================================================================================================================
Revenue:
Rental $1,612 $ 3,358
- -------------------------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 530 593
Depreciation and amortization 357 523
Real estate taxes and insurance 155 184
Interest -- 2,400
- -------------------------------------------------------------------------------------------------------------------
Total expenses 1,042 3,700
- -------------------------------------------------------------------------------------------------------------------
Income (loss) before interest income 570 (342)
Interest income 16 27
- -------------------------------------------------------------------------------------------------------------------
Net income (loss) before common dividends 586 (315)
Dividends paid to common shareholders prior to syndication of preferred shares -- 99
- -------------------------------------------------------------------------------------------------------------------
Net income (loss) attributable to preferred shareholders $ 586 $ (414)
===================================================================================================================
Weighted average number of preferred shares outstanding, basic and diluted 400 400
===================================================================================================================
Net income (loss) per preferred share, basic and diluted $1,465 $(1,035)
===================================================================================================================
See accompanying notes to financial statements.
3
FSP Plaza Ridge Corp.
Statements of Changes in Stockholders' Equity
For the Period ended May 31, 2003
and the Period February 28, 2002
(Date of inception) to December 31, 2002
Retained Deficit
Additional and Dividends Total
Preferred Common Paid in in Excess of Stockholders'
(in thousands, except shares) Stock Stock Capital Earnings Equity
====================================================================================================================
Private offering of 400 shares, net $ -- $ -- $ 36,690 $ -- $ 36,690
Dividends -- -- -- (1,906) (1,906)
Net Loss -- -- -- (315) (315)
- --------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 -- -- 36,690 (2,221) 34,469
Dividends -- -- -- (1,618) (1,618)
Net Income -- -- -- 586 586
- --------------------------------------------------------------------------------------------------------------------
Balance, May 31, 2003 $ -- $ -- $ 36,690 $ (3,253) $ 34,437
====================================================================================================================
See accompanying notes to financial statements.
4
FSP Plaza Ridge Corp.
Statement of Cash Flows
For the Period
For the February 28, 2002
Period Ended (date of inception)
May 31, to December 31,
(in thousands) 2003 2002
=================================================================================================================
Cash flows from operating activities:
Net income (loss) $ 586 $ (315)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization 357 523
Provision for favorable leases 98 137
Changes in operating assets and liabilities:
Cash-funded reserve 4 (1,729)
Tenant rent receivable 7 (37)
Step rent receivable 299 (299)
Prepaid expenses and other assets 82 (106)
Accounts payable and accrued expenses 362 324
- ----------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 1,795 (1,502)
- ----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets (176) (29,265)
Purchase of deferred lease origination costs and favorable leases -- (3,383)
- ----------------------------------------------------------------------------------------------------------
Net cash used for investing activities (176) (32,648)
- ----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock -- 40,010
Syndication costs -- (3,320)
Dividends to stockholders (1,749) (1,034)
Proceeds from long-term debt -- 32,250
Principal payments on long-term debt -- (32,250)
- ----------------------------------------------------------------------------------------------------------
Net cash (used for) provided by financing activities (1,749) 35,656
- ----------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (130) 1,506
Cash and cash equivalents, beginning of period 1,506 --
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 1,376 $ 1,506
==========================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest -- $ 2,400
Disclosure of non-cash financing activities:
Dividends declared but not paid $ 740 $ 872
See accompanying notes to financial statements.
5
FSP Plaza Ridge Corp.
Notes to Financial Statements
1. Organization
FSP Plaza Ridge Corp. (the "Company") was organized on February 28, 2002 as a
Corporation under the laws of the State of Delaware to purchase, own and operate
a commercial office building located in Herndon, Virginia (the "Property"). The
Property consists of a six-story Class "A" suburban office building that
contains approximately 158,000 square feet of space situated on approximately
5.3 acres of land. The company acquired the Property on May 23, 2002 and
operates in a manner intended to qualify as a real estate investment trust
("REIT") for Federal income tax purposes.
2. Summary of Significant Accounting Policies
ESTIMATES AND ASSUMPTIONS
The Company prepares its financial statements and related notes in conformity
with accounting principles generally accepted in the United States of America
("GAAP"). These principles require management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
RECLASSIFICATIONS
Certain information in the 2002 financial statements have been reclassified to
conform to the 2003 presentation.
REAL ESTATE AND DEPRECIATION
Real estate assets are stated at the lower of cost or fair value, as
appropriate, less accumulated depreciation.
Costs related to property acquisition and improvements are capitalized. Typical
capital items include new roofs, site improvements, various exterior building
improvements and major interior renovations. Funding for capital improvement
typically is provided by cash set aside at the time the property was purchased.
Routine replacements and ordinary maintenance and repairs that do not extend the
life of the asset are expensed as incurred. Typical expense items include
interior painting, landscaping and minor carpet replacements. Funding for
repairs and maintenance items typically is provided by cash flows from operating
activities.
Depreciation is computed using the straight-line method over the assets'
estimated useful lives as follows:
Category Years
-------- -----
Building - Commercial 39
Building Improvements 15-39
Furniture and equipment 5-7
6
FSP Plaza Ridge Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
REAL ESTATE AND DEPRECIATION (continued)
The following schedule reconciles the cost of the property as shown in the
Offering Memorandum as to the amounts shown on the Company's Balance Sheet:
(in thousands)
Price per Offering Memorandum $ 32,250
Plus: Acquisition fees 200
Plus: Other acquistion costs 198
----------------------------------------------------------------
Total Acquisition Costs $ 32,648
================================================================
These costs are reported in the Company's Balance Sheet as follows:
Land $ 4,055
Building 25,210
Deferred lease origination costs 1,737
Provision for favorable leases 1,646
----------------------------------------------------------------
Total reported in Balance Sheets $ 32,648
================================================================
The Company evaluates its assets used in operations by identifying indicators of
impairment and by comparing the sum of the estimated undiscounted future cash
flows for each asset to the asset's carrying value. When indicators of
impairment are present and the sum of the undiscounted future cash flows is less
than the carrying value of such asset, an impairment loss is recorded equal to
the difference between the asset's current carrying value and its fair value
based on discounting its estimated future cash flows. At May 31, 2003 no such
indicators of impairment were identified.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an initial
maturity of three months or less to be cash equivalents.
CASH-FUNDED RESERVES
The Company has set aside funds in anticipation of future capital needs of the
property. Although these funds typically are used for the payment of real estate
assets and deferred leasing commissions, there is no legal restriction on their
use and they may be used for any company purpose.
MARKETABLE SECURITIES
The Company accounts for investments in debt securities under the provisions of
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". The Company typically has classified its debt securities as
available-for-sale.
There were no investments in marketable securities at May 31, 2003 and December
31, 2002.
