-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, G/UAxOOK9a+xJq7RpZSfeie+O/H27CZe9oFSi5NNEbnHNP2TVnBYhit5eD0UPZxx Y7oLIt9pHzi5mptfwnX7FA== 0001171520-04-000385.txt : 20041118 0001171520-04-000385.hdr.sgml : 20041118 20041118154115 ACCESSION NUMBER: 0001171520-04-000385 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20041118 ITEM INFORMATION: Results of Operations and Financial Condition ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20041118 DATE AS OF CHANGE: 20041118 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRANKLIN STREET PROPERTIES CORP /MA/ CENTRAL INDEX KEY: 0001031316 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 042724223 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-32615 FILM NUMBER: 041154912 BUSINESS ADDRESS: STREET 1: 401 EDGEWATER PL STREET 2: STE 200 CITY: WAKEFIELD STATE: MA ZIP: 01880 BUSINESS PHONE: 7815571300 MAIL ADDRESS: STREET 1: 401 EDGEWATER PLACE STREET 2: STE 200 CITY: WAKEFIELD STATE: MA ZIP: 01880 FORMER COMPANY: FORMER CONFORMED NAME: FRANKLIN STREET PARTNERS LP DATE OF NAME CHANGE: 20010301 8-K 1 eps1591.txt FRANKLIN STREET PROPERTIES CORP. 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) November 18, 2004 ------------------- Franklin Street Properties Corp. (formerly known as Franklin Street Partners Limited Partnership) - -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in Its Charter) Maryland - -------------------------------------------------------------------------------- (State or Other Jurisdiction of Incorporation) 000-32615 04-3578653 - -------------------------------------------------------------------------------- (Commission File Number) (IRS Employer Identification No.) 401 Edgewater Place, Suite 200, Wakefield, MA 01880-6210 - -------------------------------------------------------------------------------- (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 2.02 Results of Operations and Financial Condition On August 13, 2004, Franklin Street Properties Corp. ("FSP Corp."), 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 preferred stock of the Target REITs will become stockholders of FSP Corp. Pursuant to the requirements of Regulation S-X, this Current Report on Form 8-K includes a Statement of Revenues over Certain Operating Expenses for FSP Addison Circle Corp., FSP Collins Crossing Corp., FSP Montague Business Center Corp., and FSP Royal Ridge Corp. for the nine months ended September 30, 2004 (unaudited) and for the thee years year ended December 31, 2003, as well as pro forma financial information for FSP Corp. and an acquisition completed by us in June 2003. Because changes will likely occur in occupancy, rents and expenses experienced by the Target REITs and because the merger may not be completed, the historical financial statements and pro forma financial data presented should not be considered as a projection of future results. In connection with the mergers, the Registrant is hereby filing as exhibits to this Current Report on Form 8-K the financial statements and pro forma financial statements 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, THE REVENUE IN EXCESS OF OPERATING EXPENSES MAY BE LESS THAN CURRENTLY EXPECTED DUE TO CHANGING MARKET CONDITIONS, INCREASED EXPENSES OR FOR OTHER REASONS. ALSO, 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 Addison Circle Index to financial statements as of September 30, 2004 (unaudited) F-2 Index to financial statements as of December 31, 2003 F-8 Index to statements of revenue over certain operating expenses for the period January 1, 2002 to September 29, 2002 and for the year ended December 31, 2001 F-24 Collins Crossing Index to financial statements as of September 30, 2004 (unaudited) F-29 Index to financial statements as of December 31, 2003 F-35 Index to statements of revenue over certain operating expenses for the period January 1, 2003 to March 2, 2003 and for the years ended December 31, 2002 and 2001 F-51 Montague Business Center Index to financial statements as of September 30, 2004 (unaudited) F-56 Index to financial statements as of December 31, 2003 F-62 Index to statements of revenue over certain operating expenses for the period January 1, 2002 to August 26, 2002 and for the year ended December 31, 2001 F-77 Royal Ridge Index to financial statements as of September 30, 2004 (unaudited) F-82 Index to financial statements as of December 31, 2003 F-88 Index to statements of revenue over certain operating expenses for the period January 1, 2003 to January 29, 2003 and for the year ended December 31, 2002 F-104 (b) Pro Forma Financial Information Franklin Street Properties Corp. Unaudited Pro Forma Condensed Combined Financial Statements F-109 (c) Exhibits 23.1 Consent of Braver and Company, P.C. FSP Addison Circle Corp. Financial Statements September 30, 2004 Table of Contents Page Financial Statements Balance Sheets as of September 30, 2004 and December 31, 2003............. F-3 Statements of Income for the three and nine months ended September 30, 2004 and 2003......................................... F-4 Statements of Cash Flows for the nine months ended September 30, 2004 and 2003......................................... F-5 Notes to Financial Statements............................................. F-6 F-2 FSP Addison Circle Corp. Balance Sheets (unaudited)
September 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 46,112 45,895 - --------------------------------------------------------------------------------------------------- 50,477 50,260 Less accumulated depreciation 2,406 1,519 - --------------------------------------------------------------------------------------------------- Real estate investments, net 48,071 48,741 Acquired real estate leases, net of accumulated amortization of $588 and $349 1,150 1,389 Cash and cash equivalents 5,492 5,966 Restricted cash 20 35 Tenant rents receivable 1 25 Step rent receivable 531 421 Deferred leasing costs, net of accumulated amortization of $10 and $0 358 39 Prepaid expenses and other assets 99 51 - --------------------------------------------------------------------------------------------------- Total assets $ 55,722 $ 56,667 =================================================================================================== Liabilities and stockholders' equity: Liabilities: Accounts payable and accrued expenses $ 1,694 $ 2,055 Dividends payable -- 1,265 Tenant security deposits 20 35 - --------------------------------------------------------------------------------------------------- Total liabilities 1,714 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 (4,375) (5,071) - --------------------------------------------------------------------------------------------------- Total stockholders' equity 54,008 53,312 - --------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 55,722 $ 56,667 ===================================================================================================
See accompanying notes to financial statements. F-3 FSP Addison Circle Corp. Statement of Income (unaudited)
For the For the Three Months Nine Months Ended Ended September 30, September 30, --------------------- --------------------- (in thousands, except shares and per share amounts) 2004 2003 2004 2003 ============================================================================================================ Revenues: Rental $2,171 $2,115 $6,892 $6,448 - ------------------------------------------------------------------------------------------------------------ Expenses: Rental operating expenses 684 487 1,490 1,355 Real estate taxes and insurance 361 300 1,045 926 Depreciation and amortization 378 381 1,136 1,126 ============================================================================================================ Total expenses 1,423 1,168 3,671 3,407 - ------------------------------------------------------------------------------------------------------------ Income before interest 748 947 3,221 3,041 Interest income 25 10 67 32 - ------------------------------------------------------------------------------------------------------------ Net income attributable to preferred stockholders $ 773 $ 957 $3,288 $3,073 ============================================================================================================ Weighted average number of preferred shares outstanding, basic and diluted 636 636 636 636 ============================================================================================================ Net income per preferred share, basic and diluted $1,215 $1,505 $5,170 $4,832 ============================================================================================================
See accompanying notes to financial statements. F-4 FSP Addison Circle Corp. Statements of Cash Flows
For the Nine Months Ended (in thousands) September 30, 2004 September 30, 2003 ========================================================================================================== Cash flows from operating activities: Net Income $ 3,288 $ 3,073 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation and amortization 1,136 1,126 Changes in operating assets and liabilities: Restricted cash 15 9 Tenant rent receivables 24 50 Step rent receivable (110) (241) Prepaid expenses and other assets (48) (28) Accounts payable and accrued expenses (361) (256) Tenant security deposits (15) (9) Payment of deferred leasing costs (329) -- - ---------------------------------------------------------------------------------------------------------- Net cash provided by operating activities $ 3,600 $ 3,724 - ---------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Purchase of real estate assets (217) -- - ---------------------------------------------------------------------------------------------------------- Net cash used for investing activities (217) -- - ---------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Distributions to stockholders (3,857) (3,446) - ---------------------------------------------------------------------------------------------------------- Net cash used for financing activities (3,857) (3,446) - ---------------------------------------------------------------------------------------------------------- Net (decrease) increase in cash and cash equivalents (474) 278 Cash and cash equivalents, beginning of period 5,966 5,402 - ---------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 5,492 $ 5,680 ========================================================================================================== Supplemental disclosure of cash flow information: Disclosure of non-cash financing activities: Dividends declared but not paid $ -- $ 1,277
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 balances in the 2003 financial statements have been reclassified to conform to the 2004 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 convertible into shares. There were no potential dilutive shares outstanding at September 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. 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 $20,000 and $19,000 for the three months ended September 30, 2004 and 2003, respectively and $61,000 and $60,000 for the nine months ended September 30, 2004 and 2003, respectively. 5. Subsequent Events On October 1, 2004 the Company declared a dividend of $2,144.00 per share of preferred stock payable to holders of record as of October 1, 2004. F-7 FSP Addison Circle Corp. Financial Statements December 31, 2003 and 2002 Table of Contents Page ---- Financial Statements Independent Auditor's Report............................................... F-9 Balance Sheets as of December 31, 2003 and 2002............................ F-10 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-11 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-12 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-13 Notes to the Financial Statements......................................... F-14 F-8 [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-9 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-10 FSP Addison Circle Corp. Statements of Operations
For the Period August 21, 2002 For the Year Ended (date of inception) to (in thousands, except 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) Distributions 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-11 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 Net loss -- -- -- (2,869) (2,869) Distributions to stockholders -- -- -- (1,070) (1,070) - ------------------------------------------------------------------------------------------------------------- Balance, December 31, 2002 -- -- 58,383 (3,939) 54,444 Net income -- -- -- 4,005 4,005 Distributions to stockholders -- -- -- (5,137) (5,137) - ------------------------------------------------------------------------------------------------------------- Balance, December 31, 2003 $ -- $ -- $58,383 $(5,071) $ 53,312 =============================================================================================================
See accompanying notes to financial statements. F-12 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) Distributions 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-13 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-14 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 $322,000 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-15 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-16 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-17 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 convertible 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: F-18
Year Ended Year Ended December 31, 2003 December 31, 2002 Per Preferred Per Common Per Preferred Per Common (in thousands, except per share data) Total Share Share Total Share Share - --------------------------------------------------------------------------------------------------------------------- Cash distributions paid $ 4,721 $ 7,278 $ 93,807 $ 220 $ -- $ 220,000 Less: Return of captial (734) (1,133) (14,605) (220) -- (220,000) - --------------------------------------------------------------------------------------------------------------------- Dividends paid deduction $ 3,987 $ 6,145 $ 79,202 $ -- $ -- $ -- =====================================================================================================================
F-19 FSP Addison Circle Corp. Notes to Financial Statements 5. 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. 6. 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 distribution of $313,000 to the common shareholder relating to operating activities of the Company prior to the completion of the offering of preferred shares. F-20 FSP Addison Circle Corp. Notes to Financial Statements 7. 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-21 SCHEDULE III ADDISON CIRCLE REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2003
Initial Cost --------------------------------- Costs Capitalized Buildings (Disposals) Improvements Subsequent and to Description Encumbrances (1) Land Equipment Acquisition ---------------- ---- --------- ------------ (in thousands) Addison Circle, Addison, TX 4,365 45,870 25 Historical Costs -------------------------------------------------------------------------------------- Buildings Total Costs, Improvements Net of Depreciable and Accumulated Accumulated Life Date of Description Land Equipment Total (2) Depreciation Depreciation Years Acquisition ---- --------- --------- ------------ ------------ ----- ----------- (in thousands) Addison Circle, Addison, TX 4,365 45,895 50,260 1,519 48,741 39 2002
