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, 2003
|_| 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. 0-32615
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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0001 par value per share
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. |X|
Indicate by check mark whether the registrant is an accelerated filer as
defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended.
Yes |X| No |_|.
As of June 30, 2003, the aggregate fair market value of Common Stock held
by non-affiliates of the registrant, as determined in good faith by the Board of
Directors of the registrant, was $40,164,195.
There were 49,630,338 shares of Common Stock outstanding as of March 10,
2004.
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 7, 2004. The
information required in response to Items 10 - 14 of Part III of this Form 10-K,
other than that contained in Item 4A, "Executive Officers of FSP Corp.," is
hereby incorporated by reference to such proxy statement.
TABLE OF CONTENTS
PART I.........................................................................1
Item 1. Business............................................................1
Item 1A. Risk Factors........................................................4
Item 2. Properties.........................................................10
Item 3. Legal Proceedings..................................................12
Item 4. Submission of Matters to a Vote of Security Holders................12
Item 4A. Executive Officers of FSP Corp. ...................................12
PART II.......................................................................15
Item 5. Market For Registrant's Common Equity and Related
Stockholder Matters................................................15
Item 6. Selected Financial and Other Data..................................16
Item 7. Management's Discussion And Analysis Of Financial Condition
And Results Of Operations..........................................17
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.........28
Item 8. Financial Statements and Supplementary Data........................28
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure...........................................28
Item 9A. Controls and Procedures............................................29
PART III......................................................................30
Item 10. Directors and Executive Officers of the Registrant.................30
Item 11. Executive Compensation.............................................30
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters....................................30
Item 13. Certain Relationships and Related Transactions.....................30
Item 14. Principal Accountant Fees and Services.............................30
PART IV.......................................................................30
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...30
SIGNATURES....................................................................32
EXHIBIT INDEX.................................................................33
Index to Consolidated Financial Statements...................................F-1
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. 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, which we
refer to as Target REITs, by merger. In these mergers, we issued 25,000,091
shares of our common stock to holders of preferred stock in the Target REITs. As
a result of these mergers, we now hold all of the assets previously held by
these Target REITs.
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 and asset/property management, which generate
rental income, loan origination 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. We call these entities
Sponsored Entities, and although we previously organized them as
partnerships, in 2001 we began to organize them as corporations
operated in a manner intended to qualify as real estate investment
trusts, and refer to them as Sponsored REITs.
See Note 3 to our consolidated financial statements.
Real Estate
We own a portfolio of real estate, consisting of 28 properties as of
December 31, 2003, which includes apartment complexes, office buildings and
industrial use properties. We derive rental revenue from income paid to us by
tenants of these properties. See Item 2 of this Annual Report.
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. These loans typically are repaid out of
the proceeds of the borrower's equity offering.
We also provide asset management services, property management services
and/or property accounting services to certain of our Sponsored REITs through
our subsidiary FSP Property Management. FSP Corp. recognizes revenue for its
receipt of fee income from those 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
1
Securities Act of 1933. These single-purpose entities each typically acquire a
single real estate asset. FSP Investments sells preferred stock in the Sponsored
REIT 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. Since 1997, FSP Investments has sponsored 34
Sponsored Entities, 14 of which were partnerships, and 20 of which were
Sponsored REITs.
FSP Investments derives revenue from commissions received in connection
with the sale of equity interests 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, including
loan origination fees and interest, from such activities. We may also acquire
additional real properties by 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 Sponsored REITs.
From time to time, as market conditions warrant, we may sell properties
owned by us. In 2003, we sold two properties, Wesleyan Oaks and Reata
Apartments. When we sell a property, we either distribute the sale proceeds to
our stockholders as a dividend 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. Of the 28 properties we own, four
are apartment complexes, 22 are office buildings and two are industrial. See
Item 2 of this Annual Report.
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 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 properties in excellent locations with substantial
infrastructure in place around them and avoid investing in locations
where the construction of such infrastructure is speculative;
o we seek to buy 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;
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 December 31, 2003, none of our 28 properties was
subject to mortgage debt.
2
Line of Credit
We currently have an unsecured revolving line of credit with a group of
banks that provides for borrowings of up to $125,000,000. We have drawn on this
line of credit, and intend to draw on this line of credit in the future, to
obtain funds for the purpose of making interim mortgage loans to Sponsored
REITs. We typically cause these loans to be secured by a first mortgage of 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 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 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 competition, our competitors
may decide to enter the market and build new buildings to compete with our
existing projects. Our competition is not only with other landlords, 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 35 employees as of December 31, 2003.
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 public reference
facilities maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549. Copies of such material can be obtained by mail from the Public Reference
Section of the SEC at 450 West Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. 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 these public reference facilities may be obtained by calling the SEC at
1-800-SEC-0330.
Reports and other information concerning us may also be obtained
electronically through a variety of databases, including, among others, our
Electronic Data Gathering and Retrieval (EDGAR) program, Knight-Ridder
Information Inc., Federal Filing/Dow Jones and Lexis/Nexis.
We do not make our reports available electronically, as we do not maintain
an Internet website. We will voluntarily provide paper copies of our filings
upon request.
3
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.
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 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.
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 of 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.
We may not be able to find properties that meet our criteria for purchase.
Growth in our investment banking/investment services business is dependent
on the ability of our acquisition executives to find properties for sale which
meet our investment critieria. 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.
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.
4
The real properties held by us may significantly decrease in value.
As of December 31, 2003, we owned 28 properties. 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.
New acquisitions may fail to perform as expected.
We may acquire new properties, whether by cash purchase, by acquisition of
Sponsored REITs or by investment in a Sponsored REIT. 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 and operating real property.
An investment in us is subject to the risks incident to the ownership 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.
We face risks from geographic concentration.
