Filed pursuant to Rule 424(b)(3)
File No. 333-118748
FSP ADDISON CIRCLE CORP.
FSP COLLINS CROSSING CORP.
FSP MONTAGUE BUSINESS CENTER CORP.
FSP ROYAL RIDGE CORP.
Consent Solicitation
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FRANKLIN STREET PROPERTIES CORP.
Prospectus
401 Edgewater Place, Suite 200
Wakefield, Massachusetts 01880
(781) 557-1300
February 25, 2005
Dear Stockholders:
You are the holders of preferred stock in one or more of the following
four real estate investment trusts: FSP Addison Circle Corp., FSP Collins
Crossing Corp., FSP Montague Business Center Corp. and FSP Royal Ridge Corp.,
each of which is referred to as a target REIT. The board of directors of each
target REIT has approved and adopted an agreement and plan of merger with
Franklin Street Properties Corp., which we call FSP Corp., and four wholly-owned
subsidiaries of FSP Corp., providing for the acquisition of the target REITs by
FSP Corp. by merging each target REIT with and into an acquisition subsidiary.
The adoption of the merger agreement and the approval of the mergers by
the stockholders of the target REITs is necessary to effect the mergers. If the
merger agreement is adopted and approved:
o Each target REIT will merge with and into an acquisition subsidiary
created for the sole purpose of effectuating the merger with that
target REIT, and
o FSP Corp. will issue an aggregate of approximately 10,894,994 shares
of common stock, $0.0001 par value per share, or the FSP common
stock, to you, the holders of preferred stock, or target stock, of
the target REITs.
After careful consideration, each target board unanimously approved and
adopted the merger agreement and concluded that the merger agreement is in the
best interests of its target REIT and its target REIT stockholders. Your board
of directors unanimously recommends that you vote "FOR" adoption of the merger
agreement and approval of the mergers contemplated thereby.
There is no public or other market for the shares of FSP common stock, and
although the combined company will have the goal in the future of creating a
public market for its securities, there is no certainty that the combined
company will be successful or that such a market will develop.
Please carefully consider all of the information in the accompanying
Consent Solicitation/Prospectus for additional information regarding the target
REITs, FSP Corp., the acquisition subsidiaries and the mergers, including in
particular the discussion in the section called "Risk Factors" starting on page
26.
Very truly yours,
/s/ George J. Carter
------------------------
George J. Carter
President
This Consent Solicitation/Prospectus is first being mailed on or about February
28, 2005 to target REIT stockholders of record at the close of business on
August 13, 2004.
The date of this Consent Solicitation/Prospectus is February 25, 2005.
--------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
Consent Solicitation/Prospectus is truthful or complete. Any representation to
the contrary is a criminal offense.
--------------------------------------------------------------------------------
FSP ADDISON CIRCLE CORP.
FSP COLLINS CROSSING CORP.
FSP MONTAGUE BUSINESS CENTER CORP.
FSP ROYAL RIDGE CORP.
Consent Solicitation
--------------------------------------------------------------------------------
FRANKLIN STREET PROPERTIES CORP.
Prospectus
We are furnishing this Consent Solicitation/Prospectus to holders of
preferred stock of the target REITs in connection with the solicitation of votes
to adopt that certain Agreement and Plan of Merger, dated August 13, 2004, by
and among FSP Corp., the acquisition subsidiaries and the target REITs and
approve the mergers contemplated thereby.
The merger agreement provides for the acquisition by merger of four real
estate investment trusts, each referred to as a target REIT and, collectively,
the target REITs, by individual wholly-owned acquisition subsidiaries of FSP
Corp. The target REITs are FSP Addison Circle Corp., FSP Collins Crossing Corp.,
FSP Montague Business Center Corp. and FSP Royal Ridge Corp., each a Delaware
corporation. The acquisition subsidiaries are Addison Circle Acquisition Corp.,
Collins Crossing Acquisition Corp., Montague Acquisition Corp. and Royal Ridge
Acquisition Corp., each a Delaware corporation. The merger agreement also
provides that upon consummation of the mergers, each share of target stock in
the target REITs will be converted into that number of shares of FSP common
stock set forth below opposite the applicable target REIT.
Shares of FSP Total Shares of FSP
Common Common in Exchange
Total Number of Stock Issuable Stock Issuable
Shares of Target for Each Share to Target REIT
Target REIT Stock Outstanding of Target Stock Stockholders (1)(2)
------------------ ------------------- ----------------- --------------------
Addison Circle 636 5,948.67 3,783,354
Collins Crossing 555 6,167.63 3,423,035
Montague 334 5,649.72 1,887,007
Royal Ridge 297.5 6,055.79 1,801,598
Total 10,894,994
(1) Rounded to the nearest whole share.
(2) This number of shares of FSP common stock is slightly higher than
the actual number of shares of FSP common stock anticipated to be
issued upon the consummation of the mergers due to the fact that FSP
Corp. will pay cash in lieu of issuing fractional shares of FSP
common stock.
FSP Corp. will not issue fractional shares of FSP common stock as merger
consideration. Instead, each holder of target stock who would otherwise have
been entitled to receive a fraction of a share of FSP common stock will be
entitled to receive cash (without interest) in an amount, rounded up to the
nearest whole cent, equal to the product of such fractional part of a share of
FSP common stock multiplied by $17.70, the value of one share of FSP common
stock on August 13, 2004, as determined through negotiations between the parties
to the mergers. Moreover, FSP Corp. will not receive any consideration for the
one share of common stock it holds in each target REIT.
We sometimes refer to you as target REIT stockholders and to your shares
of preferred stock as target stock. We refer to the boards of directors of the
target REITs collectively as the target boards, the board of directors of FSP
Corp. as the FSP board and the holders of FSP common stock as the FSP
stockholders. We sometimes refer to FSP Corp., its subsidiaries and the target
REITs, after giving effect to the consummation of the mergers, as the combined
company.
Consummation of the mergers is subject to a number of conditions and will
not occur unless, among other things, holders of a majority of the shares of
target stock of each target REIT vote to adopt the merger agreement and approve
the mergers contemplated thereby.
The stockholders of each target REIT are being asked to adopt the merger
agreement and approve the mergers contemplated thereby, as described in this
Consent Solicitation/Prospectus.
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 26 FOR CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
TARGET REIT STOCKHOLDERS IN EVALUATING THE MATTERS DESCRIBED HEREIN, INCLUDING
AMONG OTHERS:
o As a result of the mergers, the nature of each target REIT
stockholder's investment will change from an interest in a
corporation owning a specified property for a finite period in which
such target REIT stockholder will receive a distribution upon
liquidation based upon the net proceeds from the sale of the
entity's assets, to an investment in an ongoing fully-integrated
real estate company, which has a portfolio of properties that may be
changed from time to time and conducts real estate investment
banking operations, in which the equity owners are expected to
recover their investment from the sale of their FSP common stock,
which is currently illiquid, and not from liquidating distributions.
o As a result of the mergers, based on historical quarterly,
non-special dividends received by stockholders of FSP Corp. and the
target REIT stockholders, a majority of the target REIT stockholders
should expect to receive a lower level of dividends from the
combined company than such stockholders have historically received
from their target REITs.
o The properties of the target REITs may appreciate in value and might
be able to be liquidated at a later date for a price which would
yield target REIT stockholders more consideration than they would
receive in the mergers.
o The terms of the mergers, including the merger consideration, were
determined by negotiations between the parties to the mergers.
However, R. Scott MacPhee and William W. Gribbell, the two members
of the special committees of each target board, also serve as
executive vice presidents of FSP Corp. and own shares of FSP common
stock. In addition, while the special committees considered
independent appraisals of the target REIT properties, the target
REITs did not seek acquisition bids from any unaffiliated parties.
o There is no public or other market for the shares of FSP common
stock, and although the combined company will have the goal in the
future of creating a public market for its securities, there is no
certainty that the combined company will be successful or that such
a market will develop. FSP Corp. has filed an application to list
the FSP common stock on the American Stock Exchange, or AMEX, and
the AMEX has approved the application. There can be no assurance
that FSP Corp.'s common stock will be listed for trading or, in the
event it is, that a meaningful trading market will develop.
o Assuming the FSP common stock does become publicly traded, the
future price per share of the FSP common stock may be lower than the
price per share negotiated between the special committees of the
target boards and FSP Corp. for the purpose of determining the
merger consideration to be received by you.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
CONSENT SOLICITATION/PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
This Consent Solicitation/Prospectus is first being mailed on or about
February 28, 2005 to target REIT stockholders of record at the close of
business on August 13, 2004.
---------------------------------------------------------
The date of this Consent Solicitation/Prospectus is February 25, 2005.
TABLE OF CONTENTS
PAGE
QUESTIONS AND ANSWERS ABOUT THE MERGERS......................................1
SUMMARY......................................................................4
RISK FACTORS................................................................26
TARGET REIT CONSENT SOLICITATION............................................38
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION..........................40
BACKGROUND ON FSP CORP. AND ITS GROWTH STRATEGY.............................41
THE MERGERS.................................................................47
BENEFITS, BACKGROUND AND REASONS FOR THE MERGERS............................61
FAIRNESS OF THE MERGERS.....................................................81
ADVICE OF FINANCIAL ADVISORS AND APPRAISALS.................................86
MANAGEMENT..................................................................98
SELECTED FINANCIAL INFORMATION OF FSP CORP.................................102
SELECTED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA...................103
COMPARATIVE PER SHARE DATA.................................................119
COMPARISON OF THE TARGET REITS AND FSP CORP................................123
CONFLICTS OF INTEREST......................................................125
FIDUCIARY RESPONSIBILITY...................................................127
COMPARISON OF STOCKHOLDER RIGHTS...........................................128
BUSINESS AND PROPERTIES OF THE TARGET REITS................................148
SELECTED FINANCIAL INFORMATION OF ADDISON CIRCLE...........................153
SELECTED FINANCIAL INFORMATION OF COLLINS CROSSING.........................155
SELECTED FINANCIAL INFORMATION OF MONTAGUE.................................157
SELECTED FINANCIAL INFORMATION OF ROYAL RIDGE..............................159
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF THE TARGET REITS..................................161
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS...................169
LEGAL MATTERS..............................................................184
EXPERTS....................................................................184
WHERE YOU CAN FIND MORE INFORMATION........................................184
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................185
INDEX TO FINANCIAL STATEMENTS..............................................F-1
APPENDICES
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Appendix A Merger Agreement
Appendix B Glossary of Terms
Appendix C-1 to C-4 Fairness Opinion for each Target REIT
Appendix D Section 262 of Delaware General Corporation Law
Appendix E Articles of Incorporation of FSP Corp.
This Consent Solicitation/Prospectus incorporates important business and
financial information about Franklin Street Properties Corp. that has been filed
with the Securities and Exchange Commission that is neither included in nor
delivered with this Consent Solicitation/Prospectus. FSP Corp. will provide you
with copies of this information, without charge, upon written or oral request
to:
Franklin Street Properties Corp.
401 Edgewater Place, Suite 200
Wakefield, Massachusetts 01880
(781) 557-1300
Attn: Corporate Secretary
In order to obtain delivery of this information prior to the closing of
the mergers, you should request such information no later than April 22, 2005.
QUESTIONS AND ANSWERS ABOUT THE MERGERS
Q: What is FSP Corp.?
A: FSP Corp. is a real estate investment trust that has been a reporting company
under the Securities Exchange Act of 1934 since 2001. As of December 31, 2003,
FSP Corp. had approximately $528.5 million in assets, approximately $83.8
million in annual revenue and approximately $516.9 million in stockholders'
equity. As of August 20, 2004, FSP Corp. had 49,629,762 shares of common stock
outstanding and approximately 1,420 stockholders of record.
Q: What is the proposed transaction?
A: FSP Corp. proposes acquiring the target REITs by merging each target REIT
with and into an individual wholly-owned acquisition subsidiary of FSP Corp.
Upon consummation of the mergers, each share of target stock in the target REITs
will be converted into a certain number of shares of FSP common stock as
described elsewhere in this Consent Solicitation/Prospectus.
Q: Will the directors and officers of FSP Corp., the target REITs or their
affiliates receive any fees, commissions or other compensation in connection
with the merger agreement or the mergers?
A: No, unless they also own shares of target stock. For example, Barry
Silverstein and Dennis J. McGillicuddy, each a director of FSP Corp., own an
aggregate of 173 and 14 shares of target stock, respectively. Mr. Silverstein
owns 102.5 shares in Addison Circle, 23.25 shares in Collins Crossing, 42 shares
in Montague and 5.25 shares in Royal Ridge. Mr. McGillicuddy owns 1 share in
each of Addison Circle and Royal Ridge, 2 shares in Collins Crossing and 10
shares in Montague. Messrs. Silverstein and McGillicuddy each purchased their
shares in the original offerings of target stock and on the same terms as other
stockholders of such target REITs. These shares of target stock held by Messrs.
Silverstein and McGillicuddy will convert into approximately 1,022,217 and
approximately 80,836 shares of FSP common stock, respectively, upon consummation
of the mergers. The approximate value of the shares of FSP common stock to be
received by Messrs. Silverstein and McGillicuddy is $18,093,241 and $1,430,797,
respectively.
Q: What will I receive in the mergers?
A: Upon consummation of the mergers, each share of target stock in the target
REITs will be converted into a certain number of shares of FSP common stock as
described elsewhere in this Consent Solicitation/Prospectus.
Q: Are there any risks for me in this proposed transaction?
A: Yes, there is a high degree of risk. Some of these risks include the
following:
o As a result of the mergers, the nature of each target REIT
stockholder's investment will change from an interest in a
corporation owning a specified property for a finite period in which
1
such target REIT stockholder will receive a distribution upon
liquidation based upon the net proceeds from the sale of the
entity's assets, to an investment in an ongoing fully-integrated
real estate company, which has a portfolio of properties that may be
changed from time to time and conducts real estate investment
banking operations, in which the equity owners are expected to
recover their investment from the sale of their FSP common stock,
which is currently illiquid, and not from liquidating distributions.
o As a result of the mergers and based on historical, quarterly,
non-special dividends received by stockholders of FSP Corp. and the
stockholders of each of the target REITs, a majority of the target
REIT stockholders should expect to receive a lower level of
dividends from the combined company than such stockholders have
historically received from their target REITs.
o The properties of the target REITs may appreciate in value and might
be able to be liquidated at a later date for a price which would
yield target REIT stockholders more consideration than they would
receive in the mergers.
o The terms of the mergers, including the merger consideration, were
determined by negotiations between the parties to the mergers.
However, R. Scott MacPhee and William W. Gribbell, the two members
of the special committees of each target board, also serve as
executive vice presidents of FSP Corp. and own shares of FSP common
stock. In addition, while the special committees considered
independent appraisals of the target REIT properties, the target
REITs did not seek or obtain acquisition bids from any unaffiliated
parties.
These are not, however, the only risks you face. You should carefully read the
section of this Consent Solicitation/Prospectus titled "Risk Factors" beginning
on page 26 for additional risks you face as a result of the proposed
transaction.
Q: How do I know if the price paid for the target stock is fair to me?
A: You should carefully read the information you have received in this Consent
Solicitation/Prospectus and make your own determination. Your board of directors
believes the mergers are fair to you and recommends you vote in favor of them.
R. Scott MacPhee and William W. Gribbell, the two members of the special
committees of each target board, also serve as executive vice presidents of FSP
Corp. and own shares of FSP common stock. The special committees of the target
boards engaged A.G. Edwards & Sons, Inc., on behalf of the target REITs, to
advise them in evaluating and negotiating the terms of the mergers, including
the merger consideration, and to deliver a fairness opinion to each target
board.
Q: In addition to this consent solicitation/prospectus, I received a supplement.
What is the difference between the consent solicitation and the supplement?
A: The purpose of this consent solicitation/prospectus is to describe the
mergers generally and to provide you with a summary of the investment
considerations generic to all of the target REITs. The purpose of the supplement
is to describe the investment considerations particular to your target REIT.
2
After you read this Consent Solicitation/Prospectus, we urge you to read the
supplement. The supplement contains information unique to your target REIT. This
information is material in your decision whether to vote "For" or "Against" the
mergers.
Q: When do you expect to complete the mergers?
A: We expect to complete the mergers on or about April 30, 2005, or a later date
if the conditions to the merger agreement have not been satisfied by April 30,
2005.
Q: Who must adopt the merger agreement and approve the mergers contemplated
thereby?
A: In addition to the approvals of the board of directors of FSP Corp. and the
boards of directors of the target REITs, which have already been obtained, the
target REIT stockholders must adopt the merger agreement and approve the mergers
contemplated thereby. If one or more of the target REITs does not obtain the
vote required for the consummation of the merger, FSP Corp. will not proceed
with the mergers of any other target REIT.
Q: What rights do I have if I think the merger consideration is too low?
A: Under the Delaware general corporation law, which governs the merger, you
have the right to seek a judicial determination of the value of your target
stock. This is called an appraisal. For more information on what this means, you
should read "Appraisal Rights of Dissenting Stockholders of Target REITs" on
page 52.
Q: What do I need to do now?
A: We urge you to carefully read this Consent Solicitation/Prospectus, including
its appendices, and to consider how the merger will affect you.
Q: Where may I find additional information relating to FSP Corp.?
A: You may find additional information relating to FSP Corp. in the section
entitled "Where You Can Find More Information" on page 184 and "Incorporation of
Certain Documents by Reference" on page 185.
Q: Whom may I contact with any additional questions?
A: You may call your investment executive at FSP Investments at (800) 950-6288.
3
SUMMARY
This Summary highlights selected information from this document and may
not contain all of the information that is important to you. To understand the
proposal presented in this Consent Solicitation/Prospectus with respect to the
adoption of the merger agreement and the approval of the mergers, providing for
the issuance of FSP common stock, you should read carefully the entire document,
including the appendices, the accompanying supplement relating to your target
REIT and the other documents to which we have referred you, including documents
incorporated by reference under "Incorporation of Certain Documents By
Reference" on page 185. For your convenience, a glossary of terms is included in
Appendix B to this Consent Solicitation/Prospectus. We have included page
references parenthetically to direct you to a more complete description of the
topics of the summary.
FSP Corp. (Pages 41 to 46)
FSP Corp. is a Maryland corporation that operates in a manner intended to
qualify as a real estate investment trust for federal income tax purposes. FSP
Corp. believes it has qualified as a real estate investment trust for federal
income tax purposes since January 2002.
FSP Corp. operates in two business segments and has two principal sources
of revenue:
o Real estate operations, including real estate leasing, interim
acquisition financing and asset/property management, which generate
rental income, loan origination fees and management fees,
respectively; and
o Investment banking/investment services, which generate brokerage
commissions and other fees related to the organization of
single-purpose entities that own real estate and the private
placement of equity in those entities.
On June 1, 2003, FSP Corp. acquired 13 real estate investment trusts by
merger. In these mergers, FSP Corp. issued 25,000,091 shares of FSP common stock
to holders of preferred stock in the acquired REITs. As a result of these
mergers, FSP Corp. now holds all of the assets previously held by these acquired
REITs. As part of its growth strategy, FSP Corp. may make similar acquisitions
in the future. The proposed acquisition of the target REITs is part of that
strategy.
FSP Corp.'s principal executive offices are located at 401 Edgewater
Place, Suite 200, Wakefield, Massachusetts 01880. The telephone number of its
principal executive office is (781) 557-1300. FSP Corp. does not maintain a
website.
The Target REITs (Pages 148 to 152)
FSP Corp. sponsored the syndication of stock in the target REITs. Each
target REIT is a privately-held real estate investment trust formed as a
corporation under the laws of the State of Delaware for the purpose of acquiring
and operating a single real property. Montague owns an office/research and
development project in San Jose, California; Addison Circle owns an office
building in Addison, Texas; Royal Ridge owns an office building in Alpharetta,
Georgia; and Collins Crossing owns an office building in Richardson, Texas. Set
forth below for the properties owned by the respective target REITs are the date
4
the property was originally acquired by the target REIT, the number of square
feet in the property, the percentage of rentable square feet leased as of
September 30, 2004 and the weighted average base rent per net rentable square
foot for the nine months ended September 30, 2004 annualized:
Date of Percentage Weighted Average
Property of Rentable Rent Base
Acquisition Square Feet Annualized/Net
by the Leased as of Rentable Square Rentable
Target REIT 9/30/04 Feet Square Foot
----------- ------- --------------- -----------
Addison Circle 9/02 98% 293,787 $22.92/sf
Collins Crossing 3/03 100% 298,766 $22.47/sf
Montague 8/02 100% 145,951 $27.13/sf
Royal Ridge 1/03 100% 161,366 $13.63/sf
The target REITs' principal executive offices are located at 401 Edgewater
Place, Suite 200, Wakefield, Massachusetts 01880. The telephone number of their
principal executive offices is (781) 557-1300. No target REIT maintains a
website.
Votes Required (Pages 48 to 49)
The affirmative vote of the holders of a majority of the target stock in
each of the target REITs is required to adopt the merger agreement and approve
the respective mergers. If one or more target REITs does not obtain the vote
required for the consummation of the merger with such target REIT, FSP Corp.
will not proceed with the mergers of any other target REIT. The consent being
solicited hereby seeks the adoption of the merger agreement and the approval of
the merger agreement and the transactions contemplated thereby. The affirmative
vote of a majority of the common stock in each target REIT is also required to
effectuate the respective merger. FSP Corp. is the sole stockholder of the
common stock of each target REIT, and has agreed to vote those shares in favor
of the respective merger. FSP Corp. will not receive any consideration for the
one share of common stock it holds in each target REIT.
Target REIT stockholders as of August 13, 2004 are entitled to receive
this Consent Solicitation/Prospectus and are entitled to execute a consent in
connection with the adoption of the merger agreement and the approval of the
mergers and the transactions contemplated thereby. Each target REIT stockholder
has until the later of the approval date, as described in the section entitled
"Target REIT Consent Solicitation" on page 37, or 5:00 p.m., Eastern Time, on
April 29, 2005 (unless a target REIT is permitted to accelerate such date by
applicable law and regulation), the date that is sixty (60) days following the
date of mailing of this Consent Solicitation/Prospectus, unless extended by the
target boards in their sole discretion, to inform the target boards whether such
target REIT stockholder wishes to approve or disapprove of his, her or its
target REIT's participation in the mergers. The approval date for a target REIT
is the date on which consents have been received from stockholders owning a
majority of the target stock of that target REIT approving its merger. Each
target REIT will promptly notify its stockholders of the occurrence of its
approval date.
5
As of the date of this Consent Solicitation/Prospectus there were 334
shares of target stock in Montague held by 331 holders of record; 636 shares of
target stock in Addison Circle held by 380 holders of record; 297.5 shares of
target stock in Royal Ridge held by 246 holders of record; and 555 shares of
target stock in Collins Crossing held by 449 holders of record.
The executive officers and directors of the target REITs do not
beneficially hold any shares of target stock in any of the target REITs. Barry
Silverstein and Dennis J. McGillicuddy, each a director of FSP Corp., own an
aggregate of 173 and 14 shares of target stock, respectively. Mr. Silverstein
owns 102.5 shares in Addison Circle, 23.25 shares in Collins Crossing, 42 shares
in Montague and 5.25 shares in Royal Ridge. Mr. McGillicuddy owns 1 share in
each of Addison Circle and Royal Ridge, 2 shares in Collins Crossing and 10
shares in Montague. Messrs. Silverstein and McGillicuddy each purchased their
shares in the original offerings of target stock and on the same terms as other
stockholders of such target REITs. These shares of target stock held by Messrs.
Silverstein and McGillicuddy will convert into approximately 1,022,217 and
approximately 80,836 shares of FSP common stock, respectively, upon consummation
of the mergers. The approximate aggregate value of the shares of FSP common
stock to be received by Messrs. Silverstein and McGillicuddy is $18,093,241 and
$1,430,797, respectively, based on the value of $17.70 per share of FSP common
stock on August 13, 2004, as determined through negotiations between FSP Corp.
and the special committees. Messrs. Silverstein and McGillicuddy have indicated
that they intend to vote their respective shares of target stock in favor of the
adoption of the merger agreement and the approval of the mergers.
The Mergers (Pages 47 to 60)
Following the satisfaction or waiver of the conditions to closing relating
to a target REIT, on the effective date of the mergers, which is expected to be
on or about April 30, 2005, FSP Corp. will acquire that target REIT by merger of
the target REIT with and into a wholly-owned acquisition subsidiary of FSP Corp.
Each share of target stock of that target REIT will be converted into a
specified number of shares of FSP common stock. The shares of FSP common stock
to be issued in connection with the mergers are referred to as the merger
consideration.
The following chart sets forth the number of shares of FSP common stock to
be received as merger consideration by the target REIT stockholders for each
share of target stock of the respective target REIT. FSP Corp. will not issue
fractional shares of FSP common stock as merger consideration. Instead, each
holder of target stock who would otherwise have been entitled to receive a
fraction of a share of FSP common stock will be entitled to receive cash
(without interest) in an amount, rounded up to the nearest whole cent, equal to
the product of such fractional part of FSP common stock multiplied by $17.70,
the value of one share of FSP common stock on August 13, 2004, as determined
through negotiations between the special committees and FSP Corp. FSP Corp. will
pay an aggregate amount of approximately $16,070 in cash to the holders of
target stock in lieu of issuing fractional shares of FSP common stock.
6
Shares of FSP
Common Total Shares of
Stock Issuable FSP Common
Total Number of in Exchange for Stock Issuable
Shares of Target Each Share of to Target REIT
Target REIT Stock Outstanding Target Stock Stockholders (1)(2)
----------- ----------------- ------------ -------------------
Addison Circle 636 5,948.67 3,783,354
Collins Crossing 555 6,167.63 3,423,035
Montague 334 5,649.72 1,887,007
Royal Ridge 297.5 6,055.79 1,801,598
Total 10,894,994
(1) Round to the nearest whole share.
(2) This number of shares of FSP common stock is slightly higher than the
actual number of shares of FSP common stock anticipated to be issued upon
the consummation of the mergers due to the fact that FSP Corp. will pay
cash in lieu of issuing fractional shares of FSP common stock.
None of the shares of FSP common stock to be issued as merger
consideration to the target REIT stockholders will be placed into escrow or
otherwise withheld as a source of potential compensation to FSP Corp. should FSP
Corp. discover, after the consummation of the mergers, that any of the target
REITs incurred any undisclosed liabilities prior to the consummation of the
mergers or that any representations and warranties of the target REITs were
inaccurate. Moreover, FSP Corp. will not receive any consideration for the one
share of common stock it holds in each target REIT.
Consummation of the mergers is subject to a number of conditions and will
not occur unless, among other things, holders of a majority of the shares of
target stock of each target REIT vote to adopt the merger agreement and approve
the mergers contemplated thereby.
Background of the Mergers (Pages 62 to 67)
As a result of inquiries from members of the FSP board, the management of
FSP Corp. in late June 2004 instructed its outside legal counsel, Wilmer Cutler
Pickering Hale and Dorr LLP, to explore the feasibility of the acquisition of
the target REITs. In early July 2004, management of FSP Corp. approached the
target boards regarding the possibility of acquiring the target REITs. Each
target board then established a special committee consisting of Messrs. MacPhee
and Gribbell, the only members of the target boards who were not also members of
the FSP board, to, among other things, evaluate and negotiate a potential
acquisition by FSP Corp. and recommend that the board of each target REIT accept
or reject the FSP Corp. acquisition. The special committees engaged A.G. Edwards
& Sons, Inc., referred to as A.G. Edwards, to advise them in evaluating and
negotiating the terms of the mergers, including the merger consideration, and to
7
deliver a fairness opinion to each target board. The target REITs also engaged
third party appraisers to appraise the real estate held by each target REIT and
engaged outside legal counsel to represent the target REITs. After receiving the
real estate appraisals, after reaching agreement on the amount of merger
consideration to be paid and the terms of the mergers, after receiving a
unanimous recommendation to vote to adopt the merger agreement and approve the
mergers from its special committee and receiving the fairness opinions delivered
by A.G. Edwards, each target board unanimously voted to adopt the merger
agreement and approve the mergers contemplated thereby and recommend to its
stockholders to vote to adopt the merger agreement and approve the mergers
contemplated thereby. On August 13, 2004, based upon the reasons set forth in
"Fairness of the Mergers", the target REITs and FSP Corp. executed and delivered
the merger agreement.
The merger consideration payable to the stockholders of each target REIT
was determined through negotiations between the special committees of the target
boards and FSP Corp. The special committees relied on advice from their
financial advisor, A.G. Edwards, in their negotiations with FSP Corp. In
agreeing to the fairness of the $17.70 per share negotiated price, the target
boards reviewed the analyses presented by A.G. Edwards, financial advisor to the
special committees, the target boards and the target REITs to estimate the value
of FSP common stock. In agreeing to the merger consideration for each target
REIT, the special committees also considered the independent third party
appraisals of the target REIT properties, assets and liabilities of their
respective target REITs and FSP Corp., the expected cash available for
distribution of their respective target REITs, the multiples of cash available
for distribution commonly used in valuing REITs and the limited liquidity of FSP
common stock. The special committees were also made aware that FSP Corp.
intended to file an application to list the FSP common stock with AMEX. Although
FSP Corp. has filed the application and the AMEX has approved it, there can be
no assurance that FSP Corp's common stock will be listed for trading or that a
meaningful trading market will develop.
In order to determine the maximum aggregate consideration it would be
willing to pay for each target REIT, FSP Corp. considered each target REIT
separately. FSP Corp. reviewed several factors relating to each target REIT,
including:
o the target REIT's prior financial performance;
o the projected future performance of the target REIT as determined by
the appraisal the target REIT obtained and shared with FSP Corp.;
o FSP Corp.'s assessment of the projected future performance of the
target REIT given FSP Corp.'s knowledge and experience with certain
types of properties and specific local markets; and
o the potential increase to the overall financial performance of FSP
Corp. by the addition of the respective target REIT.
In determining a value for the FSP common stock, FSP Corp. considered:
o historical dividend payments made by FSP Corp.;
o projected cash available for distribution for holders of FSP Corp.
common stock for 2004;
8
o the cash on FSP Corp.'s balance sheet and the amount of cash
relative to the amount of debt in conjunction with shareholder
equity;
o comparable REIT industry statistics, specifically the NAREIT Index;
and
o the price paid by FSP Corp. in prior transactions.
Based on those factors, FSP Corp. considered that using the growth in the
NAREIT Index from the date of the last stock valuation by FSP Corp. in June 2003
to July 15, 2004 of approximately 14% would yield a stock value of approximately
$18.77 per share. FSP Corp. considered that dividend payments are one of the
primary reasons for investment in REITs, and considered FSP Corp.'s historical
payment of dividends and the quality of its portfolio and the strength of its
balance sheet as indicators of its ability to continue to pay the same level of
dividends. FSP Corp. recognized that market conditions could affect the
performance of its real estate portfolio or its investment banking business and
that the stock market could place different values on different types of REITs.
In addition, FSP Corp. considered that, although the $16.45 value per share
determined by FSP Corp. in June 2003 included a discount for lack of liquidity,
its share price had not been set by the market.
During the course of negotiations, the special committees and A.G. Edwards
presented other factors that they had considered in valuing the common stock of
FSP Corp. and initially suggested a per share value of $16.67. FSP Corp.
disagreed with the value of $16.67 per share, but recognized that without an
active, liquid trading market, there could be a substantial range of opinions as
to the value of the FSP common stock. Subsequent negotiations resulted in
agreement upon a per share value of $17.70. Each of FSP Corp. and the special
committees of the target boards considered a per share value of $17.70 to be
reasonable and within a possible range of fair values of the FSP common stock.
The following table sets forth: (i) the value ascribed to each target REIT
for purposes of the merger consideration, (ii) the appraised value of the
property held by each target REIT, (iii) the estimated adjusted cash reserve
balances as of June 30, 2004, (iv) the percentage (the premium) over appraised
value plus adjusted cash reserves that has been ascribed to each target REIT for
purposes of the merger consideration and (v) the percentage (premium) over the
gross proceeds contributed by investors in the original syndication of each
target REIT. The premium is based on an FSP common stock per share price of
$17.70. Should the FSP common stock trade on the AMEX, the trading price of the
FSP common stock could be significantly lower than $17.70 per share, causing the
premium received by target REIT stockholders as a result of the consummation of
the mergers to decrease significantly or disappear altogether.
9
Premium
Over Gross
Proceeds of
Value Ascribed to Appraised Adjusted Cash Properties at
Target REIT Target REIT Value Reserves (1) Premium Syndication
----------- ----------- ----- ------------ ------- -----------
Addison Circle $ 66,965,414 $ 54,500,000 $1,676,697 19.2% 5%
Collins Crossing $ 60,587,756 $ 48,500,000 $1,984,695 20.0% 9%
Montague $ 33,400,000 $ 20,000,000 $2,034,787 51.6% 0%
Royal Ridge $ 31,888,293 $ 26,075,000 $ 967,500 17.9% 7%
Total $192,841,463 $149,075,000 $6,663,679 23.8% 5%
(1) The adjusted cash reserves are lower than the actual cash reserves held by
each target REIT because the adjusted cash reserves take into account
estimated expenditures that are expected to be made by each target REIT
prior to the consummation of the mergers. These expenditures include each
target REIT's proportional share of the anticipated costs of the
contemplated transaction relating to legal fees and financial advisory
fees; the expenses payable by each target REIT for the appraisal of its
property; and certain anticipated additional expenditures related to the
operations of specific target REITs.
Each share of target stock was issued at $100,000 per share in the
original syndication.
The value ascribed to a target REIT was determined through negotiations
between the special committees and FSP Corp. These aggregate negotiated values
exceed the aggregate appraised values of the target REITs by approximately
$37,102,784. See "Benefits, Background and Reasons for the Mergers - Background
of the Mergers - Negotiation of Economic Terms" and "Fairness of the Mergers -
Fairness of the Merger Consideration to Target REIT Stockholders - Allocation of
Merger Consideration" for a discussion of how the premiums were determined by
the special committees and FSP Corp.
Recommendation of the Special Committees and the Target Boards (Pages 49 to 52)
The target board of each target REIT recommends that target REIT
stockholders of that target REIT vote for adoption of the merger agreement and
approval of the mergers and the transactions contemplated thereby.
This recommendation to the target REIT stockholders is based upon the
recommendation by the special committees to the target boards and each target
board's belief that:
o the value of the FSP common stock to be distributed as merger
consideration to its target REIT stockholders represented greater
value, or a premium, than the sum of the value of the real estate
(as determined by an appraisal) and adjusted cash reserves held by
its target REIT;
10
o the value of the FSP common stock to be distributed as merger
consideration to its target REIT stockholders was greater than was
likely to be realized upon the continuation of the respective target
REIT; and
o based upon A.G. Edwards' opinion, delivered orally to each special
committee and board of each target REIT and subsequently confirmed
in writing, as to the fairness from a financial point of view of the
merger consideration to the stockholders of each target REIT, the
merger consideration is fair from a financial point of view to such
stockholders.
The material negative factors, which each special committee viewed as
insufficient to outweigh the positive factors, were:
o that, following the mergers, the target REIT stockholders will cease
to participate in the future earnings growth, if any, of their
respective target REIT or benefit from the increase, if any, in the
future liquidation value of the respective target REIT, other than
indirectly through their FSP stock ownership;
o the possibility that the shares of FSP common stock may in the
future trade at a price lower than $17.70 per share;
o the fact that, based on historical quarterly, non-special dividends
received by stockholders of FSP Corp. and the target REIT
stockholders, a majority of the target REIT stockholders could
expect to receive a lower level of dividends from the combined
company than such stockholders have historically received from their
target REITs;
o the possibility that the shares in the target REIT would have
appreciated in value more rapidly or at a greater rate than any
appreciation in value in the FSP Corp. shares;
o that the target REITs did not seek third party bids for the
acquisition of the target REITs or their respective properties; and
o the potential conflicts of interests of officers and directors of
each target REIT in connection with the mergers.
Expected Benefits from the Mergers
The following highlights some of the primary benefits the mergers are
expected to generate:
o The combined company's real estate portfolio will be substantially
larger and more diverse geographically, by property type and by
tenant business, than the portfolio of the target REITs, reducing
the dependence of target REIT stockholders on the performance of any
one real property; and
11
o The combined company's business will generate revenues from real
estate investment banking/brokerage and property management
activities and from rentals of 32 real properties, constituting a
more diverse income stream than that currently received by any of
the target REITs.
These benefits may not be realized. There are also potential detriments to the
mergers. See "Risk Factors" beginning on page 26.
Alternatives to the Mergers for the Target REITs (Pages 71 to 72)
The following is a brief discussion of alternatives to the mergers that
were considered by the target boards.
Continuation of each Target REIT. An alternative to the mergers would be
to continue each of the target REITs as a separate legal entity in accordance
with its original investment strategy. Target REIT stockholders would likely
continue to receive regular quarterly distributions, which distributions would
likely be greater than those to be received as stockholders of FSP Corp., and
would receive a distribution on the sale of the property owned by its respective
target REIT, which is expected to occur in a five to ten year time period
following syndication of the target REIT. Continuation of the target REITs would
avoid those disadvantages which might be inherent in the mergers. See "Risk
Factors - Risks Relating to the Mergers."
Liquidation. Another alternative to the mergers would be liquidating the
assets of the target REITs and distributing the net liquidation proceeds to the
target REIT stockholders. Liquidating the target REITs would result in
concluding the investors' investment in the target REITs earlier than the
anticipated liquidation timeframes for the target REITs. The liquidations would
result in the marketplace establishing the fair market value of the target
REITs' assets.
Support of Secondary Market. Another alternative would be the creation or
support of a secondary market for the target stock through limited cash tender
offers or repurchase programs sponsored by the target REITs. Each target board
believed that this alternative would not allow it to ensure that all of its
target REIT stockholders would be treated equally and that the potential expense
associated with the creation of a secondary market would reduce the cash
available for distribution to the target REIT stockholders. The target boards
also believed that there was a significant risk that no secondary market would
develop for the target stock.
Fairness of the Mergers (Pages 81 to 85)
Each of the target boards believes that the terms of the merger agreement,
when considered as a whole, are fair to the stockholders of its target REIT and
the merger consideration offered in exchange for the target stock in its target
REIT constitutes fair consideration for the interests of the target REIT
stockholders. The following provides a summary of the factors upon which the
target boards based their respective conclusions as to the fairness of the
mergers and the merger consideration to be paid by FSP Corp. The target boards
did not find it practicable to, and did not attempt to, quantify or otherwise
assign relative weight to these factors in reaching their respective
determinations.
12
o The target boards compared the potential benefits and detriments of
the mergers with the potential benefits and detriments of several
alternatives to the mergers, including continuation of the target
REITs, liquidation of the target REITs and support of secondary
markets for the target stock. Based on these comparisons, the target
boards believe the mergers are more attractive than other
alternatives.
o The special committees of the target boards, consisting of Messrs.
MacPhee and Gribbell, each a director of the target REITs and an
executive vice president of FSP Corp., engaged A.G. Edwards to
deliver a fairness opinion to each target board. On August 11, 2004,
A.G. Edwards delivered a written opinion to each target board to the
effect that the merger consideration was fair, from a financial
point of view, to the target REIT stockholders of that target REIT.
These fairness opinions are attached hereto as Appendix C.
o Each target board determined that the value of the FSP common stock
to be distributed as merger consideration to its target REIT
stockholders represented greater value, or a premium, than the sum
of the value of the real estate (as determined by an appraisal) and
adjusted cash reserves held by such target REIT. After consultation
with A.G. Edwards, the special committees of the target boards
determined that, based on the analyses of other selected public
companies, the discounted cash flow of FSP Corp. and selected
precedent mergers, a reasonable range of value for the FSP common
stock was between $16.67 per share and $18.50 per share. The
estimated range of values included a discount for the lack of
liquidity of FSP common stock. The value ascribed to FSP common
stock in connection with the mergers of $17.70 per share is within
that range. The target boards determined that even if the actual
value of FSP common stock were at the bottom of the range, or $16.67
per share, such value would still constitute a premium to the
appraised value of the real estate plus adjusted cash reserves held
by each target REIT.
o The target boards obtained independent third-party appraisals of the
real property owned by the target REITs, and considered these
appraisals in negotiating the merger consideration.
o The target REITs will have the right to declare dividends consistent
with past practice in respect of the quarters or partial quarters
preceding the effective date. The combined company will have the
obligation to pay any such dividends that have been declared but not
paid as of the effective date.
o The members of the target boards have conflicts of interest in
connection with the mergers. Each target board established a special
committee consisting of Messrs. MacPhee and Gribbell, the only
members of the target boards who are not also members of the FSP
board. Messrs. MacPhee and Gribbell serve as executive vice
presidents of FSP Corp. The special committees engaged A.G. Edwards
to advise them in evaluating and negotiating the terms of the
mergers, including the merger consideration, and to deliver a
13
fairness opinion to each target board. No fees or other compensation
will be payable to the members of the target boards (or the special
committees) or to FSP Corp. or any of its affiliates in connection
with the mergers.
For a complete list of factors considered by the target boards, see
"Fairness of the Mergers - Conclusions of the Target Boards."
Conflicts of Interest (Pages to 125 to 126)
A number of conflicts of interest are inherent in the relationships among
the target REITs, the target boards, FSP Corp., the FSP board and their
respective affiliates. These conflicts of interest include the fact that FSP
Investments, a subsidiary of FSP Corp., syndicated each target REIT and, among
others:
o George J. Carter, the President and a director of each target REIT,
is President, Chief Executive Officer and a director of FSP Corp.
and owns an aggregate of 775,531 shares of FSP common stock;
o R. Scott MacPhee, an Executive Vice President and a director of each
target REIT and a member of each special committee, is also an
Executive Vice President of FSP Corp. and owns an aggregate of
372,451 shares of FSP common stock;
o Richard R. Norris, an Executive Vice President and a director of
each target REIT, is also a director and an Executive Vice President
of FSP Corp. and owns an aggregate of 258,087 shares of FSP common
stock;
o William W. Gribbell, an Executive Vice President and a director of
each target REIT and a member of each special committee, is also an
Executive Vice President of FSP Corp. and owns an aggregate of
129,761 shares of FSP common stock;
o Barbara J. Fournier, Vice President, Chief Operating Officer,
Treasurer, Secretary and a director of each target REIT, is also
Vice President, Chief Operating Officer, Treasurer, Secretary and a
director of FSP Corp. and owns an aggregate of 27,934 shares of FSP
common stock;
o Janet P. Notopoulos, Vice President of each target REIT, is also a
Vice President and director of FSP Corp. and owns an aggregate of
14,985 shares of FSP common stock; and
o the target REIT's properties are managed by FSP Property Management,
a subsidiary of FSP Corp. pursuant to management services agreements
under which FSP Corp. receives certain fees from each target REIT
for its management services.
14
Each target board established a special committee consisting of Messrs.
MacPhee and Gribbell, the only members of the target boards who are not also
members of the FSP board. Messrs. MacPhee and Gribbell serve as executive vice
presidents of FSP Corp. The special committees engaged A.G. Edwards to advise
them in evaluating and negotiating the terms of the mergers, including the
merger consideration.
Each target board considered increasing its board size to include an
independent director to perform the function of the special committees. However,
each target board concluded that, given the potential liability of a director
voting on the mergers, it would be difficult to retain someone with the
knowledge and credentials necessary to fulfill the role of an independent
director of a REIT who would be willing to take on the role of independent
director of any of the target REITs without being substantially compensated and
without being covered by director liability insurance. None of the target REITs
currently has director and officer liability insurance. Each target board
determined that the cost of compensating an independent director and obtaining
director and officer liability insurance would be substantial and not in the
best interests of its target REIT stockholders. For this reason, none of the
target boards appointed an independent director to perform the functions of the
special committees.
If each target REIT had a separate board of directors with executive
officers who did not serve in similar capacities for FSP Corp. and directors who
did not own FSP common stock, these persons would have had an independent
perspective which might have led them to advocate positions during the
negotiation and structuring of the merger agreement and the determination of the
merger consideration more favorable to the target REIT stockholders than those
taken by the target boards.
Barry Silverstein, Dennis J. McGillicuddy and John N. Burke are the only
directors of FSP Corp. who are not also officers or directors of any target
REIT. The remainder of the officers and directors of FSP Corp. serve as a
director and/or officer, in the positions listed above, of each target REIT.
Upon completion of the mergers, Mr. Silverstein's percentage ownership interest
of FSP Corp. will decrease from 9.67% to 9.62%, Mr. McGillicuddy's percentage
ownership interest of FSP Corp. will decrease from 7.24% to 6.07%, and the
percentage ownership of the current directors and executive officers of FSP
Corp. as a group will decrease from 19.07% to 17.46%. Mr. Burke does not own any
shares of FSP common stock or any shares of target stock.
Third Party Reports (Pages 85 to 97)
Fairness Opinions. On July 22, 2004, the special committees of the target
boards retained A.G. Edwards to act as their financial advisor in connection
with the mergers and to render to the target REIT boards A.G. Edwards' opinion
as to the fairness, from a financial point of view, of the merger consideration
to the target REIT stockholders of each target REIT. On August 11, 2004, A.G.
Edwards rendered its oral opinions to each target board, subsequently confirmed
in writing, to the effect that based upon and subject to the various
considerations described in each opinion, the merger consideration (as described
elsewhere in this Consent Solicitation/Prospectus) was fair, from a financial
point of view, to the stockholders of each target REIT.
15
The full text of A.G. Edwards' opinions, each dated August 11, 2004, which
describe the assumptions made, general procedures followed, matters considered
and limitations on the scope of review undertaken by A.G. Edwards in rendering
its opinions, are attached as Appendices C-1, C-2, C-3 and C-4 to this Consent
Solicitation/Prospectus and are incorporated into this summary by reference.
A.G. Edwards' opinions are directed only to the fairness, as of the date of the
respective opinions, from a financial point of view, of the merger consideration
to the stockholders of the target REIT to which each opinion is addressed and
does not constitute a recommendation to you as to how you should vote with
respect to the merger agreement and the mergers. The summary of A.G. Edwards'
opinions set forth below is qualified in its entirety by reference to the full
text of the opinions attached as Appendices C-1, C-2, C-3 and C-4 to this
Consent Solicitation/Prospectus. You are urged to read the opinions carefully in
their entirety.
In conducting its investigation and analysis and in arriving at its
opinions, A.G. Edwards reviewed information, made certain assumptions and took
into account financial and economic factors it deemed relevant under the
circumstances. A.G. Edwards held discussions with the executive officers of the
target REITs and FSP Corp. concerning the respective target REIT's and FSP
Corp.'s historical and current financial condition and operating results, as
well as the prospects of the target REITs and FSP Corp., respectively. A.G.
Edwards also considered other information, financial studies, analyses and
investigations and financial, economic and market data that A.G. Edwards deemed
relevant for the preparation of its opinions. A.G. Edwards assumed the value of
each target REIT to equal the sum of the appraised value of such target REIT's
real property plus its adjusted cash reserves. A.G. Edwards was not asked to,
and did not, solicit third-party indications of interest in acquiring all or any
part of the target REITs. The special committees of the target boards and FSP
Corp. determined the merger consideration through negotiations. The target
boards did not place any limitation upon A.G. Edwards with respect to the
procedures followed or factors considered by A.G. Edwards in rendering its
opinions.
The Appraisals. The respective target boards retained independent third
party appraisers to appraise the fair market value of each target REIT's real
estate. The dates of the appraisals of Addison Circle and Collins Crossing were
July 23, 2004, the date of the appraisal of Montague was July 14, 2004, and the
date of the appraisal of Royal Ridge was July 13, 2004.
In preparing the appraisals, the appraisers collected from the target
REITs information regarding the operating history of the properties, conducted
site inspections of the properties and interviewed and relied on representations
of certain representatives of the target REITs. The appraisers' conclusions are
based upon conditions they observed at the properties during their inspection
and assumptions, qualifications and limitations deemed reasonable at the time
concerning, among other things, legal title, the absence of physical defects,
future percentage of leased rentable square feet, income and competition with
respect to each property. The appraisals reflect the appraisers' valuation of
the real estate of the target REITs as of their respective dates, in the context
of the information available on that date. Events occurring subsequent to the
dates of the respective appraisals could affect the properties or the
assumptions used in preparing the appraisals. The target boards imposed no
limitations on the scope of the appraisers' appraisals. The special committees
took the appraisals into consideration in negotiating the merger consideration.
The target REITs also made the appraisals available to FSP Corp. and have
allowed the FSP board to rely on the appraisals.
16
Organizational Chart Showing Relationship Among FSP Corp., Target REITs, FSP
Board, Target Boards and their Respective Affiliates
[Organizational chart prior to the mergers: Box at the top showing
"Franklin Street Properties Corp." with a line to the left showing that it owns
100% of the common stock of sponsored REITs, including the 4 target REITs and
8.2% of the preferred stock of FSP Blue Lagoon Drive Corp., a sponsored REIT
that is not a target REIT. From the same box labeled "Franklin Street Properties
Corp." there is a line showing the wholly owned subsidiaries of FSP Corp., which
are "FSP Property Management LLC," "FSP Investments LLC (a taxable REIT
subsidiary)," "28 properties held either directly or through wholly owned
subsidiaries," "Royal Ridge Acquisition Corp.," "Montague Acquisition Corp.,"
"Collins Crossing Acquisition Corp." and "Addison Circle Acquisition Corp."]
[Organizational chart after the mergers: Box at the top showing "Franklin
Street Properties Corp." with a line to the left showing that it owns 100% of
the common stock of sponsored REITs and 8.2% of the preferred stock of FSP
Blue Lagoon Drive Corp., a sponsored REIT that is not a target REIT. From the
same box labeled "Franklin Street Properties Corp." there is a line showing the
wholly owned subsidiaries of FSP Corp., which are "FSP Property Management LLC,"
"FSP Investments LLC (a taxable REIT subsidiary)," "28 properties held either
directly or through wholly owned subsidiaries," "Royal Ridge Acquisition Corp.,"
"Montague Acquisition Corp.," "Collins Crossing Acquisition Corp." and "Addison
Circle Acquisition Corp." Royal Ridge Acquisition Corp. now holds the assets of
FSP Royal Ridge Corp., which was merged with and into it. Montague Acquisition
Corp. now holds the assets of FSP Montague Business Center Corp., which was
merged with and into it. Collins Crossing Acquisition Corp. now holds the assets
of FSP Collins Crossing Corp., which was merged with and into it. Addison Circle
Acquisition Corp. now holds the assets of FSP Addison Circle Corp., which was
merged with and into it.]
Comparison of the Target REITs and FSP Corp. (Pages 123 to 124)
The summary information below highlights a number of significant
differences between the target REITs and FSP Corp.
Form of Organization. The target REITs and FSP Corp. are each vehicles
appropriate for holding real estate investments and afford passive investors,
such as target REIT stockholders, certain benefits, including limited liability
and the avoidance of double-level taxation. The target REITs are under the
control of their respective target boards, while FSP Corp. is governed by the
FSP board.
Length of Investment. Target REIT stockholders in each of the target REITs
expect liquidation of their investments when the assets of the target REITs are
liquidated within a five to ten year period following the syndication of a
target REIT. In contrast, FSP Corp. does not expect to dispose of any of its
particular assets within any prescribed periods.
Properties and Diversification. The real estate portfolio of each target
REIT is limited to the assets acquired with its initial equity offering. FSP
Corp. holds a real estate portfolio that is substantially larger and more
diversified than the portfolio of any of the target REITs. An investment in FSP
Corp. should not be viewed as an investment in a specific pool of assets, but
17
instead as an investment in an ongoing real estate investment business, subject
to the risks normally attendant to ongoing real estate ownership, to the risks
related to the real estate investment banking/brokerage business and to the
risks related to acquisitions of additional properties.
Additional Equity. As the target REITs are not authorized to issue
additional shares of target stock or other equity interests without the approval
of their respective target REIT stockholders, the target stock is not subject to
dilution. In contrast, FSP Corp. will have substantial flexibility to raise
equity capital to finance its businesses and affairs through the issuance of
equity securities, which may result in dilution to then existing FSP
stockholders.
Percentage Ownership. As a result of the significantly higher number of
issued shares in FSP Corp. as compared to the target REITs, the target REIT
stockholders will own a much smaller percentage of FSP Corp. relative to their
ownership interest in the target REITs and, accordingly, will have less power to
control the outcome of matters submitted to a vote of the stockholders and will
receive a lesser percentage of any dividends or other distributions.
Dissenters' Rights of Target REIT Stockholders (Pages 52 to 55)
If you, as a target REIT stockholder, object to the merger, the Delaware
general corporation law permits you to seek relief as a dissenting stockholder
and have the "fair value" of your target stock determined by a court and paid to
you in cash.
The relevant provisions of the Delaware general corporation law are
technical in nature and complex. If you, as a target REIT stockholder, wish to
exercise appraisal rights and obtain an appraisal of the fair value of your
target stock, you may wish to consult with your legal counsel because the
failure to comply strictly with these provisions may result in you waiving or
forfeiting your appraisal rights.
A copy of the relevant section of the Delaware general corporation law
governing this process is attached as Appendix D to this Consent
Solicitation/Prospectus.
Material United States Federal Income Tax Considerations (Pages 169 to 183)
FSP Corp. has received an opinion from its tax counsel that, subject to
the assumptions and qualifications set forth therein, the mergers will qualify
as reorganizations within the meaning of Section 368(a) of the tax code. If the
mergers qualify as reorganizations within the meaning of Section 368(a) of the
tax code, a target REIT stockholder will generally:
o recognize no gain or loss upon the receipt of FSP common stock in
exchange for target stock in a merger;
o have an aggregate tax basis for the FSP common stock received equal
to the aggregate basis of the target stock surrendered (other than
stock for which cash was received in lieu of a fractional share of
FSP common stock); and
18
o have a holding period for the FSP common stock received that
includes the holding period for the target stock surrendered.
Following the mergers, FSP Corp. expects to continue to qualify as a "real
estate investment trust" under the tax code. FSP Corp. has received an opinion
from its tax counsel that, subject to the assumptions and qualifications set
forth therein, FSP Corp. was organized and has operated in conformity with the
requirements for qualification and taxation as a real estate investment trust
under the tax code for each taxable year beginning with its taxable year ended
December 31, 2002, and that FSP Corp.'s current organization and method of
operation will enable FSP Corp. to continue to meet the requirements for
qualification and taxation as a real estate investment trust. Provided FSP Corp.
can maintain such qualification, it generally should be able to avoid
entity-level federal income tax to the extent it distributes its taxable income.
Tax matters are very complicated, and the tax consequences of the mergers
to each target REIT stockholder will depend on the facts of its own situation.
Each target REIT stockholder is urged to consult its tax advisor for a full
understanding of the tax consequences of the merger.
Accounting Treatment
Each of the mergers will be accounted for as a purchase under generally
accepted accounting principles, or GAAP. In accordance with the applicable
accounting rules, FSP Corp. will record the value of the target REITs' assets on
its books in an amount equal to the aggregate appraised value of the target
REITs' properties on the effective date and the target REITs' cash reserves
because such amounts are more reliably measurable.
Dividends in Respect of the First and Second Quarter of 2005
Each target REIT expects to declare in April 2005 and pay to its target
REIT stockholders thereafter a dividend with respect to the first and second
quarter of 2005 operations. Pursuant to the merger agreement, such dividends
will be paid out in an amount consistent with past practice and custom of the
relevant target REIT. The cash paid out in this dividend will reduce the amount
of cash held by each target REIT and acquired by FSP Corp. upon consummation of
the mergers. Pursuant to the merger agreement, FSP Corp. has assumed the
obligation to pay any such dividends that have been declared but not paid prior
to the effective date. In addition, FSP Corp. expects to declare in the first
quarter of 2005 and in April 2005 and pay to FSP stockholders in the first
quarter of 2005 and April 2005 dividends in respect of first quarter 2005 and
April 2005 operations, respectively. Such dividends will be payable to holders
of FSP common stock as of a record date prior to the effective date and,
therefore, target REIT stockholders will only receive such dividends to the
extent they are also FSP stockholders on the record date and only to the extent
of their holdings of FSP common stock. The cash available for this dividend and
possibly for future dividends to the FSP stockholders will be reduced by the
amount of expenses related to the mergers paid by FSP Corp.
19
Expenses of the Mergers (Pages 59 to 60)
The expenses payable by FSP Corp. in connection with the mergers are
estimated to be $760,000. The expenses payable by the target REITs in connection
with the mergers are estimated to be $475,000 and consist of the appraisals,
accounting costs, A.G. Edwards' fee for financial advice to the special
committees and delivery of a fairness opinion to each target board and the fees
of independent legal counsel.
20
Selected Financial Information of the Target REITs
The following tables summarize the selected financial information of the
target REITs for the periods presented. Please see pages 153 to 160 of this
Consent Solicitation/Prospectus for additional financial information relating to
the target REITs.
Addison Circle
For the Period
August 21, 2002
For the For the Year (date of
Nine Months Ended Ended inception) to
September 30, December 31, December 31,
----------------- ------------ ---------------
(In thousands, except share and per
share data) 2004 2003 2003 2002
---- ---- ---- ----
Operating Data:
Total revenue $ 6,892 $ 6,448 $ 8,554 $ 2,102
Net income (loss) 3,288 3,173 4,005 (2,869)
Net income (loss) attributable to
preferred shareholders 3,288 3,173 4,005 (3,182)
Balance Sheet Data
Cash and cash equivalents 5,492 5,680 5,966 5,402
Total assets 55,722 56,691 56,667 57,228
Total liabilities 1,714 2,947 3,355 2,784
Total stockholders' equity 54,008 53,744 53,312 54,444
Per Share Data:
Weighted average preferred shares
outstanding 636 636 636 636
Net income (loss) per preferred share $ 5,170 $ 4,989 $ 6,297 $ (5,003)
Book value per preferred share 84,918 84,503 83,824 85,604
21
Collins Crossing
For the Period
For the January 16, 2003
Nine Months Ended (date of inception)
September 30, to December 31,
-------------------- --------------------
(In thousands, except share and per
share data) 2004 2003 2003
---- ---- ----
Operating Data:
Total revenue $ 5,205 $ 3,976 $ 5,672
Net income (loss) 2,108 (1,611) (976)
Net income (loss) attributable to
preferred shareholders 2,108 (1,981) (1,349)
Balance Sheet Data
Cash and cash equivalents 4,634 4,421 5,066
Total assets 47,472 49,289 49,314
Total liabilities 1,378 2,192 2,913
Total stockholders' equity 46,094 47,097 46,401
Per Share Data:
Weighted average preferred shares
outstanding 555 555 555
Net income (loss) per preferred share $ 3,798 $ (3,569) $ (2,431)
Book value per preferred share 83,054 84,859 83,605
22
Montague
For the Period
For the For the July 22, 2002
Nine Months Ended Year Ended (date of inception)
September 30, December 31, to December 31,
-------------------- -----------------------------------
(In thousands, except share and per
share data) 2004 2003 2003 2002
---- ---- ---- ------
Operating Data:
Total revenue $ 2,592 $ 2,737 $ 3,645 $ 1,008
Net income (loss) 1,861 1,992 2,669 (1,249)
Net income (loss) attributable to
preferred shareholders 1,861 1,992 2,669 (1,281)
Balance Sheet Data
Cash and cash equivalents 3,633 3,574 3,594 3,330
Total assets 27,412 28,412 28,450 29,111
Total liabilities 465 1,049 1,371 930
Total stockholders' equity 26,947 27,363 27,079 28,181
Per Share Data:
Weighted average preferred shares
outstanding 334 334 334 334
Net income (loss) per preferred share $ 5,572 $ 5,964 $ 7,991 $ (3,835)
Book value per preferred share 80,680 81,925 81,075 84,374
23
Royal Ridge
For the For the
Nine Months Ended Year Ended
September 30, December 31,
------------------------ --------------
(In thousands, except share and per
share data) 2004 2003 2003
---- ---- ----
Operating Data:
Total revenue $ 2,286 $ 1,562 $ 2,264
Net income (loss) before
common distributions 941 (1,222) (958)
Net income (loss) attributable to
preferred shareholders 941 (1,236) (972)
Balance Sheet Data
Cash and cash equivalents 2,510 2,479 2,251
Total assets 24,732 25,659 25,170
Total liabilities 475 994 776
Total stockholders' equity 24,257 24,665 24,394
Per Share Data:
Weighted average preferred shares
outstanding 297.50 297.50 297.50
Net income (loss) per preferred share $ 3,166 $ (4,155) $ (3,267)
Book value per preferred share 81,536 82,908 81,997
24
Comparative Per Share Data
The following table summarizes the comparative per share data of the target
REITs for the periods presented. Please see pages 153 to 160 of this Consent
Solicitation/Prospectus for additional financial information relating to the
target REITs.
As of and for the nine months ended
September 30, 2004
(unaudited)
Pro forma Pro forma
Historical Consolidated Equivalent
--------------------------------------
Net income per share
basic and diluted
FSP Corp. $ 0.54 $ 0.53 $ --
Montague 5,572 -- 2,994
Addison Circle 5,170 -- 3,153
Royal Ridge 3,166 -- 3,210
Collins Crossing 3,798 -- 3,269
Book value per share
FSP Corp. $10.34 $ 11.05 $ --
Montague 80,680 -- 62,429
Addison Circle 84,918 -- 65,733
Royal Ridge 81,536 -- 66,916
Collins Crossing 83,054 -- 68,152
Dividends declared per share
FSP Corp. $ 0.62 $ 0.58 $ --
Montague 5,967 -- 3,277
Addison Circle 4,075 -- 3,450
Royal Ridge 3,624 3,512
Collins Crossing 4,350 -- 3,577
25
RISK FACTORS
In evaluating the mergers and FSP Corp., you should carefully consider the
following factors, in addition to other matters set forth elsewhere in this
Consent Solicitation/Prospectus.
Risks Relating to the Mergers
The nature of the target REIT stockholders' investment in their respective
target REITs will change upon consummation of the mergers.
As a result of the mergers, the nature of each target REIT stockholder's
investment will change from an interest in a corporation owning a specified
property for a finite period in which such target REIT stockholder will receive
a distribution upon liquidation based upon the net proceeds from the sale of the
entity's assets, to an investment in an ongoing fully-integrated real estate
company, which has a portfolio of properties that may be changed from time to
time and conducts real estate investment banking operations, and in which the
equity owners are expected to recover their investment from the sale of their
FSP common stock, which is currently illiquid, and not from liquidating
distributions.
The mergers are expected to reduce the level of dividends paid to target REIT
stockholders.
Based on historical quarterly, non-special dividends received by
stockholders of FSP Corp. and the target REIT stockholders, the mergers are
expected to reduce the level of dividends paid to target REIT stockholders who
become stockholders in the combined company. Regardless of the initial level of
the combined company's dividends, such dividends could decline in the future.
There may be differences between the merger consideration received by the target
REIT stockholders and the amount that would have been realized through their
investment in a target REIT either now or in the future.
The merger consideration was determined through negotiations between the
special committees of the target boards and FSP Corp. The special committees
relied on advice from their financial advisor, A.G. Edwards, in their
negotiations with FSP Corp. The special committees also considered the
appraisals received from an independent third-party appraiser, the assets and
liabilities of each target REIT and FSP Corp., the expected cash available for
distribution of each target REIT, the multiples of cash available for
distribution commonly used in valuing REITs and the limited liquidity of FSP
common stock. This negotiated price is subject to certain assumptions and may
not represent the true worth or realizable value of the target REITs in a sale
transaction for cash. The target REITs did not solicit bids from third parties
for the sale of the target REITs or their respective properties. Moreover, the
properties of the target REITs may appreciate in value and might be able to be
liquidated at a later date for a price which would yield target REIT
stockholders more consideration than they would receive in the mergers.
Target REIT stockholders will be foregoing the potential appreciation in the
real property owned by their respective target REIT.
The potential appreciation in the real property owned by each target REIT
may be greater than the merger consideration being offered by FSP Corp. in
connection with the mergers, with the potential effect that some target REIT
stockholders may receive less for their investment now than if they were to hold
on to their investment in the target REIT and wait for it to be liquidated
within a five to ten year period following the syndication of the target REIT in
accordance with the original investment strategy of the respective target REIT.
26
The future price of FSP common stock may be lower than the price per share
negotiated for purposes of the merger consideration.
The future price per share of the FSP common stock may be lower than the
price per share negotiated between the special committees of the target boards
and FSP Corp. for the purpose of determining the merger consideration to be
received by you.
The mergers will require the target REIT stockholders to forgo alternatives to
the mergers.
The target boards considered alternatives to the mergers, such as the
continuation of the target REITs as currently structured, the liquidation of the
target REITs through sales of their properties, or the creation of a secondary
market for the target stock through limited cash tender offers or repurchase
programs sponsored by the target REITs. The benefits of these alternatives are
avoiding the risks associated with the mergers as set forth in this section.
Moreover, retaining the finite-life feature of the target REITs would allow
target REIT stockholders eventually to receive liquidation proceeds from the
sale of the properties of the target REITs, and a target REIT stockholder may
receive more consideration through such sale than the consideration received in
the mergers. Target REIT stockholders will forgo all benefits to the
alternatives to the mergers in the event the mergers are consummated.
Target REIT stockholders will experience a loss of relative voting power.
Target REIT stockholders have one vote per one share of target stock. FSP
stockholders have one vote per one share of FSP common stock. Immediately
following the consummation of the mergers, target REIT stockholders will have
one vote per one share of FSP common stock. If the mergers are consummated, the
target REIT stockholders will own in the aggregate approximately 18% of all
issued and outstanding shares of FSP common stock in respect of their shares of
target stock and thus will have a smaller ownership percentage of FSP Corp. than
their respective target REITs, and each target REIT stockholder will thus lose
relative voting power.
