SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
For Annual and Transitional Reports Pursuant to
Sections 13 or 15(d) of the Securities
Exchange Act of 1934
|X| Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 For the
fiscal year ended December 31, 2001
|_| Transition Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934
Commission File No. 0-32615
FRANKLIN STREET PROPERTIES CORP.
(formerly known as Franklin Street Partners Limited Partnership)
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(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|
On March 26, 2002, 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 Company, was $316,602,130.
The number of shares of Common Stock outstanding as of March 26, 2002 was
24,586,249.
Documents Incorporated By Reference
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Document Part Form 10-K
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Definitive Proxy Statement on Schedule 14A for the Annual Part III
Meeting of Stockholders to be held on May 20, 2002, to be
filed with the Securities and Exchange Commission
Appendices B and C of the Definitive Proxy Statement on Part IV
Schedule 14A, filed with the Securities and Exchange
Commission on December 18, 2001
TABLE OF CONTENTS
PART I.........................................................................1
Item 1. Business............................................................1
Item 1A. Risk Factors........................................................4
Item 2. Properties..........................................................8
Item 3. Legal Proceedings...................................................9
Item 4. Submission of Matters to a Vote of Security Holders.................9
Item 4A. Executive Officers of the Company..................................10
Item 5. Market For Registrant's Common Equity and Related
Stockholder Matters................................................11
Item 6. Selected Financial and Other Data..................................12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................12
Item 7A, Quantitative and Qualitative Disclosure About Market Risk..........26
Item 8. Financial Statements and Supplementary Data........................26
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure................................26
PART II.......................................................................27
Item 10. Directors and Executive Officers of the Registrant.................27
Item 11. Executive Compensation.............................................27
Item 12. Security Ownership of Certain Beneficial Owners And Management.....27
Item 13. Certain Relationships and Related Transactions.....................27
PART III......................................................................27
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K........................................................27
Index to Consolidated Financial Statements...................................F-1
PART I
Item 1. Business.
History
Franklin Street Properties Corp. (the "Company") is a Maryland corporation
and is the successor to Franklin Street Partners Limited Partnership, a
Massachusetts limited partnership (the "Partnership"). The Company intends to
qualify for federal income tax purposes as a real estate investment trust. The
Partnership was originally formed as a Massachusetts general partnership in
January 1997 as the successor to a Massachusetts general partnership that was
formed in 1981 and known as Franklin Street Partners, and was subsequently
formed as a Massachusetts limited partnership in February 1997. On January 1,
2002, the Partnership merged with and into the Company, which was a wholly owned
subsidiary of the Partnership, with the Company being the surviving entity (the
"Conversion"). Pursuant to the Conversion, the Partnership ceased to exist, the
Company succeeded to the business of the Partnership and each unit of both
general and limited partnership interests in the Partnership was converted into
one share of common stock, $.0001 par value per share (the "Common Stock") of
the Company. As a result of the Conversion, the Company now holds, directly and
indirectly, 100% of the interest in three former subsidiaries of the
Partnership: FSP Investments LLC, a Massachusetts limited liability company
("FSP Investments"), FSP Property Management LLC, a Massachusetts limited
liability company ("FSP Property Management"), and FSP Holdings LLC, a Delaware
limited liability company ("FSP Holdings").
Organization
FSP Investments acts as a real estate investment firm and broker/dealer
with respect to (a) the organization of investment vehicles which are typically
syndicated through private placements exempt from registration under the
Securities Act of 1933 ("Sponsored Entities"), some of which were limited
partnerships (the "Sponsored Partnerships") and some of which are corporations
intended to qualify for federal income tax purposes as real estate investment
trusts (the "Sponsored REITs"), (b) the acquisition of real estate by the
Sponsored Entities and (c) the sale of equity interests in the Sponsored
Entities. FSP Investments derives revenue from commissions received in
connection with the sale of equity interests in the Sponsored Entities. FSP
Investments also derives revenue from fees paid by the Sponsored Entities for
the services of FSP Investments in identifying, inspecting and negotiating to
purchase real properties on behalf of the Sponsored Entities. 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.
On April 1, 1997, FSP Holdings acquired the general partnership interest
in four Sponsored Partnerships (the "Prior Entities"), each of which had been
organized by the executive officers of the general partner of the Partnership
prior to the formation of the Partnership while they were employed by another
entity. Between June 1997 and June 2000, FSP Investments completed the offerings
of limited partnership interests in 14 Sponsored Partnerships. The sole general
partner of each of the Sponsored Partnerships is FSP Holdings. Between June 2000
and December 31, 2001, FSP Investments completed the offerings of preferred
stock in nine Sponsored REITs. Effective January 1, 2001, one of the Sponsored
Partnerships converted from a Partnership to a Sponsored REIT. Accordingly, as
of December 31, 2001, there were 27 Sponsored Entities, of which 17 were
Sponsored Partnerships and ten were Sponsored REITs. The Company expects that
future Sponsored Entities will be Sponsored REITs.
Each Sponsored Entity sold its equity interests only to "accredited
investors'" within the meaning of Regulation D under the Securities Act. The
Sponsored Entities (other than a Prior Entity that conducted its offering
pursuant to a registration statement on Form S-11) conducted their offerings
pursuant to exemptions from registration under Rule 506 of Regulation D and
Section 4(2) of the Securities Act. The Sponsored Entities issued equity
interests for aggregate gross cash proceeds of $480,200,000. Each Sponsored
Entity holds a single real property.
Pursuant to mergers effective January 1, 1999, January 1, 2000 and October
1, 2000, respectively, the Partnership acquired all limited partners' interest
in the 17 Sponsored Partnerships. In connection with these mergers, the
Partnership issued units of its limited partnership interest (the "Units") to
the limited partners of the Sponsored Partnerships. The mergers that were
effective January 1, 1999 were approved by a vote of limited partners of the
Partnership. Neither the Partnership's governing documents nor applicable state
law required the approval of the limited partners of the Partnership for the
mergers that were effective January 1, 2000 and October 1,
2000. Each merger was approved by a vote of the limited partners of the
applicable Sponsored Partnerships. Pursuant to the mergers, limited partners in
the Sponsored Partnerships exchanged an interest in a finite-life entity for an
interest in an infinite-life entity. As a result of the mergers, FSP Holdings is
the sole general partner of each Sponsored Partnership that was acquired and the
Partnership was the sole limited partner of each such Sponsored Partnership.
Prior to the Conversion, the Partnership owned, directly or indirectly,
100% of the interest in the 17 Sponsored Partnerships, each of which owns real
property. As a result of the Conversion, the Company is now the sole limited
partner of each such Sponsored Partnership and now owns, directly or indirectly,
100% of the interest in the 17 Sponsored Partnerships. Reference in this annual
report to the Company's properties means the real properties owned by these 17
Sponsored Partnerships. The preferred stockholder interests in the ten Sponsored
REITs have not been acquired by the Company.
FSP Property Management provides asset management services to each
Sponsored Entity and property management services to six Sponsored Entities. FSP
Property Management receives fee income from those Sponsored Entities that have
not been acquired by the Partnership or the Company. FSP Property Management
does not receive any rental income.
FSP Holdings acts as the general partner of each Sponsored Partnership.
Investment Objectives
The Company has two principal sources of revenue:
o Investment banking income consisting of brokerage commissions and
other related fees paid to FSP Investments in connection with the
organization and offering of Sponsored Entities and loan origination
fees paid in connection with loans to Sponsored Entities.
o Rental income from the real properties it owns.
The Company's investment objective is to increase the cash available for
distribution to its stockholders by increasing its revenue from investment
banking services and rental income. The Company expects that, through FSP
Investments, it will continue to organize and cause the offering of Sponsored
REITs in the future and that it will continue to derive investment banking
income from such activities. The Company also expects that in the future it will
acquire additional real properties. The Company may sell from time to time the
real properties it owns as market conditions warrant (although to date it has
only sold vacant land) and either distribute the proceeds to its stockholders or
retain some or all of such proceeds for investment in real properties or other
Company activities. The Company may acquire real properties in any geographic
area of the United States and of any property type. Of the 17 properties the
Company owns, four are apartment complexes, 11 are office buildings and two are
industrial; four of these properties are located in Texas, three properties are
located in Massachusetts, three properties are located in northern California,
two properties are located in Maryland, and one property is located in each of
southern California, Louisiana, Michigan, North Carolina and South Carolina. See
Item 2 hereof. The Company has no restrictions on the percentage of its assets
that may be invested in any one real property. The Company acquires its
properties primarily for their rental income and seeks to manage its properties
with a goal of increasing their value.
The Company relies on the following principles in selecting real
properties for acquisition by a Sponsored Entity or the Company:
o Buying investment properties at a price which produces value for
investors and avoiding overpaying for real estate merely to outbid
competitors.
o Buying properties in excellent locations with substantial
infrastructure in place around them and avoiding investing in
locations where the construction of such infrastructure is
speculative.
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o Buying properties that are well-constructed and designed to appeal
to a broad base of users and avoiding properties where quality has
been sacrificed to cost savings in construction or which appeal only
to a narrow group of users.
o Aggressively managing, maintaining and upgrading a property and
refusing to neglect or undercapitalize management, maintenance and
capital improvement programs.
o Having the ability to hold properties through down cycles and
avoiding over leveraging properties and placing them at risk of
foreclosure.
The Company acquires and operates its real properties on an unleveraged
basis not subject to any mortgage loans. The Company has a revolving line of
credit that provides for borrowings of up to $50,000,000. The Company has drawn
on this line of credit, and intends to draw on this line of credit in the
future, to obtain funds for the purpose of making interim mortgage loans to
Sponsored Entities. The Company's policy is to cause these loans to be secured
by a first mortgage of the real property (which may be of any type) owned by the
Sponsored Entity. The Company makes these loans to enable a Sponsored Entity 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. The Company has
no restriction on the percentage of its assets that may be invested in any
single mortgage.
Policies
The Company's policy is not to invest in the securities of other common
stock issuers except short-term investments in money market funds and similar
securities and the holding of a nominal interest in Sponsored REITs for the
purpose of facilitating the organization and operation of such Sponsored REITs.
The Company does not expect to receive any material amounts of revenue from its
nominal interest in any Sponsored REITs.
The Company's policy is not to issue senior securities, borrow money
(except as described above), make loans to other persons (except as described
above), invest in the securities of other issuers for the purpose of exercising
control, underwrite the securities of other issuers (except that FSP Investments
expects to continue to sell interests in Sponsored Entities on a best efforts
basis in offerings exempt from registration under the Securities Act) or offer
securities in exchange for property. The Company expects that it will engage in
the purchase and sale of real estate investments as market conditions warrant.
The Company may repurchase or otherwise reacquire its securities.
Any of the Company's policies may be changed at any time by the Board of
Directors of the Company.
Competition
With respect to its investment banking and brokerage business, the Company
faces competition for the investment dollars of potential purchasers of the
Sponsored Entities from every other kind of investment, including stocks, bonds,
mutual funds and other real-estate related investments, including other REITs.
Some of the Company's competitors have significantly more resources than the
Company and are able to advertise their investment products. Because the
offerings of the Sponsored Entities are made pursuant to an exemption from
registration under the Securities Act, FSP Investments may not advertise the
Sponsored Entities or otherwise engage in any general solicitation of investors
to purchase interests in the Sponsored Entities.
With respect to its real estate investments, the Company faces competition
in each of the markets where the properties are located. See "Management's
Analysis and Discussion of Financial Condition and Results of Operations --
Trends and Uncertainties" in Item 7 hereof. As of December 31, 2001, 13 of the
Company's 17 properties had an occupancy level in excess of 95%; one property
had an occupancy rate of 60% (100% as of March 1, 2002); and three properties
had occupancy rates ranging from 70-80%. See "Properties" in Item 2 hereof.
Employees
Prior to the Conversion, the general partner of the Partnership was FSP
General Partner LLC, a Massachusetts limited liability company (the "General
Partner"). The members of the General Partner and their respective ownership
interests therein were George J. Carter (33.94%), R. Scott MacPhee (30.66%),
Richard R.
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Norris (21.40%), William W. Gribbell (11.36%), Barbara J. Corinha (1.60%),
Melissa G. Mucciaccio (0.67%), Janet P. Notopoulos (0.26%) and Patricia A
McMullen (0.11%). The General Partner had no other business other than acting as
general partner of the Partnership. Prior to the Conversion, the executive
officers of the General Partner devoted all of their business activities to the
Partnership and its subsidiaries. The former executive officers of the General
Partner are now the current executive officers of the Company and they devote
all of their business activities to the Company and its subsidiaries.
The Company had 29 employees as of December 31, 2001.
Item 1A. Risk Factors
In addition to the other information in this Annual Report on Form 10-K, the
following factors should be considered in evaluating the Company and its
business:
The Company would incur adverse tax consequences if it failed to qualify as a
REIT.
The Company intends to qualify as a real estate investment trust for
federal income tax purposes commencing with its first taxable year. If in any
taxable year the Company does not qualify as a real estate investment trust, it
would be taxed as a corporation and distributions to stockholders would not be
deductible by the Company in computing its taxable income. In addition, if the
Company were to fail to qualify as a real estate investment trust, the Company
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, would be taxed as a corporation during such years. Failure to
qualify for even one taxable year could result in a significant reduction of the
Company's cash available for distributions to stockholders or could require the
Company 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 of the Company could make it necessary for the Company to borrow in order
to make certain distributions to 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 the Company
expects that it will be organized and will operate in a manner that will enable
it to meet such requirements, no assurance can be given that it will succeed in
doing so during the entire life of the Company.
The Company faces risks in continuing to attract investors for the Sponsored
Entities.
The Company's investment banking business depends upon its ability to
attract purchasers of equity interests in Sponsored Entities. The Company's
success in this area will depend on the propensity and ability of investors who
have previously invested in Sponsored Entities to continue to invest in future
Sponsored Entities and on the Company's ability to expand the investor pool for
the Sponsored Entities by identifying new potential investors.
The Company's level of dividends may fluctuate.
Because the Company's investment banking business is transactional in
nature, 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 the Company's not being able to maintain growth
in dividend levels in the future.
The Company faces risks in owning and operating real property.
An investment in the Company 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 the
Company's ability to vary its 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;
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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.
The Company faces risks from tenant defaults or bankruptcies.
If any of the Company's tenants defaults on its lease, the Company may
experience delays in enforcing its rights as a landlord and may incur
substantial costs in protecting its investment. In addition, at any time, a
tenant of one of the Company's properties may seek the protection of bankruptcy
laws, which could result in the rejection and termination such tenant's lease
and thereby cause a reduction in cash available for distribution to the
Company's stockholders.
The Company may encounter significant delays in reletting vacant space,
resulting in losses of income.
When leases expire, the Company 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 the Company is unable to re-lease space
promptly, if the terms are significantly less favorable than anticipated or if
the costs are higher, the Company may have to reduce its distributions to its
stockholders.
The Company faces risks from geographic concentration.
A large percentage of real properties included in the Company's portfolio
are concentrated in Texas and Massachusetts, with each area constituting
approximately 20% of the aggregate square footage owned by the Company. The
Company also owns properties in California, Maryland, Louisiana, Michigan, North
Carolina and South Carolina. The Company is likely to face risks to the extent
that any of these areas suffer deteriorating economic conditions.
The Company competes with national, regional and local real estate operators and
developers, which could adversely affect the Company's cash flow.
Competition exists in every market in which the Company's properties are
located. The Company competes with, among others, national, regional and
numerous local real estate operators and developers. Such competition may
adversely affect the occupancy levels and the rental revenues of the Company's
properties, which could adversely affect the Company's cash flow from operations
and its ability to make expected distributions to stockholders. Some of the
Company's competitors may have more resources than the Company 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. The extent to which the Company is affected by competition
will depend in significant part on local market conditions.
There is limited potential for occupancy gains in the Company's properties.