The properties in our portfolio, by aggregate square footage, are
distributed geographically as follows: Southwest - 26%, Northeast - 31%, Midwest
- - 19%, West - 16% and Southeast 8%. However, within certain of those segments,
we hold a larger concentration of our properties in Houston, Texas - 18% and
Washington, DC - 13%. 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.
5
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 located and
in every market in which our properties 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 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.
6
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 its stockholders.
There are significant conditions to our obligation to redeem shares of our
common stock, and any such redemption will result in the stockholders tendering
shares receiving less than their fair market value.
Under our redemption plan, we are only obligated to use our best efforts
to redeem shares of our common stock from stockholders wishing to have them
redeemed. There are significant conditions to our obligation to redeem shares of
our common stock including:
o we cannot be insolvent or be rendered insolvent by the redemption;
o the redemption cannot impair our capital or operations;
o the redemption cannot contravene any provision of federal or state
securities laws;
o the redemption cannot result in our failing to qualify as a REIT;
and
o our management must determine that the redemption is in our best
interests.
Any redemption effected by us under this plan would result in those
stockholders tendering shares of our common stock receiving 90% of the fair
market value of such shares, as determined by our board of directors in its sole
and absolute discretion, and not their full fair market value.
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 the properties
located in California all 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.
7
We would incur adverse tax consequences if we failed to qualify as a REIT.
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 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 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. In addition, timing
differences between the receipt of income and payment of expenses and the
inclusion and deduction of such amounts in arriving at taxable income could make
it necessary for us to borrow in order to make certain distributions to our
stockholders in satisfaction of the 90% distribution requirement applicable to
real estate investment trusts. The provisions of the Internal Revenue 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, you should note that if
one or more of the REITs we acquired in June 2003 did not qualify as a real
estate investment trust immediately prior to the consummation of the mergers, we
would be disqualified as a REIT as a result of the mergers.
As a result of our acquisition of 13 REITs, we may no longer qualify as a REIT.
As a result of our acquisition of 13 REITs by merger in June 2003, we
might no longer qualify as a real estate investment trust under Section 856 of
the Internal Revenue Code of 1986, as amended. We could lose our ability to so
qualify for a variety of reasons relating to the nature of the assets acquired
from the acquired REITs, the identity of the shareholders of the acquired REITs
who became our shareholders, or the failure of one or more of the acquired REITs
to have previously qualified as a real estate investment trust.
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
equity shares of us, 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. Moreover, we will have the right to redeem any shares of common stock
that are acquired or transferred in violation of these provisions at the market
price, which is determined by our board of directors. In addition, 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 2004, 2005 and 2006, 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.
8
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.
There is no public trading market for our securities.
There is no public trading market for our common stock, and we cannot
assure you that any market will develop or that, if such a market develops,
there will be any liquidity in such a market for our common stock.
9
Item 2. Properties.
Set forth below is information regarding our properties as of December 31,
2003:
Sponsored
Entity Percent Approx.
Date of Number Approx. Leased as Number
Property Location Purchase of Units Square Feet of 12/31/03 of Tenants Major Tenants(1)
- ----------------- -------- -------- ----------- ----------- ---------- ----------------
3919 Essex Lane 6/30/93 135 118,798 over 90% 135 None - Apts.
Houston, TX 77027
7250 Perkins Road 10/16/98 264 223,812 over 95% 264 None - Apts.
Baton Rouge, LA 70808
4000 Essex Lane 7/28/00 210 187,338 over 90% 210 None - Apts.
Houston, TX 77027
22400 Westheimer Parkway, 4/24/02 228 231,363 over 90% 228 None - Apts.
Katy, Texas 77450
-------- -----------
Total Apartments 837 761,311
-------- -----------
Office
451 Andover Street 6/1/96 91,958 over 95% 40 Pentucket
North Andover, MA 01845 Medical
1515 Mockingbird Lane 7/1/97 110,612 77% 70 Primary Physicians
Charlotte, NC 28209 Care
4995 Patrick Henry Dr. 12/1/97 40,280 100% 1 Agere
Santa Clara, CA 95054
33 & 37 Villa Road 3/1/98 143,840 42% 40 New Horizons
Greenville, SC 29615 Computer
678-686 Hillview Drive 3/9/99 36,288 100% 1 Headway
Milpitas, CA 95035 Technologies
5751-5771 Copley Drive 3/12/99 101,726 100% 4 XO, Nextel,
San Diego, CA 92111 Allegiance. Aon Service
Corp.& REVA Medical
600 Forest Point Circle 7/8/99 61,291 100% 2 American Red Cross
Charlotte, NC 28273 Cellco d/b/a Verizon
81 Blue Ravine 9/27/99 47,058 0% 0
Folsom, CA 95630
18000 W. Nine Mile Rd. 9/30/99 212,558 over 90% 7 IBM
Southfield, Michigan 48075
11211 Taylor Draper Lane 12/29/99 68,605 60% 8 CACI Technologies,
Austin, Texas 78759 State Farm, Tiburon
10
Sponsored
Entity Percent Approx.
Date of Number Approx. Leased as Number
Property Location Purchase of Units Square Feet of 12/31/03 of Tenants Major Tenants(1)
- ----------------- -------- -------- ----------- ----------- ---------- ----------------
7130-7150 Columbia 12/20/99 188,819 over 95% 7 Columbia National, Avnet,
Gateway Drive, EVI and Nextira
Columbia, MD 21046
10 Lyberty Way 5/23/00 104,711 100% 1 Lucent
Westford, MA 01886 Technologies
17030 Goldentop Road 9/22/00 141,405 100% 1 Northrop
San Diego, CA 92127 Grumman
4820 & 4920 Centennial Blvd. 9/28/00 110,730 100% 3 Hewlett-Packard
Colorado Springs, CO 80919 Starkey Laboratories
14151 Park Meadow Drive 3/15/01 134,849 100% 1 CACI, Inc.-Federal
Chantilly, VA 20151
1370 & 1390 Timberlake 5/24/01 232,722 over 95% 3 Reinsurance Group
Manor Parkway, of America and AMDOCs
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 9/17/01 210,993 100% 1 IBM
Drive, Fairfax, VA 22033
50 Northwest Point Rd. 12/5/01 176,848 100% 1 Motorola
Elk Grove Village, IL 60005
1350 Timberlake Manor 3/4/02 116,361 over 95% 8 Computer Associates,
Parkway Quest Software, RGA,
Chesterfield, MO 63017 Wachovia
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
Houston, Texas 77084 & TMI aka Trendmaker
Homes
-----------
Total Office 2,762,612
-----------
11
Sponsored
Entity Percent Approx.