The target REIT stockholders will experience greater risks relating to
diversification of portfolios following the mergers.
The assets and liabilities of the target REITs and of FSP Corp. will be
combined in the mergers. None of the target REITs currently has any debt
obligations but the target REIT stockholders may become exposed to debt
obligations FSP Corp. may incur in the future. As a result of the mergers, the
geographic diversity of the properties in which the target REIT stockholders
will own an interest will change. However, because the market for real estate
may vary widely from one region of the country to another, the change in
geographic diversity may expose the target REIT stockholders to different and
greater risks than those to which they are currently exposed.
The target REIT stockholders may be unable to bring litigation against A.G.
Edwards.
Because the engagement letters between A.G. Edwards and the target REITs
state that only the target boards may rely on the opinions rendered by A.G.
Edwards, the target REIT stockholders may be unable to assert or enforce any
claims against A.G. Edwards based on its fairness opinions in the transactions
contemplated by the merger agreement. Accordingly, if A.G. Edwards were to have
damaged the target REIT stockholders, through negligence or otherwise, in the
course of issuing its opinions, the target REIT stockholders may not be able to
recover such damages from A.G. Edwards.
27
The officers and directors of the target REITs have conflicts of interest that
may have influenced them to support or adopt the merger agreement.
A number of conflicts of interest are inherent in the relationships among
the target REITs, the target Boards, FSP Corp., the FSP board and their
respective affiliates. These conflicts of interest include the fact that FSP
Investments, a subsidiary of FSP Corp., syndicated each target REIT and, among
others:
o George J. Carter, the President and a director of each target REIT,
is President, Chief Executive Officer and a director of FSP Corp.
and owns an aggregate of 775,531 shares of FSP common stock;
o R. Scott MacPhee, an Executive Vice President and a director of each
target REIT and a member of each special committee, is also an
Executive Vice President of FSP Corp. and owns an aggregate of
372,451 shares of FSP common stock;
o Richard R. Norris, an Executive Vice President and a director of
each target REIT, is also a director and an Executive Vice President
of FSP Corp. and owns an aggregate of 258,087 shares of FSP common
stock;
o William W. Gribbell, an Executive Vice President and a director of
each target REIT and a member of each special committee, is also an
Executive Vice President of FSP Corp. and owns an aggregate of
129,761 shares of FSP common stock;
o Barbara J. Fournier, Vice President, Chief Operating Officer,
Treasurer, Secretary and a director of each target REIT, is also
Vice President, Chief Operating Officer, Treasurer, Secretary and a
director of FSP Corp. and owns an aggregate of 27,934 shares of FSP
common stock;
o Janet P. Notopoulos, Vice President of each target REIT, is also a
Vice President and director of FSP Corp. and owns an aggregate of
14,985 shares of FSP common stock; and
o The target REITs' properties are managed by FSP Property Management,
a subsidiary of FSP Corp., pursuant to management services
agreements under which FSP Corp. receives certain fees from each
target REIT for its management services.
The directors of the target REITs may have been more inclined to vote for
the mergers as a result of their ownership of FSP common stock since an increase
in the real property assets owned by FSP Corp. may result in greater value for
FSP Corp. stockholders.
Each target board established a special committee consisting of Messrs.
MacPhee and Gribbell, the only members of the target boards who are not also
members of the FSP board. Messrs. MacPhee and Gribbell serve as executive vice
presidents of FSP Corp. Under the Delaware general corporation law, the target
boards cannot delegate to a third party their fiduciary duties relating to the
determination of whether the transactions contemplated by the mergers were or
were not fair to the target REIT stockholders.
If each target REIT had a separate board of directors with executive
officers who did not serve in similar capacities for FSP Corp. and directors who
did not own FSP common stock, these persons would have had an independent
perspective which might have led them to advocate positions during the
negotiation and structuring of the merger agreement and the determination of the
merger consideration more favorable to the target REIT stockholders than those
taken by the target boards.
28
The officers and directors of the target REITs who are officers or
directors of FSP Corp. have fiduciary duties to manage the target REITs in a
manner beneficial to the target REIT stockholders. Similarly, FSP Corp.'s
directors and officers, including Mr. Carter, have fiduciary duties to manage
FSP Corp. in a manner beneficial to FSP Corp. and FSP stockholders. In some
circumstances, including the negotiation of the merger agreement, Mr. Carter's
and the other directors' and officers' duties to FSP Corp. and the FSP Corp.
stockholders and their ownership of FSP common stock may conflict with their
duties, as directors and officers of the target REITs, to the target REITs and
target REIT stockholders. A potential conflict between such fiduciary duties may
not be resolved, or if resolved, may be resolved in a manner less favorable to
the target REITs and target REIT stockholders than would otherwise have been the
case if the target REITs were dealing with unaffiliated parties. Specifically,
these conflicts may have resulted in the target REIT stockholders receiving an
aggregate merger consideration that is less than what they may have received had
the merger consideration been negotiated between unaffiliated parties.
The combined company may be liable for contingent or undisclosed liabilities of
the target REITs.
Each of the target REITs has delivered to FSP Corp. its financial
statements disclosing all known material liabilities and reserves, if any, set
aside for contingent liabilities. Each target REIT has represented and warranted
that the financial statements fairly present the financial position of each
target REIT, and each target REIT will be required to deliver on the effective
date an officer's certificate stating that that there have been no material
adverse changes in its financial condition between the date of the financial
statements and the effective date of the mergers. The accuracy and completeness
of these representations are conditions to the consummation of the mergers and
if, on or prior to the effective date, these representations and warranties are
known to be inaccurate, FSP Corp. may elect not to consummate the merger with
the target REIT that failed to fully and accurately disclose its financial
position. As these representations do not survive the effective date, after the
effective date the combined company will have no recourse against any target
REIT or the respective target REIT stockholders for any contingent or
undisclosed liabilities which first became known after the effective date. If
any contingent or undisclosed liabilities are discovered after the effective
date, the combined company's balance sheet may be adversely affected, causing
the value of the target REIT stockholders' interests in the combined company to
decrease.
The shares of FSP common stock received by the target REIT stockholders are not
tradable on a national stock market or other exchange.
There is no public or other market for the shares of FSP common stock, and
although the combined company will have the goal in the future of creating a
public market for its securities, there is no certainty that the combined
company will be successful or that such a market will develop. Although AMEX has
approved FSP Corp.'s application to list its common stock, the stock may not be
listed for trading or a meaningful trading market may not develop, even if the
stock is listed for trading. Consequently, the target REIT stockholders may be
unable to liquidate their shares of FSP common stock in the event of an
emergency or for any other reason.
The target REIT stockholders may experience dilution of their respective
holdings in FSP Corp.
The combined company will have substantial flexibility to raise equity
capital. The combined company will also have the ability to issue shares of FSP
common stock as incentive compensation to employees of the combined company or
its subsidiaries. The issuance of additional shares of FSP common stock by the
combined company does not require any approval by the target REIT stockholders
except in special circumstances. Any and all additional issuances of FSP common
stock will dilute the interests of the target REIT stockholders following the
consummation of the mergers.
29
A majority vote of the target REIT stockholders of a target REIT will bind all
the target REIT stockholders of that Target REIT.
In accordance with the charters of the target REITs and the Delaware
general corporation law, if the target REIT stockholders holding a majority of
the outstanding shares of preferred stock in a target REIT, and a majority of
the outstanding shares of common stock and preferred stock in a target REIT
voting together as a class, adopt the merger agreement and approve the mergers
contemplated thereby, the merger of that target REIT will be consummated and all
target REIT stockholders of that target REIT will participate in the mergers,
regardless of whether or not such target REIT stockholders voted to approve the
mergers, unless a target REIT stockholder exercises his, her or its appraisal
rights under the Delaware general corporation law.
Real Estate and Business Risks of FSP Corp.
If FSP Corp. is not able to collect sufficient rents from each of its owned real
properties, FSP Corp. may suffer significant operating losses or a reduction in
cash available for future dividends.
A substantial portion of FSP Corp.'s revenues are generated by the rental
income of its real properties. If its properties do not provide FSP Corp. with a
steady rental income as a result of FSP Corp.'s inability to re-lease space upon
the termination of existing leases or of the inability of existing tenants to
meet their obligations under existing leases, FSP Corp.'s revenues will decrease
and may cause it to incur operating losses in the future or incur a reduction in
cash available for future dividends.
FSP Corp. faces risks in continuing to attract investors for sponsored REITs.
FSP Corp.'s investment banking/investment services business continues to
depend upon its ability to attract purchasers of equity interests in sponsored
REITs. FSP Corp.'s success in this area will depend on the propensity and
ability of investors who have previously invested in sponsored REITs to continue
to invest in future sponsored REITs and on FSP Corp.'s ability to expand the
investor pool for the sponsored REITs by identifying new potential investors.
Moreover, FSP Corp.'s investment banking/investment services business may be
affected to the extent existing sponsored REITs incur losses or have operating
results that fail to meet investors' expectations.
If FSP Corp. is unable to fully syndicate a sponsored REIT, it may be required
to keep a balance outstanding on its line of credit or use its cash balance to
repay the line of credit, which may reduce cash available for distribution to
FSP stockholders.
FSP Corp. typically draws on its line of credit to make an interim
mortgage loan to a sponsored REIT, so that the sponsored REIT can acquire real
property prior to the consummation of the offering of its equity interests; this
interim loan is secured by a first mortgage of the real property acquired by the
sponsored REIT. Once the offering has been completed, the sponsored REIT repays
the loan from FSP Corp. out of the offering proceeds. If FSP Corp. is unable to
fully syndicate a sponsored REIT, the sponsored REIT could be unable to fully
repay the loan, and FSP Corp. would have to satisfy its obligation under its
line of credit through other means. If FSP Corp. is required to use cash for
this purpose, FSP Corp. would have less cash available for distribution to the
FSP stockholders.
30
Failure to renew, replace or extend FSP Corp.'s line of credit could have a
material adverse effect on the cash available for distribution to FSP Corp.'s
stockholders and would limit FSP Corp.'s growth.
FSP Corp.'s line of credit matures in August 2005. FSP Corp. typically
draws on its line of credit to make an interim mortgage loan to a sponsored
REIT, so that the sponsored REIT can acquire real property prior to the
consummation of the offering of such sponsored REIT's equity interests. Once the
offering has been completed, the sponsored REIT repays the loan out of the
offering proceeds. An inability to renew, replace or extend FSP Corp.'s line of
credit could result in difficulty financing growth in the investment
banking/investment services segment of FSP Corp.'s business. It could also
result in a reduction in the cash available for distribution to FSP Corp.'s
stockholders because revenue for FSP Corp.'s investment banking/investment
services segment is directly related to the amount of equity raised by sponsored
REITs which FSP Corp. syndicates. In addition, a significant part of FSP Corp.'s
growth strategy is to acquire additional real properties by cash purchase or by
acquisition of sponsored REITs, and the loss of the line of credit would make it
substantially more difficult to pursue acquisitions by either method. To the
extent FSP Corp. has a balance outstanding on the line of credit on the date of
its maturity; FSP Corp. would have to satisfy its obligation through other
means. If FSP Corp. is required to use cash for this purpose, FSP Corp. would
have less cash available for distribution to its stockholders.
FSP Corp. may not be able to find properties that meet its criteria for
purchase.
Growth in FSP Corp.'s investment banking/investment services business and
its portfolio of real estate is dependent on the ability of FSP Corp.'s
acquisition executives to find properties for sale which meet FSP Corp.'s
investment criteria. To the extent they fail to find such properties, FSP Corp.
will be unable to syndicate offerings of sponsored REITs to investors or enlarge
its portfolio, and its business could have lower revenue, which would reduce the
cash available for distribution to the FSP stockholders.
FSP Corp. is dependent on key personnel.
FSP Corp. depends on the efforts of George J. Carter, its Chief Executive
Officer, and its other executive officers. If any of them were to resign, FSP
Corp.'s operations could be adversely affected. FSP Corp. does not have
employment agreements with Mr. Carter or any other of its executive officers.
FSP Corp.'s level of dividends may fluctuate.
Because FSP Corp.'s investment banking/investment services business is
transactional in nature and real estate occupancy levels and rental rates can
fluctuate, FSP Corp. cannot predict its level of revenue from such activities.
As a result of this, the amount of cash available for distribution may
fluctuate, which may result in FSP Corp. not being able to maintain or grow
dividend levels in the future.
The real properties held by FSP Corp. may significantly decrease in value.
As of November 15, 2004, FSP Corp. owned 28 properties. Some or all of
these properties may decline in value. To the extent FSP Corp.'s real properties
decline in value, the target REIT stockholders receiving FSP common stock could
lose some or all the value of their investments. Although currently there is no
public market for the shares of FSP common stock, the value of FSP common stock
may still be adversely affected if the real properties held by FSP Corp. decline
in value since these real properties represent the majority of the tangible
assets held by FSP Corp. Moreover, if either FSP Corp. is forced to sell or
lease the real property held by it below its initial purchase price or its
carrying costs or if it is forced to lease real property at below market rates
because of the condition of the property, FSP Corp.'s results of operations
would be adversely affected and such negative results of operations may result
in lower dividends being paid to holders of FSP common stock.
31
FSP Corp. faces risks in owning and operating real property.
An investment in FSP Corp. 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 FSP
Corp.'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;
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.
FSP Corp. faces risks from tenant defaults or bankruptcies.
If any of FSP Corp.'s tenants defaults on its lease, FSP Corp. 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 FSP Corp.'s properties may seek the protection of bankruptcy
laws, which could result in the rejection and termination of such tenant's lease
and thereby cause a reduction in cash available for distribution to the FSP
stockholders.
FSP Corp. may encounter significant delays in reletting vacant space, resulting
in losses of income.
When leases expire, FSP Corp. 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 FSP Corp. is unable to re-lease space
promptly, if the terms of the replacement leases are significantly less
favorable than anticipated or if the costs are higher, FSP Corp. may have to
reduce distributions to the FSP stockholders. Approximately $11,635,000, or
approximately 17.2%, of FSP Corp.'s annualized rental revenue from commercial
and residential apartment properties derives from leases which expire during the
next twelve months.
FSP Corp. faces risks from geographic concentration.
The properties in the FSP Corp. portfolio, by aggregate square footage,
are distributed geographically as follows: Southwest - 26%, Northeast - 31%,
Midwest - 19%, West - 16% and Southeast 8%. However, within certain of those
segments, FSP Corp. holds a larger concentration of its properties in Houston,
Texas - 18% and Washington, DC - 13%. FSP Corp. is likely to face risks to the
extent that any of these areas in which it holds a larger concentration of its
properties suffers deteriorating economic conditions.
32
FSP Corp. competes with national, regional and local real estate operators and
developers, which could adversely affect its cash flow.
Competition exists in every market in which FSP Corp.'s properties are
located and in every market in which FSP Corp.'s properties will be located. FSP
Corp. competes with, among others, national, regional and numerous local real
estate operators and developers. Such competition may adversely affect the
percentage of leased space and the rental revenues of its properties, which
could adversely affect FSP Corp.'s cash flow from operations and its ability to
make expected distributions to the FSP stockholders. Some of FSP Corp.'s
competitors may have more resources than FSP Corp. does or other competitive
advantages. Competition may be accelerated by any increase in availability of
funds for investment in real estate. For example, decreases in interest rates
tend to increase the availability of funds and therefore can increase
competition. To the extent that FSP Corp.'s properties continue to operate
profitably, this will likely stimulate new development of competing properties.
The extent to which FSP Corp. is affected by competition will depend in
significant part on local market conditions.
There is limited potential for an increase in leased space gains in FSP Corp.'s
properties.
FSP Corp. anticipates that future increases in revenue from its properties
will be primarily the result of scheduled rental rate increases or rental rate
increases as leases expire. Properties with higher rates of vacancy are
generally located in soft economic markets so that it may be difficult to
realize increases in revenue when vacant space is re-leased.
FSP Corp. is subject to possible liability relating to environmental matters,
and FSP Corp. 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.
In addition:
o future laws, ordinances or regulations could impose material
environmental liability;
o the current environmental conditions of FSP Corp.'s properties could
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 FSP Corp.;
o tenants could violate their leases by introducing hazardous or toxic
substances into FSP Corp.'s properties that could expose FSP Corp.
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, could occur at
FSP Corp.'s properties and pose a threat to human health.
33
FSP Corp. is subject to compliance with the Americans With Disabilities Act and
fire and safety regulations which could require FSP Corp. to make significant
capital expenditures.
All of FSP Corp.'s properties are required to comply with the Americans
With Disabilities Act, or ADA, and the regulations, rules and orders that may be
issued thereunder. The ADA has separate compliance requirements for "public
accommodations" and "commercial facilities," but generally requires that
buildings be made accessible to persons with disabilities. Compliance with ADA
requirements might require, among other things, removal of access barriers and
noncompliance could result in the imposition of fines by the U.S. government, or
an award of damages to private litigants.
In addition, FSP Corp. is 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 FSP Corp.'s properties. Compliance with such requirements may require FSP
Corp. to make substantial capital expenditures, which expenditures would reduce
cash otherwise available for distribution to the FSP stockholders.
There are significant conditions to FSP Corp.'s obligation to redeem shares of
its common stock, and any such redemption will result in the stockholders
tendering shares receiving less than their fair market value.
Under FSP Corp.'s redemption plan, FSP Corp. is only obligated to use its
best efforts to redeem shares of FSP common stock from stockholders wishing to
have them redeemed. Stockholders wishing to have their shares redeemed must so
request on or before July 1 immediately preceding the January 1 date on which
the redemption date will be effective, and any such request will be irrevocable.
There are significant conditions to FSP Corp.'s obligation to redeem shares of
FSP common stock including:
o FSP Corp. cannot be insolvent or be rendered insolvent by the
redemption;
o the redemption cannot impair FSP Corp.'s capital or operations;
o the redemption cannot contravene any provision of federal or state
securities laws;
o the redemption cannot result in FSP Corp. failing to qualify as a
REIT; and
o FSP Corp.'s management must determine that the redemption is in FSP
Corp.'s best interests.
Any redemption effected by FSP Corp. under this plan would result in those
stockholders tendering shares of FSP common stock receiving 90% of the fair
market value of such shares, as determined by the FSP board in its sole and
absolute discretion, and not their full fair market value. If FSP common stock
becomes listed for trading on AMEX or any other national securities exchange or
the NASDAQ National Market, FSP Corp. will no longer be obligated to, and does
not intend to, effect any redemption. FSP Corp. also does not intend to accept
any requests for redemption from the time of the mailing of this Consent
Solicitation/Prospectus until the effective date of the mergers.
34
FSP Corp. may lose capital investment or anticipated profits if an uninsured
event occurs.
FSP Corp. carries or its tenants are obligated to carry comprehensive
liability, fire and extended coverage with respect to each of FSP Corp.'s
properties, with policy specification and insured limits customarily carried for
similar properties. There are, however, certain types of losses, such as from
wars, terrorist events, 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, FSP Corp.
could lose both capital invested in the property and anticipated profits.
Contingent or unknown liabilities acquired in mergers or similar transactions
could require FSP Corp. to make substantial payments.
The properties which FSP Corp. acquired in mergers were acquired subject
to liabilities and without any recourse with respect to liabilities, whether
known or unknown. As a result, if liabilities were asserted against FSP Corp.
based upon any of these properties, FSP Corp. might have to pay substantial sums
to settle them, which could adversely affect its results of operations and
financial condition and its cash flow and ability to make distributions to the
FSP stockholders. Unknown liabilities with respect to properties acquired might
include:
o liabilities for clean-up or remediation of environmental conditions;
o claims of tenants, vendors or other persons dealing with the former
owners of the properties; and
o liabilities incurred in the ordinary course of business.
FSP Corp. would incur adverse tax consequences if FSP Corp. failed to qualify as
a REIT.
The provisions of the tax code governing the taxation of real estate
investment trusts are very technical and complex, and although FSP Corp. 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 FSP Corp. will always
succeed in doing so. In addition, as a result of the combination of FSP Corp.
with the target REITs pursuant to the mergers, FSP Corp. might no longer qualify
as a real estate investment trust. FSP Corp. could lose its ability to so
qualify for a variety of reasons relating to the nature of the assets acquired
from the target REITs, the identity of the shareholders of the target REITs who
become shareholders of FSP Corp. or the failure of one or more of the target
REITs to have previously qualified as a real estate investment trust. Moreover,
you should note that if one or more of the REITs that FSP Corp. acquired in June
2003 did not qualify as a real estate investment trust immediately prior to the
consummation of its acquisition, FSP Corp. could be disqualified as a REIT as a
result of such acquisition.
If in any taxable year FSP Corp. does not qualify as a real estate
investment trust, FSP Corp. would be taxed as a corporation and distributions to
the FSP stockholders would not be deductible by FSP Corp. in computing its
taxable income. In addition, if FSP Corp. were to fail to qualify as a real
estate investment trust, FSP Corp. 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, FSP Corp. would be taxed as a
regular corporation during such years. Failure to qualify for even one taxable
year could result in a significant reduction of FSP Corp.'s cash available for
distribution to the FSP stockholders or could require FSP Corp. to incur
indebtedness or liquidate investments in order to generate sufficient funds to
pay the resulting federal income tax liabilities.
35
Provisions in FSP Corp.'s organizational documents may prevent changes in
control.
FSP Corp.'s Articles of Incorporation and Bylaws contain provisions,
described below, which may have the effect of discouraging a third party from
making an acquisition proposal for FSP Corp. and may thereby inhibit a change of
control under circumstances that could otherwise give the holders of FSP common
stock the opportunity to realize a premium over the then-prevailing market
prices.
Ownership Limits. In order for FSP Corp. to maintain its qualification as
a real estate investment trust, the holders of FSP common stock are limited to
owning, either directly or under applicable attribution rules of the tax code,
no more than 9.8% of the lesser of the value or the number of equity shares of
FSP Corp., and no holder of common stock may acquire or transfer shares that
pwould result in shares of FSP common stock being beneficially owned by fewer
than 100 persons. Such ownership limit may have the effect of preventing an
acquisition of control of FSP Corp. without the approval of the FSP board. In
addition, FSP Corp.'s Articles of Incorporation give the FSP board 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 FSP board is divided into three classes. The terms of
these classes will expire in 2005, 2006 and 2007, 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 FSP
stockholders' ability to effect a change in control even if a change in control
were in the FSP stockholders' best interests.
Preferred Stock. FSP Corp.'s Articles of Incorporation authorize the FSP
board to issue up to 20,000,000 shares of preferred stock, par value $.0001 per
share, and to establish the preferences and rights of any such shares issued.
The issuance of preferred stock could have the effect of delaying or preventing
a change in control even if a change in control were in the best interests of
the FSP stockholders.
Increase of Authorized Stock. The FSP board, without any vote or consent
of the FSP stockholders, may increase the number of authorized shares of any
class or series of stock or the aggregate number of authorized shares FSP Corp.
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 even if a change in control were in the best interests of the FSP
stockholders.
Amendment of Bylaws. The FSP board has the sole power to amend FSP Corp.'s
Bylaws. This power could have the effect of delaying or preventing a change in
control even if a change in control were in the best interests of the FSP
stockholders.
Stockholder Meetings. FSP Corp.'s 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. FSP Corp.'s Bylaws also provide that stockholders entitled to cast
more than 50% of all the votes entitled to be cast at a meeting must join in a
request by stockholders to call a special meeting of stockholders. These
provisions could have the effect of delaying or preventing a change in control
even if a change in control were in the best interests of the FSP stockholders.
Supermajority Votes Required. FSP Corp.'s Articles of Incorporation
require the affirmative vote of the holders of no less than 80% of the shares of
capital stock outstanding and entitled to vote in order (i) to amend the
provisions of the Articles of Incorporation relating to the classification of
directors, removal of directors, limitation of liability of officers and
directors or indemnification of officers and directors or (ii) to amend the
Articles of Incorporation to impose cumulative voting in the election of
directors. These provisions could have the effect of delaying or preventing a
change in control even if a change in control were in the best interests of the
FSP stockholders.
36
The listing of FSP common stock on the American Stock Exchange or another
national securities exchange and the trading price of FSP common stock following
such listing are uncertain. The FSP common stock could trade at a lower price
than anticipated.
Although FSP Corp. has filed an application to list the FSP common stock
on the AMEX, and the AMEX has approved the application, there can be no
assurances that FSP Corp.'s common stock will be listed for trading. Therefore,
a trading market may not develop at all, or if one does, it may not be
meaningful. If a trading market does develop, the market prices for the FSP
common stock may fluctuate with changes in market and economic conditions, the
financial condition of FSP Corp. securities, including the market perception of
REITs in general. Such fluctuations may depress the market price of FSP common
stock independent of the financial performance of FSP Corp. The market
conditions for REIT stocks generally could affect the market price of the FSP
common stock.
37
TARGET REIT CONSENT SOLICITATION
The votes of the target REIT stockholders with respect to the mergers are
being solicited by the target boards. Such votes will be tabulated as consents
are received. The mergers are being submitted for approval to those persons
holding common stock of each target REIT and target stock as of August 13, 2004,
also known as the record date. As of August 13, 2004, the following number of
shares of target stock were held of record by the number of target REIT
stockholders indicated below:
Number of Shares
Number of Total Number of of Target Stock
Target REIT Shares of Target Required for Approval
Target REIT Stockholders Stock Outstanding of the Mergers
Montague 331 334 167.25
Addison Circle 380 636 318.25
Royal Ridge 246 297.5 149
Collins Crossing 449 555 277.75
Each target REIT stockholder is entitled to one vote for each share of
target stock held. Accordingly, the number of shares of target stock entitled to
vote with respect to the mergers is equivalent to the number of shares of target
stock held of record as of August 13, 2004. FSP Corp. will not receive any
consideration for the one share of common stock it holds in each target REIT.
This Consent Solicitation/Prospectus and the form of consent constitute
the target boards' notice of the mergers. Each target REIT stockholder has until
the later of the approval date, as described below, or 5:00 p.m., Eastern Time,
on April 29, 2005 (unless a target REIT is permitted to accelerate such date by
applicable law and regulation), the date that is sixty (60) days following the
date of mailing of this Consent Solicitation/Prospectus, unless extended by the
target boards in their sole discretion, to inform the target boards whether such
target REIT stockholder wishes to approve or disapprove of his, her or its
target REIT's participation in the mergers. The target boards ask that each
target REIT stockholder vote by completing and returning the consent
accompanying this Consent Solicitation/Prospectus in the manner described below.
Target REIT stockholders who wish to vote "YES" for adoption of the merger
agreement and approval of the mergers and the transactions contemplated thereby
should complete, sign and return the consent or consents relating to their
target stock which accompanies this Consent Solicitation/Prospectus. One consent
has been prepared for each target REIT stockholder regardless of which target
REIT you are a stockholder. Consequently, a target REIT stockholder who holds,
for example, target stock in each of the four target REITs will receive only one
consent, which must be completed, signed and returned in order to vote "YES" for
the mergers relating to each of the four target REITs. A target REIT stockholder
owning shares in more than one target REIT does not need to vote in favor of or
against all such target REITs but may vote in favor of the merger for one target
REIT and vote against the merger of another target REIT. For example, if a
target REIT stockholder owns shares in Collins Crossing and Montague, such
person could vote to approve the merger involving Collins Crossing while voting
against the merger involving Montague. Consents must be delivered by mail or
other delivery service to:
Franklin Street Properties
401 Edgewater Place
Suite 200
Wakefield, Massachusetts 01880
38
Approval of the mergers by a target REIT requires the vote of target REIT
stockholders holding a majority of the outstanding shares of target stock, and a
majority of the outstanding shares of common stock of the target REIT and target
stock voting together as a class, as of the record date. If one or more target
REITs does not obtain the vote required for the consummation of the merger with
such target REIT, FSP Corp. will not proceed with the mergers of any other
target REIT. The number of shares of target stock that must be voted in favor of
the mergers for it to be approved by the respective target REIT is shown in the
table above. The failure to return a consent will have the effect of a vote
against the mergers. A target REIT stockholder who signs and returns the consent
without indicating a vote will be deemed to have voted "YES" in favor of
adoption of the merger agreement and approval of the mergers and the
transactions contemplated thereby. The date on which consents are received from
target REIT stockholders owning a majority of the shares of target stock of a
particular target REIT approving its merger is referred to as the "approval
date" for that entity. To the extent that the approval date is a date prior to
5:00 p.m., Eastern Time, on April 29, 2005 (unless a target REIT is permitted to
accelerate such date by applicable law and regulation), the date that is sixty
(60) days following the date of mailing of this Consent Solicitation/Prospectus,
FSP Corp. shall deliver written notice to the target REIT stockholders of the
particular target REIT informing them that the merger of such target REIT with
and into a wholly owned subsidiary of FSP Corp. has been so approved.
All questions as to the form of all documents and the validity (including
time of receipt) of all approvals and elections will be determined by the target
boards, and such determination shall be final and binding. The target boards
reserve the absolute right to waive any defects or irregularities in any
approval of the mergers or preparation of the form of consent. The target
boards' interpretation of the terms and conditions of the mergers will be final
and binding. The target boards shall be under no duty to give notification of
any defects or irregularities in any approval of the mergers or preparation of
the form of consent and shall not bear any liability for failure to give such
notification.
Target REIT stockholders may withhold or revoke their consent at any time
prior to the approval date for the entity with respect to which consent is to be
withheld or revoked. To be effective, a written, telegraphic or telex notice of
revocation or withdrawal of the consent must be received by the applicable
target boards no later than the approval date addressed as set forth above. A
notice of revocation or withdrawal must specify the target REIT stockholder's
name and the name of the target REIT or target REITs to which such revocation or
withdrawal relates.
Votes of target REIT stockholders may be solicited by FSP Investments on
behalf of the target boards through the mail or by other means of solicitation.
Costs of solicitation will be borne by FSP Corp. No person will receive any
compensation contingent upon solicitation of a favorable vote. You have the
right to inspect a list of all holders of target stock of record for your target
REIT. For a discussion relating to your appraisal rights, see "The Mergers -
Appraisal Rights of Dissenting Stockholders of Target REITs."
39
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
This Consent Solicitation/Prospectus includes forward-looking statements.
All statements, other than statements of historical facts, included in this
Consent Solicitation/Prospectus regarding the strategy, future operations,
financial position, future revenues, projected costs, prospects, plans and
objectives of management of FSP Corp. and each target REIT are forward-looking
statements. The words "anticipates," "believes," "estimates," "expects,"
"intends," "may," "plans," "projects," "will," "would" and similar expressions
are intended to identify forward-looking statements, although not all
forward-looking statements contain these identifying words. FSP Corp. and each
target REIT cannot guarantee that it actually will achieve the plans, intentions
or expectations disclosed in its forward-looking statements and you should not
place undue reliance on these forward-looking statements. Actual results or
events could differ materially from the plans, intentions and expectations
disclosed in the forward-looking statements. FSP Corp. has included important
factors in the cautionary statements included or incorporated in this Consent
Solicitation/Prospectus, particularly under the heading "Risk Factors", that FSP
Corp. believes could cause actual results or events to differ materially from
the forward-looking statements that it makes. These forward-looking statements
do not reflect the potential impact of any future acquisitions, mergers,
dispositions, joint ventures or investments FSP Corp. may make. Neither FSP
Corp. nor any target REIT assumes any obligation to update any forward-looking
statements.
40
BACKGROUND ON FSP CORP. AND ITS GROWTH STRATEGY
FSP Corp. is the successor to Franklin Street Partners Limited
Partnership, or the FSP Partnership, which was originally formed as a
Massachusetts general partnership in January 1997 as the successor to a
Massachusetts general partnership that was formed in 1981. On January 1, 2002,
the FSP Partnership converted into FSP Corp. As a result of this conversion, the
FSP Partnership ceased to exist and FSP Corp. succeeded to the business of the
FSP Partnership. In the conversion, each unit of both general and limited
partnership interests in the FSP Partnership was converted into one share of FSP
common stock. As a result of the conversion, FSP Corp. holds 100% of the
interest in three former subsidiaries of the FSP Partnership: FSP Investments
LLC, FSP Property Management LLC, and FSP Holdings LLC.
FSP Corp. operates in two business segments and has two principal sources
of revenue:
o Real estate operations, including real estate leasing, interim
acquisition financing and asset/property management, which generate
rental income, loan origination fees and management fees,
respectively.
o Investment banking/investment services, which generate brokerage
commissions and other fees related to the organization of
single-purpose entities that own real estate and the private
placement of equity in those entities. These entities are called
sponsored entities.
The predecessor to FSP Corp. organized the sponsored entities as
partnerships, but in 2001 FSP Corp. began to organize them as corporations
operated in a manner intended to qualify as real estate investment trusts, or
sponsored REITs. The sponsored entities have historically been single asset
investment vehicles with an expected five to ten year life cycle, after which
time the properties held by the sponsored entity were to be sold. The proceeds
of the sale would then be distributed to the investors in the respective
sponsored entity.
Shares issued in a syndication are sold for $100,000 per share. FSP Corp.
determines the aggregate number of shares to be issued in the syndication of a
syndicated REIT by calculating that the amount of equity raised in any
syndication must be sufficient to purchase the real property, pay for the
aggregate fees and expenses of FSP Corp. and FSP Investments and provide for a
budgeted reserve for operations and capital expenditures. The offering
memorandum distributed to potential investors in the private offering of
sponsored entities includes a detailed description of the anticipated use of
proceeds from the offering.
FSP Corp.'s investment objective is to increase the cash available for
distribution in the form of dividends to its stockholders by increasing revenue
from rental income, any net gains from sales of properties and investment
banking services. FSP Corp. expects that, through FSP Investments, it will
continue to organize and cause the offering of sponsored REITs in the future and
that FSP Corp. will continue to derive investment banking/investment services
income, including loan origination fees and interest, from such activities. FSP
Investments does not perform investment banking services for any client other
than FSP Corp. and its affiliates. FSP Corp. may also acquire additional real
properties by cash purchase or by acquisition of sponsored REITs. In addition,
FSP Corp. may invest in real estate by purchasing shares of preferred stock
offered in the syndications of sponsored REITs.
From time to time, as market conditions warrant, FSP Corp. may sell
properties owned by it. In 2003, FSP Corp. sold two properties, Weslayan Oaks
and Reata Apartments. When FSP Corp. sells a property, it either distributes the
sale proceeds to its stockholders as a dividend or retains some or all of such
proceeds for investment in real properties or other corporate activities.
41
FSP Corp. may acquire, and has acquired, real properties in any geographic
area of the United States and of any property type. Of the 28 properties it
owns, four are apartment complexes, 22 are office buildings and two are
industrial.
FSP Corp. relies on the following principles in selecting real properties
for acquisition by a sponsored REIT or FSP Corp. and managing them after
acquisition:
o FSP Corp. seeks to buy investment properties at a price which
produces value for investors and avoid overpaying for real estate
merely to outbid competitors;
o FSP Corp. seeks to buy properties in excellent locations with
substantial infrastructure in place around them and avoid investing
in locations where the construction of such infrastructure is
speculative;
o FSP Corp. seeks to buy properties that are well-constructed and
designed to appeal to a broad base of users and avoid properties
where quality has been sacrificed to cost savings in construction or
which appeal only to a narrow group of users;
o FSP Corp. aggressively manages, maintains and upgrades its
properties and refuses to neglect or undercapitalize management,
maintenance and capital improvement programs; and
o FSP Corp. believes that it has the ability to hold properties
through down cycles and avoid leveraging properties and placing them
at risk of foreclosure; as of October 31, 2004, none of the 28
properties held by FSP Corp. was subject to mortgage debt.
FPS Corp. acquires and operates its real properties on an unleveraged
basis not subject to any mortgage loans. FSP Corp. has a revolving line of
credit that provides for borrowings of up to $125,000,000. FSP Corp. has drawn
on this line of credit, and intends to draw on this line of credit in the
future, only to obtain funds for the purpose of making interim mortgage loans to
sponsored REITs. FSP Corp.'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 REIT. FSP Corp. makes these loans to enable a sponsored REIT to
acquire real property prior to the consummation of the offering of its equity
interests, and the loan is repaid out of the offering proceeds. FSP Corp. has no
restriction on the percentage of its assets that may be invested in any single
mortgage. FSP Corp. receives revenue from origination fees and interest in
connection with such mortgage loans. The interest FSP Corp. charges is at the
same rate as the interest payable by FSP Corp. from time to time under its line
of credit.
A significant part of FSP Corp.'s growth strategy is the acquisition of
additional real properties by cash purchase or by acquisition of sponsored
REITs. Acquisition of additional real estate by acquiring sponsored REITs is an
attractive method of acquisition for FSP Corp. because the familiarity with the
real property FSP Corp. gains from acting as asset manager allows FSP Corp.
better to evaluate the risks of owning the property than is possible in the
normal due diligence performed in typical acquisitions. Accordingly, FSP Corp.
has previously engaged in transactions similar to the mergers contemplated by
the merger agreement. On June 1, 2003, FSP Corp. acquired 13 sponsored REITs by
merger. Prior to the conversion, FSP Corp.'s predecessor, FSP Partnership
acquired 17 sponsored partnerships by merger. FSP Corp. subsequently sold two of
these properties. In fact, all of the 28 properties FSP Corp. currently owns
were acquisitions of sponsored partnerships or sponsored REITs. Although there
can be no assurance that FSP Corp. will continue to acquire sponsored REITs in
the future, such acquisitions are a part of FSP Corp.'s growth strategy.
42
The table below sets forth the amount paid by FSP Corp. (or its
predecessor, FSP Partnership) for each of the sponsored entities it has
acquired, the date of the acquisition, the fair market value of the FSP common
stock (or partnership units, in the case of acquisitions prior to January 1,
2001) as determined by the FSP board (or the general partner of the FSP
Partnership, in the case of the partnership units) issued as merger
consideration, the value per share or unit ascribed to the merger consideration
received by investors, the gross proceeds contributed by investors in the
original syndication of such sponsored entity, the estimated amount of fees FSP
Investments earned upon the original syndication and the estimated amount of
fees FSP Property Management earned after the original syndication but prior to
the acquisition. The level of syndication fees payable to FSP Investments is
based upon a certain percentage of the gross proceeds of the syndication. As
gross proceeds increase in value, the amount payable to FSP Corp. increases.
Generally, FSP Corp. has been paid between 13%-16% of the gross proceeds of the
syndication. The amount payable to FSP Investments has varied, however, if
commissions normally payable to FSP Investments were reduced by reductions in
such commissions to certain large purchasers in the syndication. In addition,
the fees payable to FSP Corp. by the syndicated entity has varied depending on
the amount of time necessary to complete the syndication, which is a function of
the pace of syndication sales. Following the mergers the investors in the
sponsored entities indirectly incurred their pro rata share of FSP Corp.'s
general and administrative expenses.
Per Share
or Per Unit
Value of FSP Estimated Estimated
Merger Common Stock Aggregate Fees Aggregate Fees
Consideration or Gross Proceeds Earned by FSP Earned by FSP
Date of Received by Partnership of the Corp. and FSP Property
Sponsored Entity Acquisition Investors (1) Unit Syndication Investments Management
---------------- ----------- ------------- ---- ----------- ----------- ----------
Essex 1/1/99 $13,931,760 $10.00 $12,300,000 N/A $ 27,789
Reata(2) 1/1/99 15,592,920 10.00 13,000,000 N/A 31,144
One Technology Drive 1/1/99 14,730,480 10.00 10,925,000 N/A 60,000
North Andover 1/1/99 12,187,080 10.00 10,000,000 N/A 125,557
Weslayan Oaks(3) 1/1/99 7,077,120 10.00 5,400,000 $ 648,000 13,186
Park Seneca 1/1/99 12,441,480 10.00 9,000,000 1,099,500 22,548
Santa Clara 1/1/99 9,753,120 10.00 8,700,000 1,301,204 15,625
Piedmont Center 1/1/99 15,278,400 10.00 13,500,000 1,822,500 14,850
Silverside Plantation 1/1/00 23,150,000 10.00 21,800,000 2,943,000 28,117
Hillview Center 1/1/00 6,450,000 10.00 6,100,000 823,500 3,580
Telecom Business Center 1/1/00 20,400,000 10.00 18,450,000 2,710,480 9,662
Southfield Center 10/1/00 18,998,120 11.50 18,500,000 2,436,292 23,026
Blue Ravine 10/1/00 7,402,000 11.50 7,000,000 908,919 11,855
Bollman Place 10/1/00 7,041,030 11.50 7,000,000 841,243 14,371
Austin, N.W. 10/1/00 13,027,210 11.50 12,300,000 1,707,063 10,765
Gateway Crossing 10/1/00 24,369,185 11.50 24,000,000 3,794,365 18,716
43
Per Share
or Per Unit
Value of FSP Estimated Estimated
Merger Common Stock Aggregate Fees Aggregate Fees
Consideration or Gross Proceeds Earned by FSP Earned by FSP
Date of Received by Partnership of the Corp. and FSP Property
Sponsored Entity Acquisition Investors (1) Unit Syndication Investments Management
---------------- ----------- ------------- ---- ----------- ----------- ----------
Lyberty Way 10/1/00 12,027,455 11.50 11,125,000 1,519,218 5,016
Forest Park 6/1/03 8,398,178 14.75 7,800,000 1,053,000 27,275
The Gael 6/1/03 21,864,115 14.75 21,250,000 3,058,410 74,000
Goldentop 6/1/03 24,935,572 14.75 23,150,000 3,322,974 53,000
Centennial 6/1/03 16,093,408 14.75 15,800,000 2,317,600 51,328
Meadow Point 6/1/03 26,523,256 14.75 25,750,000 3,743,256 71,000
Timberlake 6/1/03 51,556,660 14.75 51,500,000 7,512,233 120,000
Federal Way 6/1/03 19,999,997 14.75 20,000,000 2,831,000 29,000
Fair Lakes 6/1/03 48,181,949 14.75 48,000,000 7,171,517 104,000
Northwest Point 6/1/03 37,249,994 14.75 37,250,000 5,352,931 73,400
Timberlake East 6/1/03 25,188,759 14.75 25,000,000 3,604,372 35,000
Merrywood 6/1/03 20,827,429 14.75 20,600,000 2,984,148 29,000
Plaza Ridge I 6/1/03 40,249,977 14.75 40,000,000 6,053,859 52,000
Park Ten 6/1/03 27,682,040 14.75 27,500,000 4,260,087 33,000
(1) The amount set forth under this column represents the aggregate value
of FSP Partnership units or shares of FSP common stock received by the owners of
each sponsored entity.
(2) Property sold on September 2, 2003.
(3) Property sold on February 7, 2003.
44
Of the 380 stockholders in Addison Circle, 244 are also stockholders in
FSP Corp. with 236 of these 244 stockholders becoming stockholders in FSP Corp.
following FSP Corp.'s acquisition of prior sponsored entities. Of the 449
stockholders in Collins Crossing, 249 are also stockholders in FSP Corp. with
240 of these 249 stockholders becoming stockholders in FSP Corp. following FSP
Corp.'s acquisition of prior sponsored entities. Of the 331 stockholders in
Montague, 263 are also stockholders in FSP Corp.with 248 of these 263
stockholders becoming stockholders in FSP Corp. following FSP Corp.'s
acquisition of prior sponsored entities. Of the 246 stockholders in Royal Ridge,
149 are also stockholders in FSP Corp.with 140 of these 149 stockholders
becoming stockholders in FSP Corp. following FSP Corp.'s acquisition of prior
sponsored entities.
Each target REIT was initially formed as a corporation intended to
qualify as a REIT. Addison Circle was organized in August 2002. Collins Crossing
was organized in January 2003. Montague was organized in July 2002 and Royal
Ridge was organized in December 2002.
As part of its growth strategy FSP Corp. periodically considers acquiring
properties, including REITs sponsored by FSP Investments. In June 2004, members
of FSP Corp. management met to consider the possibility and feasibility of the
acquisition of additional properties by FSP Corp. At that time, members of
management identified several acquisition candidates, including the target
REITs. After some discussion amongst management over the next several weeks, Mr.
George Carter, the Chief Executive Officer of FSP Corp., determined that
acquiring the target REITs at this time was the most attractive current
acquisition alternative available to FSP Corp. and that the possibility of
acquiring the target REITs should be discussed with the FSP board. At a meeting
of the FSP board on June 25, 2004, FSP management discussed with its board the
possibility of acquiring the target REITs. No formal vote was taken, but the
directors supported the decision to begin discussions with the target REITs. On
or about July 2, 2004, Mr. Carter, as a representative of FSP Corp., contacted
Messrs. Gribbell and MacPhee, as representatives of the target REITs, to discuss
a possible business combination among FSP Corp. and the target REITs.
In identifying the target REITs as possible acquisition candidates, FSP
Corp. considered the fact that although the target REITs had not been stand
alone entities for a prolonged period of time. FSP Property Management managed
each property from the time FSP Corp. acquired the property to the time FSP
Investments completed the syndication of such properties. FSP Investments
completed the syndication of Addison Circle in December 2002, Collins Crossing
in June 2003, Royal Ridge in March 2003 and Montague in September 2002. FSP
Corp. has historically paid an amount in stock that was greater than, or a
premium over, the appraised value of the real estate and adjusted cash reserves
held by each sponsored partnership or sponsored REIT it has acquired. Members of
FSP Corp. management believed FSP Corp. could pay as merger consideration for
each target REIT an amount in FSP common stock that was greater than, or a
premium over, the appraised value and adjusted cash reserves held by such target
REIT as it had in similar prior transactions. In order to determine the maximum
aggregate consideration it would be willing to pay for each target REIT, FSP
Corp. considered each target REIT separately. FSP Corp. reviewed the several
factors relating to each target REIT, including:
o the target REIT's prior financial performance;
o the projected future performance of the target REIT as determined by
the appraisal the target REIT obtained and shared with FSP Corp.;
o FSP Corp.'s assessment of the projected future performance of the
target REIT given FSP Corp.'s knowledge and experience with certain
types of properties and specific local markets; and
x
45
o the potential increase to the overall financial performance of FSP
Corp. by the addition of the respective target REIT.
See "Benefits, Background and Reasons for the Mergers - Background of the
Mergers - Negotiation of Economic Terms" for a more detailed discussion
concerning the negotiations of the merger consideration.
FSP Corp. is a reporting company under federal securities laws by virtue
of the number of stockholders owning FSP common stock. However, there is no
public market for FSP common stock. FSP Corp. has filed an application to list
the FSP common stock on the American Stock Exchange, or AMEX, and the AMEX has
approved the application. However, there can be no assurances that a meaningful
trading market will develop or that FSP common stock will trade at prices equal
to or above the $17.70 value ascribed to it in connection with the mergers.
While there has been no public market for FSP common stock, FSP Corp. does have
a redemption plan in its current charter which allows stockholders of FSP Corp.
to have their shares redeemed. Stockholders wishing to have their shares
redeemed must so request on or before July 1 immediately preceding the January 1
date on which the redemption is to be effective, and any such request will be
irrevocable. FSP Corp. will treat all redemption requests in the same manner,
meaning that if a stockholder complies with the provision of FSP Corp.'s charter
regarding redemption, FSP Corp. will not discriminate among redeeming
stockholders based on the timing or amount of the redemption request; however,
FSP Corp.'s charter provides that in the event FSP Corp. has insufficient funds
or is otherwise prohibited from redeeming all of the shares requested, it will
redeem based on the order in which effective offers are received. Under FSP
Corp.'s redemption plan, FSP Corp. is only obligated to use its best efforts to
redeem shares of FSP common stock from stockholders wishing to have them
redeemed. There are significant conditions to FSP Corp.'s obligation to redeem
shares of FSP common stock including:
o FSP Corp. cannot be insolvent or be rendered insolvent by the
redemption;
o the redemption cannot impair FSP Corp.'s capital or operations;
o the redemption cannot contravene any provision of federal or state
securities laws;
o the redemption cannot result in FSP Corp. failing to qualify as a
REIT; and
o FSP Corp.'s management must determine that the redemption is in FSP
Corp.'s best interests.
Any redemption effected by FSP Corp. under this plan would result in those
stockholders tendering shares of FSP common stock receiving 90% of the fair
market value of such shares, as determined by the FSP board in its sole and
absolute discretion, and not their full fair market value. If FSP common stock
becomes listed for trading on AMEX or any other national securities exchange or
the NASDAQ National Market, FSP Corp. will no longer be obligated to, and does
not intend to, effect any redemption. FSP Corp. also does not intend to accept
any requests for redemption from the time of the mailing of this Consent
Solicitation/Prospectus until the effective date of the mergers.
46
THE MERGERS
We urge you to read the merger agreement by and among FSP Corp., the
acquisition subsidiaries and the target REITs, a copy of which is set forth as
Appendix A hereto and incorporated herein by reference.
Overview
FSP Corp. entered into the merger agreement, dated August 13, 2004, among
FSP Corp., four wholly-owned acquisition subsidiaries of FSP Corp. and the
target REITs. The merger agreement provides for the merger of each target REIT
with and into an acquisition subsidiary, with the acquisition subsidiary being
the surviving corporation.
The merger agreement provides that the mergers will be effected at the
time of the filing of the certificates of merger with the secretary of state of
the state of Delaware or at another date as may be specified in the certificates
of merger. On the effective date, each acquisition subsidiary will acquire by
merger a target REIT. The target REIT stockholders will be issued shares of FSP
common stock registered with the SEC pursuant to the registration statement of
which this Consent Solicitation/Prospectus is a part. FSP Corp. and the target
boards expect that the effective date will be on or about April 30, 2005 or as
soon as practicable after the conditions to the mergers are satisfied. The
mergers will not require any federal or state regulatory approvals.
Adoption of the merger agreement and approval of the mergers by a majority
of the outstanding shares of common stock of the target REIT and target stock
voting together as a class constitutes consent to the mergers of the target REIT
with and into the respective acquisition subsidiary and the issuance of FSP
common stock to the target REIT stockholders, all pursuant to the terms of the
merger agreement.
The Parties
FSP Corp. FSP Corp. is a Maryland corporation that operates in a manner
intended to qualify as a real estate investment trust for federal income tax
purposes.
FSP Corp. operates in two business segments and has two principal sources
of revenue:
o Real estate operations, including real estate leasing, interim
acquisition financing and asset/property management, which generate
rental income, loan origination fees and management fees,
respectively; and
o Investment banking/investment services, which generate brokerage
commissions and other fees related to the organization of
single-purpose entities that own real estate and the private
placement of equity in those entities.
On June 1, 2003, FSP Corp. acquired 13 real estate investment trusts by
merger. In these mergers, FSP Corp. issued 25,000,091 shares of FSP common stock
to holders of preferred stock in the acquired REITs. As a result of these
mergers, FSP Corp. now holds all of the assets previously held by these acquired
REITs. As part of its growth strategy, FSP Corp. may make similar acquisitions
in the future. The proposed acquisition of the target REITs is part of that
strategy.
The principal executive offices of FSP Corp. are located at 401 Edgewater
Place, Suite 200, Wakefield, Massachusetts 01880, and FSP Corp.'s telephone
number is (781) 557-1300. FSP Corp. leases its executive offices.
47
The Target REITs. Each Target REIT is a privately-held real estate
investment trust formed as a corporation under the laws of the state of Delaware
for the purpose of acquiring, developing and operating a single real property.
Addison Circle Addison Circle owns an office building in
Addison, Texas
Collins Crossing Collins Crossing owns an office building in
Richardson, Texas
Montague Montague owns an office/research and
development complex in San Jose, California
Royal Ridge Royal Ridge owns an office building in
Alpharetta, Georgia
The principal executive offices of the target REITs are located at 401
Edgewater Place, Suite 200, Wakefield, Massachusetts 01880, and the telephone
number is (781) 557-1300.
The Acquisition Subsidiaries. Each acquisition subsidiary is a
wholly-owned subsidiary of FSP Corp. formed as a corporation under the laws of
the State of Delaware for the sole purpose of acquiring a target REIT.
Addison Circle - formed for the sole purpose of acquiring
Acquisition Corp. Addison Circle
Collins Crossing - formed for the sole purpose of acquiring
Acquisition Corp. Collins Crossing
Montague Acquisition - formed for the sole purpose of acquiring Montague
Corp.
Royal Ridge - formed for the sole purpose of acquiring
Acquisition Corp. Royal Ridge
The principal executive offices of the acquisition subsidiaries are
located at 401 Edgewater Place, Suite 200, Wakefield, Massachusetts 01880, and
the telephone number is (781) 557-1300.
Votes Required
The affirmative vote of the holders of a majority of the target stock in
each of the target REITs, and a majority of the target stock and common stock in
each of the target REITs voting together as a class, is required to effectuate
the applicable mergers. If one or more target REITs does not obtain the vote
required for the consummation of the merger with such target REIT, FSP Corp.
will not proceed with the mergers of any other target REIT. Each target REIT
will solicit the vote of its target REIT stockholders separately. FSP Corp. is
the sole stockholder of the common stock of each target REIT, and has agreed to
vote those shares in favor of the respective mergers.
Barry Silverstein and Dennis J. McGillicuddy, each a director of FSP
Corp., own an aggregate of 173 and 14 shares of target stock, respectively. Mr.
Silverstein owns 102.5 shares in Addison Circle, 23.25 shares in Collins
Crossing, 42 shares in Montague and 5.25 shares in Royal Ridge. Mr. McGillicuddy
owns 1 share in each of Addison Circle and Royal Ridge, 2 shares in Collins
Crossing and 10 shares in Montague. Messrs. Silverstein and McGillicuddy each
purchased their shares in the original offerings of target stock and on the same
terms as other stockholders of such target REITs. These shares of target stock
held by Messrs. Silverstein and McGillicuddy will convert into approximately
1,022,217 and approximately 80,836 shares of FSP common stock, respectively,
48
upon consummation of the mergers. The approximate aggregate value of the shares
of FSP common stock to be received by Messrs. Silverstein and McGillicuddy is
$18,093,241 and $1,430,797, respectively, based on the value of $17.70 per share
of FSP common stock on August 13, 2004, as determined through negotiations
between FSP Corp. and the special committees. Messrs. Silverstein and
McGillicuddy have indicated that they intend to vote their respective shares of
target stock in favor of the adoption of the merger agreement and the approval
of the mergers. The executive officers and directors of the target REITs do not
beneficially hold any shares of target stock in any of the target REITs.
Recommendation of the Special Committees and the Target Boards
At a joint meeting held on August 11, 2004, each special committee
unanimously determined (i) that the terms of the merger agreement and mergers
are fair to, and in the best interests of, its target REIT and its target REIT
stockholders, and (ii) to recommend to its target board that such target board
approve the merger with its target REIT and adopt the merger agreement. At a
joint meeting of the target boards held on August 11, 2004, the directors
unanimously:
o determined that the terms of the merger agreement and mergers with
its target REIT are fair to, and in the best interests of, that
target REIT and its target REIT stockholders;
o authorized the officers of that target REIT to solicit consents from
the target REIT stockholders for purposes of approving the merger
relating to the respective target REIT and adopting the merger
agreement;
o determined to recommend to the respective target REIT stockholders
that they vote to adopt the merger agreement and approve the merger
relating to the respective target REIT; and
o authorized the President of the respective target REIT to execute
the merger agreement and related documents.
See "Benefits, Background and Reasons for the Mergers - Background of the
Mergers."
The Special Committees. In determining to recommend that its target board
approve the merger relating to its respective target REIT and adopt the merger
agreement, and in determining that the merger relating to its target REIT was
fair to, and in the best interests of, such target REIT stockholders, each
special committee considered both potential positive and negative factors. The
special committees believe that the mergers represent an opportunity for the
target REIT stockholders to realize a premium over the current appraised value
of the real estate and adjusted cash reserves held by the respective target
REITs. Among the positive factors considered were the following factors, each of
which, in such special committee's view, supported that special committee's
determination to recommend the respective merger:
o the determination of such special committee that the value of the
FSP common stock to be distributed as merger consideration to its
target REIT stockholders represented greater value, or a premium,
than the sum of the value of the real estate (as determined by an
appraisal) and adjusted cash reserves held by such target REIT;
o the determination of such special committee, based on such special
committee's analysis of the factors described in this section,
including consideration of the appraisals, that the value of the FSP
common stock to be distributed as merger consideration to its target
REIT stockholders was greater than the value that was likely to be
realized upon the continuation of the such target REIT;
49
o the receipt from A.G. Edwards of an opinion, delivered orally to
each special committee and board of each target REIT and
subsequently confirmed in writing, as to the fairness from a
financial point of view of the merger consideration to the
stockholders of each target REIT;
o the independent third-party appraisals of the real property owned by
each target REIT;
o the analysis presented to such special committee by A.G. Edwards
(see "Fairness of the Mergers - Fairness of the Merger Consideration
to Target REIT Stockholders - Fairness Opinions");
o the substantial likelihood of the consummation of the mergers
because of the limited number and nature of the conditions to FSP
Corp.'s and the acquisition subsidiaries' obligations to close;
o that target REIT stockholders who do not vote in favor of the
mergers will have statutory appraisal rights;
o that each target REIT can pay its customary dividends in respect of
the third and fourth quarters of 2004; and
o the representations and warranties of the merger agreement relating
to the target REITs do not survive the closing.
For a complete list of the factors considered by the target REITs, see
"Fairness of the Mergers - Conclusions of the Target Boards."
The material negative factors, which each special committee viewed as
insufficient to outweigh the positive factors, were:
o that, following the mergers, the target REIT stockholders will cease
to participate in the future earnings growth, if any, of their
respective target REIT or benefit from the increase, if any, in the
future liquidation value of the respective target REIT, other than
indirectly through their FSP stock ownership;
o the possibility that the shares of FSP common stock may in the
future trade at a price lower than $17.70 per share;
o the fact that, based on historical quarterly, non-special dividends
received by stockholders of FSP Corp. and the target REIT
stockholders, a majority of the target REIT stockholders could
expect to receive a lower level of dividends from the combined
company than such stockholders have historically received from their
target REITs;
o the possibility that the shares in the target REIT would have
appreciated in value more rapidly or at a greater rate than any
appreciation in value in the FSP Corp. shares;
o that the target REITs did not seek third party bids for the
acquisition of the target REITs or their respective properties; and
50
o the potential conflicts of interests of officers and directors of
each target REIT in connection with the mergers.
Each special committee consulted with A.G. Edwards during the course of
the negotiation processes. Although A.G. Edwards provided advice and analyses to
the special committees and each special committee accepted the opinion of A.G.
Edwards as to the fairness, from a financial point of view, of the consideration
to be received in the mergers by the target REIT stockholders, the decision to
recommend to the target boards entering into the merger agreement and accepting
the consideration to be received in the mergers was solely that of each special
committee.
The special committees believe that the mergers are procedurally fair
because:
o each special committee was appointed to represent the interests of,
and to negotiate with, FSP Corp. on behalf of the target REIT
stockholders;
o the special committees retained and were advised by independent
legal counsel;
o each special committee retained and received a report from an
independent appraisal firm as to the value of the target REIT's
property;
o the special committees retained and were advised by A.G. Edwards,
its independent financial advisor; and
o the merger consideration and the other terms and conditions of the
merger agreement resulted from negotiations between the special
committees and FSP Corp.
Each target board considered increasing its board size to include an
independent director to perform the function of the special committees. However,
each target board concluded that, given the potential liability of a director
voting on the mergers, it would be difficult to retain someone with the
knowledge and credentials necessary to fulfill the role of an independent
director of a REIT who would be willing to take on the role of independent
director of any of the target REITs without being substantially compensated and
without being covered by director liability insurance. None of the target REITs
currently has director and officer liability insurance. Each target board
determined that the cost of compensating an independent director and obtaining
director and officer liability insurance would be substantial and not in the
best interests of its target REIT stockholders. For this reason, none of the
target boards appointed an independent director to perform the functions of the
special committees.
The Board of Directors. The target boards, at a joint meeting held on
August 11, 2004, considered the unanimous recommendation of each of the special
committees, the opinions of the financial advisor as to the fairness of the
merger consideration from a financial point of view to each target REIT, as well
as the other factors (enumerated above) considered by each special committee,
and determined that the mergers are fair to, and in the best interests of, the
target REIT stockholders, adopted the merger agreement and approved the mergers
and recommended that the target REIT stockholders vote to adopt the merger
agreement and approve the mergers. Each target board considered the
recommendation of its special committee but made its own evaluation, based on
the factors enumerated above, of the substantive and procedural fairness of the
mergers and the merger agreement.
51
The foregoing discussion of the information and factors considered by the
special committees and the target boards is not intended to be exhaustive but
includes all material factors considered by them in making their respective
decisions. In view of the variety of factors considered in connection with their
evaluation of the mergers, the special committees and the target boards did not
find it practicable to, and did not, quantify or otherwise attempt to assign
relative weights to the specific factors considered in reaching their respective
determinations. In addition, individual members of the special committees or of
the target boards may have given different weight to different factors.
Appraisal Rights of Dissenting Stockholders of Target REITs
If the mergers are consummated, a target REIT stockholder who does not
consent in writing to the mergers and who is the holder of record of target
stock on the date of making a demand for appraisal, as described below, will be
entitled to have those shares appraised by the Delaware Court of Chancery, or
the Delaware Court, under Section 262 of the Delaware general corporation law
statute and to receive payment for the "fair value" of those shares instead of
the consideration provided for in the merger agreement. In order to be eligible
to receive this payment, however, a target REIT stockholder must:
o continue to hold his, her or its target stock through the time of
the mergers, and
o strictly comply with the procedures discussed under Section 262.
The statutory right of appraisal granted by Section 262 requires strict
compliance with the procedures in Section 262. Failure to follow any of these
procedures may result in a termination or waiver of appraisal rights under
Section 262. The following is a summary of the principal provisions of Section
262. The following summary is not a complete statement of Section 262 of the
Delaware general corporation law statute, and is qualified in its entirety by
reference to Section 262, which is incorporated herein by reference, together
with any amendments to the laws that may be adopted after the date of this
Consent Solicitation/Prospectus. A copy of Section 262 is attached as Appendix D
to this Consent Solicitation/Prospectus.
Notice Requirements. Under Section 262, each target REIT before the
effective date or acquisition subsidiary within ten days after the effective
date, as the surviving corporation, must send a notice of availability appraisal
rights, or the appraisal rights notice, as required under Section 262(d)(2) of
the Delaware general corporation law, and a copy of Section 262 to each target
REIT stockholder of the respective target REIT, or if sent after the effective
date, to each stockholder who has not consented in writing to adoption of the
merger agreement, approval of the mergers and the transactions contemplated by
the merger agreement and who is eligible for appraisal rights. This Consent
Solicitation/Prospectus constitutes such notice. Any target REIT stockholder
entitled to appraisal rights may, within twenty days after the date of mailing
of this Consent Solicitation/Prospectus, demand in writing from the respective
target REIT or acquisition subsidiary, as the surviving corporation, an
appraisal of his, her or its shares of target stock. Such demand will be
sufficient if it reasonably informs the respective target REIT or acquisition
subsidiary of the identity of the target REIT stockholder and that the target
REIT stockholder intends to demand an appraisal of the fair value of his, her or
its shares of target stock. Failure to make such demand on or before the
expiration of such twenty day period will foreclose a target REIT stockholder's
rights to appraisal. A target REIT stockholder should not expect to receive any
additional notice with respect to the deadline for demanding appraisal rights.
Demand for Appraisal. Only a target REIT stockholder who does not consent
in writing to the mergers will be entitled to seek appraisal. Only a record
holder of target stock on the date of making a written demand for appraisal who
continuously holds those shares through the time of the mergers is entitled to
seek appraisal. Demand for appraisal must be executed by or for the holder of
record, fully and correctly, as that holder's name appears on the holder's stock
certificates representing shares of the target stock or other evidence of
ownership of target stock. If the target stock is owned of record in a fiduciary
capacity by a trustee, guardian or custodian, the demand should be made in that
capacity. If the target stock is owned of record by more than one person, as in
a joint tenancy or tenancy in common, the demand should be made by or for all
owners of record.
52
An authorized agent, including an agent for one or more joint owners, may
execute the demand for appraisal for a holder of record; that agent, however,
must identify the record owner or owners and expressly disclose in the demand
that the agent is acting as agent for the record owner or owners of the shares.
A record holder such as a broker, fiduciary, depository or other nominee
who holds shares of the target stock as a nominee for more than one beneficial
owner, some of whom desire to demand appraisal, may exercise appraisal rights on
behalf of those beneficial owners with respect to the shares of target stock
held for those beneficial owners. In that case, the written demand for appraisal
should state the number of shares of the target stock covered by it. Unless a
demand for appraisal specifies a number of shares, the demand will be presumed
to cover all shares of the target stock held in the name of the record owner.
Failure to make a demand for appraisal on or before March 20, 2005 will
foreclose a target REIT stockholder's rights to appraisal. All demands should be
delivered to the attention of the respective acquisition subsidiary at 401
Edgewater Place, Wakefield, Massachusetts 01880, Attention: Barbara J. Fournier.
Beneficial owners who are not record owners and who intend to exercise
appraisal rights should instruct the record owner to comply with the statutory
requirements with respect to the exercise of appraisal rights within twenty days
of the date of mailing of the appraisal rights notice.
Filing of Petition. Within 120 days after the effective date of the
mergers, any target REIT stockholder who has complied with the applicable
provisions of Section 262 will be entitled, upon written request, to receive
from the respective acquisition subsidiary a statement setting forth the
aggregate number of shares of target stock of his, her or its target REIT not
voting in favor of the mergers and with respect to which demands for appraisal
were received by the respective acquisition subsidiary for his, her or its
target REIT and the number of holders of such shares. Each respective
acquisition subsidiary must mail this statement within ten days after it
receives the written request or within ten days after the expiration of the
period for the delivery of demands as described above, whichever is later.
