UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT Pursuant
to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of report (Date of earliest event reported) August 31, 2004
-----------------
Franklin Street Properties Corp.
(formerly known as Franklin Street Partners Limited Partnership)
--------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Maryland
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(State or Other Jurisdiction of Incorporation)
000-32615 04-3578653
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(Commission File Number) (IRS Employer Identification No.)
401 Edgewater Place, Suite 200, Wakefield, MA 01880-6210
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(Address of Principal Executive Offices) (Zip Code)
(781) 557-1300
--------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Not Applicable
--------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
|_| Written communications pursuant to Rule 425 under the Securities Act
(17 CFR 230.425)
|_| Soliciting material pursuant to Rule 14a-12 under the Exchange Act
(17 CFR 240.14a-12)
|_| Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
|_| Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
Item 8.01 Other Events
On August 13, 2004, Franklin Street Properties Corp. ("FSP Corp." or the
"Registrant"), a Maryland corporation, four wholly-owned acquisition
subsidiaries of FSP Corp., each a Delaware corporation (the "Acquisition Subs"),
and four real estate investment trusts, each a Delaware corporation (the "Target
REITs"), entered into an Agreement and Plan of Merger (the "Merger Agreement"),
providing for (i) FSP Corp.'s acquisition of each of the Target REITs by merging
each Target REIT into a related Acquisition Sub, resulting in the Acquisition
Sub being the surviving corporation and (ii) the issuance of approximately
10,894,994 shares of FSP Corp. Common Stock as consideration in connection with
the mergers. Upon consummation of the mergers, the holders of the preferred
stock of the Target REITs will become stockholders of FSP Corp.
The accompanying financial statements provide historical results of the
Target REITs. This information is voluntarily and supplementally provided by FSP
Corp. to assist the Target REIT stockholders in their review of the financial
statements contained in a registration statement on Form S-4 to be filed by FSP
Corp. as contemplated by the Merger Agreement.
In connection with the mergers, the Registrant is hereby filing as part of
this Current Report on Form 8-K the financial statements and set forth below
under Item 9.01.
Upon consummation of the mergers, the Registrant expects to file a Current
Report under Item 2.01 of Form 8-K, "Completion of Acquisition or Disposition of
Assets," reporting the information required to be set forth therein.
FORWARD LOOKING STATEMENTS
THIS FORM 8-K CONTAINS FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND THE FEDERAL SECURITIES
LAWS. THESE FORWARD LOOKING STATEMENTS ARE BASED UPON FSP CORP.'S CURRENT
BELIEFS AND EXPECTATIONS, BUT THEY ARE NOT GUARANTEED. FOR EXAMPLE, VARIOUS
CLOSING CONDITIONS UNDER THE MERGER AGREEMENTS MAY NOT BE SATISFIED AND THE
ACQUISITION MAY NOT BE COMPLETED. INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE
RELIANCE UPON FORWARD LOOKING STATEMENTS.
Item 9.01 Financial Statements and Exhibits.
(a) Financial Statements Under Rule 3-05 of Regulation S-X
(see Index to Financial Statements at F-1)
Financial Statements of FSP Addison Circle Corp.
Financial Statements of FSP Collins Crossing Corp.
Financial Statements of FSP Montague Business Center Corp.
Financial Statements of FSP Royal Ridge Corp.
(b) Pro Forma Financial Information
N/A
(c) Exhibits
23.1 Consent of Braver and Company, P.C.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: August 31, 2004 REGISTRANT
FRANKLIN STREET PROPERTIES CORP.
/s/ George J. Carter
-----------------------------
George J. Carter
President and Chief Executive Officer
Index to Financial Statements
Financial Statements of FSP Addison Circle Corp.
Index to financial statements as of June 30, 2004 (unaudited) F-2
Index to financial statements as of December 31, 2003 F-9
Financial Statements of FSP Collins Crossing Corp.
Index to financial statements as of June 30, 2004 (unaudited) F-23
Index to financial statements as of December 31, 2003 F-30
Financial Statements of FSP Montague Business Center Corp.
Index to financial statements as of June 30, 2004 (unaudited) F-45
Index to financial statements as of December 31, 2003 F-52
Financial Statements of FSP Royal Ridge Corp.
Index to financial statements as of June 30, 2004 (unaudited) F-66
Index to financial statements as of December 31, 2003 F-73
F-1
FSP Addison Circle Corp.
Financial Statements
June 30, 2004
Table of Contents
Page
----
Financial Statements (unaudited)
Balance Sheets as of June 30, 2004 and December 31, 2003.................. F-3
Statements of Income for the three and six months ended June 30, 2004
and 2003............................................................ F-4
Statements of Cash Flows for the six months ended June 30, 2004
and 2003............................................................ F-5
Notes to Financial Statements............................................. F-6
F-2
FSP Addison Circle Corp.
Balance Sheets
(unaudited)
June 30, 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 46,057 45,895
-----------------------------------------------------------------------------------------------------------------
50,422 50,260
Less accumulated depreciation 2,116 1,519
-----------------------------------------------------------------------------------------------------------------
Real estate investments, net 48,306 48,741
Acquired real estate leases, net of accumulated amortization of $508 and $349 1,230 1,389
Cash and cash equivalents 5,592 5,966
Restricted cash 20 35
Tenant rents receivable -- 25
Step rent receivable 561 421
Deferred leasing costs, net of accumulated amortization of $4 and $0 119 39
Prepaid expenses and other assets 87 51
-----------------------------------------------------------------------------------------------------------------
Total assets $ 55,915 $ 56,667
=================================================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses $ 1,357 $ 2,055
Dividends payable -- 1,265
Tenant security deposits 20 35
-----------------------------------------------------------------------------------------------------------------
Total liabilities 1,377 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 deficit and dividends in excess of earnings (3,845) (5,071)
-----------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 54,538 53,312
-----------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 55,915 $ 56,667
=================================================================================================================
See accompanying notes to financial statements.
F-3
FSP Addison Circle Corp.
Statement of Income
(unaudited)
For the For the
Three Months Six Months
Ended Ended
June 30, June 30,
---------------------- ----------------------
(in thousands, except shares and per share amounts) 2004 2003 2004 2003
==================================================================================================================
Revenues:
Rental $2,218 $2,226 $4,720 $4,333
------------------------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 383 516 805 869
Real estate taxes and insurance 338 305 683 626
Depreciation and amortization 382 350 760 724
==================================================================================================================
Total expenses 1,103 1,171 2,248 2,219
------------------------------------------------------------------------------------------------------------------
Income before interest 1,115 1,055 2,472 2,114
Interest income 20 15 42 22
------------------------------------------------------------------------------------------------------------------
Net income attributable to preferred shareholders $1,135 $1,070 $2,514 $2,136
==================================================================================================================
Weighted average number of preferred shares outstanding,
basic and diluted 636 636 636 636
==================================================================================================================
Net income per preferred share, basic and diluted $1,785 $1,682 $3,953 $3,358
==================================================================================================================
See accompanying notes to financial statements.
F-4
FSP Addison Circle Corp.
Statements of Cash Flows
(unaudited)
For the Six Months Ended
(in thousands) June 30, 2004 June 30, 2003
============================================================================================================
Cash flows from operating activities:
Net Income $ 2,514 $ 2,136
Adjustments to reconcile net income to net cash provided by
(used for) operating activities:
Depreciation and amortization 760 724
Changes in operating assets and liabilities:
Restricted cash 15 --
Tenant rent receivables 24 (2)
Step rent receivable (141) (161)
Prepaid expenses and other assets (36) (22)
Accounts payable and accrued expenses (1,963) (1,410)
Tenant security deposits (15) --
Payment of deferred leasing costs (84) --
------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities $ 1,074 $ 1,265
------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets (161) --
------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (161) --
------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Dividends to stockholders (1,287) (1,304)
------------------------------------------------------------------------------------------------------------
Net cash used for financing activities (1,287) (1,304)
------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (374) (39)
Cash and cash equivalents, beginning of period 5,966 5,402
------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 5,592 $ 5,363
============================================================================================================
See accompanying notes to financial statements.
F-5
FSP Addison Circle Corp.
Notes to Financial Statements
(unaudited)
1. Organization and Basis of Presentation
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.
BASIS OF PRESENTATION
The accompanying interim financial statements are unaudited; however, the
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and in conjunction with the rules and regulations of the Securities
and Exchange Commission. Accordingly, they do not include all of the disclosures
required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of management, all
adjustments (consisting solely of normal recurring matters) necessary for a fair
presentation of the financial statements for these interim periods have been
included.
Certain prior-year balances have been reclassified in order to conform to the
current-year presentation.
These financial statements should be read in conjunction with the Company's
financial statements and notes thereto for its fiscal year ended December 31,
2003.
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.
2. Net Income Per Share
Basic net income per preferred share is computed by dividing net income
attributed to preferred shareholders 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 June 30, 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 has elected to be taxed as a Real Estate Investment Trust ("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.
F-6
FSP Addison Circle Corp.
Notes to Financial Statements
(unaudited)
4. Cash Available for Distribution
The Company evaluates its performance based on Cash Available for Distribution
("CAD") as management believes that CAD represents the most accurate measure of
the Company's activity. CAD is the basis for distributions paid to equity
holders.
The Company defines CAD as: net income as computed in accordance with accounting
principles generally accepted in the United States of America ("GAAP"); plus
certain non-cash items included in the computation of net income (depreciation
and amortization and straight line rent adjustments); plus funds raised by the
issuance of shares; plus the net proceeds from the sale of land; less purchases
of real estate assets (including acquired leases) property and equipment
("Capital Expenditures"), and payments for deferred leasing commissions; plus
(less) proceeds from (payments to) cash reserves established at the acquisition
date of the property ("Cash-funded reserves"). Depreciation and amortization and
straight-line rents are an adjustment to CAD, as these are non-cash items
included in net income. Capital Expenditures and payments for deferred leasing
commissions and the proceeds from (payments to) the funded reserve are an
adjustment to CAD, as they represent cash items not reflected in income.
CAD should not be considered as an alternative to net income (determined in
accordance with GAAP), as an indicator of the Company's financial performance,
nor as an alternative to cash flows from operating activities (determined in
accordance with GAAP), nor as a measure of the Company's liquidity, nor is it
necessarily indicative of sufficient cash flow to fund all of the Company's
needs. Other real estate companies may define CAD in a different manner. It is
at the Company's discretion to retain a portion of CAD for operational needs.
Management believes that in order to facilitate a clear understanding of the
results of the Company, CAD should be examined in connection with net income and
cash flows from operating, investing and financing activities in the financial
statements.
The calculation of cash available for distribution is shown in the following
table:
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) 2004 2003 2004 2003
===================================================================================
Net income $ 1,135 $ 1,070 $ 2,514 $ 2,136
Depreciation and amortization 382 350 760 724
Straight line rent (116) (80) (141) (161)
Purchase of land and building -- -- (161) --
Proceeds from (establish) funded reserve 44 -- 284 --
Payment of deferred lease origination costs (44) -- (123) --
-----------------------------------------------------------------------------------
Cash Available for Distribution $ 1,401 $ 1,340 $ 3,133 $ 2,699
===================================================================================
The Company's cash distributions for the periods ended June 30, 2004 and
December 31, 2003 are summarized as follows:
(in thousands)
Quarter Paid 2004 2003
================================================================
First Quarter $ 1,265 $ 850
Second Quarter 1,288 1,302
Third Quarter - 1,292
Fourth Quarter - 1,277
----------------------------------------------------------------
Dividends Paid $ 2,553 $ 4,271
================================================================
Cash distributions are declared and paid based on the total outstanding shares
as of the record date and are typically paid in the quarter following the
quarter that CAD is generated.
F-7
FSP Addison Circle Corp.
Notes to Financial Statements
(unaudited)
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. Fees incurred
under the agreement were $20,149 and $20,049 for the three months ended June 30,
2004 and 2003, respectively and $40,207 and $39,826 for the six months ended
June 30, 2004 and 2003, respectively.
F-8
FSP Addison Circle Corp.