Date of Number Approx. Leased as Number
Property Location Purchase of Units Square Feet of 12/31/03 of Tenants Major Tenants(1)
- ----------------- -------- -------- ----------- ----------- ---------- ----------------
Industrial
One Technology Dr. 1982 188,000 100% 1 Alliant Foodservice
Peabody, MA 01960
8730 Bollman Place 1984 98,745 100% 1 Maines Paper and
Savage (Jessup), MD 20794 Foodservice, Inc.
-----------
Total Industrial 286,745
-----------
-------- -----------
Grand Total 837 3,810,668
======== ===========
- ----------
(1) Major tenants are tenants who occupy 10% or more of the space in an
individual property.
All of the properties listed above are owned by us. None of our properties
is subject to any mortgage loans. We have no material undeveloped or unimproved
properties, and we have no proposed programs for the renovation, improvement or
development of any of our properties. We believe that our properties are
adequately covered by insurance as of December 31, 2003.
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 the 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. Executive Officers of FSP Corp.
The following table sets forth the names, ages and positions of all our
directors and executive officers.
Name Age Position
---- --- --------
George J. Carter (5) 55 President, Chief Executive
Officer and Director
Barbara J. Corinha (1), (2), (4), (6) 48 Vice President, Chief Operating
Officer, Treasurer, Secretary
and Director
R. Scott MacPhee 46 Executive Vice President
Richard R. Norris (5) 60 Executive Vice President and
Director
William W. Gribbell 44 Executive Vice President
Janet Prier Notopoulos (1), (3) 56 Vice President and Director
12
- ----------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
(3) Class I Director
(4) Class II Director
(5) Class III Director
(6) Ms. Corinha is responsible for FSP Corp.'s accounting and financial
reporting functions.
George J. Carter, age 55, 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. Corinha, age 48, is the Vice President, Chief Operating
Officer, Treasurer, Secretary and a Director of FSP Corp. In addition, Ms.
Corinha has as her primary responsibility, together with Mr. Carter, the
management of all operating business affairs of FSP Corp. and its affiliates.
Ms. Corinha is also responsible for FSP Corp.'s accounting and financial
reporting functions. Prior to the Conversion, Ms. Corinha 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.
Corinha served as Director of Operations for Schuparra Securities Corp. and as
the Sales Administrator for Weston Financial Group. From 1979 through 1986, Ms.
Corinha worked at First Winthrop Corporation in administrative and management
capacities; including Office Manager, Securities Operations and Partnership
Administration. Ms. Corinha attended Northeastern University and the New York
Institute of Finance. Ms. Corinha 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.
R. Scott MacPhee, age 46, is an Executive Vice President of FSP Corp. and
has as his primary responsibility the direct equity placement of the Sponsored
Entities. 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.
Richard R. Norris, age 60, is an Executive Vice President and a Director
of FSP Corp. and has as his primary responsibility the direct equity placement
of the Sponsored Entities. Prior to the Conversion, Mr. Norris was an Executive
Vice President of the General Partner. From 1993 through 1996 he was an
executive officer of Boston Financial. From 1983 to 1993 Mr. Norris worked at
Winthrop Financial Associates. Prior to that, he worked at Arthur Young &
Company (subsequently named Ernst & Young through a merger). Mr. Norris is a
graduate of Bowdoin College (B.A.) and Northeastern University (M.S.). Mr.
Norris holds a NASD Series 7 general securities license.
William W. Gribbell, age 44, is an Executive Vice President of FSP Corp.
and has as his primary responsibility the direct equity placement of the
Sponsored Entities. 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.
Janet Prier Notopoulos, age 56, 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
13
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).
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 executive officers and
directors.
14
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters.
There is no established public trading market for our common stock. The
fair market value of our common stock as determined by our board of directors
was $16.45 per share as of December 31, 2003.
As of March 10, 2004, there were 1,416 holders of record of our common
stock. This computation is based upon the number of record holders reflected in
our corporate records.
We have declared a dividend of $0.31 per share of our common stock payable
to stockholders of record as of February 6, 2004. Set forth below are the
distributions per Unit made by the FSP Partnership or dividends per share of
common stock made FSP Corp., as the case may be, made in each quarter since the
quarter ended March 31, 2001.
Distribution Amount Per Unit of
FSP Partnership or Dividend Amount
Per Share of
Quarter Ended Common Stock of FSP Corp.
------------- -------------------------
3/31/01 $0.27
6/30/01 $0.28
9/30/01 $0.29
12/31/01 $0.30
3/31/02 $0.31
6/30/02 $0.31
9/30/02 $0.31
12/31/02 $0.31
3/31/03 $0.31
6/30/03 $0.31
9/30/03 $0.31
12/31/03 $0.43*
3/31/04 $0.31
*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.
15
Item 6. Selected Financial and Other Data.
The following selected financial information is derived from the
historical consolidated financial statements of the FSP Partnership and 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 Partnership's and FSP Corp.'s consolidated financial
statements and related notes thereto included in Item 8.