7
FSP Plaza Ridge Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
CONCENTRATION OF CREDIT RISKS
Cash, cash equivalents and short-term investments are financial instruments that
potentially subject the Company to a concentration of credit risk. The Company
maintains its cash balances and short-term investments principally in one bank
which the Company believes to be creditworthy. The Company periodically assesses
the financial condition of the bank and believes that the risk of loss is
minimal. Cash balances held with various financial institutions frequently
exceed the insurance limit of $100,000 provided by the Federal Deposit Insurance
Corporation.
For the periods ended May 31, 2003 and December 31, 2002, rental income was
derived from various tenants. As such, future receipts are dependent upon the
financial strength of the lessees and their ability to perform under the lease
agreements.
The following tenants represent greater than 10% of total revenue:
For the For the
Period Ended Period Ended
May 31, December 31,
2003 2002
------------------------------------
Scitor Corporation 51% 51%
Juniper Networks, Inc. 30% 30%
FINANCIAL INSTRUMENTS
The Company estimates that the carrying value of cash and cash equivalents, and
cash-funded reserves approximate their fair values based on their short-term
maturity and prevailing interest rates.
STEP RENT RECEIVABLE
Certain leases provide for fixed increases over the life of the lease. Rental
revenue is recognized on the straight-line basis over the related lease term;
however, billings by the Company are based on required minimum rentals in
accordance with the lease agreements. Step rent receivable, which is the
cumulative revenue recognized in excess of amounts billed by the Company, is $0,
and $299,000 at May 31, 2003 and December 31, 2002, respectively.
DEFERRED LEASE ORIGINATION COSTS
Deferred lease origination costs are the estimated value of legal and leasing
costs related to acquired leases that were included in the purchase price when
the Company acquired the property. Under Statement of Financial Accounting
Standards No. 141 "Business Combinations" ("SFAS 141"), which was approved by
the Financial Accounting Standards Board in June 2001, the Company is required
to segregate these costs from its investment in real estate. The Company
subsequently amortizes these costs on a straight-line basis over the
weighted-average remaining life of the related leases. Amortization expense of
approximately $84,000 and $119,000 is included in Depreciation and Amortization
in the Company's Statement of Operations for the periods ended May 31, 2003 and
December 31, 2002, respectively.
Deferred lease origination costs included in the purchase price of the property
were $1,737,000 and are being amortized over the weighted-average period of nine
years in respect of the leases assumed. Details of the deferred lease
origination costs are as follows:
For the For the
Period Ended Period Ended
May 31, December 31,
2003 2002
---------------------------------
Cost $ 1,737,000 $ 1,737,000
Accumulated amortization 203,000 119,000
---------------------------------
Book value $ 1,534,000 $ 1,618,000
=================================
8
FSP Plaza Ridge Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
DEFERRED LEASE ORIGINATION COSTS (continued)
The estimated annual amortization expense for the five periods succeeding May
31, 2003 are as follows:
2003 $ 120,000
2004 $ 204,000
2005 $ 204,000
2006 $ 204,000
2007 $ 204,000
PROVISION FOR FAVORABLE LEASES
The provision for favorable leases is the estimated benefit the Company receives
when the lease payments due under a tenant's lease exceed the market rate of the
lease at the date the property was acquired. Under SFAS 141 the Company is
required to capitalize this difference and report it separately from its
investment in real estate. The Company subsequently amortizes this provision on
a straight-line basis over the remaining life of the tenant's lease.
Amortization of $98,000 and $137,000 is shown as a reduction of rental income in
the Company's Statement of Operations for the periods ended May 31, 2003 and
December 31, 2002, respectively.
Provision for favorable leases included in the purchase price of the property
were $1,646,000 and are being amortized over the weighted-average period of
seven years in respect of the leases assumed. Details of the provision for
favorable leases are as follows:
For the For the
Period Ended Period Ended
May 31, December 31,
2003 2002
----------------------------------
Cost $ 1,646,000 $ 1,646,000
Accumulated amortization 235,000 137,000
----------------------------------
Book value $ 1,411,000 $ 1,509,000
==================================
The estimated annual amortization expense for the five periods succeeding May
31, 2003 are as follows:
2003 $ 137,000
2004 $ 235,000
2005 $ 235,000
2006 $ 235,000
2007 $ 235,000
SYNDICATION FEES
Syndication fees are selling commissions and other costs associated with the
initial offering of the Company's preferred shares. Such costs, in the amount of
$3,320,000 have been reported as a reduction in the Stockholders' Equity in the
Company's Balance Sheet.
9
FSP Plaza Ridge Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
REVENUE RECOGNITION
The Company has retained substantially all of the risks and benefits of
ownership of the Company's commercial property and accounts for its leases as
operating leases. Rental income from leases, which may include rent concession
(including free rent and tenant improvement allowances) and scheduled increases
in rental rates during the lease term, is recognized on a straight-line basis.
The Company does not have any percentage rent arrangements with its commercial
property tenants. Reimbursable costs are included in rental income in the period
earned. A schedule showing the components of rental revenue is shown below.
For the For the
Period Ended Period Ended
May 31, December 31,
(in thousands) 2003 2002
==========================================================================
Income from leases $ 1,958 $ 3,041
Straight-line rent adjustment (299) 299
Reimbursable expenses 51 155
Amortization of favorable leases (98) (137)
--------------------------------------------------------------------------
Total $ 1,612 $ 3,358
==========================================================================
INTEREST AND OTHER
Interest income and other income are recognized when the related services are
performed and the earnings process is complete.
INCOME TAXES
The Company has elected to be taxed as a REIT under the Internal Revenue Code of
1986, as amended. As a REIT, the Company generally is entitled to a tax
deduction for dividends paid to its shareholders, thereby effectively subjecting
the distributed net income of the Company to taxation at the shareholder level
only. The Company must comply with a variety of restrictions to maintain its
status as a REIT. These restrictions include the type of income it can earn, the
type of assets it can hold, the number of shareholders it can have and the
concentration of their ownership, and the amount of the Company's taxable income
that must be distributed annually.
NET INCOME PER SHARE
The Company follows Statement of Financial Accounting Standards No. 128
"Earnings per Share", which specifies the computation, presentation and
disclosure requirements for the Company's net income per share. Basic net income
per share is computed by dividing net income by the weighted average number of
shares outstanding during the period. Diluted net income per share reflects the
potential dilution that could occur if securities or other contracts to issue
shares were exercised or converted into shares. There were no potential dilutive
shares outstanding at May 31, 2003 and December 31, 2002. Subsequent to the
completion of the offering of preferred shares, the holders of common stock are
not entitled to share in any income. The denominator used for calculating basic
and diluted net income per share is shown for preferred shares only and is as
follows:
For the For the
Period Ended Period Ended
May 31, December 31,
2003 2002
=========================================================================
Weighted average number of preferred
shares outstanding 400 400
10
FSP Plaza Ridge Corp.