The Company anticipates that future increases in revenue from the
Company's properties will be primarily the result of rental rate increases as
leases expire. Most of the Company's properties had a rate of occupancy in
excess of 95% as of December 31, 2001. Those properties with higher rates of
vacancy are located in soft economic markets so that it may be difficult to
realize increases in revenue when vacant space is re-leased. To the extent that
the existing properties continue to operate profitably, this will likely
stimulate new development of competing properties and result in greater
competition between the newly developed properties and the Company's properties.
-5-
The Company is subject to possible liability relating to environmental matters,
and the Company cannot assure you that it has 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. The Company cannot assure you that any
environmental assessments it has undertaken have revealed all potential
environmental liabilities, that any prior owner or operator of the properties
did not create any material environmental condition not known to the Company, or
that an environmental condition does not otherwise exist as to any one or more
of the properties that could have a material adverse effect on the Company's
financial condition or results of operations. In addition, the Company cannot
assure you that:
o future laws, ordinances or regulations will not impose any material
environmental liability,
o the current environmental conditions of the Company's 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 the Company,
o the current environmental conditions of the Company's properties
will not be affected by mold or other environmental pollutants that
could affect indoor air quality
o tenants will not violate their leases by introducing hazardous or
toxic substances into the Company's properties that could expose the
Company 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 the Company's properties and pose a threat to human health.
The Company is subject to compliance with the Americans With Disabilities Act
and fire and safety regulations which could require the Company to make
significant capital expenditures.
All of the Company's properties are required to comply with the
Americans With Disabilities Act, and the regulations, rules and orders that may
be issued thereunder (the "ADA"). The ADA has separate compliance requirements
for "public accommodations" and "commercial facilities," but generally requires
that buildings be made accessible to persons with disabilities. Compliance with
ADA requirements might require, among other things, removal of access barriers
and noncompliance could result in the imposition of fines by the U.S.
government, or an award of damages to private litigants. In addition, the
Company will be required to operate its 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 the
Company's properties. Compliance with such requirements may require the Company
to make substantial capital expenditures, which expenditures would reduce cash
otherwise available for distribution to stockholders.
The Company may become subject to loss in profit or in its capital investment in
the event of the occurrence of an uninsured event.
The Company or its tenants carry comprehensive liability, fire and
extended coverage with respect to each of the properties owned by the Company,
with policy specification and insured limits customarily carried for similar
properties. There are, however, certain types of losses, such as from wars,
terrorism, 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, the Company
could lose both its capital invested in the property and anticipated profits.
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Provisions in our organizational documents may prevent changes in control.
The Company's Articles of Incorporation (the "Articles") and Bylaws (the
"Bylaws") contain provisions, described below, which may have the effect of
discouraging a third party from making an acquisition proposal for the Company
and may thereby inhibit a change of control of the Company under circumstances
that could give the holders of shares of Common Stock the opportunity to realize
a premium over the then-prevailing market prices.
Ownership Limits. In order for the Company to maintain its qualification
as a real estate investment trust, the holders of Common Stock will 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 the Company, and no holder of Common Stock will be able to
acquire or transfer shares that would result in the Company's being beneficially
owned by fewer than 100 persons. Such ownership limit may have the effect of
preventing an acquisition of control of the Company without the approval of the
Board of Directors of the Company. Moreover, the Company 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. In addition, the Articles give the
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. The Board of Directors of the Company is divided into
three classes. The initial terms of these classes will expire in 2002, 2003 and
2004, 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 the stockholders' ability to effect a change in control of
the Company even if a change in control were in the stockholders' best
interests.
Preferred Stock. The Articles authorize the Board of Directors of the
Company to issue up to 20,000,000 shares of preferred stock, par value $.0001
per share (the "Preferred Stock") 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 of the Company even if a change in
control were in the stockholders' best interest.
Increase of Authorized Stock. The Board of Directors of the Company,
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 the Company has 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 of the Company even if a change in
control were in the stockholders' best interest.
Amendment of Bylaws. The Board of Directors of the Company has the sole
power to amend the Bylaws. This power could have the effect of delaying or
preventing a change in control of the Company even if a change in control were
in the stockholders' best interests.
Stockholder Meetings. The 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. The 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
of the Company even if a change in control were in the best interests of the
stockholders.
Supermajority Votes Required. The Articles 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 the Articles 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 the Articles to impose cumulative voting in the election of
directors. These provisions could have the effect of delaying or preventing a
change in control of the Company even if a change in control were in the
stockholders' best interest.
There is no public trading market for our securities.
There is no public trading market for the Company's Common Stock. The
Company cannot assure you that any market will develop or that there will be any
liquidity in a market for the Company's Common Stock.
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Item 2. Properties.
Set forth below is information regarding our properties as of December 31,
2001:
Sponsored Sponsored Approx.
Partnership's Partnersh Number Approx. Number
Purchase Date of of Square Occupancy of Major
Property Location Price Purchase Units Feet 12/31/01 Tenants Tenant(s)(1)
----------------- ----- -------- ----- ---- -------- ------- ------------
Apartments
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3919 Essex Lane $ 10,100,000 6/30/93 135 118,800 over 95% 135 None - Apts.
Houston, TX (3)
3231 Allen Parkway $ 10,700,000 8/11/94 159 129,000 over 95% 159 None - Apts.
Houston, TX (3)
4041 Weslayan & Law $ 4,200,000 4/29/97 84 70,500 over 95% 84 None - Apts.
Houston, TX (3)
7250 Perkins Road $ 18,000,000 10/16/98 264 223,800 over 95% 264 None - Apts.
Baton Rouge, LA (4)
------------ --- -------
Total Apartments $ 43,000,000 642 542,100
------------ --- -------
Office
------
451 Andover Street $ 8,000,000 6/1/96 92,000 over 95% 40 Pentucket
North Andover, MA (3) Medical
1515 Mockingbird Lane $ 6,850,000 7/1/97 110,600 75% 80 Primary
Charlotte, NC (3) Physicians Care
33 & 37 Villa Road $ 10,550,000 3/1/98 143,800 70% 40 Home Gold
Greenville, SC (3)
4995 Patrick Henry Dr. $ 6,800,000 12/1/97 40,300 100% 1 Agere
Santa Clara, CA (3)
678-686 Hillview Drive $ 4,862,500 3/9/99 36,300 100% 1 Headway
Milpitas, CA (4) Technologies
5751-5771 Copley Drive $ 15,400,000 3/12/99 101,700 60% 3 XO, Nextel &
San Diego, CA (4) Allegiance (2)
81 Blue Ravine $ 5,700,000 9/27/99 47,000 100% 1 Cardinal Health
Folsom, CA (5)
18000 W. Nine Mile Rd. $ 14,950,000 9/30/99 212,500 80% 6 IBM
Southfield, Michigan (5)
11211 Taylor Draper $ 10,000,000 12/29/99 68,600 100% 6 Columbia
Lane, Austin, Texas (5) Universal Life
Insurance Co.
7130-7150 Columbia $ 19,850,000 12/20/99 188,800 100% 8 Columbia
Gateway Dr. National
Columbia, MD (5)
10 Lyberty Way $ 9,100,000 5/23/00 104,700 100% 1 Lucent
Westford, MA (5) ------------ ------- Technologies
-8-
Sponsored Sponsored Approx.
Partnership's Partnersh Number Approx. Number
Purchase Date of of Square Occupancy of Major
Property Location Price Purchase Units Feet 12/31/01 Tenants Tenant(s)(1)
----------------- ----- -------- ----- ---- -------- ------- ------------
Total Office $112,062,500 1,146,300
------------ ---------
Industrial
One Technology Dr. $ 9,175,000 12/1/95 188,000 100% 1 Alliant
Peabody, MA (3) Foodservice
8730 Bollman Place $ 5,600,000 12/14/99 99,000 100% 1 Alliant
Savage (Jessup), MD (5) ------------ ------
Foodservice
Total Industrial $ 14,775,000 287,000
============ === =========
Grand Total $169,837,500 642 1,975,400
============ === =========
(1) Major tenants are tenants who occupy 10% or more of the space in an
individual property.
(2) As of March 1, 2002, the building was 100% occupied with five tenants. The
new tenants are AON Service Corporation and MD3, Inc.
(3) Merged into the Company on January 1, 1999.
(4) Merged into the Company on January 1, 2000.
(5) Merged into the Company on October 1, 2000.
All of the properties listed above are owned by the Company. None of our
properties are subject to any mortgage loans. We have no material undeveloped or
unimproved properties, and we have no proposed programs for the renovation,
improvement or development of any of our properties. We believe that our
properties are adequately covered by insurance as of December 31, 2001.
Item 3. Legal Proceedings.
From time to time, the Company is subject to legal proceedings and claims
that arise in the ordinary course of its business. Although occasional adverse
decisions (or settlements) may occur, the Company believes that the final
disposition of such matters will not have a material adverse effect on the
Company's financial position, cash flows or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
On December 18, 2001, the Partnership mailed a Consent
Solicitation/Confidential Offering Memorandum to its security holders seeking
their approval of the Conversion. The Conversion was approved by at least a
majority of the outstanding limited partnership interests and the Conversion was
effected on January 1, 2002. Following is a summary of the votes cast "for" and
"against" the Conversion, and votes withheld, including the percentage such
votes constituted of the total number of votes entitled to be cast:
Votes For Votes Against Withheld
--------- ------------- --------
21,319,672 123,695 10,561
(90%) (0.5%) (0.04%)
-9-
Item 4A. Executive Officers of the Company.
The following table sets forth the names, ages and positions of all
executive officers of the Company.
Name Age Position
---- --- --------
George J. Carter 53 President and Chief Executive Officer
Barbara J. Corinha 46 Vice President, Chief Operating Officer,
Treasurer and Secretary
R. Scott MacPhee 44 Executive Vice President
Richard R. Norris 58 Executive Vice President
William W. Gribbell 42 Executive Vice President
Janet Prier Notopoulos 54 Vice President
George J. Carter, age 53, is President and Chief Executive Officer of the
Company and is responsible for all aspects of the business of the Company 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 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 46, is the Vice President, Chief Operating
Officer, Treasurer and Secretary of the Company. In addition, Ms. Corinha has as
her primary responsibility, together with Mr. Carter, the management of all
operating business affairs of the Company and its affiliates. 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 44, is an Executive Vice President of the Company
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 and is a registered
investment adviser.
Richard R. Norris, age 58, is an Executive Vice President of the Company
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 and is a registered investment adviser.
-10-
William W. Gribbell, age 42, is an Executive Vice President of the Company
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 and is a
registered investment adviser.
Janet Prier Notopoulos, age 54, is a Vice President of the Company and
President of FSP Property Management LLC and has as her primary responsibility
the oversight of the management of the real estate assets of the Company and its
affiliates. Prior to the Conversion, Ms. Notopoulos was a Vice President of the
General Partner. Prior to joining Franklin Street Partners 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 persons other than Ms. Notopoulos began working for the
Partnership at its inception in 1997. Ms. Notopoulos was employed as a
consultant by the Partnership commencing in March 1997 and became a full-time
employee on January 1, 1998.
There are no family relationships among any of the executive officers.
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters.
There is no established public trading market for the Company's Common
Stock.
As of March 21, 2002, there were 741 holders of record of the Company's
Common Stock. This computation is based upon the number of record holders
reflected in our corporate records.
The Company has declared a dividend of $.30 per share of Common Stock
payable to stockholders of record as of February 8, 2002. The Company has also
declared a dividend of $.01 per share of Common Stock payable to stockholders of
record as of February 15, 2002. Set forth below are the distributions per Unit
of limited partnership interest that the Partnership made in each quarter in the
last two fiscal years of the Partnership.
Amount Per Limited and
Quarter Ended General Partner Unit
------------- --------------------
3/31/00 $0.23
6/30/00 $0.24
9/30/00 $0.25
12/31/00 $0.26
3/31/01 $0.27
6/30/01 $0.28
9/30/01 $0.29
12/31/01 $0.30
While not guaranteed, the Company expects that cash dividends on the
Company's Common Stock comparable to the Partnership's most recent quarterly
distribution will continue to be paid in the future.
On July 1, 2001, January 1, 2001 and April 1, 2000, the Partnership issued
149,131 Units, 2,522 Units and 230,000 Units of limited partnership interest,
respectively, as compensation to its executive officers and certain other
employees pursuant to an exemption from registration under Section 4(2) of the
Securities Act. Effective October 1, 2000, the Partnership acquired six
Sponsored Partnerships through merger. In connection with these mergers, the
Partnership issued 7,204,716 Units of limited partnership interest to the
limited partners of those Sponsored Partnerships. Effective January 1, 2000, the
Partnership acquired three Sponsored Partnerships through merger. In connection
with these mergers, the Partnership issued 4,999,972 Units of limited
partnership interest to the limited partners of those Sponsored Partnerships.
Effective January 1, 1999, the Partnership acquired eight Sponsored Partnerships
through merger. In connection with these mergers, the Partnership issued
11,999,907 Units
-11-
of limited partnership interest to the limited partners of those Sponsored
Partnerships. The Partnership issued the Units in each of these mergers pursuant
to exemptions from registration under Rule 506 of Regulation D and Section 4(2)
of the Securities Act. The Partnership based its belief that such transactions
had the benefit of these exemptions on the fact that no general solicitation was
conducted and on information furnished in investor questionnaires, and
representations made, by the limited partners of each acquired Sponsored
Partnership as to their status as accredited investors.
On January 1, 2002, in connection with the Conversion, the Company issued
an aggregate of 24,586,249 shares of Common Stock to the general and limited
partners of the Partnership pursuant to an exemption from registration under
Rule 506 of Regulation D and Section 4(2) of the Securities Act. The Company
bases its belief that such transaction had the benefit of these exemptions on
the fact that no general solicitation was conducted and on information furnished
in investor questionnaires and representations made by the limited partners of
the Partnership as to their status as accredited investors.
Item 6. Selected Financial and Other Data.
The following selected financial information is derived from the
historical consolidated financial statements of the Partnership. This
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Item 7 hereof and
with the Partnership's consolidated financial statements and related notes
thereto included in Item 8 of this report.
Year Ended December 31,
-------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(unaudited)
(In thousands, except per Unit amounts)
Operating Data:
Total revenues .................... $ 54,447 $ 34,793 $ 18,048 $11,555 $ 7,203
Net income (loss) ................. 25,368 8,914 1,139 (1,675) 272
Basic and diluted net income (loss)
per limited and general
partnership unit .............. 1.03 0.47 0.09 (0.88) 0.14
Distributions declared per Unit
outstanding(1) ................ 1.18 1.02 0.86 1.05 0.79
As of December 31,
-------------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Balance Sheet Data (at period end):
Total assets ...................... $204,117 $219,923 $190,486 $95,886 $66,117
Total liabilities ................. 4,354 19,280 28,821 1,294 1,639
Minority interests in consolidated -- 63 78,090 89,593 56,304
entities
Total partners' capital ........... 199,763 200,580 83,575 4,999 8,174
(1) As a result of the Conversion, each Unit was converted into one share of
Common Stock.
The 2000 and 1999 financial statements reflect the merger of 17 Sponsored
Partnerships. Prior to the applicable merger, the Partnership owned a
controlling general partner interest in the 17 Sponsored Partnerships--See Note
4 to the consolidated financial statements of the Partnership and "Financial
Information--Management's Discussion and Analysis of Financial Condition and
Results of Operations" in Item 7 hereof.
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 contained in the 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 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 the
Company's forward-looking statements involve risks
-12-
and uncertainty, including without limitation, changes in economic conditions in
the markets in which the Company owns properties, changes in the demand by
investors for investment in Sponsored REITs, the impact of the events of
September 11, 2001, risks of a lessening of demand for the types of real estate
owned by the Company, 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 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
The Company operates in two business segments: investment banking services
and rental operations. FSP Investments provides real estate investment and
broker/dealer services that include: (a) the organization of Sponsored REITs in
2001 and 2000 and Sponsored Partnerships in 2000 and prior years, which were
syndicated through private placements; (b) the acquisition of real estate on
behalf of the Sponsored Entities; and (c) the sale of preferred stock in
Sponsored REITs or limited partnership interests in the Sponsored Partnerships.