Year Ended December 31,
-----------------------------------------------
2003 2002 2001 2000 1999
------- ------- ------- ------- -------
(In thousands, except per
share or unit amounts)
Operating Data:
Total revenue $83,768 $53,950 $51,955 $32,793 $15,534
Income from:
Continuing operations 39,823 26,741 24,621 8,171 406
Discontinued operations 195 571 747 743 733
Gain on sale of properties 6,362 -- -- -- --
------- ------- ------- ------- -------
Net income 46,380 27,312 25,368 8,914 1,139
Basic and diluted income per
share and per limited and
general partnership unit
from:
Continuing operations 1.02 1.09 1.00 0.43 0.03
Discontinued operations -- 0.02 0.03 0.04 0.06
Gain on sale of properties 0.16 -- -- -- --
------- ------- ------- ------- -------
Total 1.18 1.11 1.03 0.47 0.09
Distributions declared per
unit/share outstanding (1)
from:
Operations 1.24 1.24 1.18 1.02 0.86
Sale of properties 0.12 -- -- -- --
------- ------- ------- ------- -------
Total 1.36 1.24 1.18 1.02 0.86
As of December 31,
------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
Balance Sheet Data
(at period end):
Total assets $528,529 $201,936 $204,117 $219,923 $190,486
Total liabilities 11,674 4,771 4,354 19,280 28,821
Minority interests in
consolidated entities -- -- -- 63 78,090
Total shareholders'/partners'
capital 516,855 197,165 199,763 200,580 83,575
(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.
The 2003 financial statements reflect the merger of 13 Sponsored REITs.
Prior to the merger, FSP Corp. held a non-controlling interest with virtually no
economic benefits or risks in the Target REITs.
16
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. 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
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 of real estate on behalf of Sponsored REITs and the syndication of
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 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
The most significant events in 2003 for the real estate portfolio were our
acquisition by merger of 13 new properties in June and the sale of two of our
Houston apartment properties, Weslayan and Reata, in February and August,
respectively. As a result of these dispositions and acquisitions, our Houston
residential component holdings now include newer buildings with a greater number
of units per project, which we expect will produce operating efficiencies. The
properties sold were built in 1985 and 1994 and contained 84 and 159 units; the
two new apartment properties acquired were built in 1999 and 2000 and contain
210 and 228 units. In general, the office properties which we acquired in the
mergers are also newer and larger than those we held prior to the mergers, and
have leases expiring later than did those properties in the portfolio prior to
the mergers. As a result of these acquisitions, our real estate portfolio is
more diverse not only in geography, but also by property size, lease size, and
lease expiration year.
17
The portfolio was 90% leased at the end of the fourth quarter. During
2003, vacancies increased in our Greenville, South Carolina property due to the
bankruptcies of both Home Gold and Conseco, and in our Austin, Texas property,
where Columbia Universal Life was acquired by Allstate Insurance and did not
renew its lease at its expiration. Both the Greenville, South Carolina and the
Austin, Texas office markets continue to be weak in 2004. In addition to the
Greenville and Austin vacancies, there was the equivalent of one full building
vacant throughout 2003. During the first six months, all of Bollman Place in
Savage, Maryland was vacant until it was relet in July. The single tenant lease
at Blue Ravine in Folsom, California expired June 30, 2003, and the building
remains vacant. In spite of tough market conditions in other office markets,
occupancy was maintained or improved at the other multi-tenant office buildings,
and each apartment building remained over 90% leased.
It is difficult for management to predict what will happen to occupancy or
rents in 2004, because the need for space and the price tenants are willing to
pay are tied to the larger trends in the economy, such as job growth, interest
rates, and corporate earnings, which in turn are tied to even larger
macroeconomic and political factors, such as the risk of war and terrorism. In
addition to the difficulty of predicting macroeconomic factors, it is difficult
to predict which markets, projects, or tenants will suffer or benefit from
changes in the larger economy. Because our properties are in different
geographical sub-markets and our tenants are in diverse industries, these
macroeconomic trends may have a different effect on different properties.
We have begun to see an increase in showings and leasing activity in many
of our office markets during the first two months of 2004. If the trend
continues and there are no further shocks to the economy, we expect there may be
some decrease in vacancy rates in 2004. However, we expect that there will be a
continued decline in rental rates in 2004 as landlords compete on rent to fill
vacancies. Competition for tenants may increase our costs of brokerage
commissions and tenant improvements, as well as our need to invest in services
and amenities to retain tenants, and we expect that trend will continue in 2004.
Less than 10% of the office leases in our real estate portfolio expire in
2004. One full building lease has already been renewed, and we have begun
negotiations with several of the other tenants who have expressed interest in
renewing their leases. We cannot predict if these tenants will stay or what the
terms and conditions of any lease renewals will be. In addition to scheduled
lease expirations, vacancies may occur in 2004 as a result of tenant
bankruptcies or defaults, or because we and our tenants find it mutually
advantageous to negotiate early terminations for all or part of the leased
space. A partial lease termination was signed in February 2004 for the release
of approximately 31,000 square feet, which was not scheduled to expire in 2004,
in exchange for a cash payment of $1,228,000.
The market for Class A apartments in the Houston area (where we currently
own three apartment complexes) in 2004 is expected to be difficult because of
new units that have come on the market. As long as new units continue to be
built and interest rates remain low, we expect the competition from other
apartment complexes and home buying to keep rents and occupancy down.
While many of our properties have received or are expected to receive real
estate tax abatements, this did not result in a significant decrease in our
operating expenses in 2003, nor do we expect to see any decrease in operating
expenses in 2004. We have seen energy prices increase, especially in deregulated
markets, and although insurance rates appear to be stabilizing in the broader
market, our policies renew in April, and we do not know at this time how our
portfolio will be priced or what limits will be available.
The Texas Department of Transportation took land for the expansion of
Interstate 10 from the Park Ten office property in Houston. The proceeds of the
taking are shown as land sales in 2003, because the money was received in 2003.
However, we are protesting the settlement amount on a contingency basis.