(1) There are no encumbrances on the above properties. (2) The aggregate cost for Federal Income Tax purposes is $50,421. F-22 Addison Circle The following table summarizes the changes in the Company's real estate investments and accumulated depreciation: December 31, ---------------------- (in thousands) 2003 2002 ========================================================================== Real estate investments, at cost: Balance, beginning of period $50,235 $ -- Acquisitions -- 50,235 Improvements 25 -- Dispositions -- -- -------------------------------------------------------------------------- Balance, end of period $50,260 $50,235 ========================================================================== Accumulated depreciation: Balance, beginning of period $ 343 $ -- Depreciation 1,176 343 Dispositions -- -- -------------------------------------------------------------------------- Balance, end of period $ 1,519 $ 343 ========================================================================== F-23 ADDISON CIRCLE FOR THE PERIOD JANUARY 1, 2002 TO SEPTEMBER 29, 2002 AND FOR THE YEAR ENDED DECEMBER 31, 2001 CONTENTS PAGE Independent auditors' report F-25 Statements of revenue over certain operating expenses F-26 Notes accompanying the statements of revenue over certain operating expenses F-27 F-24 INDEPENDENT AUDITORS' REPORT To the Stockholders FSP Addison Circle Corp. We have audited the accompanying statements of revenue over certain operating expenses (the "Statements") of Addison Circle for the period January 1, 2002 to September 29, 2002 and for the year ended December 31, 2001. These Statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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 Statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the Statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall Statements' presentation. We believe that our audits provide a reasonable basis for our opinion. The accompanying Statements were prepared to comply with the requirements of Rule 3-14 of Regulation S-X of the Securities and Exchange Commission, and exclude certain expenses described in Note 2, and therefore, are not intended to be a complete presentation of the Property's revenue and expenses. In our opinion, these Statements referred to above present fairly, in all material respects, the revenue over certain operating expenses (as described in Note 2), of Addison Circle for the period January 1, 2002 to September 29, 2002 and for the year ended December 31, 2001, in conformity with the basis of accounting described in Note 2. /s/ Braver and Company, P.C. Newton, Massachusetts February 28, 2004 F-25 ADDISON CIRCLE STATEMENTS OF REVENUE OVER CERTAIN OPERATING EXPENSES FOR THE PERIOD JANUARY 1, 2002 TO SEPTEMBER 29, 2002 AND FOR THE YEAR ENDED DECEMBER 31, 2001 2002 2001 ---------- ---------- REVENUE Rental income $6,577,352 $8,353,790 ---------- ---------- CERTAIN OPERATING EXPENSES (Note 2): Taxes and insurance 930,968 1,195,547 Management fees 105,094 135,923 Administrative 512,993 446,024 Operating and maintenance 649,685 905,373 ---------- ---------- 2,198,740 2,682,867 ---------- ---------- Excess of revenue over certain operating expenses $4,378,612 $5,670,923 ========== ========== The accompanying notes are an integral part of these financial statements. F-26 ADDISON CIRCLE NOTES ACCOMPANYING THE STATEMENTS OF REVENUE OVER CERTAIN OPERATING EXPENSES 1. DESCRIPTION OF THE PROPERTY: The accompanying statements of revenue over certain operating expenses (the "Statements") include the operations of a commercial building located in Addison, Dallas County, Texas (the "Property"). These statements are the results of operations of the Property under the basis of accounting described in Note 2 for the period and year described prior to the acquisition of the Property by FSP Addison Circle Corp. The Property consists of a ten-story Class A suburban office tower containing approximately 293,787 square feet located on approximately 3.62 acres of land. The Property was sold to FSP Addison Circle Corp. on September 30, 2002. 2. BASIS OF ACCOUNTING: The accompanying Statements have been prepared on the accrual basis of accounting. The Statements have been prepared in accordance with Rule 3-14 of Regulation S-X of the Securities and Exchange Commission for real estate properties acquired or to be acquired. Accordingly, these Statements exclude certain historical expenses not comparable to the operations of the Property after acquisition such as amortization, depreciation, interest, corporate expenses and certain other costs not directly related to the future operations of the Property. 3. REVENUE RECOGNITION: Rental revenue includes income from leases, certain reimbursable expenses, straight-line rent adjustments and other income associated with renting the property. A summary of rental revenue is shown in the following table: For the period January 1, 2002 Year Ended to September 29, December 31, 2002 2001 ---------------- ------------ Income from leases $ 5,407,615 $7,168,574 Straight-line rent adjustment 258,696 293,420 Reimbursable expenses 909,682 887,543 Other income 1,359 4,253 ---------------- ------------ Total $ 6,577,352 $8,353,790 ================ ============ Addison Circle has retained substantially all of the risks and benefits of the property and accounts for its leases as operating leases. Rental income from leases, which include rent concessions (including free rent and tenant improvement allowances) and scheduled increases in rental rates during the lease term, is recognized on a straight-line basis. The Company does not have any percentage rent arrangements with its tenants. Reimbursable costs are included in rental income in the period earned. 4. USE OF ESTIMATES: The preparation of the Statements in conformity with the basis of accounting described in Note 2 requires management to make estimates and assumptions that affect the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. F-27 ADDISON CIRCLE NOTES ACCOMPANYING THE STATEMENTS OF REVENUE OVER CERTAIN OPERATING EXPENSES 5. CONCENTRATIONS OF RISKS: For the period January 1, 2002 to September 29, 2002, and for the year ended December 31, 2001, rental income was received from various lessees. As such, future receipts are dependent upon the financial strength of the lessees and their ability to perform under the lease agreements. 6. LEASES: The Company, as lessor, has minimum future rentals due under noncancellable operating leases as follows: Year Ending December 31, Amount ----------------- -------------- 2002 $ 1,704,000 2003 6,677,000 2004 6,684,000 2005 6,636,000 2006 5,698,000 Thereafter 6,413,000 -------------- $ 33,812,000 ============== In addition, the lessees are liable for real estate taxes and operating expenses as direct expenses to them. F-28 FSP Collins Crossing Corp. Financial Statements September 30, 2004 Table of Contents Page ---- Financial Statements Balance Sheet as of September 30, 2004 and December 31, 2003.............. F-30 Statement of Income for the three and nine months ended September 30, 2004 and 2003.......................................... F-31 Statement of Cash Flows for the nine months ended September 30, 2004 and 2003.......................................... F-32 Notes to Financial Statements............................................. F-33 F-29 FSP Collins Crossing Corp. Balance Sheet (unaudited)
September 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 1,389 731 - ------------------------------------------------------------------------------------------------------------ Real estate investments, net 36,865 37,515 Acquired real estate leases, net of accumulated amortization of $663 and $349, respectively 1,604 1,918 Acquired favorable real estate lease, net of accumulated amortization of $1,504 and $791, respectively 3,640 4,353 Cash and cash equivalents 4,634 5,066 Restricted cash 115 115 Tenant rents receivable 35 25 Step rent receivable 528 279 Prepaid expenses and other assets 51 43 - ------------------------------------------------------------------------------------------------------------ Total assets $ 47,472 $ 49,314 ============================================================================================================ Liabilities and stockholders' equity: Liabilities: Accounts payable and accrued expenses $ 1,263 $ 1,467 Distributions payable -- 1,331 Tenant security deposits 115 115 - ------------------------------------------------------------------------------------------------------------ Total liabilities 1,378 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 (5,006) (4,699) - ------------------------------------------------------------------------------------------------------------ Total stockholders' equity 46,094 46,401 - ------------------------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $ 47,472 $ 49,314 ============================================================================================================
See accompanying notes to financial statements. F-30 FSP Collins Crossing Corp. Statement of Income (unaudited)
For the For the Three Months Nine Months Ended Ended September 30, September 30, -------------------- ---------------------- (in thousands, except shares and per share amounts) 2004 2003 2004 2003 =========================================================================================================== Revenues: Rental $1,756 $1,724 $5,205 $ 3,976 - ----------------------------------------------------------------------------------------------------------- Expenses: Rental operating expenses 552 418 1,461 922 Real estate taxes and insurance 237 273 715 614 Depreciation and amortization 324 265 972 619 Interest -- 4 -- 3,444 =========================================================================================================== Total expenses 1,113 960 3,148 5,599 - ----------------------------------------------------------------------------------------------------------- Income (loss) before interest income 643 764 2,057 (1,623) Interest income 12 7 51 12 - ----------------------------------------------------------------------------------------------------------- Net income (loss) before common distibutions 655 771 2,108 (1,611) Distributions paid to common stockholders -- 217 -- 370 - ----------------------------------------------------------------------------------------------------------- Net income (loss) attributable to preferred stockholders $ 655 $ 554 $2,108 $(1,981) =========================================================================================================== Weighted average number of preferred shares outstanding, basic and diluted 555 555 555 555 =========================================================================================================== Net income (loss) per preferred share, basic and diluted $1,180 $ 998 $3,798 $(3,569) ===========================================================================================================
See accompanying notes to financial statements F-31 FSP Collins Crossing Corp. Statements of Cash Flows
For the Nine Months Ended (in thousands) September 30, 2004 September 30, 2003 ================================================================================================================ Cash flows from operating activities: Net Income (loss) $ 2,108 $ (1,611) Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Depreciation and amortization 972 619 Amortization of favorable lease 713 554 Changes in operating assets and liabilities: Restricted cash -- (115) Tenant rent receivables (10) (7) Step rent receivable (249) (194) Prepaid expenses and other assets (8) (66) Accounts payable and accrued expenses (204) 927 Tenant security deposits -- 115 - ---------------------------------------------------------------------------------------------------------------- Net cash provided by (used for) operating activities 3,322 222 - ---------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Purchase of real estate assets (8) (38,246) Purchase of acquired real estate leases -- (2,267) Purchase of acquired favorable real estate lease -- (5,144) - ---------------------------------------------------------------------------------------------------------------- Net cash used for investing activities (8) (45,657) - ---------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Proceeds from sale of company stock -- 55,839 Syndication costs -- (4,738) Distributions to stockholders (3,746) (1,245) Proceeds from long-term debt -- 45,175 Principal payments on long-term debt -- (45,175) - ---------------------------------------------------------------------------------------------------------------- Net cash (used for) provided by financing activities (3,746) 49,856 - ---------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (432) 4,421 Cash and cash equivalents, beginning of period 5,066 -- - ---------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 4,634 $ 4,421 ================================================================================================================ Supplemental disclosure of cash flow information: Cash paid for: Interest $ -- $ 3,444 Disclosure of non-cash financing activites: Dividends declared but not paid $ -- $ 1,147
See accompanying notes to financial statements. F-32 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 convertible into shares. There were no potential dilutive shares outstanding at September 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-33 FSP Collins Crossing Corp. Notes to Financial Statements (unaudited) 4. 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 $19,000 and $19,000 for the three months ended September 30, 2004 and 2003, respectively and $56,000 and $44,000 for the nine months ended September 30, 2004 and 2003, respectively. An acquisition fee of $277,000 and other costs of $206,000 were paid in the nine months ended September 30, 2003 to an affiliate of the common shareholder. Such fees were included in the cost of real estate. Syndication fees of $4,410,000 were paid in the nine months ended September 30, 2003 to an affiliate of the common shareholder for services related to syndication of the Company's preferred stock. During the nine months ended September 30, 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 during the nine months ended September 30, 2003 for obtaining the first mortgage loan. Such amount is included in interest expense on the Statement of Operations. The Company paid a distribution of $370,000 during the nine months ended September 30, 2003 to the common shareholder relating to operating activities of the Company prior to the completion of the offering of preferred shares. 5. Subsequent Events On October 1, 2004, the Company declared a dividend of $2,120.00 per share of preferred stock payable to holders of record as of October 1, 2004. F-34 FSP Collins Crossing Corp. Financial Statements December 31, 2003 Table of Contents Page ---- Financial Statements Independent Auditor's Report............................................... F-36 Balance Sheet as of December 31, 2003...................................... F-37 Statement of Operations for the period January 16, 2003 (date of inception) to December 31, 2003....................................... F-38 Statement of Changes in Stockholders' Equity for the period January 16, 2003 (date of inception) to December 31, 2003..................... F-39 Statement of Cash Flows for the period January 16, 2003 (date of inception) to December 31, 2003....................................... F-40 Notes to the Financial Statements.......................................... F-41 F-35 [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-36 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 Distributions payable to stockholders 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 distributions 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-37 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 distributions to common stockholder (976) Distributions paid to common stockholder 373 - -------------------------------------------------------------------------------- Net loss attributable to preferred stockholders $(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-38 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 Distributions -- -- -- (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-39 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) Distributions 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: Distributions declared but not paid $ 1,331 See accompanying notes to financial statements. F-40 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-41 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-42 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-43 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-44 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 convertible 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-45 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, Per Preferred Per Common (in thousands, except per share data) Total Share Share ======================================================================== Cash dividends paid $ 2,392 $ 3,637 $ 370,000 Less: Return of Capital (2,392) 3,204 326,000 ------------------------------------------------------------------------ Dividends paid deduction $ -- $ 433 $ 44,000 ======================================================================== F-46 FSP Collins Crossing Corp. Notes to Financial Statements 5. 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. 6. 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 distribution of $373,000 to the common shareholder relating to operating activities of the Company prior to the completion of the offering of preferred shares. F-47 FSP Collins Crossing Corp. Notes to Financial Statements 7. 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-48 SCHEDULE III COLLINS CROSSING REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2003
