UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 001-32470
FRANKLIN STREET PROPERTIES CORP.
(Exact name of registrant as specified in its charter)
Maryland 04-3578653
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
401 Edgewater Place, Suite 200, Wakefield, Massachusetts 01880-6210
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 557-1300
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of exchange on which registered:
Common Stock, $.0001 par value per share American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes |X| No |_|.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes |_| No |X|.
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_|.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |_|
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check One).
Large accelerated filer |X| Accelerated filer |_| Non-accelerated filer |_|
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes |_| No |X|.
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter. As of June 30, 2005 the aggregate market value was $1,010,861,107.
There were 59,794,608 shares of Common Stock outstanding as of February 21, 2006.
Documents incorporated by reference: The registrant intends to file a definitive proxy statement pursuant to Regulation 14A, promulgated under the Securities Exchange Act of 1934, as amended, to be used in connection with the registrant's Annual Meeting of Stockholders to be held on May 12, 2006. The information required in response to Items 10 - 14 of Part III of this Form 10-K, other than that contained in Part I under the caption, "Directors and Executive Officers of FSP Corp.," is hereby incorporated by reference to such proxy statement.
TABLE OF CONTENTS
FRANKLIN STREET PROPERTIES CORP................................................1
PART I.........................................................................1
Item 1. Business............................................................1
Item 1A. Risk Factors........................................................4
Item 1B. Unresolved Staff Comments..........................................10
Item 2. Properties.........................................................11
Item 3. Legal Proceedings..................................................13
Item 4. Submission of Matters to a Vote of Security Holders................14
Item 4A. Directors and Executive Officers of FSP Corp.......................14
PART II.......................................................................17
Item 5. Market For Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities..................17
Item 6. Selected Financial Data............................................19
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................20
Item 7A. Quantitative and Qualitative Disclosure About Market Risk..........36
Item 8. Financial Statements and Supplementary Data........................37
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure...............................................37
Item 9A. Controls and Procedures............................................37
Item 9B. Other information..................................................38
PART III......................................................................39
Item 10. Directors and Executive Officers of the Registrant.................39
Item 11. Executive Compensation.............................................39
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters....................................39
Item 13. Certain Relationships and Related Transactions.....................39
Item 14. Principal Accounting Fees and Services.............................39
PART IV.......................................................................40
Item 15. Exhibits and Financial Statement Schedules.........................40
SIGNATURES ...................................................................41
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PART I
Item 1. Business
History
Our company, Franklin Street Properties Corp., which we will refer to as FSP Corp. or the Company, is a Maryland corporation that operates in a manner intended to qualify as a real estate investment trust for federal income tax purposes. FSP Corp. is the successor to Franklin Street Partners Limited Partnership, or the FSP Partnership, which was originally formed as a Massachusetts general partnership in January 1997 as the successor to a Massachusetts general partnership that was formed in 1981. On January 1, 2002, the FSP Partnership converted into FSP Corp., which we refer to as the conversion. As a result of this conversion, the FSP Partnership ceased to exist and we succeeded to the business of the FSP Partnership. In the conversion, each unit of both general and limited partnership interests in the FSP Partnership was converted into one share of our common stock. As a result of the conversion, we hold, directly and indirectly, 100% of the interest in three former subsidiaries of the FSP Partnership: FSP Investments LLC, FSP Property Management LLC, and FSP Holdings LLC. We operate some of our business through these subsidiaries.
On June 1, 2003, we acquired 13 real estate investment trusts by merger. In these mergers, we issued 25,000,091 shares of our common stock to holders of preferred stock in these REITs. As a result of these mergers, we now hold all of the assets previously held by these REITs.
On April 30, 2005, we acquired four real estate investment trusts by merger. In these mergers we issued 10,894,994 shares of common stock to holders of preferred stock in these REITs. As a result of these mergers, we now hold all of the assets previously held by these REITs.
On June 2, 2005 we began trading our common stock on the American Stock Exchange under the symbol "FSP".
Our Business
We operate in two business segments and have two principal sources of revenue:
o Real estate operations, including real estate leasing, interim acquisition financing, development and asset/property management, which generate rental income, loan origination fees and interest income, development fees and management fees, respectively.
o Investment banking/investment services, which generate brokerage commissions and other fees related to the organization of single-purpose entities that own real estate and the private placement of equity in those entities. Since 2001, we refer to these entities as Sponsored REITs that are organized as corporations and operated in a manner intended to qualify as real estate investment trusts. Previously these entities were called Sponsored Entities and were organized as partnerships.
See Note 3 to our consolidated financial statements for additional information regarding our business segments.
Real Estate
We own a portfolio of real estate consisting of 27 properties which we operate as of December 31, 2005, and includes 24 office buildings, two industrial use properties and one apartment complex. In addition, we own one office building that is held for sale as of December 31, 2005, and we expect to complete the sale by December 2006. We derive rental revenue from income paid to us by tenants of these properties. See Item 2 of this Annual Report on Form 10-K.
FSP Corp. typically makes a loan to each Sponsored REIT secured by a mortgage on the borrower's real estate. Those loans produce revenue in the form of interest and loan origination fees payable to FSP Corp. These loans typically are repaid out of the proceeds of the borrower's equity offering.
We also provide development services, asset management services, property
management services and/or property accounting services to our portfolio and
certain of our Sponsored REITs through our subsidiary FSP Property Management
LLC. FSP Corp. recognizes revenue for its receipt of fee income from Sponsored
REITs that have not been acquired by us. FSP Property Management does not
receive any rental income.
Investment Banking/Investment Services
Through our subsidiary FSP Investments, which acts as a real estate investment banking firm and broker/dealer, we organize Sponsored REITs, and sell equity in them through private placements exempt from registration under the Securities Act of 1933. These single-purpose entities each typically acquire a single real estate asset. FSP Investments raises all the capital required to fully equitize these entities through best efforts offerings to "accredited investors" within the meaning of Regulation D of the Securities Act. We retain 100% of the common stock interest in the Sponsored REIT, though there is virtually no economic benefit or risk subsequent to the completion of the syndication. Since 1997, FSP Investments has sponsored 44 entities, 14 of which were Sponsored Entities, and 30 of which were Sponsored REITs.
FSP Investments derives revenue from syndication and other transaction fees received in connection with the sale of preferred stock in the Sponsored REITs and from fees paid by the Sponsored REITs for its services in identifying, inspecting and negotiating to purchase real properties on their behalf. FSP Investments is a registered broker/dealer with the Securities and Exchange Commission and is a member of the National Association of Securities Dealers, Inc. We have made an election to treat FSP Investments as a "taxable REIT subsidiary" for federal income tax purposes.
Investment Objectives
Our investment objective is to increase the cash available for distribution in the form of dividends to our stockholders by increasing revenue from rental income, any net gains from sales of properties and investment banking services. We expect that, through FSP Investments, we will continue to organize and cause the offering of Sponsored REITs in the future and that we will continue to derive investment banking/investment services income, from such activities as well as real estate revenue from loan origination fees, development fees and interest. We may also acquire additional real properties by direct cash purchase or by acquisition of Sponsored REITs. In addition, we may invest in real estate by purchasing shares of preferred stock offered in the syndications of our Sponsored REITs.
From time to time, as market conditions warrant, we may sell properties owned by us. In 2005 we sold six properties and reached an agreement to sell another property. In 2004 no properties were sold. When we sell a property, we either distribute some or all of the sale proceeds to our stockholders as a distribution or retain some or all of such proceeds for investment in real properties or other corporate activities.
We may acquire, and have acquired, real properties in any geographic area of the United States and of any property type. We own 28 properties that are located in 14 different states. Of the 28 properties, 25 are office buildings (one of which is held for sale), two are industrial properties and one is an apartment complex. See Item 2 of this Annual Report on Form 10-K.
We rely on the following principles in selecting real properties for acquisition by a Sponsored REIT or FSP Corp. and managing them after acquisition:
o we seek to buy or develop investment properties at a price which produces value for investors and avoid overpaying for real estate merely to outbid competitors;
o we seek to buy or develop properties in excellent locations with substantial infrastructure in place around them and avoid investing in locations where the future construction of such infrastructure is speculative;
o we seek to buy or develop properties that are well-constructed and designed to appeal to a broad base of users and avoid properties where quality has been sacrificed to cost savings in construction or which appeal only to a narrow group of users;
o we aggressively manage, maintain and upgrade our properties and refuse to neglect or undercapitalize management, maintenance and capital improvement programs; and
o we believe that we have the ability to hold properties through down cycles and avoid leveraging properties and placing them at risk of foreclosure; as of February 21, 2006, none of our 28 properties was subject to mortgage debt.
Line of Credit
We currently have an unsecured revolving line of credit with a group of banks that provides for borrowings of up to $150,000,000. We have drawn on this line of credit, and intend to draw on this line of credit in the future, to obtain funds primarily for the purpose of making interim mortgage loans to Sponsored REITs or for interim financing of properties we acquire directly for our portfolio. We typically cause mortgage loans to Sponsored REITs to be secured by a first mortgage against the real property owned by the Sponsored REIT. We make these loans to enable a Sponsored REIT to acquire real property prior to the consummation of the offering of its equity interests, and the loan is repaid out of the offering proceeds. We have no restriction on the percentage of our assets that may be invested in any single mortgage.
Competition
With respect to our real estate investments, we face competition in each of the markets where the properties are located. In order to establish, maintain or increase the rental revenues for a property, it must be competitive on location, cost and amenities with other buildings of similar use. Some of our competitors may have significantly more resources than we do and may be able to offer more attractive rental rates or services. On the other hand, some of our competitors may be smaller or have less fixed overhead costs, less cash or other resources that make them willing or able to accept lower rents in order to maintain a certain occupancy level. In markets where there is not currently significant existing property competition, our competitors may decide to enter the market and build new buildings to compete with our existing projects or those in a development stage. Our competition is not only with other landlords and developers, but also with the choice of home ownership or ownership of office condominiums, and larger market forces (including changes in interest rates and tax treatment) and individual decisions beyond our control may affect our ability to compete with those forms of ownership.
With respect to our investment banking and investment services business, we face competition for investment dollars from every other kind of investment, including stocks, bonds, mutual funds and other real-estate related investments, including other REITs. Some of our competitors have significantly more resources than we do and are able to advertise their investment products. Because the offerings of the Sponsored REITs are made pursuant to an exemption from registration under the Securities Act, FSP Investments may not advertise the Sponsored REITs or otherwise engage in any general solicitation of investors to purchase interests in the Sponsored REITs, which may affect our ability to compete for investment dollars.
Employees
We had 39 employees as of December 31, 2005.
Available Information
We are subject to the informational requirements of the Securities Exchange Act of 1934, and, in accordance therewith, we file reports and other information with the Securities and Exchange Commission (SEC). The reports and other information we file can be inspected and copied at the SEC Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Such reports and other information may also be obtained from the web site that the SEC maintains at http://www.sec.gov. Further information about the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.
We make available, free of charge through our website www.franklinstreetproperties.com our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with the SEC.
Reports and other information concerning us may also be obtained electronically through a variety of databases, including, among others, the Electronic Data Gathering and Retrieval (EDGAR) program, Knight-Ridder Information Inc., Federal Filing/Dow Jones and Lexis/Nexis.
We will voluntarily provide paper copies of our filings and code of ethics upon written request at the address on the cover of this Annual Report on Form 10-K, free of charge.
Item 1A. Risk Factors
The following important factors, among others, could cause actual results to differ materially from those indicated by forward-looking statements made in this Annual Report on Form 10-K and presented elsewhere by management from time to time.
If we are not able to collect sufficient rents from each of our owned real properties, we may suffer significant operating losses or a reduction in cash available for future dividends.
A substantial portion of our revenues are generated by the rental income of our real properties. If our properties do not provide us with a steady rental income, our revenues will decrease and may cause us to incur operating losses in the future.
We may not be able to find properties that meet our criteria for purchase.
Growth in our investment banking/investment services business and our portfolio of real estate is dependent on the ability of our acquisition executives to find properties for sale and/or development which meet our investment criteria. To the extent they fail to find such properties, we will be unable to syndicate offerings of Sponsored REITs to investors, and this segment of our business could have lower revenue, which would reduce the cash available for distribution to our stockholders, and we would be unable to increase the size of our portfolio of real estate.
If we are unable to fully syndicate a Sponsored REIT, we may be required to keep a balance outstanding on our line of credit or use our cash balance to repay our line of credit, which may reduce cash available for distribution to our stockholders.
We typically draw on our line of credit to make an interim mortgage loan to a Sponsored REIT, so that it can acquire real property prior to the consummation of the offering of its equity interests; this interim loan is secured by a first mortgage against the real property acquired by the Sponsored REIT. Once the offering has been completed, the Sponsored REIT repays the loan out of the offering proceeds. If we are unable to fully syndicate a Sponsored REIT, the Sponsored REIT could be unable to fully repay the loan, and we would have to satisfy our obligation under our line of credit through other means. If we are required to use cash for this purpose, we would have less cash available for distribution to our stockholders.
A default under our line of credit could have a material adverse effect on the cash available for distribution to our stockholders and would limit our growth.
We typically draw on our line of credit to make an interim mortgage loan to a Sponsored REIT, so that the Sponsored REIT can acquire real property prior to the consummation of the offering of such Sponsored REIT's equity interests. Once the offering has been completed, the Sponsored REIT repays the loan out of the offering proceeds. We also may use the line of credit to purchase properties directly for our real estate portfolio. A default under our line of credit could result in difficulty financing growth in both the investment banking/investment services and real estate segments of our business. It could also result in a reduction in the cash available for distribution to our stockholders because revenue for our investment banking/investment services segment is directly related to the amount of equity raised by Sponsored REITs which we syndicate. In addition, a significant part of our growth strategy is to acquire additional real properties by cash purchase or by acquisition of Sponsored REITs, and the inability to utilize the line of credit would make it substantially more difficult to pursue acquisitions by either method. To the extent we have a balance outstanding on the line of credit on the date of its default, we would have to satisfy our obligation through other means. If we are required to use cash for this purpose, we would have less cash available for distribution to our stockholders.
We face risks in continuing to attract investors for Sponsored REITs.
Our investment banking/investment services business continues to depend upon its ability to attract purchasers of equity interests in Sponsored REITs. Our success in this area will depend on the propensity and ability of investors who have previously invested in Sponsored REITs to continue to invest in future Sponsored REITs and on our ability to expand the investor pool for the Sponsored REITs by identifying new potential investors. Moreover, our investment banking/investment services business may be affected to the extent existing Sponsored REITs incur losses or have operating results that fail to meet investors' expectations.
We are dependent on key personnel.
We depend on the efforts of George Carter, our Chief Executive Officer, and our other executive officers. If they were to resign, our operations could be adversely affected. We do not have employment agreements with Mr. Carter or any other of our executive officers.
Our level of dividends may fluctuate.
Because our investment banking/investment services business is transactional in nature and real estate occupancy levels and rental rates can fluctuate, there is no predictable recurring level of revenue from such activities. As a result of this, the amount of cash available for distribution may fluctuate, which may result in us not being able to maintain or grow dividend levels in the future.
The real properties held by us may significantly decrease in value.
As of February 21, 2006, we owned 28 properties, of which one was held for sale. Some or all of these properties may decline in value. To the extent our real properties decline in value, our stockholders could lose some or all the value of their investments. The value of our common stock may be adversely affected if the real properties held by us decline in value since these real properties represent the majority of the tangible assets held by us. Moreover, if we are forced to sell or lease the real property held by us below its initial purchase price or its carrying costs or if we are forced to lease real property at below market rates because of the condition of the property, our results of operations would be adversely affected and such negative results of operations may result in lower dividends being paid to holders of our common stock.
New acquisitions may fail to perform as expected.
We may acquire new properties, whether by direct FSP Corp. purchase with cash or our line of credit, by acquisition of Sponsored REITs or other entities by cash or through the issuance of shares of our stock or by investment in a Sponsored REIT. We acquired four Sponsored REITs and the properties they own on April 30, 2005, and acquired a property in Colorado in February 2005, and another property in Indiana, in July 2005. Newly acquired properties may fail to perform as expected, in which case, our results of operations could be adversely affected.
We face risks in owning, developing and operating real property.
An investment in us is subject to the risks incident to the ownership, development and operation of real estate-related assets. These risks include the fact that real estate investments are generally illiquid, which may impact our ability to vary our portfolio in response to changes in economic and other conditions, as well as the risks normally associated with:
o changes in general and local economic conditions;
o the supply or demand for particular types of properties in particular markets;
o changes in market rental rates;
o the impact of environmental protection laws; and
o changes in tax, real estate and zoning laws.
Certain significant costs, such as real estate taxes, utilities, insurance and maintenance costs, generally are not reduced even when a property's rental income is reduced. In addition, environmental and tax laws, interest rate levels, the availability of financing and other factors may affect real estate values and property income. Furthermore, the supply of commercial and multi-family residential space fluctuates with market conditions.
We face risks from tenant defaults or bankruptcies.
If any of our tenants defaults on its lease, we may experience delays in enforcing our rights as a landlord and may incur substantial costs in protecting our investment. In addition, at any time, a tenant of one of our properties may seek the protection of bankruptcy laws, which could result in the rejection and termination of such tenant's lease and thereby cause a reduction in cash available for distribution to our stockholders.
We may encounter significant delays in reletting vacant space, resulting in losses of income.
When leases expire, we will incur expenses and may not be able to re-lease the space on the same terms. Certain leases provide tenants the right to terminate early if they pay a fee. If we are unable to re-lease space promptly, if the terms are significantly less favorable than anticipated or if the costs are higher, we may have to reduce distributions to our stockholders. For example, our standard lease term is five years, so approximately 20%, of our rental revenue from commercial properties could be expected to expire each year. Leases for residential properties generally expire in less than one year.
We face risks from geographic concentration.
The properties in our portfolio as of December 31, 2005, by aggregate square footage, are distributed geographically as follows: Southwest - 25%, Northeast - 23%, Midwest - 23%, West - 18% and Southeast 11%. However, within certain of those regions, we hold a larger concentration of our properties in Dallas, Texas - 14%, Virginia - 12% and Houston, Texas - 9%. We are likely to face risks to the extent that any of these areas in which we hold a larger concentration of our properties suffer deteriorating economic conditions.
We compete with national, regional and local real estate operators and developers, which could adversely affect our cash flow.
Competition exists in every market in which our properties are currently located and in every market in which properties we may acquire in the future will be located. We compete with, among others, national, regional and numerous local real estate operators and developers. Such competition may adversely affect the percentage of leased space and the rental revenues of our properties, which could adversely affect our cash flow from operations and our ability to make expected distributions to our stockholders. Some of our competitors may have more resources than we do or other competitive advantages. Competition may be accelerated by any increase in availability of funds for investment in real estate. For example, decreases in interest rates tend to increase the availability of funds and therefore can increase competition. To the extent that our properties continue to operate profitably, this will likely stimulate new development of competing properties. The extent to which we are affected by competition will depend in significant part on local market conditions.
There is limited potential for an increase in leased space gains in our properties.
We anticipate that future increases in revenue from our properties will be primarily the result of scheduled rental rate increases or rental rate increases as leases expire. Properties with higher rates of vacancy are generally located in soft economic markets so that it may be difficult to realize increases in revenue when vacant space is re-leased.
We are subject to possible liability relating to environmental matters, and we cannot assure you that we have identified all possible liabilities.
Under various federal, state and local laws, ordinances and regulations, an owner or operator of real property may become liable for the costs of removal or remediation of certain hazardous substances released on or in its property. Such laws may impose liability without regard to whether the owner or operator knew of, or caused, the release of such hazardous substances. The presence of hazardous substances on a property may adversely affect the owner's ability to sell such property or to borrow using such property as collateral, and it may cause the owner of the property to incur substantial remediation costs. In addition to claims for cleanup costs, the presence of hazardous substances on a property could result in the owner incurring substantial liabilities as a result of a claim by a private party for personal injury or a claim by an adjacent property owner for property damage.
In addition, we cannot assure you that:
o future laws, ordinances or regulations will not impose any material environmental liability;
o the current environmental conditions of our properties will not be affected by the condition of properties in the vicinity of such properties (such as the presence of leaking underground storage tanks) or by third parties unrelated to us;
o tenants will not violate their leases by introducing hazardous or toxic substances into our properties that could expose us to liability under federal or state environmental laws; or
o environmental conditions, such as the growth of bacteria and toxic mold in heating and ventilation systems or on walls, will not occur at our properties and pose a threat to human health.
We are subject to compliance with the Americans With Disabilities Act and fire and safety regulations, any of which could require us to make significant capital expenditures.
All of our properties are required to comply with the Americans With Disabilities Act (ADA), and the regulations, rules and orders that may be issued thereunder. The ADA has separate compliance requirements for "public accommodations" and "commercial facilities," but generally requires that buildings be made accessible to persons with disabilities. Compliance with ADA requirements might require, among other things, removal of access barriers and noncompliance could result in the imposition of fines by the U.S. government or an award of damages to private litigants.
In addition, we are required to operate our properties in compliance with fire and safety regulations, building codes and other land use regulations, as they may be adopted by governmental agencies and bodies and become applicable to our properties. Compliance with such requirements may require us to make substantial capital expenditures, which expenditures would reduce cash otherwise available for distribution to our stockholders.
We may lose capital investment or anticipated profits if an uninsured event occurs.
We carry, or our tenants carry, comprehensive liability, fire and extended coverage with respect to each of our properties, with policy specification and insured limits customarily carried for similar properties. There are, however, certain types of losses, such as from wars, pollution or earthquakes, that may be either uninsurable or not economically insurable (although most properties located in California have earthquake insurance). Should an uninsured material loss occur, we could lose both capital invested in the property and anticipated profits.
Contingent or unknown liabilities acquired in mergers or similar transactions could require us to make substantial payments.
The properties which we acquired in mergers were acquired subject to liabilities and without any recourse with respect to liabilities, whether known or unknown. As a result, if liabilities were asserted against us based upon any of these properties, we might have to pay substantial sums to settle them, which could adversely affect our results of operations and financial condition and our cash flow and ability to make distributions to our stockholders. Unknown liabilities with respect to properties acquired might include:
o liabilities for clean-up or remediation of environmental conditions;
o claims of tenants, vendors or other persons dealing with the former owners of the properties; and
o liabilities incurred in the ordinary course of business.
We would incur adverse tax consequences if we failed to qualify as a REIT.