The following table summarizes property owned by the Partnership and the
Sponsored Partnerships for the three years ended December 31, 2001, 2000 and
1999.
December 31,
---------------------------------------
2001 2000 1999
---- ---- ----
Residential
Number of Properties.......... 4 4 4
Number of Apartment Units..... 642 642 642
Commercial
Number of Properties.......... 13 13 12
Square Footage................ 1,433,300 1,433,300 1,328,500
As described in Note 4 to Financial Statements, the Partnership
consummated three series of mergers. As described above, the Company operates in
two segments, real estate operations and broker/dealer and real estate
investment services. Prior to the consummation of the first series of mergers,
the Partnership operated in the segment of broker/dealer and real estate
investment services. The first series of mergers added the real estate
operations of certain Sponsored Partnerships to the Partnership's business. The
nature of the Partnership's business was not changed by the second and third
series of mergers.
The mergers were accounted for as a purchase, whereby the assets and
liabilities of the Sponsored Partnerships were recorded at their fair values and
transaction costs were capitalized. In each merger the Partnership acquired the
minority interests in the Sponsored Partnerships. None of the merged Sponsored
Partnerships was subject to debt financing and no debt was assumed or created at
the time of the merger. The investors of the merged entities exchanged their
interests for an interest in the Partnership. There were no cash payments and no
contingent payments.
The acquisitions have affected the Company in two ways: the real estate
portfolio is more diverse, both geographically and with respect to property
type; and the Company has a larger borrowing capacity.
-13-
The following table sets forth the identity of each merged Sponsored
Partnership, the date of its merger and the estimated value ascribed to that
Partnership.
Estimated Value
at Merger Date (in
Merged Partnership Merger Date thousands)
------------------ ----------- ----------
Essex Lane January 1, 1999 $11,339
FSP Apartment Properties January 1, 1999 12,691
One Technology January 1, 1999 11,989
FSP North Andover January 1, 1999 9,919
FSP Weslayan Oaks January 1, 1999 5,760
FSP Park Seneca January 1, 1999 10,126
FSP Santa Clara January 1, 1999 7,938
FSP Piedmont January 1, 1999 12,435
FSP Silverside January 1, 2000 19,063
FSP Hillview January 1, 2000 5,328
FSP Telecom January 1, 2000 16,814
FSP Southfield Centre October 1, 2000 16,412
FSP Blue Ravine October 1, 2000 6,475
FSP Bollman Place October 1, 2000 6,035
FSP Austin N.W. October 1, 2000 11,403
FSP Gateway Crossing October 1, 2000 20,870
FSP Lyberty Way October 1, 2000 10,612
During 2001 and 2000, the Partnership retained 100% of the common stock in
six and three Sponsored REITs, respectively, for nominal consideration in
connection with the organization and syndication of such Sponsored REITs.
Additionally, the Partnership's general partner interest in one Sponsored
Partnership was exchanged for the common stock in a newly formed Sponsored REIT,
in connection with this Sponsored Partnership's reorganization from a limited
partnership to a REIT on January 1, 2001. The Partnership's cost of its
investment in the Sponsored REITs approximates its share of the underlying
equity in the net assets of the REITs. The Partnership's share of the Sponsored
REITs' earnings, after deducting preferred stock dividends paid or accrued, was
not material for the years ended December 31, 2001 and 2000. There were no
Sponsored REITs in 1999.
The Sponsored REITs issued both common stock and preferred stock. The
common stock is owned solely by the Company and the preferred stock is owned by
unaffiliated investors. Each Sponsored REIT was organized to acquire a single
real estate property using the proceeds raised through a private offering of its
preferred stock. The Sponsored REITs do not contemplate having any long-term
financing. Following consummation of the offerings, the preferred shareholders
in each of the Sponsored REITs are entitled to 100% of the Sponsored REIT's cash
distributions. As a common shareholder, the Company has no rights to the
Sponsored REIT's regular cash distributions. However, upon liquidation of the
Sponsored REITs, the Company will be entitled to its percentage interest in any
proceeds after the preferred shareholders have recovered their investment. The
Company's 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
the REIT's Board of Directors.
Critical Accounting Policies.
Basis of Presentation. The consolidated financial statements of the
Partnership include the accounts of the Partnership, 17 Sponsored Partnerships
and wholly and majority-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation. Prior to the
mergers, FSP Holdings was the general partner and owned a 5% interest in each of
the Sponsored Partnerships. As the general partner, FSP Holdings had the
exclusive rights and powers to manage and control the business of each Sponsored
Partnership without the consent or approval of the limited partners. The limited
partners in the Sponsored Partnerships could not elect to
-14-
replace the general partner, except for cause. Accordingly, prior to the
mergers, the accounts of the Sponsored Partnerships have been consolidated into
the Partnership's financial statements under the principles of accounting
applicable to investments in subsidiaries in accordance with SOP 78-9.
Real Estate and Depreciation.
Real estate assets are stated at the lower of cost or fair value, as
appropriate, less accumulated depreciation.
Costs related to property acquisition and improvements are capitalized.
Typical capital items include new roofs, site improvements, various exterior
building improvements and major interior renovations. Funding for capital
improvements typically is provided by cash set aside at the time the property
was purchased.
Routine replacements and ordinary maintenance and repairs that do not
extend the life of the asset are expensed as incurred. Typical expense items
include interior painting, landscaping, minor carpet replacements and
residential appliances. Funding for repairs and maintenance items typically is
provided by cash flows from operating activities. Depreciation is computed using
the straight line method over the assets' estimated useful lives as follows:
Category Years
-------- -----
Buildings:
Residential 27
Commercial 39
Building Improvements 15-39
Furniture and equipment 5-7
The Partnership evaluates its assets used in operations by identifying
indicators of impairment and by comparing the sum of the estimated undiscounted
future cash flows for each asset to the asset's carrying value. When indicators
of impairment are present and the sum of the undiscounted future cash flows is
less than the carrying value of such asset, an impairment loss is recorded equal
to the difference between the asset's current carrying value and its fair value
based on discounting its estimated future cash flows. At December 31, 2001, no
such indicators of impairment were identified.
Revenue Recognition.
Rental income for Commercial Properties -- The Partnership has retained
substantially all of the risks and benefits of ownership of the Partnership's
commercial properties and accounts for its leases as operating leases. Rental
income from leases, which include scheduled increases in rental rates during the
lease term, is recognized on a straight-line basis. The Partnership does not
have any percentage rent arrangements with its commercial property tenants.
Reimbursable common area maintenance charges are included in rental income in
the period earned.
Rental income for Residential Apartments -- The Partnership's residential
property leases are generally for terms of one year or less. Rental income from
tenants of residential apartment properties is recognized in the period earned.
Rent concessions, including free rent and leasing commissions are charged as a
reduction of rental revenue.
Investment Banking Services -- Syndication fees ranging from 6% to 8% of
the gross offering proceeds from the sale of securities in Sponsored Entities
are generally recognized upon an investor closing; at that time the Partnership
has provided all required services, the fee is fixed and collected, and no
further contingencies exist. Commission expense ranging from 3% to 4% of the
gross offering proceeds is recorded in the period the related syndication fee is
earned.
Investment Banking Services -- Transaction fees are generally recognized
upon the final investor closing of a Sponsored Entity. The final investor
closing is the last admittance of investors into a Sponsored Entity; at that
time, required funds have been received from the investors, charges relating to
the syndication have been paid or accrued, continuing investment and continuing
involvement criteria have been met, and legal and economic rights have been
transferred. Third party transaction-related costs are deferred and later
expensed to match revenue
-15-
recognition. Internal expenses are expensed as incurred. The Partnership follows
the requirements for profit recognition as set forth by Statement of Financial
Accounting Standards No. 66 "Accounting for Sales of Real Estate" and Statement
of Position 92-1 "Accounting for Real Estate Syndication Income."
Recent Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" as amended by SFAS No. 137 and
No. 138. The provisions of this statement require that derivative instruments be
carried at fair value on the balance sheet. The statement continues to allow
derivative instruments to be used to hedge various risks and sets forth specific
criteria to be used to determine when hedge accounting can be used. For
derivative instruments not accounted for as hedges, changes in fair value are
required to be recognized in earnings. The provisions of this statement became
effective January 1, 2001. The Partnership has not historically had derivative
instruments, and this standard has had no impact on its financial position,
results of operations and cash flows.
In June 2001, the FASB approved SFAS No. 141 "Business Combinations"
("SFAS 141") and No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142"),
effective July 1, 2001 and January 1, 2002, respectively, for the Partnership.
SFAS 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. The Partnership has adopted
SFAS 141; no combinations by the Partnership occurred after June 30, 2001 to
which this would apply. Under SFAS 142, amortization of goodwill, including
goodwill recorded in past business combinations, will discontinue upon adoption
of this standard. All goodwill and intangible assets will be tested for
impairment in accordance with the provisions of the Statement. The Partnership
has reviewed the provisions of SFAS 142 and believes that the impact of adoption
will not be material to its financial position, results of operations and cash
flows.
In August 2001, the FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations" ("SFAS 143") which addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS 143 requires that the
fair value of a liability for an asset retirement obligation be recognized in
the period in which it is incurred if a reasonable estimate of the fair value
can be made. The associated asset retirement costs are capitalized as part of
the carrying amount of the long-lived asset. SFAS 143 will be effective at the
beginning of 2003. The Partnership has reviewed the provisions of SFAS 143 and
believes that the impact of adoption will not be material to its financial
position, results of operations and cash flows.
In October 2001, the FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 supersedes
SFAS No. 121 and requires that long-lived assets that are to be disposed of by
sale be measured at the lower of book value or fair value less costs to sell.
SFAS 144 retains the fundamental provisions of SFAS No. 121 for (a) recognition
and measurement of the impairment of long-lived assets to be held and used, and
(b) measurement of long-lived assets to be disposed of by sale, but broadens the
definition of what constitutes a discontinued operation and how the results of a
discontinued operation are to be measured and presented. SFAS 144 will be
effective at the beginning of 2002. With the exception of reclassifying the
operations of real estate assets considered "held for sale" to "Discontinued
operations, net of tax" in the consolidated statement of income, the impact of
adoption will not have a material impact on the Partnership's financial position
and cash flows. The Partnership does not have any real estate assets that it
considers "held for sale".
Financing and Other Commitments
The Partnership has a revolving line of credit agreement (the "Loan
Agreement") with a bank providing for borrowings at the Partnership's election
up to $50 million. Borrowings under the Loan Agreement bear interest at either
the bank's base rate or a variable LIBOR rate, as defined. There were no
outstanding borrowings by the Partnership under the Loan Agreement at December
31, 2001. The Partnership is in compliance with all bank covenants required by
this line of credit. The Loan Agreement matures on February 23, 2003. It is the
Company's intention to renew the line of credit when it matures.
-16-
The Partnership has arranged for Citizens Bank to provide a line of credit
for the Partnership's senior officers in the maximum aggregate amount of $3
million. The borrowings under this line of credit are for the purpose of paying
income taxes on equity interests in the Company issued to such senior officers
as compensation. Loans under this line of credit have a term of one year and
bear interest at the bank's prime rate plus 50 basis points. Loans of $1,625,000
in the aggregate were outstanding to senior officers at December 31, 2001. Each
borrower has secured the loan by pledging shares of the Company's Common Stock
having an aggregate fair market value at the time of the loan of no less than
twice the principal amount of the loan. The Partnership has agreed to purchase
from Citizens Bank any loan on which the borrower defaults. Following the
purchase of the loan, the Partnership would have the same rights as Citizens
Bank, including the right to foreclose on the pledged stock.
The Partnership's commercial rental 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, 2001 are (in thousands): 2002 - $15,415; 2003 - $13,307; 2004 -
$9,957; 2005 - $5,898; 2006 - $3,336; and $12,207 thereafter.
The Partnership leases its corporate office space under a six-year
operating lease that commenced in June 1999. The lease includes a base annual
rent and additional rent for the Partnership's share of taxes and operating
costs. Approximate future minimum lease payments at December 31, 2001 are (in
thousands): 2002 - $199; 2003 - $203; 2004 - $209; and 2005 - $97.
In connection with the purchase of a property by a Sponsored REIT in May
2001, the Partnership obligated itself to purchase an additional parcel of real
property within a certain amount of time if the owner offered such property for
sale to the Partnership. The Company satisfied this obligation by causing FSP
Timberlake East Corp., a newly-organized Sponsored REIT, to purchase this parcel
on March 4, 2002.
Off-Balance Sheet Investments
The Partnership typically retains a minimal common stock ownership
interest in Sponsored REITs that it has organized. These ownership interests
have virtually no economic benefit or risk. At December 31, 2001 and 2000, the
Partnership had ownership interests in ten and four Sponsored REITs,
respectively. During 1999 and 2000, the Partnership acquired 100% of the
non-owned interests of certain Sponsored Partnerships (through a series of
mergers) that it had previously organized.
Summarized financial information for the Sponsored REITs are as follows:
(unaudited) December 31,
------------
2001 2000
---- ----
(in thousands)
Balance Sheet Data:
Real estate, net $222,232 $56,565
Other assets 19,048 5,058
Total liabilities 6,755 1,950
Shareholders equity 234,525 59,673
Operating Data:
Rental revenues $ 19,816 $ 2,778
Other revenues 354 117
Operating and maintenance expenses 5,973 948
Depreciation and amortization 3,191 574
Interest expense 9,916 2,298
Net income (loss) 1,090 (925)
There were no Sponsored REITS in 1999.
-17-
Results of Operations
The following table shows the Partnership's financial data as a percentage
of total revenues for the three years ended December 31, 2001, 2000 and 1999 and
the variance in dollars between the years ended December 31, 2001 and 2000 and
the years ended December 31, 2000 and 1999.
Financial Data as a Percentage
of Total Revenues Variance in Dollars
------------------------------- --------------------
For the Year Ended December 31, For the Year Ended
------------------------------- --------------------
December 31,
--------------------
2001 and 2000 and
2001 2000 1999 2000 1999
-------- -------- -------- -------- --------
(in thousands)
Revenue
Rental Revenue
Rental............................. 49.2% 73.1% 90.1% $ 1,331 $9,119
Interest and other................. 3.4% 4.8% 5.3% 184 771
Investment Services Revenue
Syndication fees................... 23.9% 11.6% 2.5% 8,964 3,592
Transaction fees................... 23.3% 10.2% 1.9% 9,163 3,193
Interest........................... 0.2% 0.3% 0.2% 12 70
----- ----- ----- ------- -------
TOTAL REVENUE...................... 100.0% 100.0% 100.0% 19,654 16,745
----- ----- ----- ------- -------
Expenses
Rental Expenses
Selling, general and administrative 3.7% 2.1% 10.4% 1,302 (1,137)
Rental operating expenses.......... 12.3% 18.7% 24.5% 537 2,060
Depreciation and amortization...... 8.7% 13.0% 17.6% 196 1,350
Real estate taxes and insurance.... 5.3% 7.1% 8.0% 427 1,025
Interest........................... 0.8% 2.5% 1.7% (42) 561
Investment Services Expenses
Selling, general and administrative 7.1% 6.7% 7.0% 854 1,621
Commissions........................ 12.0% 9.8% 14.6% 3,103 788
Partnership units issued as
compensation....................... 3.2% 6.6% 0.0% (556) 2,300
Depreciation and amortization...... 0.1% 0.2% 0.3% (12) 32
----- ----- ----- ------- -------
TOTAL EXPENSES..................... 53.3% 66.8% 84.1% 5,809 8,600
----- ----- ----- ------- -------
Minority interests..................... 0.1% 7.6% 12.6% (2,609) 370
Net income............................. 46.7% 33.2% 15.9% $16,454 $7,775
===== ===== ===== ======= ======
Comparison of The Year Ended December 31, 2001 To The Year Ended December 31,
2000
Revenue
Total revenues increased $19.6 million, or 56%, to $54.4 million for the
year ended December 31, 2001, as compared to $34.8 million for the year ended
December 31, 2000. Income from rental operations was $26.7 million for the year
ended December 31, 2001.
