Exhibit 99.1
INDEX TO FINANCIAL STATEMENTS
FSP Addison Circle Corp.
Index to financial statements as of December 31, 2004 and 2003, for
the years ended December 31, 2004 and 2003 and for the period
August 21, 2002 to December 31, 2002, including financial
statement schedules F-2
FSP Collins Crossing Corp.
Index to financial statements as of December 31, 2004 and 2003, for
the year ended December 31, 2004 and for the period January 16,
2003 to December 31, 2003, including financial statement
schedules F-17
FSP Montague Business Center Corp.
Index to financial statements as of December 31, 2004 and 2003, for
the years ended December 31, 2004 and 2003 and for the period
July 22, 2002 to December 31, 2002, including financial statement
schedules F-32
FSP Royal Ridge Corp.
Index to financial statements as of and for the years ended
December 31, 2004 and 2003, including financial statement schedules F-46
F-1
FSP Addison Circle Corp.
Financial Statements
December 31, 2004, 2003 and 2002
Table of Contents
Page
Financial Statements
Independent Auditor's Report.............................................. F-3
Balance Sheets as of December 31, 2004 and 2003........................... F-4
Statements of Operations for the years ended December 31, 2004 and 2003
and the period August 21, 2002 (date of inception) to
December 31, 2002.................................................... F-5
Statements of Changes in Stockholders' Equity for the years ended
December 31, 2004 and 2003 and the period August 21, 2002
(date of inception) to December 31, 2002 ............................ F-6
Statements of Cash Flows for the years ended December 31, 2004 and 2003
and the period August 21, 2002 (date of inception) to
December 31, 2002.................................................... F-7
Notes to Financial Statements............................................. F-8
Financial Statements Schedule - Schedule III.............................. F-15
F-2
[LETTERHEAD OF BRAVER AND COMPANY, P.C.]
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
FSP Addison Circle Corp.
Wakefield, Massachusetts
We have audited the accompanying balance sheets of FSP Addison Circle Corp. as
of December 31, 2004 and 2003 and the related statements of operations, changes
in stockholders' equity and cash flows for the years ended December 31, 2004 and
2003 and for the period from August 21, 2002 (date of inception) to December 31,
2002. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits 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 are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FSP Addison Circle Corp. as of
December 31, 2004 and 2003, and the results of its operations and its cash flows
for the years ended December 31, 2004 and 2003 and for the initial period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States of America.
/s/ Braver and Company, P.C.
Newton, Massachusetts
March 7, 2005
F-3
FSP Addison Circle Corp.
Balance Sheets
December 31, December 31,
(in thousands,except shares and par value amounts) 2004 2003
===================================================================================================================
Assets:
Real estate investments, at cost:
Land $ 4,365 $ 4,365
Buildings and improvements 46,469 45,895
- -------------------------------------------------------------------------------------------------------------------
50,834 50,260
Less accumulated depreciation 2,756 1,519
- -------------------------------------------------------------------------------------------------------------------
Real estate investments, net 48,078 48,741
Acquired real estate leases, net of accumulated amortization
of $669 and $349, respectively 1,069 1,389
Cash and cash equivalents 3,613 3,330
Cash-funded reserves 1,693 2,636
Restricted cash 20 35
Tenant rent receivable 37 52
Step rent receivable 503 421
Deferred leasing costs, net of accumulated amortization
of $58 and $0, respectively 363 39
Prepaid expenses and other assets 23 24
- -------------------------------------------------------------------------------------------------------------------
Total assets $ 55,399 $ 56,667
===================================================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses $ 1,885 $ 2,055
Distributions payable 1,289 1,265
Tenant security deposits 20 35
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 3,194 3,355
- -------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies: -- --
Stockholders' Equity:
Preferred Stock, $.01 par value, 636 shares -- --
authorized, issued and outstanding
Common Stock, $.01 par value, 1 share
authorized, issued and outstanding -- --
Additional paid-in capital 58,383 58,383
Retained earnings and distributions in excess of earnings (6,178) (5,071)
- -------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 52,205 53,312
- -------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 55,399 $ 56,667
===================================================================================================================
See accompanying notes to financial statements.
F-4
FSP Addison Circle Corp.
Statements of Operations
For the For the Period
Years Ended August 21, 2002
December 31, (date of inception) to
(in thousands, except shares and per share amounts) 2004 2003 December 31, 2002
================================================================================================================================
Revenues:
Rental $ 8,753 $ 8,554 $ 2,102
- --------------------------------------------------------------------------------------------------------------------------------
Total revenue 8,753 8,554 2,102
- --------------------------------------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 1,940 1,783 391
Real estate taxes and insurance 1,040 1,354 327
Depreciation and amortization 1,615 1,497 370
General and administrative 114 -- --
Interest -- -- 3,897
- --------------------------------------------------------------------------------------------------------------------------------
Total expenses 4,709 4,634 4,985
- --------------------------------------------------------------------------------------------------------------------------------
Income (loss) before interest income 4,044 3,920 (2,883)
Interest income 94 85 14
- --------------------------------------------------------------------------------------------------------------------------------
Net income (loss) before distributions to common stockholder 4,138 4,005 (2,869)
Distributions paid to common stockholder -- -- 313
- --------------------------------------------------------------------------------------------------------------------------------
Net income (loss) attributable to preferred stockholders $ 4,138 $ 4,005 $ (3,182)
================================================================================================================================
Weighted average number of preferred shares outstanding,
basic and diluted 636 636 636
================================================================================================================================
Net income (loss) per preferred share, basic and diluted $ 6,506 $ 6,297 $ (5,003)
================================================================================================================================
See accompanying notes to financial statements.
F-5
FSP Addison Circle Corp.
Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 2004 and 2003 and
for the Period August 21, 2002
(date of inception) to December 31, 2002
Retained Earnings
Additional and Distributions Total
Preferred Common Paid-in in Excess of Stockholders'
(in thousands, except shares) Stock Stock Capital Earnings Equity
====================================================================================================================================
Private offering of 636 shares, net $ -- $ -- $ 58,383 $ -- $ 58,383
Distributions -- -- -- (1,070) (1,070)
Net loss -- -- -- (2,869) (2,869)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 -- -- 58,383 (3,939) 54,444
Distributions -- -- -- (5,137) (5,137)
Net income -- -- -- 4,005 4,005
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 -- -- 58,383 (5,071) 53,312
Distributions -- -- -- (5,245) (5,245)
Net income -- -- -- 4,138 4,138
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2004 $ -- $ -- $ 58,383 $ (6,178) $ 52,205
====================================================================================================================================
See accompanying notes to financial statements.
F-6
FSP Addison Circle Corp.
Statements of Cash Flows
For the For the Period
Years Ended August 21, 2002
December 31, (date of inception) to
(in thousands) 2004 2003 December 31, 2002
============================================================================================================================
Cash flows from operating activities:
Net Income (loss) $ 4,138 $ 4,005 $ (2,869)
Adjustments to reconcile net income (loss) to net cash provided by
(used for) operating activities:
Depreciation and amortization 1,615 1,497 370
Changes in operating assets and liabilities:
Cash-funded reserves 943 83 (2,719)
Restricted cash 15 9 (44)
Tenant rent receivable 15 (25) --
Step rent receivable (82) (322) (99)
Prepaid expenses and other assets 1 29 (80)
Accounts payable and accrued expenses (170) 165 1,890
Tenant security deposits (15) (9) 44
Payment of deferred leasing costs (382) (39) --
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 6,078 5,393 (3,507)
- --------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets (574) (25) (50,235)
Purchase of acquired real estate leases -- -- (1,738)
- --------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (574) (25) (51,973)
- --------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock -- -- 63,610
Syndication costs -- -- (5,227)
Distributions to stockholders (5,221) (4,721) (220)
Proceeds from long-term debt -- -- 51,500
Principal payments on long-term debt -- -- (51,500)
- --------------------------------------------------------------------------------------------------------------------
Net cash (used for) provided by financing activities (5,221) (4,721) 58,163
- --------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 283 647 2,683
Cash and cash equivalents, beginning of period 3,330 2,683 --
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 3,613 $ 3,330 $ 2,683
====================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ -- $ -- $ 3,897
Disclosure of non-cash financing activities:
Distributions declared but not paid $ 1,289 $ 1,265 $ 850
See accompanying notes to financial statements.
F-7
FSP Addison Circle Corp.
Notes to Financial Statements
1. Organization
FSP Addison Circle Corp. (the "Company") was organized on August 21, 2002 as a
Corporation under the laws of the State of Delaware to purchase, own and operate
a commercial office building located in Addison, TX (the "Property"). The
Property consists of a recently constructed, ten-story Class "A" suburban office
tower that contains approximately 293,787 square feet of space situated on
approximately 3.62 acres of land. The Company acquired the Property on September
30, 2002.
On August 13, 2004, the Company entered into a merger agreement with its common
shareholder, Franklin Street Properties Corp ("FSP"). On February 25, 2005, FSP
filed a Consent Solicitation/Prospectus with the United States Securities and
Exchange Commission indicating its intent to merge the Company and three
additional REITs with and into four of FSP's wholly-owned subsidiaries. The
merger requires the approval of the shareholders of the Company as well as the
shareholders of the three additional REITs. If approved, FSP will issue
approximately 3,783,354 shares of its common stock in exchange for a 100%
ownership interest in the Company. The Company has incurred $114,000 of costs
through December 31, 2004 related to the merger and these costs have been
included as an expense in the Statements of Operations.
2. Summary of Significant Accounting Policies
BASIS OF PRESENTATION
The results of operations from inception to December 31, 2002 are not
necessarily indicative of the results to be obtained for other interim periods
or for the full fiscal year.