The provisions of the tax code governing the taxation of real estate investment trusts are very technical and complex, and although we expect that we will be organized and will operate in a manner that will enable us to meet such requirements, no assurance can be given that we will always succeed in doing so. In addition, as a result of our acquisition of the target REITs pursuant to the mergers, we might no longer qualify as a real estate investment trust. We could lose our ability to so qualify for a variety of reasons relating to the nature of the assets acquired from the target REITs, the identity of the shareholders of the target REITs who become our shareholders or the failure of one or more of the target REITs to have previously qualified as a real estate investment trust. Moreover, you should note that if one or more of the REITs that we acquired in April 2005 or June 2003 did not qualify as a real estate investment trust immediately prior to the consummation of its acquisition, we could be disqualified as a REIT as a result of such acquisition.
If in any taxable year we do not qualify as a real estate investment trust, we would be taxed as a corporation and distributions to our stockholders would not be deductible by us in computing our taxable income. In addition, if we were to fail to qualify as a real estate investment trust, we could be disqualified from treatment as a real estate investment trust in the year in which such failure occurred and for the next four taxable years and, consequently, we would be taxed as a regular corporation during such years. Failure to qualify for even one taxable year could result in a significant reduction of our cash available for distribution to our stockholders or could require us to incur indebtedness or liquidate investments in order to generate sufficient funds to pay the resulting federal income tax liabilities.
Provisions in our organizational documents may prevent changes in control.
Our Articles of Incorporation and Bylaws contain provisions, described below, which may have the effect of discouraging a third party from making an acquisition proposal for us and may thereby inhibit a change of control under circumstances that could otherwise give the holders of our common stock the opportunity to realize a premium over the then-prevailing market prices.
Ownership Limits. In order for us to maintain our qualification as a real estate investment trust, the holders of our common stock may be limited to owning, either directly or under applicable attribution rules of the Internal Revenue Code, no more than 9.8% of the lesser of the value or the number of our equity shares, and no holder of common stock may acquire or transfer shares that would result in our shares of common stock being beneficially owned by fewer than 100 persons. Such ownership limit may have the effect of preventing an acquisition of control of us without the approval of our board of directors. Our Articles of Incorporation give our board of directors the right to refuse to give effect to the acquisition or transfer of shares by a stockholder in violation of these provisions.
Staggered Board. Our board of directors is divided into three classes. The terms of these classes will expire in 2006, 2007 and 2008, respectively. Directors of each class are elected for a three-year term upon the expiration of the initial term of each class. The staggered terms for directors may affect our stockholders' ability to effect a change in control even if a change in control were in the stockholders' best interests.
Preferred Stock. Our Articles of Incorporation authorize our board of directors to issue up to 20,000,000 shares of preferred stock, par value $.0001 per share, and to establish the preferences and rights of any such shares issued. The issuance of preferred stock could have the effect of delaying or preventing a change in control even if a change in control were in our stockholders' best interest.
Increase of Authorized Stock. Our board of directors, without any vote or consent of the stockholders, may increase the number of authorized shares of any class or series of stock or the aggregate number of authorized shares we have authority to issue. The ability to increase the number of authorized shares and issue such shares could have the effect of delaying or preventing a change in control even if a change in control were in our stockholders' best interest.
Amendment of Bylaws. Our board of directors has the sole power to amend our Bylaws. This power could have the effect of delaying or preventing a change in control even if a change in control were in our stockholders' best interests.
Stockholder Meetings. Our Bylaws require advance notice for stockholder proposals to be considered at annual meetings of stockholders and for stockholder nominations for election of directors at special meetings of stockholders. Our Bylaws also provide that stockholders entitled to cast more than 50% of all the votes entitled to be cast at a meeting must join in a request by stockholders to call a special meeting of stockholders. These provisions could have the effect of delaying or preventing a change in control even if a change in control were in the best interests of our stockholders.
Supermajority Votes Required. Our Articles of Incorporation require the affirmative vote of the holders of no less than 80% of the shares of capital stock outstanding and entitled to vote in order (i) to amend the provisions of our Articles of Incorporation relating to the classification of directors, removal of directors, limitation of liability of officers and directors or indemnification of officers and directors or (ii) to amend our Articles of Incorporation to impose cumulative voting in the election of directors. These provisions could have the effect of delaying or preventing a change in control even if a change in control were in our stockholders' best interest.
Our employee retention plan may prevent changes in control.
On February 3, 2006, our Board of Directors approved a change in control plan, which included a form of retention agreement and discretionary payment plan. On February 23, 2006, our Board of Directors approved an amended form of retention agreement, which amended form is described further in Item 9B. of this Form 10-K. Payments under the discretionary plan are capped at 1% of the market capitalization of FSP Corp. as reduced by the amount paid under the retention plan. The costs associated with these two components of the plan may have the effect of discouraging a third party from making an acquisition proposal for us and may thereby inhibit a change in control under circumstances that could otherwise give the holders of our common stock the opportunity to realize a greater premium over the then-prevailing market prices.
The price of our common stock may vary.
Our common stock has only been listed for trading on the American Stock Exchange since June 2, 2005. We can provide no assurances as to the development of an ongoing meaningful trading market in our common stock. If a meaningful trading market does develop, the market prices for our common stock may fluctuate with changes in market and economic conditions, including the market perception of REITs in general, and changes in the financial condition of our securities. Such fluctuations may depress the market price of our common stock independent of the financial performance of FSP Corp. The market conditions for REIT stocks generally could affect the market price of our common stock.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties
Set forth below is information regarding our properties as of December 31, 2005:
Date of
Purchase or
Merged
Entity Number Percent Approx.
Date of of Approx. Leased as Number
Property Location Purchase Units Square Feet of 12/31/05 of Tenants Major Tenants(1)
----------------- -------- ----- ----------- ----------- ---------- ----------------
Apartment/Residential
---------------------
22400 Westheimer Parkway, 4/24/02 228 231,363 97% 228 None - Apts.
Katy, Texas 77450
---------------------
Total Apartments 228 231,363
---------------------
Office
------
451 Andover Street 6/1/96 92,446 97% 38 Pentucket Medical
North Andover, MA 01845 Associates, Inc.
1515 Mockingbird Lane 7/1/97 109,550 80% 66 Primary PhysicianCare
Charlotte, NC 28209
33 & 37 Villa Road 3/1/98 144,029 51% 24 BSA Sales, Inc.
Greenville, SC 29615
678-686 Hillview Drive 3/9/99 36,288 100% 1 Headway Technologies, Inc.
Milpitas, CA 95035
600 Forest Point Circle 7/8/99 62,212 87% 2 American Nat'l Red Cross
Charlotte, NC 28273 Cellco Partnership
d/b/a Verizon
18000 W. Nine Mile Rd. 9/30/99 215,306 90% 6 Int'l Business Machines Corp.
Southfield, Michigan 48075
11211 Taylor Draper Lane 12/29/99 68,533 82% 8 TriActive, Inc.
Austin, Texas 78759 CACI Technologies, Tiburon, Inc.
State Farm Mutual Auto. Ins. Co.
Rodriguez Transportation Group
10 Lyberty Way 5/23/00 104,711 0% 0 Vacant
Westford, MA 01886
17030 Goldentop Road 9/22/00 141,405 100% 1 Northrop Grumman Corporation
San Diego, CA 92127
4820 & 4920 Centennial Blvd. 9/28/00 110,730 82% 3 Hewlett-Packard Company
Colorado Springs, CO 80919 Starkey Laboratories, Inc.
Dalsa Colorado Springs, Inc.
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Date of
Purchase or
Merged
Entity Number Percent Approx.
Date of of Approx. Leased as Number
Property Location Purchase Units Square Feet of 12/31/05 of Tenants Major Tenants(1)
----------------- -------- ----- ----------- ----------- ---------- ----------------
14151 Park Meadow Drive 3/15/01 134,850 100% 1 CACI, Inc.-Federal
Chantilly, VA 20151
1370 & 1390 Timberlake 5/24/01 232,722 100% 4 RGA Reinsurance Company
Manor Parkway, AMDOCS, Inc.
Chesterfield, MO 63017
501 & 505 South 336th Street 9/14/01 117,227 100% 1 Weyerhaeuser Company
Federal Way, WA 98003
12902 Federal Systems Park 9/17/01 210,613 100% 1 Int'l. Business Machines Corp.
Drive, Fairfax, VA 22033
50 Northwest Point Rd. 12/5/01 176,848 100% 1 Motorola, Inc.
Elk Grove Village, IL 60005
1350 Timberlake Manor Parkway 3/4/02 116,312 73% 7 RGA Reinsurance Company
Chesterfield, MO 63017 Metropolitan Life Ins. Company
Wachovia Securities, LLC
Quest Software, Inc.
2251 Corporate Park Ridge Dr. 5/23/02 158,016 100% 2 Scitor Corporation
Herndon, VA 20171 Juniper Networks, Inc.
16285 Park Ten Place 6/27/02 155,715 100% 5 Mustang Engineering, LP
Houston, Texas 77084 & TMI, Inc. a/k/a
Trendmaker Homes
2730 - 2760 Junction Avenue 8/27/02 145,951 100% 1 Novellus Systems, Inc.
San Jose, CA 95134
15601 Dallas Parkway 09/30/02 293,787 98% 13 The Staubach Company
Addison, TX 75001 Behringer Harvard Holdings, LLC
Credit Solutions of America, Inc.
Noble Royalties, Inc.
11680 Great Oaks Way 1/30/03 161,366 93% 2 Combined Specialty Ins. Co.
Alpharetta, GA 30022 Hagemeyer North America, Inc.
1500 & 1600 Greenville Avenue 3/3/03 298,766 100% 2 Tektronix Texas, LLC
Richardson, TX 75080 Macromedia, Inc.
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Date of
Purchase or
Merged
Entity Number Percent Approx.
Date of of Approx. Leased as Number
Property Location Purchase Units Square Feet of 12/31/05 of Tenants Major Tenants(1)
----------------- -------- ----- ----------- ----------- ---------- ----------------
6500 & 6560 Greenwood Plaza 2/24/05 199,077 100% 1 Sybase, Inc.
Englewood, CO 80111
3815-3925 River Crossing Pkwy 7/6/05 205,059 100% 24 Crowe Chizek & Company, LLP
Indianapolis, IN 46240 Somerset Financial
Services, LLC
The College Network, Inc.
-----------
Sub Total Office 3,691,519
-----------
Industrial
----------
One Technology Drive 12/1/95 188,000 100% 1 U.S. Foodservice, Inc.
Peabody, MA 01960
8730 Bollman Place 12/14/99 98,745 100% 1 Maines Paper and
Savage (Jessup), MD 20794 Foodservice, Inc.
-----------
Sub Total Industrial 286,745
-----------
Grand Total (Assets with
Ongoing Operations) 228 4,209,627
=== =========
4995 Patrick Henry Dr. 12/1/97 40,280 0% Vacant
Santa Clara, CA 95054
-----------
Total Assets Held for Sale 40,280
-----------
--- ---------
Grand Total 228 4,249,907
=== =========
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All of the properties listed above are owned by us. None of our properties are subject to any mortgage loans. We have no material undeveloped or unimproved properties, and we have no proposed programs for significant renovation, improvement or development of any of our properties. We believe that our properties are adequately covered by insurance as of December 31, 2005.
Item 3. Legal Proceedings.
From time to time, we are subject to legal proceedings and claims that arise in the ordinary course of our business. Although occasional adverse decisions (or settlements) may occur, we believe that the final disposition of such matters will not have a material adverse effect on our financial position, cash flows or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.
Item 4A. Directors and Executive Officers of FSP Corp.
The following table sets forth the names, ages and positions of all our directors and executive officers as of February 21, 2006.
Name Age Position
---- --- --------
George J. Carter (5) 57 President, Chief Executive Officer and Director
Barbara J. Fournier (2) (4) 50 Vice President, Chief Operating Officer,
Treasurer, Secretary and Director
Barry Silverstein (1) (2) (4) 72 Director
Dennis J. McGillicuddy (1) (2) (3) 64 Director
Georgia Murray (1) (2) (5) 55 Director
John N. Burke (1) (2) (4) 44 Director
John G. Demeritt 45 Chief Financial Officer (Principal Financial
Officer)
William W. Gribbell 46 Executive Vice President
R. Scott MacPhee 48 Executive Vice President
Janet Prier Notopoulos (3) 58 Vice President and Director
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George J. Carter, age 57, is President, Chief Executive Officer and a Director of FSP Corp. and is responsible for all aspects of the business of FSP Corp. and its affiliates, with special emphasis on the evaluation, acquisition and structuring of real estate investments. Prior to the conversion, he was President of the General Partner and was responsible for all aspects of the business of the FSP Partnership and its affiliates. From 1992 through 1996 he was President of Boston Financial Securities, Inc. ("Boston Financial"). Prior to joining Boston Financial, Mr. Carter was owner and developer of Gloucester Dry Dock, a commercial shipyard in Gloucester, Massachusetts. From 1979 to 1988, Mr. Carter served as Managing Director in charge of marketing of First Winthrop Corporation, a national real estate and investment banking firm headquartered in Boston, Massachusetts. Prior to that, he held a number of positions in the brokerage industry including those with Merrill Lynch & Co. and Loeb Rhodes & Co. Mr. Carter is a graduate of the University of Miami (B.S.). Mr. Carter is a NASD General Securities Principal (Series 24) and holds a NASD Series 7 general securities license.
Barbara J. Fournier, age 50, is the Vice President, Chief Operating Officer, Treasurer, Secretary and a Director of FSP Corp. In addition, Ms. Fournier has as her primary responsibility, together with Mr. Carter, the management of all operating business affairs of FSP Corp. and its affiliates. Ms. Fournier was the Principal Financial Officer until March 2005. Prior to the conversion, Ms. Fournier was the Vice President, Chief Operating Officer, Treasurer and Secretary of the General Partner. From 1993 through 1996, she was Director of Operations for the private placement division of Boston Financial. Prior to joining Boston Financial, Ms. Fournier served as Director of Operations for Schuparra Securities Corp. and as the Sales Administrator for Weston Financial Group. From 1979 through 1986, Ms. Fournier worked at First Winthrop Corporation in administrative and management capacities; including Office Manager, Securities Operations and Partnership Administration. Ms. Fournier attended Northeastern University and the New York Institute of Finance. Ms. Fournier is a NASD General Securities Principal (Series 24). She also holds other NASD supervisory licenses including Series 4 and Series 53, and a NASD Series 7 general securities license.
Barry Silverstein, age 72, has been a Director of the Company and a member of the Compensation Committee since May 2002. Mr. Silverstein joined the Audit Committee in July 2004. Mr. Silverstein took his law degree from Yale University in 1957 and subsequently held positions as attorney/officer/director of various privately-held manufacturing companies in Chicago, Illinois. After selling those interests in 1964, he moved to Florida to manage his own portfolio and to teach at the University of Florida Law School. In 1968, Mr. Silverstein became the principal founder and shareholder in Coaxial Communication, a cable television company. Initially operating in small, rural communities in the southeast, Coaxial expanded its operations to Columbus, Ohio, the suburbs of Cincinnati, Ohio, and St. Paul, Minnesota, as well as smaller systems in West Virginia, Kentucky and Illinois. In 1998 and 1999, Coaxial sold its cable systems. Since January 2001, Mr. Silverstein has served as a private investor.
Dennis J. McGillicuddy, age 64, has been a Director of the Company and the Chairman of the Compensation Committee since May 2002. Mr. McGillicuddy joined the Audit Committee in July 2004. Mr. McGillicuddy graduated from the University of Florida with a B.A. degree and in 1966 he graduated from the University of Florida Law School with a J.D. degree. In 1968, Mr. McGillicuddy joined Barry Silverstein in founding Coaxial Communication, a cable television company. Initially operating in small, rural communities in the southeast, Coaxial expanded its operations to Columbus, Ohio, the suburbs of Cincinnati, Ohio, and St. Paul, Minnesota, as well as smaller systems in West Virginia, Kentucky and Illinois. In 1998 and 1999, Coaxial sold its cable systems. Since January 2001, Mr. McGillicuddy has served as a manager of BDS Management LLC, a management services company. Mr. McGillicuddy has served on the boards of various charitable organizations. He is currently president of the Board of Trustees of Florida Studio Theater, a professional non-profit theater organization. Also, Mr. McGillicuddy is an officer and board member of The Florida Winefest and Auction Inc., a Sarasota-based charity, which provides funding for programs of local charities that deal with disadvantaged children and their families.
Georgia Murray, age 55, has been a Director of the Company since April 2005. Ms. Murray is retired from Lend Lease Real Estate Investments, Inc., where she served as a Principal from November 1999 until May 2000. From 1987 through October 1999, Ms. Murray served as Senior Vice President and Director of The Boston Financial Group, Inc. She is a member of the Urban Land Institute and a past President of the Multifamily Housing Institute. She currently serves on the Board of Directors of the Capital Crossing Bank, Boston, Massachusetts. She also serves on the boards of numerous non-profit entities. Ms. Murray is a graduate of Newton College.
John N. Burke, age 44 has been a Director of the Company and Chairman of the Audit Committee since June 2004. Prior to staring his own accounting, tax and consulting firm in January 2003, he was an Assurance Partner in the Boston office of BDO Seidman, LLP, an international accounting and consulting firm. From 1987 to 2003, Mr. Burke served several private and publicly traded real estate clients at BDO Seidman, LLP and assisted companies with initial public offerings, private equity and debt financings and merger and acquisition transactions. Mr. Burke's consulting experience includes SEC reporting matters, compliance with Sarbanes-Oxley, tax and business planning and evaluation of internal controls and management information systems. Mr. Burke is a Certified Public Accountant and a member of the American Institute of Certified Public Accountants. Mr. Burke holds a Master's of Science in Taxation and studied undergraduate accounting and finance at Bentley College.
John G. Demeritt, age 45, has been the Chief Financial Officer since March 2005 and previously was Senior Vice President, Finance and Principal Accounting Officer of FSP Corp. Prior to joining the Company in September 2004, Mr. Demeritt was a Manager with Vitale Caturano & Company, Ltd., an independent accounting firm where he focused on Sarbanes Oxley compliance. Previously, from March 2002 to March 2004 he provided consulting services to public and private companies where he focused on SEC filings, evaluation of business processes and acquisition integration. During 2001 and 2002 he was Vice President of Financial Planning & Analysis at Cabot Industrial Trust, a publicly traded real estate investment trust, which was acquired by CalWest in December 2001. From October 1995 to December 2000 he was Controller and Officer of The Meditrust Companies (now known as the The La Quinta Companies, which was recently acquired by the Blackstone Group), a publicly traded real estate investment trust, where he was involved with a number of merger and financing transactions. Prior to that, from 1986 to 1995 he had financial and accounting responsibilities at three other public companies, and was previously associated with Laventhol & Horwath, an independent accounting firm from 1983 to 1986. Mr. Demeritt is a Certified Public Accountant and holds a Bachelor of Science degree from Babson College.
William W. Gribbell, age 46, is an Executive Vice President of FSP Corp. and has as his primary responsibility the direct equity placement of the Sponsored REITs. Prior to the conversion, Mr. Gribbell was an Executive Vice President of the General Partner. From 1993 through 1996 he was an executive officer of Boston Financial. From 1989 to 1993 Mr. Gribbell worked at Winthrop Financial Associates. Mr. Gribbell is a graduate of Boston University (B.A.). Mr. Gribbell holds a NASD Series 7 general securities license.
R. Scott MacPhee, age 48, is an Executive Vice President of FSP Corp. and has as his primary responsibility the direct equity placement of the Sponsored REITs. Prior to the conversion, Mr. MacPhee was an Executive Vice President of the General Partner. From 1993 through 1996 he was an executive officer of Boston Financial. From 1985 to 1993 Mr. MacPhee worked at Winthrop Financial Associates. Mr. MacPhee attended American International College. Mr. MacPhee holds a NASD Series 7 general securities license.
Janet Prier Notopoulos, age 58, is a Vice President and a Director of FSP Corp. and President of FSP Property Management and has as her primary responsibility the oversight of the management of the real estate assets of FSP Corp. and its affiliates. Prior to the conversion, Ms. Notopoulos was a Vice President of the General Partner. Prior to joining the FSP Partnership in 1997, Ms. Notopoulos was a real estate and marketing consultant for various clients. From 1975 to 1983, she was Vice President of North Coast Properties, Inc., a Boston real estate investment company. Between 1969 and 1973, she was a real estate paralegal at Goodwin, Procter & Hoar. Ms. Notopoulos is a graduate of Wellesley College (B.A.) and the Harvard School of Business Administration (M.B.A).
With the exception of John G. Demeritt, each of the above executive officers has been a full-time employee of FSP Corp. or its predecessor for the past five fiscal years.
There are no family relationships among any of the directors or executive officers.
PART II
Item 5. Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Commencing on June 2, 2005 the common stock of the Company began trading on the American Stock Exchange under the symbol FSP. The following table sets forth the high and low sales prices of the common stock on the American Stock Exchange for the applicable quarterly periods. Prior to June 2, 2005 there was no established public trading market for our common stock.
Range
Three Months --------------------------
Ended High Low
----- ---- ---
June 30, 2005 $ 22.00 $ 18.00
September 30, 2005 $ 20.51 $ 16.00
December 31, 2005 $ 21.39 $ 15.84
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As of February 17, 2006, there were 2,652 holders of record of our common stock.
On January 18, 2006 we declared a dividend of $0.31 per share of our common stock payable to stockholders of record as of January 31, 2006 that was paid on February 21, 2006. Set forth below are the distributions per share of common stock made by FSP Corp. in each quarter since 2003.
Quarter Distribution Per Share of
Ended Common Stock of FSP Corp.
----- -------------------------
March 31, 2003 $0.31
June 30, 2003 $0.31
September 30, 2003 $0.31
December 31, 2003 $0.43*
March 31, 2004 $0.31
June 30, 2004 $0.31
September 30, 2004 $0.31
December 31, 2004 $0.31
March 31, 2005 $0.31
June 30, 2005 $0.41
September 30, 2005 $0.21
December 31, 2005 $0.31
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*Included a special dividend of $0.12 per share.
While not guaranteed, we expect that cash dividends on our common stock comparable to our most recent quarterly dividend will continue to be paid in the future.
The following table provides information about purchases by Franklin Street Properties Corp. during the quarter ended December 31, 2005 of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act:
ISSUER PURCHASES OF EQUITY SECURITIES
--------------------------------------------------------------------------------------------------
(a) (b) (c) (d)
Total Number of
Shares (or Maximum Number (or
Units) Approximate Dollar
Purchased as Value) of Shares (or
Total Number of Part of Units) that May Yet
Shares (or Publicly Be Purchased Under
Period Units) Average Price Announced Plans the Plans or
Purchased Paid per Share or Programs (1) Programs
(1) (2) (or Unit) (2) (1) (2)
--------------------------------------------------------------------------------------------------
10/01/05-10/31/05 0 N/A 0 $35,000,000
--------------------------------------------------------------------------------------------------
11/01/05-11/30/05 432,800 $18.14 432,800 $27,148,381
--------------------------------------------------------------------------------------------------
12/01/05-12/31/05 298,200 $20.59 731,000 $21,008,101
--------------------------------------------------------------------------------------------------
Total: 731,000 $19.14 731,000 $21,008,101
--------------------------------------------------------------------------------------------------
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(1) Our Articles of Incorporation provide that we will use our best efforts to redeem shares of our common stock from stockholders who request such redemption. Any FSP Corp. stockholder wishing to have shares redeemed must make such a request no later than July 1 of any year for a redemption that would be effective the following January 1. This obligation is subject to significant conditions. However, as our common stock is currently listed for trading on the American Stock Exchange, we are no longer obligated to, and do not intend to, effect any such redemption.