Notes to Financial Statements
3. Related Party Transactions
On January 10, 2003, the Board of Directors of the Company and twelve other
companies (the "Target REITS"), whose common stock is owned by Franklin Street
Properties Corp. ("FSP"), resolved to enter into an Agreement and Plan of Merger
(the "Merger Agreement") with FSP. On May 30, 2003, a majority of the preferred
stockholders of the Company and the Target REITS, as well as a majority of the
common stockholders of FSP approved the merger. The effect of the merger is that
the stockholders of the Company and the Target REITS exchanged their stock for
common stock of FSP effective June 1, 2003.
The Company executed a management agreement with FSP Property Management LLC, an
affiliate of FSP, that provides for a management fee equal to 1% of collected
revenues and is cancelable with 30 days notice by either party. For the periods
ended May 31, 2003 and December 31, 2002, fees incurred under the agreement were
$16,000 and $36,000, respectively.
An acquisition fee of $200,000 and other costs of $37,000 were paid in 2002 to
an affiliate of the Common Shareholder. Such fees were included in the cost of
the real estate.
Syndication fees of $3,320,000 were paid in 2002 to an affiliate of the Common
Shareholder for services related to syndication of the Company's preferred
stock.
During 2002, the Company borrowed and repaid in full:
Note payable to FSP, principal of $32,250,000 with interest equal to the
Citizens Bank base rate. Interest paid to the affiliate was $97,000. The
average interest rate during the time the loan was outstanding was 4.75%
A commitment fee of $2,300,000 was paid for obtaining the first mortgage
loan. Such amount is included in interest expense on the Statement of
Operations.
The Company paid a dividend of $99,000 to the common shareholder relating to
earnings of the Company prior to the completion of the offering of preferred
shares.
4. Recent Accounting Standards
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations," which addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This Statement requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable estimate of the fair value
can be made. The associated asset retirement costs are capitalized as part of
the carrying amount of the long-lived asset. This Statement was effective at the
beginning of 2003. The impact of adoption did not have a material impact on the
Company's financial position, results of operations and cash flows.
In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets". This Statement supersedes SFAS No. 121 and
requires that long-lived assets that are to be disposed of by sale be measured
at the lower of book value or fair value less costs to sell. SFAS No. 144
retains the fundamental provisions of SFAS 121 for (a) recognition and
measurement of the impairment of long-lived assets to be held and used, and (b)
measurement of long-lived assets to be disposed of by sale, but broadens the
definition of what constitutes a discontinued operation and how the results of a
discontinued operation are to be measured and presented. This Statement was
effective at the beginning of 2002. The impact of adoption did not have a
material impact on the Company's financial position, results of operations and
cash flows. The Company does not have any real estate assets that it considers
"held for sale" at May 31, 2003.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements Nos.
4, 44, and 64, Amendment of SFAS 13, and Technical Corrections". This Statement
rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishments of Debt",
and an amendment of that Statement, SFAS No. 64, "Extinguishments of Debt Made
to Satisfy Sinking-Fund Requirements". This Statement amends SFAS No. 13,
"Accounting for Leases". This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings or
describe their applicability under changed conditions. This statement was
effective for the Company's fiscal year ending December 31, 2003. The impact of
adoption did not have a material impact on the Company's financial position,
results of operations and cash flows.
11
FSP Plaza Ridge Corp.
Notes to Financial Statements
4. Recent Accounting Standards (continued)
In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities". This statement was effective January 1, 2003. SFAS
No. 146 replaces current accounting literature and requires the recognition of
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. The impact of
adoption did not have a material impact on the Company's financial position,
results of operations and cash flows.
5. Income Taxes
The Company files as a REIT under Sections 856-860 of the Internal Revenue Code
of 1986, as amended. In order to qualify as a REIT, the Company is required to
distribute at least 90% of its taxable income to shareholders and to meet
certain asset and income tests as well as certain other requirements. The
Company will generally not be liable for federal income taxes, provided it
satisfies their requirements. Even as a qualified REIT, the Company is subject
to certain state and local taxes on its income and property.
For the period ended December 31, 2002, the Company incurred a net operating
loss for income tax purposes of approximately $396,000 that can be carried
forward until it expires in the year 2022. The amount of the net operating loss
that may be used annually, if any, is limited.
At May 31, 2003 and December 31, 2002 the Company's net tax basis of its real
estate assets is higher than the amount set forth in the Company's Balance Sheet
by approximately $3,293,000 and $3,329,000, respectively.
The following schedule reconciles GAAP Net Income (Loss) to Taxable Income
subject to dividend requirements:
For the For the
Period Ended Period Ended
May 31, December 31,
(in thousands) 2003 2002
==============================================================================================
GAAP net income (loss) $ 586 $(315)
Add: Book depreciation and amortization 455 660
Less: Tax depreciation and amortization (302) (442)
Straight-line rents 299 (299)
----------------------------------------------------------------------------------------------
Taxable income (loss) subject to dividend requirement * $1,038 $(396)
==============================================================================================
* A tax loss is not subject to a dividend requirement.
The following schedule reconciles cash dividends paid or accrued to the
dividends paid deduction:
For the For the
Period Ended Period Ended
May 31, December 31,
(in thousands) 2003 2002
=============================================================================================
Cash dividends paid or accrued $ 2,489 $ 1,034
Plus: Dividends designated from following year -- --
Less: Portion designated capital gain distribution -- --
Less: Return of Capital (1,451) (1,034)
---------------------------------------------------------------------------------------------
Dividends paid deduction $ 1,038 $ --
=============================================================================================
12
FSP Plaza Ridge Corp.
Notes to Financial Statements
6. Cash Available for Distribution
The Company evaluates its performance based on Cash Available for Distribution
("CAD") as management believes that CAD represents the most accurate measure of
the Company's activity. CAD is the basis for distributions paid to equity
holders.
The Company defines CAD as: net income as computed in accordance with accounting
principles generally accepted in the United States of America ("GAAP"); plus
certain non-cash items included in the computation of net income (depreciation
and amortization, certain non-cash compensation expenses and straight line rent
adjustments); plus funds raised by the issuance of shares; plus the net proceeds
from the sale of land; less purchases of real estate assets, property and
equipment ("Capital Expenditures"), payments for deferred leasing commissions
and payments for deferred lease origination costs; plus (less) proceeds from
(payments to) cash reserves established at the acquisition date of the property
(cash funded reserves). Depreciation and amortization, non-cash compensation and
straight-line rents are an adjustment to CAD, as these are non-cash items
included in net income. Capital Expenditures, payments of deferred leasing
commissions and payments for deferred lease origination costs and the proceeds
from (payments to) the funded reserve are an adjustment to CAD, as they
represent cash items not reflected in income. CAD should not be considered as an
alternative to net income (determined in accordance with GAAP), as an indicator
of the Company's financial performance, nor as an alternative to cash flows from
operating activities (determined in accordance with GAAP), nor as a measure of
the Company's liquidity, nor is it necessarily indicative of sufficient cash
flow to fund all of the Company's needs. Other real estate companies may define
CAD in a different manner. It is at the Company's discretion to retain a portion
of CAD for operational needs. The Company believes that in order to facilitate a
clear understanding of the results of the Company, CAD should be examined in
connection with net income and cash flows from operating, investing and
financing activities in the financial statements.