The increase in rental income of $1.3 million, or 5.2%, compared to the
year ended December 31, 2000, is attributable to:
o the acquisition of one commercial property in 2000, which
contributed revenue for a full year in 2001, as compared with a
partial year in 2000, resulting in $0.5 million in incremental
revenues;
o increased revenues of approximately $0.8 million as a result of rent
increases on existing properties.
The increase in investment services income (Syndication and Transaction
fees) of $18.1 million, or 239%, compared to the year ended December 31, 2000,
is attributable to the syndication of six Sponsored REITs (with aggregate gross
proceeds of $203.1 million) in 2001 compared to the syndication of three
Sponsored REITs (with aggregate gross proceeds of $60.2 million) in 2000. The
revenue associated with the syndication of three Sponsored
-18-
Partnerships in 2000 with aggregate gross proceeds of $47.4 million has been
eliminated in the Consolidated Statements of Income.
The increase in interest and other income of $0.2 million, or 11%,
compared to the year ended December 31, 2000 is attributable to interest earned
on higher cash balances, cash equivalents and marketable securities in 2001
compared to 2000.
Expenses
Total expenses increased $5.8 million, or 25%, to $29.0 million for the
year ended December 31, 2001, as compared to $23.2 million for the year ended
December 31, 2000.
The increase in selling, general and administrative expenses of $2.2
million, or 70%, compared to the year ended December 31, 2000, is attributable
to the extra costs associated with the syndication of six Sponsored REITS in
2001 (with aggregate gross proceeds of $203.1 million) compared to the
syndication of six Sponsored Entities in 2000 (with aggregate gross proceeds of
$107.6 million) as follows:
o increased payroll and related expenses of $1.5 million;
o increased consulting and professional fees of approximately $0.6
million;
o increased other costs of approximately $0.1 million.
The increase in commission expense of $3.1, million or 91%, compared to
the year ended December 31, 2000 is attributable to the increase of syndication
proceeds of approximately $95 million in 2001 as described above.
The increase in rental expenses of $0.5 million, or 8.3%, compared to the
year ended December 31, 2000, is primarily attributable to the acquisition of
one commercial property in 2000, which incurred costs for a full year in 2001,
as compared with a partial year in 2000.
The increase in depreciation and amortization expenses of $0.2 million, or
4%, compared to the year ended December 31, 2000, is primarily attributable to
the acquisition of one commercial property in 2000, which incurred a full year
of depreciation and amortization expense in 2001, as compared with a partial
year in 2000.
The increase in real estate taxes and insurance expenses of $0.4 million,
or 17%, compared to the year ended December 31, 2000, is primarily attributable
to:
o the acquisition of one commercial property in 2000, which incurred
costs for a full year in 2001, as compared with a partial year in
2000, resulting in approximately $0.1 million in incremental
expenses;
o tax rate increases on the existing properties of approximately $0.3
million.
The decrease in interest expense of $42 thousand, or 5%, compared to the
year ended December 31, 2000, is primarily attributable to lower interest rates
in 2001.
The decrease in minority interest expense of $2.6 million for the year
ended December 31, 2001 compared to the minority interest for the year ended
December 31, 2000 is a result of the mergers completed during the year ended
December 31, 2000, as described in Note 4 to the Financial Statements.
-19-
Comparison Of The Year Ended December 31, 2000 To The Year Ended December 31,
1999
Revenue
Total revenues increased $16.8 million, or 92.8%, to $34.8 million for the
year ended December 31, 2000, as compared to $18.0 million for the year ended
December 31, 1999. Income from rental operations was $25.4 million for the year
ended December 31, 2000.
The increase in rental income of $9.1 million, or 55.9%, compared to the
year ended December 31, 1999, is attributable to:
o the acquisition of seven commercial properties in 1999, which
contributed revenue for a full year in 2000, as compared with a
partial year in 1999, resulting in $8.0 million in incremental
revenues;
o the acquisition of one commercial property in 2000, which
contributed revenue for a partial year in 2000, as compared with no
revenue in 1999, resulting in approximately $0.6 million in
incremental revenues;
o increased revenue of approximately $0.5 million as a result of rent
increases and other miscellaneous fees on existing properties.
The increase in investment services income (Syndication and Transaction
fees) of $6.8 million, or 859%, compared to the year ended December 31, 1999, is
attributable to the syndication of three REITs in 2000 (with aggregate gross
proceeds of $60.2 million) compared to the syndication of one Sponsored Entity
in 1999 (with aggregate gross proceeds of $7.8 million).
The increase in interest and other income of $0.8 million, or 89.1%,
compared to the year ended December 31, 1999 is attributable to interest earned
on higher cash balances, cash equivalents and marketable securities and higher
average yields in 2000 compared to 1999.
Expenses
Total expenses increased $8.6 million, or 53.0%, to $23.2 million for the
year ended December 31, 2000, as compared to $14.6 million for the year ended
December 31, 1999.
The increase in selling, general and administrative expenses of $0.5
million, or 24%, compared to the year ended December 31, 1999, is attributable
to the extra costs associated with the syndication of six Sponsored Entities
(with aggregate gross proceeds of $107.6 million) in 2000 compared with the
syndication of six Sponsored Entities (with aggregate gross proceeds of $64.9
million) in 1999 as follows:
o increased payroll and related expenses of $0.7 million;
o offset by decreased other costs of approximately $0.2 million.
The increase in other real estate operating expenses of $2.1 million, or
46.5%, compared to the year ended December 31, 1999, is primarily attributable
to the acquisition of seven commercial properties in 1999, which incurred costs
for a full year in 2000, as compared with a partial year in 1999.
The increase in commission expense of $0.8 million, or 19%, compared to
the year ended December 31, 1999 is attributable to the syndication of six
Sponsored Entities (with aggregate gross proceeds of $107.6 million) in 2000
compared with the syndication of six Sponsored Entities (with aggregate gross
proceeds of $64.9 million) in 1999 as follows:
The increase in depreciation and amortization expenses of $1.3 million or
44.8%, compared to the year ended December 31, 1999, is primarily attributable
to:
-20-
o the acquisition of seven commercial properties in 1999, which
incurred depreciation and amortization expenses for a full year in
2000, as compared with a partial year in 1999, resulting in $1.2
million in incremental expenses;
o the acquisition of one commercial property in 2000, which incurred
depreciation and amortization expenses for a partial year in 2000,
as compared with no costs in 1999, resulting in approximately $0.1
million in incremental costs;
The increase in real estate taxes and insurance expenses of $1.0 million
or 70.8%, compared to the year ended December 31, 1999, is primarily
attributable to:
o the acquisition of seven commercial properties in 1999, which
incurred costs for a full year in 2000, as compared with a partial
year in 1999, resulting in approximately $0.8 million in incremental
expenses;
o tax rate increases on the existing properties of approximately $0.2
million.
The increase in interest expense of $0.6 million, or 187.6%, compared to
the year ended December 31, 1999, is primarily attributable to the syndication
of three REITs in 2000 compared to the syndication of one unconsolidated
Sponsored Partnership in 1999.
The increase in minority interest expense of $0.4 million for the year
ended December 31, 2000 compared to the minority interest for the year ended
December 31, 1999 is a result of the mergers completed during the year ended
December 31, 2000.
Trends and Uncertainties
Rental Operations
In 2001, the Company saw a reversal of some of the trends in 2000.
Absorption of new rental units and higher oil prices benefited the Houston
apartment properties for most of 2001 until the Enron bankruptcy at the end of
the year. The Enron bankruptcy and general economic conditions in Houston have
increased vacancy and rent concessions throughout Houston, but had not had a
material effect on the Company's apartments as of the end of the year. Vacancies
at the Company's apartments are expected to increase in 2002 as an immediate
result of the Enron bankruptcy on the downtown area, but it is not known how
long or how serious that impact will be, since Houston has a large and
diversified economic base beyond Enron.
Office vacancy rates in most markets increased during 2001, making it
harder to increase rents or lease vacancies as they occurred throughout the
year. Unless there is a turnaround in the general economy in 2002, these
conditions are likely to remain and vacancies may increase along with increased
costs to lease the vacant space, such as concessions, free rent and other
incentives. When the economy does recover, it is likely to recover unevenly with
certain industry segments and geographic areas improving before others. Because
of the diversity of the Company's portfolio and the long term nature of its
office leases, the financial impact of any recovery or further deterioration may
be slow to materialize and is difficult to predict.
During 2001, the Company had mixed success in leasing vacancies that
occurred due to normal lease expirations and as a result of unexpected vacancies
that arose because of tenant bankruptcies. In some markets, such as Greenville
and Charlotte, where vacancies arose during the year, only a portion of the
space has been relet. In others, such as San Diego and Austin, the entire space
was relet quickly, and the buildings are now 100% leased.
There are no material lease expirations until a lease for 99,000 square
feet expires on November 30, 2002. The tenant under that lease has announced its
intention to vacate the premises, and the Company began actively marketing the
space to potential users at the beginning of 2002. The only year in which more
than 10% of the Company's square footage has leases expiring is 2004, during
which leases with respect to more than 20% of the Company's square footage will
expire. Some of these leases contain options to extend, and discussions have
taken place regarding early renewals for some of the leases. The Company cannot
now predict which leases will not be extended in 2004.
-21-
Other tenants may fail in 2002, as they did in 2001, and present the same
challenges in 2002. One longstanding, privately held tenant in South Carolina is
significantly behind in its rent and may not be able to pay its arrearage or
future rent. The future of other publicly traded companies, such as XO and
Lucent, have been subjects of public speculation, but both tenants are currently
occupying the space and paying rent. Lucent has notified the Company that it is
considering subletting its space, but Lucent is and would still be liable for
the rent under any subletting or assignment of the lease.
Real estate taxes are expected to increase in 2002 as municipalities try
to compensate for lost revenue by raising tax rates or by taxing commercial real
estate more heavily. Where possible, the Company intends to protest and file for
tax abatements, particularly for buildings that had vacancies in 2001. However,
it is not certain that those efforts will be successful or that the refunds will
be made in 2002.
Due to the events of September 11, insurance costs are expected to
increase when the Company's policy is scheduled for renewal in April 2002, but
the amount of the increase and change in limits are not known at this time.
Individual states are debating and voting on whether or not to allow insurance
companies to deny coverage for terrorism, and the Company will not know until
the time of its renewal whether it will be able to obtain terrorism coverage for
all of its buildings at a reasonable price. In addition, coverage for damage
from toxic mold is expected to be excluded from the renewal policy, and such
coverage, if available, will need to be bought back at an additional premium
cost which may be prohibitively expensive. The Company intends to try to
maintain appropriate insurance coverage with reasonable deductibles at
reasonable rates but may have trouble doing so in the current insurance market.
There has not been a material increase in the cost of security to date, but if
there are additional acts of terrorism, the Company may be forced to add
security at properties where the costs cannot be passed on to the tenants.
In addition to real estate taxes, security and insurance costs, other
costs may increase in 2002 as a result of inflation. Most of the Company's
office leases pass increased operating costs on to the tenants. However, two of
the Company's office buildings, constituting 13% of the total square footage,
have leases with fixed annual rent increases of between 4% and 5% instead of
operating cost escalation clauses or direct reimbursements. The leases for the
apartment units do not allow for recovery of increases in operating expenses;
however, the apartment tenants pay for most of the utility costs for their
units.
In the course of owning and operating real estate, the potential exists
for the Company to dispose of one or more properties in its portfolio. Market
conditions in specific geographic locations could present the Company with the
opportunity to realize significant capital appreciation in an asset's value. The
Company maintains close attention to market conditions in all geographic
locations where its properties are located.
Investment Services
Unlike the Company's real estate business, which provides a rental revenue
stream which is ongoing and recurring in nature, the Company's investment
banking business is transactional in nature. While trends in 2001 were quite
positive in terms of the quantity, both in the number of transactions and equity
raised, of Sponsored REITs completed, future business in this area is
unpredictable.
As 2002 begins, the Company's acquisition executives are reporting some of
the largest spreads between bid and ask prices for properties that they have
seen in the Company's history. Differing views of the strength and timing of a
national economic recovery as well as low interest rate carrying costs on
debt-financed properties are probably contributing to this situation. Without
the ability to acquire properties at attractive prices, the Company's investment
banking activities may suffer.
Further, the Company continues to rely solely on its 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. While the
Company continues to expand its in-house sales force, uncertainties always exist
as to whether it is capable, either through the Company's existing client base
or through new prospective clients, of providing the amount of investment
capital to achieve future performance objectives. Further setbacks in the stock
market or the general economy could have negative effects, and while the tragic
events of September 11, 2001 did not disrupt the Company's transactional
business unit significantly, further terrorist attacks, if they occur, may have
a chilling effect on the willingness of investors to purchase interests in
future Sponsored Entities.
-22-
Liquidity and Capital Resources as of December 31, 2001
Cash and cash equivalents were $24.4 million and $13.7 million at December
31, 2001 and December 31, 2000, respectively. This 78% increase of $10.6 million
is attributable to $33.4 million generated by operating activities and $21.8
million generated by investing activities, partially offset by $44.5 million
used by financing activities.
Operating Activities
The Partnership's cash provided by operating activities of $33.4 million
is primarily attributable to $32.0 million from operations, after addback of
$6.6 million from non-cash expenses of which $4.8 million relates to
depreciation and amortization and $1.7 million relates to equity based
compensation, and to $1.5 million from the increase in accounts payable and
accrued expenses, partially offset by a net change in other operating assets and
liabilities of $0.1 million.
Investing Activities
The Partnership's cash provided by investing activities of $21.8 million
is attributable to the decrease in investment of $16.7 million as a result of
repayment of a mortgage loan by a Sponsored REIT and $5.3 million as a result of
the redemption of marketable securities plus proceeds of $0.4 million received
on the sale of land, offset by the purchase of $0.7 million of property and
equipment.
Financing Activities
The Partnership's cash used by financing activities of $44.5 million is
attributable to repayments of the line of credit of $16.5 million and cash
distributions to partners of $27.9 million.
Liquidity and Capital Resources as of December 31, 2000
Cash and cash equivalents were $13.7 million and $18.5 million at December
31, 2000 and 1999, respectively. This 25.9% decrease of $4.8 million is
attributable to $31.1 million used in investing activities partially offset by
$14.5 million provided by operating activities and $11.7 million provided by
financing activities.
Investing Activities
The Partnership's cash used in investing activities of $31.1 million is
primarily attributable to:
o $16.7 million relating to advances to a Sponsored REIT which were
subsequently repaid in February 2001;
o $9.9 million for the purchase of property and equipment, partially
offset by proceeds of $0.9 million from the sale of land; and
o $5.3 million for the purchase of marketable securities.
Operating Activities
The Partnership's cash provided by operating activities of $14.5 million
is primarily attributable to $18.5 million from operations, after addback of
$9.5 million from non-cash expenses of which $4.6 million relates to
depreciation and amortization, $2.3 million relates to equity based
compensation, and $2.5 million relates to minority interests.
The cash provided by operating activities is partially offset by $2.5
million from the decrease in accounts payable and accrued expenses and by $1.5
million from an aggregate net decrease in other operating assets and
liabilities.
-23-
Financing Activities
The Partnership's cash provided by financing activities of $11.7 million
is attributable to capital contributions of $39.8 million from the issuance of
partnership units in connection with the acquisition by merger of three of the
merged entities and borrowings under the line of credit of $16.5 million;
The cash provided by financing activities is partially offset by
repayments of the line of credit of $23.5 million and cash distributions to
partners of $21.0 million.
Sources and Uses of Funds
Our principal demands for liquidity are cash for operations, distributions
to equity holders, debt repayments and expense associated with indebtedness. As
of December 31, 2001 we had $4.4 million in liabilities. The Company has no
permanent, long-term debt. In the near term, liquidity is generated from funds
from ongoing real estate operations and fees and commissions received from the
sale of shares in new Sponsored REITs.