(2) On October 28, 2005 FSP Corp. announced that the Board of Directors of FSP Corp. had authorized the repurchase of up to $35 million of the Company's common stock from time to time in the open market or in privately negotiated transactions. The stock repurchase expires at the earlier of (i) November 1, 2007 or (ii) a determination by the Board of Directors of FSP Corp. to discontinue repurchases.
Item 6. Selected Financial Data.
The following selected financial information is derived from the historical consolidated financial statements of FSP Corp. This information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 and with the FSP Corp.'s consolidated financial statements and related notes thereto included in Item 8.
Year Ended December 31,
-----------------------------------------------------
2005 2004 2003 2002 2001 (1)
-------- -------- -------- -------- ---------
(In thousands, except per share or unit amounts)
Operating Data:
Total revenue $ 96,393 $ 87,436 $ 68,464 $ 42,326 $ 41,123
Income from:
Continuing operations 40,120 42,334 34,062 20,643 19,199
Discontinued operations 4,503 5,429 5,956 6,669 6,169
Gain on sale of properties 30,493 -- 6,362 -- --
-------- -------- -------- -------- ---------
Net income 75,116 47,763 46,380 27,312 25,368
Basic and diluted income per share:
Continuing operations 0.70 0.85 0.87 0.84 0.78
Discontinued operations 0.08 0.11 0.15 0.27 0.25
Gain on sale of properties 0.54 -- 0.16 -- --
-------- -------- -------- -------- ---------
Total 1.32 0.96 1.18 1.11 1.03
Distributions declared per
unit/share outstanding (1) (2): 1.24 1.24 1.36 1.24 1.18
As of December 31,
-----------------------------------------------------
2005 2004 2003 2002 2001 (1)
-------- -------- -------- -------- ---------
Balance Sheet Data:
Total assets $677,173 $573,111 $528,529 $201,936 $ 204,117
Total liabilities 15,590 70,023 11,674 4,771 4,354
Total shareholders'/partners capital 661,583 503,088 516,855 197,165 199,763
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(1) As a result of the conversion of the FSP Partnership into FSP Corp., each unit in the FSP Partnership was converted into one share of common stock in FSP Corp.
(2) In 2003 a special dividend of $0.12 per share was paid relating to the sale of two residential properties.
The 2005 and 2003 financial statements reflect acquisition by merger of 4 and 13 Sponsored REITs, respectively. Prior to their acquisition, FSP Corp. held a non-controlling interest with virtually no economic benefits or risks in these REITs.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report. Historical results and percentage relationships set forth in the consolidated financial statements, including trends which might appear, should not be taken as necessarily indicative of future operations. The following discussion and other parts of this Annual Report on Form 10-K may also contain forward-looking statements based on current judgments and current knowledge of management, which are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those indicated in such forward-looking statements. Accordingly, readers are cautioned not to place undue reliance on forward-looking statements. Investors are cautioned that our forward-looking statements involve risks and uncertainty, including without limitation changes in economic conditions in the markets in which we own properties, changes in the demand by investors for investment in Sponsored REITs, risks of a lessening of demand for the types of real estate owned by us, changes in government regulations, and expenditures that cannot be anticipated such as utility rate and usage increases, unanticipated repairs, additional staffing, insurance increases and real estate tax valuation reassessments. See "Risk Factors" in Item 1A. Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We will not update any of the forward-looking statements after the date this Annual Report on Form 10-K is filed to conform them to actual results or to changes in our expectations that occur after such date, other than as required by law.
Overview
FSP Corp. or the Company, operates in two business segments: real estate operations and investment banking/investment services. The real estate operations segment involves real estate rental operations, leasing, interim acquisition financing, development services and asset/property management services. The investment banking/investment services segment involves the provision of real estate investment and broker/dealer services that include the organization of Sponsored REITs, the acquisition and development of real estate on behalf of Sponsored REITs and the raising of capital to fully equitize the Sponsored REITs through sale of preferred stock in private placements.
The main factor that affects our real estate operations is the broad economic market conditions in the United States. These market conditions affect the occupancy levels and the rent levels on both a national and local level. We have no influence on the national market conditions. We look to acquire and/or develop quality properties in good locations in order to lessen the impact of downturns in the market and to take advantage of upturns when they occur.
Our investment banking/investment services customers are primarily institutions and high net-worth individuals. To the extent that the broad capital markets affect these investors our business is also affected. These investors have many investment choices. We must continually search for real estate at a price and at a competitive risk/reward rate of return that meets our customer's risk/reward profile for providing a stream of income and as a long-term hedge against inflation.
Trends and Uncertainties
Real Estate Operations
Our property operations during the fourth quarter of 2005 produced profit results that were generally in line with management's expectations. We believed 2005 would be another difficult year for real estate rental operations especially in the office sector, which is our primary property type. In fact, 2005 showed some modest improvement in occupancy, but little rental rate movement in most real estate markets around the country. In most office markets, occupancy rates increased 1%-1.5% and sublease inventory continued to decrease. The general economy did continue to improve in 2005, and management believes that 2006 may continue the positive trend and show legitimate broad-based improvement in real estate operating fundamentals, particularly in the long-suffering office property sector, our predominant property type. Nevertheless, assuming a normal cyclical continuation of the current U.S. economic expansion, it is likely to take at least two more years for office occupancies and rents to reach levels that were prevalent in 1999, 2000, and 2001.
The portfolio was approximately 92% leased at December 31, 2005. About 17% of the square footage in our non-residential real estate portfolio has leases that are scheduled to expire in 2006. We cannot predict if these tenants will renew their leases or what the terms and conditions of the lease renewals will be, although we expect to renew or sign new leases at current market rates for the locations in which the buildings are located, which in most cases will be below the expiring rental rates.
The apartment property was 97% leased at December 31, 2005.
Discontinued Operations
During the year ended December 31, 2005, the Company disposed of three apartment properties and three commercial properties. The three apartment properties are Essex House and Gael Apartments, which are located in Houston, Texas; and Mansions in the Park, which is located in Baton Rouge, Louisiana. The three commercial properties are Blue Ravine, which is located in Folsom, California; Gateway Crossing, which is located in Columbia, Maryland; and Telecom Business Center, which is located in San Diego, California. An agreement was also reached to sell an office property in Santa Clara, California, which is expected to be sold by December 2006 at a gain. Accordingly, as of December 31, 2005 the Santa Clara property is held for sale and is classified as such on our financial statements. During the year ended December 31, 2003, the Company disposed of two apartment properties, Weslayan Oaks and Reata, both located in Houston, Texas. The operating results for these real estate assets have been reflected as discontinued operations in the financial statements for the years ended December 31, 2005, 2004 and 2003.
We continue to evaluate our portfolio, and in the future may decide to dispose of additional properties from time-to-time in the ordinary course of business.
Investment Banking/Investment Services
Unlike our real estate operations business, which provides a rental revenue stream which is ongoing and recurring in nature, our investment banking/investment services business is transactional in nature. Both the number of Sponsored REIT syndications completed and the amount of equity raised in 2005 were below our expectations. Future business in this area is unpredictable.
Our property acquisition executives continue to be concerned about high valuation levels for prime commercial investment real estate. It appears that a combination of factors, including low interest rates, a growing general economy and substantially increased capital allocation to real estate assets is increasing prices on many properties we would have an interest in acquiring. This upward pressure on prices is causing capitalization rates to fall and prices per square foot to rise. Specifically, our acquisition executives were not able to identify enough property during 2005 at a price acceptable under our investment criteria to grow our overall investment banking/investment services business. Lower revenues from this business reduced net income and Adjusted Funds From Operations (AFFO). As 2006 begins, valuation levels for many top quality investment properties remain at historically high levels, with significant competition from a variety of capital sources to acquire them. We continue to rely solely on our in-house investment executives to access interested investors who have capital they can afford to place in an illiquid position for an indefinite period of time (i.e., invest in a Sponsored REIT). We also continue to evaluate whether our in-house sales force is capable, either through our existing client base or through new clients, of raising sufficient investment capital in Sponsored REITs to achieve future performance objectives.
Critical Accounting Policies
We have certain critical accounting policies that are subject to judgments and estimates by our management and uncertainties of outcome that affect the application of these policies. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances. On an on-going basis, we evaluate our estimates. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current information. The accounting policies that we believe are most critical to the understanding of our financial position and results of operations, and that require significant management estimates and judgments, are discussed below.
Critical accounting policies are those that have the most impact on the reporting of our financial condition and results of operations and those requiring significant judgments and estimates. We believe that our judgments and estimates are consistently applied and produce financial information that fairly presents our results of operations. Our most critical accounting policies involve our investments in Sponsored REITs and our investments in real property. These policies affect our:
o allocation of purchase prices between various asset categories and
the related impact on our recognition of rental income and
depreciation and amortization expense;
o assessment of the carrying values and impairments of long lived
assets;
o classification of leases; and
o revenue recognition in the syndication of Sponsored REITs.
Allocation of Purchase Price
We have historically allocated the purchase prices of properties to land, buildings and improvements. Each component of purchase price generally has a different useful life. For properties acquired subsequent to June 1, 2001, the effective date of Statement of Financial Accounting Standards ("SFAS") No. 141 "Business Combinations," we allocate the value of real estate acquired among land, buildings, improvements and identified intangible assets and liabilities, which may consist of the value of above market and below market leases, the value of in-place leases, and the value of tenant relationships. Purchase price allocations and the determination of the useful lives are based on management's estimates. Under some circumstances we may rely upon studies commissioned from independent real estate appraisal firms in determining the purchase price allocations.
Purchase price allocated to land and building and improvements is based on management's determination of the relative fair values of these assets assuming the property was vacant. Management determines the fair value of a property using methods similar to those used by independent appraisers. Purchase price allocated to above market leases is based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) our estimate of fair market lease rates for the corresponding leases, measured over a period equal to the remaining non-cancelable terms of the respective leases. Purchase price allocated to in-place leases and tenant relationships is determined as the excess of (i) the purchase price paid for a property after adjusting existing in-place leases to market rental rates over (ii) the estimated fair value of the property as if vacant. This aggregate value is allocated between in-place lease values and tenant relationships is based on management's evaluation of the specific characteristics of each tenant's lease; however, the value of tenant relationships has not been separated from in-place lease value because such value and its consequence to amortization expense is immaterial for acquisitions reflected in our financial statements. Factors considered by us in performing these analyses include (i) an estimate of carrying costs during the expected lease-up periods, including real estate taxes, insurance and other operating income and expenses, and (ii) costs to execute similar leases in current market conditions, such as leasing commissions, legal and other related costs. If future acquisitions result in our allocating material amounts to the value of tenant relationships, those amounts would be separately allocated and amortized over the estimated life of the relationships.
Depreciation Expense
We compute depreciation expense using the straight-line method over estimated useful lives of up to 39 years for buildings and improvements, and up to 15 years for personal property. The allocated cost of land is not depreciated. The capitalized above-market lease values (included in acquired real estate leases in our consolidated balance sheets) are amortized as a reduction to rental income over the remaining non-cancelable terms of the respective leases. The value of above or below-market leases is amortized over the remaining non-cancelable periods of the respective leases. The value of in-place leases, exclusive of the value of above-market and below-market in-place leases, is also amortized over the remaining non-cancelable periods of the respective leases. If a lease is terminated prior to its stated expiration, all unamortized amounts relating to that lease are written off. Inappropriate allocation of acquisition costs, or incorrect estimates of useful lives, could result in depreciation and amortization expenses which do not appropriately reflect the allocation of our capital expenditures over future periods, as is required by generally accepted accounting principles.
Impairment
We periodically evaluate our real estate properties for impairment indicators. These indicators may include declining tenant occupancy, weak or declining tenant profitability, cash flow or liquidity, our decision to dispose of an asset before the end of its estimated useful life or legislative, economic or market changes that permanently reduce the value of our investments. If indicators of impairment are present, we evaluate the carrying value of the property by comparing it to its expected future undiscounted cash flows. If the sum of these expected future cash flows is less than the carrying value, we reduce the net carrying value of the property to the present value of these expected future cash flows. This analysis requires us to judge whether indicators of impairment exist and to estimate likely future cash flows. If we misjudge or estimate incorrectly or if future tenant profitability, market or industry factors differ from our expectations, we may record an impairment charge which is inappropriate or fail to record a charge when we should have done so, or the amount of such charges may be inaccurate.
Lease Classification
Some of our real estate properties are leased on a triple net basis, pursuant to non-cancelable, fixed term, operating leases. Each time we enter a new lease or materially modify an existing lease we evaluate whether it is appropriately classified as a capital lease or as an operating lease. The classification of a lease as capital or operating affects the carrying value of a property, as well as our recognition of rental payments as revenue. These evaluations require us to make estimates of, among other things, the remaining useful life and market value of a property, discount rates and future cash flows. Incorrect assumptions or estimates may result in misclassification of our leases.
Revenue Recognition
We earn syndication and transaction fees in connection with the syndication of Sponsored REITs. This revenue is recognized pursuant to the provisions of SFAS No. 66 "Accounting for Sales of Real Estate," and Statement of Position 92-1 "Accounting for Real Estate Syndication Income." Revenue is recognized provided the criteria for sale accounting in SFAS No. 66 are met. Accordingly, we recognize syndication fees related to commissions when shares of the Sponsored REIT are sold and the investor's funds have been transferred from escrow into our account. We recognize transaction fees related to loan commitment and acquisition fees upon an investor closing and the subsequent payment of the Sponsored REIT's loan and fees payable to us. Other transaction fees are recognized upon the final closing of the syndication of the Sponsored REIT.
Ownership of Stock in a Sponsored REIT
Common stock investments in Sponsored REITs are consolidated while the entity is controlled by the Company. Following the commencement of syndication the Company exercises influence over, but does not control these entities and investments are accounted for using the equity method. Once under the equity method of accounting, our cost basis is adjusted by its share of the Sponsored REITs' earnings, if any, prior to completion of the syndication. Equity in losses of Sponsored REITs is not recognized to the extent that the investment balance would become negative. Distributions received are recognized as income once the investment balance is reduced to zero, unless there is an asset held for syndication from the Sponsored REIT entity. Equity in losses or distributions received in excess of investment is recorded as an adjustment to the carrying value of the asset held for syndication.
We recognize our share of the operations during the period we consolidate and when the equity method is appropriate, as opposed to classifying the Sponsored REITs as discontinued operations, because we earn an ongoing asset and/or property management fee from Sponsored REITs. These ongoing fees, in addition to the influence that we exercise over the Sponsored REIT, constitute a continuing involvement between the Company and the Sponsored REIT and preclude treatment as discontinued operations.
We have acquired a preferred stock interest in two Sponsored REITs. As a result of our common stock interest and our preferred stock interest in these two Sponsored REITs, we exercise influence over, but do not control these entities. These preferred share investments are accounted for using the equity method. Under the equity method of accounting our cost basis is adjusted by our share of the Sponsored REITs' operations and distributions received are recognized as income. We also agreed to vote our shares in any matter presented to a vote by the stockholders of these Sponsored REITs in the same proportion as shares voted by other stockholders of the Sponsored REITs.
These policies involve significant judgments made based upon our experience, including judgments about current valuations, ultimate realizable value, estimated useful lives, salvage or residual value, the ability of our tenants to perform their obligations to us, current and future economic conditions and competitive factors in the markets in which our properties are located. Recent declines in our occupancy percentages at some of our properties reflect current economic conditions and competition. Competition, economic conditions and other factors may cause additional occupancy declines in the future. In the future we may need to revise our carrying value assessments to incorporate information which is not now known and such revisions could increase or decrease our depreciation expense related to properties we own, result in the classification of our leases as other than operating leases or decrease the carrying values of our assets.
Recent Accounting Standards
In December 2003, the FASB issued FASB Interpretation No. 46(R), which replaces FASB Interpretation No. 46, Consolidation of Variable Interest Entities, clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. The objectives of the interpretations are to provide guidance on how to identify a variable interest entity ("VIE") and determine when the assets, liabilities, non-controlling interests, and results of operations of a VIE need to be included in a company's consolidated financial statements. A VIE exists when either the total equity investment at risk is not sufficient to permit the entity to finance its activities by itself, or the equity investors lack one of three characteristics associated with owning a controlling financial interest. Application of this guidance was effective on March 14, 2004. The adoption of this standard had no impact on the Company's financial position, operations or cash flow.
In December 2004, the FASB issued SFAS No. 153 "Exchanges of Nonmonetary Assets an amendment of APB Opinion No. 29". This statement was effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. This Statement addresses the measurement of exchanges of nonmonetary assets. It eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, Accounting for Nonmonetary Transactions, and replaces it with an exception for exchanges that do not have commercial substance. This Statement specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The adoption of this standard had no impact on our financial position, results of operations or cash flows.
Results of Operations
We operate in two business segments: Real Estate Operations and Investment Banking/Investment Services. We consider contribution from each segment in evaluating performance. Contribution includes revenue from each segment, less related expenses such as rental property operating expenses, depreciation and amortization, commissions and interest income and expense. Selling, general and administrative expenses arise primarily from corporate related expenses and costs associated with our headquarters in Wakefield, Massachusetts where both business segments are managed. Over the last few years there has been a shift in expense and cost allocation between the segments from being primarily related to investment banking activity to a greater focus on real estate operations. This shift has occurred as a result of:
o The increase in the number of owned properties in our real estate portfolio, and related direct acquisition and disposition of real estate assets;
o The trend to a lower level of syndication proceeds from the investment banking segment; and
o An increased level of management time related to our real estate operations.
As a result of this internal shift, we compare the total selling, general and administrative expenses from period-to-period as we believe it more meaningful than comparison of allocated expenses to each segment.
The following table shows each segment for the years ended December 31, 2005 and 2004.
(in thousands)
Real Estate Operations 2005 2004 Change
-------- -------- --------
Revenues:
Rental income $ 75,896 $ 59,180 $ 16,716
Transaction fees 8,062 11,976 (3,914)
Management fees and interest income from loans 1,807 581 1,226
Other 10 3 7
-------------------------------------
85,775 71,740 14,035
-------------------------------------
Expenses:
Real estate operating expenses 17,350 12,094 5,256
Real estate taxes and insurance 10,105 7,626 2,479
Depreciation and amortization 15,795 10,820 4,975
Interest 2,997 1,527 1,470
-------------------------------------
46,247 32,067 14,180
-------------------------------------
Other items:
Interest income 1,552 817 735
Equity in earnings of non-consolidated REIT's 1,397 620 777
-------------------------------------
2,949 1,437 1,512
-------------------------------------
Contribution from real estate 42,477 41,110 1,367
-------------------------------------
Investment Banking/Investment Services
Revenues:
Syndication fees 9,268 13,579 (4,311)
Transaction fees 1,350 2,117 (767)
Other -- -- --
-------------------------------------
10,618 15,696 (5,078)
-------------------------------------
Expenses:
Commissions 5,005 6,959 (1,954)
Depreciation and amortization 132 147 (15)
-------------------------------------
5,137 7,106 (1,969)
-------------------------------------
Other items:
Interest income 36 46 (10)
Taxes on income (422) (1,725) 1,303
-------------------------------------
(386) (1,679) 1,293
-------------------------------------
Contribution from investment banking 5,095 6,911 (1,816)
-------------------------------------
Selling, general and administrative expenses 7,452 5,687 1,765
-------------------------------------
Income from continuing operations 40,120 42,334 (2,214)
Discontinued operations, less applicable income tax:
Income from discontinued operations 4,503 5,429 (926)
Gain on sale of properties 30,493 -- 30,493
-------------------------------------
Net income $ 75,116 $ 47,763 $ 27,353
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Comparison of the year ended December 31, 2005 to the year ended December 31, 2004
The real estate segment includes operating results of properties held in our real estate portfolio, commitment fee income earned on real estate loans and development fees earned for services provided. During 2004 we operated 28 properties for the full year and there were no acquisitions, mergers or property sales. During 2005 we increased the real estate portfolio by four properties from a merger and two properties by acquisitions completed during the year. We also sold six properties in the second half of 2005 and reached an agreement to sell another property, which is expected to close in 2006. As of December 31, 2005 we operated 27 properties and had one property held for sale.
Acquisitions, Mergers and Dispositions:
In February 2005 we acquired one commercial property in Colorado, on April 30, 2005 we completed the acquisition by merger of four Sponsored REITs, and in July 2005 we acquired one commercial property in Indiana. The results of operations for each of the acquired or merged properties are included in our operating results as of their respective purchase date or the merger date of April 30, 2005. Increases in rental revenues and expenses for the year ended December 31, 2005 as compared to 2004 are primarily a result of these acquisitions and the merger. The operating results of the six properties sold and the property held for sale were classified as discontinued operations in our financial statements for all periods presented.
Sales of Real Estate:
The sales included the following. On July 13, 2005 we sold one vacant office property in California, and on September 16 and September 19, 2005, we sold a residential apartment building in Louisiana and sold by transfer of our interest in our wholly-owned subsidiary that held the property, an office property in Maryland. On September 29, 2005, we recorded a non-monetary exchange gain of $339,000 from contribution of 2.9 acres of developable land in exchange for 8.5 preferred shares (approximately 3.05%) of a Sponsored REIT, FSP Park Ten Development Corp. On October 4 and October 5, 2005 we sold two residential apartment buildings in Houston, Texas, and on December 8, 2005 we sold a commercial property in San Diego, California. As of December 31, 2005, we classified a property in Santa Clara, California as held-for-sale and expect that property to be sold at a gain in December 2006.
Investment Banking:
Our investment banking/investment services segment completed the syndication of three Sponsored REITs with total gross proceeds of $138.8 million compared to eight Sponsored REITs with total gross proceeds of $208.2 million in 2004. This decrease followed the trend noted in 2004 and was attributable to continued difficulty in finding properties that met our investment criteria in 2005, as compared to 2004, and is discussed above in "Trends and Uncertainties - Investment Banking/Investment Services." Revenues and expenses for investment banking/investment services are directly related to the gross proceeds of these syndications.