Discontinued Operations
We sold two apartment properties in Houston in 2003. We continue to
evaluate our portfolio, and from time to time may decide to dispose of
additional properties in the ordinary course of business.
18
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 2003
were below our expectations. Future business in this area is unpredictable.
Our property acquisition executives are concerned about high valuation
levels for prime commercial investment real estate in 2004. It appears that a
combination of factors, including low interest rates, a recovering general
economy and increased capital allocation to real estate assets are increasing
prices on many properties we would have an interest in acquiring. This price
push is causing capitalization rates to fall and prices per square foot to rise.
Specifically, our acquisition executives fear that we will not be able to
purchase enough property during 2004 at a price acceptable under our investment
criteria to grow our overall investment banking/investment services business. If
so, lower revenues from this business could reduce the cash available for
distribution to stockholders as dividends. However, the same capital market
forces that are causing higher real estate prices and difficulties in achieving
property acquisition goals are also presenting some appealing opportunities for
the dispositions of certain of our assets. Although our general intention is to
hold our properties for long-term appreciation, if opportunities present
themselves that are sufficiently attractive, we may take advantage of the
current market environment in 2004 and sell certain selected real estate assets.
The sale of these assets could generate cash gains available for distribution to
shareholders as dividends.
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).
While we continue to expand our in-house sales force, uncertainties always exist
as to whether we are capable, either through our existing client base or through
new clients, of raising the amount of capital invested 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
assessments are consistently applied and produce financial information that
fairly presents our results of operations. Our most critical accounting policies
involve our equity investments 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.
19
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.
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 40 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. We do not have any capitalized below-market leases. The value
of in-place leases, exclusive of the value of above-market and below-market
in-place leases, is 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.
20
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 fees upon an investor closing and the subsequent payment of the
Sponsored REIT's loan to the Company. Other transaction fees are recognized upon
the final syndication of the Sponsored REIT.
Ownership of Stock in a Sponsored REIT
We typically retain a common stock ownership in a Sponsored REIT following
syndication, and earn an ongoing asset and/or property management fee.
Accordingly, transaction fee revenue and our share of the operations of these
Sponsored REITs are not classified as discontinued operations due to its
continuing involvement.
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 April 2002, the FASB issued SFAS No. 145 "Rescission of FAS Nos. 4, 44,
and 64, Amendment of FAS 13, and Technical Corrections." This Statement rescinds
FASB No. 4, "Reporting Gains and Losses from Extinguishment of Debt," and an
amendment of that Statement, FASB No. 64, "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements." This Statement amends FASB No. 13,
"Accounting for Leases." This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings or
describe their applicability under changed conditions. This statement was
effective for our fiscal year ended December 31, 2003 and the adoption had no
impact on our financial position, results of operations and cash flows.
In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities." This statement was effective
January 1, 2003. SFAS No. 146 replaces current accounting literature and
requires the recognition of costs associated with exit or disposal activities
when they are incurred rather than at the date of a commitment to an exit or
disposal plan. FAS No. 146 supersedes Emerging Issues Task Force Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity," which in some cases required certain costs to be
recognized before a liability was actually incurred. The adoption of this
standard did not have a material impact on financial position, results of
operations or cash flow.
21
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities. In December 2003, the FASB revised
FIN 46 with certain modifications and clarifications. The objective of this
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. Application of this
guidance was effective for interests in certain VIEs commonly referred to as
special-purpose entities (SPEs) as of December 31, 2003. The provisions of this
interpretation became effective upon issuance. The adoption of this standard did
not have a material impact on the Company's financial position, operations or
cash flow.
Results of Operations
The following table shows the variance in dollars for our operations for
years ended December 31, 2003 and 2002 and the years ended December 31, 2002 and
2001.
Variance in Dollars
(in thousands) For the Year Ended December 31,
2003 and 2002 2002 and 2001
---------------------------------
Revenue
Rental revenue
Rental income $ 24,979 $ 732
Transaction fees 1,247 2,462
Sponsored REIT income 2,065 527
Other 209 (374)
---------------------------------
Total real estate revenue 28,500 3,347
---------------------------------
Investment banking/investment
services revenue
Syndication fees 911 720
Transaction fees 407 (2,072)
Other -- --
---------------------------------
Total investment
banking/investment
services revenue 1,318 (1,352)
---------------------------------
Total Revenue 29,818 1,995
---------------------------------
Expenses
Real estate expenses
Rental operating expenses 4,992 (651)
Real estate taxes and insurance 3,625 197
Depreciation and amortization 4,938 85
Selling, general and administrative (45) (253)
Sponsored REIT expenses 1,752 263
Interest 142 76
---------------------------------
Total real estate expenses 15,404 (283)
---------------------------------
Investment banking/investment
services expenses
Selling, general and administrative 662 118
Commissions 467 299
Depreciation and amortization (113) 98
Shares/units issued as compensation (604) (1,140)
---------------------------------
Total investment 412 (625)
banking/investment
services expenses
---------------------------------
Total expenses 15,816 (908)
---------------------------------
22
Variance in Dollars
(in thousands) For the Year Ended December 31,
2003 and 2002 2002 and 2001
---------------------------------
Income before minority interests 14,002 2,903
Income applicable to minority interests -- (40)
Income before interest and taxes 14,002 2,943
Interest income 81 (124)
Income before taxes 14,083 2,819
Taxes on income 1,001 699
---------------------------------
Income from continuing operations 13,082 2,120
Income from discontinued operations (376) (176)
Income before gain on sale of properties 12,706 1,944
Gain on sale of properties 6,362 --
---------------------------------
Net income $ 19,068 $ 1,944
=================================
Comparison of the year ended December 31, 2003 to the year ended
December 31, 2002
On June 1, 2003, we completed the acquisition by merger of 13 Sponsored
REITs, which more than doubled the size of our real estate operations. Increases
in rental revenues and expenses are primarily a result of this merger. We also
sold two properties in 2003. The results of operations for these two properties
are shown as discontinued operations. We owned 15 properties for a full year
and, as a result of the mergers, 13 properties for seven months in 2003. The
results of operations for 2002 have been adjusted to reflect the sale of two
properties in 2003.