Financial Statements
December 31, 2003 and 2002
Table of Contents
Page
----
Financial Statements
Independent Auditor's Report.............................................. F-10
Balance Sheets as of December 31, 2003 and 2002........................... F-11
Statements of Operations for the year ended December 31, 2003
and for the period August 21, 2002 (date of inception)
to December 31, 2002........................................... F-12
Statements of Changes in Stockholders' Equity for the year ended
December 31, 2003 and for the period August 21, 2002
(date of inception) to December 31, 2002....................... F-13
Statements of Cash Flows for the year ended December 31, 2003
and for the period August 21, 2002 (date of inception)
to December 31, 2002........................................... F-14
Notes to the Financial Statements......................................... F-15
F-9
[LETTERHEAD OF BRAVER AND COMPANY, P.C.]
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
FSP Addison Circle Corp.
We have audited the accompanying balance sheets of FSP Addison Circle Corp. as
of December 31, 2003 and 2002 and the related statements of operations, changes
in stockholders' equity and cash flows for the year ended December 31, 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, 2003 and 2002, and the results of its operations and its cash flows
for the year ended December 31, 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
January 23, 2004
F-10
FSP Addison Circle Corp.
Balance Sheets
December 31, December 31,
(in thousands, except shares and par value amounts) 2003 2002
================================================================================================================
Assets:
Real estate investments, at cost:
Land $ 4,365 $ 4,365
Buildings and improvements 45,895 45,870
----------------------------------------------------------------------------------------------------------------
50,260 50,235
Less accumulated depreciation 1,519 343
----------------------------------------------------------------------------------------------------------------
Real estate investments, net 48,741 49,892
Acquired real estate leases, net of accumulated amortization of $349 and $27 1,389 1,711
Cash and cash equivalents 3,330 2,683
Cash-funded reserves 2,636 2,719
Restricted cash 35 44
Tenant rents receivable 25 --
Step rent receivable 421 99
Deferred leasing costs 39 --
Prepaid expenses and other assets 51 80
----------------------------------------------------------------------------------------------------------------
Total assets $ 56,667 $ 57,228
================================================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses $ 2,055 $ 1,890
Dividends payable 1,265 850
Tenant security deposits 35 44
----------------------------------------------------------------------------------------------------------------
Total liabilities 3,355 2,784
----------------------------------------------------------------------------------------------------------------
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 deficit and dividends in excess of earnings (5,071) (3,939)
----------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 53,312 54,444
----------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 56,667 $ 57,228
================================================================================================================
See accompanying notes to financial statements.
F-11
FSP Addison Circle Corp.
Statements of Operations
For the Period
August 21, 2002
For the Year Ended (date of inception) to
(in thousands, except shares and per share amounts) December 31, 2003 December 31, 2002
=========================================================================================================
Revenue:
Rental $8,554 $ 2,102
---------------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 1,783 391
Real estate taxes and insurance 1,354 327
Depreciation and amortization 1,497 370
Interest -- 3,897
---------------------------------------------------------------------------------------------------------
Total expenses 4,634 4,985
---------------------------------------------------------------------------------------------------------
Income (loss) before interest income 3,920 (2,883)
Interest income 85 14
---------------------------------------------------------------------------------------------------------
Net income (loss) before common dividends 4,005 (2,869)
Dividends paid to common shareholders -- 313
---------------------------------------------------------------------------------------------------------
Net income (loss) attributable to preferred shareholders $4,005 $(3,182)
=========================================================================================================
Weighted average number of preferred shares outstanding,
basic and diluted 636 636
=========================================================================================================
Net income (loss) per preferred share, basic and diluted $6,297 $(5,003)
=========================================================================================================
See accompanying notes to financial statements.
F-12
FSP Addison Circle Corp.
Statements of Changes in Stockholders' Equity
For the year ended December 31, 2003 and for the Period August 21, 2002
(date of inception) to December 31, 2002
Retained Deficit
Additional and Dividends Total
Preferred Common Paid in in Excess of Stockholders'
(in thousands, except shares) Stock Stock Capital Earnings Equity
=========================================================================================================
Private offering of 636 shares, net $ -- $ -- $58,383 $ -- $ 58,383
Dividends -- -- -- (1,070) (1,070)
Net loss -- -- -- (2,869) (2,869)
---------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 -- -- 58,383 (3,939) 54,444
Dividends -- -- -- (5,137) (5,137)
Net income -- -- -- 4,005 4,005
---------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 $ -- $ -- $58,383 $(5,071) $ 53,312
=========================================================================================================
See accompanying notes to financial statements.
F-13
FSP Addison Circle Corp.
Statements of Cash Flows
For the Period
August 21, 2002
For the Year Ended (date of inception) to
(in thousands) December 31, 2003 December 31, 2002
======================================================================================================================
Cash flows from operating activities:
Net income (loss) $ 4,005 $ (2,869)
Adjustments to reconcile net income (loss) to net cash provided by
(used for) operating activities:
Depreciation and amortization 1,497 370
Changes in operating assets and liabilities:
Cash-funded reserve 83 (2,719)
Restricted cash 9 (44)
Tenant rent receivables (25) --
Step rent receivable (322) (99)
Prepaid expenses and other assets 29 (80)
Accounts payable and accrued expenses 165 1,890
Tenant security deposits (9) 44
Payment of deferred leasing costs (39) --
----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 5,393 (3,507)
----------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets (25) (50,235)
Purchase of acquired real estate leases -- (1,738)
----------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (25) (51,973)
----------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock -- 63,610
Syndication costs -- (5,227)
Dividends to stockholders (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 (4,721) 58,163
----------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 647 2,683
Cash and cash equivalents, beginning of period 2,683 --
----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 3,330 $ 2,683
======================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ -- $ 3,897
Disclosure of non-cash financing activities:
Dividends declared but not paid $ 1,265 $ 850
See accompanying notes to financial statements.
F-14
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.
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
F-15
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 are reported in the Company's Balance Sheets as follows:
Land $ 4,365
Building 45,870
Acquired real estate leases 1,738
-----------------------------------------------------------------
Total reported 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, 2003 and
2002, no such indicators of impairment were identified.
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 SFAS No. 141 "Business Combinations" ("SFAS
141"), 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 $349,000 and $27,000 is included in depreciation and amortization in
the Company's Statements of Operations for the year ended December 31, 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.
The estimated annual amortization expense for the five years succeeding December
31, 2003 are as follows:
(in thousands)
2004 $ 321
2005 $ 321
2006 $ 321
2007 $ 321
2008 $ 105
F-16
FSP Addison Circle 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.
RESTRICTED CASH
Restricted cash consists of tenant security deposits.
MARKETABLE SECURITIES
The Company accounts for investments in debt securities under the provisions of
Statement of Financial Accounting Standards ("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, 2003 and
2002.
CONCENTRATION OF CREDIT RISKS
Cash, cash equivalents and short-term investments are financial instruments that
potentially subject the Company to a concentration of credit risk. The Company
maintains its cash balances and short-term investments principally in one bank
which the Company believes to be creditworthy. The Company periodically assesses
the financial condition of the bank and believes that the risk of loss is
minimal. Cash balances held with various financial institutions frequently
exceed the insurance limit of $100,000 provided by the Federal Deposit Insurance
Corporation.
For the periods ended December 31, 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 Period
Ended Ended
December 31, December, 31
2003 2002
McLeod USA Telecommunications Services, Inc. 31% 31%
The Staubach Company 28% 28%
J.D. Edwards World Solutions Company 20% 20%
FINANCIAL INSTRUMENTS
The Company estimates that the carrying value of cash and cash equivalents,
cash-funded reserves, and restricted cash approximate their fair values based on
their short-term maturity and prevailing interest rates.
F-17
FSP Addison Circle Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
STEP RENT RECEIVABLE
Certain leases provide for fixed increases over the life of the lease. Rental
revenue is recognized on the straight-line basis over the related lease term;
however, billings by the Company are based on required minimum rentals in
accordance with the lease agreements. Step rent receivable, which is the
cumulative revenue recognized in excess of amounts billed by the Company, was
$421,000 and $99,000 at December 31, 2003 and 2002, respectively.
TENANT RENTS RECEIVABLE
Tenant rents 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
$5,227,000 have been reported as a reduction in Stockholders' Equity in the
Company's Balance Sheets.
REVENUE RECOGNITION
The Company has retained substantially all of the risks and benefits of
ownership of the Company's commercial property and accounts for its leases as
operating leases. Rental income from leases, which may include rent concession
(including free rent and tenant improvement allowances) and scheduled increases
in rental rates during the lease term, is recognized on a straight-line basis.
The Company does not have any percentage rent arrangements with its commercial
property tenants. Reimbursable costs are included in rental income in the period
earned. A schedule showing the components of rental revenue is shown below.
Year ended Period Ended
December 31, December, 31
(in thousands) 2003 2002
===================================================================
Income from leases $7,153 $1,823
Straight-line rent adjustment 322 99
Reimbursable expenses 1,079 180
-------------------------------------------------------------------
Total $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.
F-18
FSP Addison Circle Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
NET INCOME PER SHARE
The Company follows Statement of Financial Accounting Standards No. 128
"Earnings per Share", which specifies the computation, presentation and
disclosure requirements for the Company's net income per share. Basic net income
per 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, 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. Recent Accounting Standards
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities". This statement was effective January 1, 2003. SFAS
No. 146 replaces current accounting literature and requires the recognition of
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. The adoption of
this statement did not have a material effect on the Company's financial
position, results of operations and cash flows.
4. Income Taxes
The Company files as a REIT under Sections 856-860 of the Internal Revenue Code
of 1986, as amended. In order to qualify as a REIT, the Company is required to
distribute at least 90% of its taxable income to shareholders and to meet
certain asset and income tests as well as certain other requirements. The
Company will generally not be liable for federal income taxes, provided it
satisfies 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, 2003, the Company's net tax basis of its real estate assets was
$50,421,000.
The following schedule reconciles net income (loss) to taxable income subject to
dividend requirements:
Year Ended Period Ended
December 31, December 31,
(in thousands) 2003 2002
========================================================================
GAAP net income (loss) $ 4,005 $(2,869)
Add: Book depreciation and amortization 1,497 370
Less: Tax depreciation and amortization (1,193) (323)
Straight-line rents (322) (99)
------------------------------------------------------------------------
Taxable income (loss) (1) $ 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 Period Ended
December 31, December 31,
(in thousands) 2003 2002
=========================================================================
Cash dividends paid $ 4,721 $ 220
Less: Return of Capital (734) (220)
-------------------------------------------------------------------------
Dividends paid deduction $ 3,987 $ --
=========================================================================
F-19
FSP Addison Circle Corp.
Notes to Financial Statements
5. Cash Available for Distribution
The Company evaluates its performance based on Cash Available for Distribution
("CAD") as management believes that CAD represents the most accurate measure of
the Company's activity. CAD is the basis for distributions paid to equity
holders.
The Company defines CAD as: net income as computed in accordance with accounting
principles generally accepted in the United States of America ("GAAP"); plus
certain non-cash items included in the computation of net income (depreciation
and amortization and straight line rent adjustments); plus funds raised by the
issuance of shares; plus the net proceeds from the sale of land; less purchases
of real estate assets (including acquired leases), property and equipment
("Capital Expenditures"), and payments for deferred leasing commissions; plus
(less) proceeds from (payments to) cash reserves established at the acquisition
date of the property ("Cash-funded reserves"). Depreciation and amortization and
straight-line rents are an adjustment to CAD, as these are non-cash items
included in net income. Capital Expenditures, payments for deferred leasing
commissions and the proceeds from (payments to) the funded reserve are an
adjustment to CAD, as they represent cash items not reflected in income.
CAD should not be considered as an alternative to net income (determined in
accordance with GAAP), as an indicator of the Company's financial performance,
nor as an alternative to cash flows from operating activities (determined in
accordance with GAAP), nor as a measure of the Company's liquidity, nor is it
necessarily indicative of sufficient cash flow to fund all of the Company's
needs. Other real estate companies may define CAD in a different manner. It is
at the Company's discretion to retain a portion of CAD for operational needs.
Management believes that in order to facilitate a clear understanding of the
results of the Company, CAD should be examined in connection with net income and
cash flows from operating, investing and financing activities in the financial
statements.