The calculation of CAD is shown in the following table:
For the For the
Period Ended Period Ended
May 31, December 31,
(in thousands) 2003 2002
=============================================================================================
Net income (loss) $ 586 $ (315)
Depreciation, amortization and provision for
favorable leases 455 660
Straight line rent 299 (299)
Net proceeds from offering of shares -- 36,690
Purchase of land and building and improvements (176) (29,265)
Payment from (establish) funded reserve 4 (1,729)
Payment of deferred lease origination costs and
favorable leases -- (3,383)
---------------------------------------------------------------------------------------------
Cash Available for Distribution $1,168 $ 2,359
=============================================================================================
13
FSP Plaza Ridge Corp.
Notes to Financial Statements
6. Cash Available for Distribution (continued)
The Company's distributions are summarized as follows:
For the For the
Period Ended Period Ended
May 31, December 31,
(in thousands) 2003 2002
==========================================================================
First Quarter $ 871 $ --
Second Quarter 878 --
Third Quarter 740 212
Fourth Quarter -- 822
--------------------------------------------------------------------------
Dividends paid or accrued $2,489 $1,034
==========================================================================
The Company declared a dividend payable to stockholders of record as of May 31,
2003 and December 31, 2002 of $740,000 and $872,000, respectively.
Cash distributions are declared and paid based on the total outstanding shares
as of the record date and are typically paid in the quarter following the
quarter that CAD is generated.
7. Capital Stock
PREFERRED STOCK
Generally each holder of Shares of Preferred Stock is entitled to receive
ratably all dividends, if any, declared by the Board of Directors out of funds
legally available. The right to receive dividends shall be non-cumulative, and
no right to dividends shall accrue by reason of the fact that no dividend has
been declared in any prior year. Each holder of Shares will be entitled to
receive, to the extent that funds are available therefore, $100,000 per Share,
before any payment to the holder of Common Stock, out of distributions to
stockholders upon liquidation, dissolution or the winding up of the Company; the
balance of any such funds available for distribution will be distributed among
the holders of Shares and the holder of Common Stock, pro rata based on the
number of shares held by each; provided, however, that for these purposes, one
share of Common Stock will be deemed to equal one-tenth of a share of Preferred
Stock.
In addition to certain voting rights provided in the corporate agreements, the
holder of Shares, acting by consent of at least 51%, shall have the further
right to approve or disapprove a proposed sale of the Property, the merger of
the Company with any other entity and amendments to the corporate charter. A
vote of the holders of 66.67% of the Shares is required for the issue of any
additional shares of capital stock. Holders of Shares have no redemption or
conversion rights.
COMMON STOCK
Franklin Street Properties Corp. ("FSP"), is the sole holder of the Company's
Common Stock. FSP has the right, as one class together with the holders of
Preferred Stock, to vote to elect the directors of the Company and to vote on
all matters except those voted by the holders of Shares of Preferred Stock.
Subsequent to the completion of the offering of the preferred shares the holders
of common shares are not entitled to receive any income, nor shall the Company
declare or pay any cash dividends on shares of Common Stock.
14
FSP Plaza Ridge Corp.
Notes to Financial Statements
8. Commitments and Contingencies
The Company, as lessor, has future minimum rentals due under non-cancelable
operating leases as follows:
Period/Year Ended
(in thousands) December 31, Amount
------------------- --------
2003 $ 2,804
2004 4,886
2005 5,015
2006 5,147
2007 5,283
Thereafter 18,148
--------
$ 41,283
========
In addition, the lessees are liable for real estate taxes and certain operating
expenses of the property.
Upon acquiring the commercial rental property in May, 2002, the Company was
assigned the lease agreements between the seller of the Property and the
existing tenants. The original lease periods range from four to eleven years
with renewal options.
15
SCHEDULE III
FSP PLAZA RIDGE CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
May 31, 2003
(in thousands)
Initial Cost
-----------------------------------
Costs
Capitalized
(Disposals)
Subsequent
Encumbrances Buildings & to
Description (1) Land Improvements Acquisition
- ----------- ------------ ---- ------------ -----------
Plaza Ridge, Herndon, VA -- $ 4,055 $ 25,210 $ 176
=========== ========= =========== ==========
(in thousands)
Historical Costs
------------------------------------------------------------
Total Costs,
Net of Depreciable
Buildings & Accumulated Accumulated Life Date of
Description Land Improvements Total(2) Depreciation Depreciation Years Acquisition
- ----------- ---- ------------ -------- ------------ ------------ ----- -----------
Plaza Ridge, Herndon, VA $ 4,055 $ 25,386 $ 29,441 $ 678 $ 28,763 15-39 May, 2002
======= =========== ======== =========== ===========
(1) There are no encumbrances on the above property.
(2) The aggregate cost for Federal Income Tax purposes is greater than the
historical cost by approximately $3,383,000.
16
FSP PLAZA RIDGE CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
The following table summarizes the changes in the Company's real estate
investment and accumulated depreciation:
For the For the
Period Ended Period Ended
May 31, December 31,
(in thousands) 2003 2002
==========================================================================
Real estate investments, at cost:
Balance, beginning of period $29,265 $ --
Acquisitions -- 29,265
Improvements 176 --
Dispositions -- --
--------------------------------------------------------------------------
Balance, end of period $29,441 $29,265
==========================================================================
Accumulated depreciation:
Balance, beginning of period $ 404 $ --
Depreciation 274 404
Dispositions -- --
--------------------------------------------------------------------------
Balance, end of period $ 678 $ 404
==========================================================================
17
FSP Park Ten Corp.
Financial Statements
May 31, 2003 and December 31, 2002
Table of Contents
Page
----
Financial Statements
Independent Auditor's Report................................................. 1
Balance Sheets as of May 31, 2003 and December 31, 2002...................... 2
Statements of Operations for the period ended May 31, 2003 and the
period May 14, 2002 (date of inception) to December 31, 2002........... 3
Statements of Changes in Stockholders' Equity for the period ended
May 31, 2003 and the period May 14, 2002 (date of inception)
to December 31, 2002................................................... 4
Statements of Cash Flows for the period ended May 31, 2003 and the
period May 14, 2002 (date of inception) to December 31, 2002........... 5
Notes to Financial Statements............................................. 6-13
Schedules of Real Estate and Accumulated Depreciation.................... 14-15
[LETTERHEAD OF BRAVER AND COMPANY, P.C.]
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
FSP Park Ten Corp.