Initial Cost --------------------------------- Costs Capitalized Buildings (Disposals) Improvements Subsequent and to Description Encumbrances (1) Land Equipment Acquisition ---------------- ---- --------- ------------ (in thousands) Collins Crossing, Richardson, TX 4,022 34,224 -- Historical Costs -------------------------------------------------------------------------------------- Buildings Total Costs, Improvements Net of Depreciable and Accumulated Accumulated Life Date of Description Land Equipment Total (2) Depreciation Depreciation Years Acquisition ---- --------- --------- ------------ ------------ ----- ----------- (in thousands) Collins Crossing, Richardson, TX 4,022 34,224 38,246 731 37,515 39 2003
(1) There are no encumbrances on the above properties. (2) The aggregate cost for Federal Income Tax purposes is $41,634. F-49 Collins Crossing The following table summarizes the changes in the Company's real estate investments and accumulated depreciation: December 31, --------------- (in thousands) 2003 ========================================================================== Real estate investments, at cost: Balance, beginning of period $ -- Acquisitions 38,246 Improvements -- Dispositions -- -------------------------------------------------------------------------- Balance, end of period $38,246 ========================================================================== Accumulated depreciation: Balance, beginning of period $ -- Depreciation 731 Dispositions -- -------------------------------------------------------------------------- Balance, end of period $ 731 ========================================================================== F-50 COLLINS CROSSING FOR THE PERIOD JANUARY 1, 2003 TO MARCH 2, 2003 AND FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 CONTENTS PAGE Independent auditors' report F-52 Statements of revenue over certain operating expenses F-53 Notes accompanying the statements of revenue over certain operating expenses F-54 F-51 INDEPENDENT AUDITORS' REPORT To the Stockholders FSP Collins Crossing Corp. We have audited the accompanying statements of revenue over certain operating expenses (the "Statements") of Collins Crossing for the period January 1, 2003 to March 2, 2003 and for the years ended December 31, 2002 and 2001. These Statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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 Statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the Statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall Statements' presentation. We believe that our audits provide a reasonable basis for our opinion. The accompanying Statements were prepared to comply with the requirements of Rule 3-14 of Regulation S-X of the Securities and Exchange Commission, and exclude certain expenses described in Note 2 and, therefore, are not intended to be a complete presentation of the Property's revenue and expenses. In our opinion, these Statements referred to above present fairly, in all material respects, the revenue over certain operating expenses (as described in Note 2), of Collins Crossing for the period January 1, 2003 to March 2, 2003 and for the years ended December 31, 2002 and 2001, in conformity with the basis of accounting described in Note 2. /s/ Braver and Company, P.C. Newton, Massachusetts February 28, 2004 F-52 COLLINS CROSSING Statements of Revenue Over Certain Operating Expenses For the PERIOD JANUARY 1, 2003 TO March 2, 2003 AND FOR THE YEARS ENDED dECEMBER 31, 2002 and 2001
2003 2002 2001 ---------- ---------- ---------- REVENUE Rental income $1,347,445 $7,719,461 $7,231,817 ---------- ---------- ---------- CERTAIN OPERATING EXPENSES (Note 2): Taxes and insurance 156,372 906,803 1,080,465 Management fees 24,885 148,990 136,467 Administrative 18,688 64,208 59,948 Operating and maintenance 275,996 1,165,129 1,320,489 ---------- ---------- ---------- 475,941 2,285,130 2,597,369 ---------- ---------- ---------- Excess of revenue over certain operating expenses $ 871,504 $5,434,331 $4,634,448 ========== ========== ==========
The accompanying notes are an integral part of these financial statements. F-53 COLLINS CROSSING NOTES ACCOMPANYING THE STATEMENTS OF REVENUE OVER CERTAIN OPERATING EXPENSES 1. DESCRIPTION OF THE PROPERTY: The accompanying statements of revenue over certain operating expenses (the "Statements") include the operations of a commercial building located in Dallas County, Texas (the "Property"). These Statements are the results of operations of the Property under the basis of accounting described in Note 2 for the period and years described prior to the acquisition of the Property by FSP Collins Crossing Corp. The Property consists of an eleven-story Class "A" institutional quality suburban office tower containing approximately 298,766 square feet located on approximately 10.0 acres of land. The Property was sold to FSP Collins Crossing Corp. on March 3, 2003. 2. BASIS OF ACCOUNTING: The accompanying Statements have been prepared on the accrual basis of accounting. The Statements have been prepared in accordance with Rule 3-14 of Regulation S-X of the Securities and Exchange Commission for real estate properties acquired or to be acquired. Accordingly, these Statements exclude certain historical expenses not comparable to the operations of the Property after acquisition such as amortization, depreciation, interest, corporate expenses and certain other costs not directly related to future operations of the Property. 3. REVENUE RECOGNITION: Rental revenue includes income from leases, certain reimbursable expenses, and straight-line rent adjustments associated with renting the property.
For the period Year Ended Year Ended January 1, 2003 December 31, December 31, to March 2, 2003 2002 2001 ---------------- ------------ ------------ Income from leases $1,219,096 $6,747,319 $6,415,650 Straight-line rent adjustment 53,506 294,140 252,620 Reimbursable expenses 74,843 678,002 563,547 ---------- ---------- ---------- Total $1,347,445 $7,719,461 $7,231,817 ========== ========== ==========
Collins Crossing has retained substantially all of the risks and benefits of the Property and accounts for its leases as operating leases. Rental income from leases, which includes rent concessions (including free rent and tenant improvement allowances) and scheduled increases in rental rates during the lease term, is recognized on a straight-line basis. The Company does not have any percentage rent arrangements with its tenants. Reimbursable costs are included in rental income in the period earned. USE OF ESTIMATES: The preparation of the Statements in conformity with the basis of accounting described in Note 2 requires management to make estimates and assumptions that affect the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. CONCENTRATIONS OF RISKS: For the period January 1, 2003 to March 2, 2003 and for the years ended December 31, 2002 and 2001, rental income was from three lessees. As such, future receipts are dependent upon the financial strength of these lessees and their ability to perform under the lease agreements. F-54 COLLINS CROSSING NOTES ACCOMPANYING THE STATEMENTS OF REVENUE OVER CERTAIN OPERATING EXPENSES LEASES: The Company, as lessor, has minimum future rentals due under noncancellable operating leases as follows: Year Ending December 31, Amount ------------- ------------- 2003 $ 5,604,000 2004 6,701,000 2005 6,947,000 2006 6,036,000 2007 5,811,000 Thereafter 14,499,000 ------------- $ 45,598,000 ============= In addition, the lessees are liable for real estate taxes and operating expenses as direct expenses to them. F-55 FSP Montague Business Center Corp. Financial Statements September 30, 2004 Table of Contents Page ---- Financial Statements Balance Sheets as of September 30, 2004 and December 31, 2003............. F-57 Statements of Income for the three and nine months ended September 30, 2004 and 2003......................................... F-58 Statements of Cash Flows for the nine months ended September 30, 2004 and 2003....................................................... F-59 Notes to Financial Statements............................................. F-60 F-56 FSP Montague Business Center Corp. Balance Sheet (unaudited)
September 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 560 359 - ---------------------------------------------------------------------------------------------------------------------------- Real estate investments, net 20,439 20,640 Acquired real estate leases, net of accumulated amortization of $224 and $143 241 322 Acquired favorable real estate lease, net accumulated amortization of $2,616 and $1,744 2,616 3,488 Cash and cash equivalents 3,633 3,594 Step rent receivable 461 392 Prepaid expenses and other assets 22 14 - ---------------------------------------------------------------------------------------------------------------------------- Total assets $ 27,412 $ 28,450 ============================================================================================================================ Liabilities and Stockholders' Equity: Liabilities: Accounts payable and accrued expenses $ 465 $ 411 Dividends payable -- 960 - ---------------------------------------------------------------------------------------------------------------------------- Total liabilities 465 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 (3,705) (3,573) - ---------------------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity 26,947 27,079 - ---------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $ 27,412 $ 28,450 ============================================================================================================================
See accompanying notes to financial statements. F-57 FSP Montague Business Center Corp. Statement of Income (unaudited)
For the For the Three Months Nine Months Ended Ended September 30, September 30, --------------------- --------------------- (in thousands, except shares and per share amounts) 2004 2003 2004 2003 ========================================================================================================================= Revenues: Rental $ 878 $ 889 $2,592 $2,737 - ------------------------------------------------------------------------------------------------------------------------- Expenses: Rental operating expenses 143 60 273 235 Real estate taxes and insurance 69 90 210 262 Depreciation and amortization 94 92 282 276 ========================================================================================================================= Total expenses 306 242 765 773 - ------------------------------------------------------------------------------------------------------------------------- Income (loss) before interest income 572 647 1,827 1,964 Interest income 5 9 34 28 - ------------------------------------------------------------------------------------------------------------------------- Net income before common dividends 577 656 1,861 1,992 Dividends paid to common shareholders -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------- Net income attributable to preferred shareholders $ 577 $ 656 $1,861 $1,992 ========================================================================================================================= Weighted average number of preferred shares outstanding, basic and diluted 334 334 334 334 ========================================================================================================================= Net income per preferred share, basic and diluted $1,728 $1,964 $5,572 $5,964 =========================================================================================================================
See accompanying notes to financial statements. F-58 FSP Montague Business Center Corp. Statements of Cash Flows
For the Nine Months Ended (in thousands) September 30, 2004 September 30, 2003 ================================================================================================================== Cash flows from operating activities: Net Income $ 1,861 $ 1,992 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 282 276 Amortization of favorable leases 872 872 Changes in operating assets and liabilities: Tenant rent receivable -- 25 Step rent receivable (69) (212) Prepaid expenses and other assets (8) (16) Accounts payable and accrued expenses 54 65 - ------------------------------------------------------------------------------------------------------------------ Net cash provided by (used for) operating activities 2,992 3,002 - ------------------------------------------------------------------------------------------------------------------ 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 (2,953) (2,758) Proceeds from long-term debt -- -- Principal payments on long-term debt -- -- - ------------------------------------------------------------------------------------------------------------------ Net cash (used for) provided by financing activities (2,953) (2,758) - ------------------------------------------------------------------------------------------------------------------ Net increase in cash and cash equivalents 39 244 Cash and cash equivalents, beginning of period 3,594 3,330 - ------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents, end of period $ 3,633 $ 3,574 ================================================================================================================== Supplemental disclosure of cash flow information: Disclosure of non-cash financing activities: Dividends declared but not paid $ -- $ 956