Overview
Total revenues increased $9.0 million, or 10.2%, to $96.4 million for the year ended December 31, 2005, as compared to $87.4 million for the year ended December 31, 2004. Total expenses were $58.8 million for the year ended December 31, 2005, an increase of $14.0 million, or 31.2%, compared to the year ended December 31, 2004. Each segment is discussed below.
Real Estate Operations
Contribution from the real estate segment was $42.5 million for the year ended December 31, 2005; an increase of $1.4 million, or 3.3%, compared to the year ended December 31, 2004. The increase is primarily attributable to:
o An increase in real estate operating income of $9.0 million to $48.4 million for the year ended December 31, 2005 compared to $39.4 million for the comparable 2004 period. The increase primarily relates to the four properties, which we acquired by merger on April 30, 2005, and two properties acquired in Colorado and Indiana that were described earlier. We define real estate operating income as rental revenues less real estate operating expenses, real estate taxes and insurance;
o An increase in management fees and interest income of $1.2 million to $1.8 million for the year ended December 31, 2005 compared to $0.6 million for the year ended December 31, 2004. The increase is primarily attributable to interest income from Sponsored REITs, which had higher interest rates charged and larger loan balances outstanding for a longer period of time during the comparable periods, and, to a lesser extent increases to management fees earned from Sponsored REITs;
o An increase from equity in income from non-consolidated REITs of $0.8 million as a result of Sponsored REITs in syndication with greater net operating income during the year ended December 31, 2005 compared to the year ended December 31, 2004; and
o An increase in interest income of $0.7 million during the year ended December 31, 2005, which was primarily a result of larger cash balances and higher interest rates on cash and cash equivalents during the year ended December 31, 2005 compared to the year ended December 31, 2004;
These increases were partially offset by:
o A decrease in transaction fee revenues of $3.9 million to $8.1 million for the year ended December 31, 2005 as compared to $12.0 million for the year ended December 31, 2004. The decrease was principally caused by the year-over-year decrease in gross syndication proceeds;
o An increase in depreciation and amortization of $5.0 million to $15.8 million for year ended December 31, 2005 compared to $10.8 million for the year ended December 31, 2004, which relates to the four properties owned by the Sponsored REITs, that we acquired on April 30 2005, and two properties acquired in Colorado and Indiana; and
o An increase in interest expense of $1.5 million resulting from higher interest rates and larger loan balances outstanding for assets acquired during the year ended December 31, 2005 compared to the year ended December 31, 2004.
Investment Banking/Investment Services
Contribution of the investment banking/investment services segment was $5.1 million for the year ended December 31, 2005; a decrease of $1.8 million, or 26.3%, compared to the year ended December 31, 2004. The decrease was primarily attributable to:
o A decrease in syndication fee revenues of $5.1 million, which was primarily attributable to the continued difficulty in finding properties that met our investment criteria in 2005, as compared to 2004, discussed above in "Trends and Uncertainties - Investment Banking/Investment Services".
This decrease was partially offset by:
o A decrease in commission expense of $2.0 million, which relates to the decrease in gross syndication proceeds;
o A decrease in tax expense of $1.3 million to $0.4 million for the year ended December 31, 2005 as compared to $1.7 million for the year ended December 31, 2004 primarily due to a lower taxable income from the investment banking and services business in 2005 compared to 2004. During 2005 we had an effective tax rate of 40.3% compared to 38.7% for 2004. The effective rate in 2004 was lower as a result of an adjustment to the statutory rate to better reflect the benefit of lower tax rates at lower levels of taxable income. We expect an effective tax rate of approximately 40.3% for our taxable REIT subsidiary in the future; and
o A decrease in interest income of $10,000 to $36,000 for the year ended December 31, 2005 compared to 2004, primarily as a result of lower cash balances and lower gross syndication proceeds in 2005 compared to 2004.
Selling, general and administrative expenses
Selling, general and administrative expenses increased $1.8 million to $7.5 million for the year ended December 31, 2005 compared to $5.7 million for the year ended December 31, 2004, which increase was primarily a result of compensation and other costs relating to monitoring and managing a larger portfolio of REITs and expenses related to having a publicly traded stock, which commenced on June 2, 2005. These increases were partially offset by decreases to professional fees related to an investor related project completed in 2004. We had approximately 39 and 37 employees, respectively as of December 31, 2005 and 2004 at our headquarters in Wakefield, Massachusetts.
Income from continuing operations
Contribution from both segments, net of selling, general and administrative expenses for 2005 decreased $2.2 million to $40.1 million compared to $42.3 million for the reasons discussed above.
Discontinued operations and gain on sale of properties
During June 2005 an agreement was reached to sell a property called Blue Ravine, which is located in Folsom, California. The sale was completed on July 13, 2005 and resulted in a loss of approximately $1.1 million. The property had been vacant since mid-2003. The offer to purchase the property was compared to estimated future costs to convert the property from a single tenant to a multi-tenant facility and lease the building. The Company concluded that accepting the offer was the more prudent decision because the management time and oversight of such a conversion outweighed the potential future benefit.
On September 29, 2005, we recorded a non-monetary exchange gain of $0.3 million from contribution of 2.9 acres of developable land we contributed in exchange for 8.5 preferred shares (approximately 3.05%) of a Sponsored REIT, FSP Park Ten Development Corp. ("Park Ten Development"). The appraised value of the land and market value of the stock acquired were used to estimate the sale price, and the gain was recorded net of the Company's interest in Park Ten Development. Also during September 2005 the Company sold a residential property called Mansions in the Park, which is located in Baton Rouge, Louisiana, and sold by transfer of our interest in a wholly-owned subsidiary that held an office property called Gateway Crossing, which is located in Columbia, Maryland at gains, which aggregated approximately $14.1 million.
During October 2005 we sold two residential properties called Essex House and Gael Apartments, which are located adjacent to each other in Houston, Texas; and in December 2005 we sold an office property called Telecom Business Center in San Diego, California. All of these properties were sold at gains, which aggregated approximately $17.2 million.
During December 2005 we classified one commercial property, which is located in Santa Clara, California as held for sale. We have an agreement to sell the property at a gain, which is expected to close by December 2006.
Accordingly, as of December 31, 2005, each of the six properties sold and the property classified as held for sale are classified as discontinued operations on our financial statements. Income from discontinued operations of the seven properties was approximately $4.5 million and $5.4 million for the years ended December 31, 2005 and 2004, respectively. For the year ended December 31, 2005 we reported $30.5 million as net gains on sale of properties. During 2004 there were no assets sold.
Net Income
The resulting net income for the year ending December 31, 2005 was $75.1 million compared to net income of $47.8 million for the year ended December 31, 2004.
The following table shows each segment for the years ended December 31, 2004 and 2003.
(in thousands)
Real Estate Operations 2004 2003 Change
---- ---- ------
Revenues:
Rental income $ 59,180 $ 38,105 $ 21,075
Transaction fees 11,976 13,328 (1,352)
Management fees and interest income from loans 581 961 (380)
Other 3 20 (17)
----------------------------------
71,740 52,414 19,326
----------------------------------
Expenses:
Real estate operating expenses 12,094 8,135 3,959
Real estate taxes and insurance 7,626 4,712 2,914
Depreciation and amortization 10,820 6,877 3,943
Interest 1,527 1,036 491
----------------------------------
32,067 20,760 11,307
----------------------------------
Other items:
Interest income 817 288 529
Equity in earnings of non-consolidated REIT's 620 753 (133)
----------------------------------
1,437 1,041 396
----------------------------------
Contribution from real estate 41,110 32,695 8,415
----------------------------------
Investment Banking/Investment Services
Revenues:
Syndication fees 13,579 14,631 (1,052)
Transaction fees 2,117 1,417 700
Other -- 2 (2)
----------------------------------
15,696 16,050 (354)
----------------------------------
Expenses:
Commissions 6,959 7,291 (332)
Depreciation and amortization 147 56 91
----------------------------------
7,106 7,347 (241)
----------------------------------
Other items:
Interest income 46 75 (29)
Taxes on income (1,725) (1,700) (25)
----------------------------------
(1,679) (1,625) (54)
----------------------------------
Contribution from investment banking 6,911 7,078 (167)
----------------------------------
Selling, general and administrative expenses 5,687 5,711 (24)
----------------------------------
Income from continuing operations 42,334 34,062 8,272
Discontinued operations, less applicable income tax:
Income from discontinued operations 5,429 5,956 (527)
Gain on sale of properties -- 6,362 (6,362)
----------------------------------
Net income $ 47,763 $ 46,380 $ 1,383
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Comparison of the year ended December 31, 2004 to the year ended December 31, 2003
The real estate segment included 28 owned properties for the full year of 2004. At the beginning of 2003 we owned 15 properties. On June 1, 2003, we completed the acquisition by merger of 13 Sponsored REITs, which added 13 properties to our portfolio. Increases in rental revenues and expenses are primarily a result of those mergers. During 2005 we sold six properties and reached an agreement to sell another property, which is expected to close in 2006. During 2003 we sold two properties. Accordingly, as of December 31, 2004 and 2003, respectively, each of the properties sold in 2005 and 2003 and the property held for sale in 2005 have been reclassified as discontinued operations in our financial statements.
Our investment banking/investment services segment syndicated eight Sponsored REITs with total gross proceeds of $208.2 million in 2004 compared to five Sponsored REITs syndicated in 2003 with total gross proceeds of $231.8 million, a decrease of $23.6 million or 10.2%. This decrease was attributable to the increased difficulty in finding properties that met our investment criteria in 2004, as compared to 2003. Revenues and expenses for investment banking/investment services are directly related to the gross proceeds of these syndications.
Total revenues increased $18.9 million, or 27.7%, to $87.4 million for the year ended December 31, 2004, as compared to $68.5 million for the year ended December 31, 2003. Total expenses were $44.9 million for the year ended December 31, 2004; an increase of $11.0 million, or 32.7%, compared to the year ended December 31, 2003. Each segment is discussed below.
Real Estate Operations
Contribution from the real estate segment was $41.1 million for the year ended December 31, 2004, an increase of $8.4 million, or 25.7%, compared to the year ended December 31, 2003. The increase is primarily attributable to:
o An increase in real estate operating income of $14.2 million to $39.5 million for the year ended December 31, 2004 compared to $25.3 million for the comparable 2003 period. We define real estate operating income as rental revenues less real estate operating expenses, real estate taxes and insurance. The increase primarily relates to the merger of 13 Sponsored REITs completed on June 1, 2003, which added 13 properties to the real estate portfolio. The benefit of owning the merged properties for the full year was partially offset by a slight decrease in occupancy in the portfolio prior to the merger; and
o An increase to interest income of $0.5 million during the year ended December 31, 2004, which was primarily a result of larger cash balances, somewhat offset by lower general interest rates, on cash and cash equivalents during the year ended December 31, 2004 compared to the year ended December 31, 2003;
These increases were partially offset by:
o A decrease in transaction fee revenues of $1.3 million to $12.0 million for the year ended December 31, 2004 as compared to $13.3 million for the year ended December 31, 2003. The decrease was principally caused by the year over year decrease in gross syndication proceeds;
o A decrease in management fees and interest income from loans of $0.4 million to $0.6 million for the year ended December 31, 2004 from $1.0 million for the year ended December 31, 2003. The decrease was primarily a result of the merger of 13 Sponsored REITs completed on June 1, 2003, that reduced management fee income compared to 2003;
o An increase in depreciation and amortization of $3.9 million to $10.8 million for year ended December 31, 2004 compared to $6.9 million for the year ended December 31, 2003, which primarily relates to the merger of 13 Sponsored REITs completed on June 1, 2003, that added 13 properties to the real estate portfolio;
o An increase in interest expense of $0.5 million resulting from higher loan balances outstanding for longer periods of time for syndications compared to the year ended December 31, 2003; and
o A decrease in equity from non-consolidated REITs, which was principally caused by the impact of EITF 98-13, where equity in losses or dividends received in excess of investment in non-consolidated REITs of $0.2 million were deferred from revenue recognition and recorded as a reduction in the carrying value of assets held for syndication from a Sponsored REIT.
Investment Banking/Investment Services
Contribution of the investment banking and services segment was $6.9 million for the year ended December 31, 2004, a decrease of $0.2 million, or 2.4%, compared to the year ended December 31, 2003. The decrease was primarily attributable to:
o A decrease in syndication fee revenues of $1.0 million, which was primarily attributable to the increased difficulty in finding properties that met our investment criteria in 2004, as compared to 2003. This decrease was partially offset by an increase in transaction fee revenue of $0.7 million. The increase primarily related to transaction fee revenue recognized from a 2003 syndication, which closed in early 2004;
o A decrease in commission expense of $0.3 million, which relates to the decrease in gross syndication proceeds compared to 2003;
o An increase in depreciation expense of $0.1 million related to capital expenditures in our Wakefield headquarters;
o A decrease in interest income of $29,000 to $46,000 for the year ended December 31, 2004 compared to 2003, primarily as a result of decreases in general interest rates and lower gross syndication proceeds in 2004 compared to 2003; and
o An increase in taxes on income of $25,000 to $1.7 million for the year ended December 31, 2004 at an effective tax rate of 38.7%, compared to 2003, during which our effective tax rate was 41.2%. The effective rate in 2004 was lower as a result of an adjustment to the statutory rate to better reflect the benefit of lower tax rates at lower levels of taxable income. We expect an effective tax rate of approximately 40.3% for our taxable REIT subsidiary in the future.
Selling, general and administrative expenses
Selling, general and administrative expenses did not change significantly for the year ended December 31, 2004 compared to the year ended December 31, 2003. Increases arising from professional fees related to Sarbanes-Oxley compliance and additional costs to monitor and manage a larger portfolio of REITs were offset by decreases related primarily to a reduction in bonus compensation. We had approximately 37 employees as of December 31, 2004 at our headquarters in Wakefield compared to 35 employees as of December 31, 2003.
Income from continuing operations
Contribution from both segments, net of selling, general and administrative expenses for the year ended December 31, 2004 increased $8.3 million to $42.3 million compared to $34.0 million for the reasons discussed above.
Discontinued operations and gain on sale of properties
As described in the comparison of the year ended December 31, 2005 to the year ended December 31, 2004, six properties were sold in 2005 and one property was held for sale as of December 31, 2005. During 2004 there were no assets sold; for the year ended December 31, 2003, two properties were sold resulting in a gain of $6.4 million. Accordingly, the operations of properties sold or held for sale are classified as discontinued operations on our financial statements for all periods presented. Income from discontinued operations was approximately $5.4 million and $5.9 million for the years ended December 31, 2004 and 2003, respectively.
Net Income
The resulting net income for the year ending December 31, 2004 was $47.8 million compared to net income of $46.4 million for the year ended December 31, 2003.
Liquidity and Capital Resources
Cash and cash equivalents were $69.7 million and $52.8 million at December 31, 2005 and December 31, 2004, respectively. This increase of $16.9 million is attributable to $65.2 million provided by operating activities, and $92.5 million used for investing activities, less $140.8 million used for financing activities. Presentation of our consolidated statements of cash flows combines cash flows from continuing operations with those of discontinued operations. Where significant, cash flows from discontinued operations are discussed below. Management believes that existing cash, cash anticipated to be generated internally by operations, cash anticipated to be generated by the sale of preferred stock in future Sponsored REITs and our line of credit will be sufficient to meet working capital requirements and anticipated capital expenditures for at least the next 12 months.
Operating Activities
The cash provided by our operating activities of $65.2 million, which includes $6.5 million from the discontinued operations from the sale of real estate assets, is primarily attributable to net income of $75.1 million, less the gain on sale of real estate assets of $30.5 million and payments of deferred leasing commissions of $1.6 million made during 2005; plus the add-back of $22.2 million of non-cash depreciation and amortization.
Investing Activities
Our cash provided by investing activities of $92.5 million is attributable to the proceeds from sale of properties of $112 million; plus the sale of assets held for syndication of $59.5 million; plus cash acquired through our merger transaction that was completed on April 30, 2005 of $10.6 million; less uses of $88.5 million for acquisitions and additions to real estate investments and office equipment, which includes $0.6 million in additions made to properties sold during 2005; plus costs paid related to the merger of $0.4 million; less changes in deposits on real estate assets of $0.7 million.
Financing Activities
Our cash used by financing activities of $140.8 million is primarily attributable to $67.2 million of distributions to shareholders; $14.0 million for the purchase of treasury shares; and $59.6 million for net repayments on our line of credit and deferred financing costs from our amended and restated line of credit. Net repayments made during 2005 were from investment banking proceeds on assets held for syndication and proceeds from sales of properties, which were partially offset by borrowings for interim financing of property acquisitions.
Line of Credit
We have a revolving line of credit agreement with a group of banks providing for borrowings of up to $150 million. During August 2005 the line of credit was amended and restated, and the maturity date was extended to August 18, 2008. Borrowings under the line of credit bear interest at either the bank's prime rate (7.25% at December 31, 2005) or a rate equal to LIBOR plus 125 basis points (5.64% at December 31, 2005). There were no borrowings outstanding under the line of credit at December 31, 2005. We are in compliance with all bank covenants required by the line of credit.
Contingencies
We are subject to various legal proceedings and claims that arise in the ordinary course of its business. Although occasional adverse decisions (or settlements) may occur, we believe that the final disposition of such matters will not have a material adverse effect on our financial position or results of operations.
Assets Held for Syndication
As of December 31, 2005 there were no assets held for syndication. On August 23, 2005 we completed the syndication of FSP Galleria North Corp., on September 28, 2005 we completed the syndication of FSP Park Ten Development Corp, and on December 22, 2005 we completed the syndication of FSP Energy Tower I Corp.
As of December 31, 2004 we had two assets held for syndication. One was FSP 505 Waterford Corp., which was completed in January 2005, and the other was FSP Galleria North Corp.
Assets Held for Sale
During 2005 an agreement was reached to sell a commercial property in Santa Clara, California that is expected to be sold by December 2006 and is anticipated to be sold at a gain. Accordingly, as of December 31, 2005 the property is classified as held for sale on the balance sheet and its cost basis.
Related Party Transactions
During 2005, we completed the syndication of FSP 505 Waterford Corp., FSP Galleria North Corp., FSP Park Ten Development Corp., and FSP Energy Tower I Corp. As part of the syndication of FSP Park Ten Development Corp., we contributed land from the Company in exchange for 8.5 shares of Preferred Stock, representing approximately a 3% interest in the entity. We did not enter into any other significant transactions with related parties during 2005. For a discussion of transactions between us and related parties during 2005, see Footnote No. 5 "Related Party Transactions" to the Consolidated Financial Statements included in this Annual Report on Form 10-K for the year ended December 31, 2005.
Other Considerations
We generally pay the ordinary annual operating expenses of our properties from the rental revenue generated by the properties. For the years ended December 31, 2005 and 2004 the rental income exceeded the expenses for each individual property, with the exception of a property called Blue Ravine for both 2005 and 2004; and Lyberty Way for 2005. Blue Ravine was sold on July 13, 2005, which had been vacant since June 2003 and had operating expenses of approximately $103,000 and $156,000 for the years ended December 31, 2005 and 2004. The single tenant lease at the Lyberty Way, a property located in Westford, Massachusetts, expired in early 2005. Operating expenses at Lyberty Way exceeded revenue by approximately $209,000 for the year ended December 31, 2005. We have not re-let this property and expect that it will not produce revenue to cover its expenses in the first quarter of 2006.
Rental Income Commitments
Our commercial real estate operations include the leasing of office buildings
and industrial properties subject to leases with terms greater than one year.
The leases thereon expire at various dates through 2015. Approximate future
minimum rental income from non-cancelable operating leases as of December 31,
2005 is:
Amount
Date (in thousands)
---- --------------
2006 $ 64,239
2007 52,220
2008 48,189
2009 41,498
2010 21,508
2011-2015 27,149
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Contractual Obligations
The following table sets forth our contractual obligations as of December 31, 2005.
--------------------------------------------------------------------------------
Contractual Payment due by period
Obligations (in thousands)
------------------------------------------------------------
Total 2006 2007 2008 2009 2010 After 2010
--------------------------------------------------------------------------------
Line of Credit $ -- $ -- $ -- $ -- $ -- $ -- $ --
--------------------------------------------------------------------------------
Operating Leases 792 302 308 182 -- -- --
--------------------------------------------------------------------------------
Total $792 $302 $308 $182 $ -- $ -- $ --
--------------------------------------------------------------------------------
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The operating leases in the table above consist of our lease of corporate office space, which was amended in 2003. The lease includes a base annual rent and additional rent for our share of taxes and operating costs.
Off-Balance Sheet Arrangements
Investments in Sponsored REITs
As part of our business model we organize single-purpose entities that own real estate, purchases of which are financed through the private placement of equity in those entities, typically through syndication. We call these entities Sponsored REITs, and they are operated in a manner intended to qualify as real estate investment trusts. We earn fees related to the sale of preferred stock in the Sponsored REITs in these syndications. The Sponsored REITs issue both common stock and preferred stock. The common stock is owned solely by FSP Corp. Generally the preferred stock is owned by unaffiliated investors, however, on two occasions we acquired an interest in preferred shares of two Sponsored REITs. In addition, two non-management directors of FSP Corp., have from time to time invested in Sponsored REITs and may do so again in the future. Following consummation of the offerings, the preferred stockholders in each of the Sponsored REITs are entitled to 100% of the Sponsored REIT's cash distributions. Subsequent to the completion of the offering of preferred shares, except of the preferred stock we own, the Company does not share in any of a Sponsored REIT's earnings, or any related dividend, and the common stock ownership interests have virtually no economic benefit or risk. Prior to the completion of the offering of preferred shares, the Company shares in a Sponsored REIT's earnings (and related dividends) to the extent of its ownership interest in the Sponsored REIT.
As a common stockholder, upon completion of the syndication, we have no rights to the Sponsored REIT's earnings or any related cash distributions. However, upon liquidation of a Sponsored REIT, we are entitled to our percentage interest in any proceeds remaining after the preferred stockholders have recovered their investment. Our percentage interest in each Sponsored REIT is less than 0.1%. The affirmative vote of the holders of a majority of the Sponsored REIT's preferred stockholders is required for any actions involving merger, sale of property, amendment to charter or issuance of additional capital stock. In addition, all of the Sponsored REITs allow the holders of more than 50% of the outstanding preferred shares to remove (without cause) and replace one or more members of that Sponsored REIT's board of directors.
Common stock investments in Sponsored REITs are consolidated while the entity is controlled by the Company. Following the commencement of syndication the Company exercises influence over, but does not control these entities and investments are accounted for using the equity method. Under the equity method of accounting, the Company's cost basis is adjusted by its share of the Sponsored REITs' earnings, if any, prior to completion of the syndication. Equity in losses of Sponsored REITs is not recognized to the extent that the investment balance would become negative and distributions received are recognized as income once the investment balance is reduced to zero, unless there are assets held for syndication from the Sponsored REIT entity. Equity in losses or distributions received in excess of investment is recorded as an adjustment to the carrying value of the asset held for syndication.