Within 120 days after the effective date of the mergers, each respective
acquisition subsidiary, as the surviving corporation, or any target REIT
stockholder who has complied with the requirements of Section 262 and who is
otherwise entitled to appraisal rights may file a petition in the Delaware Court
demanding a determination of the fair value of the shares of target REIT stock
held by all target REIT stockholders of a specific target REIT seeking
appraisal. A dissenting target REIT stockholder must serve a copy of the
petition on the respective acquisition subsidiary. If no petition is filed by
either the respective acquisition subsidiary or any dissenting target REIT
stockholder within the 120-day period, the rights of all dissenting target REIT
stockholders to appraisal will cease, and the stockholders will be entitled to
receive the merger consideration that they would have received had they not
exercised appraisal rights.
Target REIT stockholders seeking to exercise appraisal rights should not
assume that the respective acquisition subsidiary, as the surviving corporation,
will file a petition with respect to the appraisal of the fair value of their
target stock or that the respective acquisition subsidiary will initiate any
negotiations with respect to the fair value of those shares. The acquisition
subsidiaries are under no obligation to, and have no present intention to, take
any action in this regard. Accordingly, target REIT stockholders who wish to
seek appraisal of their shares should initiate all necessary action with respect
to the perfection of their appraisal rights within the time periods and in the
manner prescribed in Section 262. Failure to file the petition on a timely basis
will cause the target REIT stockholder's right to an appraisal to cease.
53
Notice of and Hearing in Chancery Court. Upon the filing of a petition by
a target REIT stockholder seeking appraisal, the Delaware Court may order a
hearing and deliver notice of the time and place fixed for the hearing on the
petition to the respective acquisition subsidiary and all of the dissenting
target REIT stockholders. Notice will also be published at least one week before
the day of the hearing in a newspaper of general circulation published in the
City of Wilmington, Delaware or in another publication deemed advisable by the
Delaware Court. The costs relating to those notices will be borne by the
respective acquisition subsidiary. If a petition for an appraisal is filed in a
timely manner, at the hearing on the petition, the Delaware Court will determine
which target REIT stockholders are entitled to appraisal rights and will
appraise the shares of target stock owned by those target REIT stockholders. The
Delaware Court may require the target REIT stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of target stock to the Register in Chancery for
notation thereon of the pendency of the appraisal proceedings; and if any target
REIT stockholder fails to comply with such direction, the Delaware Court may
dismiss the proceedings as to such target REIT stockholder. The court will
determine the fair value of those shares, exclusive of any element of value
arising from the consummation or expectation of the mergers, together with a
fair rate of interest, to be paid, if any, upon the fair value. The Court of
Chancery may determine the cost of the appraisal proceeding and assess it
against the parties as the Court deems equitable.
Although each target board believes that the consideration to be received
by its respective target REIT stockholders for their shares of target stock is
fair, no representation is made as to the outcome of the appraisal of fair value
as determined by the court, and target REIT stockholders should recognize that
such an appraisal could result in a determination of a value that is higher or
lower than, or the same as, the merger consideration. Moreover, FSP Corp. does
not anticipate offering more than the merger consideration to any target REIT
stockholder exercising appraisal rights and reserves the right to assert, in any
appraisal proceeding, that, for purposes of Section 262, the "fair value" of a
share of target stock is less than the merger consideration.
Determination of Fair Value. In determining "fair value," the Delaware
Court is required to take into account all relevant factors. In Weinberger v.
UOP, Inc., the Delaware Supreme Court discussed the factors that could be
considered in determining fair value in an appraisal proceeding, stating that
"proof of value by any techniques or methods which are generally considered
acceptable in the financial community and otherwise admissible in court" should
be considered and the "[f]air price obviously requires consideration of all
relevant factors involving the value of a company." The Delaware Supreme Court
has stated that in making this determination of fair value the court must
consider market value, asset value, dividends, earnings prospects, the nature of
the enterprise and any other facts which could be ascertained as of the date of
the merger which throw any light on the prospects of the merged corporation.
Section 262 provides that fair value is to be "exclusive of any element of
value arising from the accomplishment or expectation of the merger." In Cede &
Co. v. Technicolor, Inc., the Delaware Supreme Court stated that such exclusion
is a "narrow exclusion [that] does not encompass known elements of value," but
which rather applies only to the speculative elements of value arising from such
accomplishment or expectation. In Weinberger, the Delaware Supreme Court
construed Section 262 to mean that "elements of future value, including the
nature of the enterprise, which are known or susceptible of proof as of the date
of the merger and not the product of speculation, may be considered."
Expenses. Each dissenting target REIT stockholder is responsible for his,
her or its attorneys' and expert witness expenses, although upon application of
a dissenting target REIT stockholder, the Court may order that all or a portion
of the expenses incurred by any dissenting target REIT stockholder in connection
with the appraisal proceeding (including, without limitation, reasonable
attorneys' fees and the fees and expenses of experts) be charged pro rata
against the value of all shares of target stock entitled to appraisal. In the
absence of a court determination or assessment, each party bears its own
expenses.
54
No Right to Vote or Receive Dividends. Any target REIT stockholder who has
demanded appraisal in compliance with Section 262 will not, after the mergers,
be entitled to vote such stock for any purpose or receive payment of dividends
or other distributions, if any, on the target stock, except for dividends or
distributions, if any, payable to stockholders of record at a date prior to the
mergers.
Withdrawal. A target REIT stockholder may withdraw a demand for appraisal
and accept the FSP common stock at any time within 60 days after the effective
date of the mergers, or thereafter may withdraw a demand for appraisal with the
written approval of the respective acquisition subsidiary. Notwithstanding the
foregoing, if an appraisal proceeding is properly instituted, it may not be
dismissed as to any target REIT stockholder without the approval of the Delaware
Court, and any such approval may be conditioned on the Delaware Court deeming
the terms to be just. If, after the mergers, a holder of target stock who had
demanded appraisal for his, her or its target stock fails to perfect or loses
his, her or its right to appraisal, those shares of target stock will be treated
as if they were converted into FSP common stock at the time of the mergers.
In view of the complexity of these provisions of the Delaware corporate
law, any target REIT stockholder who is considering exercising appraisal rights
should consult a legal advisor.
Conditions Precedent to the Mergers
The respective obligations of each party to effect the mergers are subject
to the fulfillment or waiver on or before the effective date of the following
conditions:
o the adoption of the merger agreement and the approval of the mergers
by the affirmative vote of the holders of a majority of the shares
of target stock of each target REIT;
o the parties must receive all necessary consents, waivers, approvals,
authorizations or orders required to be obtained and the making of
all filings required to be made by any of the parties for the
authorization, execution and delivery of the merger agreement and
the consummation of the transactions contemplated thereby on or
before (and remaining in effect at) the effective date;
o FSP Corp. and each of the target REITs shall have received an
opinion from Wilmer Cutler Pickering Hale and Dorr LLP or another
nationally recognized law firm to the effect that each merger will
be treated for federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Code and confirming
that, to the extent the matters discussed under the heading
"Material United States Federal Income Tax Considerations" in this
Consent Solicitation/Prospectus constitute matters of law, they are
accurate in all material respects;
o delivery by the President and Chief Executive Officer of FSP Corp.
and the President of each of the target REITs of certificates to the
effect that there have been no material adverse changes in the
financial condition of such entity prior to the consummation of the
mergers;
o there having been no statute, rule, order, or regulation enacted or
issued by the United States or any State thereof, or by a court,
which prohibits the consummation of the mergers; and
o the representations of each of FSP Corp. and the target REITs set
forth in the merger agreement shall be true and complete in all
material respects as of the closing date (provided that the party
whose representation was not correct shall have no right not to
proceed with the closing as a result thereof).
55
The conditions described in the second bulleted paragraph above may be
waived by the FSP board in whole or in part if, in the opinion of the FSP board,
such waiver does not materially affect the terms of the transaction, which
waiver shall not be unreasonably withheld. Certain of the conditions to the
consummation of the mergers are beyond the control of FSP Corp., the target
REITs and the target boards. There can be no assurance that the mergers will
occur.
Legal Proceedings
FSP Corp., one or more of the target REITs and the target boards may be
involved in litigation incidental to their business, but no material litigation
is currently pending or threatened against FSP Corp. or any of the target REITs,
their respective properties or the target boards.
Solicitation of Consents by FSP Investments
FSP Investments, as the soliciting agent, will use its best efforts to
solicit the consents of target REIT stockholders to approve the mergers. FSP
Investments will not receive any commissions with respect to the mergers;
however, all out-of-pocket expenses (including telephone, mailing and other
expenses) incurred by FSP Investments will be treated as solicitation expenses
and will be reimbursed to FSP Investments as set forth below in "Expenses of the
Mergers." FSP Investments is a wholly-owned subsidiary of FSP Corp.
Interests of Certain Persons in the Mergers
A number of conflicts of interest are inherent in the relationships among
the target REITs, the target boards, FSP Corp., the FSP board and their
respective affiliates. These conflicts of interest include the fact that FSP
Investments, a subsidiary of FSP Corp., syndicated each target REIT and, among
others:
o George J. Carter, the President and a director of each target REIT,
is President, Chief Executive Officer and a director of FSP Corp.
and owns an aggregate of 775,531 shares of FSP common stock;
o R. Scott MacPhee, an Executive Vice President and a director of each
target REIT and a member of each special committee, is also an
Executive Vice President of FSP Corp. and owns an aggregate of
372,451 shares of FSP common stock;
o Richard R. Norris, an Executive Vice President and a director of
each target REIT, is also a director and an Executive Vice President
of FSP Corp. and owns an aggregate of 258,087 shares of FSP common
stock;
o William W. Gribbell, an Executive Vice President and a director of
each target REIT and a member of each special committee, is also an
Executive Vice President of FSP Corp. and owns an aggregate of
129,761 shares of FSP common stock;
o Barbara J. Fournier, Vice President, Chief Operating Officer,
Treasurer, Secretary and a director of each target REIT, is also
Vice President, Chief Operating Officer, Treasurer, Secretary and a
director of FSP Corp. and owns an aggregate of 27,934 shares of FSP
common stock;
o Janet P. Notopoulos, Vice President of each target REIT, is also a
Vice President and director of FSP Corp. and owns an aggregate of
14,985 shares of FSP common stock; and
56
o the target REITs' properties are managed by FSP Property Management,
a subsidiary of FSP Corp. pursuant to management services agreements
under which FSP Corp. receives certain fees from each target REIT
for its management services.
The directors of the target REITs may have been more inclined to vote for
the mergers as a result of their ownership of FSP common stock since an increase
in the real property assets owned by FSP Corp. may result in greater value for
FSP Corp. stockholders.
Each target board established a special committee consisting of Messrs.
MacPhee and Gribbell, the only members of the target boards who are not also
members of the FSP board. Messrs. MacPhee and Gribbell serve as executive vice
presidents of FSP Corp. Under the Delaware general corporation law, the target
boards cannot delegate to a third party their fiduciary duties relating to the
determination of whether the transactions contemplated by the mergers were or
were not fair to the target REIT stockholders. For this reason, no unaffiliated
person(s) was or were retained by any target board to represent the interests of
the target REIT stockholders, whether or not such stockholders are or were
affiliated with FSP Corp. Each target board considered increasing its board size
to include an independent director to perform the function of the special
committees. However, each target board concluded that, given the potential
liability of a director voting on the mergers, it would be difficult to retain
someone with the knowledge and credentials necessary to fulfill the role of an
independent director of a REIT who would be willing to take on the role of
independent director of any of the target REITs without being substantially
compensated and without being covered by director liability insurance. None of
the target REITs currently has director and officer liability insurance. Each
target board determined that the cost of compensating an independent director
and obtaining director and officer liability insurance would be substantial and
not in the best interests of its target REIT stockholders. For this reason, none
of the target boards appointed an independent director to perform the functions
of the special committees.
If each target REIT had a separate board of directors with executive
officers who did not serve in similar capacities for FSP Corp. and directors who
did not own FSP common stock, these persons would have had an independent
perspective which might have led them to advocate positions during the
negotiation and structuring of the merger agreement and the determination of the
merger consideration more favorable to the target REIT stockholders than those
taken by the target boards.
The executive officers and directors of the target REITs do not
beneficially hold any shares of target stock in any of the target REITs. Barry
Silverstein and Dennis J. McGillicuddy, each a director of FSP Corp., own an
aggregate of 173 and 14 shares of target stock, respectively. Mr. Silverstein
owns 102.5 shares in Addison Circle, 23.25 shares in Collins Crossing, 42 shares
in Montague and 5.25 shares in Royal Ridge. Mr. McGillicuddy owns 1 share in
each of Addison Circle and Royal Ridge, 2 shares in Collins Crossing and 10
shares in Montague. Messrs. Silverstein and McGillicuddy each purchased their
shares in the original offerings of target stock and on the same terms as other
stockholders of such target REIT. These shares of target stock held by Messrs.
Silverstein and McGillicuddy will convert into approximately 1,022,217 and
approximately 80,836 shares of FSP common stock, respectively, upon consummation
of the mergers. The approximate aggregate value of the shares of FSP common
stock to be received by Messrs. Silverstein and McGillicuddy is $18,093,241 and
$1,430,797, respectively, based on the value of $17.70 per share of FSP common
stock on August 13, 2004, as determined through negotiations between FSP Corp.
and the special committees. Messrs. Silverstein and McGillicuddy have indicated
that they intend to vote their respective shares of target stock in favor of the
adoption of the merger agreement and the approval of the mergers.
The following table represents the percentage ownership in each target
REIT held by Messrs. Silverstein and McGillicuddy:
57
Mr. Silverstein Mr. McGillicuddy
--------------- ----------------
Addison Circle 16.12% *
Collins Crossing 4.19% *
Montague 12.57% 2.99%
Royal Ridge 1.76% *
* Less than 1%.
Barry Silverstein, Dennis J. McGillicuddy and John N. Burke are the only
directors of FSP Corp. who are not also officers or directors of any target
REIT. The remainder of the officers and directors of FSP Corp. serve as a
director and/or officer, in the positions listed above, of each target REIT.
Upon completion of the mergers, Mr. Silverstein's percentage ownership
interest of FSP Corp. will decrease from 9.67% to 9.62%, Mr. McGillicuddy's
percentage ownership interest of FSP Corp. will decrease from 7.24% to 6.07%,
and the percentage ownership of the current directors and executive officers of
FSP Corp. as a group will decrease from 19.07% to 17.46%. Mr. Burke does not own
any shares of FSP common stock or any shares of target stock.
Material United States Federal Income Tax Considerations
The mergers are intended to qualify as reorganizations within the meaning
of Section 368(a) of the tax code. It is a condition to the closing of the
mergers that FSP Corp. and each target REIT shall have received an opinion from
Wilmer Cutler Pickering Hale and Dorr LLP or another nationally recognized law
firm to the effect that the mergers will be treated for United States federal
income tax purposes as reorganizations within the meaning of Section 368(a) of
the tax code and confirming in all material respects that, to the extent the
matters discussed under the heading "Material United States Federal Income Tax
Considerations" in the Consent Solicitation/Prospectus constitute matters of
law, they are accurate in all material respects.
Accounting Treatment
Each of the mergers will be accounted for as a purchase under GAAP. In
accordance with the applicable accounting rules, FSP Corp. will record the value
of the target REITs' assets on its books in an amount equal to the aggregate
appraised value of the target REITs' properties on the effective date and the
target REITs' cash reserves because such amounts are more reliably measurable.
Timing and Effectiveness of the Mergers
The effective date of the mergers is expected to occur on or about April
30, 2005 or such other time as the conditions to the mergers are satisfied.
Market Information
There is no established public trading market for FSP common stock. FSP
Corp. has filed an application to list its common stock on AMEX, and the AMEX
has approved the application. There can be no assurance that FSP Corp.'s common
stock will be listed for trading, or, in the event that it is, that a meaningful
trading market will develop. The value of FSP common stock of $17.70 per share
was determined through negotiations between the special committees of the target
boards and FSP Corp. of the merger consideration to be received by the target
REIT stockholders.
58
As of August 20, 2004, there were approximately 1,420 holders of record of
FSP common stock. This computation is based upon the number of record holders
reflected in the corporate records of FSP Corp.
FSP Corp. has declared a dividend of $0.31 per share of FSP common stock
payable to stockholders of record as of February 7, 2005. Set forth below are
the dividends per share of FSP common stock that FSP Corp. made in each quarter
since the quarter ended June 30, 2002.
Distribution Amount
Per Share of FSP
Quarter Ended Common Stock
6/30/02 $0.31
9/30/02 $0.31
12/31/02 $0.31
3/31/03 $0.31
6/30/03 $0.31
9/30/03 $0.31
12/31/03 $0.31
3/31/04 $0.31
6/30/04 $0.31
9/30/04 $0.31
12/31/04 $0.31
Moreover, for the quarter ended September 30, 2003, FSP Corp. declared a
special dividend of $0.12 per share of FSP common stock.
Expenses of the Mergers
The expenses payable by FSP Corp. and the target REITs in connection with
the mergers are estimated to be as follows:
By FSP Corp. By Target REITs
------------ ---------------
Appraisals (including fees and
expenses) $ -- $ 20,500
Fairness Opinions (including fees
and expenses) -- 380,000
Legal (including fees and
expenses) 500,000 65,000
59
By FSP Corp. By Target REITs
------------ ---------------
Accounting 125,000 24,500
Printing and Postage 95,000
Soliciting Agent (Out-of-Pocket
Expenses) 5,000
Contingency 40,000
----------- ------------
Total $ 760,000 $ 475,000
The target REITs are only responsible for payment of A.G. Edwards'
engagement, including the fairness opinions, the appraisals and the fees of its
outside legal counsel and independent accountants. All other fees and expenses
will be paid by FSP Corp.
60
BENEFITS, BACKGROUND AND REASONS FOR THE MERGERS
History of FSP Corp. and the Target REITs
FSP Corp. FSP Corp. is a Maryland corporation that operates in a manner
intended to qualify as a real estate investment trust for federal income tax
purposes.
FSP Corp. operates in two business segments and has two principal sources
of revenue:
o Real estate operations, including real estate leasing, interim
acquisition financing and asset/property management, which generate
rental income, loan origination fees and management fees,
respectively.
o Investment banking/investment services, which generate brokerage
commissions and other fees related to the organization of
single-purpose entities that own real estate and the private
placement of equity in those entities.
On June 1, 2003, FSP Corp. acquired 13 real estate investment trusts by
merger. In these mergers, FSP Corp. issued 25,000,091 shares of FSP common stock
to holders of preferred stock in the acquired REITs. As a result of these
mergers, FSP Corp. now holds all of the assets previously held by these acquired
REITs. As part of its growth strategy, FSP Corp. may make similar acquisitions
in the future. The proposed acquisition of the target REITs is part of that
strategy.
For more detailed information regarding FSP Corp. and its growth strategy
and prior acquisitions see "Background of FSP Corp. and its Growth Strategy."
FSP Investments completed the syndication of Addison Circle in December 2002,
Collins Crossing in June 2003, Royal Ridge in March 2003 and Montague in
September 2002. The following table sets forth the amount to be paid by FSP
Corp. for each of the target REITs as negotiated in connection with the mergers,
the value per share of the FSP common stock as negotiated in connection with the
mergers, the gross proceeds contributed by investors in the original syndication
of such sponsored entity, the estimated amount of fees FSP Corp. (including FSP
Investments) earned upon the original syndication and the estimated amount of
fees FSP Property Management earned after the original syndication but prior to
the acquisition. Following the mergers the target REIT stockholders will
indirectly incur their pro rata share of FSP Corp.'s general and administrative
expenses.
Merger Estimated
Consideration to Aggregate Fees
be Received by Per Share Value Gross Proceeds Estimated Aggregate Earned by FSP
Target REIT of FSP Common of the Fees Earned by FSP Property
Target REIT Stockholders Stock Syndication Corp. Management
----------- ------------ --------------- -------------- ------------------- --------------
Addison Circle $66,965,414 $17.70 $63,600,000 $9,818,870 $158,697
Collins Crossing 60,587,756 17.70 55,500,000 8,706,270 118,167
Montague 33,400,000 17.70 33,400,000 5,009,680 93,026
Royal Ridge 31,888,293 17.70 29,750,000 4,384,860 43,317
61
Background of the Mergers
In accordance with FSP Corp.'s strategy of periodically reviewing the
possibility of acquiring sponsored REITs, at a meeting of the FSP board on June
25, 2004, FSP management discussed with its board the possibility of acquiring
the target REITs. No formal vote was taken, but the directors supported the
decision to begin discussions with the target REITs.
On June 29, 2004, members of FSP Corp. management met with Wilmer Cutler
Pickering Hale and Dorr LLP, FSP Corp.'s legal counsel, and Ernst & Young LLP,
FSP Corp.'s independent auditors, to discuss the possibility of the mergers and
FSP Corp.'s intent to apply to list the FSP common stock on AMEX.
On or about July 2, 2004, Mr. Carter, as a representative of FSP Corp.,
contacted Messrs. Gribbell and MacPhee, as representatives of the target REITs,
to discuss a possible business combination among FSP Corp. and the target REITs.
On or about July 5, 2004, the target boards held a telephonic meeting to
discuss the possibility of a business combination with FSP Corp. On July 12,
2004, each target board established a special committee to consider the proposed
mergers with FSP Corp. Each special committee is comprised of Messrs. MacPhee
and Gribbell, the members of the target REIT boards who were not also members of
the FSP board.
On July 13, 2004, the special committees held a telephonic meeting with
representatives of A.G. Edwards to discuss the potential engagement of A.G.
Edwards.
On or about July 19, 2004, the special committees engaged Gehrke, Gish &
Umana LLP, or GGU, to act as independent legal counsel to the target REITs. On
or about July 22, 2004, the special committees engaged A.G. Edwards to advise
the special committees in evaluating and negotiating the terms of the mergers,
including the merger consideration, and to deliver a fairness opinion to each
target board.
On July 19, 2004, the special committees held a telephonic meeting at
which the special committees, representatives of GGU and representatives of A.G.
Edwards began reviewing certain financial, strategic and legal considerations
relating to a potential acquisition of the target REITs by FSP Corp.
Negotiation of Non-Economic Terms
On July 20, 2004, counsel for FSP Corp. distributed a draft of the merger
agreement to FSP Corp., the special committees, GGU and A.G. Edwards. This draft
did not include a proposed amount of merger consideration. Based on negotiations
between the parties, counsel for FSP Corp. distributed a revised draft of the
merger agreement on July 27, 2004. The revised draft reflected the addition of
representations by FSP Corp. concerning its financial statements, the addition
of a representation by FSP Corp. stating that to FSP Corp.'s knowledge there are
no breaches by any target REIT of any of its representations contained in the
merger agreement, the addition of a covenant by FSP Corp. to vote its shares of
the common stock of each target REIT in favor of the mergers, the addition of
provisions allowing a target REIT to engage in discussions with other potential
buyers and a target REIT board to withdraw or modify its recommendation to
stockholders to vote in favor of the merger, in each case to the extent required
by the fiduciary duties of such target REIT board, and the deletion of FSP
Corp.'s right to terminate the merger agreement in its entirety in the event of
a material casualty loss to the property of one target REIT.
Based on further negotiations between, and further review of the merger
agreement by, the parties in late July and early August 2004, counsel for FSP
Corp. distributed further revised drafts of the merger agreement on August 6,
August 9, August 10 and August 13, 2004. These revised drafts reflected
62
primarily the addition of a provision allowing FSP Corp. or a target REIT to
terminate the merger agreement in the event that, following receipt by a target
REIT of an acquisition proposal superior to the FSP Corp. proposal, the target
REIT board withdraws its recommendation and the stockholders fail to approve the
merger, and changes to the required tax opinion and other tax-related
provisions.
Negotiation of Economic Terms
On July 13, 2004, the special committee received the appraisal for Royal
Ridge from CB Richard Ellis, legally known as CBRE- Valuation and Advisory
Services. On July 14, 2004, the special committee received the appraisal for
Montague from Cushman & Wakefield of California, Inc. On July 23, 2004, the
special committee received the appraisal for Addison Circle and Collins Crossing
from Bryan E. Humphries and Associates.
On July 26, 2004, the special committees held a telephonic meeting in
which the special committees and representatives of A.G. Edwards began reviewing
potential valuations and analyses relating to the proposed acquisition of the
target REITs by FSP Corp. The special committees then determined, after
consultation with A.G. Edwards, to initially propose $16.67 as the per share
value of the FSP common stock. This determination and the special committees'
negotiations with FSP Corp. and subsequent determination to agree to a price of
$17.70 were based upon a number of factors considered by the special committees
in consultation with A.G. Edwards, including the following primary factors:
o a discounted cash flow analysis of FSP Corp.'s projected cash flows;
o an analysis of companies deemed comparable to FSP Corp. and their
current trading multiples;
o an analysis of precedent transactions that could be deemed
comparable to the proposed transactions between the target REITs and
FSP Corp.;
o the range of dividend yields for existing publicly traded REITs;
o prices previously used by FSP Corp. in its stock repurchases; and
o the general economic environment in the REIT industry.
On July 26, 2004, the special committees held a second telephonic meeting
at which a representative of GGU discussed the fiduciary duties of the special
committees and the boards of the target REITs in connection with an acquisition
of the target REITs by FSP Corp. The special committees and a representative of
GGU also discussed the terms of the merger agreement prepared by FSP Corp.'s
counsel, and the special committees authorized GGU to continue negotiations
concerning the merger agreement with FSP Corp.'s counsel.
Between July 26, 2004 and July 27, 2004, members of FSP Corp.'s management
and the special committees discussed an appropriate price per share to be
ascribed to FSP common stock in connection with the potential mergers of the
target REITs and the wholly-owned acquisition subsidiaries of FSP Corp. The per
share price initially proposed by the special committees was $16.67 and by FSP
Corp., $18.50. After several discussions, as detailed below, with FSP Corp.
relating to the proposed price and the basis for the price, the target boards
presented FSP Corp. with a proposed per share price of $17.70 for the FSP common
stock. After additional discussions, also detailed below, FSP Corp. accepted the
proposed per share price. A.G. Edwards participated in many of these
discussions, serving in its role as financial advisor to the special committees
of the target boards of directors by providing services including, but not
limited to, guidance regarding an expected valuation range as provided below and
advice regarding negotiations with FSP Corp.
63
In conducting these negotiations, FSP Corp. believed that target REIT
stockholders would view the proposed mergers as an opportunity to exchange their
single asset real property investment for an investment in a larger and more
diversified portfolio of properties and associated FSP Corp. business at a
meaningful premium to the appraised values of their real properties. FSP Corp.
believed that investors in syndicated entities would view this opportunity as a
way to reduce the risks associated with a single asset real property investment
that, by its nature, is likely to be subject to greater potential fluctuations
in the local real estate markets and subject to possible loss of rental income
in the absence of lease renewals. FSP Corp. also believed that the target REIT
stockholders, particularly those who are also FSP Corp. stockholders, were
familiar with FSP Corp.'s acquisition history of other sponsored REITs,
including the acquisition of 13 sponsored REITs in 2003 in a similar
transaction, and would therefore be able to evaluate the potential benefits and
potential detriments to the proposed mergers.
FSP Corp. also recognized that it would need to offer an amount of merger
consideration that would represent a certain return on original investment to
some or all holders of target REIT stock in order to induce such holders to vote
in favor of the mergers. Once FSP Corp. determined the maximum amount it would
be willing to pay in total for each target REIT, it negotiated such amount with
the special committees and also negotiated a price per share of FSP common
stock.
In order to determine the maximum aggregate consideration it would be
willing to pay for each target REIT, FSP Corp. considered each target REIT
separately. FSP Corp. reviewed the following factors relating to each target
REIT:
o the target REIT's prior financial performance;
o the projected future performance of the target REIT as determined by
the appraisal the target REIT obtained and shared with FSP Corp.;
o FSP Corp.'s assessment of the projected future performance of the
target REIT given FSP Corp.'s knowledge and experience with certain
types of properties and specific local markets;
o FSP Corp.'s assessment of the likely long-term value of each
property based on its location compared to the short-term expected
cash flow from existing leases; and
o the potential increase to the overall financial performance of FSP
Corp. by the addition of the respective target REIT.
In considering each of the above-mentioned factors, FSP Corp. determined
that the appraisal of Montague did not reflect the value FSP Corp. placed on the
short-term benefit of the above-market lease held by Montague or the long-term
benefit of positioning capital in a prime location such as Silicon Valley. Due
to the volatility in the Silicon Valley market, FSP Corp. believes it is more
difficult to predict long-term value for a property in this market at any
particular date than in some other markets, but FSP Corp. believes that the
Montague location will provide good long-term value for FSP Corp. following the
mergers. FSP Corp. also considered the need to offer a price that would be
attractive enough to the holders of Montague target stock to induce them to vote
for the merger in light of the substantial cash-on-cash return such holders are
receiving annually.
In determining a value for the FSP common stock, FSP Corp. considered
o historical dividend payments made by FSP Corp.;
64
o projected cash available for distribution for holders of FSP common
stock for 2004;
o the cash on FSP Corp.'s balance sheet and the amount of cash
relative to the amount of debt in conjunction with shareholder
equity;
o comparable REIT industry statistics, specifically the NAREIT Index;
and
o the price paid by FSP Corp. in prior transactions.
Based on those factors, FSP Corp. considered that using the growth in the
NAREIT Index from the date of the last stock valuation by FSP Corp. in June 2003
to July 15, 2004 of approximately 14% would yield a stock value of approximately
$18.77 per share. FSP Corp. considered that dividend payments are one of the
primary reasons for investment in REITs, and considered FSP Corp.'s historical
payment of dividends and the quality of its portfolio and strength of its
balance sheet as indicators of its ability to continue to pay the same level of
dividends. FSP Corp. recognized that market conditions could affect the
performance of its real estate portfolio or its investment banking business and
that the stock market could place different values on different types of REITs.
In addition, FSP Corp. considered that, although the $16.45 value per share
determined by FSP Corp. in June 2003 included a discount for lack of liquidity,
its share price has not been set by the market.
During the course of negotiations, the special committees and A.G. Edwards
presented other factors that they had considered in valuing the common stock of
FSP Corp. and initially suggested a per share value of $16.67. FSP Corp.
disagreed with the value of $16.67 per share, but recognized that without an
active, liquid trading market, there could be a substantial range of opinions as
to the fair market value of the FSP common stock. FSP Corp. therefore engaged in
continued negotiations with the special committees of the target boards as
discussed below, eventually agreeing with the special committees on a price of
$17.70 per share.
Between July 26, 2004 and August 3, 2004, representatives of A.G. Edwards
engaged in discussions with members of FSP Corp.'s management, on behalf of the
target REITs, regarding potential valuations, financial models, business and
legal due diligence and other issues relating to a business combination among
the target REITs and FSP Corp.
On July 27, 2004, the special committees held a telephonic meeting at
which the special committees and representatives of A.G. Edwards discussed the
proposed price per share of FSP common stock that FSP Corp. would issue in the
proposed mergers. A.G. Edwards, acting in its role as financial advisor to the
special committees of the boards of directors, provided various draft analyses
performed as part of its due diligence in connection with the fairness opinions
it had been engaged to render to the special committees. See "Advice of
Financial Advisors and Appraisers" for a description of these analyses.
On July 27, 2004, after discussions with the FSP board, Mr. Carter and Ms.
Notopoulos discussed with the special committees and representatives of A.G.
Edwards the proposed price per share of FSP common stock that FSP Corp. would
issue in the proposed mergers.
On July 27, 2004, the special committees held a second telephonic meeting
at which they discussed with representatives of A.G. Edwards FSP Corp.'s
proposed price per share of FSP common stock. The special committees determined
that they would continue negotiations with FSP Corp. regarding the FSP common
stock price.
On July 27, 2004, Mr. Carter and Ms. Notopoulos, on behalf of FSP Corp.,
and the members of the special committees and representatives of A.G. Edwards,
on behalf of the target REITs, further discussed the proposed price per share of
FSP common stock that FSP Corp. would issue in the proposed mergers. No formal
65
vote was taken, but the members of the special committees supported the outcome
of the discussions, in which representatives of the parties indicated that they
would be willing to agree to a price per share of FSP common stock in the
mergers of $17.70, subject to the parties reaching agreement on the value of the
target REITs and the other terms of the merger agreement.
On July 28, 2004, the special committees held a telephonic meeting at
which the special committees and representatives of A.G. Edwards discussed the
appraisal of each target REIT and the proposed number of shares of FSP common
stock that would be issued to the stockholders of each target REIT in the
mergers.
On July 28, 2004, after discussions with certain members of the FSP board,
Mr. Carter informed the special committee and representatives of A.G. Edwards of
the number of shares of FSP common stock that FSP Corp. was considering offering
as merger consideration for each target REIT.
On July 29, 2004, representatives of A.G. Edwards discussed with the
special committees the proposed number of shares of FSP common stock being
offered by FSP Corp. as merger consideration. No formal vote was taken, but the
members of the special committees supported continued discussions with FSP Corp.
regarding the potential mergers.
On August 3, 2004, the special committees held a telephonic meeting at
which the special committees and a representative of GGU discussed the terms of
the revised merger agreement prepared by FSP Corp.'s counsel, and the special
committees authorized GGU to continue negotiations concerning the merger
agreement with FSP Corp.'s counsel.
Negotiations among management of FSP Corp., the special committees,
counsel for the target REITs and counsel for FSP Corp. continued until August
10, 2004. During this period, final agreement on the terms of the merger
agreement and other issues was reached over the course of several discussions
between management of and counsel for FSP Corp. and members of the special
committees and counsel for the target REITs. As noted above, on July 27, 2004,
the parties agreed to a price per share of FSP common stock of $17.70. As also
noted above, the parties negotiated the value of the target REITs separately.
The outcome of the negotiation of the price per share of FSP common stock had no
effect on the outcome of the negotiation of the value of each target REIT. The
number of shares of FSP common stock to be issued to the holders of each target
REIT was determined by dividing the negotiated value of such target REIT by
$17.70, the per share price of FSP common stock.
The negotiations between the parties resulted in agreement on merger
consideration for Addison Circle, Collins Crossing and Royal Ridge that produced
a premium, based on a value of $17.70 per share of FSP common stock, to the sum
of the appraised value of real estate and adjusted cash reserves that ranged
from 17.9% to 20.0%. With respect to Montague, FSP Corp. noted that Montague's
property is leased to a single tenant through December 31, 2006 at a rate that
is currently significantly above market. FSP Corp. further noted that the
appraised value of Montague's real estate was $20,000,000. Montague's special
committee noted that Montague's stockholders were receiving significant current
cash yields as a result of the above-mentioned lease and that, in the absence of
a significant premium to appraised value, those stockholders might not be
inclined to approve a merger. These negotiations resulted in merger
consideration for Montague that produced a premium, based on the value of $17.70
per share of FSP common stock, of 51.6%.
On August 10, 2004, the parties completed their due diligence reviews and
finalized the terms of the merger agreement and related agreements.
66
Approval of Merger Agreement
On August 10, 2004, the special committees held a meeting, and on August
11, 2004 the target boards held a meeting, to review the final terms of the
merger agreement and related documents and to consider the approval of the
merger agreement. The members of the special committees also considered,
discussed and conducted their initial formal qualitative analysis of the various
strategic alternatives available to each target REIT. This analysis consisted of
reviewing the advantages and disadvantages of each alternative, taking into
account the proposed A.G. Edwards opinions, the independent appraisals of the
target REIT properties and the information available to the members of the
special committees regarding the historical financial results of FSP Corp. and
each of the target REITs and the historical and projected dividend rates of FSP
Corp. and each of the target REITs. At the full board meeting that followed, the
target REIT boards also considered the special committees' analysis of these
strategic alternatives. At each meeting, representatives of A.G. Edwards
presented an analysis of the financial terms of each merger, including a
discussion of financial data and analyses used in evaluating the possible
acquisition of such target REIT by FSP Corp. After its presentation at the board
meeting, A.G. Edwards provided to each target board an oral opinion, later
confirmed in writing, to the effect that, as of August 11, 2004 and based upon
and subject to the various considerations set forth in its respective opinions,
the merger consideration was fair from a financial point of view to the holders
of target stock of each target REIT.
Additionally, at each of these meetings, a representative of GGU, outside
counsel to the target REITs, made a presentation regarding the significant terms
of the merger agreement and reviewed with the special committees and target
boards their fiduciary duties in connection with the proposed transactions. Each
special committee, after considering the terms of the merger agreement and other
related documents and the various presentations, unanimously approved the merger
agreement and the mergers and recommended that its respective full target board
also approve the transactions. Each target board, after considering the terms of
the merger agreement and other related documents, the various presentations and
its special committee's recommendation, unanimously approved the merger
agreement and the mergers, concluding that the consideration to be paid to the
target REIT stockholders in the mergers was fair to and in the best interests of
that target REIT and its stockholders. The target REIT boards then authorized
Mr. Carter to execute the merger agreement and related documents on behalf of
the target REITs.
On August 13, 2004, the FSP board held a special meeting to review the
final terms of the merger agreement and related documents and to consider the
approval of the merger agreement. Members of FSP Corp.'s management reviewed
with the FSP board the terms of the merger and the merger agreement. At the
meeting, representatives of Wilmer Cutler Pickering Hale and Dorr LLP, FSP
Corp.'s, outside counsel, made a presentation regarding the significant terms of
the merger agreement and reviewed with the board its fiduciary duties in
connection with the proposed transactions. Mr. John Burke, the only
disinterested member of the FSP board, after considering the terms of the merger
agreement and other related documents and the various presentations, approved
the merger agreement and the related documentation and recommended that the full
FSP board also approve the transaction. The other members of the FSP board,
after considering the terms of the merger agreement and other related documents,
the various presentations and Mr. Burke's recommendation, unanimously approved
the merger agreement and the related documentation. The FSP board then
authorized Mr. Carter to execute the merger agreement and related agreements.
On August 13, 2004, FSP Corp., the target REITs and the acquisition
subsidiaries executed the merger agreement.
Reasons for the Mergers
The Target REITs. Each target board unanimously concluded that the merger
agreement, providing for the mergers and the issuance of the merger
67
consideration, is fair to, and in the best interests of, its target REIT and
target REIT stockholders. Each target board recommends a vote FOR adoption of
the merger agreement and approval of the mergers contemplated thereby.
The special committees believe that the mergers represent an opportunity
for the target REIT stockholders to realize a premium over the current appraised
value of the real estate (as determined by the appraisal) and adjusted cash
reserves held by the respective target REITs. The decision to adopt the merger
agreement and approve the mergers contemplated thereby is also based upon:
o the determination of such special committee that the value of the
FSP common stock to be distributed as merger consideration to its
target REIT stockholders was greater than the value that was likely
to be realized upon the continuation of the such target REIT;
o the receipt from A.G. Edwards of an opinion, delivered orally to
each special committee and board of each target REIT and
subsequently confirmed in writing, as to the fairness from a
financial point of view of the merger consideration to the
stockholders of each target REIT;
o the independent third-party appraisals of the real property owned by
each target REIT;
o the analysis presented to such special committee by A.G. Edwards
(see "Fairness of the Mergers - Fairness of the Merger Consideration
to Target REIT Stockholders - Fairness Opinions");
o the substantial likelihood of the consummation of the mergers
because of the limited number and nature of the conditions to FSP
Corp.'s and the acquisition subsidiaries' obligations to close;
o that target REIT stockholders who do not vote in favor of the
mergers will have statutory appraisal rights;
o that each target REIT can pay its customary dividends in respect of
the third and fourth quarters of 2004; and
o the representations and warranties of the merger agreement relating
to the target REITs do not survive the closing.
For a complete list of the factors considered by the target REITs, see
"Fairness of the Mergers - Conclusions of the Target Boards."
The decision of the individual target boards to adopt the merger agreement
and approve the mergers contemplated thereby resulted from each target board's
consideration of a range of strategic alternatives, including the continuation
of its target REIT, the liquidation of its target REIT and the creation or
support of a secondary market for the target stock of its target REIT through
limited cash tender offers or repurchase programs sponsored by such target REIT.
The target boards considered a number of factors in evaluating the mergers,
including the following:
o the fairness opinions delivered by A.G. Edwards;
o the appraisals obtained by each target REIT;
o the value to be delivered to the target REIT stockholders in the
mergers;
o the potential for a future market for FSP common stock;
68
o the relative likelihood of completing the mergers;
o the potential volatility of the respective target REIT's business
relative to the more diversified business of FSP Corp.; and
o a review of the current and prospective business environment for
REITs.
Each target board also considered a number of potentially negative factors
in its deliberations concerning the mergers, including the fact that the premium
to be received by the target REIT stockholders is based on an FSP common stock
per share price of $17.70. Should the FSP common stock trade on the AMEX, the
trading price of the FSP common stock could be significantly lower than $17.70
per share, however, causing the premium received by target REIT stockholders as
a result of the consummation of the mergers to decrease significantly or
disappear altogether. Each target board also considered the following additional
potentially negative factors:
o the fact that, based on historical, quarterly, non-special dividends
received by stockholders of FSP Corp. and the target REIT
stockholders, a majority of the target REIT stockholders could
expect to receive a lower level of dividends from the combined
company than such stockholders have historically received from their
target REITs. Based on historical distributions paid by FSP Corp.
and each of the target REITs, the pro forma dividend payments for
the nine months ended September 30, 2004 were as follows:
Increase /
Historical Equivalent Pro Forma (Decrease)
Exchange Dividends Dividends Dividends in Dividends
Target REIT Ratio Declared Per Share Per Share Per Share
----------- ----- -------- --------- --------- ---------
Addison Circle 5,948.67 $ 6,022 $ 1.01 $ 0.90 $ (0.11)
Collins Crossing 6,167.63 6,689 1.08 0.90 (0.18)
Montague 5,649.72 8,751 1.55 0.90 (0.65)
Royal Ridge 6,055.79 5,367 0.89 0.90 0.01
---------------------------------------------------- -------------
Total 23,821.81 26,829 1.13 0.90 (0.23)
==================================================== =============
o conflicts of interest inherent between the directors and officers of
FSP Corp. and the directors and officers of the target REITs;
o the risk that the mergers might not be consummated;
o the change upon consummation of the mergers to the nature of the
target REIT stockholders' investment in their respective target
REITs;
o the possibility that FSP Corp. may not file its listing application
with AMEX, or in the event FSP Corp. does file such application, the
possibility that AMEX may reject the application or that a
meaningful trading market may not develop even if AMEX approves the
application;
o the increased risk to the value of the target REIT stockholders'
investment given that the combined company's revenues would be
derived from a greater number of real properties; and
o the risk that the benefits sought to be achieved by the mergers
would not be realized.
69
Each target board concluded, however, that, on balance, the potential
benefits of the mergers to its target REIT and its target REIT stockholders
outweighed the associated risks. In view of the variety of factors considered in
connection with its evaluation of the merger agreement and the merger
consideration, the target boards did not find it practicable to, and did not,
quantify or otherwise assign relative weight to the specific factors considered
in reaching their respective determinations.
FSP Corp. The FSP board unanimously determined that the merger agreement,
providing for the mergers and the issuance of FSP common stock in exchange for
target stock, is fair to, and in the best interests of, FSP Corp. and the FSP
stockholders. No director affiliated with the target REITs abstained from
voting. FSP Corp. determined that merging the target REITs with and into four
wholly-owned acquisition subsidiaries of FSP Corp. would provide the parties to
the transaction with favorable tax treatment.
The FSP board reviewed a number of factors in evaluating the merger
agreement, providing for the mergers and the issuance of the merger
consideration, including, but not limited to, the following:
o FSP Corp.'s management's views of the financial condition, results
of operations and business of FSP Corp. and each of the target REITs
before and after giving effect to the mergers;
o the differences and similarities between the business and operating
strategies of FSP Corp. and each of the target REITs;
o historical financial information concerning the real properties
owned by FSP Corp. and each of the target REITs;
o current conditions in the REIT market generally;
o the consideration the target REIT stockholders would receive in the
mergers;
o the belief that the terms of the merger agreement are reasonable;
o the impact of the mergers on the FSP stockholders, potential
investors and employees; and
o the appraisals obtained by each target REIT.
The FSP board also identified and considered a number of potentially
negative factors in its deliberations concerning the merger agreement, providing
for the mergers and the issuance of the merger consideration, including the
following:
o conflicts of interest inherent between the directors and officers of
FSP Corp. and the directors and officers of the target REITs;
o the fact that the representations and warranties of the target REITs
do not survive closing;
o the risks that the benefits sought to be achieved by the mergers may
not be realized;
o the immediate dilution by approximately 20% to the percentage
ownership and voting power of the FSP stockholders; and
o the possibility that the real estate holdings of the target REITs
would decline in value.
70
The FSP board concluded, however, that, on balance, the potential benefits
of the mergers to FSP Corp. and the FSP stockholders outweighed the associated
risks. In view of the variety of factors considered in connection with its
evaluation of the merger agreement, providing for the mergers and the issuance
of the merger consideration, the FSP board did not find it practicable to, and
did not quantify or otherwise assign relative weight to, the specific factors
considered in reaching its determination.
The FSP board on an on-going basis evaluates strategic alternatives
available to FSP Corp. In seeking to achieve the benefits that the FSP board
expects will result from the mergers, the FSP board did not consider any
specific alternatives to the mergers.
Alternatives Considered
Before deciding to recommend the mergers, the target boards considered
alternatives to the mergers in an effort to achieve maximum benefits for target
REIT stockholders. These alternatives are set forth below.
Continuation of each Target REIT. An alternative to the mergers would be
to continue each of the target REITs as a separate legal entity in accordance
with its original investment strategy. Target REIT stockholders would likely
continue to receive regular quarterly distributions and would receive a
distribution on the sale of the property owned by its respective target REIT,
which is expected to occur within a five to ten year time period following
syndication of the target REIT. The merger consideration payable to the
stockholders of each target REIT represents a premium to the appraised value of
each target REIT's real estate. See "Fairness of the Mergers - Conclusions of
the Target Boards." Because the appraisals include a valuation based on the
discounted cash flow of each real property's income stream, the target boards
believe that the appraised values of the real estate represent the accurate
value of each target REIT on a going concern basis. Because the real property
owned by each target REIT is 100% leased, appreciation in the value of each
property will be dependent upon, either general changes in the real estate
market or the target REIT's ability to lease space at higher rental rates upon
the termination of existing leases. Because such changes could also cause the
value of the real property to decline, rental rates could decline or space might
remain vacant, the target boards concluded that there were substantial risks
that continuation of the target REITs might not result in realizing an amount
equal to or in excess of the premium obtained in the mergers. If each target
REIT continues its separate existence, the target REIT stockholders may not have
an opportunity for liquidity in the near future and there can be no assurance,
given that the merger consideration for each target REIT exceeds the appraised
value of the real property owned by such target REIT, that any target REIT will
be able to sell its assets for consideration as attractive as the merger
consideration.
Liquidation. Another alternative to the mergers would be to liquidate the
assets of the target REITs and distribute the net liquidation proceeds to the
target REIT stockholders. Liquidating the target REITs would result in
concluding the investors' investment in the target REITs earlier than the
anticipated liquidation timeframes for the target REITs. While the target REIT
boards did not conduct a formal liquidation analysis, the liquidation value of a
target REIT would be based in large part on the fair market value of the target
REIT's net real property assets, which the target boards believed is reflected
in the applicable appraisal, together with its adjusted cash reserves. In a
liquidation, the marketplace would determine the value of a target REIT's net
assets. The target boards believe that the mergers are a more attractive
alternative than liquidation because the merger consideration for each target
REIT exceeds the appraised value of that target REIT's real property assets,
together with its adjusted cash reserves. In addition, the target boards believe
that the mergers permit target REIT stockholders to participate in the combined
company's substantially larger, more diversified investment portfolio and to
benefit from the potential for FSP Corp. eventually to provide liquidity for
target REIT stockholders. The target boards believe that over time target REIT
stockholders will benefit from the combined company's growth opportunities.
71
Support of Secondary Market. Another alternative would be the creation or
support of the secondary market for the target stock through limited cash tender
offers or repurchase programs sponsored by the target REITs. While the target
boards believe that this alternative might provide liquidity for some target
REIT stockholders, each target board believes that the benefits of this
alternative are not sufficiently broad-based to provide an attractive
alternative for a majority of the target REIT stockholders. In addition, the use
of the target REITs' cash for this purpose would reduce cash available for
distribution to target REIT stockholders. The target boards also believed that
there was a significant risk that no secondary market would develop for the
target stock. While this alternative was considered by the target boards, no
detailed financial analysis was done that would allow the target boards to
predict with any degree of certainty the possible impact of this alternative on
the value of the target stock.
Consequences if Mergers Not Completed
If the mergers are not completed, FSP Corp. and the target REITs will
continue to operate as separate legal entities with their own assets and
liabilities. There will be no change in their investment objectives, policies
and restrictions.
72
THE MERGER AGREEMENT
The following is a summary of certain provisions of the merger agreement,
a copy of which is set forth as Appendix A to this Consent
Solicitation/Prospectus and is incorporated herein by reference.
The Mergers
Subject to the terms and conditions of the merger agreement, on the
effective date FSP Corp. will acquire by merger each target REIT. The target
boards expect that the effective date will be on or about April 30, 2005.
The following chart sets forth the number of shares of FSP common stock to
be received as merger consideration by the target REIT stockholders for each
share of target stock of the respective target REIT. FSP Corp. will not issue
fractional shares of FSP common stock as merger consideration. Instead, each
holder of target stock who would otherwise have been entitled to receive a
fraction of a share of FSP common stock will be entitled to receive cash
(without interest) in an amount, rounded up to the nearest whole cent, equal to
the product of such fractional part of FSP common stock multiplied by $17.70,
the value of one share of FSP common stock on August 13, 2004, as determined
through negotiations between the special committees and FSP Corp. FSP Corp. will
pay an aggregate amount of approximately $16,070 in cash to the holders of
target stock in lieu of issuing fractional shares of FSP common stock.
Shares of FSP Total Shares of
Common Stock FSP Common
Total Number of Issuable in Exchange Stock Issuable
Shares of Target for Each Share to Target REIT
Target REIT Stock Outstanding of Target Stock Stockholders(1)(2)
----------- ----------------- --------------- ------------------
Addison Circle 636 5,948.67 3,783,354
Collins Crossing 555 6,167.63 3,423,035
Montague 334 5,649.72 1,887,007
Royal Ridge 297.5 6,055.79 1,801,598
(1) Rounded to the nearest whole share.
(2) This number of shares of FSP common stock is slightly higher than the
actual number of shares of FSP common stock to be issued upon the
consummation of the mergers due to the fact that FSP Corp. will pay cash
in lieu of issuing fractional shares of FSP common stock.
None of the shares of FSP common stock to be issued as merger
consideration to the target REIT stockholders will be placed into escrow or
otherwise withheld as a source of potential compensation to FSP Corp. should the
combined company discover, after the consummation of the mergers, that any of
the target REITs incurred any undisclosed liabilities prior to the consummation
of the mergers or that any representations and warranties of the target REITs
were inaccurate. Moreover, FSP Corp. will not receive any consideration for the
one share of common stock it holds in each target REIT.
73
Consummation of the mergers is subject to a number of conditions and will
not occur unless, among other things, holders of a majority of the shares of
target stock of each target REIT vote to adopt the merger agreement and approve
the mergers.
The following table sets forth: (i) the value ascribed to each target REIT
for purposes of the merger consideration, (ii) the appraised value of the
property held by each target REIT, (iii) the estimated adjusted cash reserve
balances as of June 30, 2004, (iv) the percentage (the premium) over appraised
value plus adjusted cash reserves that has been ascribed to each target REIT for
purposes of the merger consideration and (v) the percentage (premium) over the
gross proceeds contributed by investors in the original syndication of each
target REIT. The premium is based on an FSP common stock per share price of
$17.70. Should the FSP common stock trade on the AMEX, the trading price of the
FSP common stock could be significantly lower than $17.70 per share, causing the
premium received by target REIT stockholders as a result of the consummation of
the mergers to decrease significantly or disappear altogether.
Premium Over
Value Adjusted Gross Proceeds
Ascribed to Appraised Cash of Properties
Target REIT Target REIT Value Reserves (1) Premium at Syndication
----------- ----------- ----- ------------ ------- --------------
Addison Circle $ 66,965,414 $ 54,500,000 $1,676,697 19.2% 5%
Collins Crossing $ 60,587,756 $ 48,500,000 $1,984,695 20.0% 9%
Montague $ 33,400,000 $ 20,000,000 $2,034,787 51.6% 0%
Royal Ridge $ 31,888,293 $ 26,075,000 $ 967,500 17.9% 7%
Total $192,841,463 $149,075,000 $6,663,679 23.8% 5%
(1) The adjusted cash reserves are lower than the actual cash reserves held by
each target REIT because the adjusted cash reserves take into account
estimated expenditures that are expected to be made by each target REIT
prior to the consummation of the mergers. These expenditures include each
target REIT's proportional share of the anticipated costs of the
contemplated transaction relating to legal fees and financial advisory
fees; the expenses payable by each target REIT for the appraisal of its
property; and certain anticipated additional expenditures related to the
operations of specific target REITs.
Each share of target stock was issued at $100,000 per share in the
original syndication.
The dates of the appraisals of Addison Circle and Collins Crossing were
July 23, 2004, the date of the appraisal of Montague was July 14, 2004, and the
date of the appraisal of Royal Ridge was July 13, 2004.
The value ascribed to a target REIT was determined through negotiations
between the special committees and FSP Corp. These aggregate negotiated values
exceed the aggregate appraised values of the target REITs and the adjusted cash
reserves by approximately $37,102,784. See "Benefits, Background and Reasons for
the Mergers - Background of the Mergers - Negotiation of Economic Terms" and
"Fairness of the Mergers - Fairness of the Merger Consideration to Target REIT
Stockholders - Allocation of Merger Consideration" for a discussion of how the
premiums were determined by the special committees and FSP Corp.
74
Representations and Warranties
In the Merger Agreement, FSP Corp. and the acquisition subsidiaries have
made various representations and warranties to each target REIT, including that:
o each of FSP Corp. and each acquisition subsidiary is duly organized
and a validly existing corporation under the laws of the state of
its jurisdiction, and each has the authority to enter into the
merger agreement;
o other than as specified in the merger agreement, no third-party or
governmental consents are required for the execution and delivery of
the merger agreement and the consummation of the transactions
contemplated by the merger agreement by FSP Corp.;
o the execution and delivery of the merger agreement and the
consummation of the transactions contemplated by the merger
agreement do not violate any applicable law or material agreement to
which FSP Corp. or any of the acquisition subsidiaries is a party;
o the capitalization of FSP Corp. is as set forth in the merger
agreement;
o the FSP common stock to be issued in the mergers will be duly
authorized when so issued;
o FSP Corp. has delivered or made available the financial statements
set forth in the merger agreement and such financial statements have
been prepared in accordance with GAAP, applied on a basis consistent
with prior periods (except as otherwise noted therein) and present
fairly the financial position and results of operations of FSP Corp.
as of their respective dates and for the period presented therein,
subject to normal year-end adjustments in the case of unaudited
interim financial statements;
o FSP Corp. has filed or will file all reports, schedules, forms,
statements and other documents required to be filed by it with the
SEC on or after January 1, 2003 and prior to the closing date on a
timely basis;
o FSP Corp. has paid, caused to be paid or accrued all taxes (as
defined in the merger agreement) required to be paid or accrued by
it through the date of the merger agreement; FSP Corp. has timely
filed or obtained an extension to file all tax returns (as defined
in the merger agreement) required to be filed by it through the date
of the merger agreement, and all such tax returns completely and
accurately set forth the amount of tax; FSP Corp. has withheld and
paid all tax required to have been withheld or paid; and neither the
IRS nor any other governmental authority is asserting in writing (or
threatening to assert) any tax deficiency or claim;
o FSP Corp. has qualified as a REIT for all periods since its
inception;
o the representations of FSP Corp. in the merger agreement do not
contain any untrue statement of a material fact or omit to state any
material fact necessary to make them not misleading, and none of the
information supplied by FSP Corp. for inclusion in this Consent
Solicitation/Prospectus contains any untrue statement of a material
fact or omits to state any material fact required to be stated
herein or necessary in order to make the statements herein, in light
of the circumstances under which they are made, not misleading; and
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o there is no material litigation pending to which FSP Corp. is a
party or bound or, to FSP Corp.'s knowledge, to which any of its
directors, officers, employees or agents (in such capacity) is a
party or bound.
In addition, each target REIT has made various representations and
warranties to FSP Corp., including that:
o the target REIT is duly organized and a validly existing corporation
under the laws of the state of its jurisdiction, and it (subject to
stockholder approval) has the authority to enter into the merger
agreement;
o other than as specified in the merger agreement, no third-party or
governmental consents are required for the execution and delivery of
the merger agreement and the consummation of the transactions
contemplated by the merger agreement by the target REIT;
o the execution and delivery of the merger agreement and the
consummation of the transactions contemplated by the merger
agreement do not violate any applicable law or material agreement to
which the target REIT is a party;
o the target REIT has delivered or made available the financial
statements set forth in the merger agreement and such financial
statements have been prepared in accordance with GAAP, applied on a
basis consistent with prior periods (except as otherwise noted
therein) and present fairly the financial position and results of
operations of the target REIT as of their respective dates and for
the period presented therein, subject to normal year-end adjustments
in the case of unaudited interim financial statements;
o the target REIT has paid, caused to be paid or accrued all taxes (as
defined in the merger agreement) required to be paid or accrued by
it through the date of the merger agreement; the target REIT has
timely filed or obtained an extension to file all tax returns (as
defined in the merger agreement) required to be filed by it through
the date of the merger agreement, and all such tax returns
completely and accurately set forth the amount of tax; the target
REIT has withheld and paid all tax required to have been withheld or
paid; and neither the IRS nor any other governmental authority is
asserting in writing (or threatening to assert) any tax deficiency
or claim;
o the target REIT has qualified as a REIT for all periods since its
inception;
o the representations of the target REIT in the merger agreement do
not contain any untrue statement of a material fact or omit to state
any material fact necessary to make them not misleading, and none of
the information supplied by the target REIT for inclusion in this
Consent Solicitation/Prospectus contains any untrue statement of a
material fact or omits to state any material fact required to be
stated herein or necessary in order to make the statements herein,
in light of the circumstances under which they are made, not
misleading;
o neither the target REIT nor, to the knowledge of the target REIT,
the other party thereto, has breached or is in default of any
material contract, other than breaches or defaults which would not
reasonably be expected to be material to the target REIT;
o the target REIT has good and marketable title to its assets and its
property;
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o the target REIT does not have material environmental liabilities;
o the target REIT is not engaged in acquisition negotiations or
discussions with any third party; and
o there is no material litigation pending to which the target REIT is
a party or bound or, to the target REIT's knowledge, to which any of
its directors, officers, employees or agents (in such capacity) is a
party or bound.
None of the representations and warranties of any party shall survive the
closing.
Covenants
Each of the parties has agreed not to omit to take any action that
will result in a breach of any representations, warranties, or covenants
or a failure to satisfy any closing conditions.
Each target REIT has agreed:
o that its board of directors will recommend that its target REIT
stockholders vote in favor of the merger agreement and the merger,
o that it will not solicit or facilitate, or participate in
discussions or negotiations or furnish any person any information
with respect to, any third party acquisition proposals, and
o that its board of directors will not withdraw or modify its
recommendation to vote in favor of the merger agreement and merger,
cause or permit its target REIT to enter into any letter of intent
or agreement relating to any third party acquisition proposal, or
approve or recommend any third party acquisition proposal.
However, in the event of an unsolicited third party acquisition proposal
that is more favorable to the target REIT than the terms of the merger agreement
with FSP Corp., the target REIT may furnish information to and enter into
acquisition discussions with the third party, and the target REIT board may
withdraw or modify its recommendation to stockholders as to the merger agreement
and the merger with FSP Corp., in each case to the extent that the target REIT
board determines in good faith that its fiduciary obligations require it to do
so. Prior to taking any such action, the target REIT must furnish information to
FSP Corp. regarding the possible third party acquisition and allow FSP Corp.
five business days to make a counterproposal. The target REIT board may not
withdraw or modify its recommendation to stockholders in the event that FSP
Corp. has breached a representation, warranty or covenant or has failed to
satisfy any closing condition; however, a target REIT's right to terminate the
merger agreement, as set forth below under "-- Termination," may apply upon such
breach or failure.
Conduct of Business Prior to the Effective Date
Each target REIT and FSP Corp. has agreed that, prior to the effective
date or the earlier termination of the merger agreement, it will carry on its
business in the ordinary course in substantially the same manner as previously
conducted, will use its reasonable efforts to preserve intact its present
business organization and goodwill, maintain permits, licenses and
authorizations and preserve its relationship with third parties, and take all
actions necessary to continue to qualify as a REIT. The merger agreement permits
each target REIT and FSP Corp. to declare prior to the effective date,
consistent with past custom and practice, dividends to the pre-merger target
REIT stockholders or pre-merger FSP stockholders, as the case may be, in respect
of each entity's operating results for periods prior to the effective date. FSP
Corp. has assumed the obligation to pay any dividends consistent with past
practice declared but not paid by the target REITs prior to the consummation of
the mergers.
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Conditions Precedent to the Mergers
The respective obligations of each party to effect the mergers are subject
to the fulfillment or waiver on or before the effective date of the following
conditions:
o the adoption of the merger agreement and the approval of the mergers
by the affirmative vote of the holders of a majority of the shares
of target stock of each target REIT;
o the parties must receive all necessary consents, waivers, approvals,
authorizations or orders required to be obtained and the making of
all filings required to be made by any of the parties for the
authorization, execution and delivery of the merger agreement and
the consummation of the transactions contemplated thereby on or
before (and remaining in effect at) the effective date;
o FSP Corp. and each of the target REITs shall have received an
opinion from Wilmer Cutler Pickering Hale and Dorr LLP or another
nationally recognized law firm to the effect that each merger will
be treated for federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Code and confirming
that, to the extent the matters discussed under the heading
"Material United States Federal Income Tax Considerations" in this
Consent Solicitation/Prospectus constitute matters of law, they are
accurate in all material respects;
o delivery by the President and Chief Executive Officer of FSP Corp.
and the President of each of the target REITs of certificates to the
effect that there have been no material adverse changes in the
financial condition of such entity prior to the consummation of the
mergers;
o there having been no statute, rule, order, or regulation enacted or
issued by the United States or any State thereof, or by a court,
which prohibits the consummation of the mergers; and
o the representations of each of FSP Corp. and the target REITs set
forth in the merger agreement shall be true and complete in all
material respects as of the closing date (provided that the party
whose representation was not correct shall have no right not to
proceed with the closing as a result thereof).
The conditions described in the second bulleted paragraph above may be
waived by the FSP board in whole or in part if, in the opinion of the FSP board,
such waiver does not materially affect the terms of the transaction, which
waiver shall not be unreasonably withheld. Certain of the conditions to the
consummation of the mergers are beyond the control of FSP Corp., the target
REITs and the target boards. There can be no assurance that the mergers will
occur.
Termination
The merger agreement may be terminated, and the mergers may be abandoned,
at any time before the effective date, notwithstanding approval of the merger
agreement by the target REIT stockholders:
o by the mutual written consent of FSP Corp. and each target REIT;
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o by either FSP Corp. or any target REIT if the mergers have not been
consummated by March 30, 2005 (which date may be extended by mutual
agreement of the parties);
o by either FSP Corp. or any target REIT if the conditions to the
mergers set forth in the merger agreement are not satisfied or
waived (provided that if the condition to closing that is not
satisfied is a breach of a representation or warranty, the party in
breach shall not have the right to terminate the merger agreement as
a result thereof); or
o by FSP Corp. or a target REIT if the target REIT has received a
superior third party acquisition proposal, the board of directors of
the target REIT has withdrawn or modified its approval or
recommendation with respect to the adoption of the merger agreement
and the approval of the mergers, and the target REIT stockholders
fail to approve the merger agreement and the mergers within 75 days
of mailing this Consent Solicitation/Prospectus.
In addition, the FSP board has the right to terminate the merger agreement
with respect to a particular target REIT and consummate the mergers with the
other target REITs if:
o a target REIT incurs material casualty damage to its property, the
target REIT is unable to cure the damage after using commercially
reasonably efforts and the parties are unable to agree to an
appropriate purchase price reduction;
o a target REIT board recommends to the stockholders a third party
acquisition proposal; or
o a target REIT board receives a third party acquisition proposal and
fails within five business days of the request of FSP Corp. to
reconfirm its recommendation of the merger agreement and merger.
Effect of Termination
If the merger agreement is terminated, there will be no liability or
obligation on the part of any party thereto or its respective affiliates,
partners, directors or officers, except for payment of expenses each party is
liable for and to the extent that such termination results from the willful
breach of a party thereto of any of its representations, warranties, covenants
or agreements made in or pursuant to the merger agreement.
Material United States Federal Income Tax Considerations
Each of the mergers is expected to be a "reorganization" as defined in the
tax code. As a result, a target REIT stockholder generally will:
o recognize no gain or loss upon the receipt of FSP common stock in
exchange for target stock in the merger;
o have an aggregate tax basis for the FSP common stock received equal
to the aggregate basis of the target stock surrendered (other than
stock for which cash was received in lieu of a fractional share of
FSP common stock); and
o have a holding period for the FSP common stock received that
includes the holding period for the target stock surrendered.
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Timing and Effectiveness of the Mergers
The effective date of the mergers is expected to occur on or about April
30, 2005, or at such other time as the conditions to the mergers have been
satisfied.
Comparison of the Target REITs and FSP Corp.
The information related to the significant differences between the target
REITs and FSP Corp. may be found on pages 123-124.