Our investment banking/investment services segment syndicated five
Sponsored REITs with total gross proceeds of $231.8 million in 2003; an increase
of $21.7 million compared to six Sponsored REITs syndicated in 2002 with total
gross proceeds of $210.1 million. Revenues and expenses for investment
banking/investment services are directly related to the gross proceeds of these
syndications.
Revenue
Total revenues increased $29.8 million, or 55%, to $83.8 million for the
year ended December 31, 2003, as compared to $54.0 million for the year ended
December 31, 2002.
Income from real estate operations was $67.7 million for the year ended
December 31, 2003; an increase of $28.5 million, or 73%, compared to the year
ended December 31, 2002. The increase is attributable to:
o An increase in rental revenue of $25.0 million relating to the 13
REITs acquired in 2003.
o An increase in transaction (loan commitment) fees of $1.2 million
relating to the increase in gross syndication proceeds.
o An increase of $2.1 million in Sponsored REIT income relating to the
revenues of the Sponsored REITs prior to syndication. The average
property syndicated in 2003 was approximately $46 million compared
to $35 million in 2002. As a result, the Company's proportionate
share of income and expenses increased in 2003. See Off-Balance
Sheet Arrangements, below, for additional discussion of the
calculation of FSP Corp.'s share of income and expenses in Sponsored
REITs.
The increase was offset by a decrease due to vacancies at four properties
aggregating $1.2 million, partially offset by rent increases in the remaining
properties of $0.5 million.
Investment banking/investment services revenue was $16.0 million for the
year ended December 31, 2003; an increase of $1.3 million, or 8.9%, compared to
the year ended December 31, 2002. This increase is attributable to the increase
in gross syndication proceeds as discussed above.
23
Expenses
Total expenses were $42.6 million for the year ended December 31, 2003; an
increase of $15.8 million, or 59%, compared to the year ended December 31, 2002.
Expenses for real estate operations were $30.6 million for the year ended
December 31, 2003, an increase of $15.4 million, or 101%, compared to the year
ended December 31, 2002. The increase is attributable to:
o An increase in expenses for real estate operations of $13.6 million
attributable to the 13 REITs acquired in 2003.
o An increase in Sponsored REIT expenses of $1.8 million attributable
to increased syndication activity.
Expenses for investment banking/investment services were $12.0 million for
the year ended December 31, 2003, a net increase of $0.4 million, or 3.6%,
compared to the year ended December 31, 2002. The increase is attributable to:
o An increase in commission expense of $0.5 million which is directly
related to the increase in syndication proceeds.
o An increase in general and administrative expenses of $0.7 million
which is primarily increased compensation as a result of higher
personnel during the year and merit salary increases.
The decrease was offset by:
o Expenses related to shares issued as compensation of $0.6 million in
2002; no shares were issued as compensation in 2003
Taxes on income were $1.7 million for the year ended December 31, 2003, a
net increase of $1.0 million or 140% compared to the year ended December 31,
2002. The tax rate for 2003 on the taxable REIT subsidiary was approximately 41%
compared to the tax rate for 2002 of approximately 22%. The 2002 rate included
certain benefits that will not occur in the future. We expect a tax rate of
approximately 41% for our taxable REIT subsidiary in the future.
Comparison of the year ended December 31, 2002 to the year ended
December 31, 2001
We syndicated six Sponsored REITs with total gross proceeds of $210.1
million in 2002; an increase of $7.0 million compared to six Sponsored REITs
syndicated in 2001 with total gross proceeds of $203.1 million. In 2002, we
restructured the fees charged to the Sponsored REITs in order to better match
revenue with associated costs and risks. Loan commitment fees were increased
approximately 2%, which was off set by a corresponding decrease in acquisition
and organization fees. We owned seventeen properties in both years. The results
of operations for 2002 and 2001 have been adjusted to reflect the sale of two
properties in 2003.
Revenue
Total revenues increased $2.0 million, or 3.8%, to $54.0 million for the
year ended December 31, 2002, as compared to $52.0 million for the year ended
December 31, 2001.
Income from real estate operations was $39.2 million for the year ended
December 31, 2002, an increase of $3.3 million, or 9.3%, compared to the year
ended December 31, 2001. The increase is attributable to:
o An increase in straight-line rent revenue of $0.9 million, relating
to new or renewed leases during the year;
o An increase in reimbursable expenses of $0.5 million;
24
o An increase of $0.5 million in Sponsored REIT income relating to the
revenues of the Sponsored REITs prior to syndication;
o An increase in transaction (loan commitment) fees of $2.5 million as
a result of the volume and fee increases noted above.
The increase was offset by:
o A decrease in income from leases of $0.7 million as a result of a
rental allowance of $0.9 million given to a tenant as part of a
lease extension, partially offset by a net increase of $0.2 million
in rents (less vacancies) in the remaining properties;
o A decrease in other lease income of $0.1 million;
o A decrease of $0.4 million in interest and other income primarily
due to lower interest rates in 2002.
Investment banking/investment services revenue (Syndication fees and
Transaction fees) was $16.1 million for the year ended December 31, 2002; a
decrease of $1.3 million, or 8.4%, compared to the year ended December 31, 2001.
This decrease is attributable to:
o An increase in syndication fees of $0.7 million as a result of an
increase of $7 million of gross proceeds from offerings of the
Sponsored REITs; and
o A decrease of transaction fees of $2.1 million primarily due to the
fee restructure described above.
Expenses
Total expenses were $26.8 million for the year ended December 31, 2002, a
decrease of $0.9 million, or 3.2%, compared to the year ended December 31, 2001.