The calculation of cash available for distribution is shown in the following
table:
Period Ended
December 31,
(in thousands) 2003 2002
=========================================================================
Net income (loss) $ 4,005 $ (2,869)
Depreciation and amortization 1,497 370
Straight line rent (322) (99)
Proceeds from offering of shares, net -- 58,383
Purchase of land and building (25) (50,235)
Proceeds from (establish) funded reserve 83 (2,719)
Payment of deferred lease origination costs -- (1,738)
-------------------------------------------------------------------------
Cash Available for Distribution $ 5,238 $ 1,093
=========================================================================
The Company's cash distributions for the periods ended December 31, 2003 and
2002 are summarized as follows:
(in thousands)
Quarter Paid 2003 2002
========================================================================
First Quarter $ 850 $ --
Second Quarter 1,302 --
Third Quarter 1,292 --
Fourth Quarter 1,277 220
------------------------------------------------------------------------
Dividends Paid $ 4,721 $ 220
========================================================================
Cash distributions are declared and paid based on the total outstanding shares
as of the record date and are typically paid in the quarter following the
quarter that CAD is generated.
F-20
FSP Addison Circle Corp.
Notes to Financial Statements
6. Capital Stock
PREFERRED STOCK
Generally, each holder of Shares of Preferred Stock is entitled to receive
ratably all dividends, if any, declared by the Board of Directors out of funds
legally available. The right to receive dividends shall be non-cumulative, and
no right to dividends shall accrue by reason of the fact that no dividend has
been declared in any prior year. Each holder of Shares will be entitled to
receive, to the extent that funds are available therefore, $100,000 per Share,
before any payment to the holder of Common Stock, out of distributions to
stockholders upon liquidation, dissolution or the winding up of the Company; the
balance of any such funds available for distribution will be distributed among
the holders of Shares and the holder of Common Stock, pro rata based on the
number of shares held by each; provided, however, that for these purposes, one
share of Common Stock will be deemed to equal one-tenth of a share of Preferred
Stock.
In addition to certain voting rights provided in the corporate agreements, the
holder of Shares, acting by consent of at least 51%, shall have the further
right to approve or disapprove a proposed sale of the Property, the merger of
the Company with any other entity and amendments to the corporate charter. A
vote of the holders of 66.67% of the Shares is required for the issue of any
additional shares of capital stock. Holders of Shares have no redemption or
conversion rights.
COMMON STOCK
Franklin Street Properties Corp. ("FSP"), is the sole holder of the Company's
Common Stock. FSP has the right, as one class together with the holders of
Preferred Stock, to vote to elect the directors of the Company and to vote on
all matters except those voted by the holders of Shares of Preferred Stock.
Subsequent to the completion of the offering of the preferred shares the holders
of common shares are not entitled to share in any income, nor in any related
dividend.
7. Related Party Transactions
The Company executed a management agreement with FSP Property Management LLC, an
affiliate of FSP, that provides for a management fee equal to 1% of collected
revenues and is cancelable with 30 days notice by either party. For the period
ended December 31, 2003 and 2002, fees incurred under the agreement were $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 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 relating to
earnings of the Company prior to the completion of the offering of preferred
shares.
F-21
FSP Addison Circle Corp.
Notes to Financial Statements
8. Commitments and Contingencies
The Company, as lessor, has minimum future rentals due under non-cancelable
operating leases as follows:
Year Ending
(in thousands) December 31, Amount
------------- -----------
2004 $ 6,684
2005 6,636
2006 5,698
2007 3,101
2008 2,369
Thereafter 943
-----------
$ 25,431
===========
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-22
FSP Collins Crossing Corp.
Financial Statements
June 30, 2004
Table of Contents
Page
----
Financial Statements (unaudited)
Balance Sheet as of June 30, 2004 and December 31, 2003.................... F-24
Statement of Income for the three and six months ended June 30, 2004
and 2003............................................................. F-25
Statement of Cash Flows for the six months ended to June 30, 2004
and 2003............................................................. F-26
Notes to Financial Statements.............................................. F-27
F-23
FSP Collins Crossing Corp.
Balance Sheet
(unaudited)
June 30, 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 34,232 34,224
-----------------------------------------------------------------------------------------------------------------------------------
38,254 38,246
Less accumulated depreciation 1,170 731
-----------------------------------------------------------------------------------------------------------------------------------
Real estate investments, net 37,084 37,515
Acquired real estate leases, net of accumulated amortization of $588 and $349, respectively 1,709 1,918
Acquired favorable real estate lease, net of accumulated amortization of $1,266 and $791, respectively 3,878 4,353
Cash and cash equivalents 4,622 5,066
Cash-funded reserves -- --
Restricted cash 115 115
Tenant rents receivable 11 25
Step rent receivable 445 279
Prepaid expenses and other assets 68 43
-----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 47,932 $ 49,314
===================================================================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses $ 1,198 $ 1,467
Dividends payable -- 1,331
Tenant security deposits 115 115
-----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,313 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 deficit and dividends in excess of earnings (4,481) (4,699)
-----------------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 46,619 46,401
-----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 47,932 $ 49,314
===================================================================================================================================
See accompanying notes to financial statements.
F-24
FSP Collins Crossing Corp.
Statement of Income
(unaudited)
For the For the
Three Months Six Months
Ended Ended
June 30, June 30,
------------------- -------------------
(in thousands, except shares and per share amounts) 2004 2003 2004 2003
===================================================================================================================================
Revenues:
Rental $1,747 $ 1,916 $3,449 $ 2,569
-----------------------------------------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 506 391 909 494
Real estate taxes and insurance 238 255 478 341
Depreciation and amortization 321 266 648 354
Interest -- 3,591 -- 3,728
-----------------------------------------------------------------------------------------------------------------------------------
Total expenses 1,065 4,503 2,035 4,917
-----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before interest income 682 (2,587) 1,414 (2,348)
Interest income 18 2 38 5
-----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) before common dividends 700 (2,585) 1,452 (2,343)
Dividends paid to common shareholders -- 153 -- 153
-----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) attributable to preferred shareholders $ 700 $(2,738) $1,452 $(2,496)
===================================================================================================================================
Weighted average number of preferred shares outstanding,
basic and diluted 555 555 555 555
===================================================================================================================================
Net income (loss) per preferred share, basic and diluted $1,261 $(4,933) $2,616 $(4,497)
===================================================================================================================================
See accompanying notes to financial statements
F-25
FSP Collins Crossing Corp.
Statements of Cash Flows
(unaudited)
For the Six Months Ended
(in thousands) June 30, 2004 June 30, 2003
===============================================================================================================
Cash flows from operating activities:
Net Income (loss) $ 1,452 $ (2,343)
Adjustments to reconcile net income (loss) to net cash provided by
(used for) operating activities:
Depreciation and amortization 648 354
Amortization of favorable lease 475 --
Changes in operating assets and liabilities:
Restricted cash -- (115)
Tenant rent receivables 14 (5)
Step rent receivable (166) (111)
Prepaid expenses and other assets (25) (67)
Accounts payable and accrued expenses (1,599) 626
Tenant security deposits -- 115
---------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 799 (1,546)
---------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets (9) (45,379)
Purchase of acquired real estate leases -- --
---------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (9) (45,379)
---------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock -- 55,839
Syndication costs -- (4,738)
Dividends to stockholders (1,234) (209)
Proceeds from long-term debt -- 45,175
Principal payments on long-term debt -- (45,175)
---------------------------------------------------------------------------------------------------------------
Net cash (used for) provided by financing activities (1,234) 50,892
---------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (444) 3,967
Cash and cash equivalents, beginning of period 5,066 --
---------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 4,622 $ 3,967
===============================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ -- $ 3,728
See accompanying notes to financial statements.
F-26
FSP Collins Crossing Corp.
Notes to Financial Statements
(unaudited)
1. Organization and Basis of Presentation
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.
BASIS OF PRESENTATION
The accompanying interim financial statements are unaudited; however, the
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and in conjunction with the rules and regulations of the Securities
and Exchange Commission. Accordingly, they do not include all of the disclosures
required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of management, all
adjustments (consisting solely of normal recurring matters) necessary for a fair
presentation of the financial statements for these interim periods have been
included.
Certain prior-year balances have been reclassified in order to conform to the
current-year presentation.
These financial statements should be read in conjunction with the Company's
financial statements and notes thereto for its fiscal year ended December 31,
2003
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.
2. Net Income Per Share
Basic net income per preferred share is computed by dividing net income
attributed to preferred shareholders 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 June 30, 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 has elected to be taxed as a Real Estate Investment Trust ("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.
F-27
FSP Collins Crossing Corp.
Notes to Financial Statements
(unaudited)
4. Cash Available for Distribution
The Company evaluates its performance based on Cash Available for Distribution
("CAD") as management believes that CAD represents the most accurate measure of
the Company's activity. CAD is the basis for distributions paid to equity
holders.
The Company defines CAD as: net income as computed in accordance with accounting
principles generally accepted in the United States of America ("GAAP"); plus
certain non-cash items included in the computation of net income (depreciation
and amortization, and straight line rent adjustments); plus funds raised by the
issuance of shares; plus the net proceeds from the sale of land; less purchases
of real estate assets (including acquired leases): property and equipment
("Capital Expenditures"), payments for deferred leasing commissions and payments
for deferred lease origination costs; plus (less) proceeds from (payments to)
cash reserves established at the acquisition date of the property (cash-funded
reserves). Depreciation and amortization and straight-line rents are an
adjustment to CAD, as these are non-cash items included in net income. Capital
Expenditures, payments of deferred leasing commissions and payments for deferred
lease origination costs and the proceeds from (payments to) the funded reserve
are an adjustment to CAD, as they represent cash items not reflected in income.
CAD should not be considered as an alternative to net income (determined in
accordance with GAAP), as an indicator of the Company's financial performance,
nor as an alternative to cash flows from operating activities (determined in
accordance with GAAP), nor as a measure of the Company's liquidity, nor is it
necessarily indicative of sufficient cash flow to fund all of the Company's
needs. Other real estate companies may define CAD in a different manner. It is
at the Company's discretion to retain a portion of CAD for operational needs.
Management believes in order to facilitate a clear understanding of the results
of the Company, CAD should be examined in connection with net income and cash
flows from operating, investing and financing activities in the financial
statements.
The calculation of CAD is shown in the following table:
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) 2004 2003 2004 2003
================================================================================
Net income $ 700 $ (2,585) $ 1,452 $ (2,343)
Depreciation and amortization 321 266 648 354
Amortization of favorable leases 218 -- 475 --
Straight line rent (83) (83) (167) (111)
Proceeds from offering of shares, net -- 29,880 -- 51,100
Purchase of land and building (9) (192) (9) (45,379)
Establish funded reserve -- (2,130) -- (2,130)
---------------------------------------
Cash Available for Distribution $ 1,147 $ 25,156 $ 2,399 $ 1,491
================================================================================
The Company's cash distributions for the period ended June 30, 2004 are
summarized as follows:
(in thousands)
Quarter Paid 2004 2003
================================================================
First Quarter $1,331 $ --
Second Quarter 1,234 209
Third Quarter -- 1,036
Fourth Quarter -- 1,147
----------------------------------------------------------------
Dividends Paid $2,565 $2,392
================================================================
Cash distributions are declared and paid based on the total outstanding shares
as of the record date and are typically paid in the quarter following the
quarter that CAD is generated.
F-28
FSP Collins Crossing Corp.
Notes to Financial Statements
(unaudited)
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. Fees incurred
under the agreement were $18,654 and $18,714 for the three months ended June 30,
2004 and 2003, respectively and $37,551 and $24,970 for the six months ended
June 30, 2004 and 2003, respectively.
F-29
FSP Collins Crossing Corp.
Financial Statements
December 31, 2003
Table of Contents
Page
----
Financial Statements
Independent Auditor's Report............................................. F-31
Balance Sheet as of December 31, 2003.................................... F-32
Statement of Operations for the period January 16, 2003
(date of inception) to December 31, 2003........................... F-33
Statement of Changes in Stockholders' Equity for the period
January 16, 2003 (date of inception) to December 31, 2003.......... F-34
Statement of Cash Flows for the period January 16, 2003
(date of inception) to December 31, 2003........................... F-35
Notes to the Financial Statements........................................ F-36
F-30
[LETTERHEAD OF BRAVER AND COMPANY, P.C.]