We have acquired a preferred stock interest in two Sponsored REITs. As a result of our common stock interest and our preferred stock interest in these two Sponsored REITs, we exercise influence over, but do not control these entities. These preferred share investments are accounted for using the equity method. Under the equity method of accounting our cost basis is adjusted by our share of the Sponsored REITs' operations and distributions received are recognized as income. We also agreed to vote our shares in any matter presented to a vote by the stockholders of these Sponsored REITs in the same proportion as shares voted by other stockholders of the Sponsored REITs. These investments are included in our financial statements.
At December 31, 2005, we held a common stock interest in 13 Sponsored REITs, all of which were fully syndicated and from which we no longer share economic benefit or risk. At December 31, 2004, we held a common stock interest in 15 Sponsored REITs, of which 13 were fully syndicated and we no longer shared economic benefit or risk. The value of the two entities which were not fully syndicated was approximately $59.2 million and was shown on the consolidated balance sheets as assets held for syndication. At December 31, 2003 we held a common stock interest in eight Sponsored REITs, of which seven were fully syndicated. The value of the entity which was not fully syndicated was approximately $4.1 million and was shown on the consolidated balance sheets as assets held for syndication.
The table below shows the Company's income and expenses from Sponsored REITs. Management fees of $1,000, $102,000 and $5,000 for the years ended December 31, 2005, 2004 and 2003, respectively; and interest expense related to the Company's mortgage on properties is eliminated in consolidation.
Year Ended December 31,
(in thousands) 2005 2004 2003
---- ---- ----
Operating Data:
Rental revenues $ 146 $3,772 $552
Operating and maintenance
expenses 63 1,439 177
Depreciation and amortization 36 584 133
Interest expense 64 922 163
Interest income 1 25 --
-------------------------------
$ (16) $ 852 $ 79
===============================
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During the years ended December 31, 2005, 2004 and 2003, the Company recorded equity in earnings of Sponsored REITs following the commencement of syndication of $1,149,000, $390,000 and $753,000, respectively.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We were not a party to any derivative financial instruments at or during the year ended December 31, 2005.
We borrow from time-to-time on our line of credit. These borrowings bear interest at the bank's base rate (7.25% at December 31, 2005) or at LIBOR plus 125 basis points (5.64 at December 31, 2005), as elected by us when requesting funds as defined. As of December 31, 2005 there were no amounts outstanding under the line of credit. We have used funds drawn on our line of credit for the purpose of making interim mortgage loans to Sponsored REITs and for interim financing of acquisitions. Generally interim mortgage loans bear interest at the same variable rate payable by us under our line of credit. We therefore believe that we have mitigated our interest rate risk with respect to our borrowings for interim mortgage loans. Historically we have satisfied obligations arising from interim financing of acquisitions through cash or sale of properties in our portfolio, so we believe that we can mitigate interest rate risk with respect to borrowings for interim financing of acquisitions as well.
Item 8. Financial Statements and Supplementary Data.
The information required by this item is included elsewhere herein. Reference is made to the Index to Consolidated Financial Statements in Item 15 of Part IV.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
Not applicable.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2005. The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of December 31, 2005, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Management's Annual Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the Company's principal executive and principal financial officer and effected by the Company's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
o Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
o Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
o Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company's management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2005. In making this assessment, the Company's management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.
Based on our assessment, management concluded that, as of December 31, 2005, the Company's internal control over financial reporting is effective based on those criteria.
Management's assessment of the effectiveness of our internal control over financial reporting as of December 31, 2005 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included elsewhere herein.
Changes in Internal Control Over Financial Reporting
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the quarter ended December 31, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
On February 23, 2006, the Board of Directors of FSP Corp. approved an amended form of employee retention agreement, which we will refer to as the Amended Retention Agreement, to reflect changes in the treatment of persons who are both an Investment Executive and an Executive Vice President of FSP Corp. The original form of retention agreement was previously filed as an exhibit to our Current Report on Form 8-K filed with the Securities and Exchange Commission on February 8, 2006.
Provided that an Investment Executive/Executive Vice President (as defined in the Amended Retention Agreement) is an employee of our subsidiary, FSP Investments, on the closing date of a transaction constituting a Change in Control (as defined in the Amended Retention Agreement), FSP Investments will pay any such Investment Executive/Executive Vice President a lump sum in an amount equal to the average of the lump sum payments made by FSP Investments to its Chief Financial Officer and Chief Operating Officer, in each case, pursuant to the retention agreement between such employee and FSP Investments.
The foregoing description of the Amended Retention Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Amended Retention Agreement, which is filed with this Form 10-K as Exhibit 10.5 and incorporated herein by reference.
PART III
Certain information required by Part III of this Form 10-K is omitted because we plan to file a definitive proxy statement pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, and certain information to be included therein is incorporated herein by reference.
Item 10. Directors and Executive Officers of the Registrant.
The response to this item is contained in part under the caption "Item 4A. Directors and Executive Officers of the Registrant" in Part I hereof and the remainder is contained in the Proxy Statement under the captions "Election of Directors" and "Section 16(a) Beneficial Reporting Compliance" and is incorporated herein by reference.
Our board of directors has adopted a code of business conduct and ethics that applies to all of our executive officers, directors and employees. The code was approved by the audit committee of our board of directors and by the full board of directors. We have posted a current copy of our code under "Corporate Governance" in the "Investor Relations" section of our website at www.franklinstreetproperties.com. To the extent permitted by applicable rules of the American Stock Exchange, we intend to satisfy the disclosure requirements under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of the code of business conduct and ethics with respect to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, by posting such information on our website.
Item 11. Executive Compensation.
The response to this item is contained in the Proxy Statement under the captions "Executive Compensation," "Compensation of Directors" and "Compensation Committee Interlocks and Insider Participation" and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The response to this item is contained in the Proxy Statement under the captions "Beneficial Ownership of Voting Stock" and "Securities Authorized for Issuance Under Equity Compensation Plans" and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The response to this item is contained in the Proxy Statement under the caption "Certain Relationships and Related Transactions" and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services.
The response to this item is contained in the Proxy Statement under the captions "Independent Auditor Fees and Other Matters" and "Pre-Approval Policy and Procedure" and is incorporated herein by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) The following documents are filed as part of this report:
1. Financial Statements:
The Financial Statements listed in the accompanying Index to Consolidated Financial Statements are filed as part of this Annual Report on Form 10-K.
2. Financial Statement Schedule:
The Financial Statement Schedule listed on the accompanying Index to Consolidated Financial Statements is filed as part of this Annual Report on Form 10-K.
3. Exhibits:
The Exhibits listed in the Exhibit Index are filed as part of this Annual Report on Form 10-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf as of February 24, 2006 by the undersigned, thereunto duly authorized.
FRANKLIN STREET PROPERTIES CORP.
By: /s/ George J. Carter
-------------------------------
George J. Carter
President and Chief Executive Officer
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ George J. Carter President, Chief Executive February 24, 2006
-------------------------- Officer and Director (Principal
George J. Carter Executive Officer)
/s/ Barbara J. Fournier Vice President, Chief Operating February 24, 2006
-------------------------- Officer, Treasurer, Secretary
Barbara J. Fournier and Director
/s/ John G. Demeritt Chief Financial Officer February 24, 2006
-------------------------- (Principal Financial Officer
John G. Demeritt and Principal Accounting
Officer)
/s/ Janet P. Notopoulos Director, Vice President February 24, 2006
--------------------------
Janet P. Notopoulos
/s/ Barry Silverstein Director February 24, 2006
--------------------------
Barry Silverstein
/s/ Dennis J. McGillicuddy Director February 24, 2006
--------------------------
Dennis J. McGillicuddy
/s/ John Burke Director February 24, 2006
--------------------------
John Burke
/s/ Georgia Murray Director February 24, 2006
--------------------------
Georgia Murray
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EXHIBIT INDEX
Exhibit No. Description
----------- -----------
3.1 (1) Articles of Incorporation.
3.2 (2) Amended and Restated By-laws.
10.1+ (3) 2002 Stock Incentive Plan of FSP Corp.
10.2 (4) Second Amended and Restated Loan Agreement dated as of
August 16, 2005 by and among Citizens Bank of Massachusetts,
Bank of America, N.A., Chevy Chase Bank, F.S.B., FSP Corp.
and certain affiliates of FSP Corp.
10.3*+ Summary of executive compensation of named executive
officers.
10.4+ (5) Summary of compensation paid to non-employee directors.
10.5*+ Form of Retention Agreement
10.6+ (6) Change in Control Discretionary Plan
14.1 (7) Code of Conduct and Ethics
21.1* Subsidiaries of the Registrant.
23.1* Consent of Ernst & Young LLP.
31.1* Certification of FSP Corp.'s President and Chief Executive
Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
31.2* Certification of FSP Corp.'s Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1* Certification of FSP Corp.'s President and Chief Executive
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2* Certification of FSP Corp.'s Chief Financial Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
----------
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(1) Incorporated by reference to FSP Corp.'s Form 8-A, filed April 5,
2005 (File No. 001-32470).
(2) Incorporated by reference to FSP Corp.'s Current Report on Form 8-K,
filed on October 28, 2005 (File No. 001-32470).
(3) Incorporated by reference to FSP Corp.'s Annual Report on Form 10-K,
filed on March 29, 2002 (File No. 0-32615).
(4) Incorporated by reference to FSP Corp.'s Current Report on Form 8-K,
filed on August 18, 2005 (File No. 001-32470).
(5) Incorporated by reference to FSP Corp.'s Annual Report on Form 10-K,
filed on March 15, 2005 (File No. 0-32615).
(6) Incorporated by reference to FSP Corp.'s Current Report on Form 8-K,
filed on February 8, 2006 (File No. 001-32470).
(7) Incorporated by reference to FSP Corp.'s Current Report on Form 8-K,
filed on August 3, 2004 (File No. 0-32615).
+ Management contract or compensatory plan or arrangement filed as an
Exhibit to this Form 10-K pursuant to Items 15(b) of Form 10-K.
* Filed herewith
Franklin Street Properties Corp. Index to Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firm F-2 Consolidated Financial Statements: Consolidated Balance Sheets as of December 31, 2005 and 2004 F-4 Consolidated Statements of Income for each of the three years in the period ended December 31, 2005 F-6 Consolidated Statements of Stockholders' Equity for each of the three years in the period ended December 31, 2005 F-7 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2005 F-8 Notes to the consolidated financial statements F-9 Financial Statement Schedule - Schedule III F-28 |
All other schedules for which a provision is made in the applicable accounting resolutions of the Securities Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Stockholders of Franklin Street Properties Corp.:
We have audited the accompanying consolidated balance sheets of Franklin Street Properties Corp. as of December 31, 2005 and 2004, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2005. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Franklin Street Properties Corp. at December 31, 2005 and 2004, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Franklin Street Properties Corp.'s internal control over financial reporting as of December 31, 2005, based upon criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 21, 2006 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 21, 2006
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Stockholders of Franklin Street Properties Corp.:
We have audited management's assessment, included in the accompanying Management's Annual Report on Internal Control Over Financial Reporting, that Franklin Street Properties Corp. maintained effective internal control over financial reporting as of December 31, 2005 based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Franklin Street Properties Corp.'s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that Franklin Street Properties Corp. maintained effective internal control over financial reporting as of December 31, 2005 is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Franklin Street Properties Corp. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2005 consolidated financial statements of Franklin Street Properties Corp. and our report dated February 21, 2006 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 21, 2006
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Franklin Street Properties Corp.
Consolidated Balance Sheets
December 31,
----------------------
(in thousands, except share and par value amounts) 2005 2004
======================================================================================================
Assets:
Real estate assets:
Land $ 76,535 $ 50,355
Buildings and improvements 510,596 323,446
Fixtures and equipment 602 599
------------------------------------------------------------------------------------------------------
587,733 374,400
Less accumulated depreciation 35,136 23,227
------------------------------------------------------------------------------------------------------
Real estate assets, net 552,597 351,173
Acquired real estate leases, less accumulated amortization of $10,947
and $3,000, respectively 30,952 6,464
Investment in non-consolidated REITs 5,006 4,270
Assets held for syndication, net -- 59,246
Assets held for sale 6,631 89,783
Cash and cash equivalents 69,715 52,752
Restricted cash 461 1,033
Tenant rent receivables, less allowance for doubtful accounts
of $350 and $350, respectively 1,447 769
Straight-line rent receivable, less allowance for doubtful accounts
of $163 and $460, respectively 5,765 4,122
Prepaid expenses 805 901
Other assets 1,199 1,097
Office computers and furniture, net of accumulated
depreciation of $729 and $597, respectively 311 374
Deferred leasing commissions, net of accumulated amortization
of $890, and $689, respectively 2,284 1,127
------------------------------------------------------------------------------------------------------
Total assets $677,173 $573,111
======================================================================================================
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The accompanying notes are an integral part of these consolidated financial statements.
Franklin Street Properties Corp.
Consolidated Balance Sheets
December 31,
-------------------------
(in thousands, except share and par value amounts) 2005 2004
==========================================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Bank note payable $ -- $ 59,439
Accounts payable and accrued expenses 11,583 8,846
Accrued compensation 1,891 705
Tenant security deposits 1,293 1,033
Acquired unfavorable real estate leases, less accumulated amortization
of $134 823 --
----------------------------------------------------------------------------------------------------------
Total liabilities 15,590 70,023
----------------------------------------------------------------------------------------------------------
Commitments and contingencies
Stockholders' Equity:
Preferred stock, $.0001 par value, 20,000,000 shares
authorized, none issued or outstanding -- --
Common stock, $.0001 par value, 180,000,000 shares authorized,
59,794,608 and 49,630,338 shares issued and outstanding, respectively 6 5
Additional paid-in capital 677,397 512,813
Treasury stock, 731,898 and 575 shares at cost, respectively (14,008) (10)
Earnings (distributions) in excess of accumulated earnings/distributions (1,812) (9,720)
----------------------------------------------------------------------------------------------------------
Total stockholders' equity 661,583 503,088
----------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 677,173 $ 573,111
==========================================================================================================
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The accompanying notes are an integral part of these consolidated financial statements.
Franklin Street Properties Corp.
Consolidated Statements of Income
For the Year Ended
December 31,
(in thousands, except per share amounts) 2005 2004 2003
======================================================================================================
Revenue:
Rental $75,896 $59,180 $38,105
Related party revenue:
Syndication fees 9,268 13,579 14,631
Transaction fees 9,412 14,093 14,745
Management fees and interest income from loans 1,807 581 961
Other 10 3 22
------------------------------------------------------------------------------------------------------
Total revenue 96,393 87,436 68,464
------------------------------------------------------------------------------------------------------
Expenses:
Real estate operating expenses 17,350 12,094 8,135
Real estate taxes and insurance 10,105 7,626 4,712
Depreciation and amortization 15,927 10,967 6,933
Selling, general and administrative 7,452 5,687 5,711
Commissions 5,005 6,959 7,291
Interest 2,997 1,527 1,036
------------------------------------------------------------------------------------------------------
Total expenses 58,836 44,860 33,818
------------------------------------------------------------------------------------------------------
Income before interest income, equity in earnings in
non-consolidated REITs and taxes on income 37,557 42,576 34,646
Interest income 1,588 863 363
Equity in earnings in non-consolidated REITs 1,397 620 753
------------------------------------------------------------------------------------------------------
Income before taxes on income 40,542 44,059 35,762
Taxes on income 422 1,725 1,700
------------------------------------------------------------------------------------------------------
Income from continuing operations 40,120 42,334 34,062
Income from discontinued operations 4,503 5,429 5,956
------------------------------------------------------------------------------------------------------
Income before gain on sale of properties 44,623 47,763 40,018
Gain on sale of properties, less applicable income tax 30,493 -- 6,362
------------------------------------------------------------------------------------------------------
Net income $75,116 $47,763 $46,380
======================================================================================================
Weighted average number of shares outstanding,
basic and diluted 56,847 49,628 39,214
======================================================================================================
Earnings per share, basic and diluted, attributable to:
Continuing operations $ 0.70 $ 0.85 $ 0.87
Discontinued operations 0.08 0.11 0.15
Gain on sale of properties, less applicable income tax 0.54 -- 0.16
------------------------------------------------------------------------------------------------------
Net income per share, basic and diluted $ 1.32 $ 0.96 $ 1.18
======================================================================================================
|
The accompanying notes are an integral part of these consolidated financial statements.
Franklin Street Properties Corp. Consolidated Statements of Stockholders' Equity
Earnings/ Accumulated
(distributions) Undistributed
in excess of Net Realized
Common Stock Additional accumulated Gain on Total
------------------- Paid-In Treasury earnings/ Sale of Stockholders'
Shares Amount Capital Stock distributions Properties Equity
(in thousands)
====================================================================================================================================
Balance, December 31, 2002 24,630 $ 2 $192,743 $ -- $ 4,420 $ -- $ 197,165
Shares issued 25,000 3 320,054 -- -- -- 320,057
Net income -- -- -- -- 40,018 6,362 46,380
Distributions -- -- -- -- (40,791) (5,956) (46,747)
------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 49,630 5 512,797 -- 3,647 406 516,855
Treasury shares purchased -- -- -- (155) -- -- (155)
Treasury shares issued 16 145 161
Net income -- -- -- -- 47,763 -- 47,763
Distributions -- -- -- -- (61,130) (406) (61,536)
------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2004 49,630 5 512,813 (10) (9,720) -- 503,088
Shares issued for:
Merger 10,895 1 164,563 -- -- 164,564
Compensation 2 -- 21 10 31
Treasury shares purchased (732) (14,008) (14,008)
Net income -- -- -- -- 75,116 -- 75,116
Distributions -- -- -- -- (67,208) -- (67,208)
------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2005 59,795 $ 6 $677,397 $(14,008) $ (1,812) $ -- $ 661,583
====================================================================================================================================
|
The accompanying notes are an integral part of these consolidated financial statements.
Franklin Street Properties Corp.
Consolidated Statements of Cash Flows
(in thousands) For the Year Ended December 31,
2005 2004 2003
======================================================================================================================
Cash flows from operating activities:
Net income $ 75,116 $ 47,763 $ 46,380
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization expense 17,937 13,006 9,531
Amortization of above market lease 4,310 235 137
Gain on sale of real estate assets (30,493) -- (6,362)
Equity in earnings of non-consolidated REITs (1,418) (1,472) (832)
Distributions from non-consolidated REITs 1,217 1,582 832
Increase to bad debt reserve -- 195 --
Shares issued as compensation 31 161 --
Changes in operating assets and liabilities:
Restricted cash 572 (51) (1)
Tenant rent receivables, net (678) (83) (302)
Straight-line rents, net (1,692) (860) (1,030)
Prepaid expenses and other assets, net 586 (1,192) 305
Accounts payable, accrued expenses & other items (200) 3,816 (9,053)
Accrued compensation 1,186 (840) 258
Tenant security deposits 260 51 1
Payment of deferred leasing commissions (1,560) (582) (487)
----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 65,174 61,729 39,377
----------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Cash from issuance of common stock in the merger transaction 10,621 -- 23,524
Purchase of real estate assets and office computers and
furniture, capitalized merger costs (75,988) (1,641) (2,388)
Acquired real estate leases (12,513) -- --
Investment in non-consolidated REITs (18) (4,270) --
Merger costs paid (402) -- --
Changes in deposits on real estate assets (710) -- 841
Investment in assets held for syndication 59,532 (55,490) (4,117)
Proceeds received on sales of real estate assets 112,030 -- 21,870
----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities 92,552 (61,401) 39,730
----------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Distributions to stockholders (67,208) (61,536) (46,747)
Purchase of treasury shares (14,008) (155) --
Borrowings under bank note payable -- 59,439 4,117
Repayments of bank note payable (59,439) (4,117) --
Deferred financing costs (108) -- --
----------------------------------------------------------------------------------------------------------------------
Net cash used for financing activities (140,763) (6,369) (42,630)
----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 16,963 (6,041) 36,477
Cash and cash equivalents, beginning of year 52,752 58,793 22,316
----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 69,715 $ 52,752 $ 58,793
======================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 2,981 $ 1,503 $ 1,036
Taxes on income $ 566 $ 1,665 $ 1,963
Non-cash investing and financing activities: assets acquired through
issuance of common stock in the merger transaction, net $ 153,943 $ -- $ 297,468
|
The accompanying notes are an integral part of these consolidated financial statements.
Franklin Street Properties Corp.
Notes to the Consolidated Financial Statements
1. Organization
Franklin Street Properties Corp. ("FSP Corp." or the "Company"), holds, directly and indirectly, 100% of the interest in FSP Investments LLC, FSP Property Management LLC, and FSP Holdings LLC. The Company also has a non-controlling common stock interest in 13 corporations organized to operate as real estate investment trusts ("REITs").
On May 30, 2003, the shareholders of the Company approved the Company's acquisition by merger of 13 REITs (the "2003 Target REITs"). The mergers were effective June 1, 2003 and, as a result, the Company issued 25,000,091 shares in a tax-free exchange for all the outstanding preferred shares of the 2003 Target REITs. The mergers were accounted for as a purchase, and the acquired assets and liabilities were recorded at their fair value.
On April 30, 2005, the Company acquired four real estate investment trusts ("Target REITs") by the merger of the four Target REITs with and into four of the Company's wholly-owned subsidiaries. The merger was effective April 30, 2005 and, as a result, the Company issued 10,894,994 shares in a tax-free exchange for all outstanding preferred shares of the Target REITs. The mergers were accounted for as a purchase and the acquired assets and liabilities were recorded at their fair value.
The Company operates in two business segments: real estate operations and investment banking/investment services. FSP Investments provides real estate investment and broker/dealer services. FSP Investments' services include: (i) the organization of REIT entities (the "Sponsored REITs"), which are syndicated through private placements; (ii) sourcing of the acquisition of real estate on behalf of the Sponsored REITs; and (iii) the sale of preferred stock in Sponsored REITs. FSP Property Management provides asset management and property management services for the Sponsored REITs.
2. Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include all of the accounts of the Company and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
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.
Investments in Sponsored REITs
Common stock investments in Sponsored REITs are consolidated while the entity is controlled by the Company. Following the commencement of syndication the Company exercises influence over, but does not control these entities and investments are accounted for using the equity method. Under the equity method of accounting, the Company's cost basis is adjusted by its share of the Sponsored REITs' earnings, if any, prior to completion of the syndication. Equity in losses of Sponsored REITs is not recognized to the extent that the investment balance would become negative. Distributions received are recognized as income once the investment balance is reduced to zero, unless there is a loan receivable from the Sponsored REIT entity. Equity in losses or distributions received in excess of common stock investment is recorded as an adjustment up to the carrying value of the assets held for syndication.