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FAIRNESS OF THE MERGERS
Conclusions of the Target Boards
The target boards believe that the terms of the merger agreement, when
considered as a whole, are fair to the target REIT stockholders and the merger
consideration offered in exchange for the target stock in the target REITs
constitutes fair consideration for the interests of the target REIT
stockholders. The target boards believe that the mergers represent an
opportunity for the target REIT stockholders to realize a premium over the
current appraised value of the real estate (as determined by the appraisal) and
adjusted cash reserves held by the respective target REITs. The target boards
also considered the fact that the premium to be received by the target REIT
stockholders is based on an FSP common stock per share price of $17.70. Should
the FSP common stock trade on the AMEX, the trading price of the FSP common
stock could be significantly lower than $17.70 per share, however, causing the
premium received by target REIT stockholders as a result of the consummation of
the mergers to decrease significantly or disappear altogether. The following
provides a summary of the additional factors upon which the target boards based
their respective conclusions as to the fairness of the mergers and the merger
consideration to be paid by FSP Corp. The target boards did not find it
practicable to, and did not attempt to, quantify or otherwise assign relative
weight to these factors in reaching their respective determination.
o The target boards compared the potential benefits and detriments of
the mergers with the potential benefits and detriments of several
alternatives to the mergers, including continuation of the target
REITs, liquidation of the target REITs and support of secondary
markets for the target stock. Based on these comparisons, the target
boards believe the mergers are more attractive than the other
alternatives.
o The special committees of the target boards, consisting of Messrs.
MacPhee and Gribbell, each a director of the target REITs and an
executive vice president of FSP Corp., engaged A.G. Edwards to
deliver a fairness opinion to each target board. On August 11, 2004,
A.G. Edwards delivered a written opinion to each target board to the
effect that the merger consideration was fair, from a financial
point of view, to the target REIT stockholders of that target REIT.
These fairness opinions are attached hereto as Appendix C.
o Each target board determined that the value of the FSP common stock
to be distributed as merger consideration to its target REIT
stockholders represented greater value, or a premium, than the sum
of the value of the real estate (as determined by an appraisal) and
adjusted cash reserves held by such target REIT. After consultation
with A.G. Edwards, the special committees of the target boards
determined that, based on the analyses of other selected public
companies, the discounted cash flow of FSP Corp. and selected
precedent mergers, a reasonable range of value for the FSP common
stock was between $16.67 per share and $18.50 per share. The
estimated range of values included a discount for the lack of
liquidity of FSP common stock. The value ascribed to FSP common
stock in connection with the mergers of $17.70 per share is within
that range. The target boards determined that even if the actual
value of FSP common stock were at the bottom of the range, or $16.67
per share, such value would still constitute a premium to the
appraised value of the real estate plus adjusted cash reserves held
by each target REIT.
o The target boards obtained independent third-party appraisals of the
real property owned by the target REITs, and considered these
appraisals in negotiating the merger consideration.
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o The target boards considered historical financial information
concerning the real properties owned by FSP Corp. and the target
REITs and the amount of cash held by FSP Corp. and each of the
target REITs.
o The target REITs will have the right to declare dividends consistent
with past practice in respect of the quarters or partial quarters
preceding the effective date. The combined company will have the
obligation to pay any such dividends that have been declared but not
paid as of the effective date.
o Certain merger expenses are considered individual expenses to be
paid by the party incurring the expenses. The costs of A.G. Edwards'
engagement and the fees of the target REITs' outside legal counsel
and independent accountants will be apportioned among the target
REITs based on the relative net proceeds of the original syndication
of each target REIT and each appraisal will be paid by the target
REIT owning the property that is the subject of the appraisal. All
other expenses, including consulting, legal, accounting and
administrative, will be paid by FSP Corp.
o Stockholders of the target REITs that do not vote in favor of the
merger and that comply with required procedures will have appraisal
rights under the Delaware general corporation law entitling them to
receive fair value for their shares.
o The likelihood that the mergers would be completed in the light of
the terms of the merger agreement and the experience and reputation
of FSP Corp.
o The terms of the merger agreement provide that the representations
and warranties of the target REITs terminate at closing and that no
portion of the purchase price is withheld from the target REIT
stockholders in an escrow account or otherwise.
o The terms of the merger agreement permit the target REIT boards, in
the event of an unsolicited third party offer to purchase any of the
target REITs prior to the merger, to provide information to and
engage in discussions with the third party, to withdraw or modify
their recommendation to the target REIT stockholders to vote in
favor of the FSP Corp. mergers and to terminate the merger agreement
if the stockholders of a target REIT fail to vote in favor of the
merger agreement.
o The members of the target boards have conflicts of interest in
connection with the mergers. Each target board established a special
committee consisting of Messrs. MacPhee and Gribbell, the only
members of the target boards who are not also members of the FSP
board. Messrs. MacPhee and Gribbell serve as executive vice
presidents of FSP Corp. The special committees engaged A.G. Edwards
to advise them in evaluating and negotiating the terms of the
mergers, including the merger consideration, and to deliver a
fairness opinion to each target board. No fees or other compensation
will be payable to the members of the target boards (or the special
committees) in connection with the mergers.
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Determination of Merger Consideration
The merger consideration was determined through negotiations among the
special committees of the target boards and FSP Corp. See "Benefits, Background
and Reasons for the Mergers - Background of the Mergers - Negotiation of
Economic Terms" for a discussion of the negotiations between FSP Corp. and the
special committees of the target boards.
The special committees relied on advice from their financial advisor, A.G.
Edwards, in their negotiations with FSP Corp. In agreeing to the fairness of the
$17.70 per share negotiated price, the target boards reviewed the analyses
presented by A.G. Edwards, financial advisor to the special committees, the
target boards and the target REITs, including the analysis of CAD multiples and
discounted cash flows to estimate the value of FSP common stock. The special
committees also considered the assets and liabilities of each target REIT and
FSP Corp., the expected cash available for distribution of each target REIT, the
multiples of cash available for distribution commonly used in valuing REITs and
the limited liquidity of FSP common stock. The special committees noted that
each appraisal included a discounted cash flow analysis in arriving at an
appraised value of the real property owned by the applicable target REIT. A
discounted cash flow analysis calculates the present value of the projected
income stream from a property. The special committees believed that this
approach, which takes into account leases in place and their future rental rate
increases, provided a basis for comparing the value of the offered merger
consideration to the present value of the projected future operations of the
target REITs and, hence, a basis for determining that accepting the merger
consideration was preferable to continuing the target REITs. The special
committees relied on the discounted cash flow analysis in the appraisals because
this analysis took account of the facts that could be determined at the time the
special committees made their decisions and also projected a future sale price
of the property. The special committees recognized that if the business of the
target REITs were to be continued, one or more of the target REITs might be sold
in the future at a price that, on a discounted present value basis, might exceed
the merger consideration offered for such target REIT. The special committees
concluded, however, that any such hypothetical future sale price would be
determined by a number of factors, including the ability of the target REIT to
lease space as it became vacant, the capitalization rates at which real property
would trade at the time of sale and the conditions in the local real estate
market at the time of sale, that could not be known by the special committee at
the time it made its decision, and that any such hypothetical sale price would
be speculative. The special committees also recognized that the value of real
property may decline over time as well as increase. The special committees,
therefore, concluded that the certainty of the premium offered by the merger
consideration outweighed the risks inherent in seeking to better that premium by
continuing the operations of the target REITs.
The special committees were also made aware that FSP Corp. intended to
file an application to list the FSP common stock with AMEX. There was no
assurance that FSP Corp. would file such application or, in the event it did,
that AMEX would accept the application or that a meaningful trading market would
develop even if AMEX approved the application. After considering the foregoing
factors, the special committees determined, after consultation with A.G.
Edwards, to propose an initial range for the value of the FSP common stock. The
low end of the range was $16.67 per share and the high end was $18.50. After
several discussions with FSP Corp. relating to the basis for the range, the
target boards presented FSP Corp. with a proposed per share price of $17.70 for
the FSP common stock. After additional discussions, FSP Corp. accepted the
proposed per share price. In concluding that the merger consideration is fair,
the target boards relied in part on the fairness opinion delivered by A.G.
Edwards for its respective target REIT and the appraisal received by each target
board for its respective target REIT.
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Fairness of the Merger Consideration to Target REIT Stockholders
Fairness Opinions. On July 22, 2004, the special committees of the target
boards retained A.G. Edwards to act as their financial advisor in connection
with the mergers and to render A.G. Edwards' opinion as to the fairness, from a
financial point of view, of the merger consideration to the target REIT
stockholders of each target REIT. On August 11, 2004, A.G. Edwards rendered its
opinion to each target board to the effect that, based upon and subject to the
various considerations described in each opinion, the merger consideration (as
described elsewhere in this Consent Solicitation/Prospectus) was fair, from a
financial point of view, to the stockholders of that target REIT.
The full text of A.G. Edwards' opinions, each dated August 11, 2004, which
describes the assumptions made, general procedures followed, matters considered
and limitations on the scope of review undertaken by A.G. Edwards in rendering
its opinions, are attached as Appendices C-1, C-2, C-3 and C-4 to this Consent
Solicitation/Prospectus and are incorporated into this summary by reference.
A.G. Edwards' opinions are directed only to the fairness, as of the date of the
opinion and from a financial point of view, of the merger consideration to the
stockholders of the target REIT to which each opinion is addressed and does not
constitute a recommendation to you as to how you should vote with respect to the
merger agreement and the mergers. The summary of A.G. Edwards' opinions set
forth below are qualified in their respective entirety by reference to the full
text of the opinions attached as Appendices C-1, C-2, C-3 and C-4 to this
Consent Solicitation/Prospectus. You are urged to read the opinions carefully in
their entirety.
See "Advice of Financial Advisors and Appraisals - Fairness Opinions."
The Appraisals. The respective target boards retained independent third
party appraisers to appraise the fair market value of each target REIT's real
estate. The dates of the appraisals of Addison Circle and Collins Crossing were
July 23, 2004, the date of the appraisal of Montague was July 14, 2004, and the
date of the appraisal of Royal Ridge was July 13, 2004.
In preparing the appraisals, the appraisers collected from the target
REITs information regarding the operating history of the properties, conducted
site inspections of the properties to be appraised in July 2004 and interviewed
and relied on representations of certain representatives of the target REITs.
The appraisers' conclusions are based upon conditions they observed at the
properties during their inspection and assumptions, qualifications and
limitations deemed reasonable at the time concerning, among other things, legal
title, the absence of physical defects, future percentage of leased rentable
square feet, income and competition with respect to each property. The
appraisals reflect the appraisers' valuation of the real estate of the target
REITs as of their respective dates, in the context of the information available
on that date. Events occurring subsequent to the dates of the respective
appraisals could affect the properties or assumptions used in preparing the
appraisals. The target boards imposed no limitations on the scope of the
appraisers' appraisals. The target boards took the appraisals into consideration
in negotiating the merger consideration. The target REITs also made the
appraisals available to FSP Corp. and have allowed the FSP board to rely on the
appraisals.
Comparison of Certain Benefits and Detriments of Alternatives to The
Mergers. Prior to concluding that the mergers should be recommended to the
target REIT stockholders, the target boards considered several alternatives to
the mergers, including continuation of the target REITs, liquidation of the
target REITs and support of the secondary market. See "Benefits, Background and
Reasons for the Mergers -- Alternatives Considered." To determine whether the
mergers or one of their alternatives would be more attractive to the target REIT
stockholders, the target boards compared certain potential benefits and
detriments of the mergers with certain potential benefits and detriments of the
alternatives. Based upon this comparison, the target boards believe the mergers
are more attractive than the alternatives.
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Fairness in View of Conflicts of Interest. The members of the target
boards have significant conflicts of interest in connection with the mergers.
Each target board established a special committee consisting of Messrs. MacPhee
and Gribbell, the only members of the target boards who are not also members of
the FSP board. Messrs. MacPhee and Gribbell serve as executive vice presidents
of FSP Corp. The special committees engaged A.G. Edwards to advise them in
evaluating and negotiating the terms of the mergers, including the merger
consideration, and to deliver a fairness opinion to each target board. No fees
or other compensation will be payable to the members of the target boards (or
the special committees) in connection with the mergers.
Allocation of Merger Consideration. In allocating the approximately
$192,841,463 of merger consideration among the target REITs, FSP Corp.'s
management considered the appraised values of each target REIT, the cash flow
projected for each target REIT, the adjusted cash reserves held by each target
REIT, and the current market conditions for real estate acquisitions in the
various locations of the target REITs. The special committees, management of FSP
Corp., and A.G. Edwards held a telephonic meeting on July 29, 2004 to discuss
the allocation of the merger consideration, including the allocation of the
premiums to be paid by FSP Corp. for each target REIT. During that call, after
reaffirming with all the parties that the stock price of $17.70 per share was
the negotiated price per share to be paid as merger consideration, FSP Corp.
stated that it was willing to make an offer to each of the target REITs based,
in part, on FSP Corp.'s specific knowledge of the target REITs' properties which
it had gained from the operation of such properties by FSP Property Management,
a wholly owned subsidiary of the FSP Corp. prior to and following the
syndication of the target REITs. FSP Corp. then suggested a separate value for
each target REIT based on its knowledge of the real properties held by each
target REIT, including among other things, the tenants, the operating costs,
current market conditions, FSP Corp.'s view of future market rents, the
likelihood of lease renewals, the costs of turnover, and FSP Corp.'s experience
with acquisitions for similar properties in the same or similar markets. The
negotiations between the parties resulted in agreement on merger consideration
for Addison Circle, Collins Crossing and Royal Ridge that produced a premium,
based on a value of $17.70 per share of FSP common stock, to the sum of the
appraised value of real estate and adjusted cash reserves that ranged from 17.9%
to 20.0%. With respect to Montague, FSP Corp. noted that Montague's property is
leased to a single tenant through December 31, 2006 at a rate that is currently
significantly above market. FSP Corp. further noted that the appraised value of
Montague's real estate was $20,000,000. Montague's special committee noted that
Montague's stockholders were receiving significant current cash yields as a
result of the above-mentioned lease and that, in the absence of a significant
premium to appraised value, those stockholders might not be inclined to approve
a merger. These negotiations resulted in merger consideration for Montague that
produced a premium, based on the value of $17.70 per share of FSP common stock,
of 51.6%.
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ADVICE OF FINANCIAL ADVISORS AND APPRAISALS
Fairness Opinions
On July 22, 2004, the special committees of the target boards retained
A.G. Edwards to act as their financial advisor in connection with the mergers
and to render A.G. Edwards' opinion as to the fairness, from a financial point
of view, of the merger consideration to the target REIT stockholders of each
target REIT. On August 11, 2004, the target boards met to review the proposed
mergers. During this meeting, A.G. Edwards presented certain financial analyses
as described below. At the meeting A.G. Edwards rendered its oral opinions,
subsequently confirmed by delivery of its written opinions, to each target board
to the effect that, based upon and subject to the various considerations
described in each opinion, the merger consideration (as described elsewhere in
this Consent Solicitation/Prospectus) was fair, from a financial point of view,
to the stockholders of that target REIT.
The full text of A.G. Edwards' opinions, each dated August 11, 2004, which
describes the assumptions made, general procedures followed, matters considered
and limitations on the scope of review undertaken by A.G. Edwards in rendering
its opinions, are attached as Appendices C-1, C-2, C-3 and C-4 to this Consent
Solicitation/Prospectus and are incorporated into this summary by reference.
A.G. Edwards' opinions are directed only to the fairness, as of the date of the
opinion and from a financial point of view, of the merger consideration to the
stockholders of the target REIT to which each opinion is addressed and does not
constitute a recommendation to you as to how you should vote with respect to the
merger agreement and the mergers. The summary of A.G. Edwards' opinions set
forth below are qualified in their respective entirety by reference to the full
text of the opinions attached as Appendices C-1, C-2, C-3 and C-4 to this
Consent Solicitation/Prospectus. You are urged to read the opinions carefully in
their entirety.
In conducting its investigation and analysis and in arriving at its
opinions, A.G. Edwards reviewed information and took into account financial and
economic factors it deemed relevant under the circumstances. In rendering its
opinions, A.G. Edwards, among other things:
o reviewed certain internal information, prepared by the management of
each target REIT, primarily financial in nature, including projected
adjusted cash reserves and cash after distribution, concerning the
business and operations of each target REIT furnished to A.G.
Edwards for purposes of its analysis;
o reviewed certain internal information, primarily financial in
nature, including forecasts of 2004 and 2005 financial performance
prepared by FSP Corp.'s management concerning the business and
operations of FSP Corp. furnished to A.G. Edwards for its analysis,
as well as publicly available information including but not limited
to FSP Corp.'s recent filings with the Securities and Exchange
Commission such as FSP Corp.'s annual reports on Form 10-K and
quarterly reports on Form 10-Q;
o reviewed an appraisal of the property of each target REIT prepared
by a professional real estate valuation firm, which A.G. Edwards was
advised by the target REIT has real estate valuation expertise in
the local market for such property, which appraisals included, among
other things, analyses that valued each target REIT's business
prospects based on a study of the current marketplace and business
fundamentals; and A.G. Edwards also held discussions with each such
professional real estate valuation firm;
86
o reviewed a draft of the merger agreement and held discussions about
the merger agreement and the mergers with the management of each
target REIT and legal counsel to the target REITs and their boards;
o reviewed market data for equity securities of public companies in
the same or similar lines of business as those of FSP Corp.;
o compared the proposed financial terms of the mergers with the
financial terms of certain other business combinations A.G. Edwards
deemed relevant for analytical purposes; and
o reviewed the implied valuation range of FSP Corp.'s business based
on the discounted present values of its projected cash flows (as
estimated by FSP Corp.'s management).
A.G. Edwards held discussions with the executive officers of the target
REITs and FSP Corp. concerning the target REITs' and FSP Corp.'s respective
historical and current financial condition and operating results, as well as the
prospects of the target REITs and FSP Corp. including the potential impact of
the mergers. A.G. Edwards also considered other information, financial studies,
analyses and investigations and financial, economic and market data which A.G.
Edwards deemed relevant for the preparation of its opinions, including, but not
limited to, the current market environment as well as information relating to
the industries and the segments in which the target REITs and FSP Corp. operate.
A.G. Edwards was not engaged to consider, nor did it express any opinion
with respect to, any alternative transaction or strategic alternatives that
might be available to the target REITs or their stockholders. Further, A.G.
Edwards was not engaged to and did not solicit third-party indications of
interest in acquiring all or any part of the target REITs. The special
committees of the target boards and FSP Corp. determined the merger
consideration through negotiations and A.G. Edwards did not express any opinion
as to what the value of the target REITs' target stock has been or will be nor
did it express any opinion as to what the value of the FSP common stock will be
when issued to target REIT stockholders pursuant to the mergers or the prices at
which the FSP common stock will trade at any time. The target boards did not
place any limitation upon A.G. Edwards with respect to the procedures followed
or factors considered by A.G. Edwards in rendering its opinions.
In arriving at its opinions, A.G. Edwards assumed and relied upon, without
independent verification, the accuracy and completeness of all of the financial
and other information that was publicly available, provided to or otherwise
discussed with A.G. Edwards including financial statements and financial
projections, as provided by or on behalf of the target REITs and FSP Corp. A.G.
Edwards was not engaged to, and therefore did not, independently verify any of
this information nor did it express any opinion with respect to such
information. A.G. Edwards assumed, with the target REITs' consent, that:
o the representations and warranties of each party contained in the
merger agreement would be true and correct, that each party would
perform all of its covenants and agreements pursuant to the merger
agreement and that all conditions to the mergers will be satisfied
without modification or waiver;
o all governmental, regulatory and other necessary consents and
approvals would be obtained and that such consents would not impose
restrictions or waivers that would have an adverse effect on the
mergers; and
o the mergers will be accounted for in accordance with U.S. GAAP.
87
A.G. Edwards also assumed and was advised by the management of FSP Corp.
and each target REIT that the financial projections and other information
provided to or otherwise discussed with A.G. Edwards were reasonably prepared on
bases reflecting the best available estimates and good faith judgments as to the
expected future performance of FSP Corp. and each target REIT, respectively, on
a stand-alone basis and after giving effect to the mergers. In conducting its
review, A.G. Edwards assumed the accuracy and completeness of the appraisals of
each target REIT and did not perform any independent audit of assets or
liabilities nor did it conduct any independent appraisal of any of the assets or
liabilities, contingent or otherwise, of the target REITs or FSP Corp. A.G.
Edwards also did not independently attempt to assess or value any of the
intangible assets of FSP Corp. or the target REITs (including goodwill) nor did
it make any independent assumptions with respect to the application of
intangible assets in the mergers. A.G. Edwards' opinions were necessarily based
upon economic, financial and other conditions as they existed and could be
evaluated on the date of its opinions, and did not predict or take into account
any changes that may occur, or information that may become available, after the
date of each opinion. The analyses performed by A.G. Edwards are not necessarily
indicative of actual values or actual future results, which may be significantly
more or less favorable than suggested by such analyses. Subsequent developments
may affect the opinions, and A.G. Edwards does not have any obligation to
update, revise or reaffirm any of its opinions.
With the consent of each target board, A.G. Edwards did not attempt to
value each target REIT and, instead, has assumed that the value of each target
REIT is equal to the sum of the value of the target REIT's property, as
reflected in the appraisal provided to A.G. Edwards, plus such target REIT's
cash reserves. A.G. Edwards made this assumption and did not make an independent
valuation of the target REITs because the value of an entity with one asset
consisting of real property at a single location, such as each target REIT, is
not determined by standard financial models used to value businesses in general
but, instead, is determined by the value of the property owned by the entity.
The value of that property is, in turn, determined by local real estate,
economic and governmental factors such as commercial lease rates in the area of
the property, the values of nearby commercial properties, economic prosperity in
the area and applicable zoning laws, all of which are more appropriately
assessed by a professional real estate appraiser who is an expert in assessing
these local factors.
The following is a brief summary of the material financial analyses
performed by A.G. Edwards and reviewed with each target board in connection with
the opinions of A.G. Edwards relating to the mergers and is not a complete
description of all analyses performed and factors considered. The preparation of
a fairness opinion and related financial analyses are complex analytical
processes involving various determinations as to the most appropriate and
relevant methods of financial analysis and the application of those methods to
the particular circumstances and, therefore, a fairness opinion and related
financial analyses are not readily susceptible to summary description. THE
FINANCIAL ANALYSES SUMMARIZED BELOW INCLUDE INFORMATION PRESENTED IN TABULAR
FORMAT. IN ORDER TO FULLY UNDERSTAND A.G. EDWARDS' FINANCIAL ANALYSES, THE
TABLES MUST BE READ TOGETHER WITH THE TEXT OF EACH SUMMARY AND A.G. EDWARDS'
FINANCIAL ANALYSIS MUST BE CONSIDERED AS A WHOLE. THE TABLES ALONE DO NOT
CONSTITUTE A COMPLETE DESCRIPTION OF THE FINANCIAL ANALYSES. CONSIDERING THE
DATA BELOW WITHOUT CONSIDERING THE FULL NARRATIVE DESCRIPTION OF THE FINANCIAL
ANALYSES, INCLUDING THE METHODOLOGIES AND ASSUMPTIONS UNDERLYING THE ANALYSES,
OR SELECTING FOR CONSIDERATION SELECTED PORTIONS OR FACTORS OF THE ANALYSIS
COULD CREATE A MISLEADING OR INCOMPLETE VIEW OF A.G. EDWARDS' FINANCIAL
ANALYSES.
Valuation Approach. A.G. Edwards was asked to provide its opinion as to
the fairness, from a financial point of view, of the consideration the
stockholders of each target REIT (other than FSP Corp. which is not entitled to
any merger consideration) are to receive in the mergers. Stockholders in each of
the target REITs will receive the number of shares of FSP common stock for each
share of preferred stock in their target REIT as described below.
88
Addison Collins Royal
Circle Crossing Montague Ridge
------ -------- -------- -----
Shares of FSP common stock 5,949 6,168 5,650 6,056
to be received for each share
of target stock in the target
REIT
Each target REIT owns one or two real property assets, and thus standard
financial models used to value businesses in general are not the most
appropriate method to determine their respective values. Instead, the value of
each target REIT is derived from the value of the property owned by the entity,
and the value of that property is determined primarily by local real estate,
economic and governmental factors, all of which are assessed by professional
real estate appraisers. Each target REIT had its property appraised in the month
of July 2004. Accordingly, A.G. Edwards assumed that the fair market value of
each target REIT is equal to the sum of the appraised value of the target REITs'
individual property plus its existing cash reserves. The consideration to be
received by the stockholders of each target REIT is the number of shares of FSP
common stock to be issued to them in the mergers plus cash to be paid by FSP
Corp. in lieu of fractional shares. The following table presents the assumed
fair market values of each target REIT as well as the cash and number of shares
of FSP common stock to be delivered to the stockholders of each target REIT in
the mergers:
Addison Collins Royal
Circle Crossing Montague Ridge
------ -------- -------- -----
Fair market value of target $56,176,697 $50,484,695 $22,034,787 $27,042,500
REIT
Total cash payable to $ 2,668 $ 5,895 $ 3,799 $ 3,708
target REIT stockholders
in lieu of fractional shares
Shares of FSP common 3,783,206 3,422,704 1,886,791 1,801,389
stock issuable to target
REIT stockholders
The acquisition by the target REIT stockholders of FSP common stock in the
mergers in exchange for their shares of target stock can be viewed as a purchase
of shares of FSP common stock. Netting the cash to be paid to target REIT
stockholders in lieu of fractional shares against the fair market value of each
target REIT, the following table describes the effective cost per share to each
target REIT's stockholders to acquire the FSP common stock in the mergers:
89
Addison Collins Royal
Circle Crossing Montague Ridge
------ -------- -------- -----
Effective cost per share of $14.85 $14.75 $11.68 $15.01
FSP common stock to be
issued
A.G. Edwards' analysis attempted to determine whether the value of a share
of FSP common stock to be received by the target REIT stockholders in the
mergers equaled or exceeded this effective cost per share.
Analysis Of Selected Public Companies. A.G. Edwards compared selected
financial information and operating statistics for FSP Corp. with corresponding
financial information and operating statistics of four groups of selected
publicly held companies. While none of the companies in these groups has an
asset mix that is exactly comparable to that of FSP Corp., the combined
comparables are, in the judgment of A.G. Edwards, sufficiently comparable to FSP
Corp. to warrant comparative analysis. The Apartment REITs consist of REITs
whose primary business model is based upon the ownership and rental of
geographically diversified multi-family apartment facilities. The Office REITs
consist of REITs whose primary business model is based upon the ownership and
rental of geographically diversified class "A" office buildings. The Industrial
REITs consist of REITs whose primary business model is based upon the ownership
and rental of geographically diversified industrial facilities such as
manufacturing or distribution facilities. The Office/Industrial REITs consist of
REITs whose primary business model is based upon the ownership and rental of
geographically diversified office and industrial properties.
Apartment REITs Office REITs Industrial REITs Office/Industrial REITs
--------------- ------------ ---------------- -----------------------
Archstone-Smith Trust Boston Properties AMB Property Duke Realty Corp.
AvalonBay Communities CarrAmerica Realty ProLogis Liberty Property Trust
Corp.
Equity Residential Equity Office Properties PS Business Parks
Properties
A.G. Edwards reviewed enterprise values, calculated as the sum of equity
market capitalization plus debt, less cash and cash equivalents, as multiples of
the following: (i) actual historical and estimated future net operating income,
or NOI, for the last twelve month (LTM) period ended June 30, 2004, and for
calendar years 2004 and 2005, and (ii) actual historical and estimated future
earnings before interest, taxes, depreciation and amortization (EBITDA) for
calendar years 2003, 2004 and 2005. A.G. Edwards also reviewed stock prices as a
multiple of the (i) actual historical and estimated future funds from
operations, or FFO, which typically consists of GAAP Net Income (excluding gains
or losses related to the sale of real estate assets) plus depreciation, for the
LTM period ended June 30, 2004, and for calendar years 2004 and 2005, and (ii)
actual historical and estimated future cash available for distribution (CAD) to
stockholders for calendar years 2004 and 2005. In view of the fact that the
comparison companies all carried some level of indebtedness while FSP Corp. does
not and FSP Corp. derives significant cash flow from its investment banking
business, A.G. Edwards concluded that the comparison multiples for NOI, EBITDA
and FFO would tend to undervalue FSP Corp. and that CAD multiples would be the
most accurate comparison measure.
Multiples for the selected companies also were based on closing stock
prices on August 5, 2004. Financial data for the selected companies and FSP
Corp. were based on public filings, company reports, publicly available research
analyst estimates and research analyst estimates as reported in the
Institutional Brokers' Estimate System. The CAD multiple analyses indicated the
90
following implied mean multiples in each sector and weighted average mean
multiples, with weighting based upon FSP Corp.'s mix of revenues from the
various real estate sectors in which FSP Corp. operates:
Office/
Apartment Office Industrial Industrial Overall Weighted
Mean Mean Mean Mean Mean Average Mean
---- ---- ---- ---- ---- ------------
Stock Price/2004E CAD 18.6x 16.0x 18.8x 15.7x 17.1x 16.2x
Stock Price/2005E CAD 17.4x 15.3x 16.8x 14.7x 16.0x 15.3x
A.G. Edwards then applied the weighted average multiple from these real
estate sectors to FSP Corp.'s projected CAD for 2004 and 2005, resulting in the
implied values shown in the table below. A.G. Edwards then applied discounts to
these values ranging from 10% to 20% in recognition of the market illiquidity of
FSP Corp.'s common stock.
In deriving these marketability discounts, A.G. Edwards reviewed a wide
range of potential discounts presented in academic literature for similar
transactions and made adjustments to account for various qualitative factors
concerning FSP Corp. that militated in favor of a lower marketability discount.
These characteristics included (i) FSP Corp.'s announcement on May 7, 2004 that
it intends to list on the AMEX on or about January 1, 2005, (ii) FSP Corp.'s
limited share repurchase program which provides the opportunity for liquidity to
shareholders on an annual basis and (iii) the relatively high level of current
cash distributions which FSP Corp. has historically paid and is forecasting
paying in 2004 and 2005.
2004 Weighted 2005 Weighted
Average Mean Average Mean
Multiple Multiple
(16.2x) (15.3x)
------- -------
Before Marketability Discount $20.71 $19.77
10% Marketability Discount $18.63 $17.79
15% Marketability Discount $17.60 $16.80
20% Marketability Discount $16.57 $15.81
This analysis results in an implied range of values per share of FSP
common stock of $15.81 to $18.63. The effective cost per share to each target
REIT's stockholders of FSP common stock in the mergers is below or within this
range. Accordingly, A.G. Edwards believes that this comparable company analysis
supports its conclusion that the consideration to each target REIT's
stockholders is fair, from a financial point of view, to that target REIT's
stockholders.
Discounted Cash Flow Analysis. A.G. Edwards also performed a discounted
cash flow analysis to estimate the value of FSP common stock. The discounted
cash flow is calculated by taking the sum of the present value of FSP Corp.'s
free cash flows (before financing costs) over the forecast period and the
present value of the terminal value of FSP Corp. at the end of the forecast
period. A.G. Edwards applied this methodology to the projected cash flows of FSP
Corp. for the fiscal years ending December 31, 2004 through December 31, 2009.
FSP Corp. provided projections through December 31, 2005 and guidance on a
91
projected long-term perpetual growth rate as well as the long-term relationship
between depreciation expense and capital expenditures. Based upon FSP Corp.'s
projections and guidance, A.G. Edwards utilized a range of discount rates (7.4%
to 8.4%), terminal multiples (11.9x to 13.5x) applied to estimated CAD for the
fiscal year ending December 31, 2009 and perpetual growth rate for FSP Corp.'s
projected CAD beginning in 2005 (1% to 3%) to calculate a range of implied
equity values and prices per share for FSP common stock. A.G. Edwards then
applied discounts to these values ranging from 10% to 20% in recognition of the
market illiquidity of FSP common stock.
The discounted cash flow analysis yielded an implied equity value range of
$12.16 to $22.29 per share. The effective cost per share to each target REIT's
stockholders of FSP common stock in the mergers is below or within this range.
Accordingly, A.G. Edwards believes that this discounted cash flow analysis
supports its conclusion that the consideration to each target REIT's
stockholders is fair, from a financial point of view, to that target REIT's
stockholders.
Analysis Of Selected Precedent Mergers. While A.G. Edwards compared
selected financial information and operating statistics for FSP Corp. as related
to the consideration with corresponding financial information and operating
statistics of eleven selected precedent transactions, A.G. Edwards advised the
target boards that the precedent transactions offer limited insight into the
value of FSP common stock due to the limited number of transactions in a
relevant timeframe and/or the unique circumstance surrounding each transaction.
Using publicly available information, A.G. Edwards considered the mean LTM NOI
and FFO multiples of the three most recent transactions relative to the mean LTM
NOI and FFO multiples of the eleven transactions that occurred over the past
five years in order to determine the recent trend in transaction multiples. Each
of the transactions reviewed involved an entity that operated in one of the real
estate sectors within which FSP Corp. operates. In order to compare the
transaction multiples to a non-controlling share of FSP common stock, A.G.
Edwards adjusted the transaction multiples by a median control premium of 13%,
derives from 13 comparable transactions since 1998. These transactions included
the following:
Selected Precedent Mergers
Transaction
Equity Price/ Value/LTM Control
Target Acquirer LTM FFO NOI Premium
------ -------- ------- --- -------
Keystone Property Trust ProLogis 19.6x 19.6x 17.0%
Great Lakes REIT Transwestern 8.6x 10.1x -2.1%
Investment Company
LLC
Merry Land Properties Cornerstone Realty 20.7x 12.3x 53.1%
Income Trust
Cabot Industrial Trust CalWest Industrial 9.8x 11.2x 34.5%
Properties LLC
Charles E. Smith Archstone Communities 16.8x 16.8x 3.6%
Residential Realty Inc. Trust
Spieker Properties Equity Office Properties 13.3x 12.9x 12.0%
Trust
92
Transaction
Equity Price/ Value/LTM Control
Target Acquirer LTM FFO NOI Premium
------ -------- ------- --- -------
Grove Property Trust Equity Residential 12.0x 12.3x 3.6%
Properties Trust
Cornerstone Properties Equity Office Properties 11.2x 10.6x 21.0%
Inc. Trust
Berkshire Realty Berkshire Realty 10.1x 11.7x 26.0%
Company, Inc. Holdings, L.P.
Weeks Corp Duke Realty 10.4x 13.6x 11.5%
Investments Inc.
Meridian Industrial ProLogis Trust 12.4x 14.7x 13.0%
Trust
A.G. Edwards averaged comparable company trading multiples, discounted the
multiples by the chosen control premium and applied the multiples to value FSP
Corp. The ensuing fair market value of FSP Corp. common stock was then
discounted by the selected range of marketability discounts.
A.G. Edwards calculated the implied enterprise value of the selected
transactions (based on their acquisition prices) as multiples of LTM NOI and
FFO. The range of multiples for the three most recent transactions was 9.5x to
18.0x LTM NOI and 7.5x to 18.0x LTM FFO, which resulted in mean multiples of
14.4x LTM NOI and 14.2x LTM FFO, compared to the five year mean multiples of
11.6x LTM NOI and 11.1x LTM FFO. The range values were viewed in the context of
marketability discounts ranging from 10% to 20%. Multiples for the selected
transactions were based on publicly available information at the time of
announcement of the transactions.
The precedent transaction analysis yielded an implied equity value range
of $11.70 to $28.17 per share of FSP common stock. The effective cost per share
to each target REIT's stockholders of FSP common stock in the mergers is below
or within this range. Accordingly, although A.G. Edwards did not place
significant reliance on this methodology, it believes that this analysis also
supports its conclusion that the consideration to each target REIT's
stockholders is fair, from a financial point of view, to that target REIT's
stockholders.
Miscellaneous. A.G. Edwards is acting as financial advisor to the special
committees of the target boards with respect to the mergers and will receive
customary fees for its services pursuant to these engagements as well as
reimbursement for its reasonable expenses. The target REITs have also agreed to
indemnify A.G. Edwards for certain liabilities that may arise out of the
rendering of the opinions and any related activities as financial advisor to the
special committees of the target boards, including liabilities under the federal
securities laws.
The target REITs selected A.G. Edwards to provide opinions in connection
with the mergers because A.G. Edwards is a nationally recognized
investment-banking firm with substantial experience in similar transactions and
is familiar with the target REITs, FSP Corp. and their businesses. A.G. Edwards,
as part of its investment banking business, is regularly engaged in the
valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate or other purposes. In the ordinary course of
business, A.G. Edwards may from time to time trade in securities, including the
securities of direct competitors of the target REITs or FSP Corp., for its own
account and for accounts of its customers and, accordingly, may at any time hold
a long or short position in these securities.
93
A.G. Edwards has in the past provided services to FSP Corp. unrelated to
the mergers, and may do so in the future. Such past services have included
investment banking services and valuations of FSP Corp.'s common stock. A.G.
Edwards receives customary fees in connection with such services.
The foregoing is a summary of the analyses performed by A.G. Edwards. The
preparation of a fairness opinion is a complex process and is not necessarily
susceptible to partial analyses or summary description. A.G. Edwards believes
that its analyses and the summary set forth above must be considered as a whole
and that selecting portions of those analyses and of the factors considered by
A.G. Edwards, without considering all analyses and factors, would create an
incomplete view of the processes underlying the respective opinions. A.G.
Edwards did not attempt to assign specific weights to particular analyses. Any
estimates contained in A.G. Edwards' analyses are not necessarily indicative of
actual values, which may be significantly more or less favorable than as set
forth in A.G. Edwards' analyses. Estimates of values of companies do not purport
to be appraisals or necessarily to reflect the prices at which companies may
actually be sold.
Pursuant to engagement letter agreements dated July 22, 2004 between the
special committee of each target REIT and A.G. Edwards, the target boards each
agreed to pay A.G. Edwards an aggregate transaction fee of $350,000 comprised
of: (1) $122,140 by Addison Circle, (2) $106,584 by Collins Crossing, (3)
$57,133 by Montague and (4) $64,143 by Royal Ridge. Each fee is payable to A.G.
Edwards regardless of the conclusions reached by A.G. Edwards in its opinions
and whether or not the mergers consummated. In the engagement letters, which
were negotiated between the special committees and A.G. Edwards, the target
REITs also agreed to reimburse A.G. Edwards for its reasonable out-of-pocket
expenses.
The opinions of A.G. Edwards provide that they are solely for the
confidential use of the target boards. This limitation was based on the fact
that target REIT's engagement letters with A.G. Edwards specifically
contemplated that only the target boards and no third party, including the
target REIT stockholders, would be entitled to rely on the opinions of A.G.
Edwards. If a target REIT stockholder were to attempt to assert a claim against
A.G. Edwards based on its opinions, the validity of this limitation would be
resolved by a court of competent juridiction. The target boards believe that the
resolution of such question by a court of competent jurisdiction would have no
effect on the rights and responsibilites of the target boards under applicable
state law and no effect on the rights and responsibilities of either A.G.
Edwards or the target board under federal securities laws. Neither the target
boards nor the FSP board can express a view as to the resolution of the question
of the validity of this limitation by a court of competent jurisdiction.
Appraisals of the Target REITs' Properties
Each of the target boards engaged a third-party independent appraiser set
forth in the table below to appraise the real estate owned by its target REIT.
Each of the appraisers has delivered a written summary of its analysis, based
upon the review, analysis, scope and limitations described therein, as to the
fair market value of a particular target REIT's property as of the date set
forth in the table below. Each appraiser has a national reputation for providing
businesses with appraisals of real properties of the size and type of the
property it appraised. The target boards selected the appraisers to provide the
appraisals because of their experience and reputation in connection with real
estate assets, including in the case of Brian E. Humphries and Associates, over
24 years experience in real property appraisal and concentration on multi-family
and office property, in the case of Michael A. Davis of Cushman & Wakefield of
California, his position as director of the Valuation Services Advisory Group of
Cushman & Wakefield, over 17 years experience and numerous notable appraisals,
and in the case of Ronald A. Neyhart and Richard A. Francis of C.B. Richard
Ellis, Mr. Neyhart's position as senior managing director of CBRE -- Valuation
and Advisory Services and over 23 years experience and Mr. Francis's 12 years of
experience. In addition, the target boards in each case selected the appraiser
94
who had provided the appraisal obtained by each target REIT in connection with
its acquisition of the property in order to take advantage of the cost
efficiencies associated with such selection. The target boards imposed no
limitations on the scope of the appraisers' appraisals. The target REITs have
made the appraisals available to FSP Corp. and have allowed the FSP board to
rely on the appraisals. The appraisals for Addison Circle, Montague and Royal
Ridge covered only the single property owned by the respective target REIT. The
appraisal for Collins Crossing also covered excess land held by the target REIT.
Set forth below is certain information regarding the appraisals. Copies of
the appraisals are filed as exhibits to the registration statement of which this
Consent Solicitation/Prospectus is a part. These appraised values are for the
property owned by the respective target REIT as of the date of the appraisal.
Sum of Fair Market Value set
forth in Appraisal and
Estimated Adjusted Cash
Reserve Balances as of Date of
Target REIT Appraiser June 30, 2004 Appraisal
----------- --------- ------------- ---------
Addison Circle Bryan E. Humphries $56,176,697 July 23, 2004
and Associates
Collins Crossing Bryan E. Humphries $50,484,695 July 23, 2004
and Associates
Montague Cushman & Wakefield $22,034,787 July 14, 2004
of California, Inc.
Royal Ridge CBRE-Valuation and $27,042,500 July 13, 2004
Advisory Services
The material assumptions, qualifications and limitations to the appraisals
are described below.
Summary of Methodology. At the request of the target boards, the
appraisers updated their original appraisals for the purchase of the properties
held by the respective target REIT and, where appropriate, revised their
assumptions to reflect the changed conditions in the market or property.
Appraisers typically use three approaches in valuing real property: the cost
approach, the income approach and the sales comparison approach. The type and
age of a property, market conditions and the quantity and quality of data affect
the applicability of each approach in a specific appraisal situation. The value
estimated by the cost approach incorporates separate estimates of the value of
the unimproved site and the value of improvements, less observed physical wear
and tear and functional or economic obsolescence. The income approach estimates
a property's capacity to produce income through an analysis of the rental
market, operating expenses and net income. Net income may then be processed into
a value through either direct capitalization or discounted cash flow analysis,
or a combination of these two methods. The sales comparison approach involves a
comparative analysis of the subject property with other similar properties that
have sold recently or that are currently offered for sale in the market. The
appraisers considered or used all three of the approaches to value in their
original appraisals. In arriving at a value for the property held by Addison
95
Circle, the appraiser relied on the income approach; in arriving at a value for
the property held by Collins Crossing, the appraiser relied on the income
approach with respect to the building and the sales comparison approach with
respect to the excess land; in arriving at a value for the property held by
Montague, the appraiser relied on both the income and the sales comparison
approach; and in arriving at a value for the property held by Royal Ridge, the
appraiser relied on all three approaches.
The appraisers analyzed the individual properties of each target REIT. The
appraisers' analysis included:
o reviewing each property's historical operating statements,
o reviewing and relying on specific information regarding prospective
changes in rents and expenses for each property provided by the
applicable target REIT,
o developing information from a variety of sources about market
conditions for each individual property, and
o considering the projected cash flow for each property.
Representatives of the appraisers performed site inspections on all
properties during July 2004. In the course of these site visits, the appraisers
inspected the physical facilities, obtained current rental and percentage of
leased space information, gathered information on competing properties and the
local market, visited primary competing properties and interviewed each local
property manager or assistant manager concerning performance of the subject
property and other factors.
The appraisers reviewed historical operating statements and 2004 operating
budgets for the subject properties.
In conducting the appraisals, the appraisers also interviewed and relied
upon members of the target boards, executive management and property management
personnel to:
o obtain information relating to the condition of each property,
including any deferred maintenance, capital budgets, status of
ongoing or newly planned property additions, reconfigurations,
improvements and other factors affecting the physical condition of
the property improvements; and
o discuss competitive conditions, area economic and development trends
affecting the properties, historical and budgeted operating revenues
and expenses and occupancies.
To define the percentage of leased space, rental rate and expense
escalators to be used in developing property operating projections, the
appraisers reviewed the acquisition criteria and projection parameters in use in
the marketplace by major investors, owners and operators of the applicable
property types. Further, the appraisers interviewed various sources in local
markets to identify recent sales of similar properties and derive certain
valuation indicators. Sources for data concerning such transactions included
local appraisers, property owners, real estate brokers, tax assessors and real
estate research firms.
Conclusions as to Value
Assumptions, Limitations and Qualifications of Property Appraisals. The
appraisers utilized certain assumptions to determine the appraised value of the
properties under the income approach and the sales comparison approach. The
96
appraisals reflect the appraisers' valuation of the real estate of the target
REITs as of their respective dates, in the context of the information available
on such date. Events occurring after the date of an appraisal and before the
closing of the mergers could affect the properties or assumptions used in
preparing the real estate appraisals. The appraisers have no obligation to
update the appraisals on the basis of subsequent events.
Compensation and Material Relationships. The appraisers have been paid
fees in the aggregate amount of $20,500 to prepare the appraisals. The fees for
the appraisals were negotiated between the target boards and the appraisers and
payment thereof are not dependent upon completion of the mergers. The respective
appraisers were previously engaged to appraise the properties of the target
REITs prior to their acquisition. During the past three years, the appraisers
received an aggregate of $32,000 for appraisals obtained by each target REIT in
connection with the initial acquisition of such target REIT's property.
97
MANAGEMENT
George J. Carter, President and a director of each target REIT, age 55, is
responsible for all aspects of the business of FSP Corp., the target REITs and
their respective 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 of the FSP Partnership, the predecessor
to FSP Corp., and was responsible for all aspects of the business of the FSP
Partnership and its affiliates. From 1992 through 1996 he was President of
Boston Financial Securities, Inc. 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
positions 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.
R. Scott MacPhee, Executive Vice President and director of each target
REIT, age 47, 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 of the FSP Partnership. From 1993 through
1996 he was an executive officer of Boston Financial Services, Inc. From 1985 to
1993 Mr. MacPhee worked at Winthrop Financial Associates. Mr. MacPhee attended
American International College. Mr. MacPhee holds a NASD Series 7 general
securities license.
Richard R. Norris, Executive Vice President and director of each target
REIT, age 61, 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 of the FSP Partnership. From 1993 through
1996 he was an executive officer of Boston Financial Services, Inc. From 1983 to
1993 Mr. Norris worked at Winthrop Financial Associates. Prior to that, he
worked at Arthur Young & Company (subsequently named Ernst & Young through a
merger). Mr. Norris is a graduate of Bowdoin College (B.A.) and Northeastern
University (M.S.). Mr. Norris holds a NASD Series 7 general securities license.
William W. Gribbell, Executive Vice President and director of each target
REIT, age 44, 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 of FSP Partnership. 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.
Barbara J. Fournier, Vice President, Chief Operating Officer, Treasurer
and a director of each target REIT, age 48, has as her primary responsibility,
together with Mr. Carter, the management of all operating business affairs of
FSP Corp., the target REITs and their respective affiliates. Ms. Fournier is
also responsible for FSP Corp.'s accounting and financial reporting functions.
Prior to the conversion, Ms. Fournier was the Vice President, Chief Operating
Officer, Treasurer and Secretary of the general partner of the FSP Partnership.
From 1993 through 1996, she was Director of Operations for the private placement
division of Boston Financial. Prior to joining Boston Financial, Ms. Fournier
served as Director of Operations for Schuparra Securities Corp. and as the Sales
Administrator for Weston Financial Group. From 1979 through 1986, Ms. Fournier
worked at First Winthrop Corporation in administrative and management
capacities; including Office Manager, Securities Operations and Partnership
Administration. Ms. Fournier attended Northeastern University and the New York
Institute of Finance. Ms. Fournier is a NASD General Securities Principal
(Series 24). She also holds other NASD supervisory licenses including Series 4
and Series 53, and a NASD Series 7 general securities license.
98
Janet Prier Notopoulos, Vice President of each target REIT, age 57, has as
her primary responsibility the oversight of the management of the real estate
assets of FSP Corp., the target REITs and their respective affiliates. Prior to
the conversion, Ms. Notopoulos was a Vice President of the general partner of
the FSP Partnership. Prior to joining FSP Corp. 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.).
Management Compensation
The following summary compensation table sets forth certain information
concerning the compensation for each of (1) the President of the target REITs
and (2) the other executive officers of the target REITs. These amounts are paid
by FSP Corp. for services performed by such persons for FSP Corp.
Annual Compensation(1)
--------------------------------------------
Fiscal Other Annual All Other
Name and Principal Position Year Salary Bonus Compensation(2) Compensation(3)
--------------------------------------- ------ -------- ------------ --------------- ---------------
George J. Carter ..................... 2003 $225,000 $ 400,000(4) -- $ 12,865(5)
President 2002 $120,000 $ 255,000(6) -- $ 16,585(7)
2001 $120,000 $ 759,652(8) -- $815,585(9)
R. Scott MacPhee ..................... 2003 -- -- $1,750,850 $ 8,000(10)
Executive Vice President 2002 -- $ 13,640 $1,632,250 $611,100(11)
2001 -- $ 11,023 $2,202,483 $232,196(12)
Richard R. Norris .................... 2003 -- -- $1,077,453 $ 9,000(10)
Executive Vice President 2002 -- -- $2,062,432 $ 7,500(10)
2001 -- $ 21,428 $2,298,737 $448,436(13)
William W. Gribbell .................. 2003 -- -- $2,192,258 $ 8,000(10)
Executive Vice President 2002 -- -- $1,331,975 $ 7,000(10)
2001 -- $ 7,021 $ 898,993 $152,274(14)
Barbara J. Fournier .................. 2003 $175,000 $ 190,000(4) -- $ 8,000(10)
Vice President, Chief Operating Officer 2002 $ 75,000 $ 285,000(6) -- $ 7,000(10)
and Treasurer 2001 $ 60,000 $ 287,974(15) -- $ 66,500(16)
2003 $150,000 $ 180,000(4) -- $ 9,000(10)
Janet Prier Notopoulos ................ 2002 $ 75,000 $ 250,000(6) -- $ 7,500(10)
Vice President 2001 $ 60,000 $ 172,726(15) -- $ 61,500(17)
(1) Amounts reported represent annual compensation paid to the executive
officers by the FSP Partnership, FSP Corp.'s predecessor, for the fiscal
year 2001.
(2) Consists of brokerage commissions paid by FSP Investments to such
executive officer in his capacity as broker as compensation for such
executive's officer's efforts in the sale of securities of sponsored REITs
and sponsored partnerships in a manner consistent with the payment by FSP
Investments of commissions to its brokers.
99
(3) The FSP Partnership issued units of partnership interest, or FSP units, to
all executive officers in July 2001, valued at $11.50 per FSP unit, as
part of their annual compensation. The valuations of $11.50 per FSP unit
was determined in good faith by the general partner of the FSP
Partnership. The value of $11.50 per FSP unit was determined by the
general partner based on the value ascribed to each FSP unit in connection
with certain mergers that were effective October 1, 2000 in which the FSP
Partnership acquired several of the limited partnerships whose offerings
FSP Investments had previously sponsored, and no material changes in the
financial condition or results of the FSP Partnership had occurred between
that date and July 1, 2001.
(4) Represents a bonus accrued in 2003 and paid in 2004.
(5) Includes a $9,000 contribution to a Simple IRA Plan and $3,865 of life
insurance.
(6) Represents a bonus accrued in 2002 and paid in 2003.
(7) Includes a $7,500 contribution to a Simple IRA Plan and $9,085 of life
insurance.
(8) Includes a bonus of $720,000 accrued in 2001 and paid in 2002.
(9) Includes $800,000 in FSP units, a $6,500 FSP Partnership contribution to a
Simple IRA plan and $9,085 of life insurance.
(10) Represents a contribution to a Simple IRA Plan.
(11) Consists of $604,100 in FSP common stock and a $7,000 contribution to a
Simple IRA plan.
(12) Includes $222,400 in FSP units, a $6,500 FSP Partnership contribution to a
Simple IRA plan and $3,296 of life insurance.
(13) Includes $423,320 in FSP units, a $6,500 FSP Partnership contribution to a
Simple IRA plan and $9,616 of life insurance.
(14) Includes $145,280 in FSP units, a $6,500 FSP Partnership contribution to a
Simple IRA plan and $494 of life insurance.
(15) Represents a bonus accrued in 2001 and paid in 2002.
(16) Includes $60,000 in FSP units and a $6,500 FSP Partnership contribution to
a Simple IRA plan.
(17) Includes $55,000 in FSP units and a $6,500 FSP Partnership contribution to
a Simple IRA plan.
No options or stock appreciation rights were granted to any of the
executive officers during the fiscal years 2001, 2002 or 2003. FSP Corp. does
not have any outstanding stock options or stock appreciation rights, and
therefore, there were no stock options or stock appreciation rights exercised by
any of the executive officers during 2003.
No executive officer of any of the target REITs is a party to an
employment agreement with the target REITs or with FSP Corp.
100
The executive officers and directors of the target REITs receive no
compensation from the target REITs. All compensation for such persons is
received from FSP Corp. and is solely for services such persons perform for and
on behalf of FSP Corp.
101
SELECTED FINANCIAL INFORMATION OF FSP CORP.
The following selected financial information is derived from the
historical consolidated financial statements of the FSP Corp. and it
predecessor, the FSP Partnership. This information should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" as incorporated by reference from FSP Corp.'s Annual Report on Form
10-K for the year ended December 31, 2003, as amended, filed with the SEC and
with FSP Corp.'s consolidated financial statements and related notes thereto.
For the For the
Nine Months Ended Year Ended
September 30, December 31,
(In thousands, except per share ------------------ --------------------------------------------------
or unit data)
2004 2003 2003 2002 2001 2000 1999
---- ---- ---- ---- ---- ----- ----
Operating Data:
Total revenue $ 72,578 $ 58,892 $ 83,768 $ 53,950 $ 51,955 $32,793 $ 15,534
Income from:
Continuing operations 33,840 28,215 39,823 26,741 24,621 8,171 406
Discontinued operations -- 201 195 571 747 743 733
Gain on sale of properties,
net of tax -- 6,335 6,362 -- -- -- --
-------- -------- -------- -------- -------- ------- --------
Net income $ 33,840 $ 34,751 $ 46,380 $ 27,312 $ 25,368 $ 8,914 $ 1,139
======== ======== ======== ======== ======== ======= ========
Basic and diluted income per
share and per limited and
general partnership unit from:
Continuing operations $ 0.68 $ 0.79 $ 1.02 $ 1.09 $ 1.00 $ 0.43 $ 0.03
Discontinued operations -- -- -- 0.02 0.03 0.04 0.06
Gain on sale of properties,
net of tax -- 0.18 0.16 -- -- -- --
-------- -------- -------- -------- -------- ------- --------
Total $ 0.68 $ 0.97 $ 1.18 $ 1.11 $ 1.03 $ 0.47 $ 0.09
======== ======== ======== ======== ======== ======= ========
Distributions declared per
unit/share outstanding from:
Operations $ 0.93 $ 0.93 $ 1.24 $ 1.24 $ 1.18 $ 1.02 $ 0.86
Sale of properties -- -- 0.12 -- -- -- --
-------- -------- -------- -------- -------- ------- --------
Total $ 0.93 $ 0.93 $ 1.36 $ 1.24 $ 1.18 $ 1.02 $ 0.86
======== ======== ======== ======== ======== ======= ========
As of
September As of
30, December 31,
---------- -------------------------------------------------
2004 2003 2002 2001 2000 1999
---- ---- ---- ---- ---- -----
Balance Sheet Data (at period end):
Cash and cash equivalents $ 50,630 $ 58,793 $ 22,316 $ 24,357 $13,718 $ 18,519
Total assets 515,212 528,529 201,936 204,117 219,923 190,486
Long term liabilities -- -- -- -- -- --
Total liabilities 10,663 11,674 4,771 4,354 19,280 28,821
Minority interests in consolidated -- -- -- -- 63 78,090
entities
Total shareholders'/partners' capital 504,549 516,855 197,165 199,763 200,580 83,575
102
SELECTED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma financial information has been prepared
based upon certain pro forma adjustments to the historical consolidated
financial statements of FSP Corp. and the target REITs. The pro forma
consolidated balance sheets have been presented as if the mergers occurred as of
September 30, 2004. The pro forma consolidated statements of income for the nine
months ended September 30, 2004 and for the year ended December 31, 2003 and the
consolidated pro forma statements of cash flow for the nine months ended
September 30, 2004 and for the year ended December 31, 2003 are presented as if
the mergers occurred at the beginning of the period presented.
The pro forma financial information has been prepared assuming all of the
target REITs participate in the mergers. If one or more target REITs does not
obtain the vote required for the consummation of the merger with such target
REIT, FSP Corp. will not proceed with the mergers of any other target REIT.
The unaudited pro forma consolidated financial statement data are not
necessarily indicative of what the combined company's actual financial position
or results of operations would have been as of the date or for the period
indicated, nor do they purport to represent the combined company's financial
position or results of operations as of or for any future period. The unaudited
pro forma consolidated financial statement data should be read in conjunction
with all financial statements included elsewhere herein or incorporated herein
by reference.
103
Franklin Street Properties Corp.
Combining Condensed Consolidated Pro Forma Balance Sheets
September 30, 2004
(Unaudited)
Historical Historical Pro Forma
(in thousands) FSP Corp. Target REITs(k) Adjustment Pro Forma
-------------------------------------------------------------------------------------------------------
Assets:
Real estate assets, net $ 442,197 $ 122,561 $ 14,064(c)(d) $ 578,822
Acquired favorable leases, net -- 8,814 232(d) 9,046
Acquired lease origination costs, net 6,346 3,853 236(d) 10,435
Investment in non-consolidated REITs 4,292 -- -- 4,292
Cash and cash equivalents 50,630 16,269 (685)(c) 65,739
(475)(b)
Restricted cash 1,039 706 -- 1,745
Tenant rents receivable, net 552 36 -- 588
Straight line rents receivable, net 4,980 2,560 (2,560)(p) 4,980
Prepaid expenses 3,475 181 -- 3,656
Deferred leasing commissions, net 1,293 358 -- 1,651
Office computers and equipment, net 408 -- -- 408
-------------------------------------------------------------------------------------------------------
Total assets $ 515,212 $ 155,338 $ 10,812 $ 681,362
=======================================================================================================
Liabilities and stockholders' equity:
Liabilities:
Accounts payable and accrued expenses $ 8,574 $ 3,897 $ -- $ 12,471
Accrued compensation 1,050 -- -- 1,050
Distribution payable -- -- 6,021(o) 6,021
Tenant security deposits 1,039 135 1,174
-------------------------------------------------------------------------------------------------------
Total liabilities 10,663 4,032 6,021 20,716
-------------------------------------------------------------------------------------------------------
Stockholders' Equity:
Preferred stock -- -- -- --
Common stock 5 -- 1(i) 6
Additional paid in capital 512,813 167,412 (11,316)(i) 668,909
Treasury stock (10) -- -- (10)
Retained earnings (distributions in
excess of earnings) (8,259) (16,106) 16,106(q) (8,259)
-------------------------------------------------------------------------------------------------------
Total stockholders' equity 504,549 151,306 4,791 660,646
-------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity $ 515,212 $ 155,338 $ 10,812 $ 681,362
=======================================================================================================
See accompanying notes to condensed consolidated pro forma financial statements.
104
Franklin Street Properties Corp.
Combining Condensed Consolidated Pro Forma Statements of Income
For the nine months ended
September 30, 2004
(Unaudited)
Historical Historical Pro Forma
(in thousands, except per share amounts) FSP Corp. Target REITs(l) Adjustments Pro Forma
-------------------------------------------------------------------------------------------------------
Revenue:
Rental income $ 51,411 $ 16,975 $ 45(d) $ 68,431
Syndication fees 8,603 -- -- 8,603
Transaction fees 9,209 -- -- 9,209
Sponsored REIT income 2,357 -- -- 2,357
Management fees and interest from loans 803 -- (175)(e) 628
Equity in earnings of investment in REIT 182 -- -- 182
Other 13 -- -- 13
-------------------------------------------------------------------------------------------------------
Total revenue 72,578 16,975 (130) 89,423
=======================================================================================================
Expenses:
Rental operating expenses 10,267 3,917 (175)(e) 14,009
Real estate taxes and insurance 6,702 2,220 -- 8,922
Depreciation and amortization 9,984 2,819 304(d) 13,133
26(d)
Sponsored REIT expenses 1,693 -- -- 1,693
Selling, general and administrative 4,920 -- 475(b) 5,395
Commissions 4,384 -- -- 4,384
Interest 517 -- -- 517
-------------------------------------------------------------------------------------------------------
Total expenses 38,467 8,956 630 48,053
-------------------------------------------------------------------------------------------------------
Income (loss) before interest, taxes and 34,111 8,019 (760) 41,370
discontinued operations,
Interest income 489 179 -- 668
Taxes on income (a) (760) -- -- (760)
Income from discontinued operations -- -- -- --
-------------------------------------------------------------------------------------------------------
Net income $ 33,840 $ 8,198 $ (760) $ 41,278
=======================================================================================================
Weighted average shares outstanding
basic and diluted 49,628 -- 10,895(i) 60,523
=======================================================================================================
Net income per share basic and diluted $ 0.68 $ -- $ -- $ 0.68
=======================================================================================================
See accompanying notes to condensed consolidated pro forma financial statements.
105
Franklin Street Properties Corp.
Combining Condensed Consolidated Pro Forma Statements of Income
For the year ended
December 31, 2003
(Unaudited)
2003
Merger
Pro Forma Historical Historical
Historical Adjustment Adjusted Target REITs Property Pro Forma
(in thousands, except per share amounts) FSP Corp. (j) FSP Corp. (m) (n) Adjustments Pro Forma
-----------------------------------------------------------------------------------------------------------------------------------
Revenue:
Rental income $ 49,789 $15,204 $ 64,993 $ 20,135 $1,348 $ 61(d) $ 86,537
Syndication fees 14,631 -- 14,631 -- -- (5,403)(g) 9,228
Transaction fees 14,745 -- 14,745 -- -- (5,558(g) 9,187
Sponsored REIT income 3,452 -- 3,452 -- -- (1,595(h) 1,857
Management fees and interest on 1,129 -- 1,129 -- -- (204)(e) 652
(273)(f)
Other 22 -- 22 -- -- 22
-----------------------------------------------------------------------------------------------------------------------------------
Total revenue 83,768 15,204 98,972 20,135 1,348 (12,972) 107,483
-----------------------------------------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 10,425 3,997 14,422 4,242 415 (204)(e) 18,875
Real estate taxes and insurance 6,264 2,667 8,931 2,708 175 -- 11,814
Depreciation and amortization 9,265 3,298 12,563 3,463 -- 405(d) 16,466
35(d)
Sponsored REIT expenses 2,620 -- 2,620 -- -- (1,208)(h) 1,412
Selling, general and administrative 5,711 -- 5,711 -- -- 475(b) 6,186
Commissions 7,291 -- 7,291 -- -- -- 7,291
Interest 1,036 -- 1,036 5,175 -- (273)(f) 772
(264)(g)
(4,902)(g)
-----------------------------------------------------------------------------------------------------------------------------------
Total expenses 42,612 9,962 52,574 15,588 590 (5,936) 62,816
-----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before interest, taxes,
discontinued operations and gain
on sales of properties 41,156 5,242 46,398 4,547 758 (7,036) 44,667
Interest Income 367 117 484 193 -- -- 677
Taxes on income (a) (1,700) -- (1,700) -- -- -- (1,700)
Income from discontinued operations 195 -- 195 -- -- -- 195
Gain on sale of properties,
net of tax 6,362 -- 6,362 -- -- -- 6,362
Dividends to common shareholder -- -- -- (387) -- 387(h) --
-----------------------------------------------------------------------------------------------------------------------------------
Net income $ 46,380 $ 5,359 $ 51,739 $ 4,353 $ 758 $ (6,649) 50,201
===================================================================================================================================
Weighted average shares outstanding,
basic and diluted 39,214 10,416 49,630 -- -- 10,895(i) 60,525
===================================================================================================================================
Income per share attributable to:
Continuing operations $ 1.02 $ -- $ -- $ -- $ -- $ -- $ 0.72
Discontinued operations -- -- -- -- -- -- --
Gain on sale of properties, net $ 0.16 -- -- -- -- -- $ 0.11
-----------------------------------------------------------------------------------------------------------------------------------
Basic and diluted net income per share $ 1.18 $ -- $ -- $ -- $ -- $ -- $ 0.83
===================================================================================================================================
See accompanying notes to condensed consolidated pro forma financial statements.
106
Franklin Street Properties Corp.
Consolidated Pro Forma Statements of Cash Flow
For the nine months ended
September 30, 2004
(Unaudited)
Historical Historical Pro Forma
(in thousands) FSP Corp. Target REITs (r) Adjustments Pro Forma
-------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 33,840 $ 8,198 $ (760) $ 41,278
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization expense 9,984 2,819 330(d) 13,133
Amortization of above market lease 176 1,934 (45)(d) 2,065
Equity in earnings from non-consolidated REITs (182) -- -- (182)
Distributions from non-consolidated REITs 147 -- -- 147
Shares issued as compensation 162 -- -- 162
Changes in operating assets and liabilities:
Restricted cash (57) 15 -- (42)
Tenant rent receivables, net 329 14 -- 343
Straight-line rents, net (893) (514) -- (1,407)
Prepaid expenses and other assets, net (2,669) (59) -- (2,728)
Accounts payable and accrued expenses 3,534 (276) -- 3,258
Accrued compensation (485) -- -- (485)
Tenant security deposits 57 (15) -- 42
Payment of deferred leasing commissions (548) (329) -- (877)
-------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 43,395 11,787 (475) 54,707
-------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets and related leases,
office computers and furniture, capitalized merger costs (993) (225) (685)(c) (1,903)
Investment in non-consolidated REITs (4,257) -- -- (4,257)
Sale of assets held for syndication 4,117 -- -- 4,117
-------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities (1,133) (225) (685) (2,043)
-------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Distributions to stockholders (46,152) (12,170) -- (58,322)
Proceeds from (payments to) bank note payable, net (4,117) -- -- (4,117)
Purchase of treasury stock (156) -- -- (156)
-------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities (50,425) (12,170) -- (62,595)
-------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (8,163) (608) (1,160) (9,931)
Cash and cash equivalents, beginning of period 58,793 16,877 -- 75,670
-------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 50,630 $16,269 $ (1,160) $ 65,739
===============================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 517 $ -- $ -- $ 517
Income taxes $ 1,450 $ -- $ -- $ 1,450
Non-cash investing and financing activities:
Assets acquired through issuance of common stock in merger
transaction, net $ -- $ -- $ 149,075 $ 149,075
See accompanying notes to condensed consolidated pro forma financial statements.