Expenses for real estate operations were $15.5 million for the year ended
December 31, 2002, a net decrease of $0.3 million, or 1.8%, compared to the year
ended December 31, 2001. The decrease is attributable to:
o A decrease in rental operating expenses of $0.6 million primarily
attributable to costs associated with leasing activity in 2001 that
did not repeat in 2002; and
o A decrease in general and administrative expenses of $0.2 million,
primarily attributable to reduced professional fees allocated to
real estate operations.
The decrease was offset by:
o An increase in real estate taxes and insurance of $0.3 million, as a
result of tax rate increases on the existing properties and
increases in the price and difficulty of obtaining insurance; and
o An increase in Sponsored REIT expenses of $0.3 million primarily as
a result of increased syndications in 2002 compared with 2001.
There were no significant changes to depreciation and amortization expense
or interest expense related to real estate operations.
Expenses for investment banking/investment services were $12.2 million for
the year ended December 31, 2002, a net decrease of $0.6 million, or 5.1%,
compared to the year ended December 31, 2001. The decrease is attributable to a
decrease in expenses relating to shares/units issued as compensation of $1.1
million.
25
The decrease was offset by:
o An increase in selling and administrative expenses of $0.1 million,
primarily attributable to the increase in syndication proceeds in
2002;
o An increase in commission expense $0.3 million, attributable to the
increase in syndication proceeds in 2002; and
o An increase in depreciation and amortization expense of $0.1
million.
There was no income applicable to minority interests in 2002.
There was no tax on income in 2001. The tax rate for 2002 on the taxable
REIT subsidiary was approximately 22%.
Liquidity and Capital Resources
Cash and cash equivalents were $58.8 million and $22.3 million at December
31, 2003 and December 31, 2002, respectively. This increase of $36.4 million is
attributable to $39.4 million provided by operating activities, plus $39.7
million provided by investing activities offset by $42.6 million used for
financing activities. 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 $39.4 million is
primarily attributable to net income of $46.4 million plus the add-back of $3.3
million of non-cash activity. This was offset by a net decrease in operating
assets of $10.4 million, primarily related to approximately $11 million of
accounts payable and accrued expenses assumed by us when we acquired the 13
REITs.
Investing Activities
Our cash provided by investing activities of $39.7 million is attributable
to $23.5 million of cash acquired when we acquired the 13 REITs, plus $21.9
million in proceeds received from the sale of real estate assets. We used $2.4
million to acquire or improve real estate assets and office computers and
another $4.1 million as the balance of assets held for syndication.
Financing Activities
Our cash used by financing activities of $42.6 million is attributable to
$46.7 million of distributions to shareholders offset by borrowing of $4.1
million used to acquire assets held for syndication.
Line of Credit
We have a revolving line of credit agreement with a group of banks
providing for borrowings of up to $125.0 million. Borrowings under the line of
credit bear interest at either the bank's base rate or a variable LIBOR rate, as
defined. Borrowings by us outstanding under the line of credit at December 31,
2003 were $4.1 million. We are in compliance with all bank covenants required by
this line of credit. The maturity date of the line of credit is August 18, 2005.
26
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 2012. Approximate
future minimum rental income on non-cancelable operating leases as of December
31, 2003 are:
Amount
Date (in thousands)
---- --------------
2004 $51,075
2005 $41,701
2006 $35,624
2007 $29,579
2008 $27,626
2009-2012 $44,374
Contractual Obligations
- ------------------------------------------------------------------------------------------------------------------
Payment due by period
(in thousands)
-------------------------------------------------------------------------------
After
Contractual Obligations Total 2004 2005 2006 2007 2008 2008
- ------------------------------------------------------------------------------------------------------------------
Line of Credit $4,117 $4,117 $0 $0 $0 $0 $0
- ------------------------------------------------------------------------------------------------------------------
Operating Leases $1,376 $289 $295 $302 $308 $182 $0
------ ------ ---- ---- ---- ---- ---
- ------------------------------------------------------------------------------------------------------------------
Total $5,493 $4,406 $295 $302 $308 $182 $0
- ------------------------------------------------------------------------------------------------------------------
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
Our interest in a Sponsored REIT declines during the syndication process
as we sell shares of preferred stock in the Sponsored REIT to investors. We
record our share of the Sponsored REIT's income and expenses while we have an
ownership stake in the Sponsored REIT as Sponsored REIT income and Sponsored
REIT expenses. Our share of net income in the Sponsored REITs was $832,000,
$519,000, and $255,000, for the years ended December 31, 2003, 2002 and 2001,
respectively. Subsequent to the completion of the offering of the preferred
shares in Sponsored REITs during these three years, we did not share in any of
the Sponsored REITs' earnings.
We typically retain a minimal common stock ownership interest in Sponsored
REITs that we have organized and syndicated. During 2003, 2002 and 2001, we
retained common stock ownership interests in eight, sixteen, and ten Sponsored
REITs, respectively. Our cost of investment in these Sponsored REITs
approximates our share of the underlying equity in the net assets of the REITs.
This value is typically minimal after the Sponsored REIT is completely
syndicated. However, we had completed the syndication of only seven of the eight
Sponsored REITs in which we retained ownership interests as of December 31,
2003. The value of our holdings in the one Sponsored REIT that was not
completely syndicated is approximately $4.1 million and is shown on the balance
sheet as Assets held for syndication.
Each Sponsored REIT was organized to acquire real estate property using
the proceeds raised through a private offering of its preferred stock. The
Sponsored REITs have not obtained and do not contemplate obtaining any long-term
financing. The Sponsored REITs issued both common stock and preferred stock. The
common stock is ultimately owned solely by FSP Corp. and, except for two
non-management directors of FSP Corp., the preferred stock is owned by
unaffiliated investors. 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. As a common stockholder, we have no rights
to the Sponsored REIT's earnings and any related cash distributions subsequent
27
to the completion of the offering of the preferred shares. However, upon
liquidation of a Sponsored REIT, we will be entitled to its 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.