Subsequent to the completion of the syndication of preferred shares, the Company does not share in any of the Sponsored REITs' earnings, or any related distribution, as a result of its common stock ownership.
On January 30, 2004, the Company purchased 49.25 preferred shares (approximately 8.2%) of a Sponsored REIT, FSP Blue Lagoon Drive Corp. ("Blue Lagoon"), for $4,248,000. The Company agreed to vote its shares in any matter presented to a vote by the stockholders of Blue Lagoon in the same proportion as shares voted by other stockholders of the Company. The investment in Blue Lagoon is accounted for under the equity method.
Franklin Street Properties Corp. Notes to the Consolidated Financial Statements
2. Significant Accounting Policies (continued)
On September 29, 2005, the Company acquired 8.5 preferred shares (approximately 3.05%) of a Sponsored REIT, FSP Park Ten Development Corp. ("Park Ten Development"), in exchange for the contribution of 2.9 acres of developable land. The Company agreed to vote its shares in any matter presented to a vote by the stockholders of Park Ten Development in the same proportion as shares voted by other stockholders of the Company. The Company accounts for its investment in Park Ten Development under the equity method.
Real Estate and Depreciation
Real estate assets are stated at the lower of cost, less accumulated depreciation, or fair value, as appropriate, which in the opinion of management is not in excess of an individual property's estimated undiscounted cash flows.
Costs related to property acquisition and improvements are capitalized. Typical capital items include new roofs, site improvements, various exterior building improvements and major interior renovations. Funding for capital improvements typically is provided by cash set aside at the time the property was acquired.
Routine replacements and ordinary maintenance and repairs that do not extend the life of the asset are expensed as incurred. Typical expense items include interior painting, landscaping, minor carpet replacements and residential appliances. Funding for repairs and maintenance items typically is provided by cash flows from operating activities. Depreciation is computed using the straight-line method over the assets' estimated useful lives as follows:
Category Years
-------- -----
Buildings:
Residential 27
Commercial 39
Building improvements 15-39
Furniture and equipment 5-7
|
The Company periodically reviews its properties to determine if their carrying amounts will be recovered from future operating cash flows. The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results in future periods. Since cash flows are considered on an undiscounted basis in the analysis that the Company conducts to determine whether an asset has been impaired, the Company's strategy of holding properties over the long term directly decreases the likelihood of recording an impairment loss. If the Company's strategy changes or market conditions otherwise dictate an earlier sale date, an impairment loss may be recognized. If the Company determines that impairment has occurred, the affected assets must be reduced to their fair value.
Acquired Real Estate Leases and Amortization
The Company accounts for leases acquired via direct purchase, or as a result of a merger, of real estate assets under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 141. "Business Combinations". Accordingly, the Company recorded a value relating to the leases acquired as a result of the acquisition by merger of four and thirteen Sponsored REITs in 2005 and 2003, respectively and two direct acquisitions in 2005. Acquired real estate leases represent costs associated with acquiring an in-place lease (i.e., the market cost to execute a similar lease, including leasing commission, legal, vacancy and other related costs) and the value relating to leases with rents above the market rate. Amortization is computed using the straight-line method over the life of the leases, which range from 20 months to 91 months.
Amortization related to costs associated with acquiring an in-place lease is included in depreciation and amortization on the consolidated statements of income. Amortization related to leases with rents above the market rate is included with rental revenue in the consolidated statements of income. The estimated annual amortization expense for the five years succeeding December 31, 2005 are as follows:
Franklin Street Properties Corp. Notes to the Consolidated Financial Statements
2. Significant Accounting Policies (continued)
(in thousands)
-------------- 2006 $ 9,774 2007 6,165 2008 5,888 2009 5,353 2010 and thereafter 3,772 |
Acquired Unfavorable Real Estate Leases and Amortization
The Company accounts for leases acquired via direct purchase, or as a result of a merger, of real estate assets under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 141. "Business Combinations". Accordingly, the Company recorded a value relating to the leases acquired as a result of the direct acquisition and acquisition by merger in 2005. Acquired unfavorable real estate leases represent the value relating to leases with rents below the market rate. Amortization is computed using the straight-line method over the life of the leases, which range from 12 months to 90 months.
Amortization related to leases with rents below the market rate is included with rental revenue in the consolidated statements of income. The estimated annual amortization expense for the five years succeeding December 31, 2005 are as follows:
(in thousands)
-------------- 2006 $ 225 2007 202 2008 155 2009 110 2010 and thereafter 131 |
Discontinued Operations
The Company accounts for properties as held for sale under the provisions of SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which typically occurs upon the execution of a purchase and sale agreement and belief by management that the sale or disposition is probable of occurrence within one year. Upon determining that a property is held for sale, the Company discontinues depreciating the property and reflects the property in its consolidated balance sheets at the lower of its carrying amount or fair value less the cost to sell. The Company presents property related to discontinued operations on its consolidated balance sheets as "Assets held for sale" on a comparative basis. The Company reports the results of operations of its properties classified as discontinued operations in its statements of income if no significant continuing involvement exists after the sale or disposition.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. The Company had highly liquid debt instruments of United States Government Agencies with a carrying value of $50.7 million and $6 million at December 31, 2005 and 2004, respectively. The aggregate fair value of these instruments was $50.8 million and $6.0 million at December 31, 2005 and 2004, respectively. Gross unrecognized holding gains on these instruments were $0.1 million as of December 31, 2005; and the aggregate carrying value of these instruments approximated fair value at December 31, 2004. Also included in cash equivalents are $5.1 million and $11 million at December 31, 2005 and 2004, respectively of cash held as certificates of deposit with original maturity dates exceeding three months. There are no prepayment penalties if the Company withdraws these funds prior to maturity.
Restricted Cash
Restricted cash consists of tenant security deposits, which are required by law in some states. Tenant security deposits are refunded when tenants vacate provided that the tenant has not damaged the property.
Tenant Rent Receivables
Tenant rent receivables are expected to be collected within one year. The Company provides an allowance for doubtful accounts based on its estimate of a tenant's ability to make future rent payments. The computation of this allowance is based in part on the tenants' payment history and current credit status.
Franklin Street Properties Corp. Notes to the Consolidated Financial Statements
2. Significant Accounting Policies (continued)
Concentration of Credit Risks
Cash and cash equivalents are financial instruments that potentially subject the Company to a concentration of credit risk. The Company maintains its cash balances principally in two banks which the Company believes to be creditworthy. The Company periodically assesses the financial condition of the banks and believes that the risk of loss is minimal. Cash balances held with various financial institutions frequently exceed the insurance limit of $100,000 provided by the Federal Deposit Insurance Corporation.
Financial Instruments
The Company estimates that the carrying value of cash and cash equivalents, restricted cash, and the bank note payable approximate their fair values based on their short-term maturity and prevailing interest rates.
Straight-line Rent Receivable
Certain leases provide for fixed rent increases over the life of the lease. Rental revenue is recognized on a straight-line basis over the related lease term; however, billings by the Company are based on required minimum rentals in accordance with the lease agreements. Straight-line rent receivable, which is the cumulative revenue recognized in excess of amounts billed by the Company, is $5,765,000 and $4,947,000 at December 31, 2005 and 2004, respectively. The Company provides an allowance for doubtful accounts based on its estimate of a tenant's ability to make future rent payments. The computation of this allowance is based in part on the tenants' payment history and current credit status. During 2005 the Company reduced its allowance by $297,000 to $163,000 based on such analysis.
Deferred Leasing Commissions
Deferred leasing commissions represent direct and incremental external leasing costs incurred in the leasing of commercial space. These costs are capitalized and are amortized on a straight-line basis over the terms of the related lease agreements. Amortization expense was approximately $430,000, $287,000 and $258,000 for the years ended December 31, 2005, 2004 and 2003, respectively. The estimated annual amortization for the five years following December 31, 2005 is as follows:
(in thousands)
-------------- 2006 $ 535 2007 465 2008 361 2009 304 2010 and thereafter 619 |
Franklin Street Properties Corp. Notes to the Consolidated Financial Statements
2. Significant Accounting Policies (continued)
Revenue Recognition
Rental Revenue - Rental revenue includes income from leases, certain reimbursable expenses, straight-line rent adjustments and other income associated with renting the property. A summary of rental revenue is shown in the following table:
Year Ending
(in thousands) December 31,
--------------------------------------
2005 2004 2003
======================================
Income from leases $ 65,082 $ 50,277 $ 31,262
Reimbursable expenses 13,388 7,991 5,836
Straight-line rent adjustment 1,736 1,147 775
Amortization of favorable leases (4,310) (235) (137)
Other -- -- 369
--------------------------------------
$ 75,896 $ 59,180 $ 38,105
======================================
|
Rental Revenue, Commercial Properties -- The Company has retained substantially all of the risks and benefits of ownership of the Company's commercial properties and accounts for its leases as operating leases. Rental income from leases, which 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 commercial property tenants. Reimbursable costs are included in rental income in the period earned.
Rental Revenue, Residential Apartments -- The Company's residential property leases are generally for terms of one year or less. Rental income from tenants of residential apartment properties is recognized in the period earned. Leasing commissions incurred in connection with residential property leases are expensed as incurred.
Syndication and Transaction Fees
The Company follows the requirements for profit recognition as set forth by SFAS No. 66 "Accounting for Sales of Real Estate" and Statement of Position 92-1 "Accounting for Real Estate Syndication Income".
Syndication Fees -- Syndication fees ranging from 6% to 8% of the gross offering proceeds from the sale of securities in Sponsored REITs are generally recognized upon an investor closing; at that time the Company has provided all required services, the fee is fixed and collected, and no further contingencies exist. Commission expense ranging from 3% to 4% of the gross offering proceeds is recorded in the period the related syndication fee is earned. There is typically more than one investor closing in the syndication of a Sponsored REIT.
Transaction Fees -- Transaction fees relating to loan commitment fees and acquisition fees are recognized upon an investor closing and the subsequent payment of the Sponsored REIT's loan to the Company. Development fees are recognized upon an investor closing and once the service has been provided. Fees related to organizational, offering and other expenditures are recognized upon the final investor closing of the Sponsored REIT. The final investor closing is the last admittance of investors into a Sponsored REIT; at that time, required funds have been received from the investors and charges relating to the syndication have been paid or accrued.
Other
Other income, including property and asset management fees, is recognized when the related services are performed and the earnings process is complete.
Income Taxes
Taxes on income for the years ended December 31, 2005, 2004 and 2003 represent taxes incurred by FSP Investments, which is a taxable REIT subsidiary.
Franklin Street Properties Corp. Notes to the Consolidated Financial Statements
2. Significant Accounting Policies (continued)
Net Income Per Share
Basic net income per share is computed by dividing net income by the weighted average number of shares outstanding during the period. Diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue shares were exercised or converted into shares. There were no potential dilutive shares outstanding at December 31, 2005, 2004, and 2003. The denominator used for calculating basic and diluted net income per share was 56,847,000, 49,628,000, and 39,214,000 for the years ending December 31, 2005, 2004, and 2003, respectively.
Recent Accounting Standards
In December 2003, the FASB issued FASB Interpretation No. 46(R), which replaces FASB Interpretation No. 46, Consolidation of Variable Interest Entities, clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. The objectives of the interpretation is to provide guidance on how to identify a variable interest entity ("VIE") and determine when the assets, liabilities, non-controlling interests, and results of operations of a VIE need to be included in a company's consolidated financial statements. A VIE exists when either the total equity investment at risk is not sufficient to permit the entity to finance its activities by itself, or the equity investors lack one of three characteristics associated with owning a controlling financial interest. The adoption of this standard had no impact on the Company's financial position, operations or cash flow.
In December 2004, the FASB issued SFAS No. 153 "Exchanges of Nonmonetary Assets an amendment of APB Opinion No. 29". This statement was effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. This Statement addresses the measurement of exchanges of nonmonetary assets. It eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, Accounting for Nonmonetary Transactions, and replaces it with an exception for exchanges that do not have commercial substance. This Statement specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The adoption of this standard had no impact on our financial position, results of operations or cash flows.
Reclassifications
Certain balances in the 2004 and 2003 financial statements have been reclassified to conform to 2005 presentation. The reclassifications primarily were related to disposition of six properties sold in 2005 and one asset held for sale as of December 31, 2005, which are presented as discontinued operations for all periods presented. These reclassifications changed rental revenues, operating and maintenance expenses, depreciation and amortization, other income and the related assets, which are segregated on financial statements. There was no change to net income for any period presented as a result of these reclassifications.
Franklin Street Properties Corp. Notes to the Consolidated Financial Statements
3. Business Segments
The Company operates in two business segments: real estate operations (including real estate leasing, interim acquisition financing, development services and asset/property management) and investment banking/investment services (including real estate acquisition and broker/dealer services). The Company has identified these segments because this information is the basis upon which management makes decisions regarding resource allocation and performance assessment. The accounting policies of the reportable segments are the same as those described in the "Significant Accounting Policies". The Company's operations are located in the United States of America.
The Company evaluates the performance of its reportable segments based on
Adjusted Funds From Operations ("AFFO") as management believes that AFFO
represents the most accurate measure of the reportable segment's activity and is
the basis for distributions paid to equity holders. The Company defines AFFO as:
net income as computed in accordance with GAAP; excluding gains or losses on the
sale of real estate and non-cash income from Sponsored REITs; plus certain
non-cash items included in the computation of net income (depreciation and
amortization and straight-line rent adjustments); plus distributions received
from Sponsored REITs; plus the net proceeds from the sale of land; less
purchases of property and equipment ("Capital Expenditures") excluding
acquisitions and payments for deferred leasing commissions, plus proceeds from
(payments to) funded reserves established at the acquisition date of the
property. Depreciation and amortization, gain or loss on the sale of real
estate, and straight-line rents are an adjustment to AFFO, as these are non-cash
items included in net income. Capital expenditures, payments of deferred leasing
commissions and the proceeds from (payments to) the funded reserve are an
adjustment to AFFO, as they represent cash items not reflected in net income.
The funded reserve represents funds that the Company has set aside in anticipation of future capital needs. These reserves are typically used for the payment of capital expenditures, deferred leasing commissions and certain tenant allowances; however, there are no legal restrictions on their use and they may be used for any Company purpose. AFFO should not be considered as an alternative to net income (determined in accordance with GAAP), as an indicator of the Company's financial performance, nor as an alternative to cash flows from operating activities (determined in accordance with GAAP), nor as a measure of the Company's liquidity, nor is it necessarily indicative of sufficient cash flow to fund all of the Company's needs. Other real estate companies may define AFFO in a different manner. It is at the Company's discretion to retain a portion of AFFO for operational needs. We believe that in order to facilitate a clear understanding of the results of the Company, AFFO should be examined in connection with net income and cash flows from operating, investing and financing activities in the consolidated financial statements.
Franklin Street Properties Corp. Notes to the Consolidated Financial Statements
3. Business Segments, (continued):
The calculation of AFFO by business segment is shown in the following table:
Investment
Real Banking/
Estate Investment
(in thousands): Operations Services Total
==========================================================================================
Year ended December 31, 2005:
Net income $ 74,502 $ 614 $ 75,116
Gain on sale of properties (30,493) -- (30,493)
Equity in earnings of non-consolidated REITs (1,418) -- (1,418)
Distribution from non-consolidated REITs 1,217 -- 1,217
Depreciation and amortization 22,108 132 22,240
Straight-line rent (1,692) -- (1,692)
Capital expenditures (2,691) (69) (2,760)
Payment of deferred leasing commissions (1,560) -- (1,560)
Proceeds from funded reserves 4,251 69 4,320
------------------------------------------------------------------------------------------
Adjusted Funds From Operations $ 64,224 $ 746 $ 64,970
==========================================================================================
Year ended December 31, 2004:
Net income $ 45,030 $ 2,733 $ 47,763
Equity in earnings of non-consolidated REITs (1,472) -- (1,472)
Distribution from non-consolidated REITs 1,582 -- 1,582
Depreciation and amortization 13,095 147 13,242
Straight-line rent (860) -- (860)
Capital expenditures (1,541) (100) (1,641)
Payment of deferred leasing commissions (582) -- (582)
Proceeds from funded reserves 2,122 -- 2,122
------------------------------------------------------------------------------------------
Adjusted Funds From Operations $ 57,374 $ 2,780 $ 60,154
==========================================================================================
Year ended December 31, 2003:
Net income $ 43,949 $ 2,431 $ 46,380
Equity in earnings of non-consolidated REITs (965) -- (965)
Distribution from non-consolidated REITs 832 -- 832
Gain on sale of properties (6,362) -- (6,362)
Depreciation and amortization 9,745 56 9,801
Straight-line rent (1,030) -- (1,030)
Capital expenditures (1,125) (248) (1,373)
Payment of deferred leasing commissions (487) -- (487)
Proceeds from funded reserves 1,877 -- 1,877
Proceeds from sale of land 55 -- 55
------------------------------------------------------------------------------------------
Adjusted Funds From Operations $ 46,489 $ 2,239 $ 48,728
==========================================================================================
|
Franklin Street Properties Corp. Notes to the Consolidated Financial Statements
3. Business Segments (continued)
The Company's cash distributions for the years ended December 31, 2005, 2004 and 2003 are summarized as follows:
Distribution Total Cash
Quarter paid Per Share/Unit Distributions
==========================================================================
(in thousands)
Second quarter of 2005 $ 0.41 $ 20,349
Third quarter of 2005 0.21 12,711
Fourth quarter of 2005 0.31 18,763
First quarter of 2006 (A) 0.31 18,536
------------------------------------------------------------------------
$ 1.24 $ 70,359
========================================================================
Second quarter of 2004 $ 0.31 $ 15,385
Third quarter of 2004 0.31 15,385
Fourth quarter of 2004 0.31 15,385
First quarter of 2005 (A) 0.31 15,385
------------------------------------------------------------------------
$ 1.24 $ 61,540
========================================================================
Second quarter of 2003 $ 0.31 $ 7,635
Third quarter of 2003 0.31 10,135
Fourth quarter of 2003 (B) 0.43 21,342
First quarter of 2004 (A) 0.31 15,381
------------------------------------------------------------------------
$ 1.36 $ 54,493
========================================================================
|
(A) Represents distributions declared and paid in the first quarter related to
the fourth quarter of the prior year.
(B) Includes a special distribution of $.12 per share in the aggregate amount
of $5,956,000.
Cash distributions per share are declared and paid based on the total outstanding shares as of the record date and are typically paid in the quarter following the quarter that AFFO is generated.
Franklin Street Properties Corp. Notes to the Consolidated Financial Statements
3. Business Segments (continued)
The following table is a summary of other financial information by business segment:
Investment
Real Banking/
Estate Investment
Operations Services Total
================================================================================
(in thousands)
December 31, 2005:
Revenue $ 85,775 $10,618 $ 96,393
Interest income 1,552 36 1,588
Interest expense 2,997 -- 2,997
Income from discontinued operations, net 4,503 -- 4,503
Capital expenditures 2,691 69 2,760
Identifiable assets 671,413 5,760 677,173
December 31, 2004:
Revenue $ 71,740 $15,696 $ 87,436
Interest income 817 46 863
Interest expense 1,527 -- 1,527
Income from discontinued operations, net 5,429 -- 5,429
Capital expenditures 1,541 100 1,641
Identifiable assets 567,609 5,502 573,111
December 31, 2003:
Revenue $ 52,414 $16,050 $ 68,464
Interest income 288 75 363
Interest expense 1,036 -- 1,036
Income from discontinued operations, net 5,956 -- 5,956
Capital expenditures 1,125 248 1,373
Identifiable assets 524,788 3,741 528,529
|
4. Merger Transactions
On April 30, 2005, the Company issued 10,894,994 shares of common stock, $0.0001 par value per share, in exchange for all the outstanding preferred stock of the Target REITs. The results of operations for each of Target REIT have been included in the Company's consolidated financial statements since May 1, 2005.
The aggregate purchase price was approximately $164,564,000. On the acquisition date, for each of the four Target REITs, the appraised value of the property was allocated to real estate investments and leases, including lease origination costs. Lease origination costs represent the value associated with acquiring an in-place lease (i.e. the market cost to execute a similar lease, including leasing commission, legal, vacancy, and other related costs). The value assigned to buildings approximates their replacement cost; the value assigned to land approximates its appraised value; and the value assigned to leases approximates their fair value. Other assets and liabilities are recorded at their historical costs, which approximates fair value. The following table summarizes the estimated fair value of the assets acquired at the date of acquisition:
Franklin Street Properties Corp. Notes to the Consolidated Financial Statements
4. Merger (continued)
Value of Assets Acquired
------------------------
(in thousands)
Real estate assets $ 137,687
Value of acquired real estate leases 19,331
Cash 10,621
Other assets 229
Acquired unfavorable leases (366)
Liabilities assumed (2,938)
----------
Total $ 164,564
==========
|
Unaudited pro forma operating results for the Company and the Target REITs are shown in the following table. The results assume the mergers occurred and the shares of the Company's stock were issued on January 1, 2004 and are not necessarily indicative of what the Company's actual results of operations would have been for the period indicated, nor do they purport to represent the results of operations of any future period.
unaudited
-------------------------
(in thousands except per share amounts) 2005 2004
--------- ---------
Revenues $102,948 $107,910
--------- ---------
Income from continuing operations $ 42,766 $ 50,552
--------- ---------
Net income $ 77,762 $ 55,981
========= =========
Weighted average shares outstanding 60,459 60,523
========= =========
Income from continuing operations per share $ 0.71 $ 0.84
========= =========
Net income per share $ 1.29 $ 0.92
========= =========
5. Related Party Transactions
|
Investment in Sponsored REITs
At December 31, 2005, we held an interest in 13 Sponsored REITs, all of which were fully syndicated. FSP Park Ten Development Corp. (Park Ten Development) was syndicated in September 2005 and the Company exchanged land for a preferred stock investment in it. At December 31, 2004, the Company held an interest in 15 Sponsored REITs. Twelve were fully syndicated and the Company no longer derived economic benefits or risks from them. Blue Lagoon was syndicated in January 2004 and the Company purchased a preferred stock investment in it. The remaining two entities were not fully syndicated and have a value of approximately $59.2 million on the accompanying consolidated balance sheets as assets held for syndication. At December 31, 2003, the Company held an interest in eight Sponsored REITs, of which seven were fully syndicated. The value of Blue Lagoon, which was not fully syndicated as of December 31, 2003, was approximately $4.1 million on the accompanying consolidated balance sheets as assets held for syndication.