See accompanying notes to financial statements. F-59 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 September 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-60 FSP Montague Business Center Corp. Notes to Financial Statements (unaudited) 4. 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 $12,000 and $11,000 for the three months ended September 30, 2004 and 2003, respectively and $34,000 and $34,000 for the nine months ended September 30, 2004 and 2003 respectively. 5. Subsequent Events On October 1, 2004, the Company declared a dividend of $3,000.00 per share of preferred stock payable to holders of record as of October 1, 2004. F-61 FSP Montague Business Center Corp. Financial Statements December 31, 2003 and 2002 Table of Contents Page ---- Financial Statements Independent Auditor's Report............................................. F-63 Balance Sheets as of December 31, 2003 and 2002.......................... F-64 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-65 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-66 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-67 Notes to the Financial Statements........................................ F-68 F-62 [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-63 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 Distributions 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 distributions 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-64 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) Distributions 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-65 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 Distributions to stockholders -- -- -- (1,222) (1,222) Net loss -- -- -- (1,249) (1,249) - --------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2002 -- -- 30,652 (2,471) 28,181 Distributions to stockholders -- -- -- (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-66 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) Distributions 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-67 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-68 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-69 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-70 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 convertible 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-71 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 Year Ended December 31, 2003 December 31, 2002 Per Preferred Per Common Per Preferred Per Common (in thousands, except per share data) Total Share Share Total Share Share - --------------------------------------------------------------------------------------------------------------------- Cash distributions paid $ 3,714 $11,120 $ -- $ 320 $ 288,000 $ 3,200 Less: Return of captial -- -- -- (320) (288,000) (3,200) - --------------------------------------------------------------------------------------------------------------------- Dividends paid deduction $ 3,714 $11,120 $ -- $ -- $ -- $ -- =====================================================================================================================
F-72 FSP Montague Business Center Corp. Notes to Financial Statements 5. 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. 6. 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. 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 distribution of $32,000 to the common shareholder relating to operating activities of the Company prior to the completion of the offering of preferred shares. F-73 FSP Montague Business Center Corp. Notes to Financial Statements 7. 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-74 SCHEDULE III MONTAGUE BUSINESS CENTER REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2003
Initial Cost --------------------------------- Costs Capitalized Buildings (Disposals) Improvements Subsequent and to Description Encumbrances (1) Land Equipment Acquisition ---------------- ---- --------- ------------ (in thousands) Montague Business Center, San Jose, CA 10,500 10,499 -- Historical Costs ------------------------------------------------------------------------------------- Buildings Total Costs, Improvements Net of Depreciable and Accumulated Accumulated Life Date of Description Land Equipment Total (2) Depreciation Depreciation Years Acquisition ---- --------- --------- ------------ ------------ ----- ----------- (in thousands) Montague Business Center, San Jose, CA 10,500 10,499 20,999 359 20,640 5-39 2002
(1) There are no encumbrances on the above properties. (2) The aggregate cost for Federal Income Tax purposes is $26,136. F-75 Montague Business Center The following table summarizes the changes in the Company's real estate investments and accumulated depreciation: December 31, ---------------------- (in thousands) 2003 2002 ========================================================================== Real estate investments, at cost: Balance, beginning of period $20,644 $ -- Acquisitions -- 20,644 Improvements 355 -- Dispositions -- -- -------------------------------------------------------------------------- Balance, end of period $20,999 $20,644 ========================================================================== Accumulated depreciation: Balance, beginning of period $ 98 $ -- Depreciation 261 98 Dispositions -- -- -------------------------------------------------------------------------- Balance, end of period $ 359 $ 98 ========================================================================== F-76 MONTAGUE BUSINESS CENTER FOR THE PERIOD JANUARY 1, 2002 TO AUGUST 26, 2002 AND FOR THE YEAR ENDED DECEMBER 31, 2001 CONTENTS PAGE Independent auditors' report F-78 Statements of revenue over certain operating expenses F-79 Notes accompanying the statements of revenue over certain operating expenses F-80 F-77 INDEPENDENT AUDITORS' REPORT To the Stockholders FSP Montague Business Center Corp. We have audited the accompanying statements of revenue over certain operating expenses (the "Statements") of Montague Business Center for the period January 1, 2002 to August 26, 2002 and for the year ended December 31, 2001. These Statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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 Statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the Statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall Statements' presentation. We believe that our audits provide a reasonable basis for our opinion. The accompanying Statements were prepared to comply with the requirements of Rule 3-14 of Regulation S-X of the Securities and Exchange Commission, and exclude certain expenses described in Note 2 and, therefore, are not intended to be a complete presentation of the Property's revenue and expenses. In our opinion, these Statements referred to above present fairly, in all material respects, the revenue over certain operating expenses (as described in Note 2) of Montague Business Center for the period January 1, 2002 to August 26, 2002 and for the year ended December 31, 2001, in conformity with the basis of accounting described in Note 2. /s/ Braver and Company, P.C. Newton, Massachusetts February 28, 2004 F-78 MONTAGUE BUSINESS CENTER Statements of Revenue Over Certain Operating Expenses For the PERIOD JANUARY 1, 2002 TO aUGUST 26, 2002 and For the year ended december 31, 2001 2002 2001 ------------ ------------ REVENUE: Rental income $ 2,772,694 $ 3,822,325 ------------ ------------ CERTAIN OPERATING EXPENSES (Note 2): Taxes and insurance 117,594 223,859 Management fees 44,055 81,426 Administrative 11,095 4,169 Operating and maintenance 60,751 115,926 ------------ ------------ 233,495 425,380 ------------ ------------ Excess of revenue over certain operating expenses $ 2,539,199 $ 3,396,945 ============ ============ The accompanying notes are an integral part of these financial statements. F-79 MONTAGUE BUSINESS CENTER NOTES ACCOMPANYING THE STATEMENTS OF REVENUE OVER CERTAIN OPERATING EXPENSES 1. DESCRIPTION OF THE PROPERTY: The accompanying statements of revenue over certain operating expenses (the "Statements") include the operations of a commercial building located in San Jose, California (the "Property"). These Statements are the results of operations of the Property under the basis of accounting described in Note 2 for the period and year described prior to the acquisition of the Property by FSP Montague Business Center Corp. The Property consists of two adjacent single-story Class "A" suburban office buildings containing approximately 145,951 square feet located on approximately 9.95 acres of land. The Property was sold to FSP Montague Business Center Corp. on August 27, 2002. 2. BASIS OF ACCOUNTING: The accompanying statements have been prepared on the accrual basis of accounting. The Statements have been prepared in accordance with Rule 3-14 of Regulation S-X of the Securities and Exchange Commission for real estate properties acquired or to be acquired. Accordingly, these Statements exclude certain historical expenses not comparable to the operations of the Property after acquisition such as amortization, depreciation, interest, corporate expenses and certain other costs not directly related to future operations of the Property. 3. REVENUE RECOGNITION: Rental revenue includes income from leases, certain reimbursable expenses, straight-line rent adjustments and other income associated with renting the property. A summary of rental revenue is shown in the following table: For the period January 1, 2002 Year Ended to August 26, 2002 December 31, 2001 ------------------ ----------------- Income from leases $2,202,756 $2,731,934 Straight-line rent adjustment 245,307 679,196 Reimbursable expenses 317,190 411,195 Other income 7,441 -- ----------- ----------- Total $2,772,694 $3,822,325 =========== =========== Montague Business Center has retained substantially all of the risks and benefits of the Property and accounts for its leases as operating leases. Rental income from leases, which include rent concessions (including free rent and tenant improvement allowances) and scheduled increases in rental rates during the lease term, is recognized on a straight-line basis. The Company does not have any percentage rent arrangements with its tenants. Reimbursable costs are included in rental income in the period earned. 4. USE OF ESTIMATES: The preparation of the Statements in conformity with the basis of accounting described in Note 2 requires management to make estimates and assumptions that affect the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. F-80 MONTAGUE BUSINESS CENTER NOTES ACCOMPANYING THE STATEMENTS OF REVENUE OVER CERTAIN OPERATING EXPENSES 8. CONCENTRATIONS OF RISKS: For the period January 1, 2002 to August 26, 2002, and for the year ended December 31, 2001, rental income was from various lessees. As such, future receipts are dependent upon the financial strength of the lessees and their ability to perform under the lease agreements. 6. LEASES: The Company, as lessor, has minimum future rentals due under noncancellable operating leases as follows: Year Ending December 31, Amount ------------ ------------ 2002 $ 1,269,000 2003 3,789,000 2004 3,982,000 2005 4,174,000 2006 4,390,000 ------------- $ 17,604,000 ============= In addition, the lessees are liable for real estate taxes and operating expenses as direct expenses to them. F-81 FSP Royal Ridge Corp. Financial Statements September 30, 2004 Table of Contents Page ---- Financial Statements Balance Sheet as of September 30, 2004 and December 31, 2003............... F-83 Statement of Income for the three and nine months ended September 30, 2004............................................................. F-84 Statement of Cash Flows for the nine months ended September 30, 2004 and 2003.................................................... F-85 Notes to Financial Statements.............................................. F-86 F-82 FSP Royal Ridge Corp. Balance Sheet (unaudited)
September 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 687 375 - ---------------------------------------------------------------------------------------------------------------------------- Real estate investments, net 17,186 17,498 Acquired real estate leases, net of accumulated amortization of $260 and $143 858 975 Acquired favorable real estate lease, net of accumulated net amortization of $775 and $426 2,558 2,907 Cash and cash equivalents 2,510 2,251 Restricted cash 571 571 Step rent receivable 1,040 954 Prepaid expenses and other assets 9 14 - ---------------------------------------------------------------------------------------------------------------------------- Total assets $ 24,732 $ 25,170 ============================================================================================================================= Liabilities and stockholders' equity: Liabilities: Accounts payable and accrued expenses $ 475 $ 240 Dividends payable -- 536 - ---------------------------------------------------------------------------------------------------------------------------- Total liabilities 475 776 - ---------------------------------------------------------------------------------------------------------------------------- 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 (3,020) (2,883) - ---------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 24,257 24,394 - ---------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 24,732 $ 25,170 =============================================================================================================================
See accompanying notes to financial statements. F-83 FSP Royal Ridge Corp. Statement of Income (unaudited)
For the For the Three Months Nine Months Ended Ended September 30, September 30, ------------------- ----------------------- (in thousands, except shares and per share amounts) 2004 2003 2004 2003 ================================================================================================================== Revenues: Rental $ 769 $ 728 $2,286 $ 1,562 - ----------------------------------------------------------------------------------------------------------------- Expenses: Rental operating expenses 290 209 693 488 Real Estate Taxes and insurance 81 66 250 214 Depreciation and amortization 143 130 429 367 Interest -- -- -- 1,731 ================================================================================================================== Total expenses 514 405 1,372 2,800 - ----------------------------------------------------------------------------------------------------------------- Income (loss) before interest income 255 323 914 (1,238) Interest income 9 4 27 16 - ----------------------------------------------------------------------------------------------------------------- Net income (loss) before common dividends 264 327 941 (1,222) Dividends paid to common shareholders -- 14 -- 14 - ----------------------------------------------------------------------------------------------------------------- Net income (loss) attributable to preferred shareholders $ 264 $ 313 $ 941 $(1,236) ================================================================================================================== 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 $ 887 $1,052 $3,163 $(4,155) ==================================================================================================================
See accompanying notes to financial statements. F-84 FSP Royal Ridge Corp. Statements of Cash Flows (unaudited)
For the Nine Months Ended (in thousands) September 30, 2004 September 30, 2003 ================================================================================================================== Cash flows from operating activities: Net Income (loss) $ 941 $ (1,222) Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Depreciation and amortization 429 367 Amortization of favorable lease 349 310 Changes in operating assets and liabilities: Restricted cash -- (571) Tenant rent receivables -- (2) Step rent receivable (86) (932) Prepaid expenses and other assets 5 (29) Accounts payable and accrued expenses 235 469 - ------------------------------------------------------------------------------------------------------------------ Net cash provided by (used for) operating activities 1,873 (1,610) - ------------------------------------------------------------------------------------------------------------------ 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 (1,614) (864) Proceeds from long-term debt -- 24,250 Principal payments on long-term debt -- (24,250) - ------------------------------------------------------------------------------------------------------------------ Net cash (used for) provided by financing activities (1,614) 26,413 - ------------------------------------------------------------------------------------------------------------------ Net increase in cash and cash equivalents 259 2,479 Cash and cash equivalents, beginning of period 2,251 -- - ------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents, end of period $ 2,510 $ 2,479 ================================================================================================================== Supplemental disclosure of cash flow information: Cash paid for: Interest $ -- $ 1,731 Disclosure of non-cash financing activities: Dividends declared but not paid $ -- $ 525