107
Franklin Street Properties Corp
Consolidated Pro Forma Statements of Cash Flow
For the year ended
December 31, 2003
(Unaudited)
2003 Merger Historical
Historical Pro Forma Adjusted Target Historical Pro Forma
(in thousands) FSP Corp. Adjustment FSP Corp. REITs (s) Property Adjustments Pro forma
------------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 46,380 $5,359 $ 51,739 $ 4,740 $758 $ (6,649) $ 50,588
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization expense 9,530 3,298 12,828 3,463 -- 440(d) 16,731
Amortization of above market lease 138 -- 138 2,381 -- (61)(d) 2,458
Gain on sale of real estate assets (6,362) -- (6,362) -- -- -- (6,362)
Changes in operating assets and liabilities:
Restricted cash (1) -- (1) (677) -- -- (678)
Tenant rent receivables, net (302) -- (302) (50) -- -- (352)
Straight-line rents, net (1,030) -- (1,030) (1,817) -- -- (2,847)
Prepaid expenses and other assets, net 305 -- 305 (2,729) -- -- (2,424)
Accounts payable and accrued expenses (9,053) -- (9,053) 2,255 -- -- (6,798)
Accrued compensation 258 -- 258 -- -- -- 258
Tenant security deposits 1 -- 1 106 -- -- 107
Payment of deferred leasing commissions (487) -- (487) (39) -- -- (526)
-----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating
activities 39,377 8,657 48,034 7,633 758 (6,270) 50,155
-----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Cash acquired through issuance of common
stock in merger transaction 23,524 -- 23,524 -- -- -- 23,524
Purchase of real estate assets and
related leases, office computers and
furniture capitalized merger costs (2,388) -- (2,388) (68,361) -- (685)(c) (71,434)
Change in deposits on real estate assets 841 -- 841 -- -- -- 841
Investment in assets held for syndication (4,117) -- (4,117) -- -- -- (4,117)
Proceeds received on sales of real
estate assets 21,870 -- 21,870 -- -- -- 21,870
-----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing
activities 39,730 -- 39,730 (68,361) -- (685) (29,316)
-----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock -- -- -- 78,377 -- -- 78,377
Distributions to stockholders (46,747) -- (46,747) (12,216) -- -- (58,963)
Proceeds from (payments to) bank note
payable, net 4,117 -- 4,117 -- -- -- 4,117
-----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for)
financing activities (42,630) -- (42,630) 66,161 -- -- 23,531
-----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 36,477 8,657 45,134 5,433 758 (6,955) 44,370
Cash and cash equivalents, beginning of year 22,316 -- 22,316 3,640 -- -- 25,956
-----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 58,793 $8,657 $ 67,450 $ 9,073 $758 $ (6,955) $ 70,326
===================================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 1,036 $ -- $ 1,036 $ 5,175 $ -- $ -- $ 6,211
Income taxes $ 1,963 $ -- 1,963 $ -- $ -- $ -- $ 1,963
Non-cash investing and financing activities:
Dividends declared but not paid $ -- $ -- -- $ 4,092 $ -- $ -- $ 4,092
Assets acquired through issuance of
common stock in merger transaction, net $ 297,468 $ -- $ 297,468 $ -- $ -- $ 149,075 $ 446,543
See accompanying notes to condensed consolidated pro forma financial statements.
108
FRANKLIN STREET PROPERTIES CORP.
NOTES TO CONDENSED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS
(Unaudited)
BASIS OF PRESENTATION
The following unaudited pro forma condensed consolidated financial
statement presentation has been prepared based upon certain pro forma
adjustments to the historical consolidated financial statements of FSP Corp. The
pro forma balance sheets are presented as if the mergers occurred as of
September 30, 2004. The pro forma statements of income and the pro forma
statements of cash flow are presented as if the mergers occurred as of the
beginning of the periods presented.
The mergers will be treated as a purchase of assets and each target REIT's
assets and liabilities will be recorded on FSP Corp.'s books at their fair value
as of the effective date of the mergers. The value ascribed to the net assets of
the target REITs is estimated to be $156,424,000, which includes real estate
assets of $149,075,000 at their appraised values, cash of $6,664,000 and
capitalized merger costs of $685,000. Other assets, net of liabilities, are
expected to be immaterial. FSP Corp. will record the mergers based upon the fair
value of the assets acquired, not the value of the shares of FSP Corp.'s common
stock issued. The value allocated to the assets acquired in the mergers is
preliminary: the final value allocated to the assets acquired will be determined
as of the actual merger date.
PRO FORMA ADJUSTMENTS
Certain assumptions regarding the operations of FSP Corp. have been made
in connection with the preparation of the pro forma condensed consolidated
financial information. These assumptions are as follows:
(a) FSP Corp. and each of the target REITs have elected to be, and are
qualified as, a real estate investment trust for federal income tax
purposes. Each entity has met the various required tests; therefore,
no provision for federal or state income taxes has been reflected on
real estate operations.
FSP Corp. has subsidiaries which are not in the business of real
estate operations. Those subsidiaries are taxable as real estate
investment trust subsidiaries, or TRS, and are subject to income
taxes at statutory tax rates. The taxes on income shown in the pro
forma statements of income are the taxes on income of the TRS. There
are no material items that would cause a deferred tax asset or a
deferred tax liability.
(b) Costs of the mergers to the target REITs are estimated at $475,000
and are reflected as paid at September 30, 2004, and are recorded as
an administrative expense.
(c) The costs of the mergers to FSP Corp. are estimated at $685,000 and
are reflected as paid as of September 30, 2004 and are capitalized
to the assets acquired.
(d) The following schedule shows the merger consideration for the
acquired properties and is reconciled to the purchase price of such
properties (which is equal to the appraised value of such property
plus capitalized merger costs attributable to such property).
109
FRANKLIN STREET PROPERTIES CORP.
NOTES TO CONDENSED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS
(Unaudited)
(in thousands) Montague Addison Royal Ridge Collins Total
----------------------------------------------------------------------------------------------
Merger consideration $ 33,400 $ 66,965 $31,888 $ 60,588 $192,841
Premium (11,365) (10,788) (4,846) (10,103) (37,102)
Adjusted Cash Reserves (2,035) (1,677) (967) (1,985) (6,664)
------------------------------------------------------------
Purchase price of properties
Appraised value 20,000 54,500 26,075 48,500 149,075
Capitalized merger costs 125 239 112 209 685
------------------------------------------------------------
$ 20,125 $ 54,739 $26,187 $ 48,709 $149,760
============================================================
The cost of the property held by each target REIT (including
capitalized merger costs of $685,000) has been allocated to real
estate assets, acquired lease origination costs and acquired
favorable leases. Acquired lease origination costs represent the
value associated with acquiring an in-place lease (i.e. the market
cost to execute a similar lease, including leasing commission,
legal, vacancy and other related costs). Acquired favorable leases
represents the value associated with a lease which has a rental
stream with above market rates. The value assigned to buildings,
land and leases approximates their fair value.
The following schedule shows the difference between historical costs
of the properties and their allocated purchase price. The purchase
price of the properties is determined based upon the fair value of
the assets acquired. Depreciation and amortization for the target
REITs is based on a preliminary allocation of the purchase price to
real estate investments and to the leases acquired. The allocation
is subject to change when final purchase accounting is made or as
additional information is obtained. An increase in the allocation to
lease origination costs will result in an increase in amortization
expense. For each $1,000,000 increase in lease origination costs,
the related pro forma amortization expense will increase by
approximately $200,000 per year.
Adjustment to
Depreciation and Amortization
Estimated for the for the
Historical Allocated Life Nine months ended Year ended
Cost Purchase Price Difference (years) September 30, 2004 December 31, 2003
---------- -------------- ---------- ------- ------------------ -----------------
Montague
Land $ 10,500 7,878 $ (2,622) N/A $ -- $ --
Building 9,939 10,202 263 39 5 7
Acquired favorable leases 2,616 1,874 (742) 3 (185) (247)
Acquired lease origination costs 241 171 (70) 3 (17) (23)
-------- -------- -------- -------- --------
Total $ 23,296 $ 20,125 $ (3,171) $ (197) $ (263)
======== ======== ======== ======== ========
Addison Circle
Land $ 4,365 $ 4,140 $ (225) N/A $ -- $ --
Building 43,706 49,499 5,793 39 112 149
Acquired favorable leases -- -- -- - -- --
Acquired lease origination costs 1,150 1,100 (50) 4 (9) (12)
-------- -------- -------- -------- --------
Total $ 49,221 $ 54,739 $ 5,518 $ 103 $ 137
======== ======== ======== ======== ========
Royal Ridge
Land $ 1,649 $ 2,542 $ 893 N/A $ -- $ --
Building 15,537 19,303 3,766 39 73 97
Acquired favorable leases 2,558 3,251 693 6 87 116
Acquired lease origination costs 858 1,091 233 6 29 39
-------- -------- -------- -------- --------
Total $ 20,602 $ 26,187 $ 5,585 $ 189 $ 252
======== ======== ======== ======== ========
110
FRANKLIN STREET PROPERTIES CORP.
NOTES TO CONDENSED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS
(Unaudited)
Adjustment to
Depreciation and Amortization
Estimated for the for the
Historical Allocated Life Nine months ended Year ended
Cost Purchase Price Difference (years) September 30, 2004 December 31, 2003
---------- -------------- ---------- ------- ------------------ -----------------
Collins Crossing
Land $ 4,022 $ 4,308 $ 286 N/A $ -- $ --
Building 32,843 38,753 5,910 39 114 152
Acquired favorable leases 3,640 3,921 281 4 53 70
Acquired lease origination costs 1,604 1,727 123 4 23 31
-------- -------- -------- -------- --------
Total $ 42,109 $ 48,709 $ 6,600 $ 190 $ 253
======== ======== ======== ======== ========
Total
Land $ 20,536 $ 18,868 $ (1,668) N/A $ -- $ --
Building 102,025 117,757 15,732 39 304 405
-------- -------- -------- -------- --------
Real estate assets, net 122,561 136,625 14,064 304 405
Acquired favorable leases 8,814 9,046 232 3-6 (45) (61)
Acquired lease origination costs 3,853 4,089 236 3-6 26 35
-------- -------- -------- -------- --------
Total $135,228 $149,760 $ 14,532 $ 285 $ 379
======== ======== ======== ======== ========
(e) Management fees charged by FSP Corp. to the target REITs have been
eliminated from revenue and expenses as follows.
Nine Months Ended Year Ended
September 30, 2004 December 31, 2003
--------------------------------------------------------
$ 175,000 $ 204,000
(f) Interest of $273,000 charged by FSP Corp. on loans to the two target
REITs syndicated in 2003 has been eliminated from revenue and
expenses. See footnote (g) for additional interest expense incurred
during syndications.
(g) Income and expenses directly related to the syndication of two
target REITs in 2003 have been eliminated in the pro forma
Statements of Income.
Revenue directly related to the syndication of two target REITs in
2003 that is included in FSP Corp.'s financial statements as
follows:
Loan origination fees $ 4,902,000
Other organization costs 656,000
------------
Total transaction fees $ 5,558,000
Syndication fees, gross 6,820,000
Syndication fees, rebates (1,417,000)
------------
Total syndication fees, net 5,403,000
------------
Total revenue adjustment $10,961,000
============
111
FRANKLIN STREET PROPERTIES CORP.
NOTES TO CONDENSED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS
(Unaudited)
The two target REITs have accounted for these fees in their
financial statements as follows:
Interest expense $4,902,000
Real estate acquisition costs 656,000
----------
$5,558,000
==========
Gross syndication fees recorded as an
offset to additional paid-in capital $6,820,000
==========
In connection with the syndication of the two target REITs in 2003,
FSP Corp. incurred direct expenses of $264,000 relating to interest
expense that is eliminated in the pro forma statement of income.
(h) After a sponsored REIT purchases a real estate asset but prior to
the final syndication of the sponsored REIT, FSP Corp. records its
pro rata share of the operations of the sponsored REIT into FSP
Corp.'s statement of operations as sponsored REIT income and
sponsored REIT expenses. Subsequent to the syndication, the
sponsored REIT typically declares and pays a dividend to FSP Corp.
This adjustment eliminates duplicate revenues and expenses prior to
the syndication of the target REITs. A summary of the adjustment is
shown below:
Nine Months Ended Year Ended
(in thousands) September 30, 2004 December 31, 2003
-------------------------------------------------------------------------
Sponsored REIT income $ -- $ 1,595
Sponsored REIT expenses -- 1,208
--------- ---------
Dividends to common shareholder $ -- $ 387
========= =========
(i) Approximately 10,894,994 shares of FSP common stock will be issued
in exchange for the 1,822.5 outstanding shares of target REIT
preferred stock in connection with the mergers. Stockholders' equity
will be adjusted by the net difference between the assets and
liabilities acquired in the merger. The following schedule shows a
reconciliation detailing the adjustments to additional
paid-in-capital.
FSP Target
Corp REIT Total
---- ---- -----
Additional paid-in-capital:
FSP Corp:
Total excess of Allocated Purchase
Price over Historical Cost $14,532
Less Estimated Merger Costs (685)
--------
13,847 $ 13,847
Adjustment to record Par Value (1) (1)
Target REITS:
Adjustments for:
Estimated Merger Costs $ (475) (475)
Straight-line rent receivables (2,560) (2,560)
Distribution payable (6,021) (6,021)
Distributions in excess of earnings (16,106) (16,106)
------------------------------------
$13,846 $(25,162) $(11,316)
====================================
112
FRANKLIN STREET PROPERTIES CORP.
NOTES TO CONDENSED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS
(Unaudited)
(j) Represents the revenue and expenses of the 13 Sponsored REITs
acquired by FSP Corp. from January 1, 2003 to May 31, 2003.
For the period
(unaudited) January 1, 2003
(in thousands) to May 31, 2003
--------------------
Revenue $ 15,204
Real estate operating expenses (3,997)
Real estate taxes and insurance (2,667)
Depreciation and amortization (3,298)
Interest income 117
----------
Net income $ 5,359
==========
113
FRANKLIN STREET PROPERTIES CORP.
NOTES TO CONDENSED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS
(Unaudited)
(k) The following table combines the historical balance sheets of the
target REITs as of September 30, 2004.
(in thousands)
Montague Addison Circle Royal Ridge Collins Crossing Total
-------- -------------- ----------- ---------------- -----
Assets:
Land $ 10,500 $ 4,365 $ 1,649 $ 4,022 $ 20,536
Building 10,499 46,112 16,224 34,232 107,067
--------- --------- --------- --------- ---------
Real estate investments, cost 20,999 50,477 17,873 38,254 127,603
Less accumulated depreciation 560 2,406 687 1,389 5,042
--------- --------- --------- --------- ---------
Real estate investments, net 20,439 48,071 17,186 36,865 122,561
Acquired favorable leases, net 2,616 -- 2,558 3,640 8,814
Acquired lease origination costs, net 241 1,150 858 1,604 3,853
Cash and equivalents 3,633 5,492 2,510 4,634 16,269
Restricted cash -- 20 571 115 706
Tenant rent receivable, net -- 1 -- 35 36
Step rent receivable, net 461 531 1,040 528 2,560
Prepaid expenses 22 99 9 51 181
Deferred leasing commissions, net -- 358 -- -- 358
--------- --------- --------- --------- ---------
Total assets $ 27,412 $ 55,722 $ 24,732 $ 47,472 $ 155,338
========= ========= ========= ========= =========
Liabilities and stockholders' Equity:
Accounts payable and accrued expenses $ 465 $ 1,694 $ 475 $ 1,263 $ 3,897
Tenant security deposits -- 20 -- 115 135
--------- --------- --------- --------- ---------
Total liabilities 465 1,714 475 1,378 4,032
--------- --------- --------- --------- ---------
Stockholders' equity
Preferred stock -- -- -- -- --
Common stock -- -- -- -- --
Additional paid in capital 30,652 58,383 27,277 51,100 167,412
Retained deficit and distributions in excess
of earnings (3,705) (4,375) (3,020) (5,006) (16,106)
--------- --------- --------- --------- ---------
Total stockholders' equity 26,947 54,008 24,257 46,094 151,306
--------- --------- --------- --------- ---------
Total liabilities & stockholders' equity $ 27,412 $ 55,722 $ 24,732 $ 47,472 $ 155,338
========= ========= ========= ========= =========
114
FRANKLIN STREET PROPERTIES CORP.
NOTES TO CONDENSED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS
(Unaudited)
(l) The following table combines the historical operations for the
target REITs for the nine months ended September 30, 2004.
(in thousands)
Montague Addison Circle Royal Ridge Collins Crossing Total
-------- -------------- ----------- ---------------- -----
Revenue:
Rental $ 2,592 $ 6,892 $ 2,286 $ 5,205 $ 16,975
---------- ---------- ---------- ---------- ----------
Total revenue 2,592 6,892 2,286 5,205 16,975
---------- ---------- ---------- ---------- ----------
Expenses:
Rental operating expenses 273 1,490 693 1,461 3,917
Real estate taxes and insurance 210 1,045 250 715 2,220
Depreciation and amortization 282 1,136 429 972 2,819
---------- ---------- ---------- ---------- ----------
Total expenses 765 3,671 1,372 3,148 8,956
---------- ---------- ---------- ---------- ----------
Income before interest 1,827 3,221 914 2,057 8,019
Interest income 34 67 27 51 179
---------- ---------- ---------- ---------- ----------
Net income $ 1,861 $ 3,288 $ 941 $ 2,108 $ 8,198
========== ========== ========== ========== ==========
(m) The following table combines the historical operations of the target
REITs for the periods ended December 31, 2003.
For the Period
For the Year Ended January 30, 2003 to March 13, 2003 to
December 31, 2003 December 31, 2003 December 31, 2003
-------------------------- ----------------- -----------------
(in thousands)
Montague Addison Circle Royal Ridge Collins Crossing Total
-------- -------------- ----------- ---------------- -----
Revenue:
Rental $ 3,645 $ 8,554 $ 2,264 $ 5,672 $ 20,135
---------- ---------- ---------- ---------- ----------
Total revenue 3,645 8,554 2,264 5,672 20,135
---------- ---------- ---------- ---------- ----------
Expenses:
Rental operating expenses 314 1,783 746 1,399 4,242
Real estate taxes and insurance 339 1,354 255 760 2,708
Depreciation and amortization 368 1,497 518 1,080 3,463
Interest -- -- 1,731 3,444 5,175
---------- ---------- ---------- ---------- ----------
Total expenses 1,021 4,634 3,250 6,683 15,588
---------- ---------- ---------- ---------- ----------
Income (loss) before interest 2,624 3,920 (986) (1,011) 4,547
Interest income 45 85 28 35 193
Dividends to common shareholders -- -- (14) (373) (387)
---------- ---------- ---------- ---------- ----------
Net income (loss) attributable to
preferred shareholders $ 2,669 $ 4,005 $ (972) $ (1,349) $ 4,353
========== ========== ========== ========== ==========
115
FRANKLIN STREET PROPERTIES CORP.
NOTES TO CONDENSED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS
(Unaudited)
(n) The following information represents the historical revenues over
certain operating expenses for two properties from January 1, 2003
through the date of acquisition by a target REIT. Royal Ridge was
purchased January 30, 2003 by FSP Royal Ridge Corp. and Collins
Crossing was purchased March 3, 2003 by FSP Collins Crossing Corp.
For the Period
January 1, 2003 to January 1, 2003 to
(in thousands) January 29, 2003 March 2, 2003
Royal Ridge Collins Crossing Total
----------- ---------------- -----
Revenue:
Rental $ 1 $ 1,347 $ 1,348
---------- ---------- ----------
Total revenue 1 1,347 $ 1,348
---------- ---------- ----------
Expenses:
Rental operating expenses 95 320 415
Real estate taxes and insurance 19 156 175
---------- ---------- ----------
Total expenses 114 476 590
---------- ---------- ----------
Revenue over certain operating expenses $ (113) $ 871 $ 758
========== ========== ==========
(o) FSP Corp. is purchasing the real estate assets and a stated amount
of cash (the adjusted cash reserves) from each target REIT in
exchange for a fixed number of shares of FSP common stock. The final
dividend to the shareholders of the target REITs represents the
estimated fair value of the net assets not purchased by FSP Corp. as
of the date of the pro forma balance sheet. The estimated final
dividend as of the date of the pro forma balance sheet for the
target REITs is shown in the following table. The actual final
dividend will be based upon the fair market value of the net assets
not purchased as of the actual merger date.
Montague $1,065
Addison 2,058
Royal Ridge 1,569
Collins 1,329
-----------
Total $6,021
===========
(p) The cumulative unbilled straight-line rents of the target REITs will
be eliminated at acquisition.
(q) The cumulative deficit of the target REITs will be eliminated at
acquisition.
116
FRANKLIN STREET PROPERTIES CORP.
NOTES TO CONDENSED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS
(Unaudited)
(r) The following table combines the historical cash flows for the
target REITs for the nine months ended September 30, 2004.
(in thousands) Montague Addison Royal Collins Total
----------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 1,861 $ 3,288 $ 941 $ 2,108 $ 8,198
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization expense 282 1,136 429 972 2,819
Amortization of favorable leases 872 -- 349 713 1,934
Changes in operating assets and liabilities:
Restricted cash -- 15 -- -- 15
Tenant rent receivables -- 24 -- (10) 14
Step rent receivable (69) (110) (86) (249) (514)
Prepaid expenses and other assets (8) (48) 5 (8) (59)
Accounts payable and accrued expenses 54 (361) 235 (204) (276)
Tenant security deposits -- (15) -- -- (15)
Payment of deferred leasing commissions -- (329) -- -- (329)
----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 2,992 3,600 1,873 3,322 11,787
----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets and related leases, office
computers and furniture, capitalized merger costs -- (217) -- (8) (225)
----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities -- (217) -- (8) (225)
----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Distributions to stockholders (2,953) (3,857) (1,614) (3,746) (12,170)
----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities (2,953) (3,857) (1,614) (3,746) (12,170)
----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 39 (474) 259 (432) (608)
Cash and cash equivalents, beginning of period 3,594 5,966 2,251 5,066 16,877
----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 3,633 $ 5,492 $ 2,510 $ 4,634 $ 16,269
==================================================================================================================================
117
FRANKLIN STREET PROPERTIES CORP.
NOTES TO CONDENSED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS
(Unaudited)
(s) The following table combines the historical cash flows for the
target REITs for the year ended December 31, 2003.
(in thousands) Montague Addison Royal Collins Total
-----------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ 2,669 $ 4,005 $ (958) $ (976) $ 4,740
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization expense 368 1,497 518 1,080 3,463
Amortization of above market lease 1,164 -- 426 791 2,381
Changes in operating assets and liabilities:
Restricted cash -- 9 (571) (115) (677)
Tenant rent receivables, net -- (25) -- (25) (50)
Straight-line rents, net (262) (322) (954) (279) (1,817)
Prepaid expenses and other assets, net 377 112 (1,051) (2,167) (2,729)
Accounts payable and accrued expenses 383 165 240 1,467 2,255
Tenant security deposits -- (9) -- 115 106
Payment of deferred leasing commissions -- (39) -- -- (39)
-----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 4,699 5,393 (2,350) (109) 7,633
-----------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets and related leases, office
computers and furniture, capitalized merger costs (355) (25) (22,324) (45,657) (68,361)
-----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities (355) (25) (22,324) (45,657) (68,361)
-----------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock, net -- -- 27,277 51,100 78,377
Distributions to stockholders (3,714) (4,721) (1,389) (2,392) (12,216)
-----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities (3,714) (4,721) 25,888 48,708 66,161
-----------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 630 647 1,214 2,942 5,433
Cash and cash equivalents, beginning of period 957 2,683 -- -- 3,640
-----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 1,587 $ 3,330 $ 1,214 $ 2,942 $ 9,073
=============================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ -- $ -- $ 1,731 $ 3,444 $ 5,175
Non-cash investing and financing activities:
Dividends declared but not paid $ 960 $ 1,265 $ 536 $ 1,331 $ 4,092
118
COMPARATIVE PER SHARE DATA
The following tables present on a per share basis:
(a) Basic and diluted net income book value, and dividends declared for
FSP Corp. and each of the target REITs on a historical basis.
(b) Consolidated pro forma basic and diluted net income per share, book
value per share and dividends per share for FSP Corp. This table shows the
effect of the mergers from the perspective of an owner of one share of FSP
common stock.
(c) Equivalent pro forma basic and diluted net income per share,
equivalent pro forma book value per share and equivalent pro forma dividends per
share for each of the target REITs. This table shows the effect of the mergers
from the perspective of an owner of one share of stock of a target REIT. The
consolidated pro forma data are multiplied by the number of shares of FSP common
stock issuable in exchange for each share of target stock, also known as the
exchange ratio, as shown in the following table:
Target REIT Exchange Ratio
----------- --------------
Addison 5,948.67
Collins Crossing 6,167.63
Montague 5,649.72
Royal Ridge 6,055.79
The pro forma financial data and equivalent pro forma data are unaudited
and are not necessarily indicative of the operating results that would have been
achieved had the mergers occurred as of the beginning of the period and should
not be construed as representative of future operations.
FSP Corp. calculates historical book value per share by dividing
stockholders' equity by the number of shares of common stock (or preferred
stock, in the case of the target REITs) outstanding at the end of each period.
FSP Corp. calculates consolidated pro forma net income per share data for
FSP Corp. as if the mergers occurred on January 1, 2003 and 2004 and resulted in
weighted average shares of 60,523,000 and 60,525,000 for the nine months ended
September 30, 2004 and for the year ended December 31, 2003, respectively.
FSP Corp. calculates consolidated pro forma book value per share data for
FSP Corp. as if the mergers occurred on September 30, 2004 and resulted in an
ending number of shares of 60,525,000.
FSP Corp. calculates consolidated pro forma dividends per share by adding
the total dividends declared by FSP Corp. plus dividends declared by the target
REITs and dividing this sum by 60,525,000 shares, as shown in the following
table:
119
Dividends Declared
For the Nine For the Year
Months Ended Ended
(in thousands) September 30, 2004 December 31, 2003
------------------------------------------------------------------------
FSP Corp. $ 46,152 $ 46,747
Addison Circle 2,592 5,137
Collins Crossing 2,414 3,350
Montague 1,993 3,771
Royal Ridge 1,078 1,911
----------------------------------
Total $ 54,229 $ 60,916
==================================
FSP Corp. calculates equivalent pro forma net income per share for each
target REIT by multiplying the consolidated pro forma net income per share by
the exchange ratio.
FSP Corp. calculates equivalent pro forma book value per share for each
target REIT by multiplying the consolidated pro forma book value per share by
the exchange ratio.
FSP Corp. calculates equivalent pro forma dividends per share for each
target REIT by multiplying the consolidated pro forma dividends per share by the
exchange ratio.
120
For the purposes of the consolidated pro forma net income per share and
book value per share data, FSP Corp.'s historical financial data have been
consolidated with the target REITs' financial data.
Franklin Street Properties
Comparative Per Share Data
As of and for the nine months ended
September 30, 2004
(unaudited)
Pro forma Pro forma
Historical Consolidated Equivalent
----------------------------------------
Net income (loss) per share
basic and diluted
FSP Corp. $ 0.68 $ 0.68 $ --
Montague 5,572 -- 3,842
Addison Circle 5,170 -- 4,045
Royal Ridge 3,166 -- 4,118
Collins Crossing 3,798 -- 4,194
Book value per share
FSP Corp. $ 10.17 $ 10.92 --
Montague 80,680 -- 61,695
Addison Circle 84,918 -- 64,959
Royal Ridge 81,536 -- 66,129
Collins Crossing 83,054 -- 67,351
Dividends declared per share
FSP Corp. $ 0.93 $ 0.90 --
Montague 5,967 -- 5,085
Addison Circle 4,077 -- 5,354
Royal Ridge 5,554 5,450
Collins Crossing 4,350 -- 5,551
121
Franklin Street Properties Corp.
Comparative Per Share Data
As of and for the year ended
December 31, 2003
(unaudited)
Pro forma Pro forma
Historical Consolidated Equivalent
----------------------------------------
Net income (loss) per share
basic and diluted
FSP Corp. $ 1.18 $ 0.83 $ --
Montague 7,991 -- 4,689
Addison Circle 6,297 -- 4,937
Royal Ridge (3,267) -- 5,026
Collins Crossing (2,431) -- 5,119
Book value per share
FSP Corp. $ 10.41 $ -- $ --
Montague 81,075 -- --
Addison Circle 83,824 -- --
Royal Ridge 81,997 -- --
Collins Crossing 83,605 -- --
Dividends declared per share
FSP Corp. $ 1.36 $ 1.01 $ --
Montague 11,290 -- 5,706
Addison Circle 8,077 -- 6,008
Royal Ridge 6,424 -- 6,116
Collins Crossing 6,036 -- 6,229
122
COMPARISON OF THE TARGET REITS AND FSP CORP.
The information below highlights a number of the significant differences
among the target REITs and FSP Corp. relating to, among other things, forms of
organization, investment objectives, asset diversification and capitalization.
These comparisons are intended to assist target REIT stockholders in
understanding how their investments will be changed as a result of the mergers.
Form of Organization. The target REITs and FSP Corp. are each vehicles
appropriate for holding real estate investments and afford passive investors,
such as target REIT stockholders, certain benefits, including limited liability
and the avoidance of double-level taxation. The target REITs are under the
control of their respective target boards, while FSP Corp. will continue to be
governed by the FSP board. The target REITs are organized as Delaware
corporations, and FSP Corp. is a Maryland corporation.
Length of Investment. Target REIT stockholders in each of the target REITs
expect liquidation of their investments when the assets of the target REITs are
liquidated within a five to ten year period following the syndication of a
target REIT. In contrast, FSP Corp. does not expect to dispose of its assets
within any prescribed periods.
Properties and Diversification. The real estate portfolio of each target
REIT is limited to the assets acquired with its initial equity offering. FSP
Corp. will hold a real estate portfolio that is substantially larger and more
diversified than the portfolio of any of the target REITs. An investment in FSP
Corp. should not be viewed as an investment in a specific pool of assets, but
instead as an investment in an ongoing real estate investment business, subject
to the risks normally attendant to ongoing real estate ownership, to the risks
related to the real estate investment banking/brokerage business and to the
risks related to acquisitions of additional properties.
Additional Equity. As the target REITs are not authorized to issue
additional shares of target stock or other equity interests without the approval
of their respective target REIT stockholders, the target stock is not subject to
dilution. In contrast, FSP Corp. has substantial flexibility to raise equity
capital to finance its businesses and affairs through the issuance of equity
securities. Any and all issuances of equity securities by FSP Corp. would be
dilutive to current holders of FSP common stock.
Voting Rights. Target REIT stockholders have one vote in respect of each
share of target stock held on matters to which the target REIT stockholders have
the right to vote. These matters generally consist of:
o any amendment to or repeal of any provision of the Certificate of
Incorporation of the respective target REIT;
o any merger or consolidation by the respective target REIT into or
with any other corporation or other entity or any sale of all or
substantially all of the respective target REIT's assets; and
o any authorization or issuance of a new class or series of capital
stock or an increase of the number of authorized shares of any
existing class or classes or series of capital stock.
A stockholder in FSP Corp. will have one vote in respect of each share of
FSP common stock of record on all matters to be voted upon by the stockholders.
Matters submitted to the stockholders generally require the affirmative vote of
stockholders holding a majority of the then outstanding capital stock present in
person or by proxy entitled to vote thereon at a duly convened meeting of
stockholders, except for the election of a director, which requires a plurality
of all the votes cast at such a meeting. The Articles allow the FSP board to
increase or decrease the number of shares of stock of any class that FSP Corp.
has authority to issue without submitting the matter to the stockholders. The
Articles require the approval of a specified super-majority (80%) of the shares
123
of capital stock of FSP Corp. issued and outstanding and entitled to vote on the
matter is required 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 to amend
the Articles to impose cumulative voting in the election of directors.
Compensation to FSP Corp. FSP Corp. will receive no fees or other
compensation in connection with the mergers. FSP Property Management, a wholly
owned subsidiary of FSP Corp., currently receives asset management fees from the
target REITs ranging from $34,000 to $81,000 per annum. As a result of the
mergers, fee income received by FSP Property Management from the four target
REITs will be eliminated on the consolidated financial statements of the
combined company for accounting purposes. The executive officers and directors
of the target REITs receive no compensation from the target REITs. Such persons
will, however, continue to receive compensation from FSP Corp. See "Management -
Management Compensation".
Percentage Ownership. As a result of the significantly higher number of
issued shares in FSP Corp. as compared to the target REITs, the target REIT
stockholders will own a much smaller percentage of FSP Corp. relative to their
ownership interest in the target REITs and, accordingly, will have less power to
control the outcome of matters submitted to a vote of the stockholders and will
receive a lesser percentage of any dividends or other distributions.
124
CONFLICTS OF INTEREST
A number of conflicts of interest are inherent in the relationships among
the target REITs, the target boards, FSP Corp. and the FSP board. Certain of
these conflicts of interest are summarized below.
FSP Investments, a subsidiary of FSP Corp., syndicated each target REIT.
Moreover, each executive officer and/or director of each target REIT are
directors and executive officers of FSP Corp. Each target board and the FSP
board have independent obligations to ensure that such target REIT's or FSP
Corp.'s participation, respectively, in the merger agreement and the
determination of the merger consideration is fair and equitable, without regard
to whether the merger agreement and the determination of the merger
consideration are fair and equitable to the other participants (including the
other target REITs). The FSP board and each target board have sought to
discharge faithfully their respective obligations to FSP Corp. and the
applicable target REIT; however, target REIT stockholders should consider that
the executive officers and directors of each target REIT serve in a similar
capacity with respect to FSP Corp. The special committees of the target boards,
consisting of Messrs. MacPhee and Gribbell, each a director of the target REITs
and an executive vice president of FSP Corp., engaged in negotiations of the
terms of the merger agreement and the amount of the merger consideration, but
each special committee member was subject to a conflict of interest. If each
target REIT had a separate board of directors with executive officers who did
not serve in similar capacities for FSP Corp. and directors who did not own FSP
common stock, these persons would have had an independent perspective which
might have led them to advocate positions during the negotiation and structuring
of the merger agreement and the determination of the merger consideration more
favorable to the target REIT stockholders than those taken by the target boards.
The conflicts of interest inherent in the relationships among the target
REITs, the target boards, FSP Corp., the FSP board and their respective
affiliates are as follows:
o George J. Carter, the President and a director of each target REIT,
is President, Chief Executive Officer and a director of FSP Corp.
and owns an aggregate of 775,531 shares of FSP common stock;
o R. Scott MacPhee, an Executive Vice President and a director of each
target REIT and a member of each special committee, is also an
Executive Vice President of FSP Corp. and owns an aggregate of
372,451 shares of FSP common stock;
o Richard R. Norris, an Executive Vice President and a director of
each target REIT, is also a director and an Executive Vice President
of FSP Corp. and owns an aggregate of 258,087 shares of FSP common
stock;
o William W. Gribbell, an Executive Vice President and a director of
each target REIT and a member of each special committee, is also an
Executive Vice President of FSP Corp. and owns an aggregate of
129,761 shares of FSP common stock;
o Barbara J. Fournier, Vice President, Chief Operating Officer,
Treasurer, Secretary and a director of each target REIT, is also
Vice President, Chief Operating Officer, Treasurer, Secretary and a
director of FSP Corp. and owns an aggregate of 27,934 shares of FSP
common stock; and
o Janet P. Notopoulos, Vice President of each target REIT, is also a
Vice President and director of FSP Corp. and owns an aggregate of
14,985 shares of FSP common stock.
125
The directors of the target REITs may have been more inclined to vote for
the mergers as a result of their ownership of FSP common stock since an increase
in the real property assets owned by FSP Corp. may result in greater value for
FSP Corp. stockholders.
Each target board established a special committee consisting of Messrs.
MacPhee and Gribbell, the only members of the target boards who are not also
members of the FSP board. Messrs. MacPhee and Gribbell serve as executive vice
presidents of FSP Corp. Under the Delaware general corporation law, the target
boards cannot delegate to a third party their fiduciary duties relating to the
determination of whether the transactions contemplated by the mergers were or
were not fair to the target REIT stockholders.
Each target board considered increasing its board size to include an
independent director to perform the function of the special committees. However,
each target board concluded that, given the potential liability of a director
voting on the mergers, it would be difficult to retain someone with the
knowledge and credentials necessary to fulfill the role of an independent
director of a REIT who would be willing to take on the role of independent
director of any of the target REITs without being substantially compensated and
without being covered by director liability insurance. None of the target REITs
currently has director and officer liability insurance. Each target board
determined that the cost of compensating an independent director and obtaining
director and officer liability insurance would be substantial and not in the
best interests of its target REIT stockholders. For this reason, none of the
target boards appointed an independent director to perform the functions of the
special committees.
Messrs. MacPhee and Gribbell, the members of the special committees, both
served as directors on boards of other sponsored entities which engaged in
similar transactions with FSP Corp., including the 13 sponsored REITs acquired
by FSP Corp. in June 2003. The sponsored REITs involved in those transactions
did not appoint independent directors to serve as special committees and, in
fact, did not designate any of their members to serve on a special committee.
Moreover, no stockholder of any of the 13 sponsored REITs acquired by FSP Corp.
in June 2003 availed himself of appraisal rights. Based on their experience in
voting on prior transactions, Messrs. MacPhee and Gribbell believed that they
could and did faithfully execute their duties to the target REIT stockholders.
Moreover, George J. Carter, the chief executive officer of FSP Corp., instructed
Messrs. MacPhee and Gribbell to execute their duties on behalf of the target
REITs and their stockholders vigorously and assured Messrs. MacPhee and Gribbell
that there would be no adverse consequences to their employment by FSP Corp. as
a result of their vigorously executing their duties.
Barry Silverstein, Dennis J. McGillicuddy and John N. Burke are the only
directors of FSP Corp. who are not also officers or directors of any target
REIT. The remainder of the officers and directors of FSP Corp. serve as a
director and/or officer, in the positions listed above, of each target REIT.
Upon completion of the mergers, Mr. Silverstein's percentage ownership interest
of FSP Corp. will decrease from 9.67% to 9.62%, Mr. McGillicuddy's percentage
ownership interest of FSP Corp. will decrease from 7.24% to 6.07%, and the
percentage ownership of the current directors and executive officers of FSP
Corp. as a group will decrease from 19.07% to 17.46%. Mr. Burke does not own any
shares of FSP common stock or any shares of target stock.
126
FIDUCIARY RESPONSIBILITY
The standard of conduct for directors of a Maryland corporation is
governed by Section 2-405.1 of the Maryland General Corporation Law, which
requires that a director of a Maryland corporation perform his duties (i) in
good faith, (ii) in a manner he reasonably believes to be in the best interests
of the corporation, and (iii) with the care an ordinarily prudent person in a
like position would use under similar circumstances.
The Delaware general corporation law is silent as to the nature of the
duties of directors of a Delaware corporation. The standard of conduct for
directors has instead developed through written opinions of the Delaware courts
in cases decided by those courts. A director of a Delaware corporation is
subject to both a duty of loyalty and a duty of care. The duty of loyalty
requires a director to refrain from self-dealing, and to act in good faith and
in what he believes to be the best interests of the corporation and its
stockholders. When the interests of a director with respect to a transaction
conflict with those of the corporation, the transaction must be fair to the
corporation. The duty of care requires a director to exercise an informed
business judgment, meaning that he must inform himself of all material
information reasonably available. Having become so informed, a director then
must use that amount of care which an ordinarily careful and prudent person
would use in similar circumstances.
127
COMPARISON OF STOCKHOLDER RIGHTS
The rights of stockholders in each target REIT are governed by the charter
and bylaws of that REIT and by the laws of the State of Delaware. The rights of
FSP stockholders are governed by FSP Corp.'s charter and bylaws, each as
amended, and by the laws of the State of Maryland. As a result of the mergers,
the target REIT stockholders will become FSP stockholders and their rights will
thereafter be governed by FSP Corp.'s charter and bylaws and by the laws of the
State of Maryland.
The following summary outlines the material differences between the
Delaware general corporation law and the Maryland general corporation law,
between the charter of each target REIT and the FSP Corp. charter, and between
the bylaws of each target REIT and the FSP Corp. bylaws. Each target REIT
stockholder is encouraged to review the full text of each of the charter and
bylaws of each target REIT in which said stockholder owns stock, the FSP Corp.
charter, the FSP Corp. bylaws, the Delaware General Corporation Law, the
Maryland General Corporation Law and other corporation-related laws of Delaware
and Maryland insofar as they relate to corporations organized in such states.
The FSP Corp. charter and the FSP Corp. bylaws have been filed as exhibits to
the material filed by FSP Corp. with the Securities and Exchange Commission. For
information as to how these documents may be obtained, see "Where You Can Find
More Information."
Target REIT (Delaware) FSP Corp. (Maryland)
Authorized and Each target REIT is FSP Corp. is authorized to
outstanding common authorized to issue 1 share issue 180,000,000 shares of
stock of common stock. On August common stock. On August 20,
13, 2004, 1 share of common 2004, 49,629,762 shares of
stock was issued and common stock were issued and
outstanding in each target outstanding in FSP Corp.
REIT and held by FSP Corp.
Description of The holders of common stock FSP stockholders are
common stock in each target REIT are entitled to one vote for
entitled to one vote for each share held of record on
each share held at all all matters submitted to a
meetings of stockholders vote of stockholders.
(and written actions in lieu Shares of FSP common stock
of meetings). The voting, have equal dividend,
dividend and liquidation distribution, and
rights of the holders of the liquidation rights and have
common stock are subject to no preference or exchange
and qualified by the rights rights. In addition, shares
of the holders of the of FSP common stock have no
preferred stock. conversion, sinking fund, or
preemptive rights.
Authorized and FSP Addison Circle Corp. is FSP Corp. is authorized to
outstanding authorized to issue 636 issue 20,000,000 shares of
preferred stock shares of preferred stock. preferred stock in one or
On August 13, 2004, 636 more separately designated
shares of preferred stock classes. On August 13,
were issued and outstanding. 2004, no shares of preferred
stock were outstanding.
FSP Collins Crossing Corp.
is authorized to issue 555
shares of preferred stock.
On August 13, 2004, 555
shares of preferred stock
were issued and outstanding.
128
Target REIT (Delaware) FSP Corp. (Maryland)
FSP Montague Business Center
Corp. is authorized to issue
334 shares of preferred
stock. On August 13, 2004,
334 shares of preferred
stock were issued and
outstanding.
FSP Royal Ridge Corp. is
authorized to issue 297.5
shares of preferred stock.
On August 13, 2004, 297.5
shares of preferred stock
were issued and outstanding.
Description of Under the bylaws of each Under FSP Corp.'s charter,
preferred stock target REIT, each target the FSP board has the
board has the authority, authority, without further
subject to the provisions of action by the FSP
the charter or a vote by the stockholders, to issue up to
target REIT stockholders, to 20,000,000 shares of
issue, sell, transfer, or preferred stock in one or
otherwise dispose of the more separately designated
whole or any part of any classes. The FSP board may
unissued balance of the authorize the issuance of
authorized capital stock, shares of preferred stock
including preferred stock, with terms and conditions
of the target REIT for such which could have the effect
lawful consideration and on of discouraging a takeover
such terms as such target or other transaction in
board may determine. Any which holders of some, or a
issuance of any new class or majority of, shares of FSP
classes or series of capital common stock might receive a
stock or any increase in the premium for their shares of
number of authorized shares FSP common stock over the
of any existing class or then-prevailing market price
classes or series of capital of those shares of FSP
stock requires the common stock.
affirmative vote or written
consent of the holders of
not less than 66.67% of the
then outstanding shares of
preferred stock.
Except as provided by law,
the holders of preferred
stock have no voting rights
on any matter presented to
the target REIT stockholders
for their action or
consideration at any meeting
(or by written action of
stockholders in lieu of a
meeting), with the exception
of (1) any amendment of or
the repeal or addition of
129
Target REIT (Delaware) FSP Corp. (Maryland)
any provision to the target
REIT's charter, (2) any
merger or consolidation into
or with any other
corporation or other entity
or sale of all of
substantially all of the
target REIT's assets, (3)
the removal of one or more
members of the target REIT
board pursuant to a class
vote provision contained in
the charter (see "Removal of
directors," below), and (4)
the election of directors to
fill a vacancy created by
any such removal.
Ownership limits The charter of each target FSP Corp.'s charter provides
related to status as REIT provides that any that an FSP stockholder may
a real estate purported transfer or be limited to owning, either
investment trust acquisition of preferred directly or under applicable
stock that would result in attribution rules of the tax
the disqualification of the code, no more than 9.8% of
corporation as a real estate the lesser of the value or
investment trust is void. the number of equity shares
of FSP Corp., which we call
the ownership limit. No FSP
stockholder may acquire or
transfer shares that would
result in shares of FSP
common stock being
beneficially owned by fewer
than 100 persons and any
such purported acquisition
or transfer will be void.
Any transfer that would
cause a stockholder to
beneficially or
constructively own shares of
FSP Corp. in excess of the
ownership limit will result
in the excess number of
shares automatically being
transferred to a trust
created for the purpose of
holding such shares for the
benefit of one or more
non-profit organizations.
The FSP board has the right
to refuse to give effect to
the acquisition or transfer
of shares by an FSP
stockholder in violation of
these provisions.
130
Target REIT (Delaware) FSP Corp. (Maryland)
Rights of The target REIT stockholders FSP Corp.'s charter provides
stockholders to have no redemption rights that on an annual basis FSP
redeem shares for the target stock. Corp. will use its best
efforts to redeem any shares
of FSP common stock from FSP
stockholders desiring to
sell shares. Any FSP
stockholder wishing to take
advantage of this
opportunity must so request
no later than July 1 of any
year for a redemption that
would be effective the
following January 1. Any
such request will be
irrevocable. The purchase
price paid by FSP Corp. will
be 90% of the fair market
value of the shares
purchased, as determined by
the FSP board in its sole
and absolute discretion
after consultation with an
adviser selected by the FSP
board. FSP Corp. will treat
all redemption requests in
the same manner, meaning
that if a stockholder
complies with the provision
of FSP Corp.'s charter
regarding redemption, FSP
Corp. will not discriminate
among redeeming stockholders
based on the timing or
amount of the redemption
request; however, FSP
Corp.'s charter provides
that in the event FSP Corp.
has insufficient funds or is
otherwise prohibited from
redeeming all of the shares
requested, it will redeem
based on the order in which
effective offers are
received.
FSP Corp. will not redeem
any shares of FSP common
stock pursuant to this
provision if: FSP Corp. is
insolvent or the redemption
would render FSP Corp.
insolvent; the redemption
would impair the capital or
operations of FSP Corp.; the
redemption would contravene
131
Target REIT (Delaware) FSP Corp. (Maryland)
any provision of federal or
state securities laws; the
redemption would result in
FSP Corp.'s failing to
qualify as a real estate
investment trust; or the FSP
board determines that the
redemption would otherwise
not be in the best interests
of FSP Corp.
If FSP Corp. is unable to
purchase any shares of FSP
common stock offered for
redemption, FSP Corp. will
use its best efforts to
arrange for a purchase by a
third party or parties, each
of whom must be an
accredited investor within
the meaning of Regulation D
and must have a pre-existing
relationship with FSP Corp.
In addition, FSP Corp. will
have the right to satisfy
its obligation to effect
redemption by arranging for
a purchase by such a third
party or parties at the
redemption price.
FSP Corp. has no obligations
to, and does not intend
to, redeem shares of FSP
common stock during any
period that the FSP common
stock is listed for trading
on a national securities
exchange, such as the AMEX,
or the NASDAQ National
Market System. FSP Corp.
also does not intend to
accept any requests for
redemption from the time of
the mailing of this Consent
Solicitation/Prospectus
until the effective date of
the mergers.
Special meetings of Under the Delaware general Under Maryland law, a
stockholders corporation law, a special special meeting of
meeting of stockholders may stockholders may be called
be called by the board of by the president, the board
directors or by any persons of directors, or any other
as may be authorized by a person as may be authorized
corporation's charter or by a corporation's charter
bylaws. or bylaws. A special
meeting of stockholders may
132
Target REIT (Delaware) FSP Corp. (Maryland)
The bylaws of each target also be called by the
REIT provide that the written request of
President, the Chairman of stockholders entitled to
the Board (for Addison cast at least 25 percent of
Circle and Royal Ridge all the votes entitled to be
only), or the target REIT cast at the meeting, subject
board may call a special to certain statutory
meeting of the stockholders provisions.
at any time.
FSP Corp.'s bylaws provide
that the President, Chief
Executive Officer or a
majority of the FSP board
may call a special meeting
of the stockholders.
Special meetings shall also
be called by the Secretary
of FSP Corp. upon the
written request of the
holders of shares entitled
to cast more than 50% of the
votes entitled to be cast at
such a meeting.
Action by written Under the Delaware general Under Maryland law, any
consent in lieu of a corporation law, any action action required or permitted
stockholder meeting required or permitted to be to be taken at a meeting of
taken at a meeting of the the FSP stockholders may be
stockholders may be taken taken without a meeting if a
without a meeting by written unanimous consent which sets
consent of the holders of forth the action is given in
outstanding shares having writing or by electronic
not less than the minimum transmission by each
number of votes that would stockholder entitled to vote
be necessary to authorize or on the matter, and filed in
take such action at a paper or electronic form
meeting at which all shares with the records of meetings
entitled to vote thereon of stockholders. In actions
were present and voted. concerning the election of
directors, unless the
The bylaws of each target charter requires otherwise,
REIT provide that the target the holders of any class of
REIT stockholders may take stock other than common
action by written consent stock entitled to vote
without a meeting and generally in the election of
without prior notice, directors may take action or
provided that a consent in consent to any action by
writing, setting forth the delivering a consent in
action so taken, is signed writing or by electronic
by the holders of transmission of the
outstanding shares having stockholders entitled to
not less than the minimum cast not less than the
number of votes that would minimum number of votes that
be necessary to authorize or would be necessary to
take such action at a authorize or take the action
meeting at which all shares at a meeting of stockholders
entitled to vote on such if the corporation gives
action were present and notice of the action to each
voted. stockholder not later than
133
Target REIT (Delaware) FSP Corp. (Maryland)
ten days after the effective
time of the action.
FSP Corp.'s bylaws provide
that any action required or
permitted to be taken at a
meeting of stockholders may
be taken without such a
meeting by unanimous written
consent of the stockholders
entitled to vote on the
matter provided that any
stockholder entitled to
receive notice (but not
vote) has provided a written
waiver of any right to
dissent from such action.
Record date Under the Delaware general Under Maryland law, the
corporation law, the board board of directors has the
of directors may fix a sole power to fix the record
record date for determining date for determining
the stockholders entitled to stockholders entitled to
vote at any meeting of the request a special meeting of
stockholders, provided that the stockholders and the
the record date does not record date for determining
precede the date of the stockholders entitled to
resolution fixing the record notice of and to vote at the
date nor fall more than 60 special meeting.
nor less than ten days
before the date of such FSP Corp.'s bylaws provide
meeting. If no record date that the FSP board may set a
is fixed by the board of record date for the
directors, the record date determination of the
will be the close of stockholders entitled to
business on the day next notice of or to vote at any
preceding the day on which meeting of stockholders, or
notice is given, or if stockholders entitled to
notice is waived, at the receive payment of any
close of business on the day dividend or the allotment of
next preceding the day on any other rights, or in
which the meeting is held. order to make determination
of stockholders for any
The bylaws of each target other proper purpose;
REIT provide that such provided that the date is
target REIT board may fix a not more than 90 days and,
date as a record date for in the case of a meeting of
the determination of the stockholders, not less than
stockholders entitled to ten days, before the date on
notice of or to vote at any which the meeting or
meeting of stockholders, or particular action requiring
to express consent or such determination of
dissent to action in writing stockholders is to be held
without a meeting, or or taken. If no record date
entitled to receive payment is fixed, the record date
134
Target REIT (Delaware) FSP Corp. (Maryland)
of any dividend or other for the determination of
distribution or allotment of stockholders entitled to
any rights, or for the notice of or to vote at a
purpose of any other lawful meeting of stockholders
action; provided that that shall be at the close of
date is not more than 60 business on the day on which
days nor less than ten days the notice of meeting is
before the date of such mailed or the 30th date
meeting, nor more than ten before the meeting,
days after the date of whichever is the closer date
adoption of a record date to the meeting; and the
for a written consent record date for the
without a meeting, nor more determination of
than 60 days prior to any stockholders entitled to
other action to which such receive payment of a
record date relates. If no dividend or an allotment of
record date is fixed, the any other rights shall be
record date for determining the close of business on the
stockholders entitled to day on which the resolution
notice of or to vote at a of the directors declaring
meeting of stockholders the dividend or allotment of
shall be the close of rights is adopted, but the
business on the day before payment or allotment may not
the meeting. The record be made more than 60 days
date for determining following the date on which
stockholders entitled to such resolution is adopted.
express written consent
without a meeting shall be
the day on which the first
written consent is properly
delivered to the
corporation. The record
date for any other purpose
shall be the close of the
business day on which the
target REIT board adopts the
resolution relating to such
purpose.
Notice requirement Under the Delaware general Under Maryland law, written
for stockholder corporation law, written or electronic notice of any
meetings notice of any meeting of the meeting of the stockholders
stockholders must be given must be given not less than
not less than ten nor more ten nor more than 90 days
than 60 days before the date before the date of the
of the meeting to each meeting to each stockholder
stockholder entitled to vote entitled to vote at such
at such meeting. meeting or otherwise
entitled to notice of such
The bylaws of each target meeting.
REIT provide that except as
otherwise provided by law, FSP Corp.'s bylaws provide
written notice of any that not less than ten nor
meeting of the stockholders more than 90 days before
shall be given not less than each meeting of
ten nor more than 60 days stockholders, the secretary
before the date of the shall give to each
meeting to each stockholder stockholder entitled to vote
entitled to vote at such at such meeting and to each
meeting. stockholder not entitled to
135
Target REIT (Delaware) FSP Corp. (Maryland)
vote, who is nevertheless
entitled to notice of the
meeting, written or printed
notice stating the time and
place of the meeting and, in
the case of a special
meeting or as otherwise may
be required by statute, the
purpose for which the
meeting is called.
Advance notice The Delaware general Under Maryland law, the
provisions for board corporation law does not charter or bylaws of a
nomination and other contain any specific advance corporation may require any
stockholder notice provisions for notice stockholder proposing a
business-annual of stockholder nominations nominee for election as a
meetings of directors or stockholder director or any other matter
proposals of business. for consideration at a
meeting of the stockholders
The charters and bylaws of to provide advance notice of
the target REITs do not the nomination or proposal
contain any specific advance to the corporation of (1)
notice provisions for notice not more than 90 days before
of stockholder nominations the date of the meeting; or,
of directors or stockholder (2) in the case of an annual
proposals of business for an meeting, 90 days before
annual meeting. either (a) the first
anniversary of the mailing
date of the notice of the
preceding year's annual
meeting or (b) the preceding
year's annual meeting;
or (3) another time
specified in the charter or
bylaws.
FSP Corp.'s bylaws provide
that nominations of
directors or stockholder
proposals of business may be
made at an annual meeting by
any stockholder entitled to
vote at that meeting if (1)
that stockholder has
delivered notice of such
nominations or other
business to the Secretary of
FSP Corp. not less than 90
days nor more than 120 days
prior to the first
anniversary of the mailing
date of the notice of the
preceding year's annual
meeting, and (2) such
stockholder was a
stockholder of record at the
time of giving notice.
136
Target REIT (Delaware) FSP Corp. (Maryland)
Advance notice The Delaware general Under Maryland law, the
provisions for board corporation law does not charter or bylaws of a
nomination and other contain any specific advance corporation may require any
stockholder notice provisions for notice stockholder proposing a
business-special of stockholder nominations nominee for election as a
meetings of directors or stockholder director or any other matter
proposals of business. for consideration at a
meeting of the stockholders
The target REITs' bylaws to provide advance notice of
provide that business the nomination or proposal
transacted at any special to the corporation of not
meeting of stockholders more than 90 days before the
shall be limited to matters date of the meeting or
relating to the purpose or another time that may be
purposes stated in the specified in the
notice of the meeting. corporation's charter or
bylaws.
The charters and bylaws of
the target REITs do not FSP Corp.'s bylaws provide
contain any specific advance that business shall be
notice provisions for notice conducted at a special
of stockholder nominations meeting of stockholders and
of directors or stockholder shall be limited to matters
proposals of business for relating to the purpose or
special meetings. purposes stated in the
notice of the meeting.
Stockholder nominations of
directors may be made at a
special meeting at which
directors are to be elected,
by any stockholder entitled
to vote at that meeting if
(1) that stockholder has
delivered notice of such
nominations to the Secretary
of FSP Corp. not earlier
than the 120th day prior to
such special meeting and not
later than the close of
business on the later of the
90th day prior to such
special meeting or the tenth
day following the day on
which public announcement is
first made of the date of
the special meeting and of
the nominees proposed by the
FSP board, and (2) such
stockholder was a
stockholder of record at the
time of giving notice.
Number of directors The Delaware general Maryland law requires that
corporation law requires there be a board of
that there be a board of directors of the corporation
directors of the corporation with at least one director.
with at least one director.
FSP Corp.'s charter and
The bylaws of each target bylaws provide that the
137
Target REIT (Delaware) FSP Corp. (Maryland)
REIT provide that the number number of directors never be
of directors be determined reduced to less than the
by resolution of the minimum number required by
stockholders or the target Maryland law. The number of
REIT board, but in no event directors may be increased
shall it be less than one. or decreased by the vote of
The number of directors may a majority of the entire
be decreased by the Board of Directors at any
stockholders or by a regular meeting or any
majority of the directors in special meeting called for
office, but only to that purpose, provided that
eliminate vacancies existing the tenure of office of a
by reason of the death, director cannot be affected
resignation, removal or by any decrease in the
expiration of the term of number of directors.
one or more directors. The
number of directors may be FSP Corp.'s board of
increased at any time by the directors currently consists
stockholders or by a of seven directors.
majority of the directors
then in office.
Addison Circle's board of
directors currently consists
of six directors.
Collins Crossing's board of
directors currently consists
of six directors.
Montague's board of
directors currently consists
of six directors.
Royal Ridge's board of
directors currently consists
of six directors.
Election of directors Directors are elected by a Directors are elected by a
plurality of the votes cast plurality of the votes cast
on the election by at a meeting of stockholders
stockholders entitled to at which a quorum is
vote on such election. present. Stockholders do
Stockholders do not have not have cumulative voting
cumulative voting rights in rights in the election of
the election of directors. directors.
Classified board of The Delaware general Maryland law provides that a
directors corporation law provides corporation may divide its
that a corporation's board board into classes with
of directors may be divided terms of office provided by
into one, two or three the bylaws so long as (1) no
classes with staggered terms term of office is longer
of office. than five years, (2) no term
of office is shorter than
Each of the Target REITs' the period between annual
directors currently holds meetings, and (3) the term
office until the next annual of office of at least one
meeting of stockholders. class expires each year.
138
Target REIT (Delaware) FSP Corp. (Maryland)
FSP Corp. directors are
divided into three classes
and are elected to a term of
three years and hold office
until the third annual
stockholder meeting after
their election.
Removal of directors Under the Delaware general Under Maryland law, unless
corporation law, a director otherwise provided by a
may be removed from office, corporation's charter, a
with or without cause, by director may be removed from
the affirmative vote of a office, with or without
majority of the shares then cause, by the affirmative
entitled to vote at an vote of a majority of the
election of directors, shares then entitled to vote
except (1) unless a at an election of directors,
corporation's charter except (1) a director
provides otherwise, a sitting on a classified
director sitting on a board of directors may only
classified board may only be be removed for cause, (2) if
removed for cause, (2) if a a corporation has cumulative
corporation has cumulative voting and less than the
voting and less than the entire board is to be
entire board is to be removed, a director cannot
removed a director cannot be be removed without cause if
removed without cause if the the votes cast against his
votes cast against his removal would be sufficient
removal would be sufficient to elect him if then
to elect him if then cumulatively voted at an
cumulatively voted at an election of the entire board
election of the entire board of directors, and (3) if the
of directors, and (3) if the stockholders of any class or
stockholders of any class or series are entitled
series are entitled separately to elect one or
separately to elect one or more directors, a director
more directors, a director elected by a class or series
elected by a class or series may not be removed without
may not be removed without cause except by the
cause except by the affirmative vote of a
affirmative vote of a majority of all the votes of
majority of all the votes of that class or series.
that class or series.
FSP Corp.'s charter provides
The target REITs' charters that a director may be
and bylaws provide that removed from office only for
except as otherwise provided cause based on a material
by the General Corporation breach of his duties or
Law of Delaware, any obligations to FSP Corp.,
director may be removed, and then only by the
with or without cause, by affirmative vote of the
the holders of a majority of holders of at least
the shares then entitled to two-thirds of the votes
vote at an election of entitled to be cast in the
directors, except that the election of directors.
directors elected by the
holders of a particular
139
Target REIT (Delaware) FSP Corp. (Maryland)
class or series of stock may
be removed without cause
only by vote of the holders
of a majority of the
outstanding shares of such
class or series. A meeting
for the purpose of removing
one or more directors may be
called by the holders of 35%
or more of the outstanding
shares of preferred stock
and at such a meeting any
director may be removed with
or without cause by a vote
of greater than 50% of the
outstanding shares of
preferred stock.
Board of director Under the Delaware general Under Maryland law, the
vacancies corporation law, any vacancy stockholders may elect a
is to be filled as the successor to fill a vacancy
bylaws of the corporation on the board of directors
provide. which results from the
removal of a director,
The target REITs' bylaws except that if the
provide that any vacancy, stockholders of any class or
unless and until filled by series are entitled
the stockholders, including separately to elect one or
a vacancy resulting from an more directors, the
increase in the number of stockholders of that class
directors, may be filled by or series may elect a
vote of a majority of the successor to fill a vacancy
directors then in office, on the board of directors
although less than a quorum, which results from the
or by a sole remaining removal of a director
director. elected by that class or
series. Also, unless
otherwise provided by the
corporation's charter, a
majority of the sitting
directors may fill a vacancy
on the board except that if
the stockholders of any
class or series are entitled
separately to elect one or
more directors, a majority
of the remaining directors
elected by that class or
series or the sole remaining
director elected by that
class or series may fill any
vacancy among the number of
directors elected by that
class or series.
FSP Corp.'s charter provides
that any vacancy, other than
140
Target REIT (Delaware) FSP Corp. (Maryland)
that resulting from an
increase in the number of
authorized directors, shall
be filled by the vote of a
majority of the directors
then in office. A vacancy
created by an increase in
the number of authorized
directors shall be filled by
the vote of a majority of
the entire Board of
Directors.
Special meetings of The target REITs' bylaws FSP Corp.'s bylaws provide
the board of provide that special that special meetings of the
directors meetings of the Board of board of directors may be
Directors may be held at any called by the Chairman of
time and place designated in the Board, the President, or
a call by the Chairman of a majority of the directors
the Board (in the case of then in office.
Royal Ridge and Addison
Circle alone), the
President, two or more
directors, or by one
director in the event that
there is only a single
director in office.