The table below shows the Company's income and expenses from Sponsored REITs. Management fees of $1,000, $102,000, and $5,000 for the years ended December 31, 2005, 2004 and 2003, respectively, and interest expense related to the Company's mortgages on properties owned by these entities are eliminated in consolidation.
Franklin Street Properties Corp. Notes to the Consolidated Financial Statements
5. Related Party Transactions (continued)
Year Ended December 31,
(in thousands) 2005 2004 2003
---- ---- ----
Operating Data:
Rental revenues $ 146 $3,772 $ 552
Operating and maintenance
expenses 63 1,439 177
Depreciation and amortization 36 584 133
Interest expense 64 922 163
Interest income 1 25 --
----------------------------------
$ (16) $ 852 $ 79
==================================
|
Equity in earnings of investment in non-consolidated REITs:
The following table includes equity in earnings of investments in non-consolidated REITs:
Year Ended December 31,
(in thousands) 2005 2004 2003
---- ---- ----
Equity in earnings of Sponsored REITs $1,149 $390 $753
Equity in earnings of Blue Lagoon 248 230
Equity in earnings of Park Ten Development -- -- --
--------------------------
$1,397 $620 $753
==========================
|
Equity in earnings of investments in Sponsored REITs is derived from the Company's share of income following the commencement of syndication of Sponsored REITs. Following the commencement of syndication the Company exercises influence over, but does not control these entities, and investments are accounted for using the equity method.
Equity in earnings of Blue Lagoon is derived from the Company's preferred stock investment in the entity. In January 2004 the Company purchased 49.25 preferred shares or 8.22% of Blue Lagoon for $4,248,000 (which represented $4,925,000 at the offering price net of commissions of $394,000 and loan fees of $283,000 that were excluded).
Equity in earnings of Park Ten Development is derived from the Company's preferred stock investment in the entity. In September 2005 the Company acquired 8.5 preferred shares or 3.05% of Park Ten Development via a non-monetary exchange of land valued at $850,000. The Sponsored REIT was syndicated and is in the process of constructing a commercial property on the land. As of December 31, 2005, there was no equity in income from the project, as construction had just started.
During the year ended December 31, 2005, the Company received distributions of $856,000 and $361,000 from Sponsored REITs and Blue Lagoon, respectively. During the year ended December 31, 2004, the Company received distributions of $1,582,000 and $235,000 from Sponsored REITs and Blue Lagoon, respectively. During the years ended December 31, 2003 and 2002, the Company received distributions from investments in Sponsored REITs of $882,000 and $519,000, respectively.
Non-consolidated REITs
The Company has in the past acquired by merger entities similar to the Sponsored REITs, including four Sponsored REITs (Target REITs), which were acquired by merger on April 30, 2005. The Company's business model for growth includes the potential acquisition by merger in the future of Sponsored REITs. However, the Company has no legal or any other enforceable obligation to acquire or to offer to acquire any Sponsored REIT. In addition, any offer (and the related terms and conditions) that might be made in the future to acquire any Sponsored REIT would require the approval of the boards of directors of the Company and the Sponsored REIT and the approval of the shareholders of the Sponsored REIT.
Franklin Street Properties Corp. Notes to the Consolidated Financial Statements
5. Related Party Transactions, (continued)
The operating data below for 2005 includes operations of the 13 Sponsored REITs the Company held an interest in as of December 31, 2005 and four Target REITs from January through April 30, 2005. The four Target REITs were merged into the Company on April 30, 2005. The operating data for 2004 includes the operations of the 15 Sponsored REITs in which the Company held an interest at December 31, 2004. The operating data for 2003 includes the operations of eight Sponsored REITs in which the Company held an interest at December 31, 2003 and 13 Target REITs, which were merged into the Company on June 1, 2003, from January through May 31, 2003.
Summarized financial information for the Sponsored REITs is as follows:
December 31,
2005 2004
----------------------------
(in thousands)
Balance Sheet Data (unaudited):
-------------------------------
Real estate, net $ 403,161 $ 457,140
Other assets 82,163 91,678
Total liabilities (46,831) (83,484)
----------------------------
Shareholders equity $ 438,493 $ 465,334
============================
For the Year Ended
December 31,
---------------------------------------
2005 2004 2003
---------------------------------------
(in thousands)
Operating Data (unaudited):
---------------------------
Rental revenues $ 60,339 $ 58,474 $ 45,819
Other revenues 1,211 655 370
Operating and maintenance expenses (24,742) (20,335) (16,594)
Depreciation and amortization (12,531) (10,597) (11,155)
Interest expense (7,691) (13,316) (13,965)
--------------------------------------
Net income (loss) $ 16,586 $ 14,881 $ 4,475
======================================
|
Syndication fees and Transaction fees:
The Company provided syndication and real estate acquisition advisory services for Sponsored REITs. Syndication, development and transaction fees from non-consolidated entities amounted to approximately $18,680,000, $27,672,000 and $29,376,000, for the years ended December 31, 2005, 2004 and 2003, respectively.
Management fees and interest income from loans:
Asset management fees range from 1% to 5% of collected rents and the applicable contracts are cancelable with 30 days' notice. Asset management fee income from non-consolidated entities amounted to approximately $672,000, $539,000, and $325,000 for the years ended December 31, 2005, 2004 and 2003, respectively. The Company is typically entitled to interest on funds advanced to Sponsored REITs. The Company recognized interest income of approximately $1,135,000, $42,000, and $636,000 for the years ended December 31, 2005, 2004 and 2003, respectively, relating to these loans.
6. Bank Note Payable
The Company has a revolving line of credit agreement (the "Loan Agreement") with a group of banks providing for borrowings at the Company's election of up to $150,000,000. Borrowings under the Loan Agreement bear interest at either the bank's base rate (7.25% at December 31, 2005) or at a LIBOR plus 125 basis points (5.64% at December 31, 2005), as defined. There was no balance outstanding at December 31, 2005, and $59,439,000 was outstanding at the bank's base rate at December 31, 2004. The weighted average interest rate on amounts outstanding during the years ended December 31, 2005 and 2004 was approximately 5.35% and 3.62%, respectively.
Franklin Street Properties Corp. Notes to the Consolidated Financial Statements
6. Bank Note Payable, (continued)
The Loan Agreement includes restrictions on property liens and requires compliance with various financial covenants. Financial covenants include the maintenance of at least $1,500,000 in operating cash accounts, a minimum unencumbered cash and liquid investments balance and tangible net worth; and compliance with various debt and operating income ratios, as defined in the Loan Agreement. The Company was in compliance with the Loan Agreement's financial covenants as of December 31, 2005 and 2004. Borrowings under the Loan Agreement mature on August 18, 2008.
7. Stockholders' Equity
Equity-Based Compensation
On May 20, 2002, the stockholders of the Company approved the 2002 Stock Incentive Plan (the "Plan"). The Plan is an equity-based incentive compensation plan, and provides for the grants of up to a maximum of 2,000,000 shares of the Company's common stock ("Awards"). All of the Company's employees, officers, directors, consultants and advisors are eligible to be granted awards. Awards under the Plan are made at the discretion of the Company's Board of Directors, and have no vesting requirements. Upon granting an Award, the Company will recognize compensation cost equal to the fair value of the Company's common stock, as determined by the Company's Board of Directors, on the date of the grant.
In March 2005 and 2004 the Company issued 1,750 and 9,824 shares to certain officers and employees under the Plan with an estimated value of $31,000 and $161,000, respectively. There was no equity-based compensation for the year ended December 31, 2003. Shares issued were fully vested on the date of issuance. Equity-based compensation charges of $31,000 and $161,000 are included in selling, general & administrative expenses in the accompanying consolidated statements of income for the years ended December 31, 2005 and 2004.
A summary of shares available and granted under the plan and the related compensation costs is shown in the following table:
Shares Available Compensation
for Grant Cost
---------------- ------------
Shares approved for grant 2,000,000 $ --
Shares granted 2002 (43,998) 604,000
---------- --------
Balance, December 31, 2002 and 2003 1,956,002 604,000
Shares granted 2004 (9,824) 161,000
---------- --------
Balance, December 31, 2004 1,946,178 765,000
Shares granted 2005 (1,750) 31,000
---------- --------
Balance, December 31, 2005 1,944,428 $796,000
========== ========
|
On October 28, 2005, the Board of Directors of the Company authorized the repurchase of up to $35 million over a two year period, of the Company's common stock from time to time on the open market or in privately negotiated transactions. The Company subsequently repurchased 731,000 shares of common stock during the fourth quarter of 2005 at an aggregate cost of $13,992,000 at an average cost of $19.14 per share.
Treasury Shares
On March 1, 2005, the Company issued 575 shares from Treasury to employees in connection with the Plan. On April 30, 2005, the Company redeemed 898 fractional shares in connection with the Merger for $16,000. During 2005, the Company also repurchased 731,000 shares for $13,992,000. As a result, as of December 31, 2005 there were 731,898 Treasury Shares. During January 2004 the Company redeemed 9,824 shares through a redemption plan for $147,000. These shares were subsequently issued to employees in connection with the Plan. In August 2004 the Company redeemed an aggregate of 575 fractional shares for $10,000.
Franklin Street Properties Corp. Notes to the Consolidated Financial Statements
8. Federal Income Tax Reporting
General
The Company has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"). As a REIT, the Company generally is entitled to a tax deduction for distributions paid to its shareholders, thereby effectively subjecting the distributed net income of the Company to taxation at the shareholder level only. The Company must comply with a variety of restrictions to maintain its status as a REIT. These restrictions include the type of income it can earn, the type of assets it can hold, the number of shareholders it can have and the concentration of their ownership, and the amount of the Company's taxable income that must be distributed annually.
One such restriction is that the Company generally cannot own more than 10% of the voting power or value of the securities of any one issuer unless the issuer is itself a REIT or a taxable REIT subsidiary ("TRS"). In the case of TRSs, the Company's ownership of securities in all TRSs generally cannot exceed 20% of the value of all of the Company's assets and, when considered together with other non-real estate assets, cannot exceed 25% of the value of all of the Company's assets. Effective January 1, 2002, a subsidiary of the Company, FSP Investments, became a TRS. As a result, FSP Investments operates as a taxable corporation under the Code and has accounted for income taxes in accordance with the provisions of SFAS No. 109, Accounting for Income Taxes. Taxes are provided when FSP Investments has net profits for both financial statement and income tax purposes.
Income taxes are recorded based on the future tax effects of the difference between the tax and financial reporting bases of the Company's assets and liabilities. In estimating future tax consequences, potential future events are considered except for potential changes in income tax law or in rates.
Net operating losses
Section 382 of the Code restricts a corporation's ability to use net operating losses ("NOLs") to offset future taxable income following certain "ownership changes." Such an ownership change occurred with the June 2003 merger and accordingly a portion of the NOLs incurred by the Sponsored REITs available for use by the Company in any particular future taxable year will be limited. To the extent that the Company does not utilize the full amount of the annual NOLs limit, the unused amount may be carried forward to offset taxable income in future years. NOLs expire 20 years after the year in which they arise, and the last of the Company's NOLs will expire in 2023. A valuation allowance is provided for the full amount of the NOLs as the realization of any tax benefits from such NOLs is not assured. In 2005, the Company used $2,595,000 of NOLs in connection with amending a prior year tax return. The gross amount of NOLs available to the Company were $8,813,000, $7,918,000 and $5,839,000 as of December 31, 2005, 2004 and 2003, respectively.
Tax Rates
The income tax expense reflected in the consolidated statement of income relates only to the TRS. The expense differs from the amounts computed by applying the Federal statutory rate to income before taxes as follows:
For the years ended December 31,
----------------------------------------------------
(Dollars in thousands) 2005 2004 2003
---- ---- ----
Federal income tax expense at statutory rate $356 34.0% $ 1,516 34.0% $1,446 35.0%
Increase (decrease) in taxes resulting from:
State income taxes, net of federal impact 66 6.3% 280 6.3% 254 6.2%
Other -- -- (71) (1.6)% -- --
---- ---- ------- ---- ------ ----
Taxes on income $422 40.3% $ 1,725 38.7% $1,700 41.2%
==== ==== ======= ==== ====== ====
|
For the year ended December 31, 2004, "Other" consists of an adjustment to the statutory rate to better reflect the benefit of lower tax rates at lower levels of taxable income.
Taxes on income are a current tax expense. No deferred income taxes were provided as there were no material temporary differences between the financial reporting basis and the tax basis of the TRS.
Franklin Street Properties Corp. Notes to the Consolidated Financial Statements
8. Federal Income Tax Reporting, (continued)
At December 31, 2005 and 2004, the Company's net tax basis of its real estate assets is less than the amount set forth in the Company's consolidated balance sheets by $14,035,000 and $17,365,000, respectively.
Reconciliation Between GAAP Net Income and Taxable Income.
The following reconciles book net income to taxable income for the years ended December 31, 2005, 2004 and 2003.
For the year ended December 31,
--------------------------------------
(in thousands) 2005 2004 2003
---- ---- ----
Net income per books $ 75,116 $ 47,763 $ 46,380
Adjustments to book income:
Book depreciation and amortization 22,239 13,592 9,398
Tax depreciation and amortization (14,447) (11,449) (7,879)
Like-kind exchange gain deferral (14,351) -- --
Tax basis less book basis of properties sold, net 4,747 -- 2,347
Straight line rent adjustment, net (1,814) (860) (1,030)
Deferred rent, net (132) 55 22
Non-taxable distributions (85) -- --
Other, net (815) (611) (104)
-------- -------- --------
Taxable income 70,458 48,490 49,134
Less: Capital gains recognized (22,068) -- (8,709)
-------- -------- --------
Taxable income subject to distribution requirement $ 48,390 $ 48,490 $ 40,425
======== ======== ========
|
Tax Components
The following summarizes the tax components of the Company's common distributions paid per share for the years ended December 31, 2005, 2004 and 2003:
----------------------------------------------------------------------
2005 2004 2003
-------------------- -------------------- --------------------
Per Share % Per Share % Per Share %
--------- ------ --------- ------ --------- ------
Ordinary income $ 0.83 67.16% $ 1.01 81.48% $ 1.03 75.61%
Qualified dividends -- -- 0.03 2.79% 0.08 5.76%
Capital gain (1) 0.41 32.84% -- -- 0.25 18.63%
Return of capital -- -- 0.20 15.73% -- --
------ ------ ------ ------ ------ ------
Total $ 1.24 100% $ 1.24 100% $ 1.36 100%
====== ====== ====== ====== ====== ======
|
(1) The 32.84% capital gain for 2005 consists of 10.86% and 21.98% taxed at 15% and 25%, respectively for 2005. The 18.63% capital gain for 2003 consists of 9.03%, 5.43% and 4.17% of capital gains taxed at 15%, 20% and 25%, respectively for 2003.
Franklin Street Properties Corp. Notes to the Consolidated Financial Statements
9. Commitments
The Company's commercial real estate operations include the leasing of office buildings and industrial properties subject to leases with terms greater than one year. The leases expire at various dates through 2015. The following is a schedule of approximate future minimum rental income on non-cancelable operating leases as of December 31, 2005:
Year ended
(in thousands) December 31,
---------------------------------------------
2006 $ 64,239
2007 52,220
2008 48,189
2009 41,498
2010 21,508
Thereafter (2011-2015) 27,149
----------
$ 254,803
==========
|
The Company leases its corporate office space under an operating lease that was amended in 2003 and has no renewal options. The lease includes a base annual rent and additional rent for the Company's share of taxes and operating costs. Future minimum lease payments are as follows:
Year ended
(in thousands) December 31,
---------------------------------------------
2006 $ 302
2007 308
2008 182
Thereafter --
-------
$ 792
=======
|
Rent expense was approximately $273,000, $306,000 and $219,000 for the years ended December 31, 2005, 2004 and 2003, respectively, and is included in selling, general and administration expenses in the Consolidated Statements of Income.
10. Retirement Plan
In 1999, the Company began a retirement savings plan for eligible employees. Under the plan, the Company annually matches participant contributions up to the maximum allowed by tax regulations. The Company's total contribution under the plan amounted to approximately $158,000, $160,000 and $132,000 for the years ended December 31, 2005, 2004 and 2003, respectively.
11. Discontinued Operations
During the year ended December 31, 2005, the Company disposed of three apartment properties and three commercial properties, which are in the real estate segment. The three apartments are Essex House and Gael Apartments, which are located in Houston, Texas; and Mansions in the Park, located in Baton Rouge, Louisiana. The three commercial buildings are Blue Ravine, which is located in Folsom, California; Gateway Crossing, which is located in Columbia, Maryland; and Telecom Business Center, which is located in San Diego, California. An agreement was also reached to sell an office property in Santa Clara, California, which is expected to be sold by December 2006 at a gain. Accordingly, as of December 31, 2005 this property is held for sale and is classified as such on the accompanying balance sheet. During the year ended December 31, 2003, the Company disposed of two apartment properties, Weslayan Oaks and Reata, both located in Houston, Texas. The operating results for these real estate assets have been reflected as discontinued operations in the consolidated statements of income on a comparative basis for the years ended December 31, 2005, 2004 and 2003. There were no sales of properties in 2004.
Franklin Street Properties Corp. Notes to the Consolidated Financial Statements
11. Discontinued Operations, (continued)
The gains and losses of the properties sold are summarized below.
(in Thousands) Net
City/ Property Date of Sales Gain/
Property Address State Type Sale Proceeds (Loss)
---------------- ----- ---- ---- -------- ------
81 Blue Ravine Folsom, CA Office July 13, 2005 4,764 (1,124)
7250 Perkins Road Baton Rouge, LA Apartment September 19, 2005 22,280 7,265
7130-7150 Columbia Gateway Dr Columbia, MD Office September 20, 2005 25,949 6,807
Park Ten Development (1) Houston, TX Land September 29, 2005 850 339
3919 Essex Lane Houston, TX Apartment October 5, 2005 13,752 5,112
4000 Essex Lane Houston, TX Apartment October 5, 2005 22,715 5,151
5751-5771 Copley Drive San Diego, CA Office December 8, 2005 22,570 6,943
----------------------
$112,880 $30,493
======================
|
(1) On September 29, 2005, we recorded a non-monetary exchange gain of $0.3 million from contribution of 2.9 acres of developable land we contributed in exchange for 8.5 preferred shares (approximately 3.05%) of a Sponsored REIT, FSP Park Ten Development Corp. ("Park Ten Development"). The appraised value of the land and market value of the stock acquired were used to estimate the sale price, and the gain was recorded net of the Company's interest in Park Ten Development.
The operating results for the real estate assets sold are summarized below.
For the Years Ended
(in thousands) December 31,
---------------------------------
2005 2004 2003
------- -------- --------
Rental revenue $ 9,962 $ 12,616 $ 13,451
Rental operating expenses (2,138) (2,714) (2,903)
Real estate taxes and insurance (1,325) (1,853) (1,864)
Depreciation and amortization (2,002) (2,625) (2,732)
Interest income 6 5 4
------- -------- --------
Net income from discontinued operations $ 4,503 $ 5,429 $ 5,956
======= ======== ========
|
12. Subsequent Events
On January 18, 2006, the Board of Directors of the Company declared a cash distribution of $0.31 per share of common stock payable on February 21, 2006 to stockholders of record on January 31, 2006.
On February 3, 2006, the Board of Directors approved a change in control plan, which included a form of retention agreement and discretionary payment plan in the event there was a defined change in control of FSP Corp. Payments under the discretionary plan are capped at 1% of the market capitalization of FSP Corp. as reduced by the amount paid under the retention plan. As part of the retention plan, the Company will enter into retention agreements with employees from time to time that will provide for payments to such employees upon the closing date of a transaction constituting a change in control.
On February 21, 2006 the Company borrowed approximately $65 million under its Loan Agreement. The Company used the borrowed funds to make an interim mortgage loan for a property located in Texas.