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
FSP Collins Crossing Corp.
We have audited the accompanying balance sheet of FSP Collins Crossing Corp. as
of December 31, 2003, and the related statements of operations, changes in
stockholders' equity and cash flows for 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FSP Collins Crossing Corp. as
of December 31, 2003, and the results of its operations and its cash flows for
the initial period then ended in conformity with accounting principles generally
accepted in the United States of America.
/s/ Braver and Company, P.C.
Newton, Massachusetts
January 23, 2004
F-31
FSP Collins Crossing Corp.
Balance Sheet
December 31,
(in thousands, except shares and par value amounts) 2003
================================================================================================================
Assets:
Real estate investments, at cost:
Land $ 4,022
Buildings and improvements 34,224
----------------------------------------------------------------------------------------------------------------
38,246
Less accumulated depreciation 731
----------------------------------------------------------------------------------------------------------------
Real estate investments, net 37,515
Acquired real estate leases, net of accumulated amortization of $349 1,918
Acquired favorable real estate lease, net of accumulated amortization of $791 4,353
Cash and cash equivalents 2,942
Cash-funded reserves 2,124
Restricted cash 115
Tenant rents receivable 25
Step rent receivable 279
Prepaid expenses and other assets 43
----------------------------------------------------------------------------------------------------------------
Total assets $ 49,314
================================================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses $ 1,467
Dividends payable 1,331
Tenant security deposits 115
----------------------------------------------------------------------------------------------------------------
Total liabilities 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
Retained deficit and dividends in excess of earnings (4,699)
----------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 46,401
----------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 49,314
================================================================================================================
See accompanying notes to financial statements.
F-32
FSP Collins Crossing Corp.
Statement of Operations
For the Period
January 16, 2003
(date of inception) to
(in thousands, except shares and per share amounts) December 31, 2003
================================================================================
Revenue:
Rental $ 5,672
--------------------------------------------------------------------------------
Total revenue 5,672
--------------------------------------------------------------------------------
Expenses:
Rental operating expenses 1,399
Real estate taxes and insurance 760
Depreciation and amortization 1,080
Interest 3,444
--------------------------------------------------------------------------------
Total expenses 6,683
--------------------------------------------------------------------------------
Net loss before interest income (1,011)
Interest income 35
--------------------------------------------------------------------------------
Net loss before common dividends (976)
Dividends paid to common shareholder 373
--------------------------------------------------------------------------------
Net loss attributable to preferred shareholders $(1,349)
================================================================================
Weighted average number of preferred shares outstanding,
basic and diluted 555
================================================================================
Net loss per preferred share, basic and diluted $(2,431)
================================================================================
See accompanying notes to financial statements.
F-33
FSP Collins Crossing Corp.
Statement of Changes in Stockholders' Equity
For the Period January 16, 2003
(date of inception) to December 31, 2003
Retained Deficit
Additional and Dividends Total
Preferred Common Paid in in Excess of Stockholders'
(in thousands, except shares) Stock Stock Capital Earnings Equity
===========================================================================================================
Private offering of 555 shares, net $ -- $ -- $ 51,100 $ -- $ 51,100
Dividends -- -- -- (3,723) (3,723)
Net loss -- -- -- (976) (976)
-----------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 $ -- $ -- $ 51,100 $ (4,699) $ 46,401
===========================================================================================================
See accompanying notes to financial statements.
F-34
FSP Collins Crossing Corp.
Statement of Cash Flows
For the Period
January 16, 2003
(date of inception) to
(in thousands) December 31, 2003
================================================================================
Cash flows from operating activities:
Net loss $ (976)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 1,080
Amortization of favorable lease 791
Changes in operating assets and liabilities:
Cash-funded reserve (2,124)
Restricted cash (115)
Tenant rents receivable (25)
Step rent receivable (279)
Prepaid expenses and other assets (43)
Accounts payable and accrued expenses 1,467
Tenant security deposits 115
-------------------------------------------------------------------------------
Net cash used for operating activities (109)
-------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets (38,246)
Purchase of acquired real estate lease (2,267)
Purchase of acquired favorable real estate lease (5,144)
-------------------------------------------------------------------------------
Net cash used for investing activities (45,657)
-------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock 55,510
Syndication costs (4,410)
Dividends to stockholders (2,392)
Proceeds from long-term debt 45,175
Principal payments on long-term debt (45,175)
-------------------------------------------------------------------------------
Net cash provided by financing activities 48,708
-------------------------------------------------------------------------------
Net increase in cash and cash equivalents 2,942
Cash and cash equivalents, beginning of period --
-------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 2,942
================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 3,444
Disclosure of non-cash financing activities:
Dividends declared but not paid $ 1,331
See accompanying notes to financial statements.
F-35
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.
2. Summary of Significant Accounting Policies
BASIS OF PRESENTATION
The results of operations from inception to date are not necessarily indicative
of the results to be obtained for other interim periods or for the full fiscal
year.
ESTIMATES AND ASSUMPTIONS
The Company prepares its financial statements and related notes in conformity
with accounting principles generally accepted in the United States of America
("GAAP"). These principles require management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
REAL ESTATE AND DEPRECIATION
Real estate assets are stated at the lower of cost or fair value, as
appropriate, less accumulated depreciation.
Costs related to property acquisition and improvements are capitalized. Typical
capital items include new roofs, site improvements, various exterior building
improvements and major interior renovations. Funding for capital 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-36
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 Sheet:
(in thousands)
--------------
Price per Offering Memorandum $45,175
Plus: Acquisition fees 277
Plus: Other acquisition costs 205
----------------------------------------------------
Total Acquisition Costs $45,657
====================================================
These costs are reported in the Company's Balance Sheet as follows:
Land $ 4,022
Building 34,224
Acquired real estate leases 2,267
Acquired favorable real estate lease 5,144
----------------------------------------------------
Total reported on Balance Sheet $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, 2003, no
such indicators of impairment were identified.
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 SFAS No. 141 "Business Combinations"
("SFAS 141"), 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 $349,000 is included in Depreciation and
Amortization in the Company's Statement of Operations for the period ended
December 31, 2003.
Acquired real estate lease costs included in the purchase price of the property
were $2,267,000 and are being amortized over the period of five years in respect
of the leases assumed. Detail of the acquired real estate lease costs as of
December 31, 2003:
(in thousands)
--------------
Cost $ 2,267
Accumulated amortization 349
--------
Book value $ 1,918
========
The estimated annual amortization expense for the five years succeeding December
31, 2003 are as follows:
(in thousands)
--------------
2004 $ 418
2005 $ 418
2006 $ 418
2007 $ 418
2008 $ 244
F-37
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 $791,000 is shown
as a reduction of rental income in the Company's Statement of Operations for the
period ended December 31, 2003.
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, 2003:
(in thousands)
--------------
Cost $ 5,144
Accumulated amortization 791
--------
Book value $ 4,353
========
The estimated annual amortization expense for the five years succeeding December
31, 2003 are as follows:
(in thousands)
--------------
2004 $ 950
2005 $ 950
2005 $ 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
Statement of Financial Accounting Standards 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, 2003.
F-38
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 period ended December 31, 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:
INET 80%
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
$279,000 at December 31, 2003.
TENANT RENTS RECEIVABLE
Tenant rents 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 Sheet.
F-39
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.
Period Ended
December, 31
(in thousands) 2003
=============================================================
Income from leases $ 5,559
Straight-line rent adjustment 279
Reimbursable expenses 625
Amortization of favorable lease (791)
-------------------------------------------------------------
Total $ 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 REIT under the Internal Revenue Code of
1986, as amended. As a REIT, the Company generally is entitled to a tax
deduction for dividends paid to its shareholders, thereby effectively subjecting
the distributed net income of the Company to taxation at the shareholder level
only. The Company must comply with a variety of restrictions to maintain its
status as a REIT. These restrictions include the type of income it can earn, the
type of assets it can hold, the number of shareholders it can have and the
concentration of their ownership, and the amount of the Company's taxable income
that must be distributed annually.
NET INCOME PER SHARE
The Company follows Statement of Financial Accounting Standards No. 128
"Earnings per Share", which specifies the computation, presentation and
disclosure requirements for the Company's net income per share. Basic net income
per share is computed by dividing net income by the weighted average number of
shares outstanding during the period. Diluted net income per share reflects the
potential dilution that could occur if securities or other contracts to issue
shares were exercised or converted into shares. There were no potential dilutive
shares outstanding at December 31, 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. Recent Accounting Standards
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities". This statement was effective January 1, 2003. SFAS
No. 146 replaces current accounting literature and requires the recognition of
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. The Company does
not anticipate that the adoption of this statement will have a material effect
on the Company's financial position, results of operations and cash flows.
F-40
FSP Collins Crossing Corp.
Notes to Financial Statements
4. Income Taxes
The Company files as a REIT under Sections 856-860 of the Internal Revenue Code
of 1986, as amended. In order to qualify as a REIT, the Company is required to
distribute at least 90% of its taxable income to shareholders and to meet
certain asset and income tests as well as certain other requirements. The
Company will generally not be liable for federal income taxes, provided it
satisfies their requirements. Even as a qualified REIT, the Company is subject
to certain state and local taxes on its income and property.
At December 31, 2003, the Company's net tax basis of its real estate assets was
$41,634,000.
The following schedule reconciles GAAP net income to taxable income subject to
dividend requirements:
Period Ended
December 31,
(in thousands) 2003
====================================================================
GAAP net loss $ (976)
Add: Book depreciation and amortization 1,080
Amortization for favorable lease 791
Deferred rent 481
Less: Tax depreciation and amortization (812)
Straight-line rents (279)
--------------------------------------------------------------------
Taxable income subject to dividend requirement $ 285
====================================================================
The following schedule reconciles cash dividends paid to the dividends paid
deduction:
Period Ended
December 31,
(in thousands) 2003
====================================================================
Cash dividends paid $ 2,392
Less: Return of Capital (2,107)
--------------------------------------------------------------------
Dividends paid deduction $ 285
====================================================================
F-41
FSP Collins Crossing Corp.
Notes to Financial Statements
5. Cash Available for Distribution
The Company evaluates its performance based on Cash Available for Distribution
("CAD") as management believes that CAD represents the most accurate measure of
the Company's activity. CAD is the basis for distributions paid to equity
holders.
The Company defines CAD as: net income as computed in accordance with accounting
principles generally accepted in the United States of America ("GAAP"); plus
certain non-cash items included in the computation of net income (depreciation
and amortization, and straight line rent adjustments); plus funds raised by the
issuance of shares; plus the net proceeds from the sale of land; less purchases
of real estate assets (including acquired leases): property and equipment
("Capital Expenditures"), payments for deferred leasing commissions and payments
for deferred lease origination costs; plus (less) proceeds from (payments to)
cash reserves established at the acquisition date of the property (cash-funded
reserves). Depreciation and amortization and straight-line rents are an
adjustment to CAD, as these are non-cash items included in net income. Capital
Expenditures, payments of deferred leasing commissions and payments for deferred
lease origination costs and the proceeds from (payments to) the funded reserve
are an adjustment to CAD, as they represent cash items not reflected in income.
CAD should not be considered as an alternative to net income (determined in
accordance with GAAP), as an indicator of the Company's financial performance,
nor as an alternative to cash flows from operating activities (determined in
accordance with GAAP), nor as a measure of the Company's liquidity, nor is it
necessarily indicative of sufficient cash flow to fund all of the Company's
needs. Other real estate companies may define CAD in a different manner. It is
at the Company's discretion to retain a portion of CAD for operational needs.
Management believes in order to facilitate a clear understanding of the results
of the Company, CAD should be examined in connection with net income and cash
flows from operating, investing and financing activities in the financial
statements.