See accompanying notes to financial statements. F-85 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. 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. RECLASSIFICATIONS Certain balances in the 2003 financial statements have been reclassified to conform to the 2004 presentation. 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 convertible into shares. There were no potential dilutive shares outstanding at September 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-86 FSP Royal Ridge Corp. Notes to Financial Statements (unaudited) 4. 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 $9,000 and $9,000 for the three months ended September 30, 2004 and 2003, respectively and $26,000 and $9,000 for the nine months ended September 30, 2004 and 2003, respectively. An acquisition fee of $149,000 and other costs of $111,000 were paid in the nine months ended September 30, 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 the nine months ended September 30, 2003 to an affiliate of the common shareholder for services related to syndication of the Company's preferred stock. During the nine months ended September 30, 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 during the nine months ended September 30, 2003 for obtaining the first mortgage loan. Such amount is included in interest expense on the Statement of Operations. The Company paid a distribution of $14,000 during the nine months ended September 30, 2003 to the common shareholder relating to operating activities of the Company prior to the completion of the offering of preferred shares. 5. Subsequent Events On October 1, 2004 the Company declared a dividend of $1,787.00 per share of preferred stock payable to holders of record as of October 1, 2004. F-87 FSP Royal Ridge Corp. Financial Statements December 31, 2003 Table of Contents Page ---- Financial Statements Independent Auditor's Report.............................................. F-89 Balance Sheet as of December 31, 2003..................................... F-90 Statement of Operations for the year ended December 31, 2003.............. F-91 Statement of Changes in Stockholders' Equity for the year ended December 31, 2003................................................... F-92 Statement of Cash Flows for the year ended December 31, 2003.............. F-93 Notes to the Financial Statements......................................... F-94 F-88 [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-89 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 Distributions 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 distributions 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-90 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) Distributions paid to common stockholder 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-91 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 Distributions to stockholders -- -- -- (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-92 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) Distributions 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-93 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-94 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-95 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 2006 $ 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-96 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-97 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 convertible 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. 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. F-98 FSP Royal Ridge 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 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 distributions paid to the dividends paid deduction: Period Ended December 31, Per Preferred Per Common (in thousands, except per share data) Total Share Share ======================================================================== Cash dividends paid $ 1,389 $ 4,623 $ 14,232 Less: Return of Capital (1,389) (4,623) (14,232) ------------------------------------------------------------------------ Dividends paid deduction $ -- $ -- $ -- ======================================================================== F-99 FSP Royal Ridge Corp. Notes to Financial Statements 5. 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. 6. 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 distribution of $14,000 to the common shareholder relating to operating activities of the Company prior to the completion of the offering of preferred shares. F-100 FSP Royal Ridge Corp. Notes to Financial Statements 7. 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-101 SCHEDULE III ROYAL RIDGE REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2003
Initial Cost --------------------------------- Costs Capitalized Buildings (Disposals) Improvements Subsequent and to Description Encumbrances (1) Land Equipment Acquisition ---------------- ---- --------- ------------ (in thousands) Royal Ridge, Alpharetta, GA 1,649 16,224 -- Historical Costs -------------------------------------------------------------------------------------- Buildings Total Costs, Improvements Net of Depreciable and Accumulated Accumulated Life Date of Description Land Equipment Total (2) Depreciation Depreciation Years Acquisition ---- --------- --------- ------------ ------------ ----- ----------- (in thousands) Royal Ridge, Alpharetta, GA 1,649 16,224 17,873 375 17,498 5-39 2003
(1) There are no encumbrances on the above properties. (2) The aggregate cost for Federal Income Tax purposes is $21,822. F-102 Royal Ridge The following table summarizes the changes in the Company's real estate investments and accumulated depreciation: December 31, --------------- (in thousands) 2003 ========================================================================== Real estate investments, at cost: Balance, beginning of period $ -- Acquisitions 17,873 Improvements -- Dispositions -- -------------------------------------------------------------------------- Balance, end of period $17,873 ========================================================================== Accumulated depreciation: Balance, beginning of period $ -- Depreciation 375 Dispositions -- -------------------------------------------------------------------------- Balance, end of period $ 374 ========================================================================== F-103 ROYAL RIDGE FOR THE PERIOD JANUARY 1, 2003 TO JANUARY 29, 2003 AND FOR THE YEAR ENDED DECEMBER 31, 2002 CONTENTS PAGE Independent auditors' report F-105 Statements of revenue over certain operating expenses F-106 Notes accompanying the statements of revenue over certain operating expenses F-107 F-104 INDEPENDENT AUDITORS' REPORT To the Stockholders FSP Royal Ridge Corp. We have audited the accompanying statements of revenue over certain operating expenses (the "Statements") of Royal Ridge for the period January 1, 2003 to January 29, 2003 and for the year ended December 31, 2002. These Statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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 Statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the Statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall Statements' presentation. We believe that our audits provide a reasonable basis for our opinion. The accompanying Statements were prepared to comply with the requirements of Rule 3-14 of Regulation S-X of the Securities and Exchange Commission, and exclude certain expenses described in Note 2 and, therefore, are not intended to be a complete presentation of the Property's revenue and expenses. In our opinion, these Statements referred to above present fairly, in all material respects, the revenue over certain operating expenses (as described in Note 2) of Royal Ridge for the period January 1, 2003 to January 29, 2003 and for the year ended December 31, 2002, in conformity with the basis of accounting described in Note 2. /s/ Braver and Company, P.C. Newton, Massachusetts February 28, 2004 F-105 ROYAL RIDGE STATEMENTS OF REVENUE OVER CERTAIN OPERATING EXPENSES FOR THE PERIOD JANUARY 1, 2003 TO JANUARY 29, 2003 AND FOR THE YEAR ENDED DECEMBER 31, 2002 2003 2002 --------- --------- REVENUE: Rental income $ 1,195 $ 3,084 --------- --------- CERTAIN OPERATING EXPENSES (Note 2): Taxes and insurance 19,046 184,096 Management fees 2,652 33,212 Administrative 4,736 62,264 Operating and maintenance 87,616 526,358 --------- --------- 114,050 805,930 --------- --------- Excess of certain operating expenses over revenue $(112,855) $(802,846) ========= ========= The accompanying notes are an integral part of these financial statements. F-106 ROYAL RIDGE NOTES ACCOMPANYING THE STATEMENTS OF REVENUE OVER CERTAIN OPERATING EXPENSES 1. DESCRIPTION OF THE PROPERTY: The accompanying statements of revenue over certain operating expenses (the "Statements") include the operations of a commercial building located in Alpharetta, Georgia (the "Property"). These Statements are the results of operations of the Property under the basis of accounting described in Note 2 for the period and year described prior to the acquisition of the Property by FSP Royal Ridge Corp. The Property consists of a six-story Class "A" institutional quality suburban office tower containing approximately 161,366 square feet located on approximately 13.2 acres of land. The Property was sold to FSP Royal Ridge Corp. on January 30, 2003. No financial information is provided for 2001. The property was constructed in 2001 and there were no leases or tenants until 2002. 2. BASIS OF ACCOUNTING: The accompanying Statements have been prepared on the accrual basis of accounting. The Statements have been prepared in accordance with Rule 3-14 of Regulation S-X of the Securities and Exchange Commission for real estate properties acquired or to be acquired. Accordingly, these Statements exclude certain historical expenses not comparable to the operations of the Property after acquisition such as amortization, depreciation, interest, corporate expenses and certain other costs not directly related to future operations of the Property. 3. REVENUE RECOGNITION: Rental revenue includes income from leases, certain reimbursable expenses, and other income associated with renting the property. A summary of rental revenue is shown in the following table: For the period Year Ended January 1, 2003 to December 31, January 29, 2003 2002 --------------- --------------- Reimbursable expenses $ -- $ 3,084 Other income 1,195 -- --------------- --------------- Total $ 1,195 $ 3,084 =============== =============== Royal Ridge has retained substantially all of the risks and benefits of the Property and accounts for its leases as operating leases. Rental income from leases, which includes rent concessions (including free rent and tenant improvement allowances) and scheduled increases in rental rates during the lease term, is recognized on a straight-line basis. However, for the year ended December 31, 2002 and for the period January 1, 2003 to January 29, 2003, Royal Ridge did not recognize any rental revenue due to a "free rent" provision in its lease agreements. Had Royal Ridge recognized the rental revenue under a straight-line basis, such revenue would have been written off as uncollectible upon the sale of the Property as described in Note 1. The Company does not have any percentage rent arrangements with its tenants. Reimbursable costs are included in rental income in the period earned. 4. USE OF ESTIMATES: The preparation of the Statements in conformity with the basis of accounting described in Note 2 requires management to make estimates and assumptions that affect the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. F-107 ROYAL RIDGE NOTES ACCOMPANYING THE STATEMENTS OF REVENUE OVER CERTAIN OPERATING EXPENSES 5. CONCENTRATIONS OF RISKS: For the period January 1, 2003 to January 29, 2003, and for the year ended December 31, 2002, rental income was received from three lessees. As such, future receipts are dependent upon the financial strength of these lessees and their ability to perform under the lease agreements 6. LEASES: The Company, as lessor, has minimum future rentals due under noncancellable operating leases as follows: Year Ending December 31, Amount ------------ ------------- 2003 $ 1,153,000 2004 2,198,000 2005 2,040,000 2006 2,071,000 2007 2,123,000 Thereafter 8,926,000 ------------- $ 18,511,000 ============= In addition, the lessees are liable for real estate taxes and operating expenses as direct expenses to them. F-108 SELECTED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA The following unaudited pro forma financial information has been prepared based upon certain pro forma adjustments to the historical consolidated financial statements of FSP Corp. and the target REITs. The pro forma consolidated balance sheets have been presented as if the mergers occurred as of September 30, 2004. The pro forma consolidated statements of income for the nine months ended September 30, 2004 and for the year ended December 31, 2003 and the consolidated pro forma statements of cash flow for the nine months ended September 30, 2004 and for the year ended December 31, 2003 are presented as if the mergers occurred at the beginning of the period presented. The pro forma financial information has been prepared assuming all of the target REITs participate in the mergers. If one or more target REITs does not obtain the vote required for the consummation of the merger with such target REIT, FSP Corp. will not proceed with the mergers of any other target REIT. The unaudited pro forma consolidated financial statement data are not necessarily indicative of what the combined company's actual financial position or results of operations would have been as of the date or for the period indicated, nor do they purport to represent the combined company's financial position or results of operations as of or for any future period. The unaudited pro forma consolidated financial statement data should be read in conjunction with all financial statements included elsewhere herein or incorporated herein by reference. F-109 Franklin Street Properties Corp. Combining Condensed Consolidated Pro Forma Balance Sheets September 30, 2004 (Unaudited)
Historical Historial Pro Forma (in thousands) FSP Corp. Target REITs(k) Adjustment Pro Forma - ------------------------------------------------------------------------------------------------------- Assets: Real estate assets, net $ 442,197 $ 122,561 $ 14,064(c)(d) $ 578,822 Acquired favorable leases, net -- 8,814 232(d) 9,046 Acquired lease origination costs, net 6,346 3,853 236(d) 10,435 Investment in non-consolidated REITs 4,292 -- -- 4,292 Cash and cash equivalents 50,630 16,269 (685)(c) 65,739 (475)(b) Restricted cash 1,039 706 -- 1,745 Tenant rents receivable, net 552 36 -- 588 Straight line rents receivable, net 4,980 2,560 (2,560)(p) 4,980 Prepaid expenses 3,475 181 -- 3,656 Deferred leasing commissions, net 1,293 358 -- 1,651 Office computeres and equipment, net 408 -- -- 408 - ------------------------------------------------------------------------------------------------------- Total assets $ 515,212 $ 155,338 $ 10,812 $ 681,362 ======================================================================================================= Liabilities and stockholders' equity: Liabilities: Accounts payable and accrued expenses $ 8,574 $ 3,897 $ -- $ 12,471 Accrued compensation 1,050 -- -- 1,050 Distribution payable -- -- 6,021(o) 6,021 Tenant security deposits 1,039 135 1,174 - ------------------------------------------------------------------------------------------------------- Total liabilities 10,663 4,032 6,021 20,716 - ------------------------------------------------------------------------------------------------------- Stockholders' Equity: Preferred stock -- -- -- -- Common stock 5 -- 1(i) 6 Additional paid in capital 512,813 167,412 (11,316)(i) 668,909 Treasury stock (10) -- -- (10) Retained earnings (distributions in excess of earnings) (8,259) (16,106) 16,106(q) (8,259) - ------------------------------------------------------------------------------------------------------- Total stockholders' equity 504,549 151,306 4,791 660,646 - ------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 515,212 $ 155,338 $ 10,812 $ 681,362 =======================================================================================================