ESTIMATES AND ASSUMPTIONS
The Company prepares its financial statements and related notes in conformity
with accounting principles generally accepted in the United States of America
("GAAP"). These principles require management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
RECLASSIFICATIONS
Certain information in the 2003 and 2002 financial statements have been
reclassified to conform to the 2004 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 assets are expensed as incurred. Typical expense items include
interior painting, landscaping and minor carpet replacements. Funding for
repairs and maintenance items typically is provided by cash flows from operating
activities.
Depreciation is computed using the straight-line method over the assets'
estimated useful lives as follows:
Category Years
-------- -----
Building - Commercial 39
Building Improvements 15-39
Furniture and equipment 5-7
F-8
FSP Addison Circle 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 Sheets:
(in thousands)
--------------
Price per Offering Memorandum $ 51,500
Plus: Acquisition fees 318
Other acquisition costs 155
--------------------------------------------------------------
Total Acquisition Costs $ 51,973
==============================================================
These costs were recorded in the Company's Balance Sheets as follows:
(in thousands)
--------------
Land $ 4,365
Building 45,870
Acquired real estate leases 1,738
--------------------------------------------------------------
Total recorded on Balance Sheets $ 51,973
==============================================================
The Company evaluates its assets used in operations by identifying indicators of
impairment and by comparing the sum of the estimated undiscounted future cash
flows for each asset to the asset's carrying value. When indicators of
impairment are present and the sum of the undiscounted future cash flows is less
than the carrying value of such asset, an impairment loss is recorded equal to
the difference between the asset's current carrying value and its fair value
based on discounting its estimated future cash flows. At December 31, 2004, no
such indicators of impairment were identified.
Depreciation expense of $1,237,000, $1,176,000 and $343,000 is included in
depreciation and amortization in the Company's Statements of Operations for the
years ended December 31, 2004 and 2003 and the period ended December 31, 2002,
respectively.
ACQUIRED REAL ESTATE LEASES
Acquired real estate leases 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 Standard
("SFAS") No. 141 "Business Combinations", which was approved by the Financial
Accounting Standards Board ("FASB") 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 leases. Amortization expense of $320,000, $322,000 and
$27,000 is included in depreciation and amortization in the Company's Statements
of Operations for the years ended December 31, 2004 and 2003 and the period
ended December 31, 2002, respectively.
Acquired real estate lease costs included in the purchase price of the property
were $1,738,000 and are being amortized over the weighted-average period of six
years in respect of the leases assumed. Detail of the acquired real estate
leases as of December 31, 2004 and 2003:
(in thousands) 2004 2003
-------------- --------------- ----------------
Cost $ 1,738 $ 1,738
Accumulated amortization (669) (349)
--------------- ----------------
Book value $ 1,069 $ 1,389
=============== ================
F-9
FSP Addison Circle Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
ACQUIRED REAL ESTATE LEASES (continued)
The estimated annual amortization expense for the four years succeeding December
31, 2004 are as follows:
(in thousands)
--------------
2005 $ 321
2006 $ 321
2007 $ 321
2008 $ 106
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. These funds typically are used for the payment of real estate assets
and deferred leasing commissions; however, 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 classifies its debt securities as
available-for-sale.
There were no investments in marketable securities at December 31, 2004 and
2003.
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 December 31, 2004, 2003 and 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:
Year Ended Year Ended Period Ended
December 31, December 31, December, 31
2004 2003 2002
==========================================================================================================
McLeod USA Telecommunications Services, Inc. 32% 31% 31%
The Staubach Company 27% 28% 28%
J.D. Edwards World Solutions Company (1) 21% 20% 20%
(1) PeopleSoft (successor to JD Edwards) terminated their lease in 2004, which
contained an early termination option. The space was subsequently re-let
by January 2005.
F-10
FSP Addison Circle Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
FINANCIAL INSTRUMENTS
The Company estimates that the carrying value of cash and cash equivalents,
cash-funded reserves, and restricted cash approximate their fair values based on
their short-term maturity and prevailing interest rates.
TENANT RENT RECEIVABLE
Tenant rent receivable is reported at the amount the Company expects to collect
on balances outstanding at year-end. Management monitors outstanding balances
and tenant relationships and concluded that any realization losses would be
immaterial.
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, was
$503,000 and $421,000 at December 31, 2004 and 2003, respectively.
DEFERRED LEASING COSTS
Deferred leasing commissions represent direct and incremental external leasing
costs incurred in the leasing of commercial space. These costs are capitalized
and are amortized on a straight-line basis over the terms of the related lease
agreements. Amortization expense was approximately $58,000 and $0 for the years
ended December 31, 2004 and 2003, respectively. Detail of the deferred leasing
costs as of December 31,:
(in thousands) 2004 2003
-------------- ---------- ----------
Costs $ 421 $ 39
Accumulated Amortization (58) --
---------- ----------
Book Value $ 363 $ 39
========== ==========
The estimated annual amortization expense for the three years succeeding
December 31, 2004 are as follows:
(in thousands)
--------------
2005 $ 136
2006 $ 136
2007 $ 91
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
$5,227,000 have been reported as a reduction in Stockholders' Equity in the
Company's Balance Sheets.
F-11
FSP Addison Circle 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.
Year Ended Year Ended Period Ended
December 31, December 31, December, 31
(in thousands) 2004 2003 2002
==========================================================================
Income from leases $7,258 $7,153 $1,823
Termination Fee 449 -- --
Straight-line rent adjustment 82 322 99
Reimbursable expenses 964 1,079 180
--------------------------------------------------------------------------
Total $8,753 $8,554 $2,102
==========================================================================
INTEREST INCOME
Interest income is recognized when the related services are performed and the
earnings process is complete.
INCOME TAXES
The Company has elected to be taxed as a Real Estate Investment Trust ("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 SFAS No. 128 "Earnings per Share", which specifies the
computation, presentation and disclosure requirements for the Company's net
income per share. Basic net income per preferred share is computed by dividing
net income by the weighted average number of shares outstanding during the
period. Diluted net income per preferred share reflects the potential dilution
that could occur if securities or other contracts to issue shares were exercised
or converted into shares. There were no potential dilutive shares outstanding at
December 31, 2004, 2003 and 2002. Subsequent to the completion of the offering
of preferred shares, the holders of common stock are not entitled to share in
any income nor in any related dividend.
3. 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, 2002, the Company incurred a net operating
loss for income tax purposes of approximately $2,932,000 that can be carried
forward until it expires in the year 2022.
At December 31, 2004, the Company's net tax basis of its real estate assets was
$49,768,000.
F-12
FSP Addison Circle Corp.
Notes to Financial Statements
3. Income Taxes (continued)
The following schedule reconciles net income (loss) to taxable income subject to
dividend requirements:
Year Ended Year Ended Period Ended
December 31, December 31, December 31,
(in thousands) 2004 2003 2002
==================================================================================================
GAAP net income (loss) $ 4,138 $ 4,005 $(2,869)
Add: Book depreciation and amortization 1,615 1,497 370
Less: Tax depreciation and amortization (1,254) (1,193) (323)
Straight-line rents (82) (322) (99)
------------------------------------------------------------------------------------------------
Taxable income (loss)(1) $ 4,417 $ 3,987 $(2,921)
================================================================================================
(1) A tax loss is not subject to a dividend requirement.
The following schedule reconciles cash dividends paid to the dividends paid
deduction:
Year Ended
December 31, 2004 December 31, 2003
------------------------------ ---------------------------------
Per Per Per Per
Preferred Common Preferred Common
(in thousands, except per share data) Total Share Share Total Share Share
- -------------------------------------------------------------------------------------------------------------
Cash distributions paid $ 5,221 $ 8,209 $ -- $ 4,721 $ 7,275 $ 93,807
Less: Return of captial (804) (1,264) -- (734) (1,131) (14,605)
- -------------------------------------------------------------------------------------------------------------
Dividends paid deduction $ 4,417 $ 6,945 $ -- $ 3,987 $ 6,144 $ 79,202
=============================================================================================================
Year Ended
---------------------------------
December 31, 2002
---------------------------------
Per Per
Preferred Common
(in thousands, except per share data) Total Share Share
- --------------------------------------------------------------------------
Cash distributions paid $ 220 $ -- $ 220,000
Less: Return of captial (220) -- (220,000)
- --------------------------------------------------------------------------
Dividends paid deduction $ -- $ -- $ --
==========================================================================
4. Capital Stock
PREFERRED STOCK
Generally, each holder of Shares of Preferred Stock is entitled to receive
ratably all dividends, if any, declared by the Board of Directors out of funds
legally available. The right to receive dividends shall be non-cumulative, and
no right to dividends shall accrue by reason of the fact that no dividend has
been declared in any prior year. Each holder of Shares will be entitled to
receive, to the extent that funds are available therefore, $100,000 per Share,
before any payment to the holder of Common Stock, out of distributions to
stockholders upon liquidation, dissolution or the winding up of the Company; the
balance of any such funds available for distribution will be distributed among
the holders of Shares and the holder of Common Stock, pro rata based on the
number of shares held by each; provided, however, that for these purposes, one
share of Common Stock will be deemed to equal one-tenth of a share of Preferred
Stock.
In addition to certain voting rights provided in the corporate agreements, the
holder of Shares, acting by consent of at least 51%, shall have the further
right to approve or disapprove a proposed sale of the Property, the merger of
the Company with any other entity and amendments to the corporate charter. A
vote of the holders of 66.67% of the Shares is required for the issue of any
additional shares of capital stock. Holders of Shares have no redemption or
conversion rights.
F-13
FSP Addison Circle Corp.
Notes to Financial Statements
4. 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 share in any income, nor in any related
dividend.
5. Related Party Transactions
The Company executed a management agreement with FSP Property Management LLC, an
affiliate of FSP, that provides for a management fee equal to 1% of collected
revenues and is cancelable with 30 days notice by either party. For the periods
ended December 31, 2004, 2003 and 2002, fees incurred under the agreement were
$82,000, $79,000 and $19,000, respectively.