The calculation of CAD is shown in the following table:
Period ended
December 31,
(in thousands) 2003
====================================================================
Net loss $ (976)
Depreciation and amortization 1,080
Amortization of favorable lease 791
Straight line rent (279)
Proceeds from offering of shares, net 51,100
Purchase of land and building (38,246)
Establish funded reserve (2,124)
Purchase of acquired real estate leases (2,267)
Purchase of acquired favorable real estate leases (5,144)
--------------------------------------------------------------------
Cash Available for Distribution $ 3,935
====================================================================
The Company's cash distributions for the period ended December 31, 2003 are
summarized as follows:
(in thousands)
Total Cash
Quarter Paid Dividends
========================================================
Second Quarter of 2003 $ 209
Third Quarter of 2003 1,036
Fourth Quarter of 2003 1,147
--------------------------------------------------------
Dividends Paid in 2003 2,392
First Quarter of 2004 1,331
--------------------------------------------------------
Dividends Declared in 2003 (1) $ 3,723
========================================================
(1) The Company declared a dividend payable to stockholders of record as of
December 31, 2003.
Cash distributions are declared and paid based on the total outstanding shares
as of the record date and are typically paid in the quarter following the
quarter that CAD is generated.
F-42
FSP Collins Crossing Corp.
Notes to Financial Statements
6. Capital Stock
PREFERRED STOCK
Generally, each holder of Shares of Preferred Stock is entitled to receive
ratably all dividends, if any, declared by the Board of Directors out of funds
legally available. The right to receive dividends shall be non-cumulative, and
no right to dividends shall accrue by reason of the fact that no dividend has
been declared in any prior year. Each holder of Shares will be entitled to
receive, to the extent that funds are available therefore, $100,000 per Share,
before any payment to the holder of Common Stock, out of distributions to
stockholders upon liquidation, dissolution or the winding up of the Company; the
balance of any such funds available for distribution will be distributed among
the holders of Shares and the holder of Common Stock, pro rata based on the
number of shares held by each; provided, however, that for these purposes, one
share of Common Stock will be deemed to equal one-tenth of a share of Preferred
Stock.
In addition to certain voting rights provided in the corporate agreements, the
holder of Shares, acting by consent of at least 51%, shall have the further
right to approve or disapprove a proposed sale of the Property, the merger of
the Company with any other entity and amendments to the corporate charter. A
vote of the holders of 66.67% of the Shares is required for the issue of any
additional shares of capital stock. Holders of Shares have no redemption or
conversion rights.
COMMON STOCK
Franklin Street Properties Corp. ("FSP"), is the sole holder of the Company's
Common Stock. FSP has the right, as one class together with the holders of
Preferred Stock, to vote to elect the directors of the Company and to vote on
all matters except those voted by the holders of Shares of Preferred Stock.
Subsequent to the completion of the offering of the preferred shares the holders
of common shares are not entitled to receive any income, nor shall the Company
declare or pay any cash dividends on shares of Common Stock.
7. Related Party Transactions
The Company executed a management agreement with FSP Property Management LLC, an
affiliate of FSP, that provides for a management fee equal to 1% of collected
revenues and is cancelable with 30 days notice by either party. For the period
ended December 31, 2003, fees incurred under the agreement were $62,000.
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 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 $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 dividend of $373,000 to the common shareholder relating to
earnings of the Company prior to the completion of the offering of preferred
shares.
F-43
FSP Collins Crossing Corp.
Notes to Financial Statements
8. Commitments and Contingencies
The Company, as lessor, has minimum future rentals due under non-cancelable
operating leases as follows:
Year Ending
(in thousands) December 31, Amount
--------------- -------------
2004 $ 6,701
2005 6,947
2006 6,036
2007 5,811
2008 5,811
Thereafter 8,688
-------------
$ 39,994
=============
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-44
FSP Montague Business Center Corp.
Financial Statements
June 30, 2004
Table of Contents
Page
----
Financial Statements (unaudited)
Balance Sheets as of June 30, 2004 and December 31, 2003.................. F-46
Statements of Income for the three and six months ended June 30, 2004
and 2003............................................................ F-47
Statements of Cash Flows for the six months ended June 30, 2004
and 2003............................................................ F-48
Notes to Financial Statements............................................. F-49
F-45
FSP Montague Business Center Corp.
Balance Sheet
(unaudited)
June 30, 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 493 359
----------------------------------------------------------------------------------------------
Real estate investments, net 20,506 20,640
Acquired real estate leases, net of accumulated amortization
of $197 and $143 268 322
Acquired favorable real estate lease, net accumulated
amortization of $2,325 and $1,744 2,907 3,488
Cash and cash equivalents 3,612 3,594
Step rent receivable 459 392
Prepaid expenses and other assets 32 14
----------------------------------------------------------------------------------------------
Total assets $ 27,784 $ 28,450
==============================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses $ 401 $ 411
Dividends payable -- 960
----------------------------------------------------------------------------------------------
Total liabilities 401 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 deficit and dividends in excess of earnings (3,269) (3,573)
----------------------------------------------------------------------------------------------
Total Stockholders' Equity 27,383 27,079
----------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 27,784 $ 28,450
==============================================================================================
See accompanying notes to financial statements.
F-46
FSP Montague Business Center Corp.
Statement of Income
(unaudited)
For the For the
Three Months Six Months
Ended Ended
June 30, June 30,
-------------------- --------------------
(in thousands, except shares and per share amounts) 2004 2003 2004 2003
==============================================================================================================
Revenues:
Rental $849 $662 $1,715 $1,848
--------------------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 75 91 130 174
Real estate taxes and insurance 70 73 140 173
Depreciation and amortization 94 83 188 184
==============================================================================================================
Total expenses 239 247 458 531
--------------------------------------------------------------------------------------------------------------
Income (loss) before interest income 610 415 1,257 1,317
Interest income 14 6 29 19
--------------------------------------------------------------------------------------------------------------
Net income (loss) before common dividends 624 421 1,286 1,336
Dividends paid to common shareholders -- -- -- --
--------------------------------------------------------------------------------------------------------------
Net income (loss) attributable to preferred shareholders $624 $421 $1,286 $1,336
==============================================================================================================
Weighted average number of preferred shares outstanding,
basic and diluted 334 334 334 334
==============================================================================================================
Net income (loss) per preferred share, basic and diluted $1,868 $1,260 $3,850 $4,000
==============================================================================================================
See accompanying notes to financial statements.
F-47
FSP Montague Business Center Corp.
Statements of Cash Flows
(unaudited)
For the Six Months Ended
(in thousands) June 30, 2004 June 30, 2003
=======================================================================================================
Cash flows from operating activities:
Net Income $1,286 $1,336
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 188 184
Amortization of favorable leases 581 581
Changes in operating assets and liabilities:
Step rent receivable (67) (163)
Prepaid expenses and other assets (19) (7)
Accounts payable and accrued expenses (970) (930)
-------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 999 1,001
-------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets -- --
Purchase of acquired real estate leases -- --
-------------------------------------------------------------------------------------------------------
Net cash used for investing activities -- --
-------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock -- --
Syndication costs -- --
Dividends to stockholders (980) (914)
Proceeds from long-term debt -- --
Principal payments on long-term debt -- --
-------------------------------------------------------------------------------------------------------
Net cash (used for) provided by financing activities (980) (914)
-------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 18 87
Cash and cash equivalents, beginning of period 3,594 3,330
-------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $3,612 $3,417
=======================================================================================================
See accompanying notes to financial statements.
F-48
FSP Montague Business Center Corp.
Notes to Financial Statements
(unaudited)
1. Organization and Basis of Presentation
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.
BASIS OF PRESENTATION
The accompanying interim financial statements are unaudited; however, the
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and in conjunction with the rules and regulations of the Securities
and Exchange Commission. Accordingly, they do not include all of the disclosures
required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of management, all
adjustments (consisting solely of normal recurring matters) necessary for a fair
presentation of the financial statements for these interim periods have been
included.
Certain prior-year balances have been reclassified in order to conform to the
current-year presentation.
These financial statements should be read in conjunction with the Company's
financial statements and notes thereto for its fiscal year ended December 31,
2003.
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.
2. 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
June 30, 2004. 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 has elected to be taxed as a Real Estate Investment Trust ("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
F-49
FSP Montague Business Center Corp.
Notes to Financial Statements
(unaudited)
4. Cash Available for Distribution
The Company evaluates its performance based on Cash Available for Distribution
("CAD") as management believes that CAD represents the most accurate measure of
the Company's activity. CAD is the basis for distributions paid to equity
holders.
The Company defines CAD as: net income as computed in accordance with accounting
principles generally accepted in the United States of America ("GAAP"); plus
certain non-cash items included in the computation of net income (depreciation
and amortization and straight line rent adjustments); plus funds raised by the
issuance of shares; plus the net proceeds from the sale of land; less purchases
of real estate assets (including acquired leases) property and equipment
("Capital Expenditures"), and payments for deferred leasing commissions; plus
(less) proceeds from (payments to) cash reserves established at the acquisition
date of the property (cash-funded reserves). Depreciation and amortization and
straight-line rents are an adjustment to CAD, as these are non-cash items
included in net income. Capital Expenditures and payments of deferred leasing
commissions and payments for deferred lease origination costs and the proceeds
from (payments to) the funded reserve are an adjustment to CAD, as they
represent cash items not reflected in income.
CAD should not be considered as an alternative to net income (determined in
accordance with GAAP), as an indicator of the Company's financial performance,
nor as an alternative to cash flows from operating activities (determined in
accordance with GAAP), nor as a measure of the Company's liquidity, nor is it
necessarily indicative of sufficient cash flow to fund all of the Company's
needs. Other real estate companies may define CAD in a different manner. It is
at the Company's discretion to retain a portion of CAD for operational needs. We
believe that in order to facilitate a clear understanding of the results of the
Company, CAD should be examined in connection with net income and cash flows
from operating, investing and financing activities in the financial statements.
The calculation of Cash available for distribution is shown in the following
table:
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) 2004 2003 2004 2003
============================================================================
Net income $ 624 $ 421 $ 1,286 $ 1,336
Depreciation and amortization
and amortization of favorable lease 385 664 769 765
Straight line rent (17) (66) (67) (163)
---------------------------------------------------------------------------
Cash Available for Distribution $ 992 $ 1,019 $ 1,988 $ 1,938
============================================================================
The Company's cash distributions for the periods ended December 31, 2003 and
2002 are summarized as follows:
(in thousands)
Quarter Paid 2004 2003
==============================================================
First Quarter $ 960 $ 902
Second Quarter 980 914
Third Quarter 941
Fourth Quarter 957
--------------------------------------------------------------
Dividends Paid $ 1940 $ 3,714
==============================================================
Cash distributions are declared and paid based on the total outstanding shares
as of the record date and are typically paid in the quarter following the
quarter that CAD is generated.
F-50
FSP Montague Business Center Corp.
Notes to Financial Statements
(unaudited)
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. Fees incurred
under the agreement were $11,336 and $11,795 for the three months ended June 30,
2004 and 2003, respectively and $22,701 and $22,652 for the six months ended
June 30, 2004 and 2003 respectively.
F-51
FSP Montague Business Center Corp.
Financial Statements
December 31, 2003 and 2002
Table of Contents
Page
----
Financial Statements
Independent Auditor's Report............................................... F-53
Balance Sheets as of December 31, 2003 and 2002............................ F-54
Statements of Operations for the year ended December 31, 2003 and for the
period July 22, 2002 (date of inception) to December 31, 2002........ F-55
Statements of Changes in Stockholders' Equity for the year ended December
31, 2003 and for the period July 22, 2002 (date of inception)
to December 31, 2002................................................. F-56
Statements of Cash Flows for the year ended December 31, 2003 and for the
period July 22, 2002 (date of inception) to December 31, 2002........ F-57
Notes to the Financial Statements.......................................... F-58
F-52
[LETTERHEAD OF BRAVER AND COMPANY, P.C.]
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
FSP Montague Business Center Corp.
We have audited the accompanying balance sheets of FSP Montague Business Center
Corp. as of December 31, 2003, and 2002, and the related statements of
operations, changes in stockholders' equity and cash flows for the year ended
December 31, 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, 2003 and 2002, and the results of its operations and
its cash flows for the year ended December 31, 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
January 23, 2004
F-53
FSP Montague Business Center Corp.