(a Delaware Corporation)
We have audited the accompanying balance sheets of FSP Park Ten Corp. (a
Delaware Corporation) as of May 31, 2003 and December 31, 2002, and the related
statements of operations, changes in stockholders' equity and cash flows, as
well as the financial statement schedules listed in the accompanying index, for
the period ended May 31, 2003 and the period from May 14, 2002 (date of
inception) to December 31, 2002. These financial statements and financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements and financial statement schedules are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements and financial statement schedule. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial statement schedules
referred to above present fairly, in all material respects, the financial
position of FSP Park Ten Corp. as of May 31, 2003 and December 31, 2002, and the
results of its operations and its cash flows for the periods then ended in
conformity with accounting principles generally accepted in the United States of
America.
As described in Note 3 to the Financial Statements, effective June 1, 2003, the
Company merged with Franklin Street Properties Corp., the sole shareholder of
the Company's common stock.
/s/ Braver and Company, P.C.
Newton, Massachusetts
July 11, 2003
1
FSP Park Ten Corp.
Balance Sheets
May 31, December 31,
(in thousands, except shares and par value amounts) 2003 2002
===============================================================================================================
Assets:
Real estate investments, at cost:
Land $ 1,367 $ 1,367
Buildings and improvements 20,509 20,509
- --------------------------------------------------------------------------------------------------------------
21,876 21,876
Less accumulated depreciation 548 329
- --------------------------------------------------------------------------------------------------------------
Real estate investments, net 21,328 21,547
Cash and cash equivalents 658 865
Cash funded reserves 1,050 1,061
Restricted cash 53 53
Tenant rent receivable -- 13
Step rent receivable -- 80
Prepaid expenses and other assets 32 16
Deferred lease origination costs, net of accumulated amortization of $139 and $76 517 580
- --------------------------------------------------------------------------------------------------------------
Total assets $ 23,638 $ 24,215
==============================================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses $ 321 $ 250
Dividends payable 368 563
Tenant security deposits 53 53
- --------------------------------------------------------------------------------------------------------------
Total liabilities 742 866
- --------------------------------------------------------------------------------------------------------------
Commitments and Contingencies:
Stockholders' Equity:
Preferred Stock, $.01 par value, 275 shares -- --
authorized, issued and outstanding
Common Stock, $.01 par value, 1 share -- --
authorized, issued and outstanding
Additional paid-in capital 25,189 25,189
Retained deficit and dividends in excess of earnings (2,293) (1,840)
- --------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 22,896 23,349
- --------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 23,638 $ 24,215
==============================================================================================================
See accompanying notes to financial statements.
2
FSP Park Ten Corp.
Statements of Operations
For the Period
For the May 14, 2002
Period Ended (date of inception)
May 31, to December 31,
(in thousands, except shares and per share amounts) 2003 2002
=====================================================================================================================
Revenue:
Rental $ 1,406 $ 1,930
- ---------------------------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 421 398
Depreciation and amortization 282 405
Real estate taxes and insurance 243 260
Interest -- 1,659
- ---------------------------------------------------------------------------------------------------------------------
Total expenses 946 2,722
- ---------------------------------------------------------------------------------------------------------------------
Income (loss) before interest income 460 (792)
Interest income 10 13
- ---------------------------------------------------------------------------------------------------------------------
Net income (loss) before common dividends 470 (779)
Dividends paid to common shareholders prior to syndication of preferred shares -- 131
- ---------------------------------------------------------------------------------------------------------------------
Net income (loss) attributable to preferred shareholders $ 470 $ (910)
=====================================================================================================================
Weighted average number of preferred shares outstanding, basic and diluted 275 275
=====================================================================================================================
Net income (loss) per preferred share, basic and diluted $(1,709) $(3,309)
=====================================================================================================================
See accompanying notes to financial statements.
3
FSP Park Ten Corp.
Statements of Changes in Stockholders' Equity
For the Period Ended May 31, 2003
and the Period May 14, 2002
(date of inception) to December 31, 2002
Retained Deficit
Additional and Dividends Total
Preferred Common Paid in in Excess of Stockholders'
(in thousands, except shares) Stock Stock Capital Earnings Equity
===================================================================================================================
Private offering of 275 shares, net $ -- $ -- $ 25,189 $ -- $ 25,189
Dividends -- -- -- (1,061) (1,061)
Net Loss -- -- -- (779) (779)
- -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 -- -- 25,189 (1,840) 23,349
Dividends -- -- -- (923) (923)
Net Income -- -- -- 470 470
- -------------------------------------------------------------------------------------------------------------------
Balance, May 31, 2003 $ -- $ -- $ 25,189 $ (2,293) $ 22,896
===================================================================================================================
See accompanying notes to financial statements.
4
FSP Park Ten Corp.
Statements of Cash Flows
For the Period
For the May 14, 2002
Period Ended (date of inception)
May 31, to December 31,
(in thousands) 2003 2002
============================================================================================================
Cash flows from operating activities:
Net income (loss) $ 470 $ (779)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization 282 405
Changes in operating assets and liabilities:
Cash-funded reserve 11 (1,061)
Restricted cash -- (53)
Tenant rent receivable 13 (13)
Step rent receivable 80 (80)
Prepaid expenses and other assets (16) (16)
Accounts payable and accrued expenses 71 250
Tenant security deposits -- 53
- ------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 911 (1,294)
Cash flows from investing activities:
Purchase of real estate assets -- (21,876)
Purchase of deferred lease origination costs -- (656)
- ------------------------------------------------------------------------------------------------------------
Net cash used for investing activities -- (22,532)
- ------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock -- 27,510
Syndication costs -- (2,321)
Dividends to stockholders (1,118) (498)
Proceeds from long-term debt -- 22,300
Principal payments on long-term debt -- (22,300)
- ------------------------------------------------------------------------------------------------------------
Net cash (used for) provided by financing activities (1,118) 24,691
- ------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (207) 865
Cash and cash equivalents, beginning of period 865 --
- ------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 658 $ 865
- ------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ -- $ 1,659
Disclosure of non-cash financing activities:
Dividends declared but not paid $ 368 $ 563
See accompanying notes to financial statements.
5
FSP Park Ten Corp.
Notes to Financial Statements
1. Organization
FSP Park Ten Corp. (the "Company") was organized on May 14, 2002 as a
Corporation under the laws of the State of Delaware to purchase, own and operate
a commercial office building located in Houston, TX (the "Property"). The
Property consists of a six-story Class "A" suburban office building that
contains approximately 155,715 square feet of space situated on approximately
6.325 acres of land. The company acquired the Property on June 27, 2002 and
operates in a manner intended to qualify as a real estate investment trust
("REIT") for Federal income tax purposes.
2. Summary of Significant Accounting Policies
ESTIMATES AND ASSUMPTIONS
The Company prepares its financial statements and related notes in conformity
with accounting principles generally accepted in the United States of America
("GAAP"). These principles require management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
RECLASSIFICATIONS
Certain information in the 2002 financial statements have been reclassified to
conform to the 2003 presentation.