An acquisition fee of $318,000 and other costs of $67,000 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 $5,227,000 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 a note payable to FSP,
principal of $51,500,000, with interest equal to the Citizens Bank base rate.
Interest paid to FSP was $240,000. The average interest rate during the time the
loan was outstanding was 4.44%.
A commitment fee of $3,657,000 was paid to FSP during 2002 for obtaining the
first mortgage loan. Such amount is included in interest expense on the
Statement of Operations.
The Company paid a dividend of $313,000 to the common shareholder during 2002
relating to earnings of the Company prior to the completion of the offering of
preferred shares.
6. Commitments and Contingencies
The Company, as lessor, has minimum future rental income under non-cancelable
operating leases as of December 31, 2004, as follows:
Year Ending
(in thousands) December 31, Amount
------------ ---------
2005 $ 5,403
2006 5,257
2007 3,106
2008 2,410
2009 920
Thereafter 19
---------
$ 17,115
=========
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 2002, 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.
F-14
SCHEDULE III
FSP Addison Circle Corp.
Real Estate and Accumulated Depreciation
December 31, 2004
Initial Cost
-------------------------------
Costs
Capitalized
Buildings (Disposals)
Improvements Subsequent
and to
Description Encumbrances (1) Land Equipment Acquisition
- ----------- ---------------- ---- --------- -----------
Addison Circle, Addison, TX $4,365 $45,870 $599
Historical Costs
----------------------------------------------------------
Buildings Total Costs,
Improvements Net of Depreciable
and Accumulated Accumulated Life Date of
Description Land Equipment Total (2) Depreciation Depreciation Years Acquisition
- ----------- ---- --------- --------- ------------ ------------ ----- -----------
(in thousands)
Addison Circle, Addison, TX $4,365 $46,469 $50,834 $2,756 $48,078 39 2002
(1) There are no encumbrances on the above properties.
(2) The aggregate cost for Federal Income Tax purposes is $52,572.
F-15
FSP Addison Circle Corp.
The following table summarizes the changes in the Company's real estate
investments and accumulated depreciation:
December 31,
-------------------------------------
(in thousands) 2004 2003 2002
================================================================================
Real estate investments, at cost:
Balance, beginning of period $50,260 $50,235 $ --
Acquisitions -- -- 50,235
Improvements 574 25 --
Dispositions -- -- --
- --------------------------------------------------------------------------------
Balance, end of period $50,834 $50,260 $50,235
================================================================================
Accumulated depreciation:
Balance, beginning of period $ 1,519 $ 343 $ --
Depreciation 1,237 1,176 343
Dispositions -- -- --
- --------------------------------------------------------------------------------
Balance, end of period $ 2,756 $ 1,519 $ 343
================================================================================
F-16
FSP Collins Crossing Corp.
Financial Statements
December 31, 2004 and 2003
Table of Contents
Page
----
Financial Statements
Independent Auditor's Report............................................. F-18
Balance Sheets as of December 31, 2004 and 2003.......................... F-19
Statements of Operations for the year ended December 31, 2004 and the
period January 16, 2003 (date of inception) to December 31, 2003... F-20
Statements of Changes in Stockholders' Equity for the year ended
December 31, 2004 and the period January 16, 2003 (date of
inception) to December 31, 2003................................... F-21
Statements of Cash Flows for the year ended December 31, 2004 and the
period January 16, 2003 (date of inception) to December 31, 2003... F-22
Notes to Financial Statements............................................ F-23
Financial Statements Schedule - Schedule III............................. F-30
F-17
[LETTERHEAD OF BRAVER AND COMPANY, P.C.]
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
FSP Collins Crossing Corp.
Wakefield, Massachusetts
We have audited the accompanying balance sheets of FSP Collins Crossing Corp. as
of December 31, 2004 and 2003, and the related statements of operations, changes
in stockholders' equity and cash flows for the year ended December 31, 2004 and
the period from January 16, 2003 (date of inception) to December 31, 2003. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits 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 are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FSP Collins Crossing Corp. as
of December 31, 2004 and 2003, and the results of its operations and its cash
flows for the year ended December 31, 2004 and for the initial period then ended
in conformity with accounting principles generally accepted in the United States
of America.
/s/ Braver and Company, P.C.
Newton, Massachusetts
March 7, 2005
F-18
FSP Collins Crossing Corp.
Balance Sheets
December 31, December 31,
(in thousands, except shares and par value amounts) 2004 2003
==================================================================================================
Assets:
Real estate investments, at cost:
Land $ 4,022 $ 4,022
Buildings and improvements 34,233 34,224
- -----------------------------------------------------------------------------------------------
38,255 38,246
Less accumulated depreciation 1,609 731
- -----------------------------------------------------------------------------------------------
Real estate investments, net 36,646 37,515
Acquired real estate leases, net of accumulated amortization
of $767 and $349, respectively 1,500 1,918
Acquired favorable real estate leases, net of accumulated
amortization of $1,741 and $791, respectively 3,403 4,353
Cash and cash equivalents 2,929 2,942
Cash-funded reserves 1,998 2,124
Restricted cash 115 115
Tenant rents receivable 106 25
Step rent receivable 610 279
Prepaid expenses and other assets 45 43
- -----------------------------------------------------------------------------------------------
Total assets $ 47,352 $ 49,314
===============================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses $ 1,372 $ 1,467
Distributions payable 1,184 1,331
Tenant security deposits 115 115
- -----------------------------------------------------------------------------------------------
Total liabilities 2,671 2,913
- -----------------------------------------------------------------------------------------------
Commitments and Contingencies: -- --
Stockholders' Equity:
Preferred Stock, $.01 par value, 555 shares
authorized, issued and outstanding -- --
Common Stock, $.01 par value, 1 share
authorized, issued and outstanding -- --
Additional paid-in capital 51,100 51,100
Retained earnings and distributions in excess of earnings (6,419) (4,699)
- -----------------------------------------------------------------------------------------------
Total Stockholders' Equity 44,681 46,401
- -----------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 47,352 $ 49,314
===============================================================================================
See accompanying notes to financial statements.
F-19
FSP Collins Crossing Corp.
Statements of Operations
For the Period
For the January 16, 2003
Year Ended (date of inception) to
(in thousands, except shares and per share amounts) December 31, 2004 December 31, 2003
=============================================================================================================
Revenues:
Rental $6,990 $ 5,672
- -------------------------------------------------------------------------------------------------------------
Total revenue 6,990 5,672
- -------------------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 1,842 1,399
Real estate taxes and insurance 773 760
Depreciation and amortization 1,296 1,080
General and administrative 109 --
Interest -- 3,444
- -------------------------------------------------------------------------------------------------------------
Total expenses 4,020 6,683
- -------------------------------------------------------------------------------------------------------------
Income (loss) before interest income 2,970 (1,011)
Interest income 85 35
- -------------------------------------------------------------------------------------------------------------
Net income (loss) before distributions to common stockholder 3,055 (976)
Distributions paid to common stockholder -- 373
- -------------------------------------------------------------------------------------------------------------
Net income (loss) attributable to preferred stockholders $3,055 $(1,349)
=============================================================================================================
Weighted average number of preferred shares outstanding,
basic and diluted 555 555
=============================================================================================================
Net income (loss) per preferred share, basic and diluted $5,505 $(2,431)
=============================================================================================================
See accompanying notes to financial statements.
F-20
FSP Collins Crossing Corp.
Statements of Changes in Stockholders' Equity
For the Year Ended December 31, 2004 and for the Period
January 16, 2003 (date of inception)
to December 31, 2003
Retained Earnings
Additional and Distributions Total
Preferred Common Paid-in in Excess of Stockholders'
(in thousands, except shares) Stock Stock Capital Earnings Equity
======================================================================================================================
Private offering of 555 shares, net $ -- $ -- $51,100 $ -- $ 51,100
Distributions -- -- -- (3,723) (3,723)
Net loss -- -- -- (976) (976)
- ----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 -- -- 51,100 (4,699) 46,401
Distributions -- -- -- (4,775) (4,775)
Net income -- -- -- 3,055 3,055
- ----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2004 $ -- $ -- $51,100 $(6,419) $ 44,681
======================================================================================================================
See accompanying notes to financial statements.
F-21
FSP Collins Crossing Corp.
Statements of Cash Flows
For the Period
For the January 16, 2003
Year Ended (date of inception) to
(in thousands) December 31, 2004 December 31, 2003
============================================================================================================================
Cash flows from operating activities:
Net Income (loss) $ 3,055 $ (976)
Adjustments to reconcile net income (loss) to net cash provided by
(used for) operating activities:
Depreciation and amortization 1,296 1,080
Amortization of favorable lease 950 791
Changes in operating assets and liabilities:
Cash-funded reserves 126 (2,124)
Restricted cash -- (115)
Tenant rent receivable (81) (25)
Step rent receivable (331) (279)
Prepaid expenses and other assets (2) (43)
Accounts payable and accrued expenses (95) 1,467
Tenant security deposits -- 115
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 4,918 (109)
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets (9) (38,246)
Purchase of acquired real estate leases -- (2,267)
Purchase of acquired favorable real estate leases -- (5,144)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (9) (45,657)
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock -- 55,510
Syndication costs -- (4,410)
Distributions to stockholders (4,922) (2,392)
Proceeds from long-term debt -- 45,175
Principal payments on long-term debt -- (45,175)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash (used for) provided by financing activities (4,922) 48,708
- ----------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (13) 2,942
Cash and cash equivalents, beginning of period 2,942 --
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 2,929 $ 2,942
============================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ -- $ 3,444
Disclosure of non-cash financing activities:
Distributions declared but not paid $ 1,184 $ 1,331
See accompanying notes to financial statements.
F-22
FSP Collins Crossing Corp.