The Company maintains an unsecured line of credit through Citizens Bank.
The Company has entered into a Master Promissory Note and Loan Agreement which
provides for a revolving line of credit of up to $50 million. Borrowings under
the loan bear interest at the Company's election of either the bank's base rate
or a variable LIBOR rate. We use the unsecured line of credit to provide each
newly-formed Sponsored Entity with the funds to purchase its property. The
Company lends the purchase price of the property, at an interest rate equivalent
to the rate which the Company is paying to the bank, and takes back a mortgage.
The Company collects a loan fee from the Sponsored Entity. The loan is paid back
in full from the capital contributions of each Sponsored Entity's investors. The
Company's loan agreement with the bank includes customary restrictions on
property liens and requires compliance with various financial covenants.
Financial covenants include maintaining minimum cash balances in operating
accounts, tangible net worth of at least $140 million and compliance with other
various debt and income ratios. The Partnership was in compliance with all
covenants as of December 31, 2001. Borrowings under the loan agreement mature on
February 23, 2003.
The Partnership did not have any borrowings outstanding as of December 31,
2001. However, the Company intends to utilize, and subsequent to December 31,
2001 has utilized, its line of credit for interim financing in connection with
the acquisition of real estate by newly-formed Sponsored REITs.
The Company's real properties generate rental income to cover the
ordinary, annual operating expenses of the properties and to fund distributions
to equity holders. As of December 31, 2001, the rental income covered the
expenses for each of the Company's real properties. In addition to rental
income, the Company maintains cash reserves that may be used to fund
extraordinary expenses or major capital expenses. The cash reserves were set
aside when the Sponsored Partnerships that the Partnership acquired were
originally syndicated. The cash reserves as of December 31, 2001 are in excess
of the known needs for extraordinary expenses or capital improvements for the
real properties within the next few years. There are no external restrictions on
these reserves, and they may be used for any Company purpose.
Although there is no guarantee we will be able to obtain the funds
necessary for our future growth, we anticipate generating funds from continuing
real estate operations and from fees and commissions from the sale of shares in
newly-formed Sponsored REITs. With adequate reserves in place to cover
extraordinary expenses or capital improvements, the Company believes that it has
adequate funds for future needs. The Company's ability to maintain or increase
its level of distributions to stockholders, however, depends upon the level of
interest on the part of investors in purchasing shares of Sponsored REITs and
the level of rental income from the Company's real properties. See "Risk
Factors" in Item 1A.
Related Party Transactions
The Partnership typically retains a non-controlling common stock ownership
interest in Sponsored REITs that it has organized. These ownership interests
have virtually no economic benefit or risk. At December 31, 2001 and 2000, the
Partnership had ownership interests in ten and four Sponsored REITs,
respectively. During 1999 and 2000, the Company acquired 100% of the non-owned
interests of certain Sponsored Partnerships (through a series of
-24-
mergers) that it had previously organized. Neither the Company nor any other
related entity has an obligation to acquire the non-owned interests in any
previously syndicated Sponsored REIT.
At the request of the Company, officers and directors of the Company serve
as officers and directors of Sponsored REITs. All of the Company's revenue from
investment banking services derives from transactions involving the Sponsored
REITs. The terms of the commissions and fees paid by the Sponsored REITs to the
Company and the terms of the mortgage loans made by the Company to the Sponsored
REITs accordingly were not the product of arms-length negotiations. The Company,
however, believes that such terms are no less favorable to the Company than it
could have obtained from third parties in arms-length negotiations.
The Company has an arrangement for Citizens Bank to provide loans to the
Company's senior officers for the purpose of paying income taxes on the issuance
to them of shares of Common Stock as compensation. Each borrower has secured the
loan by pledging shares of the Company's Common Stock having an aggregate fair
market value at the time of the loan of no less than twice the principal amount
of the loan. The Company has agreed to purchase from Citizens Bank any such loan
on which the borrower defaults. Following the purchase of the loan, the
Partnership would have the same rights as Citizens Bank, including the right to
foreclose on the pledged stock. As of December 31, 2001, aggregate loans to
senior officers in the amount of $1,625,000 were outstanding.
-25-
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The Partnership was not a party to derivative financial instruments at or
during the year ended December 31, 2001.
The Company borrows from time to time upon its line of credit. These
borrowings bear interest at a variable rate. The Company uses the funds it draws
on its 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 the Company under its line of credit. Therefore, the Company believes
that it has mitigated its interest rate risk with respect to its borrowings.
Item 8. Financial Statements and Supplementary Data.
The financial statements of the Partnership at December 31, 2001 and
December 30, 2000 and for the years ended December 31, 2001, 2000 and 1999, and
the reports of PricewaterhouseCoopers LLP and BDO Seidman, LLP thereon, are
included elsewhere herein. Reference is made to the Index to Consolidated
Financial Statements in Item 14 hereof.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
The information required by this item has been previously reported by the
Registrant on a Current Report on Form 8-K filed with the Securities and
Exchange Commission on October 17, 2001.
-26-
PART II
Item 10. Directors and Executive Officers of the Registrant.
The response to this item is contained in part under the caption
"Executive Officers of the Company" in Part I of this Annual Report on Form
10-K, and in part in the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 20, 2002 (the "2002 Proxy Statement") in the
sections titled "Election of Directors -- Members of the Board of Directors" and
"Other Matters -- Section 16(a) Beneficial Ownership Reporting Compliance",
which sections are incorporated herein by reference.
Item 11. Executive Compensation.
The response to this item is contained in the 2002 Proxy Statement in the
sections titled "Election of Directors -- Compensation of Directors" and
"Executive Compensation", which sections are incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners And Management.
The response to this item is contained in the 2002 Proxy Statement in the
section titled "Beneficial Ownership of Voting Stock", which section is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The response to this item is item is contained in the 2002 Proxy Statement
in the section titled "Certain Relationships and Related Transactions," which is
incorporated herein by reference.
PART III
Item 14. 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.
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K on October 17, 2001
to report under Item 4 that it had dismissed its independent
certified accountant and retained a new independent certified
accountant.
-27-
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 28, 2002 by the undersigned, thereunto duly authorized.
FRANKLIN STREET PROPERTIES CORP.
By: /s/ George J. Carter
-----------------------------
George J. Carter
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 Chief Executive Officer and
-------------------------- Director (Principal Executive March 28, 2002
George J. Carter Officer)
/s/ Lloyd S. Dow Controller March 28, 2002
-------------------------- (Principal Accounting Officer)
Lloyd S. Dow
/s/ Richard R. Norris Director March 28, 2002
--------------------------
Richard R. Norris
/s/ Barbara J. Corinha Director March 28, 2002
--------------------------
Barbara J. Corinha
/s/ William W. Gribbell Director March 29, 2002
--------------------------
William W. Gribbell
/s/ Janet P. Notopoulos Director March 28, 2002
--------------------------
Janet P. Notopoulos
/s/ R. Scott MacPhee Director March 28, 2002
--------------------------
R. Scott MacPhee
-28-
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
2.1(1) Agreement and Plan of Merger, dated October 10, 2001, by and
between Franklin Street Properties Corp. and Franklin Street
Partners Limited Partnership.
3.1(2) Articles of Organization.
3.2(3) By-laws.
10.1+* Franklin Street Properties Corp. 2002 Stock Incentive Plan.
10.2* Loan Agreement dated as of February 23, 1999 by and among
Citizens Bank of Massachusetts, the Company and certain
affiliates of the Company, as amended.
21.1(4) Subsidiaries of the Registrant.
----------
(1) Incorporated by reference to Appendix A of Franklin Street Partners
Limited Partnership's Definitive Proxy Statement on Schedule 14A,
filed on December 18, 2001.
(2) Incorporated by reference to Appendix B of Franklin Street Partners
Limited Partnership's Definitive Proxy Statement on Schedule 14A,
filed on December 18, 2001.
(3) Incorporated by reference to Appendix C of Franklin Street Partners
Limited Partnership's Definitive Proxy Statement on Schedule 14A,
filed on December 18, 2001.
(4) Incorporated by reference to Franklin Street Partners Limited
Partnership's Form 10-12G/A, filed on December 18, 2001.
(+) Management contract or compensatory plan or arrangement filed as an
Exhibit to this Form 10-K pursuant to Items 14(a) and 14(c) of Form
10-K.
* Filed herewith
-29-
Franklin Street Partners
Limited Partnership and Subsidiaries
Index to Consolidated Financial Statements
Reports of independent certified public accountants F-2 - F-9
Consolidated financial statements:
Consolidated Balance sheets as of December 31, 2001 and 2000 F-10 - F-11
Consolidated Statements of income for the years ended F-12
December 31, 2001, 2000 and 1999
Consolidated Statements of partners' capital for the years F-13
ended December 31, 2001, 2000 and 1999
Consolidated Statements of cash flows for the years ended F-14
December 31, 2001, 2000 and 1999
Notes to consolidated financial statements F-15 - F-31
Financial Statement Schedule - Schedule III F-32 - F-33
All other schedules for which a provision is made in the applicable accounting
resolutions of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Franklin Street Partners Limited Partnership:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, partners' capital and cash flows present
fairly, in all material respects, the financial position of Franklin Street
Partners Limited Partnership and Subsidiaries (the "Partnership") at December
31, 2001, and the results of their operations and their cash flows for the year
then ended in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the financial statement
schedule listed in the accompanying index presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Partnership's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audit. We conducted our
audit of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 4, 2002
F-2
Report of Independent Certified Public Accountants
To the Partners of
Franklin Street Partners Limited Partnership
Wakefield, Massachusetts
We have audited the accompanying consolidated balance sheet of Franklin Street
Partners Limited Partnership and subsidiaries as of December 31, 2000, and the
related consolidated statements of income, partners' capital and cash flows for
the years ended December 31, 2000 and 1999. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits. We did not audit
the financial statements of certain real estate partnerships, which statements
reflect total revenues of $4,794,000 for the year ended December 31, 1999. Those
statements were audited by other auditors whose reports have been furnished to
us, and our opinion, insofar as it relates to the amounts included for such real
estate partnerships, is based solely on the reports of the other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the reports of
the other auditors for 1999 provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors for
1999, the consolidated financial statements referred to above present fairly, in
all material respects, the financial position of Franklin Street Partners
Limited Partnership and subsidiaries at December 31, 2000, and the results of
their operations and their cash flows for the years ended December 31, 2000 and
1999, in conformity with accounting principles generally accepted in the United
States of America.
BDO Seidman, LLP
Boston, Massachusetts
February 27, 2001, except Note 4
which is as of December 13, 2001
F-3
INDEPENDENT AUDITORS' REPORT
To the Partners
FSP Blue Ravine Limited Partnership
(a Massachusetts Limited Partnership)
Wakefield, Massachusetts
We have audited the accompanying balance sheet of FSP Blue Ravine Limited
Partnership (A Massachusetts Limited Partnership), as of December 31, 1999, and
the related statements of operations, changes in partners' equity and cash flows
for the period August 13, 1999 (date of inception) to December 31, 1999. These
financial statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of FSP Blue Ravine Limited
Partnership (a Massachusetts Limited Partnership) as of December 31, 1999, and
the results of its operations, and its cash flows for the period August 13, 1999
(date of inception) to December 31, 1999, in conformity with generally accepted
accounting principles.
Roy & Stevens, P.C.
Boston, Massachusetts
January 28, 2000
F-4
INDEPENDENT AUDITORS' REPORT
To the Partners
FSP Bollman Place Limited Partnership
(a Massachusetts Limited Partnership)
Wakefield, Massachusetts
We have audited the accompanying balance sheet of FSP Bollman Place
Limited Partnership (A Massachusetts Limited Partnership), as of December 31,
1999, and the related statements of operations, changes in partners' equity and
cash flows for the period September 28, 1999 (date of inception) to December 31,
1999. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of FSP Bollman Place Limited
Partnership (a Massachusetts Limited Partnership) as of December 31, 1999, and
the results of its operations, and its cash flows for the period September 28,
1999 (date of inception) to December 31, 1999, in conformity with generally
accepted accounting principles.
Roy & Stevens, P.C.
Boston, Massachusetts
January 28, 2000
F-5
INDEPENDENT AUDITORS' REPORT
To the Partners
FSP Hillview Center Limited Partnership
(a Massachusetts Limited Partnership)
Wakefield, Massachusetts
We have audited the accompanying balance sheet of FSP Hillview Center
Limited Partnership (A Massachusetts Limited Partnership), as of December 31,
1999, and the related statements of operations, changes in partners' equity and
cash flows for the year then ended. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of FSP Hillview Center Limited
Partnership (a Massachusetts Limited Partnership) as of December 31, 1999, and
the results of its operations and cash flows for the year ended December 31,
1999, in conformity with generally accepted accounting principles.
Roy & Stevens, P.C.
Boston, Massachusetts
February 15, 2000
F-6
INDEPENDENT AUDITORS' REPORT
To the Partners
FSP Telecom Business Center Limited Partnership
(a Massachusetts Limited Partnership)
Wakefield, Massachusetts
We have audited the accompanying balance sheet of FSP Telecom Business
Center Limited Partnership (A Massachusetts Limited Partnership), as of December
31, 1999, and the related statements of operations, changes in partners' equity
and cash flow for the period February 1, 1999 (date of inception) to December
31, 1999. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of FSP Telecom Business Limited
Partnership (a Massachusetts Limited Partnership) as of December 31, 1999, and
the results of its operations, and its cash flows for the period February 1,
1999 (date of inception) to December 31, 1999, in conformity with generally
accepted accounting principles.
Roy & Stevens, P.C.
Boston, Massachusetts
January 28, 2000
F-7
INDEPENDENT AUDITORS' REPORT
To the Partners
FSP Silverside Plantation Limited Partnership
We have audited the accompanying balance sheet of FSP SILVERSIDE
PLANTATION LIMITED PARTNERSHIP as of December 31, 1999 and the related
statements of income, changes in partners' equity, and cash flows for the year
then ended. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of FSP SILVERSIDE PLANTATION
LIMITED PARTNERSHIP as of December 31, 1999 and the results of its operations,
changes in partners' equity, and cash flows for the year then ended in
conformity with generally accepted accounting principles.
Habif, Arogeti & Wynne, LLP
Atlanta, Georgia
January 24, 2000
F-8
INDEPENDENT AUDITORS' REPORT
To the Partners
FSP Silverside Plantation Limited Partnership
We have audited the accompanying balance sheet of FSP SILVERSIDE
PLANTATION LIMITED PARTNERSHIP as of December 31, 1998 and the related
statements of income, changes in partners' equity, and cash flows for the period
October 16, 1998 [Date of Inception] to December 31, 1998. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of FSP SILVERSIDE PLANTATION
LIMITED PARTNERSHIP as of December 31, 1998 and the results of its operations,
changes in partners' equity, and cash flows for the period October 16, 1998
[Date of Inception] to December 31, 1998 in conformity with generally accepted
accounting principles.
Habif, Arogeti & Wynne, LLP
Atlanta, Georgia
January 15, 1999
F-9
Franklin Street Partners
Limited Partnership and Subsidiaries
Consolidated Balance Sheets
December 31,
----------------------------
2001 2000
===============================================================================================
(in thousands,
except unit amounts)
Assets:
Real estate assets:
Land $ 39,560 $ 39,994
Buildings and improvements 153,632 152,999
Fixtures and equipment 920 995
-----------------------------------------------------------------------------------------------
194,112 193,988
Less accumulated depreciation 17,419 12,917
-----------------------------------------------------------------------------------------------
Real estate assets, net 176,693 181,071
Cash and cash equivalents 24,357 13,718
Restricted cash 495 499
Marketable securities -- 5,322
Investment in affiliated Sponsored Entity -- 16,734
Tenant rent receivables, less allowance for doubtful accounts
of $210 and $10, respectively 1,434 1,238
Office computers and furniture, net of accumulated
depreciation of $215 and $142, respectively 397 303
Prepaid expenses and other assets, net 741 1,038
-----------------------------------------------------------------------------------------------
Total assets $ 204,117 $ 219,923
===============================================================================================
The accompanying notes are an integral part of these consolidated
financial statements.