Balance Sheets
December 31, December 31,
(in thousands, except shares and par value amounts) 2003 2002
========================================================================================================
Assets:
Real estate investments, at cost:
Land $ 10,500 $ 10,500
Buildings and improvements 10,499 10,144
--------------------------------------------------------------------------------------------------------
20,999 20,644
Less accumulated depreciation 359 98
--------------------------------------------------------------------------------------------------------
Real estate investments, net 20,640 20,546
Acquired real estate lease, net of accumulated amortization of $143 and $36 322 429
Acquired favorable real estate lease, net of accumulated amortization
of $1,744 and $581 3,488 4,651
Cash and cash equivalents 1,587 957
Cash-funded reserves 2,007 2,373
Step rent receivable 392 130
Prepaid expenses and other assets 14 25
--------------------------------------------------------------------------------------------------------
Total assets $ 28,450 $ 29,111
========================================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses $ 411 $ 28
Dividends payable 960 902
--------------------------------------------------------------------------------------------------------
Total liabilities 1,371 930
--------------------------------------------------------------------------------------------------------
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 deficit and dividends in excess of earnings (3,573) (2,471)
--------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 27,079 28,181
--------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 28,450 $ 29,111
========================================================================================================
See accompanying notes to financial statements.
F-54
FSP Montague Business Center Corp.
Statements of Operations
For the Period
For the July 22, 2002
Year Ended (date of inception) to
(in thousands, except shares and per share amounts) December 31, 2003 December 31, 2002
==============================================================================================================
Revenue:
Rental $3,645 $ 1,008
--------------------------------------------------------------------------------------------------------------
Total revenue 3,645 1,008
--------------------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 314 103
Real estate taxes and insurance 339 83
Depreciation and amortization 368 134
Interest -- 1,949
--------------------------------------------------------------------------------------------------------------
Total expenses 1,021 2,269
--------------------------------------------------------------------------------------------------------------
Net income (loss) before interest income 2,624 (1,261)
Interest income 45 12
--------------------------------------------------------------------------------------------------------------
Net income (loss) before common dividends 2,669 (1,249)
Dividends paid to common shareholders -- 32
--------------------------------------------------------------------------------------------------------------
Net income (loss) attributable to preferred shareholders $2,669 $(1,281)
==============================================================================================================
Weighted average number of preferred shares outstanding,
basic and diluted 334 334
==============================================================================================================
Net income (loss) per preferred share, basic and diluted $7,991 $(3,835)
==============================================================================================================
See accompanying notes to financial statements.
F-55
FSP Montague Business Center Corp.
Statements of Changes in Stockholders' Equity
For the Year ended December 31, 2003
and for the Period July 22, 2002
(date of inception) to December 31, 2002
Retained Deficit
Additional and Dividends Total
Preferred Common Paid in in Excess of Stockholders'
(in thousands, except shares) Stock Stock Capital Earnings Equity
=====================================================================================================================
Private offering of 334 shares, net $ -- $ -- $30,652 $ -- $ 30,652
Dividends -- -- -- (1,222) (1,222)
Net loss -- -- -- (1,249) (1,249)
---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 -- -- 30,652 (2,471) 28,181
Dividends -- -- -- (3,771) (3,771)
Net income -- -- -- 2,669 2,669
---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 $ -- $ -- $30,652 $(3,573) $ 27,079
=====================================================================================================================
See accompanying notes to financial statements.
F-56
FSP Montague Business Center Corp.
Statements of Cash Flows
For the Period
For the July 22, 2002
Year Ended (date of inception) to
December 31, December 31,
(in thousands) 2003 2002
=========================================================================================================
Cash flows from operating activities:
Net income (loss) $ 2,669 $ (1,249)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization 368 134
Amortization of favorable lease 1,164 581
Changes in operating assets and liabilities:
Cash-funded reserves 366 (2,373)
Step rent receivables (262) (130)
Prepaid expenses and other assets 11 (25)
Accounts payable and accrued expenses 383 28
---------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 4,699 (3,034)
---------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets (355) (20,644)
Purchase of acquired real estate leases -- (465)
Purchase of acquired favorable real estate leases -- (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)
Dividends to stockholders (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 (3,714) 30,332
---------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 630 957
Cash and cash equivalents, beginning of period 957 --
---------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 1,587 $ 957
=========================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ -- $ 1,949
Disclosure of non-cash financing activities:
Dividends declared but not paid $ 960 $ 902
See accompanying notes to financial statements.
F-57
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.
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
F-58
FSP Montague Business Center Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
REAL ESTATE AND DEPRECIATION (continued)
The following schedule reconciles the cost of the Property as shown in the
Offering Memorandum as to the amounts shown on the Company's Balance Sheets:
(in thousands)
--------------
Price per Offering Memorandum $ 26,000
Plus: Acquisition fees 167
Plus: Other acquisition costs 174
--------------------------------------------------
Total Acquisition Costs $ 26,341
==================================================
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, 2003 and
2002 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 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 life of the related lease. Amortization expense of
approximately $107,000 and $36,000 is included in depreciation and amortization
in the Company's Statements of Operations for the periods ended December 31,
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 three years succeeding
December 31, 2003 are as follows:
(in thousands)
--------------
2004 $ 107
2005 $ 107
2006 $ 107
F-59
FSP Montague Business Center Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
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 $1,164,000 and $581,000 is shown as a reduction of rental income in the
Company's Statements of Operations for the periods ended December 31, 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 expense for the three years succeeding
December 31, 2003 are as follows:
(in thousands)
--------------
2004 $ 1,163
2005 $ 1,163
2006 $ 1,162
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
Statement of Financial Accounting Standards ("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, 2003 and
2002.
CONCENTRATION OF CREDIT RISKS
Cash, cash equivalents and short-term investments are financial instruments that
potentially subject the Company to a concentration of credit risk. The Company
maintains its cash balances and short-term investments principally in one bank
which the Company believes to be creditworthy. The Company periodically assesses
the financial condition of the bank and believes that the risk of loss is
minimal. Cash balances held with various financial institutions frequently
exceed the insurance limit of $100,000 provided by the Federal Deposit Insurance
Corporation.
For the periods ended December 31, 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.
F-60
FSP Montague Business Center Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
STEP RENT RECEIVABLE
Certain leases provide for fixed increases over the life of the lease. Rental
revenue is recognized on the straight-line basis over the related lease term;
however, billings by the Company are based on required minimum rentals in
accordance with the lease agreements. Step rent receivable which is the
cumulative revenue recognized in excess of amounts billed by the Company, was
$392,000 and $130,000 at December 31, 2003 and 2002, 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 Sheet.
REVENUE RECOGNITION
The Company has retained substantially all of the risks and benefits of
ownership of the Company's commercial property and accounts for its 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 Period Ended
December, 31 December, 31
(in thousands) 2003 2002
==========================================================
Income from leases $ 3,789 $ 1,269
Straight-line rent adjustment 262 130
Reimbursable expenses 758 190
Amortization of acquired
favorable real estate lease (1,164) (581)
----------------------------------------------------------
Total $ 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 Statement of Financial Accounting Standards No. 128
"Earnings per Share", which specifies the computation, presentation and
disclosure requirements for the Company's net income per share. Basic net income
per 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, 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.
F-61
FSP Montague Business Center Corp.
Notes to Financial Statements.
3. Recent Accounting Standards
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities". This statement was effective January 1, 2003. SFAS
No. 146 replaces current accounting literature and requires the recognition of
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. The adoption of
this statement did not have a material effect on the Company's financial
position, results of operations and cash flows.
4. Income Taxes
The Company files as a REIT under Sections 856-860 of the Internal Revenue Code
of 1986, as amended. In order to qualify as a REIT, the Company is required to
distribute at least 90% of its taxable income to shareholders and to meet
certain asset and income tests as well as certain other requirements. The
Company will generally not be liable for federal income taxes, provided it
satisfies 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, 2003, the Company's net tax basis of its real estate assets was
$26,136,000.
The following schedule reconciles net income (loss) to taxable income subject to
dividend requirements:
Year Ended Period Ended
December 31, December 31,
(in thousands) 2003 2002
=========================================================================
GAAP net income (loss) $ 2,669 $ (1,249)
Add: Book depreciation and amortization 368 134
Amortization of favorable lease 1,164 581
Deferred rent 379 --
Less: Tax depreciation and amortization (399) (142)
Straight-line rents (262) (130)
-------------------------------------------------------------------------
Taxable income (loss)(1) subject to a
dividend requirement $ 3,919 $ (806)
=========================================================================
(1) A tax loss is not subject to a dividend requirement.
The following schedule reconciles cash dividends paid to the dividends paid
deduction:
Year Ended Period Ended
December 31, December 31,
(in thousands) 2003 2002
=========================================================================
Cash dividends paid: $ 3,714 $ 320
Less: Return of Capital -- (320)
-------------------------------------------------------------------------
Dividends paid deduction $ 3,714 $ --
=========================================================================
F-62
FSP Montague Business Center Corp.
Notes to Financial Statements
5. Cash Available for Distribution
The Company evaluates its performance based on Cash Available for Distribution
("CAD") as management believes that CAD represents the most accurate measure of
the Company's activity. CAD is the basis for distributions paid to equity
holders.
The Company defines CAD as: net income as computed in accordance with accounting
principles generally accepted in the United States of America ("GAAP"); plus
certain non-cash items included in the computation of net income (depreciation
and amortization and straight line rent adjustments); plus funds raised by the
issuance of shares; plus the net proceeds from the sale of land; less purchases
of real estate assets (including acquired leases) property and equipment
("Capital Expenditures"), and payments for deferred leasing commissions; plus
(less) proceeds from (payments to) cash reserves established at the acquisition
date of the property (cash-funded reserves). Depreciation and amortization and
straight-line rents are an adjustment to CAD, as these are non-cash items
included in net income. Capital Expenditures, payments of deferred leasing
commissions, payments for deferred lease origination costs and the proceeds from
(payments to) the funded reserve are an adjustment to CAD, as they represent
cash items not reflected in income.
CAD should not be considered as an alternative to net income (determined in
accordance with GAAP), as an indicator of the Company's financial performance,
nor as an alternative to cash flows from operating activities (determined in
accordance with GAAP), nor as a measure of the Company's liquidity, nor is it
necessarily indicative of sufficient cash flow to fund all of the Company's
needs. Other real estate companies may define CAD in a different manner. It is
at the Company's discretion to retain a portion of CAD for operational needs. We
believe that in order to facilitate a clear understanding of the results of the
Company, CAD should be examined in connection with net income and cash flows
from operating, investing and financing activities in the financial statements.
The calculation of Cash available for distribution is shown in the following
table:
Year Ended Period Ended
December 31, December 31,
(in thousands) 2003 2002
=========================================================================
Net income (loss) $ 2,669 $ (1,249)
Depreciation, amortization and
amortization of favorable lease 1,532 715
Straight line rent (262) (130)
Proceeds from offering of shares, net -- 30,652
Purchase of land and building and
improvements (355) (20,644)
Proceeds from (establish) funded reserve 366 (2,373)
Purchase of acquired real estate lease -- (465)
Purchase of acquired favorable real
estate lease -- (5,232)
-------------------------------------------------------------------------
Cash Available for Distribution $ 3,950 $ 1,274
=========================================================================
F-63
FSP Montague Business Center Corp.
Notes to Financial Statements
5. Cash Available for Distribution (continued)
The Company's cash distributions for the periods ended December 31, 2003 and
2002 are summarized as follows:
(in thousands)
--------------
Quarter Paid 2003 2002
==================================================
First Quarter $ 902 $ --
Second Quarter 914 --
Third Quarter 941 --
Fourth Quarter 957 320
--------------------------------------------------
Dividends Paid $ 3,714 $ 320
==================================================
Cash distributions are declared and paid based on the total outstanding shares
as of the record date and are typically paid in the quarter following the
quarter that CAD is generated.
6. Capital Stock
PREFERRED STOCK
Generally, each holder of Shares of Preferred Stock is entitled to receive
ratably all 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 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.
7. Related Party Transactions
The Company executed a management agreement with FSP Property Management LLC, an
affiliate of FSP, that provides for a management fee equal to 1% of collected
revenues and is cancelable with 30 days notice by either party. For the years
ended December 31, 2003 and 2002, fees incurred under the agreement were $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.