Notes to Financial Statements
1. Organization
FSP Collins Crossing Corp. (the "Company") was organized on January 16, 2003 as
a Corporation under the laws of the State of Delaware to purchase, own and
operate a commercial office building located in Richardson, TX (the "Property").
Completed in 1999, the Property consists of an eleven story Class "A" suburban
office tower that contains approximately 298,766 square feet of space situated
on approximately ten acres of land (including an undeveloped parcel containing
approximately 3.5 acres). The company acquired the Property on March 3, 2003.
On August 13, 2004, the Company entered into a merger agreement with its common
shareholder, Franklin Street Properties Corp ("FSP"). On February 25, 2005, FSP
filed a Consent Solicitation/Prospectus with the United States Securities and
Exchange Commission indicating its intent to merge the Company and three
additional REITs with and into four of FSP's wholly-owned subsidiaries. The
merger requires the approval of the shareholders of the Company as well as the
shareholders of the three additional REITs. If approved, FSP will issue
approximately 3,423,035 shares of its common stock in exchange for a 100%
ownership interest in the Company. The Company has incurred $109,000 of costs
through December 31, 2004 related to the merger and these costs have been
included as an expense in the Statements of Operations.
2. Summary of Significant Accounting Policies
BASIS OF PRESENTATION
The results of operations from inception to December 31, 2003 are not
necessarily indicative of the results to be obtained for other interim periods
or for the full fiscal year.
ESTIMATES AND ASSUMPTIONS
The Company prepares its financial statements and related notes in conformity
with accounting principles generally accepted in the United States of America
("GAAP"). These principles require management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
RECLASSIFICATIONS
Certain information in the 2003 financial statements has been reclassified to
conform to the 2004 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 assets are expensed as incurred. Typical expense items include
interior painting, landscaping and minor carpet replacements. Funding for
repairs and maintenance items typically is provided by cash flows from operating
activities.
Depreciation is computed using the straight-line method over the assets'
estimated useful lives as follows:
Category Years
-------- -----
Building - Commercial 39
Building Improvements 15-39
Furniture and Equipment 5-7
F-23
FSP Collins Crossing 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 Sheets:
(in thousands)
--------------
Price per Offering Memorandum $ 45,175
Plus: Acquisition fees 277
Plus: Other acquisition costs 205
--------------------------------------------------------------
Total Acquisition Costs $ 45,657
==============================================================
These costs were recorded in the Company's Balance Sheet as follows:
(in thousands)
--------------
Land $ 4,022
Building 34,224
Acquired real estate leases 2,267
Acquired favorable real estate lease 5,144
--------------------------------------------------------------
Total recorded on Balance Sheets $ 45,657
==============================================================
The Company evaluates its assets used in operations by identifying indicators of
impairment and by comparing the sum of the estimated undiscounted future cash
flows for each asset to the asset's carrying value. When indicators of
impairment are present and the sum of the undiscounted future cash flows is less
than the carrying value of such asset, an impairment loss is recorded equal to
the difference between the asset's current carrying value and its fair value
based on discounting its estimated future cash flows. At December 31, 2004 and
2003, no such indicators of impairment were identified.
Depreciation expense amounted to $878,000 and $731,000 for the periods ended
December 31, 2004 and 2003, respectively.
ACQUIRED REAL ESTATE LEASES
Acquired real estate leases represents 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 ("SFAS") No. 141 "Business Combinations", which was approved by the
Financial Accounting Standards Board ("FASB") 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
$418,000 and $349,000 is included in Depreciation and Amortization in the
Company's Statement of Operations for the period ended December 31, 2004 and
2003, respectively.
Acquired real estate lease costs included in the purchase price of the property
were $2,267,000 and are being amortized over a weighted average period of five
years in respect of the leases assumed. Detail of the acquired real estate lease
costs as of December 31,:
(in thousands) 2004 2003
--------------
--------------- ----------------
Cost $ 2,267 $ 3,267
Accumulated amortization (767) (349)
--------------- ----------------
Book value $ 1,500 $ 1,918
=============== ================
The estimated annual amortization expense for the four years succeeding December
31, 2004 are as follows:
(in thousands)
--------------
2005 $ 418
2006 $ 418
2007 $ 418
2008 $ 246
F-24
FSP Collins Crossing Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
ACQUIRED FAVORABLE REAL ESTATE LEASE
Acquired favorable real estate lease 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 report this value separately from its investment in real
estate. The Company subsequently amortizes this amount on a straight-line basis
over the remaining life of the tenant's lease. Amortization of $950,000 and
$791,000 is shown as a reduction of rental income in the Company's Statements of
Operations for the periods ended December 31, 2004 and 2003, respectively.
The acquired favorable real estate leases included in the purchase price of the
property was $5,144,000 and is being amortized over the period of five years in
respect of the lease assumed. Details of the acquired favorable real estate
lease as of December 31:
(in thousands) 2004 2003
-------------- --------------- --------------
Cost $ 5,144 $ 5,144
Accumulated amortization (1,741) (791)
--------------- --------------
Book value $ 3,403 $ 4,353
=============== ==============
The estimated annual amortization expense for the four years succeeding December
31, 2004 are as follows:
(in thousands)
--------------
2005 $ 950
2006 $ 950
2007 $ 950
2008 $ 553
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 classifies its debt securities as
available-for-sale.
There were no investments in marketable securities at December 31, 2004 and
2003.
F-25
FSP Collins Crossing 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 December 31, 2004 and 2003, rental income was derived from
various tenants. As such, future receipts are dependent upon the financial
strength of the lessees and their ability to perform under the lease agreements.
The following tenant represents greater than 10% of total revenue:
Year Ended Period Ended
December 31, 2004 December 31, 2003
Tektronix Texas, LLC 79% 81%
Macromedia 10% 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
$610,000 and $279,000 at December 31, 2004 and 2003, respectively.
TENANT RENT RECEIVABLE
Tenant rent receivable are reported at the amount the Company expects to collect
on balances outstanding at year-end. Management monitors outstanding balances
and tenant relationships and concluded that any realization losses would be
immaterial.
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
$4,410,000 have been reported as reduction in Stockholders' Equity in the
Company's Balance Sheets.
F-26
FSP Collins Crossing 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 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.
Year Ended Period Ended
December, 31 December, 31
(in thousands) 2004 2003
====================================================================
Income from leases $ 6,715 $ 5,559
Straight-line rent adjustment 331 279
Reimbursable expenses 894 625
Amortization of favorable lease (950) (791)
--------------------------------------------------------------------
Total $ 6,990 $ 5,672
====================================================================
INTEREST INCOME
Interest income is recognized when the related services are performed and the
earnings process is complete.
INCOME TAXES
The Company has elected to be taxed as a Real Estate Investment Trust ("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 SFAS No. 128 "Earnings per Share", which specifies the
computation, presentation and disclosure requirements for the Company's net
income per share. Basic net income per share is computed by dividing net income
by the weighted average number of shares outstanding during the period. Diluted
net income per share reflects the potential dilution that could occur if
securities or other contracts to issue shares were exercised or converted into
shares. There were no potential dilutive shares outstanding at December 31, 2004
and 2003. Subsequent to the completion of the offering of preferred shares, the
holders of common stock are not entitled to share in any income nor any related
dividend.
3. 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.
At December 31, 2004, the Company's net tax basis of its real estate assets was
$43,753,000.
F-27
FSP Collins Crossing Corp.
Notes to Financial Statements
3. Income Taxes (continued)
The following schedule reconciles GAAP net income to taxable income subject to
dividend requirements:
Year Ended Period Ended
December 31, December 31,
(in thousands) 2004 2003
==============================================================================================
GAAP net income (loss) $ 3,055 $ (976)
Add: Book depreciation and amortization 1,296 1,080
Amortization for favorable lease 950 791
Deferred rent (481) 481
Less: Tax depreciation and amortization (1,042) (812)
Straight-line rents (331) (279)
----------------------------------------------------------------------------------------------
Taxable income subject to dividend requirement $ 3,447 $ 285
==============================================================================================
The following schedule reconciles cash dividends paid to the dividends paid
deduction:
Year Ended Year Ended
December 31, 2004 December 31, 2003
------------------------------ --------------------------------
Per Per Per Per
Preferred Common Preferred Common
(in thousands, except per share data) Total Share Share Total Share Share
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Cash distributions paid $ 4,922 $ 8,868 $ -- $ 2,392 $ 3,637 $ 373,500
Less: Return of captial (1,475) (2,658) -- (2,107) (3,204) (329,067)
- ------------------------------------------------------------------------------------------------------------
Dividends paid deduction $ 3,447 $ 6,210 $ -- $ 285 $ 433 $ 44,433
============================================================================================================
4. 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.
F-28
FSP Collins Crossing Corp.
Notes to Financial Statements
5. Related Party Transactions
The Company executed a management agreement with FSP Property Management LLC, an
affiliate of FSP, that provides for a management fee equal to 1% of collected
revenues and is cancelable with 30 days notice by either party. For the periods
ended December 31, 2004 and 2003, fees incurred under the agreement were $75,000
and $62,000, respectively.
An acquisition fee of $277,000 and other costs of $206,000 were paid in 2003 to
an affiliate of the Common Shareholder. Such fees were included in the cost of
the real estate.
Syndication fees of $4,410,000 were paid in 2004 to an affiliate of the Common
Shareholder for services related to syndication of the Company's preferred
stock.
During 2003, the Company borrowed and repaid in full a note payable to FSP,
principal of $45,175,000 with interest equal to the Citizens Bank base rate.
Interest paid to FSP was $253,000. The average interest rate during the time the
loan was outstanding was 4.44%.
A commitment fee of $3,191,000 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 distribution of $373,000 to the common shareholder in 2003
relating to the operations of the Company prior to the completion of the
offering of preferred shares.