F-10
Franklin Street Partners
Limited Partnership and Subsidiaries
Consolidated Balance Sheets
December 31,
-----------------------------
2001 2000
================================================================================================
(in thousands,
except unit amounts)
Liabilities and Partners' Capital:
Liabilities:
Bank note payable $ -- $ 16,500
Accounts payable and accrued expenses 2,112 1,575
Accrued compensation 1,747 706
Tenant security deposits 495 499
------------------------------------------------------------------------------------------------
Total liabilities 4,354 19,280
------------------------------------------------------------------------------------------------
Minority interests in consolidated entities -- 63
------------------------------------------------------------------------------------------------
Commitments and contingencies
Partners' capital (deficit):
Limited partners, 23,637,750 and 23,486,096
units issued and outstanding, respectively 203,348 204,067
General partner, 948,499 units issued and outstanding (3,585) (3,487)
------------------------------------------------------------------------------------------------
Total partners' capital 199,763 200,580
------------------------------------------------------------------------------------------------
Total liabilities and partners' capital $ 204,117 $ 219,923
================================================================================================
The accompanying notes are an integral part of these consolidated
financial statements.
F-11
Franklin Street Partners
Limited Partnership and Subsidiaries
Consolidated Statements of Income
For the Year Ended
December 31,
----------------------------------------
2001 2000 1999
==================================================================================================
(in thousands, except unit and per
partnership unit amounts)
Revenue:
Rental $ 26,765 $ 25,434 $ 16,315
Syndication fees 13,000 4,036 444
Transaction fees 12,701 3,538 345
Interest and other 1,981 1,785 944
---------------------------------------------------------------------------------------------------
Total revenue 54,447 34,793 18,048
---------------------------------------------------------------------------------------------------
Expenses:
Selling, general and administrative 5,229 3,073 2,589
Commissions 6,525 3,422 2,634
Partnership units issued as compensation 1,744 2,300 --
Rental operating expenses 7,026 6,489 4,429
Depreciation and amortization 4,797 4,613 3,231
Real estate taxes and insurance 2,900 2,473 1,448
Interest 818 860 299
---------------------------------------------------------------------------------------------------
Total expenses 29,039 23,230 14,630
---------------------------------------------------------------------------------------------------
Income before minority interests 25,408 11,563 3,418
Income applicable to minority interests 40 2,649 2,279
---------------------------------------------------------------------------------------------------
Net income $ 25,368 $ 8,914 $ 1,139
===================================================================================================
Allocation of net income to:
Limited Partners $ 24,386 $ 8,539 $ 1,049
General Partner 982 375 90
---------------------------------------------------------------------------------------------------
$ 25,368 $ 8,914 $ 1,139
===================================================================================================
Weighted average number of units outstanding, basic
and diluted 24,511,578 18,973,558 11,999,907
===================================================================================================
Basic and diluted net income per limited and
general partnership unit $ 1.03 $ .47 $ .09
===================================================================================================
The accompanying notes are an integral part of these consolidated
financial statements.
F-12
Franklin Street Partners
Limited Partnership and Subsidiaries
Consolidated Statements of Partners' Capital
Total Partners
Limited Partners General Partner Capital
----------------------- ------------------- -----------------------
Units Amount Units Amount Units Amount
=========================================================================================================================
(in thousands, except unit amounts)
Balance, December 31, 1998 952,301 $ 6,425 948,499 $ (1,426) 1,900,800 $ 4,999
Units issued in January 1, 1999
merger transaction 10,099,107 88,413 -- -- 10,099,107 88,413
Net income -- 1,049 -- 90 -- 1,139
Distributions -- (9,380) -- (1,596) -- (10,976)
-------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 11,051,408 86,507 948,499 (2,932) 11,999,907 83,575
Units issued in January 1, 2000
merger transaction 4,999,972 45,269 -- -- 4,999,972 45,269
Units issued in October 1, 2000
merger transaction 7,204,716 77,080 -- -- 7,204,716 77,080
Units issued for compensation 230,000 2,300 -- -- 230,000 2,300
Net income -- 8,539 -- 375 -- 8,914
Distributions -- (15,628) -- (930) -- (16,558)
-------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 23,486,096 204,067 948,499 (3,487) 24,434,595 200,580
Net income -- 24,386 -- 982 -- 25,368
Distributions -- (26,849) -- (1,080) -- (27,929)
Units issued for compensation 151,654 1,744 -- -- 151,654 1,744
-------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 23,637,750 $ 203,348 948,499 $ (3,585) 24,586,249 $ 199,763
=========================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements
F-13
Franklin Street Partners
Limited Partnership and Subsidiaries
Consolidated Statements of Cash Flows
For the Year Ended December 31,
--------------------------------
2001 2000 1999
===========================================================================================
(in thousands)
Cash flows from operating activities:
Net income $ 25,368 $ 8,914 $ 1,139
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,797 4,613 3,231
Partnership units issued for compensation 1,744 2,300 --
Minority interests 40 2,649 2,279
Changes in operating assets and liabilities:
Restricted cash 4 (10) (406)
Tenant rent receivables (196) (665) (389)
Prepaid expenses and other assets, net 75 (745) (260)
Accounts payable and accrued expenses 537 (2,865) 3,777
Accrued compensation 1,041 336 (142)
Tenant security deposits (4) 10 406
-------------------------------------------------------------------------------------------
Net cash provided by operating 33,406 14,537 9,635
activities
-------------------------------------------------------------------------------------------
Cash flows from investing activities:
Distributions from (investment in) affiliated 16,734 (16,734) --
Sponsored Entity
Purchase of real estate assets and office computer (733) (9,952) (77,255)
and furniture
Proceeds received on sales of land 442 927 --
Proceeds from (purchase of) marketable securities 5,322 (5,322) --
-------------------------------------------------------------------------------------------
Net cash provided by (used for) 21,765 (31,081) (77,255)
investing activities
-------------------------------------------------------------------------------------------
Cash flows from financing activities:
Distributions to partners (27,929) (16,558) (10,976)
Distributions to minority interests in consolidated (103) (4,506) (2,375)
entities
Borrowings under bank note payable -- 16,500 23,522
Repayments of bank note payable (16,500) (23,522) --
Capital contributions from minority interest holders -- 39,829 63,316
-------------------------------------------------------------------------------------------
Net cash provided by (used for) (44,532) 11,743 73,487
financing activities
-------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 10,639 (4,801) 5,867
Cash and cash equivalents, beginning of year 13,718 18,519 12,652
-------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 24,357 $ 13,718 $ 18,519
===========================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 818 $ 860 $ 299
Non-cash investing and financing activities:
In connection with the Conversion transactions described in Note 4, the
Partnership issued limited partnership units in exchange for the limited
partner minority interests in Sponsored Partnerships resulting in a
non-cash fair value step-up in the Partnership's real estate properties
totaling approximately $6,581 and $14,390 during the years ended December
31, 2000 and 1999, respectively.
The accompanying notes are an integral part of these consolidated
financial statements.
F-14
1. Organization Franklin Street Partners Limited Partnership (Franklin
Street Properties Corp. effective January 1, 2002) (the
"Partnership" or the "Company") was formed as a
Massachusetts limited partnership on February 4, 1997.
Prior to July 1, 2001 the Partnership owned a 99%
interest in FSP Investments LLC ("FSP Investments"), a
99% interest in FSP Property Management LLC ("FSP
Property Management") and 100% of FSP Holdings LLC ("FSP
Holdings"). Effective July 1, 2001, FSP Holdings
purchased the remaining 1% interest of both entities for
approximately $30,000. The Partnership also has a
non-controlling common stock interest in ten
corporations organized to operate as Real Estate
Investment Trusts ("REITs").
The Partnership operates in two business segments:
rental operations and investment services. FSP
Investments provides real estate investment and
broker/dealer services. FSP Investments' services
include: (i) the organization of REIT entities in 2000
and 2001 (the "Sponsored REITs") and limited
partnerships in and prior to 2000 (the "Sponsored
Partnerships" and, together with the Sponsored REITs,
the "Sponsored Entities"), which are syndicated through
private placements; (ii) the acquisition of real estate
on behalf of the Sponsored Entities; and (iii) the sale
of preferred stock in Sponsored REITs or limited
partnership interests in the Sponsored Partnerships. FSP
Property Management provides asset management and
property management services for the Sponsored Entities.
During 1999 and 2000, a total of 17 Sponsored
Partnerships were merged into the Partnership. Prior to
the merger transactions, FSP Holdings owned a 5%
controlling general partner interest in each of the
merged Sponsored Partnerships. Following the
consummation of the merger transactions, the Partnership
held, directly and indirectly, 100% of the partnership
interests in each of the 17 Sponsored Partnerships.
In December 2001 the limited partners of the Partnership
approved the conversion of the Partnership from a
partnership into a corporation and the subsequent
election to be taxed as a real estate investment trust
("REIT"). As a REIT, the Company is entitled to a tax
deduction for dividends paid to its shareholders,
thereby effectively subjecting the distributed net
income of the Company to taxation at the shareholder
level only, provided it annually distributes at least
90% of its taxable income and meets certain other
qualifications. The conversion, which was effective
January 1, 2002, was accomplished, as a tax-free
reorganization, by merging the Partnership with and into
a wholly owned subsidiary, Franklin Street Properties
Corp., with the subsidiary as the surviving entity. As
part of the conversion into a REIT, FSP Investments will
elect to be a taxable REIT subsidiary and will incur
income taxes at normal tax rates.
F-15
The REIT will be taxed under Sections 856 through 860 of
the Internal Revenue Code of 1986, as amended,
commencing with its taxable year ending December 31,
2002. REITs are subject to a number of organizational
and operational requirements including a requirement
that 90.0% of the taxable income be distributed to
shareholders. Provided that the REIT continues to
qualify as a real estate investment trust, it will
generally not be subject to federal income tax on
taxable income distributed to its shareholders. However,
certain of the REIT's subsidiaries may be subject to
federal income tax.
On December 17, 1999, as part of a larger bill, the
President signed into law the REIT Modernization Act
("RMA"). Effective beginning January 1, 2001, the RMA
has amended the tax rules relating to the composition of
a REIT's assets. Under prior law, a REIT was precluded
from owning more than 10.0% of the outstanding voting
securities of any one issuer, other than a wholly owned
subsidiary or another REIT. Beginning in 2001, a REIT
will also be precluded from owning more than 10.0% of
the value of all securities of any one issuer.
One exception to these restrictions is that a REIT will
be allowed to own up to 100% of the securities of a
Taxable REIT Subsidiary ("TRS") that can provide certain
non-customary services to REIT tenants and others
without disqualifying the rents that a REIT receives
from its tenants. However, no more than 20.0% of the
value of a REIT's total assets can be represented by
securities of one or more TRS's. The amount of interest
and other expenses from a TRS to a REIT will be limited
to ensure that a TRS is subject to an appropriate level
of corporate tax. The new 10.0% asset test will not
apply to certain arrangements (including third party
subsidiaries) in place on July 12, 1999, provided that a
subsidiary does not engage in a "substantial new line of
business" or acquire any "substantial asset", and a REIT
does not acquire any new securities in the subsidiary.
Under the RMA, a subsidiary will be able to convert tax
free into a TRS. The REIT anticipates electing TRS
status for certain of its subsidiaries beginning with
its taxable year ending December 31, 2002.
2. Significant
Accounting
Policies
Basis of The accompanying consolidated financial statements
Presentation include all of the accounts of the Partnership, 17
Sponsored Partnerships and majority-owned subsidiaries.
All significant intercompany accounts and transactions
have been eliminated in consolidation.
Prior to the mergers in 1999 and 2000, FSP Holdings was
the general partner and owned a 5% controlling general
partner interest in each of the Sponsored Partnerships.
FSP Holdings had the exclusive rights and powers to
manage and control the business of each Sponsored
Partnership without the consent or approval of the
limited partners. The limited partners in the Sponsored
Partnerships could not elect to replace the general
partner, except for cause. Accordingly, the Sponsored
Partnerships were accounted for under the principles of
accounting applicable to investments in subsidiaries in
accordance with SOP 78-9 and consolidated these entities
into the Partnership's financial statements.
F-16
Business Segments The Partnership follows Statement of Financial
Accounting Standards ("SFAS") No. 131 "Disclosures about
Segments of an Enterprise and Related Information,"
which established standards for the way that public
business enterprises report information about operating
segments in annual financial statements and requires
that those enterprises report selected information about
operating segments in interim financial reports issued
to shareholders.
Minority Interests Minority interests in consolidated entities ("minority
in Consolidated interests") represents the 95% limited partner interests
Entities in Sponsored Partnerships prior to the dates of merger
and, prior to July 1, 2001, the 1% interest in FSP
Investments and FSP Property Management, which was held
by an officer and member of the general partner of the
Partnership. Minority interests included in the
Partnership's consolidated statements of income
represents the minority interest holders' share of the
income of the consolidated entities. The minority
interests in the Partnership's consolidated balance
sheets reflects the original investment made by the
minority interest holders in the consolidated entities
along with their proportional share of the earnings less
cash distributions. Cash distributions paid to minority
interest holders were approximately $103,000,
$4,506,000, and $2,375,000 for the years ended December
31, 2001, 2000, and 1999, respectively.
Estimates and The Company prepares its financial statements and
Assumptions related notes in conformity with accounting principles
generally accepted in the United States of America.
These principles require management to make estimates
and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial
statements and the reported amounts of revenue and
expenses during the reporting period. Actual results
could differ from those estimates.
Reclassifications Certain balances in the 2000 and 1999 financial
statements have been reclassified to conform to the 2001
presentation.
Investments in Common stock investments in Sponsored REITs are
REITs accounted for using the equity method, as the
Partnership exercises significant influence, but does
not control these entities. Under the equity method of
accounting, the Partnership's cost is subsequently
adjusted by its share of the Sponsored REITs' earnings,
after deducting the Sponsored REITs' preferred stock
dividends paid or accrued. Equity in the losses of
Sponsored REITs is not recognized to the extent that the
investment balance would become negative. Dividends are
recognized as income after the investment balance is
reduced to zero.
F-17
There were no dividends received or income recognized,
from the Sponsored REITs for the years ended December
31, 2001 or 2000.
Real Estate and Depreciation Real estate assets are stated at
the lower of cost or fair value, as appropriate, less
accumulated depreciation.
Costs related to property acquisition and improvements
are capitalized. Typical capital items include new
roofs, site improvements, various exterior building
improvements and major interior renovations. Funding for
capital improvements typically is provided by cash set
aside at the time the property was purchased.
Routine replacements and ordinary maintenance and
repairs that do not extend the life of the asset are
expensed as incurred. Typical expense items include
interior painting, landscaping, minor carpet
replacements and residential appliances. Funding for
repairs and maintenance items typically is provided by
cash flows from operating activities. Depreciation is
computed using the straight line method over the assets'
estimated useful lives as follows:
Category Years
-------- -----
Buildings:
Residential 27
Commercial 39
Building Improvements 15-39
Furniture and equipment 5-7
The Partnership evaluates its assets used in operations
by identifying indicators of impairment and by comparing
the sum of the estimated undiscounted future cash flows
for each asset to the asset's carrying value. When
indicators of impairment are present and the sum of the
undiscounted future cash flows is less than the carrying
value of such asset, an impairment loss is recorded
equal to the difference between the asset's current
carrying value and its fair value based on discounting
its estimated future cash flows. At December 31, 2001,
no such indicators of impairment were identified.
Cash and Cash The Partnership considers all highly liquid debt
Equivalents instruments purchased with a maturity of three months or
less to be cash equivalents.
Restricted Cash Restricted cash consists of tenant security deposits.
Tenant security deposits are refunded when tenants
vacate provided that the tenant has not damaged the
property.
Marketable The Partnership accounts for investments in debt
Securities securities under the provisions of SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities". The Partnership classified its debt
securities as available-for-sale.