Indemnification Under the Delaware general Under Maryland law, a
corporation law, a corporation may indemnify
corporation has the power to any director, officer,
indemnify any officer, employee, or agent made a
director, employee or agent party to any proceeding by
made a party to any reason of service in that
proceeding by reason of capacity unless it is
service in that capacity if established that the act or
the party acted in good omission of the party was
faith and in a manner the material to the matter
party reasonably believed to giving rise to the
be in or not opposed to the proceeding, and (1) was
best interests of the committed in bad faith; (2)
corporation, and, with was the result of active and
respect to any criminal deliberate dishonesty; (3)
action or proceeding, had no the party actually received
reasonable cause to believe an improper personal benefit
the conduct in question was in money, property, or
unlawful. However, services; or (4) in the case
indemnification for of any criminal proceeding,
liability to the corporation the party had reasonable
itself may only be given if cause to believe that the
the Court of Chancery or the act or omission was
court in which such action unlawful.
or suit was brought
determines that such person Before indemnification can
is fairly and reasonably be granted, there must be an
entitled to indemnity. authorization by the board
of directors, special legal
Any such indemnification can counsel appointed by the
only be made once authorized board of directors, or the
141
Target REIT (Delaware) FSP Corp. (Maryland)
by (1) a majority vote of stockholders, that the
the directors who are not conduct of the director,
parties to such action, suit officer, employee or agent
or proceeding, even though seeking indemnification
less than a quorum, (2) a meets the standard given
committee of such directors above.
designated by majority vote
of such directors, even Unless limited by the
though less than a quorum, corporation's charter, a
(3) if there are no such director, officer, employee,
directors, or if such or agent who has been
directors so direct, by successful, on the merits or
independent legal counsel in otherwise, in the defense of
a written opinion, or (4) any proceeding referred to
the stockholders. above shall be indemnified
against reasonable expenses
Notwithstanding any of the incurred by that party in
provisions above, the connection with the
Delaware general corporation proceeding.
law dictates that to the
extent that a present or Any indemnification of, or
former director or officer advance of expenses to, a
of a corporation has been director, officer, employee,
successful on the merits or or agent must be reported in
otherwise in defense of any writing to the stockholders
action arising out of his with the notice of the next
service, that director or stockholders' meeting or
officer shall be indemnified prior to the meeting.
against expenses (including
attorneys' fees) actually FSP Corp.'s charter and
and reasonably incurred in bylaws provide that FSP
the defense. Corp. will indemnify its
directors and officers to
The target REITs' charters the full extent permitted by
provide for indemnification Maryland law, subject to the
of directors and officers of conditions that (1) no
the corporation to the full indemnification will be
extent permitted by the given if the director or
Delaware general corporation officer is held liable to
law, subject to the the corporation itself and
conditions that (1) the (2) the termination of any
target REIT shall not proceeding by conviction, or
indemnify any party in a plea of nolo contendere or
connection with a proceeding an entry of probation prior
(or part thereof) initiated to judgment each creates a
by that same party unless rebuttable presumption that
the initiation was approved the officer or director did
by the Board of Directors not meet the requisite
and (2) the target REIT standard of conduct for
shall not indemnify any indemnification. FSP Corp.
party to the extent such will not indemnify in any
party is reimbursed from the suit where the potential
proceeds of insurance. indemnitee is found to be
liable for receiving
improper benefit and will
not indemnify any party to
the extent that such party
is reimbursed from the
proceeds of insurance.
142
Target REIT (Delaware) FSP Corp. (Maryland)
Notwithstanding any of the
provisions above, FSP Corp.
will indemnify any director
or officer that is
successful in defense of any
action arising out of his
position with FSP Corp. or
his service at the request
of FSP Corp.
Charter amendment, Under the Delaware general Under Maryland law, any
merger, sale of corporation law, any charter amendment, merger,
assets, share amendment to a corporation's sale of assets, share
exchange and charter requires the exchange or consolidation
consolidation affirmative vote of a requires the affirmative
majority of the outstanding vote of two-thirds of the
stock entitled to vote on shares of stock entitled to
the matter, and a majority vote on the matter, unless a
of the outstanding stock of lesser percentage (but not
each class entitled to vote less than a majority of all
on the matter as a class. the votes to be cast on the
The holders of the matter) is set forth in the
outstanding shares of a corporation's charter.
class are entitled to vote
as a class if the amendment FSP Corp.'s charter provides
would increase or decrease that, in addition to a
the aggregate number of majority of the shares of
authorized shares of such outstanding capital stock,
class, increase or decrease as required by law, the
the par value of the shares affirmative vote of a
of such class, or alter or majority of shares of
change the powers, preferred stock is required
preferences, or special to amend the charter, merge
rights of the shares of such or consolidate into or with
class so as to affect them any other corporation or
adversely. other entity, sell all or
substantially all of its
Under the Delaware general assets, or engage in a share
corporation law, any merger, exchange.
consolidation, or sale of
substantially all assets
requires the affirmative
vote of a majority of the
outstanding stock of the
corporation entitled to vote
on the matter.
The target REITs' charters
provide that, in addition to
a majority of the shares of
outstanding capital stock,
as required by law, the
affirmative vote of a
majority of shares of
preferred stock is required
to amend or repeal any
143
Target REIT (Delaware) FSP Corp. (Maryland)
provision of, or add any
provision to the charter,
merge or consolidate into or
with any other corporation
or other entity, or sell all
or substantially all of its
assets.
Amendment of bylaws Under the Delaware general Under Maryland law, the
corporation law, the power power to adopt, alter, and
to adopt, amend or repeal repeal the bylaws of the
bylaws is vested in the corporation is vested in the
stockholders. The fact that stockholders except to the
such power may be conferred extent that the charter or
upon the directors or bylaws vest it in the board
governing body does not of directors.
divest the stockholders of
their power to adopt, amend FSP Corp.'s bylaws provide
or repeal bylaws. that the Board of Directors
shall have the power to
The target REITs' bylaws adopt, alter or repeal any
provide that the bylaws may provision of the bylaws and
be amended or repealed by to make new bylaws.
the affirmative vote of a
majority of the directors
present at any regular or
special meeting of the
target REIT board at which a
quorum is present.
Furthermore, the bylaws may
be amended or repealed by
the affirmative vote of the
holders of a majority of the
shares of the capital stock
of the corporation issued
and outstanding and entitled
to vote at any regular
meeting of stockholders, or
at any special meeting of
stockholders, provided
notice of such amendment or
repeal has been stated in
the notice of such special
meeting.
Anti-takeover The target REITs' charters Under Maryland law, a
statutes provide that Delaware's corporation may not engage
anti-takeover statute does in any business combination
not apply to each target with any stockholder who
REIT. owns, directly or
indirectly, 10% or more of
the outstanding voting stock
of the corporation (an
"interested stockholder") or
any affiliate of the
interested stockholder for a
period of 5 years following
the most recent date on
144
Target REIT (Delaware) FSP Corp. (Maryland)
which the interested
stockholder became an
interested stockholder
unless the Board of
Directors of the corporation
approves and exempts the
business combination from
such requirement or there
are fewer than 100
beneficial owners of stock
in the corporation or
certain other conditions are
met.
Par value, The Delaware general Maryland law permits a
dividends, and corporation law permits a corporation to declare and
repurchases of shares corporation to declare and pay dividends and make other
pay dividends out of its distributions to
surplus (usually net assets shareholders, unless after
minus aggregate par value of giving effect to the
outstanding shares) or out distribution (1) the
of its net profits for the corporation would not be
fiscal year in which the able to pay indebtedness of
dividend is declared and/or the corporation as it
the preceding fiscal year. becomes due in the usual
If the capital of the course of business, or (2)
corporation is diminished by the corporation's total
depreciation of losses to an assets would be less than
amount less than the the sum of its total
aggregate amount of the liabilities plus, unless the
capital represented by the charter permits otherwise,
issued and outstanding stock the amount that would be
of all classes having a needed if the corporation
preference upon the were to be dissolved at the
distribution of assets, then time of the distribution, to
the directors cannot declare satisfy the preferential
and pay dividends out of net rights upon dissolution of
profits until the deficiency stockholders whose
of capital has been repaired. preferential rights on
dissolution are superior to
While Delaware grants no those receiving the
explicit statutory authority distribution.
to repurchase shares, there
is also no law supporting In addition, Maryland law
the proposition that provides that a corporation
directors of a company may acquire its own shares
cannot approve efforts to and that shares so acquired
repurchase shares for the constitute authorized but
benefit of the company. unissued shares.
Dissenters' or Under the Delaware general Under Maryland law, a
appraisal rights corporation law, appraisal stockholder of a Maryland
rights are generally corporation has the right to
available for holders of any demand and receive payment
class or series of stock of of the fair value of his
a constituent corporation in stock in the event of (1)
a merger or consolidation any merger or consolidation
who do not vote in favor of of the corporation, (2) any
145
Target REIT (Delaware) FSP Corp. (Maryland)
or otherwise consent to the transfer of assets requiring
merger or consolidation and stockholder approval, (3)
who continue to hold stock any charter amendment which
through the effective date alters the contract rights,
of the merger or as expressly set forth in
consolidation. However, no the charter, of any
appraisal rights are outstanding stock and
available for the shares of substantially adversely
any class or series of stock affects the stockholder's
that, at the record date rights, unless the right to
fixed to determine the do so is reserved by the
stockholders entitled to charter of the corporation,
receive notice of and to or (4) any business
vote upon merger or combination covered by the
consolidation, were either Maryland Business
(1) listed on a national Combination Act, unless (a)
securities exchange or the stock received is listed
designated as a national on a national securities
market system security on an exchange or (b) the stock
interdealer quotation system received is that of the
by the National Association surviving corporation in a
of Securities Dealers, Inc. merger that meets certain
or (2) held of record by requirements including that
more than 2,000 holders; and the survivor's charter does
no appraisal rights are not alter the contract
available for any shares of rights of the stockholders
stock of the constituent or reserve the right to do
corporation surviving a so.
merger if the merger did not
require for its approval the
vote of the stockholders of
the surviving corporation.
Notwithstanding the
provisions above, appraisal
rights are available under
the Delaware general
corporation law where the
consideration received in a
merger or consolidation is
anything other than (1)
shares of stock of the
surviving corporation, (2)
shares of stock of any other
corporation, which at the
effective date of the merger
or consolidation will be
either listed on a national
securities exchange or
designated as a national
market system security on an
interdealer quotation system
by the National Association
of Securities Dealers, Inc.
or held of record by more
than 2,000 holders, (3) cash
146
Target REIT (Delaware) FSP Corp. (Maryland)
in lieu of fractional
shares, or (4) any
combination of the above.
Dissenters' rights of target
REIT stockholders are
discussed in greater detail
in the section of this
prospectus entitled "The
Mergers - Appraisal Rights
of Dissenting Stockholders
of Target REITs."
Inspection rights Under the Delaware general Under Maryland law, any
corporation law, any stockholder may inspect and
stockholder has the right to copy that corporation's
inspect for any proper bylaws, the minutes of the
purpose and to make copies proceedings of its
and extracts from the stockholders, its annual
corporation's stock ledger, statements of affairs and
a list of its stockholders, voting trust agreements on
its other books and records file at the corporation's
and a subsidiary's books and principal office. Any
records, to the extent that stockholder may present to
the corporation has actual any officer or resident
possession and control of agent of the corporation a
such records of such written request for a
subsidiary or the statement showing all stock
corporation could obtain and securities issued by the
such records through the corporation during a
exercise of control over specified period of not more
such subsidiary without than 12 months before the
violating its contractual date of the request.
obligations to the
subsidiary or the Furthermore, one or more
subsidiary's legal rights. persons who together are and
for at least six months have
been stockholders of record
of at least 5 percent of the
outstanding stock of any
class of a corporation may
inspect and copy during
usual business hours the
corporation's books of
account and its stock
ledger; present to any
officer or resident agent of
the corporation a written
request for a statement of
its affairs; and in the case
of any corporation which
does not maintain the
original or a duplicate
stock ledger at its
principal office, present to
any officer or resident
agent of the corporation a
written request for a list
of its stockholders.
147
BUSINESS AND PROPERTIES OF THE TARGET REITs
Each target REIT was formed for the purpose of acquiring, developing and
operating its property. The principal investment objectives of the target REITs
are to provide their target REIT stockholders with regular quarterly cash
distributions; to obtain long-term appreciation in the value of their property;
and to preserve and protect their target REIT stockholders' capital. The target
REITs share executive offices with FSP Corp. Each target board believes the
property owned by its related target REIT is adequately covered by insurance.
There is no established public trading market for the preferred stock of
any of the target REITs.
The following table indicates the number of holders of record of preferred
stock in each of the target REITs as of August 13, 2004, based upon the number
of record holders reflected in the corporate records of that target REIT.
Target REIT Number of Record Holders
----------- ------------------------
Addison Circle 380
Collins Crossing 449
Montague 331
Royal Ridge 246
Set forth below are the distributions per share of preferred stock that
each target REIT has made in each quarter since the quarter ended December 31,
2002 or since such target REIT was syndicated, if such syndication occurred
after December 31, 2002.
Target REIT
-----------
Dividends Distributed per Share of Preferred Stock (in $)
Target REIT Quarter Ended
----------- -------------
3/31/05
12/31/02 3/31/03 6/30/03 9/30/03 12/31/03 3/31/04 6/30/04 9/30/04 12/31/04 (1)
-------- ------- ------- ------- -------- ------- ------- ------- -------- -------
Addison Circle N/A 1,189.22 2,050.00 2,031.00 2,008.00 1,989.00 2,025.00 2050.00 2144.00 2027.00
Collins Crossing N/A N/A 97.78 1,471.64 2,067.00 2,399.00 2,223.00 2127.00 2120.00 2133.00
Montague 860.75 2,702.00 2,737.00 2,817.00 2,863.00 2,873.00 2,934.50 3034.00 3000.00 3054.00
Royal Ridge N/A N/A 1,073.50 1,783.00 1,766.00 1,802.00 1,799.00 1825.00 1787.00 1822.00
(1) Dividends in these amounts were declared by the applicable target REITs on
12/31/04 to be payable on 2/15/05.
Each target REIT expects to declare in April 2005 and pay to its target
REIT stockholders thereafter a dividend with respect to its first and second
quarter 2005 operations. Pursuant to the merger agreement, such dividends will
be paid in an amount consistent with past practice and custom of the relevant
target REIT. The cash paid out in these dividends will reduce the amount of cash
held by each target REIT and acquired by FSP Corp. upon consummation of the
mergers. Because the target REITs have not yet declared these cash dividends,
FSP Corp. cannot estimate the aggregate amount of such dividends. As the target
REITs will cease to exist upon consummation of the mergers, FSP Corp. does not
expect that they will continue to pay quarterly dividends after such
consummation.
148
The following table sets forth the percentage of leased space and weighted
annual average base rent per square foot for each property owned by the target
REITs for the years ended December 31, 2001, 2002 and 2003 (to the extent
applicable).
Weighted Annual Average
Base Rent/Net Rentable
Target REIT Percentage of Leased Space Square Foot*
----------- -------------------------- ------------
Addison Circle
December 31, 2002 100% $22.74
December 31, 2003 100% $23.08
Collins Crossing
December 31, 2003 100% $22.34
Montague
December 31, 2002 100% $24.99
December 31, 2003 100% $25.96
Royal Ridge**
December 31, 2003 100% $13.32
* All rents are base rent only without step rents or operating expense
recoveries. Montague and Royal Ridge are net leases and Addison Circle and
Collins Crossing are gross rent leases.
** Royal Ridge rents for 2003 included a credit from the seller of the
property for free rental periods.
The following table sets forth for each property owned by the target
REITs, the number of tenants leasing 10% or more of the rentable square feet,
the principal nature of the business of such tenant and the principal
businesses, occupations and professions carried on in the property:
Number of
Tenants Leasing Principal Businesses Carried
10% or More of Principal Nature of on in the Property as of
Space as of Tenant's Business 9/30/04
----------- ----------------- -------
Addison Circle Three Provider of integrated None; tenant has partially
communications and subleased space to general office
telecommunications services tenants
Real estate services company General office use
Software developer General office use
Collins Crossing Two Provider of communications General office use
software solutions
Software provider None; tenant has partially
subleased space to general office
tenants
Montague One Provider of sophisticated General office use
manufacturing systems used to
create advanced integrated circuits
Royal Ridge Three Insurance company General office use
Distributor of electrical materials General office use
Real estate developer General office use
149
The following table sets forth, for each tenant leasing 10% or more of the
rentable square feet in the properties owned by the target REITs, the principal
provisions of their leases:
Current Base Rent as of
9/30/04 Annualized and
Percentage of Square
Feet Leased as of
Target REIT Tenant 9/30/04 Expiration Date Renewal Options
----------- ------ ------- --------------- ---------------
Addison Circle McLeod $2,312,952 March 31, 2007 Two 5-year options to
31% renew at fair market rent
Staubach $1,907,356 April 30, 2009 Two 5-year options to
30% renew at fair market rent
Peoplesoft $1,442,559 February 28, 2005 Tenant has exercised
20% early termination option.
Collins Crossing Tektronix $5,367,284 June 30, 2010 Two 5-year options to
80% renew at fair market rent
Macromedia $1,378,956 February 28, 2006 One 5-year option to
18% renew at fair market
rent or last month's rent
Montague Novellus $4,045,755 December 31, 2006 None
100%
Royal Ridge Combined Specialty $1,183,688 November 30, 2012 Two 3-year options to
Insurance Company 51% renew at 95% of fair
market rent
Hagemeyer North $778,193 October 31, 2012 Two 5-year options to
America 38% renew at fair market
rent or last month's rent
CK Royal LLC $232,444 January 29, 2005 None
11%
150
The following table sets forth for each property owned by the target REITs
a schedule of lease expirations for each of the ten years beginning with 2004,
the number of tenants whose leases will expire, the total area in square feet
covered by such leases, the annual rental represented by such leases and the
percentage of gross annual rental represented by such leases:
--------------------------------------------------------------------------------
Total Annual
Number of Contract Rent Percentage of
Lease Total Square as of 9/30/04 Annual Gross
Target REIT Expirations Feet annualized Rent
--------------------------------------------------------------------------------
Addison Circle
--------------------------------------------------------------------------------
2004 One 9,139 $ 182,780 3%
2005 Two 64,076 $1,574,600 23%
2006 -- -- -- --
2007 Two 112,474 $2,849,446 41%
2008 One 4,508 $ 76,636 1%
2009 Two 89,470 $2,089,390 30%
2010 One 8,868 $ 212,832 3%
2011 -- -- -- --
2012 -- -- -- --
2013 -- -- -- --
2014 -- -- -- --
--------------------------------------------------------------------------------
Collins Crossing
--------------------------------------------------------------------------------
2004 -- -- -- --
2005 -- -- -- --
2006 One 55,394 $1,378,956 20%
2007 -- -- -- --
2008 -- -- -- --
2009 One 2,000 $ 16,800 0%
2010 One 241,372 $5,367,284 79%
2011 -- -- -- --
2012 -- -- -- --
2013 -- -- -- --
2014 -- -- -- --
--------------------------------------------------------------------------------
151
--------------------------------------------------------------------------------
Total Annual
Number of Contract Rent Percentage of
Lease Total Square as of 9/30/04 Annual Gross
Target REIT Expirations Feet annualized Rent
--------------------------------------------------------------------------------
Montague
--------------------------------------------------------------------------------
2004 -- -- -- --
2005 -- -- -- --
2006 One 145,951 $4,045,755 100%
2007 -- -- -- --
2008 -- -- -- --
2009 -- -- -- --
2010 -- -- -- --
2011 -- -- -- --
2012 -- -- -- --
2013 -- -- -- --
2014 -- -- -- --
--------------------------------------------------------------------------------
Royal Ridge
--------------------------------------------------------------------------------
2004 -- -- -- --
2005 One 18,142 $ 232,444 11%
2006 -- -- -- --
2007 -- -- -- --
2008 -- -- -- --
2009 -- -- -- --
2010 -- -- -- --
2011 -- -- -- --
2011 -- -- -- --
2012 -- -- -- --
2013 -- -- -- --
2014 Two 143,224 $1,981,328 89%
--------------------------------------------------------------------------------
152
SELECTED FINANCIAL INFORMATION OF ADDISON CIRCLE
The following selected financial information is derived from the
historical financial statements of Addison Circle. This information should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on pages 161 to 168 of this Consent
Solicitation/Prospectus.
Addison Circle was organized on August 21, 2002 and purchased the property
on September 30, 2002. No information is presented prior to the date the target
REIT was organized.
Total assets at merger value represent the sum of the real estate being
acquired at its appraised value plus the amount of adjusted cash reserves. See
page 10 for the values ascribed for each Target REIT.
For the Period
For the For the August 21, 2002
Nine Months Ended Year Ended (date of inception)
September 30, December 31, to December 31,
----------------------- ------------ ------------------
(In thousands, except share and per share data) 2004 2003 2003 2002
Operating Data:
Total revenue $ 6,892 $ 6,448 $ 8,554 $ 2,102
Net income (loss) 3,288 3,073 4,005 (2,869)
Net income (loss) attributable to
preferred shareholders 3,288 3,073 4,005 (3,182)
Ratio of earnings to fixed charges N/A N/A N/A N/A
(Addison Circle has no permanent debt)
Net (decrease) increase in cash and
cash equivalents (474) 278 647 2,683
Net cash provided by (used for)
operating activities 3,929 3,724 5,393 (3,507)
Net cash used for distributions 3,857 3,446 4,721 220
Balance Sheet Data
Cash and cash equivalents 5,492 5,680 5,966 5,402
Total assets at book value 55,722 56,611 56,667 57,228
Total assets at merger value 56,117 -- -- --
Long term liabilities -- --
Total liabilities 1,714 2,947 3,355 2,784
Total stockholders' equity 54,008 53,664 53,312 54,444
Per Share Data:
Weighted average preferred shares
outstanding 636 636 636 636
Net income (loss) per preferred share $ 5,170 $ 4,832 $ 6,297 $ (5,003)
Book value per preferred share 84,918 84,377 83,824 85,604
Merger value per preferred share 88,329 -- -- --
Distributions paid per preferred share 6,064 5,270 7,275 --
Distributions paid per preferred share
(return of capital) -- -- 1,154 --
153
Selected unaudited quarterly financial data for Addison Circle
(in thousands, except shares and per share data)
2004
-----------------------------------
First Second Third
Quarter Quarter Quarter
------- ------- -------
Revenue $ 2,503 $ 2,218 $92,171
Net income $ 1,380 $ 1,135 $ 773
Income to preferred shareholders $ 1,380 $ 1,135 $ 773
Income per preferred share $ 2,169 $ 1,786 $ 1,215
Shares 636 636 636
2003
---------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Revenue $2,107 $2,226 $2,098 $2,106
Net income $1,066 $1,070 $ 957 $ 912
Income to preferred shareholders $1,066 $1,070 $ 957 $ 912
Income per preferred share $1,676 $1,682 $1,505 $1,436
Shares 636 636 636 636
2002
-------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Revenue N/A N/A N/A $ 2,102
Net income N/A N/A N/A $(2,869)
Distributions to common shareholders N/A N/A N/A $ 313
Loss to preferred shareholders N/A N/A N/A $(3,182)
Loss per preferred share N/A N/A N/A $(5,003)
Shares N/A N/A N/A 636
154
SELECTED FINANCIAL INFORMATION OF COLLINS CROSSING
The following selected financial information is derived from the
historical financial statements of Collins Crossing. This information should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on pages 161 to 168 of this Consent
Solicitation/Prospectus.
Collins Crossing was organized on January 16, 2003 and purchased the
property on March 3, 2003. No information is presented prior to the date the
target REIT was organized.
Total assets at merger value represent the sum of the real estate being
acquired at its appraised value plus the amount of adjusted cash reserves. See
page 10 for the values ascribed for each Target REIT.
For the Period
For the For the Period Jaunary 16, 2003
Nine Months Ended Ended (date of inception)
September 30, September 30, to December 31,
------------- ------------- ---------------
(In thousands, except share and per share data) 2004 2003 2002
Operating Data:
Total revenue $ 5,205 $ 3,976 $ 5,672
Net income (loss) 2,108 (1,611) (976)
Net income (loss) attributable to
preferred shareholders 2,108 (1,981) (1,349)
Ratio of earnings to fixed charges N/A N/A N/A
(Royal Ridge has no permanent debt)
Net increase in cash and
cash equivalents (432) 4,421 2,942
Net cash provided by (used for)
operating activities 3,322 222 (109)
Net cash used for distributions 3,746 1,245 2,392
Balance Sheet Data
Cash and cash equivalents 4,634 4,421 5,066
Total assets at book value 47,472 49,289 49,314
Total assets at merger value 50,485 -- --
Long term liabilities -- --
Total liabilities 1,377 2,192 2,913
Total stockholders' equity 46,095 47,097 46,401
Per Share Data:
Weighted average preferred shares
outstanding 555 555 555
Net income (loss) per preferred share $ 3,798 $ (3,569) $ (2,431)
Book value per preferred share 83,054 86,926 83,605
Merger value per share 90,964 -- --
Distributions paid per preferred share 6,750 1,569 3,638
Distributions paid per preferred share
(return of capital) -- -- 3,205
155
Selected unaudited quarterly financial data for Collins Crossing
(in thousands, except shares and per share data)
2004
-----------------------------------
First Second Third
Quarter Quarter Quarter
------- ------- -------
Revenue $1,702 $1,747 1,756
Income to preferred shareholders $ 753 $ 700 655
Income per preferred share $1,357 $1,261 $1,180
Shares 555 555 555
2003
---------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Revenue $574 $ 1,678 $1,724 $1,696
Income (loss) to preferred shareholder $163 $(2,698) $ 554 $ 634
Income (loss) to preferred share $294 $(4,861) $ 998 $1,140
Shares 555 555 555 555
156
SELECTED FINANCIAL INFORMATION OF MONTAGUE
The following selected financial information is derived from the
historical financial statements of Montague. This information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" on pages 161 to 168 of this Consent
Solicitation/Prospectus.
Montague was organized on July 22, 2002 and purchased the property on
August 27, 2002. No information is presented prior to the date the target REIT
was organized.
Total assets at merger value represent the sum of the real estate being
acquired at its appraised value plus the amount of adjusted cash reserves. See
page 10 for the values ascribed for each Target REIT.
For the Period
For the For the July 22, 2002
Nine Months Ended Year Ended (date of inception)
September 30, December 31, to December 31,
----------------------- ------------ -------------------
(In thousands, except share and per share data) 2004 2003 2003 2002
Operating Data:
Total revenue $ 2,592 $ 2,737 $ 3,645 1,088
Net income (loss) 1,861 1,992 2,669 (1,249)
Net income (loss) attributable to
preferred shareholders 1,861 1,992 2,669 (1,281)
Ratio of earnings to fixed charges N/A N/A N/A N/A
(Royal Ridge has no permanent debt)
Net increase in cash and
cash equivalents 39 244 630 957
Net cash provided by (used for)
operating activities 2,992 3,002 4,699 (3,034)
Net cash used for distributions 2,953 2,758 3,714 320
Balance Sheet Data
Cash and cash equivalents 3,633 3,574 3,594 3,330
Total assets at book value 27,412 28,412 28,450 29,111
Total assets at merger value 22,035 -- -- --
Long term liabilities -- -- -- --
Total liabilities 465 1,049 1,371 930
Total stockholders' equity 26,947 27,363 27,079 28,181
Per Share Data:
Weighted average preferred shares
outstanding 334 334 334 334
Net income (loss) per preferred share $ 5,572 $ 5,964 $ 7,991 (3,835)
Book value per preferred share 80,680 81,925 81,075 84,374
Merger value per share 65,973 -- -- --
Distributions paid per preferred share 7,763 8,257 11,120 862
Distributions paid per preferred share
(return of capital) -- -- -- --
157
Selected unaudited quarterly financial data for Montague
(in thousands, except shares and per share data)
2004
-----------------------------------
First Second Third
Quarter Quarter Quarter
------- ------- -------
Revenue $ 865 $ 849 878
Income to preferred shareholders $ 660 $ 624 577
Income per preferred share $1,976 $1,868 $1,728
Shares 334 334 334
2003
---------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Revenue $1,186 $ 662 $ 889 $ 908
Net Income $ 915 $ 421 $ 656 $ 677
Income per preferred share $2,740 $1,260 $1,964 $2,027
Shares 334 334 298 334
2002
-------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Revenue N/A N/A $ 211 $ 797
Net Income (loss) N/A N/A $(1,480) $ 231
Distributions to common shareholders N/A N/A $ -- $ 32
Income (loss) to preferred shareholders N/A N/A $(1,480) $ 199
Income (loss) per preferred share N/A N/A $(4,431) $ 596
Shares N/A N/A 334 334
158
SELECTED FINANCIAL INFORMATION OF ROYAL RIDGE
The following selected financial information is derived from the
historical financial statements of Royal Ridge. This information should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" on pages 161 to 168 of this Consent
Solicitation/Prospectus.
Royal Ridge was organized on December 20, 2002 and purchased the property
on January 30, 2003. No information is presented prior to the date the target
REIT was organized. No information is presented prior to the date the target
REIT was organized.
Total assets at merger value represent the sum of the real estate being
acquired at its appraised value plus the amount of adjusted cash reserves. See
page 10 for the values ascribed for each Target REIT.
For the For the
Nine Months Ended Year Ended
September 30, December 31,
------------------------ -------------
(In thousands, except share and per share data) 2004 2003 2003
Operating Data:
Total revenue $ 2,286 $ 1,562 $ 2,264
Net income (loss) 942 (1,222) (958)
Net income (loss) attributable to
preferred shareholders 942 (1,236) (972)
Ratio of earnings to fixed charges N/A N/A N/A
(Royal Ridge has no permanent debt)
Net increase in cash and
cash equivalents 259 2,479 1,214
Net cash provided by (used for)
operating activities 1,873 (1,610) (2,350)
Net cash used for distributions 1,614 864 1,389
Balance Sheet Data
Cash and cash equivalents 2,510 2,479 2,251
Total assets at book value 24,732 25,659 25,170
Total assets at merger value 27,042 -- --
Long term liabilities --
Total liabilities 475 994 776
Total stockholders' equity 24,257 24,665 24,394
Per Share Data:
Weighted average preferred shares
outstanding 297.50 297.50 297.50
Net income (loss) per preferred share $ 3,166 $ (4,155) $ (3,267)
Book value per preferred share 81,536 82,908 81,997
Merger value per share 90,897 -- --
Distributions paid per preferred share 5,426 2,857 4,623
Distributions paid per preferred share
(return of capital) -- 2,857 4,623
159
Selected unaudited quarterly financial data for Royal Ridge
(in thousands, except shares and per share data)
2004
-----------------------------------
First Second Third
Quarter Quarter Quarter
------- ------- -------
Revenue $ 762 $ 755 $ 769
Income to preferred shareholders $ 344 $ 333 $ 264
Income per preferred share $1,157 $1,119 $ 887
Shares 297.5 297.5 297.5
2003
-------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Revenue $ 343 $ 491 $ 728 $ 702
Net Income (loss) $(1,650) $ 101 $ 327 $ 264
Distributions to common shareholders $ -- $ 14 $ -- $ --
Income (loss) to preferred shareholders $(1,650) $ 87 $ 327 $ 264
Income (loss) per preferred share $(5,546) $ 292 $1,099 $ 888
Shares 297.5 297.5 297.5 297.5
160
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF THE TARGET REITS
The following discussion should be read in conjunction with the financial
statements of Addison Circle, Collins Crossing, Montague and Royal Ridge and
notes thereto appearing elsewhere in this consent solicitation/prospectus.
Historical results and percentage relationships set forth in the respective
target REIT financial statements should not be taken as necessarily indicative
of future operations.
Trends and Uncertainties
Real Estate Operations
It is difficult for management to predict what will happen to occupancy or
rents during the remainder of 2004 and beyond because the need for space and the
price tenants are willing to pay are tied to both the local economy and to the
larger trends in the economy, such as job growth, interest rates, and corporate
earnings, which in turn are tied to even larger macroeconomic and political
factors, such as the risk of war and terrorism. In addition to the difficulty of
predicting macroeconomic factors, it is difficult to predict how local markets,
projects, or tenants will suffer or benefit from changes in the larger economy.
Because each property is in a single geographical market and each property's
tenants are in diverse industries, these macroeconomic trends may have a
different effect on a property and on its tenants.
Addison Circle
Addison Circle is located in Dallas, Texas. The vacancy rate was
approximately 17% for the third quarter of 2004 for Class A space in the Far
North Dallas Market. The Far North Dallas market has been outperforming the
overall Dallas/Fort Worth market, and management currently expects that trend to
continue in the fourth quarter of 2004.
Collins Crossing
Collins Crossing is located in Plano, Texas. The vacancy rate was
approximately 30% for the third quarter of 2004 for Class A space in the
Richardson/Plano submarket, which is an increase in the vacancy rate from the
second quarter of 2004. However, since 80% of Collins Crossing is leased until
2010, and the remaining 20% is leased until 2006, management cannot project what
impact current market conditions will have on leasing terms and rates when
Collins Crossing's leases expire.
Montague
Montague is located in San Jose, California. The San Jose, California
market continues to see positive absorption combined with declining rental
rates. If the positive absorption and current general economic trends continue,
then management expects this trend of declining rental rates to continue.
Management cannot predict whether these trends will continue or what the market
will be at December 31, 2006, when the lease expires for Montague's single
tenant, Novellus.
Royal Ridge
The Alpharetta/Roswell, Georgia market, where Royal Ridge is located, had
a slight decline in vacancy rate in the third quarter of 2004, and a continuing
decline in rental rates for Class A space. Management does not know how much
longer this trend will continue or when it might reverse. In 2005, one lease for
approximately 11% of Royal Ridge will expire; the rest of the leases do not
expire until 2012. Management expects that the space becoming vacant in 2005 may
lease for $0.50 to $1.00 per square foot less if it is leased in the fourth
quarter of 2004, but management cannot predict when the space will be leased.
161
Results of Operations of Addison Circle
The Addison Circle property consists of a ten-story Class "A" suburban
office tower that contains approximately 293,787 square feet of space situated
on approximately 3.61 acres of land. Addison Circle acquired the property on
September 30, 2002.
The property is leased to three major tenants that provide approximately
79% of the revenue. Bankruptcy or a material adverse change in financial
condition of any of these tenants may cause a material adverse affect to Addison
Circle. Peoplesoft, a tenant contributing approximately 21% of the revenues,
exercised its termination option and notified Addison Circle of its intent to
terminate its lease as of March 1, 2005. The expiring base rent for Peoplesoft
is approximately $25 per square foot, and current market rents are $1 to $5 per
square foot below that rate. Peoplesoft leased approximately 58,741 square feet
of rentable space in the Addison Circle office tower. As of December 20, 2004,
27,955 rentable square feet previously leased to Peoplesoft have been leased to
a new tenant for three years at $19.00 per square foot for the first year with
an increase to $19.50 in the second year and to $20.00 per square foot in the
third year. FSP Corp. has signed a non-binding letter of intent with another new
tenant regarding the remaining 30,786 square feet of space. Management currently
expects that the remaining space will be leased at current market rents before
the expiration of the term in March 2005 or shortly thereafter.
Comparison of the nine months ended September 30, 2004 to the nine months ended
September 30, 2003
Revenue
Total revenue increased $0.4 million, to $6.8 million for the nine months
ended September 30, 2004, as compared to $6.4 million for the nine months ended
September 30, 2003. This increase is primarily due to a termination fee paid by
a tenant that exercised a termination option on its lease.
Expenses
Total expenses were $3.6 million for the nine months ended September 30,
2004, and were consistent with the comparable period in 2003.
Comparison of the year ended December 31, 2003 to the period ended
December 31, 2002
As discussed above, Addison Circle acquired the property on September 30,
2002; accordingly, there were twelve months of operations in 2003 compared to
three months of operations in 2002.
Revenue
Total revenue increased $6.5 million, to $8.6 million for the year ended
December 31, 2003, as compared to $2.1 million for the period ended December 31,
2002.
The increase in rental income of $6.5 million, as compared to the period
ended December 31, 2002, is primarily attributable to the twelve months of
operations in 2003 compared to three months of operations in 2002.
Expenses
Total expenses decreased $0.3 million for the year ended December 31,
2003, as compared to the period ended December 31, 2002. This decrease is
primarily attributable to a decrease in interest expense of $3.9 million due to
a loan payable being paid in full in 2002.
162
The decrease was offset by an increase of taxes and insurance of $1.0
million, an increase in operating expenses of $1.4 million and an increase in
depreciation and amortization of $1.1 million as a result of a full year of
operations in 2003 compared to three months of operations for the period ended
December 31, 2002.
Liquidity and Capital Resources
Cash and cash equivalents were $5.5 million and $6.0 million at September
30, 2004 and December 31, 2003, respectively. This decrease of $0.5 million is
attributable to $3.6 million provided by operating activities, offset by $0.2
million used for investing activities and $3.9 million used for financing
activities. Management believes that existing cash and cash anticipated to be
generated internally by operations will be sufficient to meet working capital
requirements and anticipated capital expenditures for at least the next 12
months.
Operating Activities
The cash provided by our operating activities of $3.6 million is primarily
attributable to net income of $3.3 million plus the add-back of $1.1 million of
non-cash activity, principally depreciation and amortization. This was offset by
a decrease in operating assets of $0.8 million primarily related to accounts
payable and accrued expenses and payments of deferred leasing costs.
Investing Activities
Cash used for investing activities of $0.2 million is attributable to the
purchase and/or improvement of real estate assets, including tenant
improvements.
Financing Activities
Cash used by financing activities of $3.9 million is attributable to
distributions to shareholders.
Sources and Uses of Funds
Addison Circle's principal demands on liquidity are cash for operations
and dividends to equity holders. As of September 30, 2004 Addison Circle had
approximately $1.7 million in liabilities and no long-term debt. In the near
term, liquidity is generated from funds from operations.
Results of Operations of Collins Crossing
The Collins Crossing property consists of an eleven story Class "A"
suburban office tower that contains approximately 298,766 square feet of space
situated on approximately ten acres of land (including an undeveloped parcel
containing approximately 3.5 acres). Collins Crossing acquired the property on
March 3, 2003.
The major tenant at Collins Crossing provides approximately 80% of the
revenue and a second tenant provides approximately the remaining 20% of the
revenue. Inet Technologies, Inc., the major tenant at Collins Crossing, held a
special meeting of stockholders on September 30, 2004 and approved its
acquisition by Textronix, Inc. The lease to which Inet is a party specifies that
any successor shall remain liable for Inet's obligations under the lease.
Pursuant to its terms, the lease expires in June 2010. Bankruptcy or a material
adverse change in financial condition of these tenants may cause a material
adverse affect to Collins Crossing.
163
Comparison of the nine months ended September 30, 2004 to the nine months ended
September 30, 2003
As discussed above, Collins Crossing acquired its property on March 3,
2003; accordingly, there are nine and seven months of operations for the nine
months ended September 30, 2004 and 2003, respectively.
Revenue
Total revenue increased $1.2 million, to $5.2 million for the nine months
ended September 30, 2004, as compared to $4.0 million for the nine months ended
September 30, 2003. This increase is primarily due to a full six months of
revenue in 2004 offset by the amortization of favorable leases acquired at
purchase as compared to four months of operations in 2003.
Expenses
Total expenses decreased $2.5 million to $3.1 million for the nine months
ended September 30, 2004, as compared to $5.6 million at September 30, 2003.
This decrease is primarily attributable to a $3.4 million decrease in interest
expense offset by nine months of operations in 2004 compared to seven months in
2003.
Comparison of the year ended December 31, 2003 to the year ended
December 31, 2002
Because the property was purchased in 2003, there are no comparable
amounts for prior years.
Revenue
Total revenue was $5.6 million for the year ended December 31, 2003.
This is comprised of $5.6 million in rental income, $0.6 million of
recoverable expenses, $0.2 million of straight-line rents offset by $0.8 million
of amortization of acquired favorable leases.
Expenses
Total expenses were $6.7 million for the year ended December 31, 2003. The
expenses consist of:
o operating and maintenance expenses of $1.4 million;
o real estate taxes and insurance of $0.8 million;
o interest expense and commitment fees of $3.5 million; and
o depreciation and amortization of $1.0 million.
Liquidity and Capital Resources
Cash and cash equivalents were $4.6 million and $5.0 million at September
30, 2004 and December 31, 2003, respectively. This decrease of $0.4 million is
attributable to $3.7 million used for financing activities, offset by $3.3
million provided by operating activities. Management believes that existing cash
and cash anticipated to be generated internally by operations will be sufficient
to meet working capital requirements and anticipated capital expenditures for at
least the next 12 months.
164
Operating Activities
The cash provided by operating activities of $3.3 million is primarily
attributable to net income of $2.1 million plus the add-back of $1.7 million of
non-cash activity. This was offset by a decrease in operating assets of $0.5
million, primarily related to approximately $0.2 million of step rent receivable
and $0.2 million of accounts payable and accrued expenses.
Investing Activities
No cash was provided by or used for investing activities.
Financing Activities
Cash used by financing activities of $3.7 million is attributable to
distributions to shareholders.
Sources and Uses of Funds
Collins Crossing's principal demands on liquidity are cash for operations
and dividends to equity holders. As of September 30, 2004 Collins Crossing had
approximately $1.4 million in liabilities and no long-term debt. In the near
term, liquidity is generated from funds from operations.
Results of Operations of Montague
The Montague property contains approximately 145,951 square feet of space
situated on approximately 9.95 acres of land. Montague acquired the property on
August 27, 2002.
The property is leased to a single tenant, Novellus, which provides 100%
of the revenue. Bankruptcy or a material adverse change in financial condition
of this tenant may cause a material adverse affect to Montague. Moreover,
Montague's property is leased to a single tenant through December 31, 2006 at a
rate that is currently significantly above market. Following the termination of
this lease, the property may only be able to release the space at a rate that is
significantly lower than the current rate, possibly causing a material adverse
effect to Montague.
Comparison of the nine months ended September 30, 2004 to the nine months ended
September 30, 2003
Revenue
Total revenue decreased $0.2 million, to $2.6 million for the nine months
ended September 30, 2004, as compared to $2.7 million for the nine months ended
September 30, 2003. This decrease is primarily due to a slight reduction in
reimbursable operating expenses, real estate taxes and insurance which resulted
in lower billings to the tenant.
Expenses
Total expenses decreased less than $0.1 million and remained at $0.8
million for the nine months ended September 30, 2004 and for the nine months
ended September 30, 2003. This decrease is primarily due to a minor cost savings
in various operating expenses and a small decrease in real estate taxes as a
result of a lower tax assessment.
Comparison of the year ended December 31, 2003 to the period ended
December 31, 2002.
As discussed above, Montague acquired the property on August 27, 2002;
accordingly, there are twelve months of operations in 2003 compared to
approximately four months of operations in 2002.
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Revenue
Total revenue increased $2.6 million, to $3.6 million for the year ended
December 31, 2003, as compared to $1.0 million for the period ended December 31,
2002.
The increase in rental income of $2.6 million, as compared to the year
ended December 31, 2002, is attributable to twelve months of operations in 2003
compared to four months of operations in 2002.
Expenses
Total expenses decreased $1.2 million to $1.0 million for the year ended
December 31, 2003, as compared to the period ended December 31, 2002.
The decrease is primarily attributable to a decrease in interest expense
of $1.9 million due to a loan payable being paid in full in 2002, which was
offset by:
o an increase of $0.3 million in taxes and insurance of which $0.1
million is a result of rate increases and $0.2 million is a result
of twelve months of operations in 2004 compared to four months in
2003;
o a combined increase in management fee and operating and maintenance
expenses of $0.2 million; and
o an increase in depreciation and amortization of $0.2 million as a
result of twelve months of operations in 2003 compared to four
months of operations in 2002.
Liquidity and Capital Resources
Cash and cash equivalents were $3.6 million at September 30, 2004 and at
December 31, 2003. This is attributable to $3.0 million provided by operating
activities, offset by $3.0 million used for financing activities. Management
believes that existing cash and cash anticipated to be generated internally by
operations will be sufficient to meet working capital requirements and
anticipated capital expenditures for at least the next 12 months.
Operating Activities
The cash provided by operating activities of $3.0 million is primarily
attributable to net income of $1.9 million plus the add-back of $1.2 million of
non-cash activity, principally depreciation and amortization. This was offset by
a decrease in operating assets of less than $0.1 million primarily related to
accounts payable and accrued expenses.
Investing Activities
No cash was provided by or used for investing activities.
Financing Activities
Cash used by financing activities of $3.0 million is attributable to
distributions to shareholders.
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Sources and Uses of Funds
Montague's principal demands on liquidity are cash for operations and
dividends to equity holders. As of September 30, 2004 Montague had approximately
$0.4 million in liabilities. There is no long-term debt. In the near term,
liquidity is generated from funds from operations.
Results of Operations of Royal Ridge
Royal Ridge owns and operates a six-story Class "A" suburban office
building containing approximately 161,366 rental square feet of space located on
approximately 13.2 acres of land in Alpharetta, Georgia. Royal Ridge acquired
the property on January 30, 2003.
The property is leased to two major tenants, Combined Speciality Insurance
and Hagemeyer North America, which together provide approximately 90% of the
revenue. Bankruptcy or a material adverse change in financial condition to
either of these tenants may cause a material adverse affect to Royal Ridge.
On January 30, 2003, Royal Ridge purchased a building for which the
construction was completed in December 2001. The two major tenants executed
their respective leases between May and June 2002.
Because Royal Ridge purchased the property on January 30, 2003; there were
nine and eight months of operations for the nine months ended September 30, 2004
and 2003, respectively.
Comparison of the nine months ended September 30, 2004 to the nine months ended
September 30, 2003
Revenue
Total revenue was $2.3 million for the nine months ended September 30,
2004, as compared to $1.6 million for the nine months ended September 30, 2003.
The increase in rental income of $0.7 million is primarily attributable to
nine months of operations in 2004 compared to eight months of operations in 2003
and billing of recoverable operating expenses.
Expenses
Total expenses decreased $1.4 million, to $1.4 million for the nine months
ended September 30, 2004, as compared to $2.8 million for the nine months ended
September 30, 2003. This decrease is primarily attributable to decreased
interest expense of $1.7 million offset by an additional month of operations in
2004.
Comparison of the year ended December 31, 2003 to the year ended
December 31, 2002
Royal Ridge had no operations in 2002.
Revenue
Total revenue was $2.2 million for the year ended December 31, 2003. The
revenue includes rental income of $1.2 million, recoverable expenses of $0.5
million, and step rents of $0.9 million offset by amortization of favorable
leases of $0.4 million.
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Expenses
Total expenses were $3.3 million for the year ended December 31, 2003. The
expenses include:
o rental operating expenses of $0.7 million;
o real estate taxes and insurance of $0.2 million;
o interest and commitment fees of $1.7 million; and
o depreciation and amortization of $0.5 million.
Liquidity and Capital Resources
Cash and cash equivalents were approximately $2.5 million and $2.3 million
at September 30, 2004 and December 31, 2003, respectively. This is attributable
to $1.3 million provided by operating activities, offset by $1.1 million used
for financing activities. Management believes that existing cash and cash
anticipated to be generated internally by operations will be sufficient to meet
working capital requirements and anticipated capital expenditures for at least
the next 12 months.
Operating Activities
The cash provided by operating activities of $1.9 million is primarily
attributable to net income of $0.9 million plus the add-back of $0.8 million of
non-cash activity, principally depreciation and amortization.
Investing Activities
No cash was provided by or used for investing activities.
Financing Activities
Cash used by financing activities of $1.6 million is attributable to
distributions to shareholders.
Sources and Uses of Funds
Royal Ridge's principal demands on liquidity are cash for operations and
dividends to equity holders. As of September 30, 2004 Royal Ridge had
approximately $0.5 million in liabilities and no long-term debt. In the near
term, liquidity is generated from funds from operations.
Contractual Obligations and Off Balance Sheet Arrangements
None of the target REITs has any long term contractual obligations or is a
party to any off balance sheet arrangements. Moreover, no target REIT has a
proposed program for the renovation, improvement or development of any of their
real properties other than normal tenant improvements or replacements of
equipment in the ordinary course of ongoing operations.
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MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a general summary of the material United States federal
income tax considerations associated with the mergers and with the acquisition,
ownership and disposition of FSP common stock pursuant to the mergers. The
following summary is not exhaustive of all possible tax considerations.
Moreover, the summary contained herein does not address all aspects of taxation
that may be relevant to particular target REIT stockholders in light of their
personal tax circumstances, or to certain types of stockholders subject to
special treatment under federal income tax laws, including insurance companies,
tax-exempt organizations (except to the extent discussed below under the heading
"Taxation of Tax-Exempt Shareholders"), financial institutions, broker-dealers,
and foreign corporations and persons who are not citizens or residents of the
United States (except to the extent discussed below under the heading "Taxation
of Non-U.S. Shareholders"). For purposes of this summary, references to the
"combined company" exclude any taxable REIT subsidiaries (as described below) of
FSP Corp.
Assuming no material changes in the applicable federal income tax laws
prior to the effective date of the mergers, Wilmer Cutler Pickering Hale and
Dorr LLP will issue an opinion to FSP Corp. and each target REIT based upon
certain factual representations made by FSP Corp. and the target REITs that (i)
the mergers will constitute reorganizations within the meaning of Section 368(a)
of the tax code, and (ii) to the extent that the matters discussed under this
heading "Material United States Federal Income Tax Considerations" constitute
matters of law, they are accurate in all material respects. In addition, Wilmer
Cutler Pickering Hale and Dorr LLP has rendered its opinion, based upon various
assumptions specified therein and upon FSP Corp.'s representations, FSP Corp.
has been organized and operated in conformity with the requirements for
qualification as a real estate investment trust for each taxable year beginning
with its taxable year ending December 31, 2002 and that FSP Corp.'s current
organization and method of operation (as described in this (Consent
solicitation/Prospectus) will enable FSP Corp. to continue to meet the
requirements for qualification and taxation as a real estate investment trust.
The statements in this summary are, and the opinions of Wilmer Cutler
Pickering Hale and Dorr LLP will be, based on the provisions of the Internal
Revenue Code, or the tax code, applicable United States Treasury regulations
promulgated thereunder, and judicial and administrative decisions and rulings
all as in effect on the date rendered. Neither the statements below nor the
opinions are binding on the Internal Revenue Service or the courts, and there
can be no assurance that the Internal Revenue Service or the courts will not
take a contrary view. No ruling from the Internal Revenue Service has been or
will be sought. Future legislative, judicial or administrative changes or
interpretations could alter or modify the statements and conclusions set forth
herein, possibly adversely.
EACH TARGET REIT STOCKHOLDER IS URGED TO CONSULT HIS, HER, OR ITS OWN TAX
ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO THE TARGET REIT STOCKHOLDER
OF THE MERGERS AND OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF STOCK IN AN
ENTITY ELECTING TO BE TAXED AS A REAL ESTATE INVESTMENT TRUST, INCLUDING
FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES, AS WELL AS POTENTIAL
CHANGES IN THE APPLICABLE TAX LAWS.
Tax Consequences of the Mergers
In the opinion of Wilmer Cutler Pickering Hale and Dorr LLP, each merger
will be treated as a "reorganization" within the meaning of Section 368(a) of
the tax code. Accordingly, subject to the limitations and qualifications
referred to herein, the following tax consequences will result:
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o No gain or loss will be recognized by the target REIT stockholders
upon the receipt of FSP common stock in exchange for target stock in
the merger, except with respect to any cash received in lieu of a
fractional share of FSP common stock.
o The aggregate tax basis of the FSP common stock received by a target
REIT stockholder in the merger will be the same as the aggregate
basis of the target stock surrendered by the stockholder in the
exchange, reduced by any the portion of such basis attributable to
the shares of target stock exchanged for cash in lieu of a
fractional share of FSP Corp. common stock.
o The holding period of the FSP common stock received by each target
REIT stockholder in the merger will include the holding period for
the target stock surrendered by the stockholder in the exchange.
A successful Internal Revenue Service challenge to the "reorganization"
status of the merger would result in each target REIT stockholder recognizing
gain or loss with respect to each share of target stock surrendered in the
applicable merger equal to the difference between the stockholder's basis in his
target stock and the fair market value, as of the completion of the merger, of
the FSP common stock received in exchange therefor. In the event of a successful
challenge, the total tax basis in the FSP common stock so received would equal
its fair market value, as of the completion of the merger, and the holding
period for the FSP common stock would begin the day after the merger.
Each target REIT stockholder who receives shares of FSP common stock in a
merger will be required to file a statement with his, her or its federal income
tax return setting forth the stockholder's basis in the shares of target stock
surrendered and the fair market value of FSP common stock received in the
merger. The target REIT stockholder will be required to retain permanent records
of these facts relating to the transaction.
Certain Tax Risks Relating to the Mergers
The mergers entail certain tax risks which, if realized, may cause the
combined company to fail to qualify as a REIT in the year of the mergers or in
any subsequent year, or may result in substantial penalties (excise taxes) being
imposed upon the combined company. As a result of the mergers, for example:
o The combined company may, directly or indirectly, improperly own 10%
or more of a tenant from which the combined company collects rent,
causing the rent received from such tenant to fail to qualify as
rents from real property, as described below under "Requirements for
Taxation as a Real Estate Investment Trust - Income Tests".
o The combined company may improperly own (i) more than 10% of the
outstanding voting securities of any issuer, or (ii) more than 10%
of the value of the securities of any issuer, causing the combined
company to fail to satisfy the asset tests, as described below under
"Requirements for Taxation as a Real Estate Investment Trust - Asset
Tests".
o The combined company would be disqualified as a REIT if any of the
target REITs did not qualify as a REIT and, as a result, had any
undistributed "earnings and profits" at the time of the mergers.
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If the combined company fails to qualify as a REIT, the combined company
could be disqualified from treatment as a REIT in the year in which such failure
occurred and for the next four taxable years and, consequently, would be taxed
as a regular corporation during such years. Other tax costs that could result if
one or more of the mergers caused the combined company to acquire impermissible
assets or income are described below under "Tax Consequences of REIT Election -
Taxation of the combined company - General."
Tax Consequences of REIT Election
Introduction. FSP Corp. has elected under Section 856 of the tax code to
be taxed as a real estate investment trust. Following the mergers, subject to
the risks described above, the combined company intends to continue to be taxed
as a REIT. Generally, companies that meet the eligibility requirements for
treatment as a real estate investment trust and that elect to be so treated are
not subject to federal income tax on the income they distribute to their
stockholders. FSP Corp. believes that it is organized and has operated in a
manner so as to meet these eligibility requirements. In addition, FSP Corp.'s
counsel, Wilmer Cutler Pickering Hale and Dorr LLP, has rendered its opinion,
based upon various assumptions specified therein and upon FSP Corp.'s
representations, that FSP Corp. has been organized and operated in conformity
with the requirements for qualification as a real estate investment trust for
each taxable year beginning with its taxable year ending December 31, 2002 and
that FSP Corp.'s current organization and method of operation (as described in
this prospectus) will enable it to continue to meet the requirements for
qualification and taxation as a real estate investment trust. Qualification as a
REIT, however, depends upon FSP Corp.'s ability to meet, through actual annual
(or in some cases quarterly) operating results, requirements (discussed in
greater detail below) relating to, among other things, the sources of FSP
Corp.'s income, the nature of its assets, the level of its distributions and the
diversity of our share ownership. Wilmer Cutler Pickering Hale and Dorr LLP has
not reviewed and will not review these results on an independent basis. Given
the complex nature of the REIT qualification requirements, the ongoing
importance of factual determinations and the possibility of future changes in
our circumstances, there can be no assurance that FSP Corp.'s actual operating
results will satisfy the requirements for taxation as a REIT under the tax code
for any particular taxable year.
Taxation of the combined company
General. If the combined company continues to qualify as a real estate
investment trust, it generally will not be subject to federal corporate income
taxes on its net income to the extent that the income is currently distributed
to its shareholders. The benefit of this tax treatment is that it substantially
eliminates the "double taxation" resulting from the taxation at both the
corporate and shareholder levels that generally results from owning stock in a
corporation. Accordingly, income generated by the combined company generally
will be subject to taxation solely at the shareholder level upon a distribution
from the combined company. The combined company will, however, be required to
pay certain federal income taxes, including in the following circumstances:
o The combined company will be subject to federal income tax at
regular corporate rates on taxable income, including net capital
gain, that the combined company does not distribute to shareholders
during, or within a specified time period after, the calendar year
in which such income is earned.
o The combined company will be subject to the "alternative minimum
tax" with respect to its undistributed alternative minimum taxable
income.
o The combined company will be subject to a 100% tax on net income
from certain sales or other dispositions of property that it holds
primarily for sale to customers in the ordinary course of business,
also known as "prohibited transactions".
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o If the combined company fails to satisfy the 75% gross income test
or the 95% gross income test, both described below, but nevertheless
qualifies as a real estate investment trust, the combined company
will be subject to a 100% tax on an amount equal to (i) the gross
income attributable to the greater of the amount by which the
combined company fails the 75% or 95% gross income test multiplied
by (ii) a fraction intended to reflect the combined company's
profitability.
o If the combined company fails to satisfy the securities asset test,
described below, and such failure exceeds a de minimis threshold,
then the combined company must dispose of the non-qualifying
securities and will be subject to a tax equal to the greater of
$50,000 and the highest corporate tax rate multiplied by the income
generated by the non-qualifying securities for the period beginning
with the first date of the failure and ending on the date that the
combined company disposed of the securities.
o If the combined company fails to distribute during the calendar year
at least the sum of (i) 85% of its real estate investment trust
ordinary income for such year, (ii) 95% of its real estate
investment trust capital gain net income for such year, and (iii)
any undistributed taxable income from prior periods, the combined
company will pay a 4% excise tax on the excess of such required
distribution over the amount actually distributed to its
shareholders.
o The combined company may elect to retain and pay income tax on some
or all of its long-term capital gain, as described below.
o The combined company may be subject to a 100% excise tax on
transactions with any of its taxable REIT subsidiaries that are not
conducted on an arm's-length basis.
o If the combined company fails to satisfy one or more of the other
requirements for real estate investment trust qualification for
reasonable cause and not due to willful neglect, then in order to
avoid disqualification as a real estate investment trust, the
combined company would be required to pay a penalty of $50,000 for
each such failure.
Requirements for Qualification as a Real Estate Investment Trust
Introduction. In order to qualify as a real estate investment trust for
federal income tax purposes a REIT must elect (or have elected, and have not
revoked its election) to be treated as a REIT and must satisfy certain statutory
tests relating to, among other things, (i) the sources of its income, (ii) the
nature of its assets, (iii) the amount of its distributions, and (iv) the
ownership of its stock. FSP Corp. has elected to be treated as a REIT and has
endeavored, and the combined company will endeavor, to satisfy the tests for
REIT qualification.
A real estate investment trust may own a "qualified REIT subsidiary." A
qualified REIT subsidiary is a corporation, all of the capital stock of which is
owned by a real estate investment trust, and for which subsidiary no election
has been made to treat it as a "taxable REIT subsidiary" (as discussed below). A
corporation that is a qualified REIT subsidiary is not treated as a corporation
separate from its parent real estate investment trust for federal income tax
purposes. All assets, liabilities, and items of income, deduction, and credit of
a qualified REIT subsidiary are treated as the assets, liabilities, and items of
income, deduction and credit of the parent real estate investment trust. Thus,
in applying the requirements described herein, any qualified REIT subsidiary of
the combined company will be ignored, and all assets, liabilities and items of
income, deduction and credit of such subsidiary will be treated as the assets,
liabilities, and items of income deduction and credit of the combined company.
In the event that the combined company becomes a partner in a partnership,
the combined company will be deemed to own its proportionate share (based upon
its share of the capital of the partnership) of the assets of the partnership
and will be deemed to be entitled to the income of the partnership attributable
to such share. In addition, the assets and income of the partnership so
attributed to the combined company will retain their same character as in the
hands of the partnership for purposes of determining whether the combined
company satisfies the income and asset tests described below.
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A real estate investment trust may own up to 100% of the stock of one or
more taxable REIT subsidiaries. A taxable REIT subsidiary may earn income that
would not be qualifying income, as described below, if earned directly by the
parent real estate investment trust. Both the subsidiary and the parent real
estate investment trust must jointly elect to treat the subsidiary as a taxable
REIT subsidiary. Overall, not more than 20% of the value of a REIT's assets may
consist of securities of one or more taxable REIT subsidiaries. A taxable REIT
subsidiary will pay tax at regular corporate rates on any income that it earns.
There is a 100% excise tax imposed on certain transactions involving a taxable
REIT subsidiary and its parent real estate investment trust that are not
conducted on an arm's-length basis. An election has been made to treat FSP
Investments as a taxable REIT subsidiary. FSP Investments pays corporate income
tax on its taxable income and its after-tax net income will be available for
distribution to the combined company, generally as a dividend.
Income Tests - General. The combined company must satisfy annually two
tests regarding the sources of its gross income in order to maintain its real
estate investment trust status. First, at least 75% of the combined company's
gross income, excluding gross income from certain "dealer" sales, for each
taxable year generally must consist of defined types of income that the combined
company derives, directly or indirectly, from investments relating to real
property or mortgages on real property or temporary investment income, also
known as the "75% gross income test". Qualifying income for purposes of the 75%
gross income test generally includes:
o "rents from real property" (as described below);
o interest from debt secured by mortgages on real property or on
interests in real property;
o dividends or other distributions on, and gain from the sale of,
shares in other real estate investment trusts;
o gain from the sale or other disposition of real property or
mortgages on real property;
o amounts (other than amounts the determination of which depends in
whole or in part on the income or profits of any person) received as
consideration for entering into agreements to make loans secured by
mortgages on real property or on interests in real property or
agreements to purchase or lease real property; and
o certain investment income attributable to temporary investment of
capital raised by the combined company.
Second, at least 95% of the combined company's gross income, excluding
gross income from certain "dealer" sales, for each taxable year generally must
consist of income that is qualifying income for purposes of the 75% gross income
test, as well as dividends, other types of interest, and gain from the sale or
disposition of stock or securities, also known as the "95% gross income test".
Income Tests - Rents from Real Property. Rent that the combined company
receives from real property that it owns and leases to tenants will qualify as
"rents from real property" if the following conditions are satisfied:
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o First, the rent must not be based, in whole or in part, on the
income or profits of any person. An amount will not fail to qualify
as rent from real property solely by reason of its being based on a
fixed percentage (or percentages) of sales or receipts.
o Second, neither the combined company nor any direct or indirect
owner of 10% or more of its stock may own, actually or
constructively, 10% (by vote or value) or more of the tenant from
which the combined company collects the rent.
o Third, all of the rent received under a lease will not qualify as
rents from real property unless the rent attributable to the
personal property leased in connection with the real property
constitutes no more than 15% of the total rent received under the
lease.
o Finally, the combined company generally must not operate or manage
its real property or furnish or render services to its tenants,
other than through an "independent contractor" who is adequately
compensated and from whom the combined company does not derive
revenue. The combined company may provide services directly,
however, if the services are "usually or customarily rendered" in
connection with the rental of space for occupancy only and are not
otherwise considered rendered "primarily for the occupant's
convenience." In addition, the combined company may render, other
than through an independent contractor, a de minimis amount of
"non-customary" services to the tenants of a property as long as the
combined company's income from such services does not exceed 1% of
its gross income from the property.
Although no assurances can be given that either of the gross income tests
will be satisfied in any given year, the combined company anticipates that its
operations will allow it to meet each of the 75% gross income test and the 95%
gross income test. Such belief is premised in large part on the combined
company's expectation that substantially all of the amounts received by the
company with respect to its properties will qualify as "rents from real
property." Shareholders should be aware, however, that there are a variety of
circumstances, as described above, in which rent received from a tenant will not
be treated as rents from real property.
Income Tests - Failure to Satisfy Gross Income Tests. If the combined
company fails to satisfy either or both of the 75% or 95% gross income tests for
taxable years beginning before October 22, 2004, the combined company may
nevertheless qualify as a real estate investment trust for that year if it is
eligible for relief under certain provisions of the federal income tax laws.
Those relief provisions generally will be available if:
o the combined company's failure to meet the gross income test was due
to reasonable cause and not due to willful neglect;
o the combined company attaches a schedule of the sources of its
income to its federal income tax return; and
o any incorrect information on the schedule is not due to fraud with
intent to evade tax.
Pursuant to the American Jobs Creation Act of 2004 (the "2004 Tax Act"),
if the combined company fails to satisfy either or both of the 75% or 95% gross
income tests for any taxable year beginning after October 22, 2004, the relief
provisions generally will be available if:
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o following the combined company's identification of the failure to
meet the gross income test for any taxable year, a description of
each item of its gross income included in the 75% and 95% gross
income tests is set forth in a schedule for such taxable year filed
in accordance with regulations to be prescribed by the Treasury
Secretary; and
o the combined company's failure to meet the gross income test was due
to reasonable cause and not due to willful neglect.
It is not possible to state whether the combined company would be entitled
to the benefit of the above relief provisions in a particular circumstance that
might arise in the future. Furthermore, as discussed above under "Taxation of
the combined company - General," even if the relief provisions apply, the
combined company would incur a 100% tax on the gross income attributable to the
greater of the amounts by which it fails the 75% and 95% gross income tests,
multiplied by a fraction that reflects the combined company's profitability.
Asset Tests. The combined company also must satisfy the following four
tests relating to the nature of its assets at the close of each quarter of its
taxable year.
o First, at least 75% of the value of the combined company's total
assets must consist of cash or cash items (including receivables),
government securities, "real estate assets," or qualifying temporary
investments, also known as the "75% asset test";
o Second, no more than 25% of the value of the combined company's
total assets may be represented by securities other than those that
are qualifying assets for purposes of the 75% asset test or of
certain entities that qualify as taxable REIT subsidiaries, also
known as the "25% asset test";
o Third, of the investments included in the 25% asset test, the value
of any one issuer's securities that the combined company owns may
not exceed 5% of the value of the combined company's total assets,
and the combined company may not own 10% or more of the total
combined voting power or 10% or more of the total value of the
securities of any issuer, unless such issuer and the combined
company make an election to treat the issuer as a taxable REIT
subsidiary or the issuer is a "disregarded entity" for federal
income tax purposes or is itself a REIT (the "securities asset
test"); and
o Fourth, while the combined company may own up to 100% of the stock
of a corporation that elects to be treated as a taxable REIT
subsidiary for federal income tax purposes, the total value of the
combined company's stock ownership in one or more taxable REIT
subsidiaries may not exceed 20% of the value of the combined
company's gross assets.
The combined company intends to operate so that it will not acquire any
assets that would cause it to violate any of the asset tests. If, however, the
combined company should fail to satisfy any of the asset tests at the end of a
calendar quarter, it would not lose its real estate investment trust status if
(i) the combined company satisfied the asset tests at the end of the close of
the preceding calendar quarter, and (ii) the discrepancy between the value of
the combined company's assets and the asset test requirements arose from changes
in the market values of the combined company's assets and was not wholly or
partly caused by the acquisition of one or more nonqualifying assets. If the
combined company did not satisfy the condition described in clause (ii) of the
preceding sentence, it could still avoid disqualification as a real estate
investment trust by eliminating any discrepancy within 30 days after the close
of the calendar quarter in which the discrepancy arose.