6. Commitments and Contingencies
The Company, as lessor, has minimum future rentals due under non-cancelable
operating leases as follows:
Year Ending
(in thousands) December 31, Amount
------------ ---------
2005 $ 7,017
2006 6,097
2007 5,871
2008 5,872
2009 5,854
Thereafter 2,925
---------
$ 33,636
=========
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 2003, 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.
F-29
SCHEDULE III
FSP Collins Crossing Corp.
Real Estate and Accumulated Depreciation
December 31, 2004
Initial Cost
-------------------------------
Costs
Capitalized
Buildings (Disposals)
Improvements Subsequent
and to
Description Encumbrances (1) Land Equipment Acquisition
- ----------- ---------------- ---- --------- -----------
Collins Crossing, Richardson, TX $4,022 $34,224 $9
Historical Costs
----------------------------------------------------------
Buildings Total Costs,
Improvements Net of Depreciable
and Accumulated Accumulated Life Date of
Description Land Equipment Total (2) Depreciation Depreciation Years Acquisition
- ----------- ---- --------- --------- ------------ ------------ ----- -----------
(in thousands)
Collins Crossing, Richardson, TX $4,022 $34,233 $38,255 $1,609 $36,646 39 2003
(1) There are no encumbrances on the above properties.
(2) The aggregate cost for Federal Income Tax purposes is $45,666.
F-30
FSP Collins Crossing Corp.
The following table summarizes the changes in the Company's real estate
investments and accumulated depreciation:
December 31, December 31,
-----------------------------
(in thousands) 2004 2003
================================================================================
Real estate investments, at cost:
Balance, beginning of period $38,246 $ --
Acquisitions -- 38,246
Improvements 9 --
Dispositions -- --
- --------------------------------------------------------------------------------
Balance, end of period $38,255 $38,246
================================================================================
Accumulated depreciation:
Balance, beginning of period $ 731 $ --
Depreciation 878 731
Dispositions -- --
- --------------------------------------------------------------------------------
Balance, end of period $ 1,609 $ 731
================================================================================
F-31
FSP Montague Business Center Corp.
Financial Statements
December 31, 2004, 2003 and 2002
Table of Contents
Page
----
Financial Statements
Independent Auditor's Report............................................. F-33
Balance Sheets as of December 31, 2004, and 2003......................... F-34
Statements of Operations for the years ended December 31, 2004 and 2003
and for the period July 22, 2002 (date of inception) to
December 31, 2002.................................................. F-35
Statements of Changes in Stockholders' Equity for the years ended
December 31, 2004 and 2003 and for the period July 22, 2002
(date of inception) to December 31, 2002........................... F-36
Statements of Cash Flows for the years ended December 31, 2004 and 2003
and for the period July 22, 2002 (date of inception) to
December 31, 2002.................................................. F-37
Notes to Financial Statements............................................ F-38
Financial Statements Schedule - Schedule III............................. F-44
F-32
[LETTERHEAD OF BRAVER AND COMPANY, P.C.]
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
FSP Montague Business Center Corp.
Wakefield, Massachusetts
We have audited the accompanying balance sheets of FSP Montague Business Center
Corp. as of December 31, 2004 and 2003, and the related statements of
operations, changes in stockholders' equity and cash flows for the years ended
December 31, 2004 and 2003 and for the period from July 22, 2002 (date of
inception) to December 31, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits 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 are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FSP Montague Business Center
Corp. as of December 31, 2004 and 2003, and the results of its operations and
its cash flows for the years ended December 31, 2004 and 2003 and for the
initial period ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America.
/s/ Braver and Company, P.C.
Newton, Massachusetts
March 7, 2005
F-33
FSP Montague Business Center Corp.
Balance Sheets
December 31, December 31,
(in thousands,except shares and par value amounts) 2004 2003
======================================================================================================
Assets:
Real estate investments, at cost:
Land $ 10,500 $ 10,500
Buildings and improvements 10,499 10,499
- ------------------------------------------------------------------------------------------------------
20,999 20,999
Less accumulated depreciation 628 359
- ------------------------------------------------------------------------------------------------------
Real estate investments, net 20,371 20,640
Acquired real estate leases, net of accumulated amortization
of $250 and $143, respectively 215 322
Acquired favorable real estate leases, net of accumulated
amortization of $2,907 and $1,744, respectively 2,325 3,488
Cash and cash equivalents 1,596 1,587
Cash-funded reserves 2,061 2,007
Step rent receivable 462 392
Prepaid expenses and other assets 20 14
- ------------------------------------------------------------------------------------------------------
Total assets $ 27,050 $ 28,450
======================================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses $ 452 $ 411
Distributions payable 1,020 960
- ------------------------------------------------------------------------------------------------------
Total liabilities 1,472 1,371
- ------------------------------------------------------------------------------------------------------
Commitments and Contingencies: -- --
Stockholders' Equity:
Preferred Stock, $.01 par value, 334 shares
authorized, issued and outstanding -- --
Common Stock, $.01 par value, 1 share
authorized, issued and outstanding -- --
Additional paid-in capital 30,652 30,652
Retained earnings and distirbutions in excess of earnings (5,074) (3,573)
- ------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 25,578 27,079
- ------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 27,050 $ 28,450
======================================================================================================
See accompanying notes to financial statements.
F-34
FSP Montague Business Center Corp.
Statements of Operations
For the Period
July 22, 2002
For the Year Ended For the Year Ended (date of inception)
(in thousands, except shares and per share amounts) December 31, 2004 December 31, 2003 to December 31, 2002
===================================================================================================================================
Revenues:
Rental $3,432 $3,645 $ 1,008
- -----------------------------------------------------------------------------------------------------------------------------------
Total revneue 3,432 3,645 1,008
- -----------------------------------------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 284 314 103
Real estate taxes and insurance 255 339 83
Depreciation and amortization 376 368 134
General and administrative 63 -- --
Interest -- -- 1,949
- -----------------------------------------------------------------------------------------------------------------------------------
Total expenses 978 1,021 2,269
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before interest income 2,454 2,624 (1,261)
Interest income 61 45 12
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) before distributions to common stockholder 2,515 2,669 (1,249)
Distributions paid to common stockholder -- -- 32
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) attributable to preferred stockholders $2,515 $2,669 $(1,281)
===================================================================================================================================
Weighted average number of preferred shares outstanding,
basic and diluted 334 334 334
===================================================================================================================================
Net income (loss) per preferred share, basic and diluted $7,530 $7,991 $(3,835)
===================================================================================================================================
See accompanying notes to financial statements.
F-35
FSP Montague Business Center Corp.
Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 2004 and 2003 and
for the Period July 22, 2002 (date of inception)
to December 31, 2002
Retained Earnings
Additional and Distributions Total
Preferred Common Paid in in Excess of Stockholders'
(in thousands, except shares) Stock Stock Capital Earnings Equity
======================================================================================================================
Private offering of 334 shares, net $ -- $ -- $30,652 $ -- $ 30,652
Distributions -- -- -- (1,222) (1,222)
Net loss -- -- -- (1,249) (1,249)
- ----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 -- -- 30,652 (2,471) 28,181
Distributions -- -- -- (3,771) (3,771)
Net income -- -- -- 2,669 2,669
- ----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 -- -- 30,652 (3,573) 27,079
Distributions -- -- -- (4,016) (4,016)
Net income -- -- -- 2,515 2,515
- ----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2004 $ -- $ -- $30,652 $(5,074) $ 25,578
======================================================================================================================
See accompanying notes to financial statements.
F-36
FSP Montague Business Center Corp.
Statements of Cash Flows
For the Period
July 22, 2002
For the Year Ended For the Year Ended (date of inception) to
(in thousands) December 31, 2004 December 31, 2003 December 31, 2002
====================================================================================================================================
Cash flows from operating activities:
Net Income (loss) $ 2,515 $ 2,669 $ (1,249)
Adjustments to reconcile net income (loss) to net cash provided by
(used for) operating activities:
Depreciation and amortization 376 368 134
Amortization of favorable real estate lease 1,163 1,164 581
Changes in operating assets and liabilities:
Cash-funded reserves (54) 366 (2,373)
Step rent receivable (70) (262) (130)
Prepaid expenses and other assets (6) 11 (25)
Accounts payable and accrued expenses 41 383 28
- --------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 3,965 4,699 (3,034)
- --------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets -- (355) (20,644)
Purchase of acquired real estate lease -- -- (465)
Purchase of acquired favorable real estate lease -- -- (5,232)
- --------------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities -- (355) (26,341)
- --------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock -- -- 33,410
Syndication costs -- -- (2,758)
Distributions to stockholders (3,956) (3,714) (320)
Proceeds from long-term debt -- 26,000
Principal payments on long-term debt -- (26,000)
- --------------------------------------------------------------------------------------------------------------------------------
Net cash (used for) provided by financing activities (3,956) (3,714) 30,332
- --------------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 9 630 957
Cash and cash equivalents, beginning of period 1,587 957 --
- --------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 1,596 $ 1,587 $ 957
================================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ -- $ -- $ 1,949
Disclosure of non-cash financing activities:
Distributions declared but not paid $ 1,020 $ 960 $ 902
See accompanying notes to financial statements.
F-37
FSP Montague Business Center Corp.
Notes to Financial Statements
1. Organization
FSP Montague Business Center Corp. (the "Company") was organized on July 22,
2002 as a Corporation under the laws of the State of Delaware to purchase, own
and operate two adjacent single-story research and development/office buildings
located in San Jose, California (the "Property"). The Property contains
approximately 145,951 square feet of space situated on approximately 9.95 acres
of land. The Company acquired the Property on August 27, 2002.