There were no investments in marketable securities at
December 31, 2001.
Investments in marketable securities at December 31,
2000 of $5,322,000 mature within one year. These
securities are stated at cost, which approximates fair
market value.
F-18
Concentration of Cash, cash equivalents and short-term investments are
Credit Risks financial instruments that potentially subject the
Partnership to a concentration of credit risk. The
Partnership maintains its cash balances and short term
investments principally in one bank which the
Partnership believes to be creditworthy. The Partnership
periodically assesses the financial condition of the
bank and believes that the risk of loss is minimal. Cash
balances held with various financial institutions
frequently exceed the insurance limit of $100,000
provided by the Federal Deposit Insurance Corporation.
Financial Instruments The Partnership estimates that the carrying
value of cash and cash equivalents, restricted cash,
marketable securities and the bank note payable
approximate their fair values based on their short-term
maturity and prevailing interest rates.
Prepaid Expenses Included in Prepaid expenses and other assets, net at
December 31, 2001 and 2000 is $922,000 and $932,000,
respectively, which represents external leasing and
tenant improvement costs incurred in the leasing of
commercial space. These costs are amortized on a
straight-line basis over the terms of the related lease
agreements. Amortization expense was approximately
$222,000, $146,000 and $116,000 for the years ended
December 31, 2001, 2000 and 1999, respectively.
Revenue Commercial Properties -- The Partnership has retained
Recognition substantially all of the risks and benefits of ownership
of the Partnership's commercial properties and accounts
for its leases as operating leases. Rental income from
leases, which include scheduled increases in rental
rates during the lease term, is recognized on a
straight-line basis. The Partnership does not have any
percentage rent arrangements with its commercial
property tenants. Reimbursable common area maintenance
charges are included in rental income in the period
earned.
Residential Apartments -- The Partnership's residential
property leases are generally for terms of one year or
less. Rental income from tenants of residential
apartment properties is recognized in the period earned.
Rent concessions, including free rent and leasing
commissions incurred in connection with residential
property, leases are expensed as incurred.
Investment Banking Services -- Syndication fees ranging
from 6% to 8% of the gross offering proceeds from the
sale of securities in Sponsored Entities are generally
recognized upon an investor closing; at that time the
Partnership has provided all required services, the fee
is fixed and collected, and no further contingencies
exist. Commission expense ranging from 3% to 4% of the
gross offering proceeds is recorded in the period the
related syndication fee is earned.
Investment Banking Services -- Transaction fees are
generally recognized upon the final investor closing of
a Sponsored Entity. The final investor closing is the
last admittance of investors into a Sponsored Entity; at
that time, required funds have been received from the
investors, charges relating to the syndication have been
paid or accrued, continuing investment and continuing
involvement criteria have been met, and legal and
economic rights have been transferred. Third party
transaction-related costs are deferred and later
expensed to match revenue recognition. Internal costs
are expensed as incurred.
Property and Asset Property and asset management fees, interest income and
Management Fees other income are recognized when the related services
are performed and the earnings process is complete.
F-19
The Company follows the requirements for profit
recognition as set forth by Statement of Financial
Accounting Standards No. 66 "Accounting for Sales of
Real Estate" and Statement of Position 92-1 "Accounting
for Real Estate Syndication Income".
Income Taxes No provision has been made for Federal or state
income taxes in the consolidated financial statements of
the Partnership. Partners are required to report on
their individual tax returns their allocable share of
income, gains, losses, deductions and credits of the
Partnership.
Net Income Per The Partnership follows Statement of Financial
Partnership Unit Accounting Standards No. 128 "Earnings per Share", which
specifies the computation, presentation and disclosure
requirements for the Partnership's net income per
partnership unit. Basic net income per unit is computed
by dividing net income by the weighted average number of
partnership units outstanding during period. Diluted net
income per share reflects the potential dilution that
could occur if securities or other contracts to issue
units were exercised or converted into units. There were
no potential dilutive units outstanding at December 31,
2001, 2000, and 1999. The denominator used for
calculating basic and diluted net income per unit is as
follows:
Year Ended December 31,
----------------------------------
2001 2000 1999
=======================================================
Weighted average
number of units
outstanding
Limited partners 23,563,079 18,025,059 11,051,408
General partner 948,499 948,499 948,499
-------------------------------------------------------
24,511,578 18,973,558 11,999,907
=======================================================
Recent Accounting In June 1998, the Financial Accounting Standards Board
Standards ("FASB") issued Statements of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities" as amended by SFAS
No. 137 and No. 138. The provisions of this statement
require that derivative instruments be carried at fair
value on the balance sheet. The statement continues to
allow derivative instruments to be used to hedge various
risks and sets forth specific criteria to be used to
determine when hedge accounting can be used. For
derivative instruments not accounted for as hedges,
changes in fair value are required to be recognized in
earnings. The provisions of this statement became
effective January 1, 2001. The Partnership has not
historically had derivative instruments, and this
standard has had no impact on its financial position,
results of operations and cash flows.
F-20
In June 2001, the FASB approved SFAS No. 141 "Business
Combinations" ("SFAS 141") and No. 142 "Goodwill and
Other Intangible Assets" ("SFAS 142"), effective July 1,
2001 and January 1, 2002, respectively, for the
Partnership. SFAS 141 requires that the purchase method
of accounting be used for all business combinations
initiated after June 30, 2001. The Partnership has
adopted SFAS 141; however, no combinations by the
Partnership occurred after June 30, 2001 to which this
would apply. Under SFAS 142, amortization of goodwill,
including goodwill recorded in past business
combinations, will discontinue upon adoption of this
standard. All goodwill and intangible assets will be
tested for impairment in accordance with the provisions
of the Statement. The Partnership has reviewed the
provisions of SFAS 142 and believes that the impact of
adoption will not be material to its financial position,
results of operations and cash flows.
In August 2001, the FASB issued SFAS No. 143 "Accounting
for Asset Retirement Obligations" ("SFAS 143") which
addresses financial accounting and reporting for
obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement
costs. This Statement requires that the fair value of a
liability for an asset retirement obligation be
recognized in the period in which it is incurred if a
reasonable estimate of the fair value can be made. The
associated asset retirement costs are capitalized as
part of the carrying amount of the long-lived asset.
SFAS 143 will be effective at the beginning of 2003. The
Partnership has reviewed the provisions of SFAS 143 and
believes that the impact of adoption will not be
material to its financial position, results of
operations and cash flows.
F-21
In October 2001, the FASB issued SFAS No. 144
"Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"). SFAS 144 supersedes SFAS No. 121
and requires that long-lived assets that are to be
disposed of by sale be measured at the lower of book
value or fair value less costs to sell. SFAS 144 retains
the fundamental provisions of SFAS No. 121 for (a)
recognition and measurement of the impairment of
long-lived assets to be held and used, and (b)
measurement of long-lived assets to be disposed of by
sale, but broadens the definition of what constitutes a
discontinued operation and how the results of a
discontinued operation are to be measured and presented.
SFAS 144 will be effective at the beginning of 2002.
With the exception of reclassifiying, the operations of
real estate assets considered "held for sale" to
"Discontinued operations, net of tax" in the
consolidated statement of income, the impact of adoption
of SFAS 144 will not have a material impact on the
Partnership's financial position and cash flows. The
Partnership does not have any real estate assets that it
considers "held for sale."
3. Business Segments The Partnership operates in two business segments:
rental operations and investment services (including
real estate acquisition, financing and broker/dealer
services). The Partnership has identified these segments
because this discrete information is the basis upon
which management makes decisions regarding resource
allocation and performance assessment. The accounting
policies of the reportable segments are the same as
those described in the "Significant Accounting
Policies". The Partnership's segments are located in the
United States of America. The Partnership previously
evaluated the performance of its reportable segments
based on Funds from Operations ("FFO"); however,
effective October 1, 2001 management changed its
evaluation performance measure to Cash Available for
Distribution ("CAD") as management believes that CAD
represents a more accurate measure of the reportable
segment's activity and is the basis for distributions
paid to equity holders. The Partnership defines CAD as:
net income as computed in accordance with accounting
principles generally accepted in the United States of
America ("GAAP"); plus non-cash items included in the
computation of net income (depreciation and
amortization, non-cash compensation expenses and
straight line rent adjustments);plus Investment Services
Proceeds received from controlled partnerships; plus the
net proceeds from the sale of land; less purchases of
property and equipment from operating cash. Purchases of
real estate assets from cash reserves established at the
acquisition date of the property are not reflected in
the computation of CAD. CAD should not be considered an
alternative to net income (determined in accordance with
GAAP), as an indicator of the Company's financial
performance, cash flows from operating activities
(determined in accordance with GAAP), nor as a measure
of the Company's liquidity, nor is it necessarily
indicative of sufficient cash flow to fund all of the
Company's needs. Other real estate companies may define
CAD in a different manner.
F-22
CAD by business segment is as follows (in thousands):
Rental Investment Intercompany Total
Operations Services Total Elimination Consolidated
============================================================
Year ended December 31, 2001:
Net Income $ 21,381 $ 3,987 $25,368 $ -- $ 25,368
Depreciation and amortization 4,900 71 4,971 (174) 4,797
Non-cash compensation expenses -- 1,744 1,744 -- 1,744
Straight line rent (797) -- (797) -- (797)
Proceeds from sale of surplus land 449 -- 449 -- 449
Purchase of fixed assets from operating (79) (167) (246) -- (246)
cash
---------------------------------------------------------------------------------------------------------
Cash Available for Distribution $ 25,854 $ 5,635 $31,489 $ (174) $ 31,315
=========================================================================================================
Year ended December 31, 2000:
Net Income $ 11,351 $ 2,789 $14,140 $(5,226) $ 8,914
Investment services proceeds received from
controlled partnerships (1) -- -- -- 5,226 5,226
Depreciation and amortization 4,679 83 4,762 (149) 4,613
Non cash compensation expenses -- 2,300 2,300 -- 2,300
Straight line rent (185) -- (185) -- (185)
Proceeds from sale of land 1,068 -- 1,068 -- 1,068
Purchase of fixed assets from operating (512) (135) (647) -- (647)
cash
---------------------------------------------------------------------------------------------------------
Cash Available for Distribution $ 16,401 $ 5,037 $21,438 $ (149) $21,289
=========================================================================================================
Year ended December 31, 1999:
Net Income $ 3,665 $ 5,089 $ 8,754 $(7,615) $ 1,139
Investment services proceeds received from
controlled partnerships -- -- -- 7,615 7,615
Depreciation and amortization 3,272 68 3,340 (109) 3,231
Straight line rent (102) -- (102) -- (102)
Purchase of fixed assets from operating (187) (186) (373) -- (373)
cash
---------------------------------------------------------------------------------------------------------
Cash Available for Distribution $ 6,648 $ 4,971 $11,619 $ (109) $ 11,510
=========================================================================================================
(1) The Partnership received various investment services income from the
syndication of Sponsored Partnerships. Although this income was eliminated
in the calculation of consolidated net income in accordance with GAAP, the
cash received from the Sponsored Partnerships was available for
distribution to the members of the Partnership.
F-23
The Partnership's cash distributions from operations for the years ended
December 31, 2001, 2000 and 1999 are summarized as follows:
Distribution Per Total Cash
Quarter paid Partnership Unit Distributions
========================================================
(in thousands)
Second quarter of 2001 $.28 $ 6,842
Third quarter of 2001 .29 7,087
Fourth quarter of 2001 .30 7,376
First quarter of 2002 (A) .31 7,622
--------------------------------------------------------
$1.18 $28,927
========================================================
Second quarter of 2000 $.24 $ 4,080
Third quarter of 2000 .25 4,308
Fourth quarter of 2000 .26 4,480
First quarter of 2001 .27 6,597
--------------------------------------------------------
$1.02 $19,465
========================================================
Second quarter of 1999 $.20 $ 2,400
Third quarter of 1999 .21 2,520
Fourth quarter of 1999 .22 2,640
First quarter of 2000 .23 2,760
--------------------------------------------------------
$.86 $10,320
========================================================
(A) Represents dividends declared and paid by the
Company in the first quarter of 2002.
Cash distributions per partnership unit is based on the
total outstanding units at the end of each calendar
quarter. Cash available for distribution, as determined
at the sole discretion of the general partner, is
required to be distributed to unit holders within 90
days following the end of each calendar quarter. The
cash distribution of approximately $7,622,000 for the
fourth quarter of 2001 was declared and paid in 2002.
The cash distribution of approximately $6,597,000 for
the fourth quarter of 2000 was declared and paid in the
first quarter of 2001. The cash distribution of
approximately $2,670,000 for the fourth quarter of 1999
was declared and paid in 2000.
F-24
The following table is a summary of other financial
information by business segment:
Rental Investment
Operations Services Total
========================================================
(in thousands)
December 31, 2001:
Revenue $ 26,765 $ 25,701 $ 52,466
Interest Income 1,870 111 1,981
Interest Expense 818 0 818
Capital expenditures 566 167 733
Identifiable assets 199,140 4,977 204,117
December 31, 2000:
Revenue $ 25,434 $ 7,574 $ 33,008
Interest Income 1,686 99 1,785
Interest Expense 860 -- 860
Capital expenditures 9,825 127 9,952
Identifiable assets 194,328 25,595 219,923
December 31, 1999:
Revenue $ 16,315 $ 789 $ 17,104
Interest Income 915 29 944
Interest Expense 299 0 299
Capital expenditures 77,060 195 77,255
Identifiable assets 159,324 31,162 190,486
4. Merger Transactions The merger transactions involved the exchange of the
Partnership's limited partner units for the minority
interest holder's limited partnership units in 17
Sponsored Partnerships. The Partnership has recorded the
minority interest acquisitions based on the fair value
of assets and liabilities acquired. Additionally,
transaction costs incurred in connection with the 2000
and 1999 mergers totaling approximately $453,000 and
$736,000, respectively, have been reflected as a cost of
the minority interest acquisitions. The fair market
value of the merged entities' real estate was determined
based on independent appraisals.
Effective October 1, 2000, the Partnership and six
Sponsored Partnerships consummated a series of mergers
pursuant to an Agreement and Plan of Merger (the
"October 2000 Merger"). Under the terms of the October
2000 Merger, all limited partnership interests in the
six Sponsored Partnerships outstanding on October 1,
2000 were exchanged for 7,204,716 new limited
partnership units in the Partnership. The operations of
the six merged Sponsored Partnerships consist of six
commercial rental properties.
Effective January 1, 2000, the Partnership and three
Sponsored Partnerships consummated a series of mergers
pursuant to an Agreement and Plan of Merger (the
"January 2000 Merger"). Under the terms of the January
2000 Merger, all limited partnership interests in the
three Sponsored Partnerships outstanding on January 1,
2000 were exchanged for 4,999,972 new limited
partnership units in the Partnership. The operations of
the three merged Sponsored Partnerships consist of a
residential apartment property and two commercial real
estate properties.
F-25
Effective January 1, 1999, the Partnership and eight
Sponsored Partnerships consummated a series of mergers
pursuant to an Agreement and Plan of Merger (the "1999
Merger"). Under the terms of the 1999 Merger, all
limited partnership interests in the eight Sponsored
Partnerships outstanding on January 1, 1999 were
exchanged for 10,099,107 new limited partnership units
in the Partnership. Additionally, the partnership
interests held by the Partnership's existing general
partner and limited partners were exchanged for 948,499
new general partnership units and 952,301 new limited
partnership units, respectively. The operations of the
merged Sponsored Partnerships consist of five commercial
rental properties and three residential real estate
properties.
Following the consummation of the mergers described
above, the Partnership owned, directly and indirectly,
100% of the interests in each merged Sponsored
Partnership. The merger transactions were structured as
exchanges of partnership units and no cash was involved.
The Partnership's consolidated financial statements
include the full results of operations of the merged
Sponsored Partnerships from the date of merger.