REAL ESTATE AND DEPRECIATION
Real estate assets are stated at the lower of cost or fair value, as
appropriate, less accumulated depreciation.
Costs related to property acquisition and improvements are capitalized. Typical
capital items include new roofs, site improvements, various exterior building
improvements and major interior renovations. Funding for capital improvement
typically is provided by cash set aside at the time the property was purchased.
Routine replacements and ordinary maintenance and repairs that do not extend the
life of the asset are expensed as incurred. Typical expense items include
interior painting, landscaping and minor carpet replacements. Funding for
repairs and maintenance items typically is provided by cash flows from operating
activities.
Depreciation is computed using the straight-line method over the assets'
estimated useful lives as follows:
Category Years
-------- -----
Building - Commercial 39
Building Improvements 15-39
Furniture and equipment 5-7
6
FSP Park Ten Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
REAL ESTATE AND DEPRECIATION (continued)
The following schedule reconciles the cost of the property as shown in the
Offering Memorandum as to the amounts shown on the Company's Balance Sheet:
(in thousands)
Price per Offering Memorandum $ 22,300
Plus: Acquisition fees 137
Plus: Other acquisition costs 95
--------------------------------------------------------
Total Acquisition Costs $ 22,532
========================================================
These costs are reported in the Company's Balance Sheet as follows:
Land $ 1,367
Building 20,509
Deferred lease origination costs 656
--------------------------------------------------------
Total reported on Balance Sheet $ 22,532
========================================================
The Company evaluates its assets used in operations by identifying indicators of
impairment and by comparing the sum of the estimated undiscounted future cash
flows for each asset to the asset's carrying value. When indicators of
impairment are present and the sum of the undiscounted future cash flows is less
than the carrying value of such asset, an impairment loss is recorded equal to
the difference between the asset's current carrying value and its fair value
based on discounting its estimated future cash flows. At May 31, 2003 no such
indicators of impairment were identified.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an initial
maturity of three months or less to be cash equivalents.
CASH-FUNDED RESERVES
The Company has set aside funds in anticipation of future capital needs of the
property. Although these funds typically are used for the payment of real estate
assets and deferred leasing commissions, there is no legal restriction on their
use and they may be used for any company purpose.
RESTRICTED CASH
Restricted cash consists of tenant security deposits.
MARKETABLE SECURITIES
The Company accounts for investments in debt securities under the provisions of
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". The Company typically has classified its debt securities as
available-for-sale.
There were no investments in marketable securities at May 31, 2003 and December
31, 2002.
7
FSP Park Ten Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
CONCENTRATION OF CREDIT RISKS
Cash, cash equivalents and short-term investments are financial instruments that
potentially subject the Company to a concentration of credit risk. The Company
maintains its cash balances and short-term investments principally in one bank
which the Company believes to be creditworthy. The Company periodically assesses
the financial condition of the bank and believes that the risk of loss is
minimal. Cash balances held with various financial institutions frequently
exceed the insurance limit of $100,000 provided by the Federal Deposit Insurance
Corporation.
For the periods ended May 31, 2003 and December 31, 2002, rental income was
derived from various tenants. As such, future receipts are dependent upon the
financial strength of the lessees and their ability to perform under the lease
agreements.
For the periods ended May 31, 2003 and December 31, 2002, the following tenant
represents greater than 10% of total revenue:
Mustang Engineering, L.P. 94%
FINANCIAL INSTRUMENTS
The Company estimates that the carrying value of cash and cash equivalents,
cash-funded reserves and restricted cash approximate their fair values based on
their short-term maturity and prevailing interest rates.
STEP RENT RECEIVABLE
Certain leases provide for fixed increases over the life of the lease. Rental
revenue is recognized on the straight-line basis over the related lease term;
however, billings by the Company are based on required minimum rentals in
accordance with the lease agreements. Step rent receivable which is the
cumulative revenue recognized in excess of amounts billed by the Company, is $0
and $80,000, at May 31, 2003 and December 31, 2002, respectively.
DEFERRED LEASE ORIGINATION COSTS
Deferred lease origination costs are the estimated value of legal and leasing
costs related to acquired leases that were included in the purchase price when
the Company acquired the property. Under Statement of Financial Accounting
Standards No. 141 "Business Combinations" ("SFAS 141"), which was approved by
the Financial Accounting Standards Board in June 2001, the Company is required
to segregate these costs from its investment in real estate. The Company
subsequently amortizes these costs on a straight-line basis over the
weighted-average remaining life of the related leases. Amortization expense of
approximately $63,000 and $76,000 is included in Depreciation and Amortization
in the Company's Statement of Operations for the periods ended May 31, 2003 and
December 31, 2002, respectively.
Deferred lease origination cost included in the purchase price of the property
were $656,000 and are being amortized over the weighted-average period of five
years in respect of the leases assumed. Detail of the deferred lease origination
costs are as follows:
For the For the
Period Ended Period Ended
May 31, December 31,
2003 2002
---------------------------------
Cost $ 656,000 $ 656,000
Accumulated amortization 139,000 76,000
---------------------------------
Book value $ 517,000 $ 580,000
=================================
The estimated annual amortization expense for the four periods succeeding May
31, 2003 are as follows:
2003 $ 88,349
2004 $ 151,456
2005 $ 151,456
2006 $ 125,632
8
FSP Park Ten Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
SYNDICATION FEES
Syndication fees are selling commissions and other costs associated with the
initial offering of the Company's preferred shares. Such costs, in the amount of
$2,321,000 have been reported as a reduction in the Stockholders' Equity in the
Company's Balance Sheet.
REVENUE RECOGNITION
The Company has retained substantially all of the risks and benefits of
ownership of the Company's commercial properties and accounts for its leases as
operating leases. Rental income from leases, which may include rent concession
(including free rent and tenant improvement allowances) and scheduled increases
in rental rates during the lease term, is recognized on a straight-line basis.
The Company does not have any percentage rent arrangements with its commercial
property tenants. Reimbursable costs are included in rental income in the period
earned. A schedule showing the components of rental revenue is shown below.
For the For the
Period Ended Period Ended
May 31, December 31,
(in thousands) 2003 2002
========================================================================
Income from leases $1,431 $1,755
Straight-line rent adjustment (80) 80
Reimbursable expenses 55 95
------------------------------------------------------------------------
Total $1,406 $1,930
========================================================================
INTEREST AND OTHER
Interest income and other income are recognized when the related services are
performed and the earnings process is complete.
INCOME TAXES
The Company has elected to be taxed as a REIT under the Internal Revenue Code of
1986, as amended. As a REIT, the Company generally is entitled to a tax
deduction for dividends paid to its shareholders, thereby effectively subjecting
the distributed net income of the Company to taxation at the shareholder level
only. The Company must comply with a variety of restrictions to maintain its
status as a REIT. These restrictions include the type of income it can earn, the
type of assets it can hold, the number of shareholders it can have and the
concentration of their ownership, and the amount of the Company's taxable income
that must be distributed annually.