See accompanying notes to condensed consolidated pro forma financial statements F-110 Franklin Street Properties Corp. Combining Condensed Consolidated Pro Forma Statements of Income For the nine months ended September 30, 2004 (Unaudited)
Historical Historical Pro Forma (in thousands, except per share amounts) FSP Corp. Target REITs(l) Adjustments Pro Forma - ------------------------------------------------------------------------------------------------------- Revenue: Rental income $ 51,411 $ 16,975 $ 45(d) $ 68,431 Syndication fees 8,603 -- -- 8,603 Transaction fees 9,209 -- -- 9,209 Sponsored REIT income 2,357 -- -- 2,357 Management fees and interest from loans 803 -- (175)(e) 628 Equity in earnings of investment in REIT 182 -- -- 182 Other 13 -- -- 13 - ------------------------------------------------------------------------------------------------------- Total revenue 72,578 16,975 (130) 89,423 ======================================================================================================= Expenses: Rental operating expenses 10,267 3,917 (175)(e) 14,009 Real estate taxes and insurance 6,702 2,220 -- 8,922 Depreciation and amortization 9,984 2,819 304(d) 13,133 26(d) Sponsored REIT expenses 1,693 -- -- 1,693 Selling, general and administrative 4,920 -- 475(b) 5,395 Commissions 4,384 -- -- 4,384 Interest 517 -- -- 517 - ------------------------------------------------------------------------------------------------------- Total expenses 38,467 8,956 630 48,053 - ------------------------------------------------------------------------------------------------------- Income (loss) before interest, taxes and 34,111 8,019 (760) 41,370 discontinued operations, Interest income 489 179 -- 668 Taxes on income (a) (760) -- -- (760) Income from discontinued operations -- -- -- -- - ------------------------------------------------------------------------------------------------------- Net income $ 33,840 $ 8,198 $ (760) $ 41,278 ======================================================================================================= Weighted average shares outstanding 49,628 -- 10,895(i) 60,523 basic and diluted ======================================================================================================= Net income per share basic and diluted $ 0.68 $ -- $ -- $ 0.68 =======================================================================================================
See accompanying notes to condensed consolidated pro forma financial statements. F-111 Franklin Street Properties Corp. Combining Condensed Consolidated Pro Forma Statements of Income For the year ended December 31, 2003 (Unaudited)
2003 Merger Pro Forma Historical Historical Historical Adjustment Adjusted Target REITs Property Pro Forma (in thousands, except per share amounts) FSP Corp. (j) FSP Corp. (m) (n) Adjustments Pro Forma - ----------------------------------------------------------------------------------------------------------------------------------- Revenue: Rental income $ 49,789 $15,204 $ 64,993 $ 20,135 $1,348 $ 61(d) $ 86,537 Syndication fees 14,631 -- 14,631 -- -- (5,403)(g) 9,228 Transaction fees 14,745 -- 14,745 -- -- (5,558(g) 9,187 Sponsored REIT income 3,452 -- 3,452 -- -- (1,595(h) 1,857 Management fees and interest on 1,129 -- 1,129 -- -- (204)(e) 652 (273)(f) Other 22 -- 22 -- -- 22 - ----------------------------------------------------------------------------------------------------------------------------------- Total revenue 83,768 15,204 98,972 20,135 1,348 (12,972) 107,483 - ----------------------------------------------------------------------------------------------------------------------------------- Expenses: Rental operating expenses 10,425 3,997 14,422 4,242 415 (204)(e) 18,875 Real estate taxes and insurance 6,264 2,667 8,931 2,708 175 -- 11,814 Depreciation and amortization 9,265 3,298 12,563 3,463 -- 405(d) 16,466 35(d) Sponsored REIT expenses 2,620 -- 2,620 -- -- (1,208)(h) 1,412 Selling, general and administrative 5,711 -- 5,711 -- -- 475(b) 6,186 Commissions 7,291 -- 7,291 -- -- -- 7,291 Interest 1,036 -- 1,036 5,175 -- (273)(f) 772 (264)(g) (4,902)(g) - ----------------------------------------------------------------------------------------------------------------------------------- Total expenses 42,612 9,962 52,574 15,588 590 (5,936) 62,816 - ----------------------------------------------------------------------------------------------------------------------------------- Income (loss) before interest, taxes, discontinued operations and gain on sales of properties 41,156 5,242 46,398 4,547 758 (7,036) 44,667 Interest Income 367 117 484 193 -- -- 677 Taxes on income (a) (1,700) -- (1,700) -- -- -- (1,700) Income from discontinued operations 195 -- 195 -- -- -- 195 Gain on sale of properties, net of tax 6,362 -- 6,362 -- -- -- 6,362 Dividends to common shareholder -- -- -- (387) -- 387(h) -- - ----------------------------------------------------------------------------------------------------------------------------------- Net income $ 46,380 $ 5,359 $ 51,739 $ 4,353 $ 58 $ (6,649) 50,201 =================================================================================================================================== Weighted average shares outstanding, basic and diluted 39,214 10,416 49,630 -- -- 10,895(i) 60,525 =================================================================================================================================== Income per share attributable to: Continuing operations $ 1.02 $ -- $ -- $ -- $ -- $ -- $ 0.72 Discontinued operations -- -- -- -- -- -- -- Gain on sale of properties, net $ 0.16 -- -- -- -- -- $ 0.11 - ----------------------------------------------------------------------------------------------------------------------------------- Basic and diluted net income per share $ 1.18 $ -- $ -- $ -- $ -- $ -- $ 0.83 ===================================================================================================================================
See accompanying notes to condensed consolidated pro forma financial statements F-112 Franklin Street Properties Corp. Consolidated Pro Forma Statements of Cash Flow For the nine months ended September 30, 2004 (Unaudited)
Historical Historical Pro Forma (in thousands) FSP Corp. Target REITs (r) Adjustments Pro Forma - ------------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 33,840 $ 8,198 $ (760) $ 41,278 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization expense 9,984 2,819 330(d) 13,133 Amortization of above market lease 176 1,934 (45)(d) 2,065 Equity in earnings from non-consolidated REITs (182) -- -- (182) Distributions from non-consolidated REITs 147 -- -- 147 Shares issued as compensation 162 -- -- 162 Changes in operating assets and liabilities: Restricted cash (57) 15 -- (42) Tenant rent receivables, net 329 14 -- 343 Straight-line rents, net (893) (514) -- (1,407) Prepaid expenses and other assets, net (2,669) (59) -- (2,728) Accounts payable and accrued expenses 3,534 (276) -- 3,258 Accrued compensation (485) -- -- (485) Tenant security deposits 57 (15) -- 42 Payment of deferred leasing commissions (548) (329) -- (877) - ------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used for) operating activities 43,395 11,787 (475) 54,707 - ------------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Purchase of real estate assets and related leases, office computers and furniture, capitalized merger costs (993) (225) (685)(c) (1,903) Investment in non-consolidated REITs (4,257) -- -- (4,257) Sale of assets held for syndication 4,117 -- -- 4,117 - ------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used for) investing activities (1,133) (225) (685) (2,043) - ------------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Distributions to stockholders (46,152) (12,170) -- (58,322) Proceeds from (payments to) bank note payable, net (4,117) -- -- (4,117) Purchase of treasury stock (156) -- -- (156) - ------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used for) financing activities (50,425) (12,170) -- (62,595) - ------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (8,163) (608) (1,160) (9,931) Cash and cash equivalents, beginning of period 58,793 16,877 -- 75,670 - ------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 50,630 $16,269 $ (1,160) $ 65,739 =============================================================================================================================== Supplemental disclosure of cash flow information: Cash paid for: Interest $ 517 $ -- $ -- $ 517 Income taxes $ 1,450 $ -- $ -- $ 1,450 Non-cash investing and financing activities: Assets acquired through issuance of common stock in merger transaction, net $ -- $ -- $ 149,075 $ 149,075
See accompanying notes to condensed consolidated pro forma financial statements. F-113 Franklin Street Properties Corp Consolidated Pro Forma Statements of Cash Flow For the year ended December 31, 2003 (Unaudited)
2003 Merger Historical Historical Pro Forma Adjusted Target Historical Pro Forma (in thousands) FSP Corp. Adjustment FSP Corp. REITs (s) Property Adjustments Pro forma - ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net income $ 46,380 $5,359 $ 51,739 $ 4,740 $758 $ (6,649) $ 50,588 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization expense 9,530 3,298 12,828 3,463 -- 440(d) 16,731 Amortization of above market lease 138 -- 138 2,381 -- (61)(d) 2,458 Gain on sale of real estate assets (6,362) -- (6,362) -- -- -- (6,362) Changes in operating assets and liabilities: Restricted cash (1) -- (1) (677) -- -- (678) Tenant rent receivables, net (302) -- (302) (50) -- -- (352) Straight-line rents, net (1,030) -- (1,030) (1,817) -- -- (2,847) Prepaid expenses and other assets, net 305 -- 305 (2,729) -- -- (2,424) Accounts payable and accrued expenses (9,053) -- (9,053) 2,255 -- -- (6,798) Accrued compensation 258 -- 258 -- -- -- 258 Tenant security deposits 1 -- 1 106 -- -- 107 Payment of deferred leasing commissions (487) -- (487) (39) -- -- (526) - ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used for) operating activities 39,377 8,657 48,034 7,633 758 (6,270) 50,155 - ----------------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Cash acquired through issuance of common stock in merger transaction 23,524 -- 23,524 -- -- -- 23,524 Purchase of real estate assets and related leases, office computers and furniture capitalized merger costs (2,388) -- (2,388) (68,361) -- (685)(c) (71,434) Change in deposits on real estate assets 841 -- 841 -- -- -- 841 Investment in assets held for syndication (4,117) -- (4,117) -- -- -- (4,117) Proceeds received on sales of real estate assets 21,870 -- 21,870 -- -- -- 21,870 - ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used for) investing activities 39,730 -- 39,730 (68,361) -- (685) (29,316) - ----------------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Proceeds from sale of company stock -- -- -- 78,377 -- -- 78,377 Distributions to stockholders (46,747) -- (46,747) (12,216) -- -- (58,963) Proceeds from (payments to) bank note payable, net 4,117 -- 4,117 -- -- -- 4,117 - ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used for) financing activities (42,630) -- (42,630) 66,161 -- -- 23,531 - ----------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 36,477 8,657 45,134 5,433 758 (6,955) 44,370 Cash and cash equivalents, beginning of year 22,316 -- 22,316 3,640 -- -- 25,956 - ----------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of year $ 58,793 $8,657 $ 67,450 $ 9,073 $758 $ (6,955) $ 70,326 =================================================================================================================================== Supplemental disclosure of cash flow information: Cash paid for: Interest $ 1,036 $ -- $ 1,036 $ 5,175 $ -- $ -- $ 6,211 Income taxes $ 1,963 $ -- 1,963 $ -- $ -- $ -- $ 1,963 Non-cash investing and financing activities: Dividends declared but not paid $ -- $ -- -- $ 4,092 $ -- $ -- $ 4,092 Assets acquired through issuance of common stock in merger transaction, net $ 297,468 $ -- $ 297,468 $ -- $ -- $ 149,075 $ 446,543
See accompanying notes to condensed consolidated pro forma financial statements. F-114 FRANKLIN STREET PROPERTIES CORP. NOTES TO CONDENSED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS (Unaudited) BASIS OF PRESENTATION The following unaudited pro forma condensed consolidated financial statement presentation has been prepared based upon certain pro forma adjustments to the historical consolidated financial statements of FSP Corp. The pro forma balance sheets are presented as if the mergers occurred as of September 30, 2004. The pro forma statements of income and the pro forma statements of cash flow are presented as if the mergers occurred as of the beginning of the periods presented. The mergers will be treated as a purchase of assets and each target REIT's assets and liabilities will be recorded on FSP Corp.'s books at their fair value as of the effective date of the mergers. The value ascribed to the net assets of the target REITs is estimated to be $156,424,000, which includes real estate assets of $149,075,000 at their appraised values, cash of $6,664,000 and capitalized merger costs of $685,000. Other assets, net of liabilities, are expected to be immaterial. FSP Corp. will record the mergers based upon the fair value of the assets acquired, not the value of the shares of FSP Corp.'s common stock issued. The value allocated to the assets acquired in the mergers is preliminary: the final value allocated to the assets acquired will be determined as of the actual merger date. PRO FORMA ADJUSTMENTS Certain assumptions regarding the operations of FSP Corp. have been made in connection with the preparation of the pro forma condensed consolidated financial information. These assumptions are as follows: (a) FSP Corp. and each of the target REITs have elected to be, and are qualified as, a real estate investment trust for federal income tax purposes. Each entity has met the various required tests; therefore, no provision for federal or state income taxes has been reflected on real estate operations. FSP Corp. has subsidiaries which are not in the business of real estate operations. Those subsidiaries are taxable as real estate investment trust subsidiaries, or TRS, and are subject to income taxes at statutory tax rates. The taxes on income shown in the pro forma statements of income are the taxes on income of the TRS. There are no material items that would cause a deferred tax asset or a deferred tax liability. (b) Costs of the mergers to the target REITs are estimated at $475,000 and are reflected as paid at September 30, 2004, and are recorded as an administrative expense. (c) The costs of the mergers to FSP Corp. are estimated at $685,000 and are reflected as paid as of September 30, 2004 and are capitalized to the assets acquired. (d) The following schedule shows the cost of the property (at its appraised value) plus capitalized merger costs for each target REIT.