F-64
FSP Montague Business Center Corp.
Notes to Financial Statements
7. Related Party Transactions (continued)
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 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 to the common shareholder relating to
earnings of the Company prior to the completion of the offering of preferred
shares.
8. Commitments and Contingencies
The Company, as lessor, has minimum future rentals due under a non-cancelable
operating lease as follows:
Year Ending
(in thousands) December 31, Amount
-------------- ------------ ------
2004 $ 3,982
2005 4,174
2006 4,390
-----------
$ 12,546
===========
In addition, the lessee is liable for real estate taxes and certain operating
expenses of the Property.
F-65
FSP Royal Ridge Corp.
Financial Statements
June 30, 2004
Table of Contents
Page
----
Financial Statements (unaudited)
Balance Sheet as of June 30, 2004 and December 31, 2003................... F-67
Statement of Income for the three and six months ended June 30, 2004...... F-68
Statement of Cash Flows for the six months ended June 30, 2004 and 2003... F-69
Notes to Financial Statements............................................. F-70
F-66
FSP Royal Ridge Corp.
Balance Sheet
(unaudited)
June 30, 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 16,224 16,224
------------------------------------------------------------------------------------------------------------------------
17,873 17,873
Less accumulated depreciation 584 375
------------------------------------------------------------------------------------------------------------------------
Real estate investments, net 17,289 17,498
Acquired real estate leases, net of accumulated amortization of $221 and $143 897 975
Acquired favorable real estate lease, net of accumulated net amortization of $659 and $426 2,674 2,907
Cash and cash equivalents 2,301 2,251
Restricted cash 571 571
Tenant rents receivable 14 --
Step rent receivable 1,005 954
Prepaid expenses and other assets 17 14
------------------------------------------------------------------------------------------------------------------------
Total assets $ 24,768 $ 25,170
========================================================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses $ 231 $ 240
Dividends payable -- 536
------------------------------------------------------------------------------------------------------------------------
Total liabilities 231 776
------------------------------------------------------------------------------------------------------------------------
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 deficit and dividends in excess of earnings (2,740) (2,883)
------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 24,537 24,394
------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 24,768 $ 25,170
========================================================================================================================
See accompanying notes to financial statements.
F-67
FSP Royal Ridge Corp.
Statement of Income
(unaudited)
For the For the
Three Months Six Months
Ended Ended
June 30, June 30,
----------------- --------------------
(in thousands, except shares and per share amounts) 2004 2003 2004 2003
==================================================================================================================
Revenues:
Rental $ 755 $ 352 $1,517 $ 590
------------------------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 210 181 406 274
Real Estate Taxes and insurance 78 88 164 147
Depreciation and amortization 143 129 286 237
Interest -- -- -- 1,889
==================================================================================================================
Total expenses 431 398 856 2,547
------------------------------------------------------------------------------------------------------------------
Income (loss) before interest income 324 (46) 661 (1,957)
Interest income 9 6 18 12
------------------------------------------------------------------------------------------------------------------
Net income (loss) before common dividends 333 (40) 679 (1,945)
Dividends paid to common shareholders -- 14 -- 14
------------------------------------------------------------------------------------------------------------------
Net income (loss) attributable to preferred shareholders $ 333 $ (54) $ 679 $(1,959)
==================================================================================================================
Weighted average number of preferred shares outstanding,
basic and diluted 297.5 297.5 297.5 297.5
==================================================================================================================
Net income per preferred share, basic and diluted $1,119 $ (182) $2,282 $(6,585)
==================================================================================================================
See accompanying notes to financial statements
F-68
FSP Royal Ridge Corp.
Statements of Cash Flows
(unaudited)
For the Six Months Ended
(in thousands) June 30, 2004 June 30, 2003
==========================================================================================================
Cash flows from operating activities:
Net Income (loss) $ 679 $ (1,945)
Adjustments to reconcile net income (loss) to net cash provided by
(used for) operating activities:
Depreciation and amortization 286 237
Amortization of favorable lease 233 --
Changes in operating assets and liabilities:
Restricted cash -- (571)
Tenant rent receivables (13) (2)
Step rent receivable (51) (437)
Prepaid expenses and other assets (4) (32)
Accounts payable and accrued expenses (545) 433
----------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 585 (2,317)
----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets -- (21,752)
Purchase of acquired real estate leases -- (423)
----------------------------------------------------------------------------------------------------------
Net cash used for investing activities -- (22,175)
----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock -- 29,760
Syndication costs -- (2,483)
Dividends to stockholders (535) (334)
Proceeds from long-term debt -- 24,250
Principal payments on long-term debt -- (24,250)
----------------------------------------------------------------------------------------------------------
Net cash (used for) provided by financing activities (535) 26,943
----------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 50 2,451
Cash and cash equivalents, beginning of period 2,251 --
----------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 2,301 $ 2,451
==========================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ -- $ 1,889
See accompanying notes to financial statements.
F-69
FSP Royal Ridge Corp.
Notes to Financial Statements
(unaudited)
1. Organization and Basis of Presentation
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.
BASIS OF PRESENTATION
The accompanying interim financial statements are unaudited; however, the
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and in conjunction with the rules and regulations of the Securities
and Exchange Commission. Accordingly, they do not include all of the disclosures
required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of management, all
adjustments (consisting solely of normal recurring matters) necessary for a fair
presentation of the financial statements for these interim periods have been
included.
Certain prior-year balances have been reclassified in order to conform to the
current-year presentation.
These financial statements should be read in conjunction with the Company's
financial statements and notes thereto for its fiscal year ended December 31,
2003.
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.
2. Net Income Per Share
Basic net income per preferred share is computed by dividing net income
attributed to preferred shareholders 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 June 30, 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 has elected to be taxed as a Real Estate Investment Trust ("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.
F-70
FSP Royal Ridge Corp.
Notes to Financial Statements
(unaudited)
4. Cash Available for Distribution
The Company evaluates its performance based on Cash Available for Distribution
("CAD") as management believes that CAD represents the most accurate measure of
the Company's activity. CAD is the basis for distributions paid to equity
holders.
The Company defines CAD as: net income as computed in accordance with accounting
principles generally accepted in the United States of America ("GAAP"); plus
certain non-cash items included in the computation of net income (depreciation
and amortization and straight line rent adjustments); plus funds raised by the
issuance of shares; plus the net proceeds from the sale of land; less purchases
of real estate assets (including acquired leases) property and equipment
("Capital Expenditures"), and payments for deferred leasing commissions; plus
(less) proceeds from (payments to) cash reserves established at the acquisition
date of the property ("Cash-funded reserves"). Depreciation and amortization and
straight-line rents are an adjustment to CAD, as these are non-cash items
included in net income. Capital Expenditures and payments for deferred leasing
commissions and the proceeds from (payments to) the funded reserve are an
adjustment to CAD, as they represent cash items not reflected in income.
CAD should not be considered as an alternative to net income (determined in
accordance with GAAP), as an indicator of the Company's financial performance,
nor as an alternative to cash flows from operating activities (determined in
accordance with GAAP), nor as a measure of the Company's liquidity, nor is it
necessarily indicative of sufficient cash flow to fund all of the Company's
needs. Other real estate companies may define CAD in a different manner. It is
at the Company's discretion to retain a portion of CAD for operational needs.
Management believes that in order to facilitate a clear understanding of the
results of the Company, CAD should be examined in connection with net income and
cash flows from operating, investing and financing activities in the financial
statements.
The calculation of cash available for distribution is shown in the following
table:
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands) 2004 2003 2004 2003
=====================================================================================
Net income $ 333 $ (54) $ 679 $ (1,959)
Depreciation and amortization 143 129 286 237
Amortization of favorable lease 116 -- 233 --
Straight line rent (24) (262) (51) (437)
Proceeds from offering of shares, net -- -- 27,277
Proceeds from (establish) funded reserve -- -- (56) (1,037)
Restricted cash for tenant improvements -- -- -- (571)
Purchase of land and building -- -- -- (15,538)
Tenant improvements -- (183) -- (2,335)
-------------------------------------------------------------------------------------
Cash Available for Distribution $ 568 $(370) $1,091 $ 5,637
=====================================================================================
The Company's cash distributions for the period ended June 30, 2004 and December
31, 2003 are summarized as follows:
(in thousands)
Quarter Paid 2004 2003
==============================================================
First Quarter $ 536 $ --
Second Quarter 535 334
Third Quarter -- 530
Fourth Quarter -- 525
--------------------------------------------------------------
Dividends Paid $ 1,071 $ 1,389
==============================================================
Cash distributions are declared and paid based on the total outstanding shares
as of the record date and are typically paid in the quarter following the
quarter that CAD is generated.
F-71
FSP Royal Ridge Corp.
Notes to Financial Statements
(unaudited)
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. Fees incurred
under the agreement were $8,650 and $614for the three months ended June 30, 2004
and 2003, respectively and $17,006 and $614 for the six months ended June 30,
2004 and 2003, respectively.
F-72
FSP Royal Ridge Corp.
Financial Statements
December 31, 2003
Table of Contents
Page
----
Financial Statements
Independent Auditor's Report.............................................. F-74
Balance Sheet as of December 31, 2003..................................... F-75
Statement of Operations for the year ended December 31, 2003.............. F-76
Statement of Changes in Stockholders' Equity for the year ended
December 31, 2003................................................... F-77
Statement of Cash Flows for the year ended December 31, 2003.............. F-78
Notes to the Financial Statements......................................... F-79
F-73
[LETTERHEAD OF BRAVER AND COMPANY, P.C.]
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
FSP Royal Ridge Corp.
We have audited the accompanying balance sheet of FSP Royal Ridge Corp. as of
December 31, 2003, and the related statements of operations, changes in
stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FSP Royal Ridge Corp. as of
December 31, 2003, and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States of America.
/s/ Braver and Company, P.C.
Newton, Massachusetts
January 23, 2004
F-74
FSP Royal Ridge Corp.
Balance Sheet
December 31,
(in thousands, except shares and par value amounts) 2003
=================================================================================================
Assets:
Real estate investments, at cost:
Land $ 1,649
Buildings and improvements 16,224
-------------------------------------------------------------------------------------------------
17,873
Less accumulated depreciation 375
-------------------------------------------------------------------------------------------------
Real estate investments, net 17,498
Acquired real estate leases, net of accumulated amortization of $143 975
Acquired favorable real estate leases, net of accumulated amortization of $426 2,907
Cash and cash equivalents 1,214
Cash-funded reserves 1,037
Restricted cash 571
Step rent receivable 954
Prepaid expenses and other assets 14
-------------------------------------------------------------------------------------------------
Total assets $ 25,170
=================================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses $ 240
Dividends payable 536
-------------------------------------------------------------------------------------------------
Total liabilities 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
Retained deficit and dividends in excess of earnings (2,883)
-------------------------------------------------------------------------------------------------
Total Stockholders' Equity 24,394
-------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 25,170
=================================================================================================
See accompanying notes to financial statements.
F-75
FSP Royal Ridge Corp.
Statement of Operations
For the
Year Ended
(in thousands, except shares and per share amounts) December 31, 2003
================================================================================
Revenue:
Rental $ 2,264
--------------------------------------------------------------------------------
Total revenue 2,264
--------------------------------------------------------------------------------
Expenses:
Rental operating expenses 746
Real estate taxes and insurance 255
Depreciation and amortization 518
Interest 1,731
--------------------------------------------------------------------------------
Total expenses 3,250
--------------------------------------------------------------------------------
Loss before interest income (986)
Interest income 28
--------------------------------------------------------------------------------
Net loss before common dividends (958)
Dividends paid to common shareholder 14
--------------------------------------------------------------------------------
Net loss attributable to preferred shareholders $ (972)
================================================================================
Weighted average number of preferred shares outstanding,
basic and diluted 297.5
================================================================================
Net loss per preferred share, basic and diluted $(3,267)
================================================================================
See accompanying notes to financial statements.
F-76
FSP Royal Ridge Corp.