NET INCOME PER SHARE
The Company follows Statement of Financial Accounting Standards No. 128
"Earnings per Share", which specifies the computation, presentation and
disclosure requirements for the Company's net income per share. Basic net income
per share is computed by dividing net income by the weighted average number of
shares outstanding during the period. Diluted net income per share reflects the
potential dilution that could occur if securities or other contracts to issue
shares were exercised or converted into shares. There were no potential dilutive
shares outstanding at May 31, 2003 and December 31, 2002. Subsequent to the
completion of the offering of preferred shares, the holders of common stock are
not entitled to share in any income. The denominator used for calculating basic
and diluted net income per share is shown for preferred shares only and is as
follows:
For the For the
Period Ended Year Ended
May 31, December 31,
2003 2002
==========================================================================
Weighted average number of preferred shares
outstanding 275 275
9
FSP Park Ten Corp.
Notes to Financial Statements
3. Related Party Transactions
On January 10, 2003, the Board of Directors of the Company and twelve other
companies (the "Target REITS"), whose common stock is owned by Franklin Street
Properties Corp. ("FSP"), resolved to enter into an Agreement and Plan of Merger
(the "Merger Agreement") with FSP. On May 30, 2003, a majority of the preferred
stockholders of the Company and the Target REITS, as well as a majority of the
common stockholders of FSP approved the merger. The effect of the merger is that
the stockholders of the Company and the Target REITS exchanged their stock for
common stock of FSP effective June 1, 2003.
The Company executed a management agreement with FSP Property Management LLC, an
affiliate of FSP, that provides for a management fee equal to 1% of collected
revenues and is cancelable with 30 days notice by either party. For the periods
ended May 31, 2003 and December 31, 2002, fees incurred under the agreement were
$15,000 and $18,000, respectively.
An acquisition fee of $137,500 and other costs of $11,000 were paid in 2002 to
an affiliate of the Common Shareholder. Such fees were included in the cost of
the real estate.
Syndication fees of $2,321,000 were paid in 2002 to an affiliate of the Common
Shareholder for services related to syndication of the Company's preferred
stock.
During 2002, the Company borrowed and repaid in full:
Note payable to FSP, principal of $22,300,000 with interest equal to the
Citizens Bank base rate. Interest paid to FSP was $78,000. The average
interest rate during the time the loan was outstanding was 4.75%.
A commitment fee of $1,581,000 was paid to FSP for obtaining the first
mortgage loan. Such amount is included in interest expense on the
Statement of Operations.
The Company paid a dividend of $131,000 to the Common Shareholder relating to
earnings of the Company prior to the completion of the offering of preferred
shares.
4. Recent Accounting Standards
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations," which addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. This Statement requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable estimate of the fair value
can be made. The associated asset retirement costs are capitalized as part of
the carrying amount of the long-lived asset. This Statement was effective at the
beginning of 2003. The impact of adoption did not have a material impact on the
Company's financial position, results of operations and cash flows.
In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets". This Statement supersedes SFAS No. 121 and
requires that long-lived assets that are to be disposed of by sale be measured
at the lower of book value or fair value less costs to sell. SFAS No. 144
retains the fundamental provisions of SFAS 121 for (a) recognition and
measurement of the impairment of long-lived assets to be held and used, and (b)
measurement of long-lived assets to be disposed of by sale, but broadens the
definition of what constitutes a discontinued operation and how the results of a
discontinued operation are to be measured and presented. This Statement was
effective at the beginning of 2002. The impact of adoption did not have a
material impact on the Company's financial position, results of operations and
cash flows. The Company does not have any real estate assets that it considers
"held for sale" at May 31, 2003.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements Nos.
4, 44, and 64, Amendment of SFAS 13, and Technical Corrections". This Statement
rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt",
and an amendment of that Statement, SFAS No. 64, "Extinguishments of Debt Made
to Satisfy Sinking-Fund Requirements". This Statement amends SFAS No. 13,
"Accounting for Leases". This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings or
describe their applicability under changed conditions. This statement was
effective for the Company's fiscal year ending December 31, 2003. The impact of
adoption did not have a material impact on the Company's financial position,
results of operations and cash flows.
10
FSP Park Ten Corp.
Notes to Financial Statements
4. Recent Accounting Standards (continued)
In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities". This statement was effective January 1, 2003. SFAS
No. 146 replaces current accounting literature and requires the recognition of
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. The impact of
adoption did not have a material impact on the Company's financial position,
results of operations and cash flows.
5. Income Taxes
The Company files as a REIT under Sections 856-860 of the Internal Revenue Code
of 1986, as amended. In order to qualify as a REIT, the Company is required to
distribute at least 90% of its taxable income to shareholders and to meet
certain asset and income tests as well as certain other requirements. The
Company will generally not be liable for federal income taxes, provided it
satisfies their requirements. Even as a qualified REIT, the Company is subject
to certain state and local taxes on its income and property.
For the period ended December 31, 2002, the Company incurred a net operating
loss for income tax purposes of approximately $790,000 that can be carried
forward until it expires in the year 2022. The amount of the net operating loss
that may be used annually, if any, is limited.
At May 31, 2003 and December 31, 2002, the Company's net tax basis of its real
estate assets is higher than the amount set forth in the Company's Balance Sheet
by approximately $639,000 and $646,000, respectively.
The following schedule reconciles GAAP Net Income to Taxable Income subject to
dividend requirements:
For the For the
Period Ended Period Ended
May 31, December 31,
(in thousands) 2003 2002
===========================================================================================
GAAP net income (loss) $ 470 $(779)
Add: Book depreciation and amortization 282 405
Less: Tax depreciation and amortization (220) (328)
Straight-line rents 80 (80)
-------------------------------------------------------------------------------------------
Taxable income (loss) subject to dividend requirement * $ 612 $(782)
===========================================================================================
* A tax loss is not subject to a dividend requirement.
The following schedule reconciles cash dividends paid or accrued to the
dividends paid deduction:
For the For the
Period Ended Period Ended
May 31, December 31,
(in thousands) 2003 2002
========================================================================================
Cash dividends paid or accrued $1,486 $ 498
Plus: Dividends designated from following year -- --
Less: Portion designated capital gain distribution -- --
Less: Return of Capital (874) (498)
----------------------------------------------------------------------------------------
Dividends paid deduction 612 --
========================================================================================
11
FSP Park Ten Corp.
Notes to Financial Statements
6. Cash Available for Distribution
The Company evaluates its performance based on Cash Available for Distribution
("CAD") as management believes that CAD represents the most accurate measure of
the Company's activity. CAD is the basis for distributions paid to equity
holders.