On August 13, 2004, the Company entered into a merger agreement with its common
shareholder, Franklin Street Properties Corp ("FSP"). On February 25, 2005, FSP
filed a Consent Solicitation/Prospectus with the United States Securities and
Exchange Commission indicating its intent to merge the Company and three
additional REITs with and into four of FSP's wholly-owned subsidiaries. The
merger requires the approval of the shareholders of the Company as well as the
shareholders of the three additional REITs. If approved, FSP will issue
approximately 1,887,007 shares of its common stock in exchange for a 100%
ownership interest in the Company. The Company has incurred $63,000 of costs
through December 31, 2004 related to the merger and these costs have been
included as an expense in the Statements of Operations.
2. Summary of Significant Accounting Policies
BASIS OF PRESENTATION
The results of operations from inception to December 31, 2002 are not
necessarily indicative of the results to be obtained for other interim periods
or for the full fiscal year.
ESTIMATES AND ASSUMPTIONS
The Company prepares its financial statements and related notes in conformity
with accounting principles generally accepted in the United States of America
("GAAP"). These principles require management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
REAL ESTATE AND DEPRECIATION
Real estate assets are stated at the lower of cost or fair value, as
appropriate, less accumulated depreciation.
Costs related to property acquisition and improvements are capitalized. Typical
capital items include new roofs, site improvements, various exterior building
improvements and major interior renovations. Funding for capital 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 assets 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
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 Sheets:
(in thousands)
--------------
Price per Offering Memorandum $ 26,000
Plus: Acquisition fees 167
Plus: Other acquisition costs 174
--------------------------------------------------------------
Total Acquisition Costs $ 26,341
==============================================================
F-38
FSP Montague Business Center Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
REAL ESTATE AND DEPRECIATION (continued)
These costs are reported in the Company's Balance Sheets as follows:
Land $ 10,500
Building 10,144
Acquired real estate lease 465
Acquired favorable lease 5,232
---------------------------------------------------------------
Total reported on Balance Sheet $ 26,341
===============================================================
The Company evaluates its assets used in operations by identifying indicators of
impairment and by comparing the sum of the estimated undiscounted future cash
flows for each asset to the asset's carrying value. When indicators of
impairment are present and the sum of the undiscounted future cash flows is less
than the carrying value of such asset, an impairment loss is recorded equal to
the difference between the asset's current carrying value and its fair value
based on discounting its estimated future cash flows. At December 31, 2004 and
2003 no such indicators of impairment were identified.
ACQUIRED REAL ESTATE LEASE
Acquired real estate lease represents the estimated value of legal and leasing
costs related to the acquired leases that were included in the purchase price
when the Company acquired the Property. Under Statement of Financial Accounting
Standards (`SFAS") No. 141 "Business Combinations" , which was approved by the
Financial Accounting Standards Board ("FASB") 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
life of the related lease. Amortization expense of $107,000, $107,000 and
$36,000 is included in depreciation and amortization in the Company's Statements
of Operations for the periods ended December 31, 2004, 2003 and 2002,
respectively.
The acquired real estate lease included in the purchase price of the property
was $465,000 and is being amortized over a period of five years.
The estimated annual amortization expense for the two years succeeding December
31, 2004 are as follows:
(in thousands)
--------------
2005 $ 107
2006 $ 108
ACQUIRED FAVORABLE REAL ESTATE LEASE
Acquired favorable real estate lease represents the value related to the leases
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 amount on a
straight-line basis over the remaining life of the tenant's lease. Amortization
of $1,163,000, $1,164,000 and $581,000 is shown as a reduction of rental income
in the Company's Statements of Operations for the periods ended December 31,
2004, 2003 and 2002, respectively.
The acquired favorable real estate lease included in the purchase price of the
property was $5,232,000 and is being amortized over a period of five years in
respect of the lease assumed.
The estimated annual amortization for the two years succeeding December 31, 2004
are as follows:
(in thousands)
--------------
2005 $ 1,163
2006 $ 1,162
F-39
FSP Montague Business Center 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. These funds typically are used for the payment of real estate assets
and deferred leasing commissions; however, 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 classifies its debt securities as
available-for-sale.
There were no investments in marketable securities at December 31, 2004 and
2003.
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 December 31, 2004, 2003 and 2002, 100% of the rental
income was derived from one tenant, Novellus Systems, 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 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, was
$462,000 and $392,000 at December 31, 2004 and 2003, 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
$2,758,000 have been reported as a reduction in Stockholders' Equity in the
Company's Balance Sheets.
F-40
FSP Montague Business Center 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 tenant. Reimbursable costs are included in rental income in the period
earned. A schedule showing the components of rental revenue is shown below.
Year Ended Year Ended Period Ended
December, 31 December, 31 December, 31
(in thousands) 2004 2003 2002
==========================================================================
Income from leases $ 3,982 $ 3,789 $ 1,269
Straight-line rent adjustment 70 262 130
Reimbursable expenses 543 758 190
Amortization of
acquired
favorable real estate lease (1,163) (1,164) (581)
--------------------------------------------------------------------------
Total $ 3,432 $ 3,645 $ 1,008
==========================================================================
INTEREST INCOME
Interest income is recognized when the related services are performed and the
earnings process is complete.
INCOME TAXES
The Company has elected to be taxed as a Real Estate Investment Trust ("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 SFAS No. 128 "Earnings per Share", which specifies the
computation, presentation and disclosure requirements for the Company's net
income per share. Basic net income per preferred share is computed by dividing
net income by the weighted average number of preferred shares outstanding during
the period. Diluted net income per preferred share reflects the potential
dilution that could occur if securities or other contracts to issue shares were
exercised or converted into shares. There were no potential dilutive shares
outstanding at December 31, 2004, 2003 and 2002. Subsequent to the completion of
the offering of preferred shares, the holders of common stock are not entitled
to share in any income nor in any related dividend.
3. 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, 2002, the Company incurred a net operating
loss for income tax purposes of approximately $810,000 that can be carried
forward until it expires in the year 2022.
At December 31, 2004, the Company's net tax basis of its real estate assets was
$25,721,000.
F-41
FSP Montague Business Center Corp.
Notes to Financial Statements.
3. Income Taxes (continued)
The following schedule reconciles net income (loss) to taxable income subject to
dividend requirements:
Year Ended Year Ended Period Ended
December 31, December 31, December 31,
(in thousands) 2004 2003 2002
============================================================================================================
GAAP net income (loss) $ 2,515 $ 2,669 $ (1,249)
Add: Book depreciation and amortization 376 368 134
Amortization of favorable lease 1,163 1,164 581
Deferred rent (379) 379 --
Less: Tax depreciation and amortization (404) (399) (142)
Straight-line rents (70) (262) (130)
------------------------------------------------------------------------------------------------------------
Taxable income (loss)(1) subject to a dividend requirement $ 3,201 $ 3,919 $ (806)
============================================================================================================
(1) A tax loss is not subject to a dividend requirement.
The following schedule summarizes the tax components of the distributions paid
for the years ended December 31,:
Year Ended Year Ended
December 31, 2004 December 31, 2003
------------------------------ -------------------------------
Per Per Per Per
Preferred Common Preferred Common
(in thousands, except per share data) Total Share Share Total Share Share
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Cash distributions paid $ 3,956 $ 11,844 $ -- $3,714 $11,119 $ --
Less: Return of captial (550) (1,647) -- -- -- --
- -----------------------------------------------------------------------------------------------------------
Dividends paid deduction $ 3,406 $ 10,197 $ -- $3,714 $11,119 $ --
===========================================================================================================
Year Ended
December 31, 2002
---------------------------------
Per Per
Preferred Common
(in thousands, except per share data) Total Share Share
- --------------------------------------------------------------------------
Cash distributions paid $ 320 $ 861 $ 32,227
Less: Return of captial (320) (861) (32,227)
- --------------------------------------------------------------------------
Dividends paid deduction $ -- $ -- $ --
==========================================================================
4. Capital Stock
PREFERRED STOCK
Generally, each holder of Shares of Preferred Stock is entitled to receive
ratably all distributions, if any, declared by the Board of Directors out of
funds legally available. The right to receive distributions shall be
non-cumulative, and no right to distributions shall accrue by reason of the fact
that no distribution 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.
F-42
FSP Montague Business Center Corp.
Notes to Financial Statements
4. 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 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 share in any earnings nor any related dividend.
5. Related Party Transactions
The Company executed a management agreement with FSP Property Management LLC, an
affiliate of FSP, that provides for a management fee equal to 1% of collected
revenues and is cancelable with 30 days notice by either party. For the years
ended December 31, 2004, 2003 and 2002, fees incurred under the agreement were
$46,000, $45,000 and $14,000, respectively.
An acquisition fee of $167,000 and other costs of $104,000 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 $2,758,000 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 a note payable to FSP,
principal of $26,000,000, with interest equal to the Citizens Bank base rate.
Interest paid to FSP was $29,000. The average interest rate during the time the
loan was outstanding was 4.75%.
A commitment fee of $1,920,000 was paid to FSP in 2002 for obtaining the first
mortgage loan and is included in interest expense on the Statement of
Operations.
The Company paid a dividend of $32,000 in 2002 to the common shareholder
relating to operations of the Company prior to the completion of the offering of
preferred shares.
6. Commitments and Contingencies
The Company, as lessor, has minimum future rentals due under a non-cancelable
operating lease as follows:
Year Ending
(in thousands) December 31, Amount
-------------- ------------ ---------
2005 $ 4,174
2006 4,390
---------
$ 8,564
=========
In addition, the lessee is liable for real estate taxes and certain operating
expenses of the Property.
F-43
SCHEDULE III
FSP Montague Business Center Corp.