Statement of Changes in Stockholders' Equity
For the year ended December 31, 2003
Retained Deficit
Additional and Dividends Total
Preferred Common Paid in in Excess of Stockholders'
(in thousands, except shares) Stock Stock Capital Earnings Equity
============================================================================================================
Private offering of 297.5 shares, net $ -- $ -- $27,277 $ -- $ 27,277
Dividends -- -- -- (1,925) (1,925)
Net loss -- -- -- (958) (958)
------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 $ -- $ -- $27,277 $(2,883) $ 24,394
============================================================================================================
See accompanying notes to financial statements.
F-77
FSP Royal Ridge Corp.
Statement of Cash Flows
For the Year Ended
(in thousands) December 31, 2003
================================================================================
Cash flows from operating activities:
Net loss $ (958)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 518
Amortization of favorable leases 426
Changes in operating assets and liabilities:
Cash-funded reserve (1,037)
Restricted cash (571)
Step rent receivable (954)
Prepaid expenses and other assets (14)
Accounts payable and accrued expenses 240
--------------------------------------------------------------------------------
Net cash used for operating activities (2,350)
--------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets (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 (22,324)
--------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock 29,760
Syndication costs (2,483)
Dividends to stockholders (1,389)
Proceeds from long-term debt 24,250
Principal payments on long-term debt (24,250)
--------------------------------------------------------------------------------
Net cash provided by financing activities 25,888
--------------------------------------------------------------------------------
Net increase in cash and cash equivalents 1,214
Cash and cash equivalents, beginning of period --
--------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 1,214
================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 1,731
Disclosure of non-cash financing activities:
Dividends declared but not paid $ 536
See accompanying notes to financial statements.
F-78
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.
2. Summary of Significant Accounting Policies
BASIS OF PRESENTATION
The results of operations from inception to date are not necessarily indicative
of the results to be obtained for other interim periods or for the full fiscal
year.
ESTIMATES AND ASSUMPTIONS
The Company prepares its financial statements and related notes in conformity
with accounting principles generally accepted in the United States of America
("GAAP"). These principles require management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
REAL ESTATE AND DEPRECIATION
Real estate assets are stated at the lower of cost or fair value, as
appropriate, less accumulated depreciation.
Costs related to property acquisition and improvements are capitalized. Typical
capital items include new roofs, site improvements, various exterior building
improvements and major interior renovations. Funding for capital 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-79
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 are reported in the Company's Balance Sheet as follows:
Land $ 1,649
Building 13,889
Acquired real estate leases 1,118
Acquired favorable real estate leases 3,333
---------------------------------------------------------------
Total reported on Balance Sheet $ 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, 2003, no
such indicators of impairment were identified.
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 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
$143,000 is included in Depreciation and Amortization in the Company's Statement
of Operations for the period ended December 31, 2003.
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, 2003:
(in thousands)
--------------
Cost $ 1,118
Accumulated amortization (143)
---------
Book value $ 975
=========
The estimated annual amortization expense for the five years succeeding December
31, 2003 are as follows:
(in thousands)
--------------
2004 $ 156
2005 $ 156
2006 $ 156
2007 $ 156
2008 $ 156
F-80
FSP Royal Ridge Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
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 tenant's lease. Amortization of $426,000 is shown as a
reduction of rental income in the Company's Statement of Operations for the
period ended December 31, 2003.
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, 2003:
(in thousands)
--------------
Cost $ 3,333
Accumulated amortization (426)
---------
Book value $ 2,907
=========
The estimated annual amortization expense for the five years succeeding December
31, 2003 are as follows:
2004 $ 465
2005 $ 465
2005 $ 465
2007 $ 465
2008 $ 465
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.
MARKETABLE SECURITIES
The Company accounts for investments in debt securities under the provisions of
Statement of Financial Accounting Standards ("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, 2003.
F-81
FSP Royal Ridge Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
CONCENTRATION OF CREDIT RISKS
Cash, cash equivalents and short-term investments are financial instruments that
potentially subject the Company to a concentration of credit risk. The Company
maintains its cash balances and short-term investments principally in one bank
which the Company believes to be creditworthy. The Company periodically assesses
the financial condition of the bank and believes that the risk of loss is
minimal. Cash balances held with various financial institutions frequently
exceed the insurance limit of $100,000 provided by the Federal Deposit Insurance
Corporation.
For the period ended December 31, 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:
Axis U.S Insurance 52%
Hagemeyer North America, Inc. 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 $
954,000 at December 31, 2003.
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 Sheet.
REVENUE RECOGNITION
The Company has retained substantially all of the risks and benefits of
ownership of the Company's commercial properties and accounts for its leases as
operating leases. Rental income from leases, which may include rent concession
(including free rent and tenant improvement allowances) and scheduled increases
in rental rates during the lease term, is recognized on a straight-line basis.
The Company does not have any percentage rent arrangements with its commercial
property tenants. Reimbursable costs are included in rental income in the period
earned. A schedule showing the components of rental revenue is shown below.
Period Ended
December 31,
(in thousands) 2003
=======================================================
Income from leases $ 1,152
Straight-line rent adjustment 954
Reimbursable expenses 584
Amortization of favorable leases (426)
-------------------------------------------------------
Total $ 2,264
=======================================================
F-82
FSP Royal Ridge Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
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 Statement of Financial Accounting Standards No. 128
"Earnings per Share", which specifies the computation, presentation and
disclosure requirements for the Company's net income per share. Basic net income
per 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, 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.
F-83
FSP Royal Ridge Corp.
Notes to Financial Statements
3. Recent Accounting Standards
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities". This statement was effective January 1, 2003. SFAS
No. 146 replaces current accounting literature and requires the recognition of
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. The adoption of
this statement did not have a material effect on the Company's financial
position, results of operations and cash flows.
4. Income Taxes
The Company files as a REIT under Sections 856-860 of the Internal Revenue Code
of 1986, as amended. In order to qualify as a REIT, the Company is required to
distribute at least 90% of its taxable income to shareholders and to meet
certain asset and income tests as well as certain other requirements. The
Company will generally not be liable for federal income taxes, provided it
satisfies 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, 2003, the Company's net tax basis of its real estate assets was
$21,822,000.
The following schedule reconciles net income (loss) to taxable income subject to
dividend requirements:
Period Ended
December 31,
(in thousands) 2003
==================================================================
Net loss $ (958)
Add: Book depreciation and amortization 518
Amortization of favorable real estate leases 426
Deferred rent 99
Less: Tax depreciation and amortization (480)
Straight-line rents (954)
------------------------------------------------------------------
Taxable loss (1) $(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:
Period Ended
December 31,
(in thousands) 2003
=================================================================
Cash dividends paid $ 1,389
Less: Return of Capital (1,389)
-----------------------------------------------------------------
Dividends paid deduction $ --
=================================================================
F-84
FSP Royal Ridge Corp.
Notes to Financial Statements
5. Cash Available for Distribution
The Company evaluates its performance based on Cash Available for Distribution
("CAD") as management believes that CAD represents the most accurate measure of
the Company's activity. CAD is the basis for distributions paid to equity
holders.
The Company defines CAD as: net income as computed in accordance with accounting
principles generally accepted in the United States of America ("GAAP"); plus
certain non-cash items included in the computation of net income (depreciation
and amortization and straight line rent adjustments); plus funds raised by the
issuance of shares; plus the net proceeds from the sale of land; less purchases
of real estate assets (including acquired leases) property and equipment
("Capital Expenditures"), and payments for deferred leasing commissions; plus
(less) proceeds from (payments to) cash reserves established at the acquisition
date of the property ("Cash-funded reserves"). Depreciation and amortization and
straight-line rents are an adjustment to CAD, as these are non-cash items
included in net income. Capital Expenditures, payments for deferred leasing
commissions and the proceeds from (payments to) the funded reserve are an
adjustment to CAD, as they represent cash items not reflected in income.
CAD should not be considered as an alternative to net income (determined in
accordance with GAAP), as an indicator of the Company's financial performance,
nor as an alternative to cash flows from operating activities (determined in
accordance with GAAP), nor as a measure of the Company's liquidity, nor is it
necessarily indicative of sufficient cash flow to fund all of the Company's
needs. Other real estate companies may define CAD in a different manner. It is
at the Company's discretion to retain a portion of CAD for operational needs.
Management believes that in order to facilitate a clear understanding of the
results of the Company, CAD should be examined in connection with net income and
cash flows from operating, investing and financing activities in the financial
statements.
The calculation of cash available for distribution is shown in the following
table:
Year Ended
December 31,
(in thousands) 2003
================================================================
Net loss $ (958)
Depreciation and amortization 518
Amortization of favorable lease 426
Straight line rent (954)
Proceeds from offering of shares, net 27,277
Establish funded reserve (1,037)
Restricted Cash for Tenant Improvements (571)
Purchase of land and building (15,538)
Building Improvements (2,335)
Purchase of acquired real estate leases (1,118)
Purchase of acquired favorable real estate leases (3,333)
----------------------------------------------------------------
Cash Available for Distribution $ 2,377
================================================================
The Company's cash distributions for the period ended December 31, 2003 are
summarized as follows:
(in thousands)
Total Cash
Quarter Paid Dividends
=========================================================
Second Quarter of 2003 $ 334
Third Quarter of 2003 530
Fourth Quarter of 2003 525
---------------------------------------------------------
Dividends Paid in 2003 1,389
First Quarter of 2004 536
---------------------------------------------------------
Dividends Declared in 2003(1) $1,925
=========================================================
(1) The Company declared a dividend payable to stockholders of record as of
December 31, 2003.
Cash distributions are declared and paid based on the total outstanding shares
as of the record date and are typically paid in the quarter following the
quarter that CAD is generated.
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FSP Royal Ridge Corp.
Notes to Financial Statements
6. Capital Stock
PREFERRED STOCK
Generally, each holder of Shares of Preferred Stock is entitled to receive
ratably all dividends, if any, declared by the Board of Directors out of funds
legally available. The right to receive dividends shall be non-cumulative, and
no right to dividends shall accrue by reason of the fact that no dividend has
been declared in any prior year. Each holder of Shares will be entitled to
receive, to the extent that funds are available therefore, $100,000 per Share,
before any payment to the holder of Common Stock, out of distributions to
stockholders upon liquidation, dissolution or the winding up of the Company; the
balance of any such funds available for distribution will be distributed among
the holders of Shares and the holder of Common Stock, pro rata based on the
number of shares held by each; provided, however, that for these purposes, one
share of Common Stock will be deemed to equal one-tenth of a share of Preferred
Stock.
In addition to certain voting rights provided in the corporate agreements, the
holder of Shares, acting by consent of at least 51%, shall have the further
right to approve or disapprove a proposed sale of the Property, the merger of
the Company with any other entity and amendments to the corporate charter. A
vote of the holders of 66.67% of the Shares is required for the issue of any
additional shares of capital stock. Holders of Shares have no redemption or
conversion rights.
COMMON STOCK
Franklin Street Properties Corp. ("FSP"), is the sole holder of the Company's
Common Stock. FSP has the right, as one class together with the holders of
Preferred Stock, to vote to elect the directors of the Company and to vote on
all matters except those voted by the holders of Shares of Preferred Stock.
Subsequent to the completion of the offering of the preferred shares the holders
of common shares are not entitled to share in any earnings nor any related
dividend.
7. Related Party Transactions
The Company executed a management agreement with FSP Property Management LLC, an
affiliate of FSP, that provides for a management fee equal to 1% of collected
revenues and is cancelable with 30 days notice by either party. For the period
ended December 31, 2003, fees incurred under the agreement were $17,605.
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 to FSP for obtaining the first mortgage
loan. Such amount is included in interest expense on the Statement of
Operations.
The Company paid a dividend of $14,000 to the common shareholder relating to
earnings of the Company prior to the completion of the offering of preferred
shares.
F-86
FSP Royal Ridge Corp.
Notes to Financial Statements
8. Commitments and Contingencies
The Company, as lessor, has minimum future rentals due under non-cancelable
operating leases as follows:
Year Ending
(in thousands) December 31, Amount
------------ ---------
2004 $ 2,198
2005 2,040
2006 2,071
2007 2,123
2008 2,176
Thereafter 6,750
---------
$ 17,358
=========
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-87