The Company defines CAD as: net income as computed in accordance with accounting
principles generally accepted in the United States of America ("GAAP"); plus
certain non-cash items included in the computation of net income (depreciation
and amortization, certain non-cash compensation expenses and straight line rent
adjustments); plus funds raised by the issuance of shares; plus the net proceeds
from the sale of land; less purchases of real estate assets, property and
equipment ("Capital Expenditures"), payments for deferred leasing commissions
and payments for deferred lease origination costs; plus (less) proceeds from
(payments to) cash reserves established at the acquisition date of the property
(cash-funded reserves). Depreciation and amortization, non-cash compensation and
straight-line rents are an adjustment to CAD, as these are non-cash items
included in net income. Capital Expenditures, payments of deferred leasing
commissions and payments for deferred lease origination costs and the proceeds
from (payments to) the funded reserve are an adjustment to CAD, as they
represent cash items not reflected in income. CAD should not be considered as an
alternative to net income (determined in accordance with GAAP), as an indicator
of the Company's financial performance, nor as an alternative to cash flows from
operating activities (determined in accordance with GAAP), nor as a measure of
the Company's liquidity, nor is it necessarily indicative of sufficient cash
flow to fund all of the Company's needs. Other real estate companies may define
CAD in a different manner. It is at the Company's discretion to retain a portion
of CAD for operational needs. The Company believes that in order to facilitate a
clear understanding of the results of the Company, CAD should be examined in
connection with net income and cash flows from operating, investing and
financing activities in the financial statements.
The calculation of CAD is shown in the following table:
For the For the
Period Ended Period Ended
May 31, December 31,
(in thousands) 2003 2002
=========================================================================================
Net income (loss) $470 $ (779)
Depreciation and amortization 282 405
Straight line rent 80 (80)
Net proceeds from offering of shares -- 25,189
Purchase of land and building and improvements -- (21,876)
Payments from (establish) funded reserve 11 (1,061)
Payment of deferred lease origination costs -- (656)
-----------------------------------------------------------------------------------------
Cash Available for Distribution $843 $ 1,142
=========================================================================================
The Company's distributions are summarized as follows:
For the For the
(in thousands) Period Ended Period Ended
May 31, December 31,
Quarter Paid 2003 2002
=========================================================================
First Quarter $ 563 $ --
Second Quarter 555 --
Third Quarter 368 --
Fourth Quarter -- 498
-------------------------------------------------------------------------
Dividends paid or accrued $1,486 $498
=========================================================================
12
FSP Park Ten Corp.
Notes to Financial Statements
6. Cash Available for Distribution (continued)
The Company declared a dividend payable to stockholders of record as of May 31,
2003 and December 31, 2002 of $368,000 and $563,000, respectively.
Cash distributions are declared and paid based on the total outstanding shares
as of the record date and are typically paid in the quarter following the
quarter that CAD is generated.
7. Capital Stock
PREFERRED STOCK
Generally, each holder of Shares of Preferred Stock is entitled to receive
ratably all income and all dividends, if any, declared by the Board of Directors
out of funds legally available. The right to receive dividends shall be
non-cumulative, and no right to dividends shall accrue by reason of the fact
that no dividend has been declared in any prior year. Each holder of Shares will
be entitled to receive, to the extent that funds are available therefore,
$100,000 per Share, before any payment to the holder of Common Stock, out of
distributions to stockholders upon liquidation, dissolution or the winding up of
the Company; the balance of any such funds available for distribution will be
distributed among the holders of Shares and the holder of Common Stock, pro rata
based on the number of shares held by each; provided, however, that for these
purposes, one share of Common Stock will be deemed to equal one-tenth of a share
of Preferred Stock.
In addition to certain voting rights provided in the corporate agreements, the
holder of Shares, acting by consent of at least 51%, shall have the further
right to approve or disapprove a proposed sale of the Property, the merger of
the Company with any other entity and amendments to the corporate charter. A
vote of the holders of 66.67% of the Shares is required for the issue of any
additional shares of capital stock. Holders of Shares have no redemption or
conversion rights.
COMMON STOCK
Franklin Street Properties Corp. ("FSP"), is the sole holder of the Company's
Common Stock. FSP has the right, as one class together with the holders of
Preferred Stock, to vote to elect the directors of the Company and to vote on
all matters except those voted by the holders of Shares of Preferred Stock.
Subsequent to the completion of the offering of the preferred shares the holders
of common shares are not entitled to receive any income, nor shall the Company
declare or pay any cash dividends on shares of Common Stock.
8. Commitments and Contingencies
The Company, as lessor, has future minimum future rentals due under a
non-cancelable operating lease as follows:
Period/Year Ended
(in thousands) December 31, Amount
------------------------- ------------
2003 $ 1,977
2004 3,400
2005 3,524
2006 2,983
2007 850
Thereafter 1,115
------------
$ 13,849
============
In addition, the lessees are liable for real estate taxes and certain operating
expenses of the property.
Upon acquiring the commercial rental property in June, 2002, the Company was
assigned the lease agreements between the seller of the Property and the
existing tenants. The original lease periods range from four to eleven years
with renewal options.
13
SCHEDULE III
FSP PARK TEN CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
May 31, 2003
(in thousands)
Initial Cost
-----------------------------------
Costs
Capitalized
(Disposals)
Subsequent
Encumbrances Buildings & to
Description (1) Land Improvements Acquisition
- ----------- ------------ ---- ------------ -----------
Park Ten, Houston, Texas -- $ 1,367 $ 20,509 $ --
========== ======== ========== =========
(in thousands)
Historical Costs
------------------------------------------------------------
Total Costs,
Net of Depreciable
Buildings & Accumulated Accumulated Life Date of
Description Land Improvements Total(2) Depreciation Depreciation Years Acquisition
- ----------- ---- ------------ -------- ------------ ------------ ----- -----------
Park Ten, Houston, Texas $ 1,367 $ 20,509 $ 21,876 $ 548 $ 21,328 15-39 June, 2002
======== =========== ======== ========== ===========
(1) There are no encumbrances on the above property.
(2) The aggregate cost for Federal Income Tax purposes is greater than the
total historical cost by approximately $656,000.
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FSP PARK TEN CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
The following table summarizes the changes in the Company's real estate
investment and accumulated depreciation:
For the For the
Period Ended Period Ended
May 31, December 31,
(in thousands) 2003 2003
==========================================================================
Real estate investments, at cost:
Balance, beginning of period $21,876 $ --
Acquisitions -- 21,876
Improvements -- --
Dispositions -- --
--------------------------------------------------------------------------
Balance, end of period $21,876 $21,876
==========================================================================
Accumulated depreciation:
Balance, beginning of period $ 329 $ --
Depreciation 219 329
Dispositions -- --
--------------------------------------------------------------------------
Balance, end of period $ 548 $ 329
==========================================================================
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