(in thousands) Montague Addison Royal Ridge Collins Total - ---------------------------------------------------------------------------------------------- Purchase price of properties Appraised value $ 20,000 $ 54,500 $ 26,075 $ 48,500 $149,075 Capitalized merger costs 125 239 112 209 685 - ---------------------------------------------------------------------------------------------- Total $ 20,125 $ 54,739 $ 26,187 $ 48,709 $149,760 ==============================================================================================
F-115 FRANKLIN STREET PROPERTIES CORP. NOTES TO CONDENSED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS (Unaudited) The cost of the property held by each target REIT (including capitalized merger costs of $685,000) has been allocated to real estate assets, acquired lease origination costs and acquired favorable leases. Acquired lease origination costs represent the value associated with acquiring an in-place lease (i.e. the market cost to execute a similar lease, including leasing commission, legal, vacancy and other related costs). Acquired favorable leases represents the value associated with a lease which has a rental stream with above market rates. The value assigned to buildings, land and leases approximates their fair value. The following schedule shows the difference between historical costs of the properties and their allocated purchase price. The purchase price of the properties is determined based upon the fair value of the assets acquired. Depreciation and amortization for the target REITs is based on a preliminary allocation of the purchase price to real estate investments and to the leases acquired. The allocation is subject to change as additional information is obtained. An increase in the allocation to lease origination costs will result in an increase in amortization expense. For each $1,000,000 increase in lease origination costs, the related pro forma amortization expense will increase by approximately $200,000 per year.
Adjustment to Depreciation and Amortization Estimated for the for the Historical Allocated Life Nine months ended Year ended Cost Purchase Price Difference (years) September 30, 2004 December 31, 2003 ---------- -------------- ---------- ------- ------------------ ----------------- Montague Land $ 10,500 7,878 $ (2,622) N/A $ -- $ -- Building 9,939 10,202 263 39 5 7 Acquired favorable leases 2,616 1,874 (742) 3 (185) (247) Acquired lease origination costs 241 171 (70) 3 (17) (23) -------- -------- -------- -------- -------- Total $ 23,296 $ 20,125 $ (3,171) $ (197) $ (263) ======== ======== ======== ======== ======== Addison Circle Land $ 4,365 $ 4,140 $ (225) N/A $ -- $ -- Building 43,706 49,499 5,793 39 112 149 Acquired favorable leases -- -- -- - -- -- Acquired lease origination costs 1,150 1,100 (50) 4 (9) (12) -------- -------- -------- -------- -------- Total $ 49,221 $ 54,739 $ 5,518 $ 103 $ 137 ======== ======== ======== ======== ======== Royal Ridge Land $ 1,649 $ 2,542 $ 893 N/A $ -- $ -- Building 15,537 19,303 3,766 39 73 97 Acquired favorable leases 2,558 3,251 693 6 87 116 Acquired lease origination costs 858 1,091 233 6 29 39 -------- -------- -------- -------- -------- Total $ 20,602 $ 26,187 $ 5,585 $ 189 $ 252 ======== ======== ======== ======== ======== Collins Crossing Land $ 4,022 $ 4,308 $ 286 N/A $ -- $ -- Building 32,843 38,753 5,910 39 114 152 Acquired favorable leases 3,640 3,921 281 4 53 70 Acquired lease origination costs 1,604 1,727 123 4 23 31 -------- -------- -------- -------- -------- Total $ 42,109 $ 48,709 $ 6,600 $ 190 $ 253 ======== ======== ======== ======== ======== Total Land $ 20,536 $ 18,868 $ (1,668) N/A $ -- $ -- Building 102,025 117,757 15,732 39 304 405 -------- -------- -------- -------- -------- Real estate assets, net 122,561 136,625 14,064 304 405 Acquired favorable leases 8,814 9,046 232 3-6 (45) (61) Acquired lease origination costs 3,853 4,089 236 3-6 26 35 -------- -------- -------- -------- -------- Total $135,228 $149,760 $ 14,532 $ 285 $ 379 ======== ======== ======== ======== ========
F-116 FRANKLIN STREET PROPERTIES CORP. NOTES TO CONDENSED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS (Unaudited) (e) Management fees charged by FSP Corp. to the target REITs have been eliminated from revenue and expenses as follows. Nine Months Ended Year Ended September 30, 2004 December 31, 2003 -------------------------------------------------------- $ 175,000 $ 204,000 (f) Interest of $273,000 charged by FSP Corp. on loans to the two target REITs syndicated in 2003 has been eliminated from revenue and expenses. See footnote (g) for additional interest expense incurred during syndications. (g) Income and expenses directly related to the syndication of two target REITs in 2003 have been eliminated in the pro forma Statements of Income. Revenue directly related to the syndication of two target REITs in 2003 that is included in FSP Corp.'s financial statements as follows: Loan origination fees $ 4,902,000 Other organization costs 656,000 ------------ Total transaction fees $ 5,558,000 Syndication fees, gross 6,820,000 Syndication fees, rebates (1,417,000) ------------ Total syndication fees, net 5,403,000 ------------ Total revenue adjustment $10,961,000 ============ F-117 FRANKLIN STREET PROPERTIES CORP. NOTES TO CONDENSED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS (Unaudited) The two target REITs have accounted for these fees in their financial statements as follows: Interest expense $4,902,000 Real estate acquisition costs 656,000 ---------- $5,558,000 ========== Gross syndication fees recorded as an offset to additional paid-in capital $6,820,000 ========== In connection with the syndication of the two target REITs in 2003, FSP Corp. incurred direct expenses of $264,000 relating to interest expense that is eliminated in the pro forma statement of income. (h) After a sponsored REIT purchases a real estate asset but prior to the final syndication of the sponsored REIT, FSP Corp. records its pro rata share of the operations of the sponsored REIT into FSP Corp.'s statement of operations as sponsored REIT income and sponsored REIT expenses. Subsequent to the syndication, the sponsored REIT typically declares and pays a dividend to FSP Corp. This adjustment eliminates duplicate revenues and expenses prior to the syndication of the target REITs. A summary of the adjustment is shown below:
Nine Months Ended Year Ended (in thousands) September 30, 2004 December 31, 2003 ------------------------------------------------------------------------- Sponsored REIT income $ -- $ 1,595 Sponsored REIT expenses -- 1,208 --------- --------- Dividends to common shareholder $ -- $ 387 ========= =========
(i) Approximately 10,894,994 shares of FSP common stock will be issued in exchange for the 1,822.5 outstanding shares of target REIT preferred stock in connection with the mergers. Stockholders' equity will be adjusted by the net difference between the assets and liabilities acquired in the merger. (j) Represents the revenue and expenses of the 13 Sponsored REITs acquired by FSP Corp. from January 1, 2003 to May 31, 2003. For the period (unaudited) January 1, 2003 (in thousands) to May 31, 2003 -------------------- Revenue $ 15,204 Real estate operating expenses (3,997) Real estate taxes and insurance (2,667) Depreciation and amortization (3,298) Interest income 117 ---------- Net income $ 5,359 ========== F-118 (k) The following table combines the historical balance sheets of the target REITs as of September 30, 2004.
(in thousands) Montague Addison Circle Royal Ridge Collins Crossing Total -------- -------------- ----------- ---------------- ----- Assets: Land $ 10,500 $ 4,365 $ 1,649 $ 4,022 $ 20,536 Building 10,499 46,112 16,224 34,232 107,067 --------- --------- --------- --------- --------- Real estate investments, cost 20,999 50,477 17,873 38,254 127,603 Less accumulated depreciation 560 2,406 687 1,389 5,042 --------- --------- --------- --------- --------- Real estate investments, net 20,439 48,071 17,186 36,865 122,561 Acquired favorable leases, net 2,616 -- 2,558 3,640 8,814 Acquired lease origination costs, net 241 1,150 858 1,604 3,853 Cash and equivalents 3,633 5,492 2,510 4,634 16,269 Restricted cash -- 20 571 115 706 Tenant rent receivable, net -- 1 -- 35 36 Step rent receivable, net 461 531 1,040 528 2,560 Prepaid expenses 22 99 9 51 181 Deferred leasing commissions, net -- 358 -- -- 358 --------- --------- --------- --------- --------- Total assets $ 27,412 $ 55,722 $ 24,732 $ 47,472 $ 155,338 ========= ========= ========= ========= ========= Liabilities and stockholders' Equity: Accounts payable and accrued expenses $ 465 $ 1,694 $ 475 $ 1,263 $ 3,897 Tenant security deposits -- 20 -- 115 135 --------- --------- --------- --------- --------- Total liabilities 465 1,714 475 1,378 4,032 --------- --------- --------- --------- --------- Stockholders' equity Preferred stock -- -- -- -- -- Common stock -- -- -- -- -- Additional paid in capital 30,652 58,383 27,277 51,100 167,412 Retained deficit and distributions in excess of earnings (3,705) (4,375) (3,020) (5,006) (16,106) --------- --------- --------- --------- --------- Total stockholders' equity 26,947 54,008 24,257 46,094 151,306 --------- --------- --------- --------- --------- Total liabilities & stockholders' equity $ 27,412 $ 55,722 $ 24,732 $ 47,472 $ 155,338 ========= ========= ========= ========= =========
F-119 FRANKLIN STREET PROPERTIES CORP. NOTES TO CONDENSED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS (Unaudited) (l) The following table combines the historical operations for the target REITs for the nine months ended September 30, 2004.
(in thousands) Montague Addison Circle Royal Ridge Collins Crossing Total -------- -------------- ----------- ---------------- ----- Revenue: Rental $ 2,592 $ 6,892 $ 2,286 $ 5,205 $ 16,975 ---------- ---------- ---------- ---------- ---------- Total revenue 2,592 6,892 2,286 5,205 16,975 ---------- ---------- ---------- ---------- ---------- Expenses: Rental operating expenses 273 1,490 693 1,461 3,917 Real estate taxes and insurance 210 1,045 250 715 2,220 Depreciation and amortization 282 1,136 429 972 2,819 ---------- ---------- ---------- ---------- ---------- Total expenses 765 3,671 1,372 3,148 8,956 ---------- ---------- ---------- ---------- ---------- Income before interest 1,827 3,221 914 2,057 8,019 Interest income 34 67 27 51 179 ---------- ---------- ---------- ---------- ---------- Net income $ 1,861 $ 3,288 $ 941 $ 2,108 $ 8,198 ========== ========== ========== ========== ==========
(m) The following table combines the historical operations of the target REITs for the periods ended December 31, 2003.