Real Estate and Accumulated Depreciation
December 31, 2004
Initial Cost
-------------------------------
Costs
Capitalized
Buildings (Disposals)
Improvements Subsequent
and to
Description Encumbrances (1) Land Equipment Acquisition
- ----------- ---------------- ---- --------- -----------
Montague Business Center, San Jose, CA $10,500 $10,144 $355
Historical Costs
----------------------------------------------------------
Buildings Total Costs,
Improvements Net of Depreciable
and Accumulated Accumulated Life Date of
Description Land Equipment Total (2) Depreciation Depreciation Years Acquisition
- ----------- ---- --------- --------- ------------ ------------ ----- -----------
(in thousands)
Montague Business Center, San Jose, CA $10,500 $10,499 $20,999 $628 $20,371 39 2002
(1) There are no encumbrances on the above properties.
(2) The aggregate cost for Federal Income Tax purposes is $26,696.
F-44
FSP Montague Business Center Corp.
The following table summarizes the changes in the Company's real estate
investments and accumulated depreciation:
December 31,
---------------------------------------
(in thousands) 2004 2003 2002
==============================================================================
Real estate investments, at cost:
Balance, beginning of period $20,999 $20,644 $ --
Acquisitions -- -- 20,644
Improvements -- 355 --
Dispositions -- -- --
- ------------------------------------------------------------------------------
Balance, end of period $20,999 $20,999 $20,644
==============================================================================
Accumulated depreciation:
Balance, beginning of period $ 359 $ 98 $ --
Depreciation 269 261 98
Dispositions -- -- --
- ------------------------------------------------------------------------------
Balance, end of period $ 628 $ 359 $ 98
==============================================================================
F-45
FSP Royal Ridge Corp.
Financial Statements
December 31, 2004 and 2003
Table of Contents
Page
----
Financial Statements
Independent Auditor's Report.............................................. F-47
Balance Sheets as of December 31, 2004 and 2003........................... F-48
Statements of Operations for the years ended December 31, 2004 and 2003... F-49
Statements of Changes in Stockholders' Equity for the years ended
December 31, 2004 and 2003.......................................... F-50
Statements of Cash Flows for the years ended December 31, 2004 and 2003... F-51
Notes to Financial Statements............................................. F-52
Financial Statements Schedule - Schedule III.............................. F-59
F-46
[LETTERHEAD OF BRAVER AND COMPANY, P.C.]
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
FSP Royal Ridge Corp.
Wakefield, Massachusetts
We have audited the accompanying balance sheets of FSP Royal Ridge Corp. as of
December 31, 2004 and 2003, and the related statements of operations, changes in
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our 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 are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FSP Royal Ridge Corp. as of
December 31, 2004 and 2003, and the results of its operations and its cash flows
for the years then ended, in conformity with accounting principles generally
accepted in the United States of America.
/s/ Braver and Company, P.C.
Newton, Massachusetts
March 7, 2005
F-47
FSP Royal Ridge Corp.
Balance Sheets
December 31, December 31,
(in thousands,except shares and par value amounts) 2004 2003
=========================================================================================================
Assets:
Real estate investments, at cost:
Land $ 1,649 $ 1,649
Buildings and improvements 16,567 16,224
- -------------------------------------------------------------------------------------------------------
18,216 17,873
Less accumulated depreciation 795 375
- -------------------------------------------------------------------------------------------------------
Real estate investments, net 17,421 17,498
Acquired real estate leases, net of accumulated amortization
of $299 and $143, respectively 819 975
Acquired favorable real estate leases, net of accumulated amortization
of $891 and $426, respectively 2,442 2,907
Cash and cash equivalents 1,038 1,214
Cash-funded reserves 967 1,037
Restricted cash 571 571
Step rent receivable 1,061 954
Prepaid expenses and other assets 6 14
- -------------------------------------------------------------------------------------------------------
Total assets $ 24,325 $ 25,170
=======================================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses $ 281 $ 240
Distributions payable 542 536
- -------------------------------------------------------------------------------------------------------
Total liabilities 823 776
- -------------------------------------------------------------------------------------------------------
Commitments and Contingencies: -- --
Stockholders' Equity:
Preferred Stock, $.01 par value, 297.5 shares
authorized, issued and outstanding -- --
Common Stock, $.01 par value, 1 share
authorized, issued and outstanding -- --
Additional paid-in capital 27,277 27,277
Retained earnings and distributions in excess of earnings (3,775) (2,883)
- -------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 23,502 24,394
- -------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 24,325 $ 25,170
=======================================================================================================
See accompanying notes to financial statements.
F-48
FSP Royal Ridge Corp.
Statements of Operations
For the
Years Ended
December 31,
(in thousands, except shares and per share amounts) 2004 2003
=============================================================================================
Revenues:
Rental $3,064 $ 2,264
- ---------------------------------------------------------------------------------------------
Total revenue 3,064 2,264
- ---------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 875 746
Real estate taxes and insurance 324 255
Depreciation and amortization 576 518
General and administrative 66 --
Interest -- 1,731
- ---------------------------------------------------------------------------------------------
Total expenses 1,841 3,250
- ---------------------------------------------------------------------------------------------
Income (loss) before interest income 1,223 (986)
Interest income 37 28
- ---------------------------------------------------------------------------------------------
Net income (loss) before distributions to common stockholder 1,260 (958)
Distributions paid to common stockholder -- 14
- ---------------------------------------------------------------------------------------------
Net income (loss) attributable to preferred stockholders $1,260 $ (972)
=============================================================================================
Weighted average number of preferred shares outstanding,
basic and diluted 297.5 297.5
=============================================================================================
Net income (loss) per preferred share, basic and diluted $4,235 $(3,267)
=============================================================================================
See accompanying notes to financial statements.
F-49
FSP Royal Ridge Corp.
Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 2004 and 2003
Retained Earnings
Additional and Distributions Total
Preferred Common Paid-in in Excess of Stockholders'
(in thousands, except shares) Stock Stock Capital Earnings Equity
==========================================================================================================================
Private offering of 297.5 shares, net $ -- $ -- $27,277 $ -- $ 27,277
Distributions -- -- -- (1,925) (1,925)
Net loss -- -- -- (958) (958)
- --------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 -- -- 27,277 (2,883) 24,394
Distributions -- -- -- (2,152) (2,152)
Net income -- -- -- 1,260 1,260
- --------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2004 $ -- $ -- $27,277 $(3,775) $ 23,502
==========================================================================================================================
See accompanying notes to financial statements.
F-50
FSP Royal Ridge Corp.
Statements of Cash Flows
For the
Years Ended
December 31,
-----------------------
(in thousands) 2004 2003
============================================================================================================
Cash flows from operating activities:
Net Income (loss) $ 1,260 $ (958)
Adjustments to reconcile net income (loss) to net cash provided by
(used for) operating activities:
Depreciation and amortization 576 518
Amortization of favorable leases 465 426
Changes in operating assets and liabilities:
Cash-funded reserves 70 (1,037)
Restricted cash -- (571)
Step rent receivable (107) (954)
Prepaid expenses and other assets 8 (14)
Accounts payable and accrued expenses 41 240
- -----------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 2,313 (2,350)
- -----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets (343) (17,873)
Purchase of acquired real estate leases -- (1,118)
Purchase of acquired favorable real estate leases -- (3,333)
- -----------------------------------------------------------------------------------------------------------
Net cash used for investing activities (343) (22,324)
- -----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock -- 29,760
Syndication costs -- (2,483)
Distributions to stockholders (2,146) (1,389)
Proceeds from long-term debt -- 24,250
Principal payments on long-term debt -- (24,250)
- -----------------------------------------------------------------------------------------------------------
Net cash (used for) provided by financing activities (2,146) 25,888
- -----------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (176) 1,214
Cash and cash equivalents, beginning of year 1,214 --
- -----------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 1,038 $ 1,214
===========================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ -- $ 1,731
Disclosure of non-cash financing activities:
Distributions declared but not paid $ 542 $ 536
See accompanying notes to financial statements.
F-51
FSP Royal Ridge Corp.
Notes to Financial Statements
1. Organization
FSP Royal Ridge Corp. (the "Company") was organized on December 20, 2002 as a
Corporation under the laws of the State of Delaware to purchase, own and operate
a six-story Class "A" suburban office building containing approximately 161,366
rental square feet of space located on approximately 13.2 acres of land in
Alpharetta, GA (the "Property). The Company acquired the Property on January 30,
2003.
On August 13, 2004, the Company entered into a merger agreement with its common
shareholder, Franklin Street Properties Corp ("FSP"). On February 25, 2005, FSP
filed a Consent Solicitation/Prospectus with the United States Securities and
Exchange Commission indicating its intent to merge the Company and three
additional REITs with and into four of FSP's wholly-owned subsidiaries. The
merger requires the approval of the shareholders of the Company as well as the
shareholders of the three additional REITs. If approved, FSP will issue
approximately 1,801,598 shares of its common stock in exchange for a 100%
ownership interest in the Company. The Company has incurred $66,000 of costs
through December 31, 2004 related to the merger and these costs have been
included as an expense in the Statements of Operations.
2. Summary of Significant Accounting Policies
BASIS OF PRESENTATION
The results of operations from inception to December 31, 2003 are not
necessarily indicative of the results to be obtained for other interim periods
or for the full fiscal year.
ESTIMATES AND ASSUMPTIONS
The Company prepares its financial statements and related notes in conformity
with accounting principles generally accepted in the United States of America
("GAAP"). These principles require management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
RECLASSIFICATIONS
Certain information in the 2003 financial statements have been reclassified to
conform to the 2004 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 & Equipment 5-7
F-52
FSP Royal 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 $ 24,250
Plus: Acquisition fees 149
Plus: Other acquisition costs 111
Less : Closing credit for tenant improvements (3,251)
Less : Closing credit for free rent (1,270)
-------------------------------------------------------------------------
Total Acquisition Costs $ 19,989
=========================================================================
These costs were recorded in the Company's Balance Sheets as follows:
Land $ 1,649
Building 13,889
Acquired real estate leases 1,118
Acquired favorable real estate leases 3,333
-----------------------------------------------------------------------
Total recorded on Balance Sheets $ 19,989
=======================================================================
The Company evaluates its assets used in operations by identifying indicators of
impairment and by comparing the sum of the estimated undiscounted future cash
flows for each asset to the asset's carrying value. When indicators of
impairment are present and the sum of the undiscounted future cash flows is less
than the carrying value of such asset, an impairment loss is recorded equal to
the difference between the asset's current carrying value and its fair value
based on discounting its estimated future cash flows. At December 31, 2004 and
2003, no such indicators of impairment were identified.