Pursuant to the 2004 Tax Act, for taxable years beginning after October
22, 2004, the combined company may also be able to avoid disqualification as a
real estate investment trust as a result of a failure of the securities asset
test if:
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o such failure is due to the ownership of assets the total value of
which does not exceed the lesser of $10 million and 1% of the total
value of the combined company's assets at the end of the quarter
(the "de minimis threshold") and the combined company disposes of
the assets in order to satisfy the securities asset test within six
months after the last day of the quarter in which the combined
company identified the failure or such other time period prescribed
by the Treasury Secretary and in the manner prescribed by the
Treasury Secretary; or
o in the case of a failure that involves the ownership of assets the
total value of which exceeds the de minimis threshold, (i) the
combined company prepares a schedule that sets forth each asset that
causes it to fail the securities asset test and files such schedule
in accordance with regulations to be prescribed by the Treasury
Secretary, (ii) the failure to satisfy the securities asset test is
due to reasonable cause and is not due to willful neglect, and (ii)
the combined company pays a tax equal to the greater of $50,000 or
the highest corporate tax rate multiplied by the net income
generated by the non-qualifying asset for the period beginning on
the first date of the failure and ending on the date that the
combined company disposed of the asset.
Distribution Requirements. Each taxable year, the combined company must
distribute dividends to its shareholders in an amount at least equal to:
o 90% of the combined company's "real estate investment trust taxable
income," computed without regard to the dividends paid deduction and
the combined company's net capital gain or loss; and
o certain items of noncash income.
The combined company must make such distributions in the taxable year to
which they relate, or in the following taxable year if the combined company
declares the distribution before it timely files its federal income tax return
for such year and pays the distribution on or before the first regular
distribution date after such declaration. Further, if the combined company fails
to meet the 90% distribution requirement as a result of an adjustment to its tax
returns by the Internal Revenue Service, the combined company may, if the
deficiency is not due to fraud with intent to evade tax or a willful failure to
file a timely tax return, and if certain other conditions are met, retroactively
cure the failure by paying a deficiency dividend (plus interest) to its
shareholders.
The combined company will be subject to federal income tax on its taxable
income, including net capital gain that it does not distribute to its
shareholders. Furthermore, if the combined company fails to distribute during a
calendar year, or, in the case of distributions with declaration and record
dates falling within the last three months of the calendar year, by the end of
the January following such calendar year, at least the sum of:
o 85% of the combined company's real estate investment trust ordinary
income for such year;
o 95% of the combined company's real estate investment trust capital
gain income for such year; and
o any of the combined company's undistributed taxable income from
prior periods,
the combined company will be subject to a 4% nondeductible excise tax on the
excess of such required distribution over the amount actually distributed. If
the combined company elects to retain and pay income tax on the net capital gain
that it receives in a taxable year, the combined company will be deemed to have
distributed any such amount for the purposes of the 4% excise tax described in
the preceding sentence.
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The combined company intends to make distributions to holders of FSP
common stock in a manner that will allow it to satisfy the distribution
requirements described above. It is possible that, from time to time, the
combined company's pre-distribution taxable income may exceed its cash flow and
that the combined company may have difficulty satisfying the distribution
requirements. The combined company intends to monitor closely the relationship
between its pre-distribution taxable income and its cash flow and intends to
borrow funds or liquidate assets in order to overcome any cash flow shortfalls
if necessary to satisfy the distribution requirements imposed by the tax code.
It is possible, although unlikely, that the combined company may decide to
terminate its real estate investment trust status as a result of any such cash
shortfall. Such a termination would have adverse tax consequences to the
combined company's stockholders. See "Taxation of the combined company -
General".
Recordkeeping Requirements. The combined company must maintain records of
information specified in applicable Treasury Regulations in order to maintain
its qualification as a real estate investment trust. In addition, in order to
avoid monetary penalties, the combined company must request on an annual basis
certain information from its shareholders designed to disclose the actual
ownership of the combined company's outstanding stock. The combined company
intends to comply with these recordkeeping requirements.
Ownership Requirements. For the combined company to qualify as a real
estate investment trust, shares of the combined company must be held by a
minimum of 100 persons for at least 335 days in each taxable year. Further, at
no time during the second half of any taxable year may more than 50% of the
combined company's shares be owned, actually or constructively, by five or fewer
"individuals" (which term is defined for this purpose to include certain
tax-exempt entities including pension trusts). The FSP common stock will be held
by 100 or more persons. The combined company intends to continue to comply with
these ownership requirements. Also, the combined company's charter contains
ownership and transfer restrictions designed to prevent violation of these
requirements.
Failure to Qualify. If the combined company failed to satisfy all of the
above requirements for any taxable year beginning before October 22, 2004 and no
relief provisions in effect for such years applied, then the combined company
would fail to qualify as a real estate investment trust. If the combined company
failed to satisfy all of the above requirements for any taxable year beginning
after October 22, 2004 and no relief provisions in effect for such years
applied, then the combined company could nevertheless qualify as a real estate
investment trust if:
o such failures are due to reasonable cause and not due to willful
neglect, and
o the combined company pays (in the manner prescribed by the Treasury
Secretary in regulations) a penalty of $50,000 for each such
failure.
It is not possible to state whether the combined company would be entitled
to the benefit of the relief provisions in a particular circumstance. If such
relief is not available, the combined company would fail to qualify as a real
estate investment trust.
If the combined company does fail to qualify as a real estate investment
trust in any taxable year, the combined company would be subject to federal
income tax, including any applicable alternative minimum tax, on its taxable
income at regular corporate rates. In calculating the combined company's taxable
income in a year in which it did not qualify as a real estate investment trust,
the combined company would not be able to deduct amounts paid out to its
shareholders. The combined company would not be required to distribute any
amounts to its shareholders in such taxable year. In such event, to the extent
of the combined company's current and accumulated earnings and profits, all
distributions to shareholders would be characterized as dividends and would be
taxable as ordinary income. Non-corporate shareholders, however, could qualify
for a lower maximum tax rate on such dividends in most circumstances. Moreover,
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subject to certain limitations under the tax code, corporate shareholders might
be eligible for the dividends received deduction. Unless the combined company
qualified for relief under specific statutory provisions, the combined company
would be disqualified from taxation as a real estate investment trust for the
four taxable years following the year in which it ceased to qualify as a real
estate investment trust. The combined company cannot predict whether it would
qualify for such statutory relief in a particular circumstance that might arise
in the future.
Taxation of Taxable U.S. Shareholders
As used herein, the term "taxable U.S. shareholder" means a shareholder
that, for United States federal income tax purposes, is:
o a citizen or resident of the United States;
o a corporation, partnership, or other entity created or organized in
or under the laws of the United States or any state or political
subdivision thereof;
o an estate the income of which is includible in gross income for
United States federal income tax purposes regardless of such
estate's connection with the conduct of a trade or business within
the United States; or
o any trust with respect to which (i) a United States court is able to
exercise primary supervision over the administration of such trust,
and (ii) one or more United States persons have the authority to
control all substantial decisions of the trust.
For any taxable year in which the combined company qualifies as a real
estate investment trust, amounts distributed to taxable U.S. shareholders will
be taxed as follows.
Distributions Generally. Distributions made to the combined company's
taxable U.S. shareholders out of current or accumulated earnings and profits
(and not designated as a capital gain dividend) will be taken into account by
such shareholder as ordinary income and will not, in the case of a corporate
taxable U.S. shareholder, be eligible for the dividends received deduction. In
addition, such dividends will not qualify for the lower maximum tax rate
applicable to dividends received by non-corporate taxpayers except to the extent
that they were attributable to income previously taxed to the combined company.
To the extent that the combined company makes a distribution with respect to the
FSP common stock that is in excess of its current or accumulated earnings and
profits, the distribution will be treated by a taxable U.S. shareholder first as
a tax-free return of capital, reducing the taxable U.S. shareholder's tax basis
in the FSP common stock, and any portion of the distribution in excess of the
shareholder's tax basis in the FSP common stock will then be treated as gain
from the sale of such stock. Dividends declared by the combined company in
October, November, or December of any year payable to a taxable U.S. shareholder
of record on a specified date in any such month shall be treated as both paid by
the combined company and received by shareholders on December 31 of such year,
provided that the dividend is actually paid by the combined company during
January of the following calendar year. Taxable U.S. shareholders may not
include on their federal income tax returns any of the combined company's tax
losses.
Capital Gain Dividends. Dividends to taxable U.S. shareholders that
properly are designated by the combined company as capital gain dividends will
be treated by such shareholders as long-term capital gain, to the extent that
such dividends do not exceed the combined company's actual net capital gain,
without regard to the period for which the taxable U.S. shareholders have held
the FSP common stock. Taxable U.S. shareholders that are corporations may be
required, however, to treat up to 20% of particular capital gain dividends as
ordinary income. Capital gain dividends, like regular dividends from a real
estate investment trust, are not eligible for the dividends received deduction
for corporations.
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For taxable U.S. shareholders who are taxable at the rates applicable to
individuals, the combined company will classify portions of any capital gain
dividend as either (i) a "regular" capital gain dividend taxable to the taxable
U.S. shareholder at a maximum rate of 15% or (ii) an "unrecaptured Section 1250
gain" dividend taxable to the taxable U.S. shareholder at a maximum rate of 25%.
Retained Capital Gains. The combined company may elect to retain, rather
than distribute, its net long-term capital gain received during the tax year. If
the combined company so elects, it will be required to pay tax on the retained
amounts. To the extent designated in a notice to the taxable U.S. shareholders,
the taxable U.S. shareholders will be required to include their proportionate
shares of the undistributed net long-term capital gain so designated in their
income for the tax year, but will be permitted a credit or refund, as the case
may be, for their respective shares of any tax paid on such gains by the
combined company. In addition, each taxable U.S. shareholder will be entitled to
increase the tax basis in his or her shares of FSP common stock by an amount
equal to the amount of net long-term capital gain the taxable U.S. shareholder
was required to include in income, reduced by the amount of any tax paid by the
combined company for which the taxable U.S. shareholder was entitled to receive
a credit or refund.
Passive Activity Loss and Investment Interest Limitations. Distributions,
including deemed distributions of undistributed net long-term capital gain, from
the combined company and gain from the disposition of FSP common stock will not
be treated as passive activity income, and therefore taxable U.S. shareholders
will not be able to apply any passive activity losses against such income.
Distributions from the combined company, to the extent they do not constitute a
return of capital, generally will be treated as investment income for purposes
of the investment income limitation on deductibility of investment interest.
However, dividends attributable to income that was subject to tax at the
combined company level as well as net capital gain from the disposition of FSP
common stock or capital gain dividends, including deemed distributions of
undistributed net long-term capital gains, generally will be excluded from
investment income.
Sale of FSP Common Stock. Upon the sale of FSP common stock, a taxable
U.S. shareholder generally will recognize gain or loss equal to the difference
between the amount realized on such sale and the holder's tax basis in the stock
sold. To the extent that the FSP common stock is held as a capital asset by the
taxable U.S. shareholder, the gain or loss will be a long-term capital gain or
loss if the stock has been held for more than a year, and will be a short-term
capital gain or loss if the stock has been held for a shorter period. In
general, however, any loss upon a sale of the FSP common stock by a taxable U.S.
shareholder who has held such stock for six months or less (after applying
certain holding period rules) will be treated as a long-term capital loss to the
extent that distributions from the combined company were required to be treated
as long-term capital gain by that holder.
Taxation of Tax-Exempt Shareholders
Tax-exempt entities, including qualified employee pension and profit
sharing trusts and individual retirement accounts, collectively known as "exempt
organizations", generally are exempt from federal income taxation. Exempt
organizations are subject to tax, however, on their unrelated business taxable
income, or "UBTI". UBTI is defined as the gross income derived by an exempt
organization from an unrelated trade or business, less the deductions directly
connected with that trade or business, subject to certain exceptions. While many
investments in real estate generate UBTI, the Internal Revenue Service has
issued a ruling that dividend distributions from a real estate investment trust
to an exempt employee pension trust do not constitute UBTI, provided that the
shares of the real estate investment trust are not otherwise used in an
unrelated trade or business of the exempt employee pension trust. Based on that
ruling, amounts distributed to exempt organizations generally should not
constitute UBTI. However, if an exempt organization finances its acquisition of
FSP common stock with debt, a portion of its income from the combined company
will constitute UBTI pursuant to the "debt-financed property" rules.
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In addition, in certain circumstances, a pension trust that owns more than
10% of the stock of the combined company will be required to treat a percentage
of the dividends paid by the combined company as UBTI based upon the percentage
of the combined company's income that would constitute UBTI to the shareholder
if received directly by it. This rule applies to a pension trust holding more
than 10% (by value) of the FSP common stock only if (i) the percentage of the
income from the combined company that is UBTI (determined as if the combined
company were a pension trust) is at least 5% and (ii) the combined company is
treated as a "pension-held REIT." The combined company does not expect to
receive significant amounts of income that would be considered UBTI if received
directly by a pension trust and does not expect to qualify as a "pension-held
REIT."
Taxation of Non-U.S. Shareholders
General. The rules governing United States federal income taxation of
nonresident alien individuals, foreign corporations, foreign partnerships,
foreign trusts and certain other foreign stockholders, collectively known as
"non-U.S. shareholders," are complex and no attempt is made herein to provide
more than a general summary of such rules. This discussion does not consider the
tax rules applicable to all non-U.S. shareholders and, in particular, does not
consider the special rules applicable to U.S. branches of foreign banks or
insurance companies or certain intermediaries. NON-U.S. SHAREHOLDERS SHOULD
CONSULT WITH THEIR OWN TAX ADVISORS TO DETERMINE THE IMPACT OF FEDERAL, STATE,
LOCAL AND FOREIGN TAX LAWS WITH REGARD TO THE MERGERS AND THE ACQUISITION,
OWNERSHIP AND DISPOSITION OF FSP COMMON STOCK, INCLUDING ANY REPORTING AND
WITHHOLDING REQUIREMENTS.
Ordinary Dividends - General. Distributions to non-U.S. shareholders that
are not attributable to gain from sales or exchanges by the combined company of
United States real property interests and are not designated by the combined
company as capital gain dividends (or deemed distributions of retained capital
gains) will be treated as ordinary dividends to the extent that they are made
out of current or accumulated earnings and profits of the combined company. Any
portion of a distribution in excess of current and accumulated earnings and
profits of the combined company will not be taxable to a non-U.S. shareholder to
the extent that such distribution does not exceed the adjusted basis of the
shareholder in the FSP common stock, but rather will reduce the adjusted basis
of such stock. To the extent that the portion of the distribution in excess of
current and accumulated earnings and profits exceeds the adjusted basis of a
non-U.S. shareholder for the FSP common stock, such excess generally will be
treated as gain from the sale or disposition of the stock and will be taxed as
described below.
Ordinary Dividends - Withholding. Dividends paid to non-U.S. shareholders
may be subject to U.S. withholding tax. If an income tax treaty does not apply
and the non-U.S. shareholder's investment in the FSP common stock is not
effectively connected with a trade or business conducted by the non-U.S.
shareholder in the United States (or if a tax treaty does apply and the
investment in the FSP common stock is not attributable to a United States
permanent establishment maintained by the non-U.S. shareholder), ordinary
dividends (i.e., distributions out of current and accumulated earnings and
profits) will be subject to a U.S. withholding tax at a 30% rate, or, if an
income tax treaty applies, at a lower treaty rate. Because the combined company
generally cannot determine at the time that a distribution is made whether or
not such a distribution will be in excess of earnings and profits, the combined
company intends to withhold on the gross amount of each distribution at the 30%
rate (or lower treaty rate) (other than distributions subject to the 35% FIRPTA
withholding rules described below). To receive a reduced treaty rate, a non-U.S.
shareholder must furnish the combined company or its paying agent with a duly
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completed Form W-8BEN (or authorized substitute form) certifying such holder's
qualification for the reduced rate. Generally, a non-U.S. shareholder will be
entitled to a refund from the Internal Revenue Service to the extent the amount
withheld by the combined company from a distribution exceeds the amount of
United States tax owed by such shareholder.
In the case of a non-U.S. shareholder that is a partnership or a trust,
the withholding rules for a distribution to such a partnership or trust will be
dependent on numerous factors, including (i) the classification of the type of
partnership or trust, (ii) the status of the partner or beneficiary, and (iii)
the activities of the partnership or trust. Non-U.S. shareholders that are
partnerships or trusts are urged to consult their tax advisors regarding the
withholding rules applicable to them based on their particular circumstances.
If an income tax treaty does not apply, ordinary dividends that are
effectively connected with the conduct of a trade or business within the U.S. by
a non-U.S. shareholder (and, if a tax treaty applies, ordinary dividends that
are attributable to a United States permanent establishment maintained by the
non-U.S. shareholder) are exempt from U.S. withholding tax. In order to claim
such exemption, a non-U.S. shareholder must provide the combined company or its
paying agent with a duly completed Form 4224 or FormW-8ECI (or authorized
substitute form) certifying such holder's exemption. However, ordinary dividends
exempt from U.S. withholding tax because they are effectively connected or are
attributable to a United States permanent establishment maintained by the
non-U.S. shareholder generally are subject to U.S. federal income tax on a net
income basis at regular graduated rates. In the case of non-U.S. shareholders
that are corporations, any effectively connected ordinary dividends or ordinary
dividends attributable to a United States permanent establishment maintained by
the non-U.S. shareholder may, in certain circumstances, be subject to branch
profits tax at a 30% rate, or at such lower rate as may be provided in an
applicable income tax treaty.
Capital Gain Dividends - General. For any year in which the combined
company qualifies as a real estate investment trust, distributions that are
attributable to gain from sales or exchanges by the combined company of United
States real property interests will be taxed to a non-U.S. shareholder under the
provisions of the Foreign Investment in Real Property Tax Act of 1980, also
known as "FIRPTA". Under FIRPTA, except as described below, distributions
attributable to gain from sales of United States real property are taxed to a
non-U.S. shareholder as if such gain were effectively connected with a United
States trade or business. Non-U.S. shareholders thus would be taxed at the
regular capital gain rates applicable to taxable U.S. shareholders (subject to
the applicable alternative minimum tax and a special alternative minimum tax in
the case of nonresident alien individuals). Distributions subject to FIRPTA also
may be subject to a 30% branch profits tax in the hands of a corporate non-U.S.
shareholder not otherwise entitled to treaty relief or exemption.
Pursuant to the 2004 Tax Act, for taxable years beginning after October
22, 2004, a distribution attributable to gain from sales of United States real
property is not treated as effectively connected with a United States trade or
business provided that (i) the distribution is received with respect to stock
that is publicly traded on an established securities market in the United States
and (ii) the non-U.S. shareholder does not own more than five percent of the
stock at any time during the taxable year in which the distribution is received.
If these requirements are satisfied, the distribution is treated in the manner
described above for ordinary dividends rather than being treated as a capital
gain dividend, and the distribution is not subject to the branch profits tax.
Capital Gain Dividends - Withholding. Under FIRPTA, the combined company
is required to withhold 35% of any distribution that is designated as a capital
gain dividend or which could be designated as a capital gain dividend. Moreover,
if the combined company designates previously made distributions as capital gain
dividends, subsequent distributions (up to the amount of the prior distributions
so designated) will be treated as capital gain dividends for purposes of FIRPTA
withholding. If a distribution is treated as an ordinary dividend rather than a
capital gain dividend pursuant to the terms of the 2004 Tax Act, the FIRPTA
withholding rules would not apply, however the withholding rules applicable to
ordinary dividends, described above, would apply.
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Sale of FSP Common Stock. A non-U.S shareholder generally will not be
subject to United States federal income tax under FIRPTA with respect to gain
recognized upon a sale of FSP common stock, provided that the combined company
is a "domestically-controlled REIT." A domestically-controlled REIT generally is
defined as a real estate investment trust in which at all times during a
specified testing period less than 50% in value of the stock was held directly
or indirectly by non-U.S. persons. Although currently it is anticipated that the
combined company will be a domestically-controlled REIT, and, therefore, that
the sale of FSP common stock will not be subject to taxation under FIRPTA, there
can be no assurance that the combined company will, at all relevant times, be a
domestically-controlled REIT. If the gain on the sale of FSP common stock were
subject to taxation under FIRPTA, a non-U.S. shareholder would be subject to the
same treatment as taxable U.S. shareholders with respect to such gain (subject
to the applicable alternative minimum tax and a special alternative minimum tax
in the case of nonresident alien individuals). In addition, a purchaser of FSP
common stock from a non U.S. shareholder subject to taxation under FIRPTA
generally would be required to deduct and withhold a tax equal to 10% of the
amount realized by a non-U.S. shareholder on the disposition. Any amount
withheld would be creditable against the non-U.S. shareholder's FIRPTA tax
liability.
Even if gain recognized by a non-U.S. shareholder upon the sale of FSP
common stock is not subject to FIRPTA, such gain generally will subject such
shareholder to U.S. tax if:
o an income tax treaty does not apply and the gain is effectively
connected with a trade or business conducted by the non-U.S.
shareholder in the United States (or, if an income tax treaty
applies and the gain is attributable to a United States permanent
establishment maintained by the non-U.S. shareholder), in which
case, unless an applicable treaty provides otherwise, a non-U.S.
shareholder will be taxed on his or her net gain from the sale at
regular graduated U.S. federal income tax rates. In the case of a
non-U.S. shareholder that is a corporation, such shareholder may be
subject to a branch profits tax at a 30% rate, unless an applicable
income tax treaty provides for a lower rate and the shareholder
demonstrates its qualification for such rate; or
o the non-U.S. shareholder is a nonresident alien individual who holds
the FSP common stock as a capital asset and was present in the
United States for 183 days or more during the taxable year (as
determined under the tax code) and certain other conditions apply,
in which case the non-U.S. shareholder will be subject to a 30% tax
on capital gains.
Estate Tax Considerations. The value of FSP common stock owned, or treated
as owned, by a non-U.S. shareholder who is a nonresident alien individual at the
time of his or her death will be included in the individual's gross estate for
United States federal estate tax purposes, unless otherwise provided in an
applicable estate tax treaty.
Information Reporting and Backup Withholding
The combined company is required to report to its shareholders and to the
Internal Revenue Service the amount of distributions paid during each tax year,
and the amount of tax withheld, if any. These requirements apply even if
withholding was not required with respect to payments made to a shareholder. In
the case of non-U.S. shareholders, the information reported may also be made
available to the tax authorities of the non-U.S. shareholder's country of
residence, if an applicable income tax treaty so provides.
Backup withholding generally may be imposed on certain payments to a
shareholder unless the shareholder (i) furnishes certain information, or (ii) is
otherwise exempt from backup withholding.
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A shareholder who does not provide the combined company with his or her
correct taxpayer identification number also may be subject to penalties imposed
by the Internal Revenue Service. In addition, the combined company may be
required to withhold a portion of capital gain distributions to any shareholders
who fail to certify their non-foreign status to the combined company.
Shareholders should consult their own tax advisors regarding their
qualification for an exemption from backup withholding and the procedure for
obtaining an exemption. Backup withholding is not an additional tax. Rather, the
amount of any backup withholding with respect to a distribution to a shareholder
will be allowed as a credit against such holder's United States federal income
tax liability and may entitle the shareholder to a refund, provided that the
required information is furnished to the Internal Revenue Service.
In general, backup withholding and information reporting will not apply to
a payment of the proceeds of the sale of FSP common stock by a non-U.S.
shareholder by or through a foreign office of a foreign broker effected outside
of the United States; provided, however, that foreign brokers having certain
connections with the United States may be obligated to comply with the backup
withholding and information reporting rules. Information reporting (but not
backup withholding) will apply, however, to a payment of the proceeds of a sale
of FSP common stock by foreign offices of certain brokers, including foreign
offices of a broker that:
o is a United States person;
o derives 50% or more of its gross income for certain periods from the
conduct of a trade or business in the United States; or
o is a "controlled foreign corporation" for United States tax
purposes.
Information reporting will not apply in the above cases if the broker has
documentary evidence in its records that the holder is a non-U.S. shareholder
and certain conditions are met, or the non-U.S. shareholder otherwise
establishes an exemption.
Payment to or through a United States office of a broker of the proceeds
of a sale of FSP common stock is subject to both backup withholding and
information reporting unless the shareholder certifies in the manner required
that he or she is a non-U.S. shareholder and satisfies certain other
qualifications under penalties of perjury or otherwise establishes an exemption.
State and Local Tax
The discussion herein concerns only the United States federal income tax
treatment likely to be accorded to the combined company and its shareholders. No
consideration has been given to the state and local tax treatment of such
parties. The state and local tax treatment may not conform to the federal
treatment described above. As a result, a shareholder should consult his or her
own tax advisor regarding the specific state and local tax consequences of the
mergers and acquisition, ownership, and disposition of FSP common stock in the
combined company.
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LEGAL MATTERS
Wilmer Cutler Pickering Hale and Dorr LLP, Boston, Massachusetts, will
deliver opinions to the effect that (i) upon consummation of the mergers, the
shares of FSP common stock in the combined company offered pursuant to the
merger agreement will be validly issued, fully paid and nonassessable and (ii)
the mergers will be treated for federal income tax purposes as tax-free
transactions and the discussion under "Material United States Federal Income Tax
Considerations," to the extent it involves matters of law, is accurate in all
material respects. Certain partners of Wilmer Cutler Pickering Hale and Dorr LLP
own an aggregate of 725,162 shares of FSP common stock.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedule included in our Annual Report on Form 10-K
for the year ended December 31, 2003, as set forth in their report, which is
incorporated by reference in this Prospectus and elsewhere in the registration
statement. Our financial statements and schedule are incorporated by reference
in reliance on Ernst & Young LLP's report, given on their authority as experts
in accounting and auditing.
The financial statements incorporated in this prospectus by reference to
the Annual Report on Form 10-K of Franklin Street Properties Corp. as of
December 31, 2002 and for each of the two years in the period ended December 31,
2002 have been so incorporated in reliance on the report of
PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm, given
on the authority of said firm as experts in auditing and accounting.
The financial statements of Montague, Addison Circle, Royal Ridge and
Collins Crossing for the years ended December 31, 2003, December 31, 2002,
December 31, 2001 (as applicable) included herein have been examined and
reported on by Braver and Company, P.C., independent auditors, and have been
included in reliance upon their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
FSP Corp. files reports, proxy statements and other documents with the
SEC. You may read and copy any document FSP Corp. files at the SEC's public
reference room at Judiciary Plaza Building, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549. You should call 1-800-SEC-0330 for more information on
the public reference room. FSP Corp.'s SEC filings are also available to you on
the SEC's Internet site at http://www.sec.gov.
This Consent Solicitation/Prospectus is part of a registration statement
that FSP Corp. filed with the SEC. The registration statement contains more
information than this Consent Solicitation/Prospectus regarding FSP Corp. and
the FSP common stock, including certain exhibits and schedules. You can obtain a
copy of the registration statement from the SEC at the address listed above or
from the SEC's Internet site.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
FSP Corp. is incorporating by reference certain documents it files with
the SEC, which means that FSP Corp. can disclose important information to you by
referring you to those documents. The information in the documents incorporated
by reference is considered to be part of this prospectus. Information in
documents that FSP Corp. files with the SEC after the date of this prospectus
will automatically update and supersede information in this Consent
Solicitation/Prospectus. FSP Corp. incorporates by reference the documents
listed below and any future filings it may make with the SEC under Sections
13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 prior to the
later of the approval date or 5:00 p.m., Eastern Time, on April 29, 2005
(unless a target REIT is permitted to accelerate such date by applicable law and
regulation).
o FSP Corp.'s Annual Report on Form 10-K for the fiscal year ended
December 31, 2003, filed with the SEC on March 15, 2004, as amended
by a Form 10-K/A filed with the SEC on April 1, 2004;
o FSP Corp.'s Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 2004, filed with the SEC on May 6, 2004, as amended
by a Form 10-Q/A filed with the SEC on July 29, 2004;
o FSP Corp.'s Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 2004, filed with the SEC on July 30, 2004;
o FSP Corp.'s Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 2004, filed with the SEC on November 8, 2004;
o FSP Corp.'s Current Report on Form 8-K, filed with the SEC on
February 6, 2004;
o FSP Corp.'s Current Report on Form 8-K, filed with the SEC on May 7,
2004;
o FSP Corp.'s Current Report on Form 8-K, filed with the SEC on June
1, 2004;
o FSP Corp.'s Current Report on Form 8-K, filed with the SEC on August
3, 2004;
o FSP Corp.'s Current Report on Form 8-K, filed with the SEC on August
13, 2004;
o FSP Corp.'s Current Report on Form 8-K, filed with the SEC on August
30, 2004;
o FSP Corp.'s Current Report on Form 8-K, filed with the SEC on August
31, 2004;
o FSP Corp.'s Current Report on Form 8-K, filed with the SEC on
September 28, 2004;
o FSP Corp.'s Current Report on Form 8-K, filed with the SEC on
November 18, 2004; and
o FSP Corp.'s Current Report on Form 8-K, filed with the SEC on
January 20, 2005;
o FSP Corp.'s Current Report on Form 8-K, filed with the SEC on
January 28, 2005; and
o All of FSP Corp.'s filings pursuant to the Exchange Act after the
date of the initial filing of the registration statement of which
this prospectus is a part and prior to its effectiveness.
185
A statement contained in a document incorporated by reference in this
prospectus shall be deemed to be modified or superseded for purposes of this
Consent Solicitation/Prospectus to the extent that a statement contained in this
Consent Solicitation/Prospectus, any subsequently filed document which is also
incorporated in this Consent Solicitation/Prospectus modifies or replaces such
statement. Any statements so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this Consent
Solicitation/Prospectus.
You may request a free copy of any of the documents incorporated by
reference in this Consent Solicitation/Prospectus by writing or telephoning FSP
Corp. at the following address:
Franklin Street Properties Corp.
401 Edgewater Place, Suite 200
Wakefield, MA 01880
(781) 557-1300
Attention: Investor Relations
186
INDEX TO FINANCIAL STATEMENTS
Addison Circle
Index to financial statements as of June 30, 2004 (unaudited) F-2
Index to financial statements as of December 31, 2003 F-8
Index to statements of revenue over certain operating expenses
for the period January 1, 2002 to September 29, 2002 and for the
year ended December 31, 2001 F-24
Collins Crossing
Index to financial statements as of June 30, 2004 (unaudited) F-29
Index to financial statements as of December 31, 2003 F-35
Index to statements of revenue over certain operating expenses
for the period January 1, 2003 to March 2, 2003 and for the
years ended December 31, 2002 and 2001 F-51
Montague Business Center
Index to financial statements as of June 30, 2004 (unaudited) F-56
Index to financial statements as of December 31, 2003 F-62
Index to statements of revenue over certain operating expenses
for Exhibits the period January 1, 2002 to August 26, 2002 and
for the year ended December 31, 2001 F-77
Royal Ridge
Index to financial statements as of June 30, 2004 (unaudited) F-82
Index to financial statements as of December 31, 2003 F-88
Index to statements of revenue over certain operating expenses
for the period January 1, 2003 to January 29, 2003 and for the
year ended December 31, 2002 F-104
F-1
FSP Addison Circle Corp.
Financial Statements
September 30, 2004
Table of Contents
Page
Financial Statements
Balance Sheets as of September 30, 2004 and December 31, 2003............. F-3
Statements of Income for the three and nine months ended
September 30, 2004 and 2003......................................... F-4
Statements of Cash Flows for the nine months ended
September 30, 2004 and 2003......................................... F-5
Notes to Financial Statements............................................. F-6
F-2
FSP Addison Circle Corp.
Balance Sheets
(unaudited)
September 30, December 31,
(in thousands, except shares and par value amounts) 2004 2003
===================================================================================================
Assets:
Real estate investments, at cost:
Land $ 4,365 $ 4,365
Buildings and improvements 46,112 45,895
---------------------------------------------------------------------------------------------------
50,477 50,260
Less accumulated depreciation 2,406 1,519
---------------------------------------------------------------------------------------------------
Real estate investments, net 48,071 48,741
Acquired real estate leases, net of accumulated
amortization of $588 and $349 1,150 1,389
Cash and cash equivalents 5,492 5,966
Restricted cash 20 35
Tenant rents receivable 1 25
Step rent receivable 531 421
Deferred leasing costs, net of accumulated
amortization of $10 and $0 358 39
Prepaid expenses and other assets 99 51
---------------------------------------------------------------------------------------------------
Total assets $ 55,722 $ 56,667
===================================================================================================
Liabilities and stockholders' equity:
Liabilities:
Accounts payable and accrued expenses $ 1,694 $ 2,055
Distributions payable -- 1,265
Tenant security deposits 20 35
---------------------------------------------------------------------------------------------------
Total liabilities 1,714 3,355
---------------------------------------------------------------------------------------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 636 shares
authorized, issued and outstanding -- --
Common stock, $.01 par value, 1 share
authorized, issued and outstanding -- --
Additional paid-in capital 58,383 58,383
Retained deficit and distributions in excess of earnings (4,375) (5,071)
---------------------------------------------------------------------------------------------------
Total stockholders' equity 54,008 53,312
---------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 55,722 $ 56,667
===================================================================================================
See accompanying notes to financial statements.
F-3
FSP Addison Circle Corp.
Statement of Income
(unaudited)
For the For the
Three Months Nine Months
Ended Ended
September 30, September 30,
--------------------- ---------------------
(in thousands, except shares and per share amounts) 2004 2003 2004 2003
============================================================================================================
Revenues:
Rental $2,171 $2,115 $6,892 $6,448
------------------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 684 487 1,490 1,355
Real estate taxes and insurance 361 300 1,045 926
Depreciation and amortization 378 381 1,136 1,126
============================================================================================================
Total expenses 1,423 1,168 3,671 3,407
------------------------------------------------------------------------------------------------------------
Income before interest 748 947 3,221 3,041
Interest income 25 10 67 32
------------------------------------------------------------------------------------------------------------
Net income attributable to preferred stockholders $ 773 $ 957 $3,288 $3,073
============================================================================================================
Weighted average number of preferred shares outstanding,
basic and diluted 636 636 636 636
============================================================================================================
Net income per preferred share, basic and diluted $1,215 $1,505 $5,170 $4,832
============================================================================================================
See accompanying notes to financial statements.
F-4
FSP Addison Circle Corp.
Statements of Cash Flows
For the Nine Months Ended
(in thousands) September 30, 2004 September 30, 2003
==========================================================================================================
Cash flows from operating activities:
Net Income $ 3,288 $ 3,073
Adjustments to reconcile net income to net cash provided by
(used for) operating activities:
Depreciation and amortization 1,136 1,126
Changes in operating assets and liabilities:
Restricted cash 15 9
Tenant rent receivables 24 50
Step rent receivable (110) (241)
Prepaid expenses and other assets (48) (28)
Accounts payable and accrued expenses (361) (256)
Tenant security deposits (15) (9)
Payment of deferred leasing costs (329) --
----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 3,600 $ 3,724
----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets (217) --
----------------------------------------------------------------------------------------------------------
Net cash used for investing activities (217) --
----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Distributions to stockholders (3,857) (3,446)
----------------------------------------------------------------------------------------------------------
Net cash used for financing activities (3,857) (3,446)
----------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (474) 278
Cash and cash equivalents, beginning of period 5,966 5,402
----------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 5,492 $ 5,680
==========================================================================================================
Supplemental disclosure of cash flow information:
Disclosure of non-cash financing activities:
Distributions declared but not paid $ -- $ 1,277
See accompanying notes to financial statements.
F-5
FSP Addison Circle Corp.
Notes to Financial Statements
(unaudited)
1. Organization and Basis of Presentation
FSP Addison Circle Corp. (the "Company") was organized on August 21, 2002 as a
Corporation under the laws of the State of Delaware to purchase, own and operate
a commercial office building located in Addison, TX (the "Property"). The
Property consists of a recently constructed, ten-story Class "A" suburban office
tower that contains approximately 293,787 square feet of space situated on
approximately 3.62 acres of land. The Company acquired the Property on September
30, 2002.
BASIS OF PRESENTATION
The accompanying interim financial statements are unaudited; however, the
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and in conjunction with the rules and regulations of the Securities
and Exchange Commission. Accordingly, they do not include all of the disclosures
required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of management, all
adjustments (consisting solely of normal recurring matters) necessary for a fair
presentation of the financial statements for these interim periods have been
included.
Certain balances in the 2003 financial statements have been reclassified to
conform to the 2004 presentation.
These financial statements should be read in conjunction with the Company's
financial statements and notes thereto for its fiscal year ended December 31,
2003.
ESTIMATES AND ASSUMPTIONS
The Company prepares its financial statements and related notes in conformity
with accounting principles generally accepted in the United States of America
("GAAP"). These principles require management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
2. Net Income Per Share
Basic net income per preferred share is computed by dividing net income
attributed to preferred shareholders by the weighted average number of preferred
shares outstanding during the period. Diluted net income per preferred share
reflects the potential dilution that could occur if securities or other
contracts to issue shares were convertible into shares. There were no potential
dilutive shares outstanding at September 30, 2004 and 2003. Subsequent to the
completion of the offering of preferred shares, the holders of common stock are
not entitled to share in any income nor in any related distribution.
3. Income Taxes
The Company has elected to be taxed as a Real Estate Investment Trust ("REIT")
under Sections 856-860 of the Internal Revenue Code of 1986, as amended. In
order to qualify as a REIT, the Company is required to distribute at least 90%
of its taxable income to shareholders and to meet certain asset and income tests
as well as certain other requirements. The Company will generally not be liable
for federal income taxes, provided it satisfies these requirements. Even as a
qualified REIT, the Company is subject to certain state and local taxes on its
income and property.
F-6
FSP Addison Circle Corp.
Notes to Financial Statements
(unaudited)
4. Related Party Transactions
The Company executed a management agreement with FSP Property Management LLC, an
affiliate of FSP, that provides for a management fee equal to 1% of collected
revenues and is cancelable with 30 days notice by either party. Fees incurred
under the agreement were $20,000 and $19,000 for the three months ended
September 30, 2004 and 2003, respectively and $61,000 and $60,000 for the nine
months ended September 30, 2004 and 2003, respectively.
5. Subsequent Events
On October 1, 2004 the Company declared a distribution of $2,144.00 per share of
preferred stock payable to holders of record as of October 1, 2004.
F-7
FSP Addison Circle Corp.
Financial Statements
December 31, 2003 and 2002
Table of Contents
Page
----
Financial Statements
Independent Auditor's Report............................................... F-9
Balance Sheets as of December 31, 2003 and 2002............................ F-10
Statements of Operations for the year ended December 31, 2003
and for the period August 21, 2002 (date of inception) to
December 31, 2002.................................................... F-11
Statements of Changes in Stockholders' Equity for the year ended
December 31, 2003 and for the period August 21, 2002
(date of inception) to December 31, 2002............................. F-12
Statements of Cash Flows for the year ended December 31, 2003
and for the period August 21, 2002 (date of inception) to
December 31, 2002.................................................... F-13
Notes to the Financial Statements......................................... F-14
F-8
[LETTERHEAD OF BRAVER AND COMPANY, P.C.]
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
FSP Addison Circle Corp.
We have audited the accompanying balance sheets of FSP Addison Circle Corp. as
of December 31, 2003 and 2002 and the related statements of operations, changes
in stockholders' equity and cash flows for the year ended December 31, 2003 and
for the period from August 21, 2002 (date of inception) to December 31, 2002.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FSP Addison Circle Corp. as of
December 31, 2003 and 2002, and the results of its operations and its cash flows
for the year ended December 31, 2003 and for the initial period ended December
31, 2002, in conformity with accounting principles generally accepted in the
United States of America.
/s/ Braver and Company, P.C.
Newton, Massachusetts
January 23, 2004
F-9
FSP Addison Circle Corp.
Balance Sheets
December 31, December 31,
(in thousands, except shares and par value amounts) 2003 2002
==================================================================================================
Assets:
Real estate investments, at cost:
Land $ 4,365 $ 4,365
Buildings and improvements 45,895 45,870
-------------------------------------------------------------------------------------------------
50,260 50,235
Less accumulated depreciation 1,519 343
-------------------------------------------------------------------------------------------------
Real estate investments, net 48,741 49,892
Acquired real estate leases, net of accumulated
amortization of $349 and $27 1,389 1,711
Cash and cash equivalents 3,330 2,683
Cash-funded reserves 2,636 2,719
Restricted cash 35 44
Tenant rents receivable 25 --
Step rent receivable 421 99
Deferred leasing costs 39 --
Prepaid expenses and other assets 51 80
-------------------------------------------------------------------------------------------------
Total assets $ 56,667 $ 57,228
=================================================================================================
Liabilities and stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses $ 2,055 $ 1,890
Distributions payable 1,265 850
Tenant security deposits 35 44
-------------------------------------------------------------------------------------------------
Total liabilities 3,355 2,784
-------------------------------------------------------------------------------------------------
Commitments and contingencies:
Stockholders' equity:
Preferred stock, $.01 par value, 636 shares
authorized, issued and outstanding -- --
Common stock, $.01 par value, 1 share
authorized, issued and outstanding -- --
Additional paid-in capital 58,383 58,383
Retained deficit and distributions in excess of earnings (5,071) (3,939)
-------------------------------------------------------------------------------------------------
Total stockholders' equity 53,312 54,444
-------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 56,667 $ 57,228
=================================================================================================
See accompanying notes to financial statements.
F-10
FSP Addison Circle Corp.
Statements of Operations
For the Period
August 21, 2002
For the Year Ended (date of inception) to
(in thousands, except per share amounts) December 31, 2003 December 31, 2002
===========================================================================================================
Revenue:
Rental $8,554 $ 2,102
----------------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 1,783 391
Real estate taxes and insurance 1,354 327
Depreciation and amortization 1,497 370
Interest -- 3,897
----------------------------------------------------------------------------------------------------------
Total expenses 4,634 4,985
----------------------------------------------------------------------------------------------------------
Income (loss) before interest income 3,920 (2,883)
Interest income 85 14
----------------------------------------------------------------------------------------------------------
Net income (loss) before common distributions 4,005 (2,869)
Distributions paid to common shareholders -- 313
----------------------------------------------------------------------------------------------------------
Net income (loss) attributable to preferred shareholders $4,005 $(3,182)
===========================================================================================================
Weighted average number of preferred shares outstanding,
basic and diluted 636 636
===========================================================================================================
Net income (loss) per preferred share, basic and diluted $6,297 $(5,003)
===========================================================================================================
See accompanying notes to financial statements.
F-11
FSP Addison Circle Corp.
Statements of Changes in Stockholders' Equity
For the year ended December 31, 2003 and for the Period August 21, 2002
(date of inception) to December 31, 2002
Retained Deficit
Additional and Distributions Total
Preferred Common Paid in in Excess of Stockholders'
(in thousands, except shares) Stock Stock Capital Earnings Equity
=============================================================================================================
Private offering of 636 shares, net $ -- $ -- $58,383 $ -- $ 58,383
Net loss -- -- -- (2,869) (2,869)
Distributions to stockholders -- -- -- (1,070) (1,070)
-------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 -- -- 58,383 (3,939) 54,444
Net income -- -- -- 4,005 4,005
Distributions to stockholders -- -- -- (5,137) (5,137)
-------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 $ -- $ -- $58,383 $(5,071) $ 53,312
=============================================================================================================
See accompanying notes to financial statements.
F-12
FSP Addison Circle Corp.
Statements of Cash Flows
For the Period
August 21, 2002
For the Year Ended (date of inception) to
(in thousands) December 31, 2003 December 31, 2002
============================================================================================================
Cash flows from operating activities:
Net income (loss) $ 4,005 $ (2,869)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization 1,497 370
Changes in operating assets and liabilities:
Cash-funded reserve 83 (2,719)
Restricted cash 9 (44)
Tenant rent receivables (25) --
Step rent receivable (322) (99)
Prepaid expenses and other assets 29 (80)
Accounts payable and accrued expenses 165 1,890
Tenant security deposits (9) 44
Payment of deferred leasing costs (39) --
------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 5,393 (3,507)
------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets (25) (50,235)
Purchase of acquired real estate leases -- (1,738)
------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (25) (51,973)
------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock -- 63,610
Syndication costs -- (5,227)
Distributions to stockholders (4,721) (220)
Proceeds from long-term debt -- 51,500
Principal payments on long-term debt -- (51,500)
------------------------------------------------------------------------------------------------------------
Net cash (used for) provided by financing activities (4,721) 58,163
------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 647 2,683
Cash and cash equivalents, beginning of period 2,683 --
------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 3,330 $ 2,683
============================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ -- $ 3,897
Disclosure of non-cash financing activities:
Distributions declared but not paid $ 1,265 $ 850
See accompanying notes to financial statements.
F-13
FSP Addison Circle Corp.
Notes to Financial Statements
1. Organization
FSP Addison Circle Corp. (the "Company") was organized on August 21, 2002 as a
Corporation under the laws of the State of Delaware to purchase, own and operate
a commercial office building located in Addison, TX (the "Property"). The
Property consists of a recently constructed, ten-story Class "A" suburban office
tower that contains approximately 293,787 square feet of space situated on
approximately 3.62 acres of land. The Company acquired the Property on September
30, 2002.
2. Summary of Significant Accounting Policies
BASIS OF PRESENTATION
The results of operations from inception to December 31, 2002 are not
necessarily indicative of the results to be obtained for other interim periods
or for the full fiscal year.
ESTIMATES AND ASSUMPTIONS
The Company prepares its financial statements and related notes in conformity
with accounting principles generally accepted in the United States of America
("GAAP"). These principles require management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
REAL ESTATE AND DEPRECIATION
Real estate assets are stated at the lower of cost or fair value, as
appropriate, less accumulated depreciation.
Costs related to property acquisition and improvements are capitalized. Typical
capital items include new roofs, site improvements, various exterior building
improvements and major interior renovations. Funding for capital improvements
typically is provided by cash set aside at the time the Property was purchased.
Routine replacements and ordinary maintenance and repairs that do not extend the
life of the assets are expensed as incurred. Typical expense items include
interior painting, landscaping and minor carpet replacements. Funding for
repairs and maintenance items typically is provided by cash flows from operating
activities.
Depreciation is computed using the straight-line method over the assets'
estimated useful lives as follows:
Category Years
-------- -----
Building - Commercial 39
Building Improvements 15-39
Furniture and equipment 5-7
F-14
FSP Addison Circle Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
REAL ESTATE AND DEPRECIATION (continued)
The following schedule reconciles the cost of the Property as shown in the
Offering Memorandum as to the amounts shown on the Company's Balance Sheets:
(in thousands)
Price per Offering Memorandum $ 51,500
Plus: Acquisition fees 318
Other acquisition costs 155
--------------------------------------------------
Total Acquisition Costs $ 51,973
==================================================
These costs are reported in the Company's Balance Sheets as follows:
Land $ 4,365
Building 45,870
Acquired real estate leases 1,738
--------------------------------------------------
Total reported on Balance Sheets $ 51,973
==================================================
The Company evaluates its assets used in operations by identifying indicators of
impairment and by comparing the sum of the estimated undiscounted future cash
flows for each asset to the asset's carrying value. When indicators of
impairment are present and the sum of the undiscounted future cash flows is less
than the carrying value of such asset, an impairment loss is recorded equal to
the difference between the asset's current carrying value and its fair value
based on discounting its estimated future cash flows. At December 31, 2003 and
2002, no such indicators of impairment were identified.
ACQUIRED REAL ESTATE LEASES
Acquired real estate leases are the estimated value of legal and leasing costs
related to acquired leases that were included in the purchase price when the
Company acquired the Property. Under SFAS No. 141 "Business Combinations" ("SFAS
141"), which was approved by the Financial Accounting Standards Board ("FASB")
in June 2001, the Company is required to segregate these costs from its
investment in real estate. The Company subsequently amortizes these costs on a
straight-line basis over the remaining life of the related leases. Amortization
expense of $322,000 and $27,000 is included in depreciation and amortization in
the Company's Statements of Operations for the year ended December 31, 2003 and
the period ended December 31, 2002, respectively.
Acquired real estate lease costs included in the purchase price of the property
were $1,738,000 and are being amortized over the weighted-average period of six
years in respect of the leases assumed.
The estimated annual amortization expense for the five years succeeding December
31, 2003 are as follows:
(in thousands)
2004 $ 321
2005 $ 321
2006 $ 321
2007 $ 321
2008 $ 105
F-15
FSP Addison Circle Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an initial
maturity of three months or less to be cash equivalents.
CASH-FUNDED RESERVES
The Company has set aside funds in anticipation of future capital needs of the
Property. These funds typically are used for the payment of real estate assets
and deferred leasing commissions; however, there is no legal restriction on
their use and they may be used for any Company purpose.
RESTRICTED CASH
Restricted cash consists of tenant security deposits.
MARKETABLE SECURITIES
The Company accounts for investments in debt securities under the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". The Company typically
classifies its debt securities as available-for-sale.
There were no investments in marketable securities at December 31, 2003 and
2002.
CONCENTRATION OF CREDIT RISKS
Cash, cash equivalents and short-term investments are financial instruments that
potentially subject the Company to a concentration of credit risk. The Company
maintains its cash balances and short-term investments principally in one bank
which the Company believes to be creditworthy. The Company periodically assesses
the financial condition of the bank and believes that the risk of loss is
minimal. Cash balances held with various financial institutions frequently
exceed the insurance limit of $100,000 provided by the Federal Deposit Insurance
Corporation.
For the periods ended December 31, 2003 and 2002, rental income was derived from
various tenants. As such, future receipts are dependent upon the financial
strength of the lessees and their ability to perform under the lease agreements.
The following tenants represent greater than 10% of total revenue:
Year Period
Ended Ended
December 31, December, 31
2003 2002
McLeod USA Telecommunications Services, Inc. 31% 31%
The Staubach Company 28% 28%
J.D. Edwards World Solutions Company 20% 20%
FINANCIAL INSTRUMENTS
The Company estimates that the carrying value of cash and cash equivalents,
cash-funded reserves, and restricted cash approximate their fair values based on
their short-term maturity and prevailing interest rates.
F-16
FSP Addison Circle Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
STEP RENT RECEIVABLE
Certain leases provide for fixed increases over the life of the lease. Rental
revenue is recognized on the straight-line basis over the related lease term;
however, billings by the Company are based on required minimum rentals in
accordance with the lease agreements. Step rent receivable, which is the
cumulative revenue recognized in excess of amounts billed by the Company, was
$421,000 and $99,000 at December 31, 2003 and 2002, respectively.
TENANT RENTS RECEIVABLE
Tenant rents receivable are reported at the amount the Company expects to
collect on balances outstanding at year-end. Management monitors outstanding
balances and tenant relationships and concluded that any realization losses
would be immaterial.
SYNDICATION FEES
Syndication fees are selling commissions and other costs associated with the
initial offering of the Company's preferred shares. Such costs, in the amount of
$5,227,000 have been reported as a reduction in Stockholders' Equity in the
Company's Balance Sheets.
REVENUE RECOGNITION
The Company has retained substantially all of the risks and benefits of
ownership of the Company's commercial property and accounts for its leases as
operating leases. Rental income from leases, which may include rent concession
(including free rent and tenant improvement allowances) and scheduled increases
in rental rates during the lease term, is recognized on a straight-line basis.
The Company does not have any percentage rent arrangements with its commercial
property tenants. Reimbursable costs are included in rental income in the period
earned. A schedule showing the components of rental revenue is shown below.
Year Ended Period Ended
December 31, December, 31
(in thousands) 2003 2002
=======================================================
Income from leases $ 7,153 $ 1,823
Straight-line rent
adjustment 322 99
Reimbursable expenses 1,079 180
-------------------------------------------------------
Total $ 8,554 $ 2,102
=======================================================
INTEREST INCOME
Interest income is recognized when the related services are performed and the
earnings process is complete.
INCOME TAXES
The Company has elected to be taxed as a Real Estate Investment Trust ("REIT")
under the Internal Revenue Code of 1986, as amended. As a REIT, the Company
generally is entitled to a tax deduction for dividends paid to its shareholders,
thereby effectively subjecting the distributed net income of the Company to
taxation at the shareholder level only. The Company must comply with a variety
of restrictions to maintain its status as a REIT. These restrictions include the
type of income it can earn, the type of assets it can hold, the number of
shareholders it can have and the concentration of their ownership, and the
amount of the Company's taxable income that must be distributed annually.
F-17
FSP Addison Circle Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
NET INCOME PER SHARE
The Company follows Statement of Financial Accounting Standards No. 128
"Earnings per Share", which specifies the computation, presentation and
disclosure requirements for the Company's net income per share. Basic net income
per preferred share is computed by dividing net income by the weighted average
number of shares outstanding during the period. Diluted net income per preferred
share reflects the potential dilution that could occur if securities or other
contracts to issue shares were convertible into shares. There were no potential
dilutive shares outstanding at December 31, 2003 and 2002. Subsequent to the
completion of the offering of preferred shares, the holders of common stock are
not entitled to share in any income nor in any related distribution.
3. Recent Accounting Standards
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities". This statement was effective January 1, 2003. SFAS
No. 146 replaces current accounting literature and requires the recognition of
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. The adoption of
this statement did not have a material effect on the Company's financial
position, results of operations and cash flows.
4. Income Taxes
The Company files as a REIT under Sections 856-860 of the Internal Revenue Code
of 1986, as amended. In order to qualify as a REIT, the Company is required to
distribute at least 90% of its taxable income to shareholders and to meet
certain asset and income tests as well as certain other requirements. The
Company will generally not be liable for federal income taxes, provided it
satisfies these requirements. Even as a qualified REIT, the Company is subject
to certain state and local taxes on its income and property.
For the period ended December 31, 2002, the Company incurred a net operating
loss for income tax purposes of approximately $2,932,000 that can be carried
forward until it expires in the year 2022.
At December 31, 2003, the Company's net tax basis of its real estate assets was
$50,421,000.
The following schedule reconciles net income (loss) to taxable income subject to
dividend requirements:
Year Ended Period Ended
December 31, December 31,
(in thousands) 2003 2002
==========================================================================
GAAP net income (loss) $ 4,005 $ (2,869)
Add: Book depreciation and amortization 1,497 370
Less: Tax depreciation and amortization (1,193) (323)
Straight-line rents (322) (99)
--------------------------------------------------------------------------
Taxable income (loss)(1) $ 3,987 $ (2,921)
==========================================================================
(1) A tax loss is not subject to a dividend requirement.
The following schedule reconciles cash distributions paid to the dividends paid
deduction:
F-18
Year Ended Year Ended
December 31, 2003 December 31, 2002
Per Preferred Per Common Per Preferred Per Common
(in thousands, except per share data) Total Share Share Total Share Share
---------------------------------------------------------------------------------------------------------------------
Cash distributions paid $ 4,721 $ 7,278 $ 93,807 $ 220 $ -- $ 220,000
Less: Return of captial (734) (1,133) (14,605) (220) -- (220,000)
---------------------------------------------------------------------------------------------------------------------
Dividends paid deduction $ 3,987 $ 6,145 $ 79,202 $ -- $ -- $ --
=====================================================================================================================
F-19
FSP Addison Circle Corp.
Notes to Financial Statements
5. Capital Stock
PREFERRED STOCK
Generally, each holder of Shares of Preferred Stock is entitled to receive
ratably all distributions, if any, declared by the Board of Directors out of
funds legally available. The right to receive distributions shall be
non-cumulative, and no right to distributions shall accrue by reason of the fact
that no distribution has been declared in any prior year. Each holder of Shares
will be entitled to receive, to the extent that funds are available therefore,
$100,000 per Share, before any payment to the holder of Common Stock, out of
distributions to stockholders upon liquidation, dissolution or the winding up of
the Company; the balance of any such funds available for distribution will be
distributed among the holders of Shares and the holder of Common Stock, pro rata
based on the number of shares held by each; provided, however, that for these
purposes, one share of Common Stock will be deemed to equal one-tenth of a share
of Preferred Stock.
In addition to certain voting rights provided in the corporate agreements, the
holder of Shares, acting by consent of at least 51%, shall have the further
right to approve or disapprove a proposed sale of the Property, the merger of
the Company with any other entity and amendments to the corporate charter. A
vote of the holders of 66.67% of the Shares is required for the issue of any
additional shares of capital stock. Holders of Shares have no redemption or
conversion rights.
COMMON STOCK
Franklin Street Properties Corp. ("FSP"), is the sole holder of the Company's
Common Stock. FSP has the right, as one class together with the holders of
Preferred Stock, to vote to elect the directors of the Company and to vote on
all matters except those voted by the holders of Shares of Preferred Stock.
Subsequent to the completion of the offering of the preferred shares the holders
of common shares are not entitled to share in any income, nor in any related
distribution.
6. Related Party Transactions
The Company executed a management agreement with FSP Property Management LLC, an
affiliate of FSP, that provides for a management fee equal to 1% of collected
revenues and is cancelable with 30 days notice by either party. For the period
ended December 31, 2003 and 2002, fees incurred under the agreement were $79,000
and $19,000, respectively.
An acquisition fee of $318,000 and other costs of $67,000 were paid in 2002 to
an affiliate of the Common Shareholder. Such fees were included in the cost of
the real estate.
Syndication fees of $5,227,000 were paid in 2002 to an affiliate of the Common
Shareholder for services related to syndication of the Company's preferred
stock.
During 2002, the Company borrowed and repaid in full a note payable to FSP,
principal of $51,500,000, with interest equal to the Citizens Bank base rate.
Interest paid to FSP was $240,000. The average interest rate during the time the
loan was outstanding was 4.44%.
A commitment fee of $3,657,000 was paid to FSP for obtaining the first mortgage
loan. Such amount is included in interest expense on the Statement of
Operations.
The Company paid a distribution of $313,000 to the common shareholder relating
to operating activities of the Company prior to the completion of the offering
of preferred shares.
F-20
FSP Addison Circle Corp.
Notes to Financial Statements
7. Commitments and Contingencies
The Company, as lessor, has minimum future rentals due under non-cancelable
operating leases as follows:
Year Ending
(in thousands) December 31, Amount
---------------- -------------
2004 $ 6,684
2005 6,636
2006 5,698
2007 3,101
2008 2,369
Thereafter 943
-------------
$ 25,431
=============
In addition, the lessees are liable for real estate taxes and certain operating
expenses of the Property.
Upon acquiring the commercial rental property in September, 2002, the Company
was assigned the lease agreements between the seller of the Property and the
existing tenants. The original lease periods range from five to ten years with
renewal options.
F-21
SCHEDULE III
ADDISON CIRCLE
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2003
Initial Cost
---------------------------------
Costs
Capitalized
Buildings (Disposals)
Improvements Subsequent
and to
Description Encumbrances (1) Land Equipment Acquisition
---------------- ---- --------- ------------
(in thousands)
Addison Circle, Addison, TX 4,365 45,870 25
Historical Costs
--------------------------------------------------------------------------------------
Buildings Total Costs,
Improvements Net of Depreciable
and Accumulated Accumulated Life Date of
Description Land Equipment Total (2) Depreciation Depreciation Years Acquisition
---- --------- --------- ------------ ------------ ----- -----------
(in thousands)
Addison Circle, Addison, TX 4,365 45,895 50,260 1,519 48,741 39 2002
(1) There are no encumbrances on the above properties.
(2) The aggregate cost for Federal Income Tax purposes is $50,421.
F-22
Addison Circle
The following table summarizes the changes in the Company's real estate
investments and accumulated depreciation:
December 31,
----------------------
(in thousands) 2003 2002
==========================================================================
Real estate investments, at cost:
Balance, beginning of period $50,235 $ --
Acquisitions -- 50,235
Improvements 25 --
Dispositions -- --
--------------------------------------------------------------------------
Balance, end of period $50,260 $50,235
==========================================================================
Accumulated depreciation:
Balance, beginning of period $ 343 $ --
Depreciation 1,176 343
Dispositions -- --
--------------------------------------------------------------------------
Balance, end of period $ 1,519 $ 343
==========================================================================
F-23
ADDISON CIRCLE
FOR THE PERIOD JANUARY 1, 2002 TO SEPTEMBER 29, 2002
AND FOR THE YEAR ENDED DECEMBER 31, 2001
CONTENTS
PAGE
Independent auditors' report F-25
Statements of revenue over certain operating expenses F-26
Notes accompanying the statements of revenue over certain
operating expenses F-27
F-24
INDEPENDENT AUDITORS' REPORT
To the Stockholders
FSP Addison Circle Corp.
We have audited the accompanying statements of revenue over certain operating
expenses (the "Statements") of Addison Circle for the period January 1, 2002 to
September 29, 2002 and for the year ended December 31, 2001. These Statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these Statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the Statements
are free of material misstatements. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the Statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall Statements'
presentation. We believe that our audits provide a reasonable basis for our
opinion.
The accompanying Statements were prepared to comply with the requirements of
Rule 3-14 of Regulation S-X of the Securities and Exchange Commission, and
exclude certain expenses described in Note 2, and therefore, are not intended to
be a complete presentation of the Property's revenue and expenses.
In our opinion, these Statements referred to above present fairly, in all
material respects, the revenue over certain operating expenses (as described in
Note 2), of Addison Circle for the period January 1, 2002 to September 29, 2002
and for the year ended December 31, 2001, in conformity with the basis of
accounting described in Note 2.
/s/ Braver and Company, P.C.
Newton, Massachusetts
February 28, 2004
F-25
ADDISON CIRCLE
STATEMENTS OF REVENUE OVER CERTAIN OPERATING EXPENSES
FOR THE PERIOD JANUARY 1, 2002 TO SEPTEMBER 29, 2002 AND
FOR THE YEAR ENDED DECEMBER 31, 2001
2002 2001
---------- ----------
REVENUE
Rental income $6,577,352 $8,353,790
---------- ----------
CERTAIN OPERATING EXPENSES (Note 2):
Taxes and insurance 930,968 1,195,547
Management fees 105,094 135,923
Administrative 512,993 446,024
Operating and maintenance 649,685 905,373
---------- ----------
2,198,740 2,682,867
---------- ----------
Excess of revenue over certain operating expenses $4,378,612 $5,670,923
========== ==========
The accompanying notes are an integral part of these financial statements.
F-26
ADDISON CIRCLE
NOTES ACCOMPANYING THE STATEMENTS OF REVENUE OVER CERTAIN OPERATING EXPENSES
1. DESCRIPTION OF THE PROPERTY:
The accompanying statements of revenue over certain operating expenses
(the "Statements") include the operations of a commercial building located
in Addison, Dallas County, Texas (the "Property"). These statements are
the results of operations of the Property under the basis of accounting
described in Note 2 for the period and year described prior to the
acquisition of the Property by FSP Addison Circle Corp. The Property
consists of a ten-story Class A suburban office tower containing
approximately 293,787 square feet located on approximately 3.62 acres of
land. The Property was sold to FSP Addison Circle Corp. on September 30,
2002.
2. BASIS OF ACCOUNTING:
The accompanying Statements have been prepared on the accrual basis of
accounting. The Statements have been prepared in accordance with Rule 3-14
of Regulation S-X of the Securities and Exchange Commission for real
estate properties acquired or to be acquired. Accordingly, these
Statements exclude certain historical expenses not comparable to the
operations of the Property after acquisition such as amortization,
depreciation, interest, corporate expenses and certain other costs not
directly related to the future operations of the Property.
3. REVENUE RECOGNITION:
Rental revenue includes income from leases, certain reimbursable expenses,
straight-line rent adjustments and other income associated with renting
the property. A summary of rental revenue is shown in the following table:
For the period
January 1, 2002 Year Ended
to September 29, December 31,
2002 2001
---------------- ------------
Income from leases $ 5,407,615 $7,168,574
Straight-line rent adjustment 258,696 293,420
Reimbursable expenses 909,682 887,543
Other income 1,359 4,253
---------------- ------------
Total $ 6,577,352 $8,353,790
================ ============
Addison Circle has retained substantially all of the risks and benefits of
the property and accounts for its leases as operating leases. Rental
income from leases, which include rent concessions (including free rent
and tenant improvement allowances) and scheduled increases in rental rates
during the lease term, is recognized on a straight-line basis. The Company
does not have any percentage rent arrangements with its tenants.
Reimbursable costs are included in rental income in the period earned.
4. USE OF ESTIMATES:
The preparation of the Statements in conformity with the basis of
accounting described in Note 2 requires management to make estimates and
assumptions that affect the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
F-27
ADDISON CIRCLE
NOTES ACCOMPANYING THE STATEMENTS OF REVENUE OVER CERTAIN OPERATING EXPENSES
5. CONCENTRATIONS OF RISKS:
For the period January 1, 2002 to September 29, 2002, and for the year
ended December 31, 2001, rental income was received from various lessees.
As such, future receipts are dependent upon the financial strength of the
lessees and their ability to perform under the lease agreements.
6. LEASES:
The Company, as lessor, has minimum future rentals due under
noncancellable operating leases as follows:
Year Ending
December 31, Amount
----------------- --------------
2002 $ 1,704,000
2003 6,677,000
2004 6,684,000
2005 6,636,000
2006 5,698,000
Thereafter 6,413,000
--------------
$ 33,812,000
==============
In addition, the lessees are liable for real estate taxes and operating
expenses as direct expenses to them.
F-28
FSP Collins Crossing Corp.
Financial Statements
September 30, 2004
Table of Contents
Page
----
Financial Statements
Balance Sheet as of September 30, 2004 and December 31, 2003.............. F-30
Statement of Income for the three and nine months ended
September 30, 2004 and 2003.......................................... F-31
Statement of Cash Flows for the nine months ended
September 30, 2004 and 2003.......................................... F-32
Notes to Financial Statements............................................. F-33
F-29
FSP Collins Crossing Corp.