Franklin Street Properties Corp. Notes to the Consolidated Financial Statements
13. Selected unaudited quarterly information
Selected unaudited quarterly information is shown in the following table
2005
---------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
(in thousands, except per share data)
Revenue $ 20,030 $ 22,272 $ 27,125 $ 26,966
======== ======== ======== ========
Income from continuing operations $ 8,962 $ 9,149 $ 11,204 $ 10,805
Income from discontinued operations 1,461 1,359 1,296 387
Gain (loss) on sale of properties -- (1,055) 14,316 17,232
-------- -------- -------- --------
Net income $ 10,423 $ 9,453 $ 26,816 $ 28,424
======== ======== ======== ========
Basic and diluted net income per share $ 0.21 0.17 0.44 0.47
======== ======== ======== ========
Weighted average number of shares outstanding 49,630 56,815 60,526 60,259
======== ======== ======== ========
2004
---------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
(in thousands, except per share data)
Revenue $ 22,529 $ 25,104 $ 14,032 $ 25,771
======== ======== ======== ========
Income from continuing operations $ 11,920 $ 12,347 $ 5,677 $ 12,390
Income from discontinued operations 1,299 1,329 1,268 1,533
Gain on sale of properties -- -- -- --
-------- -------- -------- --------
Net income $ 13,219 $ 13,676 $ 6,945 $ 13,923
======== ======== ======== ========
Basic and diluted net income per share $ 0.27 $ 0.28 $ 0.14 $ 0.28
======== ======== ======== ========
Weighted average number of shares outstanding 49,624 49,630 49,630 49,630
======== ======== ======== ========
|
SCHEDULE III
FRANKLIN STREET PROPERTIES CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2005
Initial Cost Historical Costs
Costs
Capitalized
Buildings (Disposals) Buildings
Improvements Subsequent Improvements
Encumbrances and to and Total
Description (1) Land Equipment Acquisition Land Equipment (2)
------------ ---- --------- ----------- ---- --------- --------
(in thousands)
Residential Apartments:
Merrywood Apartments, Katy, TX -- $ 2,170 $ 15,334 0 $ 2,170 $ 15,334 $ 17,504
Commercial Properties:
One Technology Drive, Peabody, MA -- 1,658 10,246 (450) 1,658 9,796 11,454
NAOP, No. Andover, MA -- 1,311 8,136 948 1,311 9,084 10,395
Park Seneca, Charlotte, NC -- 1,815 7,917 368 1,815 8,285 10,100
Piedmont Center, Greenville, SC -- 1,449 9,839 1,663 1,449 11,502 12,951
Hillview Center, Milpitas, CA -- 2,203 2,813 7 2,203 2,820 5,023
Southfield Centre, Southfield, MI -- 4,344 11,455 1,233 4,344 12,688 17,032
Bollman Place, Savage, MD -- 1,585 4,121 281 1,585 4,402 5,987
Austin N.W., Austin, TX -- 708 10,494 886 708 11,380 12,088
10 Lyberty Way, Westford, MA -- 1,315 8,862 404 1,315 9,266 10,581
Forest Park, Charlotte, NC -- 1,559 5,672 0 1,559 5,672 7,231
Centennial Center, Colorado Springs, CO -- 1,549 11,877 375 1,549 12,252 13,801
Meadow Point, Chantilly, VA -- 2,634 18,911 0 2,634 18,911 21,545
Timberlake, Chesterfield, MO -- 2,984 38,661 52 2,984 38,713 41,697
Fair Lakes, Fairfax, VA -- 4,383 33,976 1 4,383 33,977 38,360
Northwest Point, Elk Grove Village, IL -- 2,914 26,295 9 2,914 26,304 29,218
Timberlake East, Chesterfield, MO -- 2,626 17,608 86 2,626 17,674 20,320
Plaza Ridge, Herndon, VA -- 4,210 25,640 0 4,210 25,640 29,850
Park Ten, Houston, TX -- 1,061 21,303 (507) 569 21,288 21,857
Goldentop Technology Center, San Diego, CA -- 5,356 17,049 20 5,356 17,069 22,425
Federal Way, Federal Way, WA -- 2,518 13,212 0 2,518 13,212 15,730
Addison, Addison, TX -- 4,325 48,040 741 4,325 48,781 53,106
Collins, Richardson, TX -- 4,000 42,598 0 4,000 42,598 46,598
Montague, San Jose, CA -- 10,250 5,254 0 10,250 5,254 15,504
Royal Ridge, Alpharetta, GA -- 2,000 22,068 51 2,000 22,119 24,119
Greenwood, Englewood, CO -- 3,100 30,201 0 3,100 30,201 33,301
River Crossing, Indianapolis, IN -- 3,000 36,926 30 3,000 36,956 39,956
------ ------- -------- ------ ------- -------- --------
Balance - Real Estate -- 77,027 504,508 6,198 76,535 511,198 587,733
Assets held for sale -- 3,274 4,130 57 3,274 4,187 7,461
------ ------- -------- ------ ------- -------- --------
Balance - End of Year -- $80,301 $508,638 $6,255 $79,809 $515,385 $595,194
====== ======= ======== ====== ======= ======== ========
Total
Costs, Net
of Depreciable Date of
Accumulated Accumulated Life Acquisition
Description Depreciation Depreciation Years (3)
------------ ------------ ----------- -----------
Residential Apartments:
Merrywood Apartments, Katy, TX $ 1,441 $ 16,063 5-27 2002
Commercial Properties:
One Technology Drive, Peabody, MA 2,429 9,025 5-39 1995
NAOP, No. Andover, MA 2,762 7,633 5-39 1996
Park Seneca, Charlotte, NC 1,563 8,537 5-39 1997
Piedmont Center, Greenville, SC 2,274 10,677 5-39 1998
Hillview Center, Milpitas, CA 488 4,535 5-39 1999
Southfield Centre, Southfield, MI 1,929 15,103 5-39 1999
Bollman Place, Savage, MD 637 5,350 5-39 1999
Austin N.W., Austin, TX 1,731 10,357 5-39 1999
10 Lyberty Way, Westford, MA 1,312 9,269 5-39 2000
Forest Park, Charlotte, NC 375 6,856 5-39 1999
Centennial Center, Colorado Springs, CO 886 12,915 5-39 2000
Meadow Point, Chantilly, VA 1,253 20,292 5-39 2001
Timberlake, Chesterfield, MO 2,563 39,134 5-39 2001
Fair Lakes, Fairfax, VA 2,251 36,109 5-39 2001
Northwest Point, Elk Grove Village, IL 1,742 27,476 5-39 2001
Timberlake East, Chesterfield, MO 1,173 19,147 5-39 2002
Plaza Ridge, Herndon, VA 1,699 28,151 5-39 2002
Park Ten, Houston, TX 1,410 20,447 5-39 2002
Goldentop Technology Center, San Diego, CA 1,130 21,295 5-39 2000
Federal Way, Federal Way, WA 876 14,854 5-39 2001
Addison, Addison, TX 897 52,209 5-39 2002
Collins, Richardson, TX 728 45,870 5-39 2003
Montague, San Jose, CA 90 15,414 5-39 2002
Royal Ridge, Alpharetta, GA 377 23,742 5-39 2003
Greenwood, Englewood, CO 645 32,656 5-39 2005
River Crossing, Indianapolis, IN 475 39,481 5-39 2005
------- --------
Balance - Real Estate 35,136 552,597
Assets held for sale 830 6,631 5-39 1997
------- --------
Balance - End of Year $35,966 $559,228
======= ========
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(1) There are no encumbrances on the above properties.
(2) The aggregate cost for Federal Income Tax purposes is $600,255.
(3) Original date of acquisition by Sponsored Entity.
The following table summarizes the changes in the Company's real estate investments and accumulated depreciation:
December 31,
-------------------------------------
(in thousands) 2005 2004 2003
================================================================================
Real estate investments, at cost:
Balance, beginning of year 476,982 475,368 195,275
Acquisition by merger 138,535 -- 298,425
Acquisitions 73,227 -- --
Improvements 2,692 1,614 1,125
Assets held for sale (7,461) (102,582) (102,075)
Dispositions (96,242) -- (19,457)
-------------------------------------
Balance - Real Estate 587,733 374,400 373,293
Assets held for sale 7,461 102,582 102,075
-------------------------------------
Balance, end of year 595,194 476,982 475,368
=====================================
Accumulated depreciation:
Balance, beginning of year 37,227 25,836 21,999
Depreciation 13,822 11,391 7,786
Assets held for sale (830) (14,000) (11,521)
Dispositions (15,083) -- (3,949)
-------------------------------------
Balance - Accumulated Depreciation 35,136 23,227 14,315
Assets held for sale 830 14,000 11,521
-------------------------------------
Balance, end of year 35,966 37,227 25,836
=====================================
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Exhibit 10.3
Summary of Executive Compensation of Named Executive Officers
The current salaries payable to each "named executive officer", as defined in Item 401 of Regulation S-K, of Franklin Street Properties Corp. (the "Company") are as follows:
George J. Carter, President and Chief Executive Officer $225,000 Barbara J. Fournier, Vice President, Chief Operating $200,000 Officer, Treasurer and Secretary John G. Demeritt, Chief Financial Officer $180,000 R. Scott MacPhee, Executive Vice President -- William W. Gribbell, Executive Vice President -- |
Messrs. MacPhee and Gribbell are Investment Executives of the Company, whose compensation consists primarily of commissions earned on the sale of interests in the Sponsored REITs that are syndicated by the Company. As is standard practice in the investment industry, Investment Executives earn as commission a percentage of payout of the gross sales commission earned on each investment sale. The actual amount of compensation earned as commissions is determined by the level of sales conducted by each individual.
Each of the executive officers listed above, other than the Investment Executives, is eligible for a bonus payable in the form of cash and/or shares of common stock of the Company based on the Company's performance and the individual's performance during the year. With respect to the 2005 fiscal year, the Company paid the following cash bonuses:
George J. Carter, President and Chief Executive Officer $300,000 Barbara J. Fournier, Vice President, Chief Operating $275,000 Officer, Treasurer and Secretary John G. Demeritt, Chief Financial Officer $235,000 |
The Company did not pay any bonuses in the form of shares of common stock to any of the executive officers listed above for the 2005 fiscal year.
Exhibit 10.5
RETENTION AGREEMENT
RETENTION AGREEMENT (the "Agreement") made and entered into as of this __ day of ______________, 2006 by and between FSP INVESTMENTS LLC, a Massachusetts limited liability company (the "Employer"), FRANKLIN STREET PROPERTIES CORP., a Maryland corporation ("FSP") and [INSERT EMPLOYEE NAME], an individual resident of the [State] [Commonwealth] of [Insert State Name] [Massachusetts] ("Employee").
WHEREAS, the Employer is a wholly-owned subsidiary of FSP;
WHEREAS, the Employer recognizes that, as is generally the case with publicly-held corporations, the possibility of a Change in Control exists and that such possibility, and the uncertainty and questions that it may raise among employees, may result in the departure or distraction of such employees to the detriment of the Employer and FSP and FSP's stockholders; and
WHEREAS, the Employer intends for this Agreement to provide protection for its employees, for so long as such employees remain in the employment of the Employer, against the exigencies of a Change in Control, but not to otherwise provide assurance of or rights to continued employment; and
WHEREAS, should the possibility of a Change in Control arise, in addition to the Employee's regular duties, the Employee may be called upon to assist in the assessment of such possible Change in Control, to advise management and the Board as to whether such Change in Control would be in the best interests of FSP and to take such other actions as the Board might determine to be appropriate; and
WHEREAS, this Agreement is not intended to alter the rights of the Employee in the absence of a Change in Control with respect to his or her employment by the Employer, including without limitation his or her compensation and benefits in connection with such employment, and accordingly this Agreement, although taking effect as provided above, will be operative only upon a Change in Control.
NOW, THEREFORE, in consideration of the mutual promises hereinafter contained, the parties hereto hereby agree as follows:
1. Definitions.
For purposes of this Agreement, the following terms shall have the following meanings:
1.1 "Annualized Draw" shall mean the annualized draw that an Employee who is an Investment Executive receives as base salary, which is in effect at the time of the closing of a transaction constituting a Change in Control under this Agreement.
1.2 Board" shall mean the Board of Directors of FSP.
1.3 "Change in Control" shall mean a change in ownership or effective control of FSP or a change in ownership of a substantial portion of the assets of FSP, in each case as defined in Proposed Treasury Regulation Section 1.409A-3(g)(5) or any successor regulations; provided, however, that any potential future mergers of the Sponsored REITs into FSP shall not be deemed to be a Change in Control.
1.4 "Employee's Base Salary" shall mean the annualized base salary of the Employee in effect at the time of the closing of a transaction constituting a Change in Control under this Agreement.
1.5 "Employee's Bonus Opportunity" shall mean an amount equal to __% of the Employee's Base Salary.
1.6 "FSP Companies" shall mean FSP and any subsidiaries thereof including, without limitation, the Employer and FSP Property Management LLC, a Massachusetts limited liability company.
1.7 "Investment Executive" shall mean any NASD licensed Employee who is paid in the form of an Annualized Draw.
1.8 "Investment Executive/Executive Vice President" shall mean any Investment Executive who is also an Executive Vice President of FSP.
1.9 Sponsored REITs" shall mean any and all real estate investment trusts managed and controlled by the FSP Companies but not wholly owned by FSP.
2. Payment Upon Change in Control.
2.1 Provided that the Employee is employed by the Employer on the closing of any transaction constituting a Change in Control, then the Employer shall pay to the Employee a lump sum in an amount equal to the [USE FOR INVESTMENT EXECUTIVES ONLY: Annualized Draw of the Investment Executive][USE FOR INVESTMENT EXECUTIVE/EXECUTIVE VICE PRESIDENT ONLY: average of the lump sum payments made by the Employer to each of the Employer's (i) Chief Financial Officer and (ii) Chief Operating Officer, in each case, pursuant to the Retention Agreement between the Employer and such individual][USE FOR ALL OTHER EMPLOYEES: (I) sum of (a) Employee's Base Salary and (b) Employee's Bonus Opportunity, (II) divided by twelve (12) and (III) multiplied by [INSERT APPLICABLE NUMBER].
2.2 The amount set forth in Section 2.1 shall be paid to the Employee as soon as practicable following the closing of the Change in Control, but in no event more than thirty (30) days following the closing of the Change in Control.
2.3 Neither the Employer nor the Employee may accelerate delivery of any payment that may be required to be made pursuant to this Agreement to a date earlier than the date set forth in this Section 2. Neither the Employer nor the Employee may defer delivery of any payment that may be required to be made pursuant to this Agreement unless such deferral complies in all respects with the requirements of Section 409A of the Internal Revenue Code of 1986, as amended, and any successor provision thereto (the "Code"), and any applicable guidance and Treasury Regulations issued thereunder ("Section 409A").
2.4 Notwithstanding anything to the contrary in this Agreement, any payment under this Agreement shall be made without regard to whether the deductibility of such payment (or any other "parachute payments," as that term is defined in Section 280G of the Code, to or for the Employee's benefit) would be limited or precluded by Section 280G and without regard to whether such payment (or any other "parachute payments" as so defined) would subject the Employee to the federal excise tax levied on certain "excess parachute payments" under Section 4999 of the Code; provided, however, that if the total of all "parachute payments" to or for the Employee's benefit, after reduction for all federal, state and local taxes (including the tax described in Section 4999 of the Code, if applicable) with respect to such payments (the "Total After-Tax Payments"), would be increased by the limitation or elimination of any payment under this Agreement or any "parachute payments" under other agreements or arrangements between the Employee and the Employer or FSP or any successor entity, then the amount payable under this Agreement (or the "parachute payment" under such other agreement or arrangement as the Employer and the Employee shall mutually determine) shall be reduced to the extent, and only to the extent, necessary to maximize the Total After-Tax Payments. The determination as to whether and to what extent any payment under this Agreement (or the "parachute payment" under such other agreement or arrangement) are required to be reduced in accordance with the preceding sentence shall be made at the Employer's expense by a nationally recognized accounting firm retained by the Employer. In the event of any underpayment or overpayment under this Agreement (or such other agreement or arrangement) as determined by the accounting firm, the amount of such underpayment or overpayment shall forthwith be paid to the Employee or refunded to the Employer, as the case may be, with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code.
3. Miscellaneous.
3.1 Arbitration: Dispute Resolution.
(a) Arbitration Procedure. Any disagreement, dispute, controversy or claim arising out of or relating to this Agreement or the interpretation of this Agreement or any arrangement relating to this Agreement or contemplated in this Agreement or the breach, termination or invalidity thereof, shall be settled by final and binding arbitration in Boston, Massachusetts in accordance with the National Rules for the Resolution of Employment Disputes (the "Arbitration Rules") of the American Arbitration Association (the "AAA"), provided that nothing contained herein shall be deemed to prohibit either party from applying to a court of competent jurisdiction for temporary or preliminary equitable relief. The arbitral tribunal shall consist of one arbitrator. In making any decision, the arbitrator shall apply and follow the substantive law of Massachusetts without reference to the conflicts of law provisions thereof. The parties to the arbitration shall directly appoint such arbitrator within thirty
(30) calendar days of the initiation of arbitration. If the parties fail to appoint such arbitrator, an arbitrator shall be appointed by the AAA as provided in the Arbitration Rules. The Employee and the Employer agree that the decision of the arbitrator shall be final, that the arbitral award may be enforced against the parties to the arbitration proceeding or their assets wherever they may be found and that a judgment upon the arbitral award may be entered in any court having jurisdiction thereof. Any claim or controversy not submitted to arbitration in accordance with this section shall be waived, and thereafter no arbitrator, tribunal or court shall have the power to rule or make any award on any such disagreement, dispute, controversy or claim. Each party shall be responsible for its and his or her own attorneys' fees and expenses associated with any arbitration. Both the Employer and the Employee expressly waive any right that any party either has or may have to a jury trial of any dispute arising out of or in any way related to this Agreement.
(b) Compensation During Dispute. The Employee shall not be entitled to any payments under this Agreement until any disagreement, dispute, controversy or claim arising out of or relating to this Agreement has been settled. If the dispute is resolved in the Employee's favor, promptly after final resolution of the dispute, the Employer shall pay to the Employee the sum that was withheld during the period of the dispute plus interest at the rate provided in Section 1274(d) of the Code, compounded quarterly.
3.2 Authority; No Restrictions. Each party represents and warrants that it and he or she has full power and authority to execute and deliver this Agreement and that this Agreement is the legal, valid and binding obligation of the party, enforceable against the party in accordance with its terms. Each party further represents and warrants that no consent, approval or agreement of any person, party, court, government or entity is required to be obtained by either party in connection with the execution and delivery of this Agreement, that neither party is subject to any agreement, restriction, lien, encumbrance or right, title or interest in anyone or anything limiting in any way the scope of this Agreement or in any way inconsistent herewith, and that neither party will hereafter grant anyone or anything the same.
3.3 Governing Law. This Agreement shall be governed by the laws of the Commonwealth of Massachusetts, applied without regard to conflict of law principles.
3.4 Waiver. The waiver of the breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach of the same or other provision hereof.
3.5 Section 409A. This Agreement is intended to comply with, or be exempt from, the requirements of Section 409A and shall be construed and interpreted consistently therewith.
3.6 Liability. Each of FSP and the Employer shall be jointly and severally liable for the payments to be made pursuant to this Agreement.
3.7 Entire Agreement; Modifications. Except as otherwise provided herein, this Agreement represents the entire understanding between the parties with respect to the subject matter hereof, and this Agreement supersedes any and all prior understandings, agreements, plans and negotiations, whether written or oral, with respect to the subject matter hereof; provided, however, that this Agreement shall not effect the Employee's eligibility to participate in the FSP Investments LLC Change in Control Discretionary Plan (the "Plan"), as determined in the sole discretion of the Administrator (as defined in the Plan). All modifications to this Agreement must be made in writing and signed by the party against whom enforcement of such modification is sought.
3.8 Notices. All notices and other communications under this Agreement shall be in writing and shall be deemed duly given (a) when delivered, or (b) two (2) calendar days after being mailed by first class mail, certified or registered with return receipt requested, or (c) one (1) calendar day after being mailed through an overnight delivery service, or (d) upon confirmation of transmission via facsimile, each to the following addresses:
If to the Employer: FSP Investments LLC
401 Edgewater Place, Suite 200
Wakefield, Massachusetts 01880
Attn: In-house Counsel
If to FSP: Franklin Street Properties Corp.
401 Edgewater Place, Suite 200
Wakefield, Massachusetts 01880
Attn: In-house Counsel
Fax: 781-246-2807
If to the Employee: [INSERT EMPLOYEE NAME]
[INSERT EMPLOYEE STREET ADDRESS]
[INSERT EMPLOYEE CITY, STATE AND ZIP CODE]
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Any party may change such party's address for notices by notice duly given pursuant to this Section 3.8.
3.9 Headings. The Section headings are intended for reference and shall not by themselves determine the construction or interpretation of this Agreement.
3.10 Severability. Should a court or other body of competent jurisdiction determine that any provision of this Agreement is excessive in scope or otherwise invalid or unenforceable, such provision shall be adjusted rather than voided, if possible, and all other provisions of this Agreement shall be deemed valid and enforceable to the extent possible.
3.11 Successors and Assigns. This Agreement may not be assigned by the Employee without the prior written consent of the Employer. This Agreement may be assigned by the Employer and shall be binding upon, and inure to the benefit of, the Employee, the Employer, and the successors and assigns of each. The Employer will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Employer to assume expressly and agree to perform this Agreement in the same manner and to the extent that the Employer would be required to perform it if no such succession had taken place. As used in this Agreement, "Employer" shall mean the Employer as herein before defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law or otherwise.
3.12 Counterparts. This Agreement may be executed in one or more counterparts, all of which taken together shall constitute one and the same agreement.
3.13 Withholdings. All compensation and benefits provided to the Employee hereunder shall be reduced by all federal, state, local and other withholdings and similar taxes and payments required by applicable law. The Employee agrees to pay all federal, state and local taxes owed by him or her in connection with this Agreement.
[Signatures appear on the following page.]
IN WITNESS WHEREOF, the parties hereto have executed this Agreement under seal as of the day and year first above written.
EMPLOYER: FSP INVESTMENTS LLC
--------
------------------------------------
Name:
Title:
FSP: FRANKLIN STREET PROPERTIES CORP.
---
------------------------------------
Name:
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Title:
EMPLOYEE:
-------- ------------------------------------
[INSERT EMPLOYEE NAME]
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Exhibit 21.1
Subsidiaries of Franklin Street Properties Corp.
Jurisdiction of
Name Organization
---- ------------
FSP Investments LLC Massachusetts
FSP Property Management LLC Massachusetts
FSP Holdings LLC Delaware
FSP REIT Protective Trust Massachusetts
FSP Protective TRS Corp. Massachusetts
FSP Royal Ridge Corp. Delaware
FSP Montague Business Center Corp. Delaware
FSP Collins Crossing Corp. Delaware
FSP Addison Circle Corp. Delaware
Essex Lane Associates Limited Partnership Massachusetts
FSP Austin N.W. Limited Partnership Massachusetts
FSP Bollman Place Limited Partnership Massachusetts
FSP Gateway Crossing Limited Partnership Massachusetts
FSP Hillview Center Limited Partnership Massachusetts
FSP Lyberty Way Limited Partnership Massachusetts
FSP North Andover Office Park Limited Partnership Massachusetts
FSP Park Seneca Limited Partnership Massachusetts
FSP Piedmont Center Limited Partnership Massachusetts
FSP Santa Clara Limited Partnership Massachusetts
FSP Silverside Plantation Limited Partnership Massachusetts
FSP Southfield Centre Limited Partnership Massachusetts
FSP Telecom Business Center Limited Partnership Massachusetts
One Technology Drive Limited Partnership Massachusetts
FSP Gael Apartments Limited Partnership Texas
FSP Goldentop Technology Center Limited Partnership California
FSP Merrywood Apartments Limited Partnership Texas
FSP Park Ten Limited Partnership Texas
FSP Forest Park IV NC Limited Partnership North Carolina
FSP Greenwood Plaza Corp. Delaware
FSP River Crossing LLC Delaware
FSP Liberty Plaza Limited Partnership Texas
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Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-91680) of Franklin Street Properties Corp. of our reports dated February 21, 2006, with respect to the consolidated financial statements and schedule of Franklin Street Properties Corp., Franklin Street Properties Corp. management's assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of Franklin Street Properties Corp., included in this Annual Report (Form 10-K) for the year ended December 31, 2005.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
February 21, 2006
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Exhibit 31.1
CERTIFICATIONS
I, George J. Carter, certify that:
1. I have reviewed this Annual Report on Form 10-K of Franklin Street Properties Corp.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: February 24, 2006 /s/ George J. Carter
-------------------------------------
George J. Carter
President and Chief Executive Officer
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Exhibit 31.2
CERTIFICATIONS
I, John G. Demeritt, certify that:
1. I have reviewed this Annual Report on Form 10-K of Franklin Street Properties Corp.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: February 24, 2006 /s/ John G. Demeritt
-----------------------
John G. Demeritt
Chief Financial Officer
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Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report on Form 10-K of Franklin Street Properties Corp. (the "Company") for the period ended December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, George J. Carter, President and Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.
Date: February 24, 2006 /s/ George J. Carter
-------------------------------------
George J. Carter
President and Chief Executive Officer
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Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report on Form 10-K of Franklin Street Properties Corp. (the "Company") for the period ended December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, John G. Demeritt, Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.
Date: February 24, 2006 /s/ John G. Demeritt
-----------------------
John G. Demeritt
Chief Financial Officer
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