Depreciation expense of $420,000 and $375,000 is included in Depreciation and
Amortization in the Company's Statements of Operations for the years ended
December 31, 2004 and 2003, respectively.
ACQUIRED REAL ESTATE LEASES
Acquired real estate leases represent 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 ("SFAS") No. 141 "Business Combinations", which was approved by the
Financial Accounting Standards Board ("FASB") 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 leases. Amortization expense of $156,000 and
$143,000 are included in Depreciation and Amortization in the Company's
Statement of Operations for the periods ended December 31, 2004 and 2003,
respectively.
Acquired real estate lease costs included in the purchase price of the Property
were $1,118,000 and are being amortized over the weighted-average period of
seven years in respect of the leases assumed. Detail of the acquired real estate
leases as of December 31,:
(in thousands) 2004 2003
-------------- --------------- --------------
Cost $ 1,118 $ 1,118
Accumulated amortization (299) (143)
--------------- --------------
Book value $ 819 $ 975
=============== ==============
F-53
FSP Royal Ridge Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
ACQUIRED REAL ESTATE LEASES (continued)
The estimated annual amortization expense for the five years succeeding December
31, 2004 are as follows:
(in thousands)
--------------
2005 $ 156
2006 $ 156
2007 $ 156
2008 $ 156
2009 $ 156
Thereafter $ 39
ACQUIRED FAVORABLE REAL ESTATE LEASES
Acquired favorable real estate leases represent the value related to the leases
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 report this value separately from its investment in real estate. The
Company subsequently amortizes this amount on a straight-line basis over the
remaining life of the related lease. Amortization of $465,000 and $426,000 is
shown as a reduction of rental income in the Company's Statements of Operations
for the periods ended December 31, 2004 and 2003 respectively.
The acquired favorable real estate leases included in the purchase price of the
property was $3,333,000 and is being amortized over a period of seven years with
respect of the leases assumed. Details of the acquired favorable real estate
leases as of December 31 are as follows:
2004 2003
------------ -----------
Cost $ 3,333 $ 3,333
Accumulated Amortization (891) (426)
------------ -----------
Book Value $ 2,442 $ 2,907
============ ===========
The estimated annual amortization for the five years succeeding December 31,
2004 are as follows:
2005 $ 465
2006 $ 465
2007 $ 465
2008 $ 465
2009 $ 465
Thereafter $ 117
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. These funds typically are used for the payment of real estate assets
and deferred leasing commissions; however, there is no legal restriction on
their use and they may be used for any Company purpose.
RESTRICTED CASH
Restricted cash represents funds held in escrow for tenant improvements.
F-54
FSP Royal Ridge Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
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 classifies its debt securities as
available-for-sale.
There were no investments in marketable securities at December 31, 2004 and
2003.
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 December 31, 2004 and 2003 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:
2004 2003
---- ----
Axis U.S Insurance 52% 52%
Hagemeyer North America, Inc. 38% 38%
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 $
1,061,000 and $954,000 at December 31, 2004 and 2003, 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
$ 2,483,000 have been reported as a reduction in Stockholders' Equity in the
Company's Balance Sheets.
F-55
FSP Royal 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 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.
Year Ended Period Ended
December 31, December 31,
(in thousands) 2004 2003
==========================================================================
Income from leases $ 2,204 $ 1,152
Straight-line rent adjustment 107 954
Reimbursable expenses 1,218 584
Amortization of favorable leases (465) (426)
--------------------------------------------------------------------------
Total $ 3,064 $ 2,264
==========================================================================
INTEREST INCOME
Interest income is recognized when the related services are performed and the
earnings process is complete.
INCOME TAXES
The Company has elected to be taxed as a Real Estate Investment Trust ("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 SFAS No. 128 "Earnings per Share", which specifies the
computation, presentation and disclosure requirements for the Company's net
income per share. Basic net income per preferred share is computed by dividing
net income by the weighted average number of preferred shares outstanding during
the period. Diluted net income per preferred share reflects the potential
dilution that could occur if securities or other contracts to issue shares were
exercised or converted into shares. There were no potential dilutive shares
outstanding at December 31, 2004 and 2003. Subsequent to the completion of the
offering of preferred shares, the holders of common stock are not entitled to
share in any income nor in any related dividend.
3. 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, 2003, the Company incurred a net operating
loss for income tax purposes of approximately $1,349,000 that can be carried
forward until it expires in the year 2023.
At December 31, 2004, the Company's net tax basis of its real estate assets was
$21,635,000.
F-56
FSP Royal Ridge Corp.
Notes to Financial Statements
3. Income Taxes (continued)
The following schedule reconciles net income (loss) to taxable income subject to
dividend requirements:
Year Ended Period Ended
December 31, December 31,
(in thousands) 2004 2003
============================================================================================
Net income (loss) $ 1,260 $ (958)
Add: Book depreciation and amortization 576 518
Amortization of favorable real estate leases 465 426
Deferred rent (99) 99
Less: Tax depreciation and amortization (517) (480)
Straight-line rents (107) (954)
--------------------------------------------------------------------------------------------
Taxable income (loss)(1) $ 1,578 $ (1,349)
============================================================================================
(1) A tax loss is not subject to a dividend requirement.
The following schedule reconciles cash dividends paid to the dividends paid
deduction:
Year Ended
December 31, 2004 December 31, 2003
------------------------------ ------------------------------
Per Per Per Per
Preferred Common Preferred Common
(in thousands, except per share data) Total Share Share Total Share Share
- ------------------------------------------------------------------------------------------------------------
Cash distributions paid $ 2,146 $ 7,213 $ -- $ 1,389 $ 4,621 $ 14,232
Less: Return of captial (568) (1,909) -- (1,389) (4,621) (14,232)
- ------------------------------------------------------------------------------------------------------------
Dividends paid deduction $ 1,578 $ 5,304 $ -- $ -- $ -- $ --
- ------------------------------------------------------------------------------------------------------------
4. 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 share in any earnings nor any related
dividend.
F-57
FSP Royal Ridge Corp.
Notes to Financial Statements
5. Related Party Transactions
The Company executed a management agreement with FSP Property Management LLC, an
affiliate of FSP, that provides for a management fee equal to 1% of collected
revenues and is cancelable with 30 days notice by either party. For the period
ended December 31, 2004 and 2003, fees incurred under the agreement were $36,000
and $18,000 respectively.
An acquisition fee of $149,000 and other costs of $111,000 were paid in 2003 to
an affiliate of the Common Shareholder. Such fees were included in the cost of
the real estate.
Syndication fees of $2,380,000 were paid in 2003 to an affiliate of the Common
Shareholder for services related to syndication of the Company's preferred
stock.
During 2003, the Company borrowed and repaid in full a note payable to FSP,
principal of $24,250,000, with interest equal to the Citizens Bank base rate.
Interest paid to FSP was $20,000. The average interest rate during the time the
loan was outstanding was 4.50%.
A commitment fee of $1,711,000 was paid in 2003 to FSP for obtaining the first
mortgage loan. Such amount is included in interest expense on the Statements of
Operations.
The Company paid a distribution of $14,000 in 2003 to the common shareholder
relating to the operations of the Company prior to the completion of the
offering of preferred shares.
6. Commitments and Contingencies
The Company, as lessor, has minimum future rentals due under non-cancelable
operating leases as follows:
Year Ending
(in thousands) December 31, Amount
------------ ---------
2005 $ 2,040
2006 2,071
2007 2,123
2008 2,176
2009 2,230
Thereafter 6,748
---------
$ 17,388
=========
In addition, the lessees are liable for real estate taxes and certain operating
expenses of the Property.
Upon acquiring the commercial rental property in January 2003, the Company was
assigned the lease agreements between the seller of the Property and the
existing tenants. The original lease periods range from two to ten years with
renewal options.
F-58
SCHEDULE III
FSP Royal Ridge Corp.
Real Estate and Accumulated Depreciation
December 31, 2004
Initial Cost
-------------------------------
Costs
Capitalized
Buildings (Disposals)
Improvements Subsequent
and to
Description Encumbrances (1) Land Equipment Acquisition
- ----------- ---------------- ---- --------- -----------
Royal Ridge, Alpharetta, GA $1,649 $16,224 $343
Historical Costs
----------------------------------------------------------
Buildings Total Costs,
Improvements Net of Depreciable
and Accumulated Accumulated Life Date of
Description Land Equipment Total (2) Depreciation Depreciation Years Acquisition
- ----------- ---- --------- --------- ------------ ------------ ----- -----------
(in thousands)
Royal Ridge, Alpharetta, GA $1,649 $16,567 $18,216 $795 $17,421 39 2003
(1) There are no encumbrances on the above properties.
(2) The aggregate cost for Federal Income Tax purposes is $22,667
F-59
FSP Royal Ridge Corp.
The following table summarizes the changes in the Company's real estate
investments and accumulated depreciation:
December 31, December 31,
----------------------------
(in thousands) 2004 2003
================================================================================
Real estate investments, at cost:
Balance, beginning of period $17,873 $ --
Acquisitions -- 17,873
Improvements 343 --
Dispositions -- --
- --------------------------------------------------------------------------------
Balance, end of period $18,216 $17,873
================================================================================
Accumulated depreciation:
Balance, beginning of period $ 375 $ --
Depreciation 420 375
Dispositions -- --
- --------------------------------------------------------------------------------
Balance, end of period $ 795 $ 375
================================================================================
F-60