For the Period For the Year Ended January 30, 2003 to March 13, 2003 to December 31, 2003 December 31, 2003 December 31, 2003 -------------------------- ----------------- ----------------- (in thousands) Montague Addison Circle Royal Ridge Collins Crossing Total -------- -------------- ----------- ---------------- ----- Revenue: Rental $ 3,645 $ 8,554 $ 2,264 $ 5,672 $ 20,135 ---------- ---------- ---------- ---------- ---------- Total revenue 3,645 8,554 2,264 5,672 20,135 ---------- ---------- ---------- ---------- ---------- Expenses: Rental operating expenses 314 1,783 746 1,399 4,242 Real estate taxes and insurance 339 1,354 255 760 2,708 Depreciation and amortization 368 1,497 518 1,080 3,463 Interest -- -- 1,731 3,444 5,175 ---------- ---------- ---------- ---------- ---------- Total expenses 1,021 4,634 3,250 6,683 15,588 ---------- ---------- ---------- ---------- ---------- Income (loss) before interest 2,624 3,920 (986) (1,011) 4,547 Interest income 45 85 28 35 193 Dividends to common shareholders -- -- (14) (373) (387) ---------- ---------- ---------- ---------- ---------- Net income (loss) attributable to preferred shareholders $ 2,669 $ 4,005 $ (972) $ (1,349) $ 4,353 ========== ========== ========== ========== ==========
F-120 FRANKLIN STREET PROPERTIES CORP. NOTES TO CONDENSED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS (Unaudited) (n) The following information represents the historical revenues over certain operating expenses for two properties from January 1, 2003 through the date of acquisition by a target REIT. Royal Ridge was purchased January 30, 2003 by FSP Royal Ridge Corp. and Collins Crossing was purchased March 3, 2003 by FSP Collins Crossing Corp.
For the Period January 1, 2003 to January 1, 2003 to (in thousands) January 29, 2003 March 2, 2003 Royal Ridge Collins Crossing Total ----------- ---------------- ----- Revenue: Rental $ 1 $ 1,347 $ 1,348 ---------- ---------- ---------- Total revenue 1 1,347 $ 1,348 ---------- ---------- ---------- Expenses: Rental operating expenses 95 320 415 Real estate taxes and insurance 19 156 175 ---------- ---------- ---------- Total expenses 114 476 590 ---------- ---------- ---------- Revenue over certain operating expenses $ (113) $ 871 $ 758 ========== ========== ==========
(o) FSP Corp. is purchasing the real estate assets and a stated amount of cash (the adjusted cash reserves) from each target REIT in exchange for a fixed number of shares of FSP common stock. The final dividend to the shareholders of the target REITs represents the estimated fair value of the net assets not purchased by FSP Corp. as of the date of the pro forma balance sheet. The estimated final dividend as of the date of the pro forma balance sheet for the target REITs is shown in the following table. The actual final dividend will be based upon the fair market value of the net assets not purchased as of the actual merger date. Montague $1,065 Addison 2,058 Royal Ridge 1,569 Collins 1,329 ----------- Total $6,021 =========== (p) The cumulative unbilled straight-line rents of the target REITs will be eliminated at acquisition. (q) The cumulative deficit of the target REITs will be eliminated at acquisition. F-121 FRANKLIN STREET PROPERTIES CORP. NOTES TO CONDENSED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS (Unaudited) (r) The following table combines the historical cash flows for the target REITs for the nine months ended September 30, 2004.
(in thousands) Montague Addison Royal Collins Total - ---------------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 1,861 $ 3,288 $ 941 $ 2,108 $ 8,198 Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Depreciation and amortization expense 282 1,136 429 972 2,819 Amortization of favorable leases 872 -- 349 713 1,934 Changes in operating assets and liabilities: Restricted cash -- 15 -- -- 15 Tenant rent receivables -- 24 -- (10) 14 Step rent receivable (69) (110) (86) (249) (514) Prepaid expenses and other assets (8) (48) 5 (8) (59) Accounts payable and accrued expenses 54 (361) 235 (204) (276) Tenant security deposits -- (15) -- -- (15) Payment of deferred leasing commissions -- (329) -- -- (329) - ---------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used for) operating activities 2,992 3,600 1,873 3,322 11,787 - ---------------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Purchase of real estate assets and related leases, office computers and furniture, capitalized merger costs -- (217) -- (8) (225) - ---------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used for) investing activities -- (217) -- (8) (225) - ---------------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Distributions to stockholders (2,953) (3,857) (1,614) (3,746) (12,170) - ---------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used for) financing activities (2,953) (3,857) (1,614) (3,746) (12,170) - ---------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 39 (474) 259 (432) (608) Cash and cash equivalents, beginning of period 3,594 5,966 2,251 5,066 16,877 - ---------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 3,633 $ 5,492 $ 2,510 $ 4,634 $ 16,269 ==================================================================================================================================
F-122 FRANKLIN STREET PROPERTIES CORP. NOTES TO CONDENSED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS (Unaudited) (s) The following table combines the historical cash flows for the target REITs for the year ended December 31, 2003.
(in thousands) Montague Addison Royal Collins Total - ----------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income (loss) $ 2,669 $ 4,005 $ (958) $ (976) $ 4,740 Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Depreciation and amortization expense 368 1,497 518 1,080 3,463 Amortization of above market lease 1,164 -- 426 791 2,381 Changes in operating assets and liabilities: Restricted cash -- 9 (571) (115) (677) Tenant rent receivables, net -- (25) -- (25) (50) Straight-line rents, net (262) (322) (954) (279) (1,817) Prepaid expenses and other assets, net 377 112 (1,051) (2,167) (2,729) Accounts payable and accrued expenses 383 165 240 1,467 2,255 Tenant security deposits -- (9) -- 115 106 Payment of deferred leasing commissions -- (39) -- -- (39) - ----------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used for) operating activities 4,699 5,393 (2,350) (109) 7,633 - ----------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Purchase of real estate assets and related leases, office computers and furniture, capitalized merger costs (355) (25) (22,324) (45,657) (68,361) - ----------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used for) investing activities (355) (25) (22,324) (45,657) (68,361) - ----------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Proceeds from sale of company stock, net -- -- 27,277 51,100 78,377 Distributions to stockholders (3,714) (4,721) (1,389) (2,392) (12,216) - ----------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used for) financing activities (3,714) (4,721) 25,888 48,708 66,161 - ----------------------------------------------------------------------------------------------------------------------------- Net increase in cash and cash equivalents 630 647 1,214 2,942 5,433 Cash and cash equivalents, beginning of period 957 2,683 -- -- 3,640 - ----------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 1,587 $ 3,330 $ 1,214 $ 2,942 $ 9,073 ============================================================================================================================= Supplemental disclosure of cash flow information: Cash paid for: Interest $ -- $ -- $ 1,731 $ 3,444 $ 5,175 Non-cash investing and financing activities: Dividends declared but not paid $ 960 $ 1,265 $ 536 $ 1,331 $ 4,092
F-123 COMPARATIVE PER SHARE DATA The following tables present on a per share basis: (a) Basic and diluted net income book value, and dividends declared for FSP Corp. and each of the target REITs on a historical basis. (b) Consolidated pro forma basic and diluted net income per share, book value per share and dividends per share for FSP Corp. This table shows the effect of the mergers from the perspective of an owner of one share of FSP common stock. (c) Equivalent pro forma basic and diluted net income per share, equivalent pro forma book value per share and equivalent pro forma dividends per share for each of the target REITs. This table shows the effect of the mergers from the perspective of an owner of one share of stock of a target REIT. The consolidated pro forma data are multiplied by the number of shares of FSP common stock issuable in exchange for each share of target stock, also known as the exchange ratio, as shown in the following table: Target REIT Exchange Ratio ----------- -------------- Addison 5,948.67 Collins Crossing 6,167.63 Montague 5,649.72 Royal Ridge 6,055.79 The pro forma financial data and equivalent pro forma data are unaudited and are not necessarily indicative of the operating results that would have been achieved had the mergers occurred as of the beginning of the period and should not be construed as representative of future operations. FSP Corp. calculates historical book value per share by dividing stockholders' equity by the number of shares of common stock (or preferred stock, in the case of the target REITs) outstanding at the end of each period. FSP Corp. calculates consolidated pro forma net income per share data for FSP Corp. as if the mergers occurred on January 1, 2003 and 2004 and resulted in weighted average shares of 60,523,000 and 60,525,000 for the nine months ended September 30, 2004 and for the year ended December 31, 2003, respectively. FSP Corp. calculates consolidated pro forma book value per share data for FSP Corp. as if the mergers occurred on September 30, 2004 and resulted in an ending number of shares of 60,525,000. FSP Corp. calculates consolidated pro forma dividends per share by adding the total dividends declared by FSP Corp. plus dividends declared by the target REITs and dividing this sum by 60,525,000 shares, as shown in the following table: F-124 Dividends Declared For the Nine For the Year Months Ended Ended (in thousands) September 30, 2004 December 31, 2003 ------------------------------------------------------------------------ FSP Corp. $ 46,152 $ 46,747 Addison Circle 2,592 5,137 Collins Crossing 2,414 3,350 Montague 1,993 3,771 Royal Ridge 1,078 1,911 ---------------------------------- Total $ 54,229 $ 60,916 ================================== FSP Corp. calculates equivalent pro forma net income per share for each target REIT by multiplying the consolidated pro forma net income per share by the exchange ratio. FSP Corp. calculates equivalent pro forma book value per share for each target REIT by multiplying the consolidated pro forma book value per share by the exchange ratio. FSP Corp. calculates equivalent pro forma dividends per share for each target REIT by multiplying the consolidated pro forma dividends per share by the exchange ratio. F-125 For the purposes of the consolidated pro forma net income per share and book value per share data, FSP Corp.'s historical financial data have been consolidated with the target REITs' financial data. Franklin Street Properties Comparative Per Share Data As of and for the nine months ended September 30, 2004 (unaudited) Pro forma Pro forma Historical Consolidated Equivalent ---------------------------------------- Net income (loss) per share basic and diluted FSP Corp. $ 0.68 $ 0.68 $ -- Montague 5,572 -- 3,842 Addison Circle 5,170 -- 4,045 Royal Ridge 3,166 -- 4,118 Collins Crossing 3,798 -- 4,194 Book value per share FSP Corp. $ 10.17 $ 10.92 -- Montague 80,680 -- 61,695 Addison Circle 84,918 -- 64,959 Royal Ridge 81,536 -- 66,129 Collins Crossing 83,054 -- 67,351 Dividends declared per share FSP Corp. $ 0.93 $ 0.90 -- Montague 5,967 -- 5,085 Addison Circle 4,077 -- 5,354 Royal Ridge 5,554 5,450 Collins Crossing 4,350 -- 5,551 F-126 Franklin Street Properties Corp. Comparative Per Share Data As of and for the year ended December 31, 2003 (unaudited) Pro forma Pro forma Historical Consolidated Equivalent ---------------------------------------- Net income (loss) per share basic and diluted FSP Corp. $ 1.18 $ 0.83 $ -- Montague 7,991 -- 4,689 Addison Circle 6,297 -- 4,937 Royal Ridge (3,267) -- 5,026 Collins Crossing (2,431) -- 5,119 Book value per share FSP Corp. $ 10.41 $ -- $ -- Montague 81,075 -- -- Addison Circle 83,824 -- -- Royal Ridge 81,997 -- -- Collins Crossing 83,605 -- -- Dividends declared per share FSP Corp. $ 1.36 $ 1.01 $ -- Montague 11,290 -- 5,706 Addison Circle 8,077 -- 6,008 Royal Ridge 6,424 -- 6,116 Collins Crossing 6,036 -- 6,229 F-127 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: November 18, 2004 REGISTRANT FRANKLIN STREET PROPERTIES CORP. By: /s/ George J. Carter -------------------------------------- George J. Carter President and Chief Executive Officer EX-23.1 2 ex23-1.txt Exhibit 23.1 Consent of Independent Auditors We consent to the inclusion in this Current Report on Form 8-K of our reports dated February 28, 2004, with respect to the financial statements of FSP Addison Circle Corp., FSP Collins Crossing Corp., FSP Montague Business Center Corp., and FSP Royal Ridge Corp. and to their incorporation by reference in the Registration Statement on Form S-8 (No. 333-91860) of Franklin Street Properties Corp. /s/ Braver and Company, P.C. Braver and Company, P.C. Newton, Massachusetts November 17, 2004 -----END PRIVACY-ENHANCED MESSAGE-----