The following pro forma consolidated results of
operations are presented as if the merger transactions
had occurred at the beginning of the periods presented:
Year ended December 31, 2000 1999
========================================================
(unaudited) (in thousands,
except per unit amounts)
Revenue $34,793 $18,048
Net income 10,987 3,121
Basic and diluted net income
per limited and general
partnership unit $ 0.47 $ 0.19
5. Related Party
Transactions
Investment in The Partnership typically retains a non-controlling
Affiliated common stock ownership interest in Sponsored REITs that
Sponsored REITs it has organized. These ownership interests have
virtually no economic benefit or risk. At December 31,
2001 and 2000, the Partnership had ownership interests
in ten and four Sponsored REITs, respectively. During
1999 and 2000, the Company acquired 100% of the
non-owned interests of certain Sponsored Partnerships
(through a series of mergers) that it had previously
organized. Neither the Company nor any other related
entity has an obligation to acquire the non-owned
interests in any previously syndicated Sponsored REIT.
Summarized financial information for the Sponsored REITs
is as follows:
(unaudited)
2001 2000
---- ----
(in thousands)
Balance Sheet Data:
-------------------
Real estate, net $222,232 $56,565
Other assets 19,048 5,058
Total liabilities 6,755 1,950
Shareholders equity 234,525 59,673
F-26
2001 2000
---- ----
(in thousands)
Operating Data:
---------------
Rental revenues $19,816 $2,778
Other revenues 354 117
Operating and maintenance expenses 5,973 948
Depreciation and amortization 3,191 574
Interest expense 9,916 2,298
Net income (loss) 1,090 (925)
The Partnership's proportionate share of income prior to
syndication from these Sponsored REITs was $255,000, $0
and $0 for the years ended December 31, 2001, 2000 and
1999, respectively.
In addition to management services, the Partnership is
typically entitled to a return on funds advanced to
syndicated REITs. The Partnership recognized income of
$552,000, $402,000 and $0 for the years ended December
31, 2001, 2000 and 1999, respectively, relating to these
investments.
Sponsored Entity The Partnership has provided syndication and real estate
Fees acquisition advisory services for the Sponsored REITs in
2001 and 2000 and Sponsored Partnerships prior to July
2000. Syndication and transaction fees from
non-consolidated related entities amounted to
approximately $25,701,000, $7,574,000 and $789,000 for
the years ended December 31, 2001, 2000 and 1999,
respectively.
Management Fees Management fees charged to the Sponsored Partnerships
prior to the respective mergers have been eliminated in
the accompanying consolidated statements of income due
to the Partnership's controlling interest in a Sponsored
Partnership. Total property management fee income from
non-consolidated entities amounted to approximately
$412,000, $178,000 and $16,000 for the years ended
December 31, 2001, 2000 and 1999, respectively, and is
included in "Interest and other income" in the
Consolidated Statements of Income. Property management
fees range from 1% to 5% of collected rents and the
applicable contracts are cancelable with 30 days'
notice.
6. Bank Note Payable The Partnership has a revolving line of credit agreement
(the "Loan Agreement") with a bank providing for
borrowings at the Partnership's election up to
$50,000,000. Borrowings under the Loan Agreement bear
interest at either the bank's base rate or a variable
LIBOR rate, as defined. Borrowings outstanding under the
Loan Agreement consist of the following:
December 31, 2001 2000
========================================================
(in thousands)
Note payable, bearing interest at
the bank's base rate
(9.5% at December 31, 2000). $-- $16,500
F-27
The Loan Agreement includes restrictions on property
liens and requires compliance with various financial
covenants. Financial covenants include the maintenance
of at least $1,500,000 in operating cash accounts, a
minimum tangible net worth of $140,000,000 and
compliance with various debt and operating income
ratios, as defined in the Loan Agreement. The
Partnership was in compliance with the Loan Agreement's
financial covenants as of December 31, 2001 and 2000.
The Loan Agreement matures on February 23, 2003.
The Partnership has arranged for Citizens Bank to
provide a line of credit for the Partnership's senior
officers in the maximum aggregate amount of $3 million.
The borrowings under this line of credit are for the
purpose of paying income taxes on equity interests in
the Company issued to such senior officers as
compensation. Loans under this line of credit have a
term of one year and bear interest at the bank's prime
rate plus 50 basis points. Each borrower has secured the
loan by pledging shares of the Company's Common Stock
having an aggregate fair market value at the time of the
loan of no less than twice the principal amount of the
loan. Borrowings of $1,625,000 and $800,000 were
outstanding to senior officers of the Partnership at
December 31, 2001 and 2000 respectively. The Partnership
has agreed to purchase from Citizens Bank any such loan
on which the borrower defaults. Following the purchase
of the loan, the Partnership would have the same rights
as Citizens Bank, including the right to foreclose on
the pledged. stock.
7. Partners' Capital
General The Partnership's general partner has the exclusive
right to manage the business of the Partnership and make
certain amendments to the Partnership Agreement, without
the consent or approval of the limited partners. The
Partnership's limited partners do not take part in
management and do not have any voting rights regarding
the Partnership's operations. A majority in interest of
the limited partners, with the consent of the general
partner, may amend the Partnership Agreement, subject to
certain limitations as defined in the Partnership
Agreement. Except as provided for under certain Federal
tax provisions described in the Partnership Agreement,
net income or net losses from operations are allocated
to all partners based on their percentage interest in
the Partnership. Net profits or losses arising from a
sale or other disposition of all or any portion of the
Partnership's property or upon liquidation of the
Partnership are allocated as follows:
Net Profit -- The Partnership's net profits are
allocated first to the extent of any partner's negative
capital account balance, and thereafter in proportion
with their percentage interest in the Partnership.
Net Losses -- First to the extent of any partner's
positive capital account balance, and thereafter in
proportion with their percentage interest in the
Partnership.
The Partnership's cash distributions are allocated to
the limited partners and the general partner based on
each partner's percentage interest in the Partnership.
F-28
Equity-Based In April 2000, January 2001 and July 2001, the
Compensation Partnership issued 230,000 Units, 2,522 Units and
149,131 Units, respectively, with a fair value of
approximately $2,300,000, $29,000 and $1,715,000,
respectively, to certain officers and employees of the
Partnership in lieu of cash compensation. These
partnership units were fully vested on the date of
issuance. Equity-based compensation charges of
$1,744,000 and $2,300,000 are reported in the
accompanying consolidated statement of income for the
year ended December 31, 2001 and 2000, respectively.
General Partner On December 30, 1999, FSP General Partner LLC (the
"General Partner") was organized solely to hold the
Partnership's general partner units, which were
previously held by eight individuals. The General
Partner's financial activities consist of receiving cash
distributions from the Partnership and paying such
amounts to its members. The members of the General
Partner function as officers and/or directors of the
Partnership. The Partnership pays no fees or other
compensation to the General Partner. The General Partner
has no commitment or intent to furnish direct or
indirect financial assistance to the Partnership.
8. Federal Income Tax The difference between Partners' capital for financial
Reporting reporting purposes and for income tax purposes is
approximately as follows (in thousands):
2001 2000
---- ----
Partnership capital - financial $199,763 $200,580
reporting purposes,
Partnership's cumulative tax
reporting differences, primarily
relating to non-deductible
expenses, depreciation and other
temporary differences and the
effects of mergers (17,217) (19,090)
--------------------------------------------------------
Partners' capital -- income tax
purposes $182,546 $181,490
========================================================
The merger transactions described in Note 4 were treated
as tax-free reorganizations for income tax reporting
purposes.
9. Commitments The Partnership's commercial rental operations include
Rentals Under the leasing of office buildings and industrial
Operating Leases properties subject to leases with terms greater than one
year. The leases thereon expire at various dates through
2012. The following is a schedule of approximate future
minimum rental income on non-cancelable operating leases
as of December 31, 2001:
Year ended December 31,
========================================================
(in thousands)
2002 $15,415
2003 13,307
2004 9,957
2005 5,898
2006 3,336
Thereafter 12,207
--------------------------------------------------------
$60,120
========================================================
F-29
Certain leases provide for fixed step rent increases.
Rental revenue is recognized on the straight-line basis
over the related lease term while billings by the
Company are based on required minimum rentals in
accordance with the lease agreements. Cumulative revenue
recognized in excess of amounts billed by the Company is
$1,382,000 and $585,000 at December 31, 2001 and 2000,
respectively, and is included in tenant rent
receivables.
Office Lease The Partnership leases its corporate office space under
a six-year operating lease that commenced in June 1999.
The lease includes a base annual rent and additional
rent for the Partnership's share of taxes and operating
costs.
Future minimum lease payments are approximately as
follows (in thousands):
Year ended December 31,
========================================================
2002 $199
2003 203
2004 209
2005 97
--------------------------------------------------------
$708
========================================================
Rent expense was approximately $196,000, $184,000 and
$126,000 for the years ended December 31, 2001, 2000 and
1999, respectively, and is included in selling, general
and administration expenses in the Consolidated
Statement of Income.
Retirement Plan During 1999, the Partnership formed a retirement savings
plan for eligible employees. Under the plan, the
Partnership matches participant contributions up to
$6,500 ($6,000 in 2000) annually per participant. The
Partnership's total contribution under the plan amounted
to approximately $76,000, $53,000 and $13,000 for the
years ended December 31, 2001, 2000 and 1999,
respectively.
10. Subsequent Events
Property Purchase In connection with the purchase of a property by a
Sponsored REIT in May 2001, the Partnership obligated
itself to purchase an additional parcel of real property
within a certain amount of time if the owner offered
such property for sale to the Partnership. The Company
satisfied this obligation by causing FSP Timberlake East
Corp., a newly-organized Sponsored REIT, to purchase
this parcel on March 4, 2002.
Dividends On February 8, 2002, the Company declared a dividend of
$.30 per share of Common Stock payable to stockholders
of record as of February 8, 2002. On February 15, 2002,
the Company also declared a dividend of $.01 per share
of Common Stock payable to stockholders of record as of
February 15, 2002.
F-30
11. Quarterly Financial Information (unaudited)
2000
-----------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- -------- --------- ---------
(in thousands, except per unit data)
Revenue $ 6,404 $ 6,760 $ 10,769 $ 10,860
Income before minority interests 238 589 5,612 5,124
Income applicable to minority interests 412 1,111 1,107 19
Net income (net loss) (174) (522) 4,505 5,105
Allocation of net income (net loss) to Limited
Partners (164) (493) 4,257 4,939
Allocation of net income (net loss) to General
Partner (10) (29) 248 166
Basic and diluted net income (net loss) per
limited and general partnership unit (0.01) (0.03) 0.26 0.21
Weighted average number of units outstanding 17,000 17,230 17,230 24,436
2001
-----------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- -------- --------- ---------
(in thousands, except per unit data)
Revenue $12,787 $13,496 $11,302 $16,862
Income before minority interests 6,023 5,935 4,083 9,367
Income applicable to minority interests 21 19 0 0
Net income 6,002 5,916 4,083 9,367
Allocation of net income to Limited Partners 5,769 5,686 3,925 9,006
Allocation of net income to General Partner 233 230 158 361
Basic and diluted net income per limited and
general partnership unit 0.25 0.24 0.17 0.38
Weighted average number of units outstanding 24,436 24,437 24,586 24,586
F-31
SCHEDULE III
FRANKLIN STREET PARTNERS LIMITED PARTNERSHIP AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2001
Initial Cost
-----------------------------------
Costs
Capitalized
Encumbrances (Disposals)
Buildings & Subsequent to
Description (1) Land Improvement Acquisition
------------ ---- ----------- -------------
Residential Apartments:
Essex House, Houston, TX -- $ 2,920 $ 9,367 $ 648
Reata, Houston, TX -- 3,399 9,657 597
Weslayan Oaks, Houston, TX -- 1,658 3,990 71
Silverside Plantation, Baton Rouge, LA -- 2,000 17,082 119
Commercial Properties:
North Andover
Office Park, No. Andover, MA -- 1,311 8,136 902
Park Seneca, Charlotte, NC -- 1,915 7,817 26
Piedmont Center, Greenville, SC -- 1,449 9,839 809
4995 Patrick Henry, Santa Clara, CA -- 3,274 4,130 58
One Technology Drive, Peabody, MA -- 1,658 10,246 (450)
Hillview Center, Milpitas, CA -- 2,203 2,813 7
Telecom Business Center, San Diego, CA -- 5,035 11,363 79
Southfield Centre, Southfield, MI -- 4,344 11,455 143
Blue Ravine, Folsom, CA -- 846 5,450 22
Bollman Place, Savage, MD -- 1,585 4,121 46
Austin N.W., Austin, TX -- 708 10,494 170
10 Lyberty Way, Westford, MA -- 1,315 8,862 162
Gateway Crossing 95, Columbia, MD -- 4,453 15,931 (123)
-------- -------- -------- --------
-- $ 40,073 $150,753 $ 3,286
======== ======== ======== ========
Historical Costs
-------------------------------------------------------------
Total Costs,
Net of Depreciable Date of
Buildings & Accumulated Accumulated Life Acquisition
Description Land Improvements Total(2) Depreciation Depreciation Years (3)
----------- -------- ------------ -------- ------------ ------------ ----------- -----------
(in thousands)
Residential Apartments:
Essex House, Houston, TX $ 2,920 $ 10,015 $ 12,935 $ 2,887 $ 10,048 5-27 1993
Reata, Houston, TX 3,399 10,254 13,653 2,386 11,267 5-27 1994
Weslayan Oaks, Houston, TX 1,658 4,061 5,719 717 5,002 5-27 1997
Silverside Plantation, Baton Rouge, LA 2,021 17,180 19,201 2,010 17,191 5-27 1998
Commercial Properties:
North Andover
Office Park, No. Andover, MA 1,311 9,038 10,349 1,766 8,583 5-39 1996
Park Seneca, Charlotte, NC 1,815 7,943 9,758 781 8,977 5-39 1997
Piedmont Center, Greenville, SC 1,449 10,648 12,097 1,126 10,971 5-39 1998
4995 Patrick Henry, Santa Clara, CA 3,274 4,188 7,462 436 7,026 5-39 1997
One Technology Drive, Peabody, MA 1,658 9,796 11,454 1,383 10,071 5-39 1995
Hillview Center, Milpitas, CA 2,203 2,820 5,023 206 4,817 5-39 1999
Telecom Business Center, San Diego, CA 5,035 11,442 16,477 832 15,645 5-39 1999
Southfield Centre, Southfield, MI 4,344 11,598 15,942 673 15,269 5-39 1999
Blue Ravine, Folsom, CA 846 5,472 6,318 300 6,018 5-39 1999
Bollman Place, Savage, MD 1,585 4,167 5,752 224 5,528 5-39 1999
Austin N.W., Austin, TX 708 10,664 11,372 511 10,861 5-39 1999
10 Lyberty Way, Westford, MA 1,315 9,024 10,339 352 9,987 5-39 2000
Gateway Crossing 95, Columbia, MD 4,019 16,242 20,261 829 19,432 5-39 1999
-------- -------- -------- -------- --------
$ 39,560 $154,552 $194,112 $ 17,419 $176,693
======== ======== ======== ======== ========
(1) There are no encumbrances on the above properties.
(2) The aggregate cost for Federal Income Tax purposes is $181,606.
(3) Original date of acquisition by Sponsored Partnership.
F-32
The following table summarizes the changes in the
Partnership's real estate investments and accumulated
depreciation:
December 31,
-----------------------------
2001 2000 1999
========================================================
(in thousands)
Real estate investments,
at cost:
Balance, beginning of $193,988 $178,294 $ 86,835
period
Acquisitions -- 15,982 91,271
Improvements 566 639 188
Dispositions (442) (927) --
--------------------------------------------------------
Balance, end of period $194,112 $193,988 $178,294
========================================================
Accumulated depreciation:
Balance, beginning of $ 12,917 $ 8,526 $ 5,447
period
Depreciation 4,502 4,391 3,079
Dispositions -- -- --
--------------------------------------------------------
Balance, end of period $ 17,419 $ 12,917 $ 8,526
========================================================
F-33