Summarized financial information for the Sponsored REITs is as follows:
(unaudited) December 31,
(in thousands) 2003 2002 2001
-----------------------------------
Balance Sheet Data:
Real estate, net $ 257,700 $ 385,907 $ 222,232
Other assets 53,646 39,465 19,048
Total liabilities (18,129) (6,554) (6,755)
--------- --------- ---------
Shareholders' equity $ 293,217 $ 418,818 $ 234,525
========= ========= =========
December 31,
2003 2002 2001
-----------------------------------
Operating Data:
Rental revenues $ 45,819 $ 46,836 $ 19,816
Other revenues 370 543 354
Operating and maintenance
Expenses (16,594) (14,191) (5,973)
Depreciation and amortization (11,155) (7,220) (3,191)
Interest expense (13,965) (13,395) (9,916)
--------- --------- ---------
Net income $ 4,475 $ 12,573 $ 1,090
========= ========= =========
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We were not a party to derivative financial instruments at or during the
year ended December 31, 2003.
We borrow from time to time on our line of credit. These borrowings bear
interest at a variable rate. As of December 31, 2003, $4,117,000 was outstanding
under the line of credit. We have used the funds drawn on our line of credit
only for the purpose of making interim mortgage loans to Sponsored REITs. These
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.
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.
On April 14, 2003, our prior independent accountants,
PricewaterhouseCoopers LLP, informed us that they were declining to stand for
reelection as our independent accountants and on May 8, 2003 we engaged Ernst &
Young LLP as our independent accountants. Information required by this item has
been previously reported by FSP Corp. on Current Reports on Form 8-K dated April
14, 2003 and May 8, 2003.
28
Item 9A. Controls and Procedures
Our management, with the participation of FSP Corp.'s President and Chief
Executive Officer and FSP Corp.'s Vice President and Chief Operating Officer
(equivalent of Chief Financial Officer), evaluated the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(d)
under the Exchange Act) as of December 31, 2003. Based on this evaluation, FSP
Corp.'s President and Chief Executive Officer and FSP Corp.'s Vice President and
Chief Operating Officer (equivalent of Chief Financial Officer) concluded that,
as of December 31, 2003, our disclosure controls and procedures were (1)
designed to ensure that material information relating to us, including our
consolidated subsidiaries, is made known to FSP Corp.'s President and Chief
Executive Officer and FSP Corp.'s Vice President and Chief Operating Officer
(equivalent of Chief Financial Officer) by others within these entities,
particularly during the period in which this report was being prepared and (2)
effective, in that they provide reasonable assurance that information required
to be disclosed by us in the reports that we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms.
No change to 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, 2003 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
29
PART III
Certain information required by Part III of this Form 10-K is omitted
because we will file a definitive proxy statement pursuant to Regulation 14A not
later than 120 days after the end of the fiscal year covered by this 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.
Executive Officers of the Registrant" in Part I hereof, and the remainder is
contained in the Proxy Statement under the caption "Election of Directors" and
is incorporated herein by reference.
Item 11. Executive Compensation.
The response to this item is contained in the Proxy Statement under the
caption "Executive Compensation" 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
caption "Beneficial Ownership of Voting Stock" and under the caption "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 Accountant Fees and Services.
The response to this item is contained in the Proxy Statement under the
caption "Auditor Fees and Other Matters" and is incorporated herein by
reference.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as part of this report:
1. Financial Statements:
The Financial Statements listed in the accompanying Index to
Financial Statements are filed as part of this Annual Report on Form
10-K.
2. Financial Statement Schedules:
The Financial Statement Schedule listed on the accompanying Index to
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.
30
(b) Reports on Form 8-K.
1. On October 8, 2003, FSP Corp. furnished a Current Report on Form 8-K
to disclose certain information regarding A.G. Edwards, Inc.'s
delivery to FSP Corp. of an estimate of the value of FSP Corp.
2. On October 20, 2003, FSP Corp. furnished a Current Report on Form
8-K to disclose A.G. Edwards, Inc.'s written report regarding the
value of FSP Corp.
31
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 March 12, 2004 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 in
the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ George J. Carter President, Chief Executive
- -------------------------- Officer and Director
George J. Carter (Principal Executive Officer) March 12, 2004
/s/ Barbara J. Corinha Vice President, Chief
- -------------------------- Operating Officer, Treasurer,
Barbara J. Corinha Secretary and Director
(Principal Financial Officer) March 9, 2004
/s/ Lloyd S. Dow Vice President and Controller
- -------------------------- (Principal Accounting Officer) March 12, 2004
Lloyd S. Dow
/s/ Richard R. Norris Director March 11, 2004
- --------------------------
Richard R. Norris
/s/ Janet P. Notopoulos Director March 12, 2004
- --------------------------
Janet P. Notopoulos
/s/ Barry Silverstein Director March 12, 2004
- --------------------------
Barry Silverstein
/s/ Dennis J. McGillicuddy Director March 8, 2004
- --------------------------
Dennis J. McGillicuddy
32
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
2.1 (1) Agreement and Plan of Merger by and among FSP Corp. and 13
Target REITs (as defined therein), dated as of January 14, 2003.
3.1 (2) Articles of Organization.
3.2 (3) By-laws.
10.1+ (4) FSP Corp.'s 2002 Stock Incentive Plan.
10.2 (5) Amended and Restated Loan Agreement dated as of August 18, 2003
by and among Citizens Bank of Massachusetts, Fleet National
Bank, FSP Corp. and certain affiliates of FSP Corp.
21.1* Subsidiaries of the Registrant.
23.1* Consent of Ernst & Young LLP.
23.2* Consent of PricewaterhouseCoopers LLP
31.1* Certification of FSP Corp.'s President and Chief Executive
Officer pursuant to Section 302 of the Sarba