Balance Sheet
(unaudited)
September 30, December 31,
(in thousands,except shares and par value amounts) 2004 2003
============================================================================================================
Assets:
Real estate investments, at cost:
Land $ 4,022 $ 4,022
Buildings and improvements 34,232 34,224
------------------------------------------------------------------------------------------------------------
38,254 38,246
Less accumulated depreciation 1,389 731
------------------------------------------------------------------------------------------------------------
Real estate investments, net 36,865 37,515
Acquired real estate leases, net of accumulated amortization
of $663 and $349, respectively 1,604 1,918
Acquired favorable real estate lease, net of accumulated
amortization of $1,504 and $791, respectively 3,640 4,353
Cash and cash equivalents 4,634 5,066
Restricted cash 115 115
Tenant rents receivable 35 25
Step rent receivable 528 279
Prepaid expenses and other assets 51 43
------------------------------------------------------------------------------------------------------------
Total assets $ 47,472 $ 49,314
============================================================================================================
Liabilities and stockholders' equity:
Liabilities:
Accounts payable and accrued expenses $ 1,263 $ 1,467
Distributions payable -- 1,331
Tenant security deposits 115 115
------------------------------------------------------------------------------------------------------------
Total liabilities 1,378 2,913
------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 555 shares
authorized, issued and outstanding -- --
Common stock, $.01 par value, 1 share
authorized, issued and outstanding -- --
Additional paid-in capital 51,100 51,100
Retained deficit and distributions in excess of earnings (5,006) (4,699)
------------------------------------------------------------------------------------------------------------
Total stockholders' equity 46,094 46,401
------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 47,472 $ 49,314
============================================================================================================
See accompanying notes to financial statements.
F-30
FSP Collins Crossing Corp.
Statement of Income
For the For the
Three Months Nine Months
Ended Ended
September 30, September 30,
-------------------- ----------------------
(in thousands, except shares and per share amounts) 2004 2003 2004 2003
===========================================================================================================
Revenues:
Rental $1,756 $1,724 $5,205 $ 3,976
-----------------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 552 418 1,461 922
Real estate taxes and insurance 237 273 715 614
Depreciation and amortization 324 265 972 619
Interest -- 4 -- 3,444
===========================================================================================================
Total expenses 1,113 960 3,148 5,599
-----------------------------------------------------------------------------------------------------------
Income (loss) before interest income 643 764 2,057 (1,623)
Interest income 12 7 51 12
-----------------------------------------------------------------------------------------------------------
Net income (loss) before common distibutions 655 771 2,108 (1,611)
Distributions paid to common stockholders -- 217 -- 370
-----------------------------------------------------------------------------------------------------------
Net income (loss) attributable to preferred stockholders $ 655 $ 554 $2,108 $(1,981)
===========================================================================================================
Weighted average number of preferred shares outstanding,
basic and diluted 555 555 555 555
===========================================================================================================
Net income (loss) per preferred share, basic and diluted $1,180 $ 998 $3,798 $(3,569)
===========================================================================================================
See accompanying notes to financial statements
F-31
FSP Collins Crossing Corp.
Statements of Cash Flows
(unaudited)
For the Nine Months Ended
(in thousands) September 30, 2004 September 30, 2003
================================================================================================================
Cash flows from operating activities:
Net Income (loss) $ 2,108 $ (1,611)
Adjustments to reconcile net income (loss) to net cash provided by
(used for) operating activities:
Depreciation and amortization 972 619
Amortization of favorable lease 713 554
Changes in operating assets and liabilities:
Restricted cash -- (115)
Tenant rent receivables (10) (7)
Step rent receivable (249) (194)
Prepaid expenses and other assets (8) (66)
Accounts payable and accrued expenses (204) 927
Tenant security deposits -- 115
----------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 3,322 222
----------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets (8) (38,246)
Purchase of acquired real estate leases -- (2,267)
Purchase of acquired favorable real estate lease -- (5,144)
----------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (8) (45,657)
----------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock -- 55,839
Syndication costs -- (4,738)
Distributions to stockholders (3,746) (1,245)
Proceeds from long-term debt -- 45,175
Principal payments on long-term debt -- (45,175)
----------------------------------------------------------------------------------------------------------------
Net cash (used for) provided by financing activities (3,746) 49,856
----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (432) 4,421
Cash and cash equivalents, beginning of period 5,066 --
----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 4,634 $ 4,421
================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ -- $ 3,444
Disclosure of non-cash financing activites:
Distributions declared but not paid $ -- $ 1,147
See accompanying notes to financial statements.
F-32
FSP Collins Crossing Corp.
Notes to Financial Statements
(unaudited)
1. Organization and Basis of Presentation
FSP Collins Crossing Corp. (the "Company") was organized on January 16, 2003 as
a Corporation under the laws of the State of Delaware to purchase, own and
operate a commercial office building located in Richardson, TX (the "Property").
Completed in 1999, the Property consists of an eleven story Class "A" suburban
office tower that contains approximately 298,766 square feet of space situated
on approximately ten acres of land (including an undeveloped parcel containing
approximately 3.5 acres). The company acquired the Property on March 3, 2003.
BASIS OF PRESENTATION
The accompanying interim financial statements are unaudited; however, the
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and in conjunction with the rules and regulations of the Securities
and Exchange Commission. Accordingly, they do not include all of the disclosures
required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of management, all
adjustments (consisting solely of normal recurring matters) necessary for a fair
presentation of the financial statements for these interim periods have been
included.
Certain prior-year balances have been reclassified in order to conform to the
current-year presentation.
These financial statements should be read in conjunction with the Company's
financial statements and notes thereto for its fiscal year ended December 31,
2003
ESTIMATES AND ASSUMPTIONS
The Company prepares its financial statements and related notes in conformity
with accounting principles generally accepted in the United States of America
("GAAP"). These principles require management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
2. Net Income Per Share
Basic net income per preferred share is computed by dividing net income
attributed to preferred shareholders by the weighted average number of preferred
shares outstanding during the period. Diluted net income per preferred share
reflects the potential dilution that could occur if securities or other
contracts to issue shares were convertible into shares. There were no potential
dilutive shares outstanding at September 30, 2004 and 2003. Subsequent to the
completion of the offering of preferred shares, the holders of common stock are
not entitled to share in any income nor in any related distribution.
3. Income Taxes
The Company has elected to be taxed as a Real Estate Investment Trust ("REIT")
under Sections 856-860 of the Internal Revenue Code of 1986, as amended. In
order to qualify as a REIT, the Company is required to distribute at least 90%
of its taxable income to shareholders and to meet certain asset and income tests
as well as certain other requirements. The Company will generally not be liable
for federal income taxes, provided it satisfies these requirements. Even as a
qualified REIT, the Company is subject to certain state and local taxes on its
income and property.
F-33
FSP Collins Crossing Corp.
Notes to Financial Statements
(unaudited)
4. Related Party Transactions
The Company executed a management agreement with FSP Property Management LLC, an
affiliate of FSP, that provides for a management fee equal to 1% of collected
revenues and is cancelable with 30 days notice by either party. Fees incurred
under the agreement were $19,000 and $19,000 for the three months ended
September 30, 2004 and 2003, respectively and $56,000 and $44,000 for the nine
months ended September 30, 2004 and 2003, respectively.
An acquisition fee of $277,000 and other costs of $206,000 were paid in the nine
months ended September 30, 2003 to an affiliate of the common shareholder. Such
fees were included in the cost of real estate.
Syndication fees of $4,410,000 were paid in the nine months ended September 30,
2003 to an affiliate of the common shareholder for services related to
syndication of the Company's preferred stock.
During the nine months ended September 30, 2003, the Company borrowed and repaid
in full a note payable to FSP, principal of $45,175,000 with interest equal to
the Citizens Bank base rate. Interest paid to FSP was $253,000. The average
interest rate during the time the loan was outstanding was 4.44%.
A commitment fee of $3,191,000 was paid to FSP during the nine months ended
September 30, 2003 for obtaining the first mortgage loan. Such amount is
included in interest expense on the Statement of Operations.
The Company paid a distribution of $370,000 during the nine months ended
September 30, 2003 to the common shareholder relating to operating activities of
the Company prior to the completion of the offering of preferred shares.
5. Subsequent Events
On October 1, 2004, the Company declared a distribution of $2,120.00 per share
of preferred stock payable to holders of record as of October 1, 2004.
F-34
FSP Collins Crossing Corp.
Financial Statements
December 31, 2003
Table of Contents
Page
----
Financial Statements
Independent Auditor's Report............................................... F-36
Balance Sheet as of December 31, 2003...................................... F-37
Statement of Operations for the period January 16, 2003 (date of
inception) to December 31, 2003....................................... F-38
Statement of Changes in Stockholders' Equity for the period January
16, 2003 (date of inception) to December 31, 2003..................... F-39
Statement of Cash Flows for the period January 16, 2003 (date of
inception) to December 31, 2003....................................... F-40
Notes to the Financial Statements.......................................... F-41
F-35
[LETTERHEAD OF BRAVER AND COMPANY, P.C.]
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
FSP Collins Crossing Corp.
We have audited the accompanying balance sheet of FSP Collins Crossing Corp. as
of December 31, 2003, and the related statements of operations, changes in
stockholders' equity and cash flows for the period from January 16, 2003 (date
of inception) to December 31, 2003. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FSP Collins Crossing Corp. as
of December 31, 2003, and the results of its operations and its cash flows for
the initial period then ended in conformity with accounting principles generally
accepted in the United States of America.
/s/ Braver and Company, P.C.
Newton, Massachusetts
January 23, 2004
F-36
FSP Collins Crossing Corp.
Balance Sheet
December 31,
(in thousands, except shares and par value amounts) 2003
================================================================================
Assets:
Real estate investments, at cost:
Land $ 4,022
Buildings and improvements 34,224
--------------------------------------------------------------------------------
38,246
Less accumulated depreciation 731
--------------------------------------------------------------------------------
Real estate investments, net 37,515
Acquired real estate leases, net of accumulated
amortization of $349 1,918
Acquired favorable real estate lease, net of
accumulated amortization of $791 4,353
Cash and cash equivalents 2,942
Cash-funded reserves 2,124
Restricted cash 115
Tenant rents receivable 25
Step rent receivable 279
Prepaid expenses and other assets 43
--------------------------------------------------------------------------------
Total assets $ 49,314
================================================================================
Liabilities and stockholders' equity:
Liabilities:
Accounts payable and accrued expenses $ 1,467
Distributions payable to stockholders 1,331
Tenant security deposits 115
--------------------------------------------------------------------------------
Total liabilities 2,913
--------------------------------------------------------------------------------
Commitments and contingencies:
Stockholders' equity:
Preferred Stock, $.01 par value, 555 shares
authorized, issued and outstanding --
Common Stock, $.01 par value, 1 share
authorized, issued and outstanding --
Additional paid-in capital 51,100
Retained deficit and distributions in excess of earnings (4,699)
--------------------------------------------------------------------------------
Total stockholders' equity 46,401
--------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 49,314
================================================================================
See accompanying notes to financial statements.
F-37
FSP Collins Crossing Corp.
Statement of Operations
For the Period
January 16, 2003
(date of inception) to
(in thousands, except shares and per share amounts) December 31, 2003
================================================================================
Revenue:
Rental $ 5,672
--------------------------------------------------------------------------------
Total revenue 5,672
--------------------------------------------------------------------------------
Expenses:
Rental operating expenses 1,399
Real estate taxes and insurance 760
Depreciation and amortization 1,080
Interest 3,444
--------------------------------------------------------------------------------
Total expenses 6,683
--------------------------------------------------------------------------------
Net loss before interest income (1,011)
Interest income 35
--------------------------------------------------------------------------------
Net loss before distributions to common stockholder (976)
Distributions paid to common stockholder 373
--------------------------------------------------------------------------------
Net loss attributable to preferred stockholders $(1,349)
================================================================================
Weighted average number of preferred shares outstanding,
basic and diluted 555
================================================================================
Net loss per preferred share, basic and diluted $(2,431)
================================================================================
See accompanying notes to financial statements.
F-38
FSP Collins Crossing Corp.
Statement of Changes in Stockholders' Equity
For the Period January 16, 2003
(date of inception) to December 31, 2003
Retained Deficit
Additional and Distributions Total
Preferred Common Paid in in Excess of Stockholders'
(in thousands, except shares) Stock Stock Capital Earnings Equity
===============================================================================================================
Private offering of 555 shares, net $ -- $ -- $ 51,100 $ -- $ 51,100
Distributions -- -- -- (3,723) (3,723)
Net loss -- -- -- (976) (976)
---------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 $ -- $ -- $ 51,100 $ (4,699) $ 46,401
===============================================================================================================
See accompanying notes to financial statements.
F-39
FSP Collins Crossing Corp.
Statement of Cash Flows
For the Period
January 16, 2003
(date of inception) to
(in thousands) December 31, 2003
================================================================================
Cash flows from operating activities:
Net loss $ (976)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 1,080
Amortization of favorable lease 791
Changes in operating assets and liabilities:
Cash-funded reserve (2,124)
Restricted cash (115)
Tenant rents receivable (25)
Step rent receivable (279)
Prepaid expenses and other assets (43)
Accounts payable and accrued expenses 1,467
Tenant security deposits 115
--------------------------------------------------------------------------------
Net cash used for operating activities (109)
--------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets (38,246)
Purchase of acquired real estate lease (2,267)
Purchase of acquired favorable real estate lease (5,144)
--------------------------------------------------------------------------------
Net cash used for investing activities (45,657)
--------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock 55,510
Syndication costs (4,410)
Distributions to stockholders (2,392)
Proceeds from long-term debt 45,175
Principal payments on long-term debt (45,175)
--------------------------------------------------------------------------------
Net cash provided by financing activities 48,708
--------------------------------------------------------------------------------
Net increase in cash and cash equivalents 2,942
Cash and cash equivalents, beginning of period --
--------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 2,942
================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 3,444
Disclosure of non-cash financing activities:
Distributions declared but not paid $ 1,331
See accompanying notes to financial statements.
F-40
FSP Collins Crossing Corp.
Notes to Financial Statements
1. Organization
FSP Collins Crossing Corp. (the "Company") was organized on January 16, 2003 as
a Corporation under the laws of the State of Delaware to purchase, own and
operate a commercial office building located in Richardson, TX (the "Property").
Completed in 1999, the Property consists of an eleven story Class "A" suburban
office tower that contains approximately 298,766 square feet of space situated
on approximately ten acres of land (including an undeveloped parcel containing
approximately 3.5 acres). The company acquired the Property on March 3, 2003.
2. Summary of Significant Accounting Policies
BASIS OF PRESENTATION
The results of operations from inception to date are not necessarily indicative
of the results to be obtained for other interim periods or for the full fiscal
year.
ESTIMATES AND ASSUMPTIONS
The Company prepares its financial statements and related notes in conformity
with accounting principles generally accepted in the United States of America
("GAAP"). These principles require management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
REAL ESTATE AND DEPRECIATION
Real estate assets are stated at the lower of cost or fair value, as
appropriate, less accumulated depreciation.
Costs related to property acquisition and improvements are capitalized. Typical
capital items include new roofs, site improvements, various exterior building
improvements and major interior renovations. Funding for capital improvements
typically is provided by cash set aside at the time the Property was purchased.
Routine replacements and ordinary maintenance and repairs that do not extend the
life of the assets are expensed as incurred. Typical expense items include
interior painting, landscaping and minor carpet replacements. Funding for
repairs and maintenance items typically is provided by cash flows from operating
activities.
Depreciation is computed using the straight-line method over the assets'
estimated useful lives as follows:
Category Years
-------- -----
Building - Commercial 39
Building Improvements 15-39
Furniture and Equipment 5-7
F-41
FSP Collins Crossing Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
REAL ESTATE AND DEPRECIATION (continued)
The following schedule reconciles the cost of the property as shown in the
Offering Memorandum as to the amounts shown on the Company's Balance Sheet:
(in thousands)
--------------
Price per Offering Memorandum $ 45,175
Plus: Acquisition fees 277
Plus: Other acquisition costs 205
--------------------------------------------------
Total Acquisition Costs $ 45,657
==================================================
These costs are reported in the Company's Balance Sheet as follows:
Land $ 4,022
Building 34,224
Acquired real estate leases 2,267
Acquired favorable real estate
lease 5,144
--------------------------------------------------
Total reported on Balance Sheet $ 45,657
==================================================
The Company evaluates its assets used in operations by identifying indicators of
impairment and by comparing the sum of the estimated undiscounted future cash
flows for each asset to the asset's carrying value. When indicators of
impairment are present and the sum of the undiscounted future cash flows is less
than the carrying value of such asset, an impairment loss is recorded equal to
the difference between the asset's current carrying value and its fair value
based on discounting its estimated future cash flows. At December 31, 2003, no
such indicators of impairment were identified.
ACQUIRED REAL ESTATE LEASES
Acquired real estate leases represents the estimated value of legal and leasing
costs related to acquired leases that were included in the purchase price when
the Company acquired the Property. Under SFAS No. 141 "Business Combinations"
("SFAS 141"), which was approved by the Financial Accounting Standards Board
("FASB") in June 2001, the Company is required to segregate these costs from its
investment in real estate. The Company subsequently amortizes these costs on a
straight-line basis over the weighted-average remaining life of the related
leases. Amortization expense of $349,000 is included in Depreciation and
Amortization in the Company's Statement of Operations for the period ended
December 31, 2003.
Acquired real estate lease costs included in the purchase price of the property
were $2,267,000 and are being amortized over the period of five years in respect
of the leases assumed. Detail of the acquired real estate lease costs as of
December 31, 2003:
(in thousands)
--------------
Cost $ 2,267
Accumulated amortization 349
---------
Book value $ 1,918
=========
The estimated annual amortization expense for the five years succeeding December
31, 2003 are as follows:
(in thousands)
--------------
2004 $ 418
2005 $ 418
2006 $ 418
2007 $ 418
2008 $ 244
F-42
FSP Collins Crossing Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
ACQUIRED FAVORABLE REAL ESTATE LEASE
Acquired favorable real estate lease is the estimated benefit the Company
receives when the lease payments due under a tenant's lease exceed the market
rate of the lease at the date the property was acquired. Under SFAS 141 the
Company is required to report this value separately from its investment in real
estate. The Company subsequently amortizes this amount on a straight-line basis
over the remaining life of the tenant's lease. Amortization of $791,000 is shown
as a reduction of rental income in the Company's Statement of Operations for the
period ended December 31, 2003.
The acquired favorable real estate leases included in the purchase price of the
property was $5,144,000 and is being amortized over the period of five years in
respect of the lease assumed. Details of the acquired favorable real estate
lease as of December 31, 2003:
(in thousands)
--------------
Cost $ 5,144
Accumulated amortization 791
---------
Book value $ 4,353
=========
The estimated annual amortization expense for the five years succeeding December
31, 2003 are as follows:
(in thousands)
----------------
2004 $ 950
2005 $ 950
2005 $ 950
2007 $ 950
2008 $ 553
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an initial
maturity of three months or less to be cash equivalents.
CASH-FUNDED RESERVES
The Company has set aside funds in anticipation of future capital needs of the
Property. Although these funds typically are used for the payment of real estate
assets and deferred leasing commissions, there is no legal restriction on their
use and they may be used for any Company purpose.
RESTRICTED CASH
Restricted cash consists of tenant security deposits.
MARKETABLE SECURITIES
The Company accounts for investments in debt securities under the provisions of
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". The Company typically classifies its
debt securities as available-for-sale.
There were no investments in marketable securities at December 31, 2003.
F-43
FSP Collins Crossing Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
CONCENTRATION OF CREDIT RISKS
Cash, cash equivalents and short-term investments are financial instruments that
potentially subject the Company to a concentration of credit risk. The Company
maintains its cash balances and short-term investments principally in one bank
which the Company believes to be creditworthy. The Company periodically assesses
the financial condition of the bank and believes that the risk of loss is
minimal. Cash balances held with various financial institutions frequently
exceed the insurance limit of $100,000 provided by the Federal Deposit Insurance
Corporation.
For the period ended December 31, 2003 rental income was derived from various
tenants. As such, future receipts are dependent upon the financial strength of
the lessees and their ability to perform under the lease agreements.
The following tenant represents greater than 10% of total revenue:
INET 80%
FINANCIAL INSTRUMENTS
The Company estimates that the carrying value of cash and cash equivalents,
cash-funded reserves and restricted cash approximate their fair values based on
their short-term maturity and prevailing interest rates.
STEP RENT RECEIVABLE
Certain leases provide for fixed increases over the life of the lease. Rental
revenue is recognized on the straight-line basis over the related lease term;
however, billings by the Company are based on required minimum rentals in
accordance with the lease agreements. Step rent receivable, which is the
cumulative revenue recognized in excess of amounts billed by the Company, is
$279,000 at December 31, 2003.
TENANT RENTS RECEIVABLE
Tenant rents receivable are reported at the amount the Company expects to
collect on balances outstanding at year-end. Management monitors outstanding
balances and tenant relationships and concluded that any realization losses
would be immaterial.
SYNDICATION FEES
Syndication fees are selling commissions and other costs associated with the
initial offering of the Company's preferred shares. Such costs, in the amount of
$4,410,000 have been reported as reduction in Stockholders' Equity in the
Company's Balance Sheet.
F-44
FSP Collins Crossing Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
REVENUE RECOGNITION
The Company has retained substantially all of the risks and benefits of
ownership of the Company's commercial properties and accounts for its leases as
operating leases. Rental income from leases, which may include rent concession
(including free rent and tenant improvement allowances) and scheduled increases
in rental rates during the lease term, is recognized on a straight-line basis.
The Company does not have any percentage rent arrangements with its commercial
property tenants. Reimbursable costs are included in rental income in the period
earned. A schedule showing the components of rental revenue is shown below.
Period Ended
December, 31
(in thousands) 2003
===================================================
Income from leases $ 5,559
Straight-line rent adjustment 279
Reimbursable expenses 625
Amortization of favorable lease (791)
---------------------------------------------------
Total $ 5,672
===================================================
INTEREST INCOME
Interest income is recognized when the related services are performed and the
earnings process is complete.
INCOME TAXES
The Company has elected to be taxed as a REIT under the Internal Revenue Code of
1986, as amended. As a REIT, the Company generally is entitled to a tax
deduction for dividends paid to its shareholders, thereby effectively subjecting
the distributed net income of the Company to taxation at the shareholder level
only. The Company must comply with a variety of restrictions to maintain its
status as a REIT. These restrictions include the type of income it can earn, the
type of assets it can hold, the number of shareholders it can have and the
concentration of their ownership, and the amount of the Company's taxable income
that must be distributed annually.
NET INCOME PER SHARE
The Company follows Statement of Financial Accounting Standards No. 128
"Earnings per Share", which specifies the computation, presentation and
disclosure requirements for the Company's net income per share. Basic net income
per share is computed by dividing net income by the weighted average number of
shares outstanding during the period. Diluted net income per share reflects the
potential dilution that could occur if securities or other contracts to issue
shares were convertible into shares. There were no potential dilutive shares
outstanding at December 31, 2003. Subsequent to the completion of the offering
of preferred shares, the holders of common stock are not entitled to share in
any income nor any related distribution.
3. Recent Accounting Standards
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities". This statement was effective January 1, 2003. SFAS
No. 146 replaces current accounting literature and requires the recognition of
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. The Company does
not anticipate that the adoption of this statement will have a material effect
on the Company's financial position, results of operations and cash flows.
F-45
FSP Collins Crossing Corp.
Notes to Financial Statements
4. Income Taxes
The Company files as a REIT under Sections 856-860 of the Internal Revenue Code
of 1986, as amended. In order to qualify as a REIT, the Company is required to
distribute at least 90% of its taxable income to shareholders and to meet
certain asset and income tests as well as certain other requirements. The
Company will generally not be liable for federal income taxes, provided it
satisfies their requirements. Even as a qualified REIT, the Company is subject
to certain state and local taxes on its income and property.
At December 31, 2003, the Company's net tax basis of its real estate assets was
$41,634,000.
The following schedule reconciles GAAP net income to taxable income subject to
dividend requirements:
Period Ended
December 31,
(in thousands) 2003
==================================================================
GAAP net loss $ (976)
Add: Book depreciation and amortization 1,080
Amortization for favorable lease 791
Deferred rent 481
Less: Tax depreciation and amortization (812)
Straight-line rents (279)
-----------------------------------------------------------------
Taxable income subject to dividend requirement $ 285
==================================================================
The following schedule reconciles cash distributions paid to the dividends paid
deduction:
Period Ended
December 31,
Per Preferred Per Common
(in thousands, except per share data) Total Share Share
========================================================================
Cash distributions paid $ 2,392 $ 3,637 $ 370,000
Less: Return of Capital (2,392) 3,204 326,000
------------------------------------------------------------------------
Dividends paid deduction $ -- $ 433 $ 44,000
========================================================================
F-46
FSP Collins Crossing Corp.
Notes to Financial Statements
5. Capital Stock
PREFERRED STOCK
Generally, each holder of Shares of Preferred Stock is entitled to receive
ratably all distributions, if any, declared by the Board of Directors out of
funds legally available. The right to receive distributions shall be
non-cumulative, and no right to distributions shall accrue by reason of the fact
that no distribution has been declared in any prior year. Each holder of Shares
will be entitled to receive, to the extent that funds are available therefore,
$100,000 per Share, before any payment to the holder of Common Stock, out of
distributions to stockholders upon liquidation, dissolution or the winding up of
the Company; the balance of any such funds available for distribution will be
distributed among the holders of Shares and the holder of Common Stock, pro rata
based on the number of shares held by each; provided, however, that for these
purposes, one share of Common Stock will be deemed to equal one-tenth of a share
of Preferred Stock.
In addition to certain voting rights provided in the corporate agreements, the
holder of Shares, acting by consent of at least 51%, shall have the further
right to approve or disapprove a proposed sale of the Property, the merger of
the Company with any other entity and amendments to the corporate charter. A
vote of the holders of 66.67% of the Shares is required for the issue of any
additional shares of capital stock. Holders of Shares have no redemption or
conversion rights.
COMMON STOCK
Franklin Street Properties Corp. ("FSP"), is the sole holder of the Company's
Common Stock. FSP has the right, as one class together with the holders of
Preferred Stock, to vote to elect the directors of the Company and to vote on
all matters except those voted by the holders of Shares of Preferred Stock.
Subsequent to the completion of the offering of the preferred shares the holders
of common shares are not entitled to receive any income, nor shall the Company
declare or pay any cash distributions on shares of Common Stock.
6. Related Party Transactions
The Company executed a management agreement with FSP Property Management LLC, an
affiliate of FSP, that provides for a management fee equal to 1% of collected
revenues and is cancelable with 30 days notice by either party. For the period
ended December 31, 2003, fees incurred under the agreement were $62,000.
An acquisition fee of $277,000 and other costs of $206,000 were paid in 2003 to
an affiliate of the Common Shareholder. Such fees were included in the cost of
the real estate.
Syndication fees of $4,410,000 were paid in 2003 to an affiliate of the Common
Shareholder for services related to syndication of the Company's preferred
stock.
During 2003, the Company borrowed and repaid in full a note payable to FSP,
principal of $45,175,000 with interest equal to the Citizens Bank base rate.
Interest paid to FSP was $253,000. The average interest rate during the time the
loan was outstanding was 4.44%.
A commitment fee of $3,191,000 was paid to FSP for obtaining the first mortgage
loan. Such amount is included in interest expense on the Statement of
Operations.
The Company paid a distribution of $373,000 to the common shareholder relating
to operating activities of the Company prior to the completion of the offering
of preferred shares.
F-47
FSP Collins Crossing Corp.
Notes to Financial Statements
7. Commitments and Contingencies
The Company, as lessor, has minimum future rentals due under non-cancelable
operating leases as follows:
Year Ending
(in thousands) December 31, Amount
------------ ---------
2004 $ 6,701
2005 6,947
2006 6,036
2007 5,811
2008 5,811
Thereafter 8,688
---------
$ 39,994
=========
In addition, the lessees are liable for real estate taxes and certain operating
expenses of the Property.
Upon acquiring the commercial rental property in March 2003, the Company was
assigned the lease agreements between the seller of the Property and the
existing tenants. The original lease periods range from five to ten years with
renewal options.
F-48
SCHEDULE III
COLLINS CROSSING
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2003
Initial Cost
---------------------------------
Costs
Capitalized
Buildings (Disposals)
Improvements Subsequent
and to
Description Encumbrances (1) Land Equipment Acquisition
---------------- ---- --------- ------------
(in thousands)
Collins Crossing, Richardson, TX 4,022 34,224 --
Historical Costs
--------------------------------------------------------------------------------------
Buildings Total Costs,
Improvements Net of Depreciable
and Accumulated Accumulated Life Date of
Description Land Equipment Total (2) Depreciation Depreciation Years Acquisition
---- --------- --------- ------------ ------------ ----- -----------
(in thousands)
Collins Crossing, Richardson, TX 4,022 34,224 38,246 731 37,515 39 2003
(1) There are no encumbrances on the above properties.
(2) The aggregate cost for Federal Income Tax purposes is $41,634.
F-49
Collins Crossing
The following table summarizes the changes in the Company's real estate
investments and accumulated depreciation:
December 31,
---------------
(in thousands) 2003
==========================================================================
Real estate investments, at cost:
Balance, beginning of period $ --
Acquisitions 38,246
Improvements --
Dispositions --
--------------------------------------------------------------------------
Balance, end of period $38,246
==========================================================================
Accumulated depreciation:
Balance, beginning of period $ --
Depreciation 731
Dispositions --
--------------------------------------------------------------------------
Balance, end of period $ 731
==========================================================================
F-50
COLLINS CROSSING
FOR THE PERIOD JANUARY 1, 2003 TO MARCH 2, 2003 AND
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
CONTENTS
PAGE
Independent auditors' report F-52
Statements of revenue over certain operating expenses F-53
Notes accompanying the statements of revenue over certain
operating expenses F-54
F-51
INDEPENDENT AUDITORS' REPORT
To the Stockholders
FSP Collins Crossing Corp.
We have audited the accompanying statements of revenue over certain operating
expenses (the "Statements") of Collins Crossing for the period January 1, 2003
to March 2, 2003 and for the years ended December 31, 2002 and 2001. These
Statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these Statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the Statements
are free of material misstatements. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the Statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall Statements'
presentation. We believe that our audits provide a reasonable basis for our
opinion.
The accompanying Statements were prepared to comply with the requirements of
Rule 3-14 of Regulation S-X of the Securities and Exchange Commission, and
exclude certain expenses described in Note 2 and, therefore, are not intended to
be a complete presentation of the Property's revenue and expenses.
In our opinion, these Statements referred to above present fairly, in all
material respects, the revenue over certain operating expenses (as described in
Note 2), of Collins Crossing for the period January 1, 2003 to March 2, 2003 and
for the years ended December 31, 2002 and 2001, in conformity with the basis of
accounting described in Note 2.
/s/ Braver and Company, P.C.
Newton, Massachusetts
February 28, 2004
F-52
COLLINS CROSSING
Statements of Revenue Over Certain Operating Expenses
For the PERIOD JANUARY 1, 2003 TO March 2, 2003 AND
FOR THE YEARS ENDED dECEMBER 31, 2002 and 2001
2003 2002 2001
---------- ---------- ----------
REVENUE
Rental income $1,347,445 $7,719,461 $7,231,817
---------- ---------- ----------
CERTAIN OPERATING EXPENSES (Note 2):
Taxes and insurance 156,372 906,803 1,080,465
Management fees 24,885 148,990 136,467
Administrative 18,688 64,208 59,948
Operating and maintenance 275,996 1,165,129 1,320,489
---------- ---------- ----------
475,941 2,285,130 2,597,369
---------- ---------- ----------
Excess of revenue over certain
operating expenses $ 871,504 $5,434,331 $4,634,448
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
F-53
COLLINS CROSSING
NOTES ACCOMPANYING THE STATEMENTS OF REVENUE OVER CERTAIN OPERATING EXPENSES
1. DESCRIPTION OF THE PROPERTY:
The accompanying statements of revenue over certain operating expenses
(the "Statements") include the operations of a commercial building located
in Dallas County, Texas (the "Property"). These Statements are the results
of operations of the Property under the basis of accounting described in
Note 2 for the period and years described prior to the acquisition of the
Property by FSP Collins Crossing Corp. The Property consists of an
eleven-story Class "A" institutional quality suburban office tower
containing approximately 298,766 square feet located on approximately 10.0
acres of land. The Property was sold to FSP Collins Crossing Corp. on
March 3, 2003.
2. BASIS OF ACCOUNTING:
The accompanying Statements have been prepared on the accrual basis of
accounting. The Statements have been prepared in accordance with Rule 3-14
of Regulation S-X of the Securities and Exchange Commission for real
estate properties acquired or to be acquired. Accordingly, these
Statements exclude certain historical expenses not comparable to the
operations of the Property after acquisition such as amortization,
depreciation, interest, corporate expenses and certain other costs not
directly related to future operations of the Property.
3. REVENUE RECOGNITION:
Rental revenue includes income from leases, certain reimbursable expenses,
and straight-line rent adjustments associated with renting the property.
For the period Year Ended Year Ended
January 1, 2003 December 31, December 31,
to March 2, 2003 2002 2001
---------------- ------------ ------------
Income from leases $1,219,096 $6,747,319 $6,415,650
Straight-line rent adjustment 53,506 294,140 252,620
Reimbursable expenses 74,843 678,002 563,547
---------- ---------- ----------
Total $1,347,445 $7,719,461 $7,231,817
========== ========== ==========
Collins Crossing has retained substantially all of the risks and benefits
of the Property and accounts for its leases as operating leases. Rental
income from leases, which includes rent concessions (including free rent
and tenant improvement allowances) and scheduled increases in rental rates
during the lease term, is recognized on a straight-line basis. The Company
does not have any percentage rent arrangements with its tenants.
Reimbursable costs are included in rental income in the period earned.
USE OF ESTIMATES:
The preparation of the Statements in conformity with the basis of
accounting described in Note 2 requires management to make estimates and
assumptions that affect the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
CONCENTRATIONS OF RISKS:
For the period January 1, 2003 to March 2, 2003 and for the years ended
December 31, 2002 and 2001, rental income was from three lessees. As such,
future receipts are dependent upon the financial strength of these lessees
and their ability to perform under the lease agreements.
F-54
COLLINS CROSSING
NOTES ACCOMPANYING THE STATEMENTS OF REVENUE OVER CERTAIN OPERATING EXPENSES
LEASES:
The Company, as lessor, has minimum future rentals due under
noncancellable operating leases as follows:
Year Ending
December 31, Amount
------------- -------------
2003 $ 5,604,000
2004 6,701,000
2005 6,947,000
2006 6,036,000
2007 5,811,000
Thereafter 14,499,000
-------------
$ 45,598,000
=============
In addition, the lessees are liable for real estate taxes and operating
expenses as direct expenses to them.
F-55
FSP Montague Business Center Corp.
Financial Statements
September 30, 2004
Table of Contents
Page
----
Financial Statements
Balance Sheets as of September 30, 2004 and December 31, 2003............. F-57
Statements of Income for the three and nine months ended
September 30, 2004 and 2003......................................... F-58
Statements of Cash Flows for the nine months ended September 30,
2004 and 2003....................................................... F-59
Notes to Financial Statements............................................. F-60
F-56
FSP Montague Business Center Corp.
Balance Sheet
(unaudited)
September 30, December 31,
(in thousands,except shares and par value amounts) 2004 2003
============================================================================================================================
Assets:
Real estate investments, at cost:
Land $ 10,500 $ 10,500
Buildings and improvements 10,499 10,499
----------------------------------------------------------------------------------------------------------------------------
20,999 20,999
Less accumulated depreciation 560 359
----------------------------------------------------------------------------------------------------------------------------
Real estate investments, net 20,439 20,640
Acquired real estate leases, net of accumulated amortization of $224 and $143 241 322
Acquired favorable real estate lease, net accumulated amortization of $2,616 and $1,744 2,616 3,488
Cash and cash equivalents 3,633 3,594
Step rent receivable 461 392
Prepaid expenses and other assets 22 14
----------------------------------------------------------------------------------------------------------------------------
Total assets $ 27,412 $ 28,450
============================================================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses $ 465 $ 411
Distributions payable -- 960
----------------------------------------------------------------------------------------------------------------------------
Total liabilities 465 1,371
----------------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies
Stockholders' Equity:
Preferred Stock, $.01 par value, 334 shares
authorized, issued and outstanding -- --
Common Stock, $.01 par value, 1 share
authorized, issued and outstanding -- --
Additional paid-in capital 30,652 30,652
Retained deficit and distributions in excess of earnings (3,705) (3,573)
----------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 26,947 27,079
----------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 27,412 $ 28,450
============================================================================================================================
See accompanying notes to financial statements.
F-57
FSP Montague Business Center Corp.
Statement of Income
For the For the
Three Months Nine Months
Ended Ended
September 30, September 30,
--------------------- ---------------------
(in thousands, except shares and per share amounts) 2004 2003 2004 2003
=========================================================================================================================
Revenues:
Rental $ 878 $ 889 $2,592 $2,737
-------------------------------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 143 60 273 235
Real estate taxes and insurance 69 90 210 262
Depreciation and amortization 94 92 282 276
=========================================================================================================================
Total expenses 306 242 765 773
-------------------------------------------------------------------------------------------------------------------------
Income (loss) before interest income 572 647 1,827 1,964
Interest income 5 9 34 28
-------------------------------------------------------------------------------------------------------------------------
Net income before common distributions 577 656 1,861 1,992
Distributions paid to common shareholders -- -- -- --
-------------------------------------------------------------------------------------------------------------------------
Net income attributable to preferred shareholders $ 577 $ 656 $1,861 $1,992
=========================================================================================================================
Weighted average number of preferred shares outstanding,
basic and diluted 334 334 334 334
=========================================================================================================================
Net income per preferred share, basic and diluted $1,728 $1,964 $5,572 $5,964
=========================================================================================================================
See accompanying notes to financial statements.
F-58
FSP Montague Business Center Corp.
Statements of Cash Flows
(unaudited)
For the Nine Months Ended
(in thousands) September 30, 2004 September 30, 2003
==================================================================================================================
Cash flows from operating activities:
Net Income $ 1,861 $ 1,992
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 282 276
Amortization of favorable leases 872 872
Changes in operating assets and liabilities:
Tenant rent receivable -- 25
Step rent receivable (69) (212)
Prepaid expenses and other assets (8) (16)
Accounts payable and accrued expenses 54 65
------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 2,992 3,002
------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets -- --
Purchase of acquired real estate leases -- --
------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities -- --
------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock -- --
Syndication costs -- --
Distributions to stockholders (2,953) (2,758)
Proceeds from long-term debt -- --
Principal payments on long-term debt -- --
------------------------------------------------------------------------------------------------------------------
Net cash (used for) provided by financing activities (2,953) (2,758)
------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 39 244
Cash and cash equivalents, beginning of period 3,594 3,330
------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 3,633 $ 3,574
==================================================================================================================
Supplemental disclosure of cash flow information:
Disclosure of non-cash financing activities:
Distributions declared but not paid $ -- $ 956
See accompanying notes to financial statements.
F-59
FSP Montague Business Center Corp.
Notes to Financial Statements
(unaudited)
1. Organization and Basis of Presentation
FSP Montague Business Center Corp. (the "Company") was organized on July 22,
2002 as a Corporation under the laws of the State of Delaware to purchase, own
and operate two adjacent single-story research and development/office buildings
located in San Jose, California (the "Property"). The Property contains
approximately 145,951 square feet of space situated on approximately 9.95 acres
of land. The company acquired the Property on August 27, 2002.
BASIS OF PRESENTATION
The accompanying interim financial statements are unaudited; however, the
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and in conjunction with the rules and regulations of the Securities
and Exchange Commission. Accordingly, they do not include all of the disclosures
required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of management, all
adjustments (consisting solely of normal recurring matters) necessary for a fair
presentation of the financial statements for these interim periods have been
included.
Certain prior-year balances have been reclassified in order to conform to the
current-year presentation.
These financial statements should be read in conjunction with the Company's
financial statements and notes thereto for its fiscal year ended December 31,
2003.
ESTIMATES AND ASSUMPTIONS
The Company prepares its financial statements and related notes in conformity
with accounting principles generally accepted in the United States of America
("GAAP"). These principles require management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
2. Net Income Per Share
Basic net income per preferred share is computed by dividing net income by the
weighted average number of preferred shares outstanding during the period.
Diluted net income per preferred share reflects the potential dilution that
could occur if securities or other contracts to issue shares were exercised or
converted into shares. There were no potential dilutive shares outstanding at
September 30, 2004. Subsequent to the completion of the offering of preferred
shares, the holders of common stock are not entitled to share in any income nor
in any related distribution.
3. Income Taxes
The Company has elected to be taxed as a Real Estate Investment Trust ("REIT")
under Sections 856-860 of the Internal Revenue Code of 1986, as amended. In
order to qualify as a REIT, the Company is required to distribute at least 90%
of its taxable income to shareholders and to meet certain asset and income tests
as well as certain other requirements. The Company will generally not be liable
for federal income taxes, provided it satisfies these requirements. Even as a
qualified REIT, the Company is subject to certain state and local taxes on its
income and property
F-60
FSP Montague Business Center Corp.
Notes to Financial Statements
(unaudited)
4. Related Party Transactions
The Company executed a management agreement with FSP Property Management LLC, an
affiliate of FSP, that provides for a management fee equal to 1% of collected
revenues and is cancelable with 30 days notice by either party. Fees incurred
under the agreement were $12,000 and $11,000 for the three months ended
September 30, 2004 and 2003, respectively and $34,000 and $34,000 for the nine
months ended September 30, 2004 and 2003 respectively.
5. Subsequent Events
On October 1, 2004, the Company declared a distribution of $3,000.00 per share
of preferred stock payable to holders of record as of October 1, 2004.
F-61
FSP Montague Business Center Corp.
Financial Statements
December 31, 2003 and 2002
Table of Contents
Page
----
Financial Statements
Independent Auditor's Report............................................. F-63
Balance Sheets as of December 31, 2003 and 2002.......................... F-64
Statements of Operations for the year ended December 31, 2003
and for the period July 22, 2002 (date of inception) to
December 31, 2002.................................................. F-65
Statements of Changes in Stockholders' Equity for the year ended
December 31, 2003 and for the period July 22, 2002 (date of
inception) to December 31, 2002.................................... F-66
Statements of Cash Flows for the year ended December 31, 2003
and for the period July 22, 2002 (date of inception) to
December 31, 2002.................................................. F-67
Notes to the Financial Statements........................................ F-68
F-62
[LETTERHEAD OF BRAVER AND COMPANY, P.C.]
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
FSP Montague Business Center Corp.
We have audited the accompanying balance sheets of FSP Montague Business Center
Corp. as of December 31, 2003, and 2002, and the related statements of
operations, changes in stockholders' equity and cash flows for the year ended
December 31, 2003 and for the period from July 22, 2002 (date of inception) to
December 31, 2002. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FSP Montague Business Center
Corp. as of December 31, 2003 and 2002, and the results of its operations and
its cash flows for the year ended December 31, 2003 and for the initial period
ended December 31, 2002 in conformity with accounting principles generally
accepted in the United States of America.
/s/ Braver and Company, P.C.
Newton, Massachusetts
January 23, 2004
F-63
FSP Montague Business Center Corp.
Balance Sheets
December 31, December 31,
(in thousands, except shares and par value amounts) 2003 2002
=============================================================================================================
Assets:
Real estate investments, at cost:
Land $ 10,500 $ 10,500
Buildings and improvements 10,499 10,144
-------------------------------------------------------------------------------------------------------------
20,999 20,644
Less accumulated depreciation 359 98
-------------------------------------------------------------------------------------------------------------
Real estate investments, net 20,640 20,546
Acquired real estate lease, net of accumulated amortization of $143 and $36 322 429
Acquired favorable real estate lease, net of accumulated amortization
of $1,744 and $581 3,488 4,651
Cash and cash equivalents 1,587 957
Cash-funded reserves 2,007 2,373
Step rent receivable 392 130
Prepaid expenses and other assets 14 25
-------------------------------------------------------------------------------------------------------------
Total assets $ 28,450 $ 29,111
=============================================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses $ 411 $ 28
Distributions payable 960 902
-------------------------------------------------------------------------------------------------------------
Total liabilities 1,371 930
-------------------------------------------------------------------------------------------------------------
Commitments and Contingencies:
Stockholders' Equity:
Preferred Stock, $.01 par value, 334 shares
authorized, issued and outstanding -- --
Common Stock, $.01 par value, 1 share
authorized, issued and outstanding -- --
Additional paid-in capital 30,652 30,652
Retained deficit and distributions in excess of earnings (3,573) (2,471)
-------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 27,079 28,181
-------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 28,450 $ 29,111
=============================================================================================================
See accompanying notes to financial statements.
F-64
FSP Montague Business Center Corp.
Statements of Operations
For the Period
For the July 22, 2002
Year Ended (date of inception) to
(in thousands, except shares and per share amounts) December 31, 2003 December 31, 2002
=============================================================================================================
Revenue:
Rental $3,645 $ 1,008
-------------------------------------------------------------------------------------------------------------
Total revenue 3,645 1,008
-------------------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 314 103
Real estate taxes and insurance 339 83
Depreciation and amortization 368 134
Interest -- 1,949
-------------------------------------------------------------------------------------------------------------
Total expenses 1,021 2,269
-------------------------------------------------------------------------------------------------------------
Net income (loss) before interest income 2,624 (1,261)
Interest income 45 12
-------------------------------------------------------------------------------------------------------------
Net income (loss) before common distributions 2,669 (1,249)
Distributions paid to common shareholders -- 32
-------------------------------------------------------------------------------------------------------------
Net income (loss) attributable to preferred shareholders $2,669 $(1,281)
=============================================================================================================
Weighted average number of preferred shares outstanding,
basic and diluted 334 334
=============================================================================================================
Net income (loss) per preferred share, basic and diluted $7,991 $(3,835)
=============================================================================================================
See accompanying notes to financial statements.
F-65
FSP Montague Business Center Corp.
Statements of Changes in Stockholders' Equity
For the Year ended December 31, 2003
and for the Period July 22, 2002
(date of inception) to December 31, 2002
Retained Deficit
Additional and Distributions Total
Preferred Common Paid in in Excess of Stockholders'
(in thousands, except shares) Stock Stock Capital Earnings Equity
===========================================================================================================================
Private offering of 334 shares, net $ -- $ -- $ 30,652 $ -- $ 30,652
Distributions to stockholders -- -- -- (1,222) (1,222)
Net loss -- -- -- (1,249) (1,249)
---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 -- -- 30,652 (2,471) 28,181
Distributions to stockholders -- -- -- (3,771) (3,771)
Net income -- -- -- 2,669 2,669
---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 $ -- $ -- $ 30,652 $ (3,573) $ 27,079
===========================================================================================================================
See accompanying notes to financial statements.
F-66
FSP Montague Business Center Corp.
Statements of Cash Flows
For the Period
For the July 22, 2002
Year Ended (date of inception) to
December 31, December 31,
(in thousands) 2003 2002
=====================================================================================================
Cash flows from operating activities:
Net income (loss) $ 2,669 $ (1,249)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization 368 134
Amortization of favorable lease 1,164 581
Changes in operating assets and liabilities:
Cash-funded reserves 366 (2,373)
Step rent receivables (262) (130)
Prepaid expenses and other assets 11 (25)
Accounts payable and accrued expenses 383 28
-----------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 4,699 (3,034)
-----------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets (355) (20,644)
Purchase of acquired real estate leases -- (465)
Purchase of acquired favorable real estate leases -- (5,232)
-----------------------------------------------------------------------------------------------------
Net cash used for investing activities (355) (26,341)
-----------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock -- 33,410
Syndication costs -- (2,758)
Distributions to stockholders (3,714) (320)
Proceeds from long-term debt -- 26,000
Principal payments on long-term debt -- (26,000)
-----------------------------------------------------------------------------------------------------
Net cash (used for) provided by financing activities (3,714) 30,332
-----------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 630 957
Cash and cash equivalents, beginning of period 957 --
-----------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 1,587 $ 957
=====================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ -- $ 1,949
Disclosure of non-cash financing activities:
Distributions declared but not paid $ 960 $ 902
See accompanying notes to financial statements.
F-67
FSP Montague Business Center Corp.
Notes to Financial Statements
1. Organization
FSP Montague Business Center Corp. (the "Company") was organized on July 22,
2002 as a Corporation under the laws of the State of Delaware to purchase, own
and operate two adjacent single-story research and development/office buildings
located in San Jose, California (the "Property"). The Property contains
approximately 145,951 square feet of space situated on approximately 9.95 acres
of land. The Company acquired the Property on August 27, 2002.
2. Summary of Significant Accounting Policies
BASIS OF PRESENTATION
The results of operations from inception to December 31, 2002 are not
necessarily indicative of the results to be obtained for other interim periods
or for the full fiscal year.
ESTIMATES AND ASSUMPTIONS
The Company prepares its financial statements and related notes in conformity
with accounting principles generally accepted in the United States of America
("GAAP"). These principles require management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
REAL ESTATE AND DEPRECIATION
Real estate assets are stated at the lower of cost or fair value, as
appropriate, less accumulated depreciation.
Costs related to property acquisition and improvements are capitalized. Typical
capital items include new roofs, site improvements, various exterior building
improvements and major interior renovations. Funding for capital improvements
typically is provided by cash set aside at the time the Property was purchased.
Routine replacements and ordinary maintenance and repairs that do not extend the
life of the assets are expensed as incurred. Typical expense items include
interior painting, landscaping and minor carpet replacements. Funding for
repairs and maintenance items typically is provided by cash flows from operating
activities.
Depreciation is computed using the straight line method over the assets'
estimated useful lives as follows:
Category Years
-------- -----
Building - Commercial 39
Building Improvements 15-39
Furniture and equipment 5-7
F-68
FSP Montague Business Center Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
REAL ESTATE AND DEPRECIATION (continued)
The following schedule reconciles the cost of the Property as shown in the
Offering Memorandum as to the amounts shown on the Company's Balance Sheets:
(in thousands)
--------------
Price per Offering Memorandum $ 26,000
Plus: Acquisition fees 167
Plus: Other acquisition costs 174
--------------------------------------------------
Total Acquisition Costs $ 26,341
==================================================
These costs are reported in the Company's Balance Sheets as follows:
Land $ 10,500
Building 10,144
Acquired real estate lease 465
Acquired favorable lease 5,232
--------------------------------------------------
Total reported on Balance
Sheet $ 26,341
==================================================
The Company evaluates its assets used in operations by identifying indicators of
impairment and by comparing the sum of the estimated undiscounted future cash
flows for each asset to the asset's carrying value. When indicators of
impairment are present and the sum of the undiscounted future cash flows is less
than the carrying value of such asset, an impairment loss is recorded equal to
the difference between the asset's current carrying value and its fair value
based on discounting its estimated future cash flows. At December 31, 2003 and
2002 no such indicators of impairment were identified.
ACQUIRED REAL ESTATE LEASE
Acquired real estate lease represents the estimated value of legal and leasing
costs related to the acquired leases that were included in the purchase price
when the Company acquired the Property. Under SFAS No. 141 "Business
Combinations" , which was approved by the Financial Accounting Standards Board
("FASB") in June 2001, the Company is required to segregate these costs from its
investment in real estate. The Company subsequently amortizes these costs on a
straight-line basis over life of the related lease. Amortization expense of
approximately $107,000 and $36,000 is included in depreciation and amortization
in the Company's Statements of Operations for the periods ended December 31,
2003 and 2002, respectively.
The acquired real estate lease included in the purchase price of the property
was $465,000 and is being amortized over a period of five years.
The estimated annual amortization expense for the three years succeeding
December 31, 2003 are as follows:
(in thousands)
--------------
2004 $ 107
2005 $ 107
2006 $ 107
F-69
FSP Montague Business Center Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
ACQUIRED FAVORABLE REAL ESTATE LEASE
Acquired favorable real estate lease represents the value related to the leases
when the lease payments due under a tenant's lease exceed the market rate of the
lease at the date the Property was acquired. Under SFAS 141 the Company is
required to capitalize this difference and report it separately from its
investment in real estate. The Company subsequently amortizes this amount on a
straight-line basis over the remaining life of the tenant's lease. Amortization
of $1,164,000 and $581,000 is shown as a reduction of rental income in the
Company's Statements of Operations for the periods ended December 31, 2003 and
2002, respectively.
The acquired favorable real estate lease included in the purchase price of the
property was $5,232,000 and is being amortized over a period of five years in
respect of the lease assumed.
The estimated annual amortization expense for the three years succeeding
December 31, 2003 are as follows:
(in thousands)
--------------
2004 $ 1,163
2005 $ 1,163
2006 $ 1,162
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an initial
maturity of three months or less to be cash equivalents.
CASH-FUNDED RESERVES
The Company has set aside funds in anticipation of future capital needs of the
Property. These funds typically are used for the payment of real estate assets
and deferred leasing commissions; however, there is no legal restriction on
their use and they may be used for any Company purpose.
MARKETABLE SECURITIES
The Company accounts for investments in debt securities under the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". The Company typically
classifies its debt securities as available-for-sale.
There were no investments in marketable securities at December 31, 2003 and
2002.
CONCENTRATION OF CREDIT RISKS
Cash, cash equivalents and short-term investments are financial instruments that
potentially subject the Company to a concentration of credit risk. The Company
maintains its cash balances and short-term investments principally in one bank
which the Company believes to be creditworthy. The Company periodically assesses
the financial condition of the bank and believes that the risk of loss is
minimal. Cash balances held with various financial institutions frequently
exceed the insurance limit of $100,000 provided by the Federal Deposit Insurance
Corporation.
For the periods ended December 31, 2003 and 2002, 100% of the rental income was
derived from one tenant, Novellus Systems, Inc. As such, future receipts are
dependent upon the financial strength of the lessee and its ability to perform
under the lease agreement.
FINANCIAL INSTRUMENTS
The Company estimates that the carrying value of cash and cash equivalents and
cash-funded reserves approximate their fair values based on their short-term
maturity and prevailing interest rates.
F-70
FSP Montague Business Center Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
STEP RENT RECEIVABLE
Certain leases provide for fixed increases over the life of the lease. Rental
revenue is recognized on the straight-line basis over the related lease term;
however, billings by the Company are based on required minimum rentals in
accordance with the lease agreements. Step rent receivable which is the
cumulative revenue recognized in excess of amounts billed by the Company, was
$392,000 and $130,000 at December 31, 2003 and 2002, respectively.
SYNDICATION FEES
Syndication fees are selling commissions and other costs associated with the
initial offering of the Company's preferred shares. Such costs in the amount of
$2,758,000 have been reported as a reduction in Stockholders' Equity in the
Company's Balance Sheet.
REVENUE RECOGNITION
The Company has retained substantially all of the risks and benefits of
ownership of the Company's commercial property and accounts for its lease as an
operating lease. Rental income from the lease, which may include rent concession
(including free rent and tenant improvement allowances) and scheduled increases
in rental rates during the lease term, is recognized on a straight-line basis.
The Company does not have any percentage rent arrangements with its commercial
property tenant. Reimbursable costs are included in rental income in the period
earned. A schedule showing the components of rental revenue is shown below.
Year Ended Period Ended
December, 31 December, 31
(in thousands) 2003 2002
============================================================
Income from leases $ 3,789 $ 1,269
Straight-line rent adjustment 262 130
Reimbursable expenses 758 190
Amortization of acquired
favorable real estate lease (1,164) (581)
------------------------------------------------------------
Total $ 3,645 $ 1,008
============================================================
INTEREST INCOME
Interest income is recognized when the related services are performed and the
earnings process is complete.
INCOME TAXES
The Company has elected to be taxed as a Real Estate Investment Trust ("REIT")
under the Internal Revenue Code of 1986, as amended. As a REIT, the Company
generally is entitled to a tax deduction for dividends paid to its shareholders,
thereby effectively subjecting the distributed net income of the Company to
taxation at the shareholder level only. The Company must comply with a variety
of restrictions to maintain its status as a REIT. These restrictions include the
type of income it can earn, the type of assets it can hold, the number of
shareholders it can have and the concentration of their ownership, and the
amount of the Company's taxable income that must be distributed annually.
NET INCOME PER SHARE
The Company follows Statement of Financial Accounting Standards No. 128
"Earnings per Share", which specifies the computation, presentation and
disclosure requirements for the Company's net income per share. Basic net income
per preferred share is computed by dividing net income by the weighted average
number of preferred shares outstanding during the period. Diluted net income per
preferred share reflects the potential dilution that could occur if securities
or other contracts to issue shares were convertible into shares. There were no
potential dilutive shares outstanding at December 31, 2003 and 2002. Subsequent
to the completion of the offering of preferred shares, the holders of common
stock are not entitled to share in any income nor in any related distribution.
F-71
FSP Montague Business Center Corp.
Notes to Financial Statements.
3. Recent Accounting Standards
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities". This statement was effective January 1, 2003. SFAS
No. 146 replaces current accounting literature and requires the recognition of
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. The adoption of
this statement did not have a material effect on the Company's financial
position, results of operations and cash flows.
4. Income Taxes
The Company files as a REIT under Sections 856-860 of the Internal Revenue Code
of 1986, as amended. In order to qualify as a REIT, the Company is required to
distribute at least 90% of its taxable income to shareholders and to meet
certain asset and income tests as well as certain other requirements. The
Company will generally not be liable for federal income taxes, provided it
satisfies these requirements. Even as a qualified REIT, the Company is subject
to certain state and local taxes on its income and property.
For the period ended December 31, 2002, the Company incurred a net operating
loss for income tax purposes of approximately $810,000 that can be carried
forward until it expires in the year 2022.
At December 31, 2003, the Company's net tax basis of its real estate assets was
$26,136,000.
The following schedule reconciles net income (loss) to taxable income subject to
dividend requirements:
Year Ended Period Ended
December 31, December 31,
(in thousands) 2003 2002
==============================================================================
GAAP net income (loss) $ 2,669 $ (1,249)
Add: Book depreciation and amortization 368 134
Amortization of favorable lease 1,164 581
Deferred rent 379 --
Less: Tax depreciation and amortization (399) (142)
Straight-line rents (262) (130)
------------------------------------------------------------------------------
Taxable income (loss)(1) subject to a dividend
requirement $ 3,919 $ (806)
==============================================================================
(1) A tax loss is not subject to a dividend requirement.
The following schedule reconciles cash distributions paid to the dividends paid
deduction:
Year Ended Year Ended
December 31, 2003 December 31, 2002
Per Preferred Per Common Per Preferred Per Common
(in thousands, except per share data) Total Share Share Total Share Share
---------------------------------------------------------------------------------------------------------------------
Cash distributions paid $ 3,714 $11,120 $ -- $ 320 $ 288,000 $ 3,200
Less: Return of captial -- -- -- (320) (288,000) (3,200)
---------------------------------------------------------------------------------------------------------------------
Dividends paid deduction $ 3,714 $11,120 $ -- $ -- $ -- $ --
=====================================================================================================================
F-72
FSP Montague Business Center Corp.
Notes to Financial Statements
5. Capital Stock
PREFERRED STOCK
Generally, each holder of Shares of Preferred Stock is entitled to receive
ratably all distributions, if any, declared by the Board of Directors out of
funds legally available. The right to receive distributions shall be
non-cumulative, and no right to distributions shall accrue by reason of the fact
that no distribution has been declared in any prior year. Each holder of Shares
will be entitled to receive, to the extent that funds are available therefore,
$100,000 per Share, before any payment to the holder of Common Stock, out of
distributions to stockholders upon liquidation, dissolution or the winding up of
the Company; the balance of any such funds available for distribution will be
distributed among the holders of Shares and the holder of Common Stock, pro rata
based on the number of shares held by each; provided, however, that for these
purposes, one share of Common Stock will be deemed to equal one-tenth of a share
of Preferred Stock.
In addition to certain voting rights provided in the corporate agreements, the
holder of Shares, acting by consent of at least 51%, shall have the further
right to approve or disapprove a proposed sale of the Property, the merger of
the Company with any other entity and amendments to the corporate charter. A
vote of the holders of 66.67% of the Shares is required for the issue of any
additional shares of capital stock. Holders of Shares have no redemption or
conversion rights.
COMMON STOCK
Franklin Street Properties Corp. ("FSP"), is the holder of the Company's Common
Stock. FSP has the right, as one class together with the holders of Preferred
Stock, to vote to elect the directors of the Company and to vote on all matters
except those voted by the holders of Shares of Preferred Stock. Subsequent to
the completion of the offering of the preferred shares the holders of common
shares are not entitled to share in any earnings nor any related distribution.
6. Related Party Transactions
The Company executed a management agreement with FSP Property Management LLC, an
affiliate of FSP, that provides for a management fee equal to 1% of collected
revenues and is cancelable with 30 days notice by either party. For the years
ended December 31, 2003 and 2002, fees incurred under the agreement were $45,000
and $14,000, respectively.
An acquisition fee of $167,000 and other costs of $104,000 were paid in 2002 to
an affiliate of the Common Shareholder. Such fees were included in the cost of
the real estate.
Syndication fees of $2,758,000 were paid in 2002 to an affiliate of the Common
Shareholder for services related to syndication of the Company's preferred
stock.
During 2002, the Company borrowed and repaid in full a note payable to FSP,
principal of $26,000,000, with interest equal to the Citizens Bank base rate.
Interest paid to FSP was $29,000. The average interest rate during the time the
loan was outstanding was 4.75%.
A commitment fee of $1,920,000 was paid to FSP for obtaining the first mortgage
loan and is included in interest expense on the Statement of Operations.
The Company paid a distribution of $32,000 to the common shareholder relating to
operating activities of the Company prior to the completion of the offering of
preferred shares.
F-73
FSP Montague Business Center Corp.
Notes to Financial Statements
7. Commitments and Contingencies
The Company, as lessor, has minimum future rentals due under a non-cancelable
operating lease as follows:
Year Ending
(in thousands) December 31, Amount
-------------- ------------ ----------
2004 $ 3,982
2005 4,174
2006 4,390
----------
$ 12,546
==========
In addition, the lessee is liable for real estate taxes and certain operating
expenses of the Property.
F-74
SCHEDULE III
MONTAGUE BUSINESS CENTER
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2003
Initial Cost
---------------------------------
Costs
Capitalized
Buildings (Disposals)
Improvements Subsequent
and to
Description Encumbrances (1) Land Equipment Acquisition
---------------- ---- --------- ------------
(in thousands)
Montague Business Center, San Jose, CA 10,500 10,499 --
Historical Costs
-------------------------------------------------------------------------------------
Buildings Total Costs,
Improvements Net of Depreciable
and Accumulated Accumulated Life Date of
Description Land Equipment Total (2) Depreciation Depreciation Years Acquisition
---- --------- --------- ------------ ------------ ----- -----------
(in thousands)
Montague Business Center, San Jose, CA 10,500 10,499 20,999 359 20,640 5-39 2002
(1) There are no encumbrances on the above properties.
(2) The aggregate cost for Federal Income Tax purposes is $26,136.
F-75
Montague Business Center
The following table summarizes the changes in the Company's real estate
investments and accumulated depreciation:
December 31,
----------------------
(in thousands) 2003 2002
==========================================================================
Real estate investments, at cost:
Balance, beginning of period $20,644 $ --
Acquisitions -- 20,644
Improvements 355 --
Dispositions -- --
--------------------------------------------------------------------------
Balance, end of period $20,999 $20,644
==========================================================================
Accumulated depreciation:
Balance, beginning of period $ 98 $ --
Depreciation 261 98
Dispositions -- --
--------------------------------------------------------------------------
Balance, end of period $ 359 $ 98
==========================================================================
F-76
MONTAGUE BUSINESS CENTER
FOR THE PERIOD JANUARY 1, 2002 TO AUGUST 26, 2002
AND FOR THE YEAR ENDED DECEMBER 31, 2001
CONTENTS
PAGE
Independent auditors' report F-78
Statements of revenue over certain operating expenses F-79
Notes accompanying the statements of revenue over certain operating
expenses F-80
F-77
INDEPENDENT AUDITORS' REPORT
To the Stockholders
FSP Montague Business Center Corp.
We have audited the accompanying statements of revenue over certain operating
expenses (the "Statements") of Montague Business Center for the period January
1, 2002 to August 26, 2002 and for the year ended December 31, 2001. These
Statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these Statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the Statements
are free of material misstatements. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the Statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall Statements'
presentation. We believe that our audits provide a reasonable basis for our
opinion.
The accompanying Statements were prepared to comply with the requirements of
Rule 3-14 of Regulation S-X of the Securities and Exchange Commission, and
exclude certain expenses described in Note 2 and, therefore, are not intended to
be a complete presentation of the Property's revenue and expenses.
In our opinion, these Statements referred to above present fairly, in all
material respects, the revenue over certain operating expenses (as described in
Note 2) of Montague Business Center for the period January 1, 2002 to August 26,
2002 and for the year ended December 31, 2001, in conformity with the basis of
accounting described in Note 2.
/s/ Braver and Company, P.C.
Newton, Massachusetts
February 28, 2004
F-78
MONTAGUE BUSINESS CENTER
Statements of Revenue Over Certain Operating Expenses
For the PERIOD JANUARY 1, 2002 TO aUGUST 26, 2002
and For the year ended december 31, 2001
2002 2001
------------ ------------
REVENUE:
Rental income $ 2,772,694 $ 3,822,325
------------ ------------
CERTAIN OPERATING EXPENSES (Note 2):
Taxes and insurance 117,594 223,859
Management fees 44,055 81,426
Administrative 11,095 4,169
Operating and maintenance 60,751 115,926
------------ ------------
233,495 425,380
------------ ------------
Excess of revenue over certain operating expenses $ 2,539,199 $ 3,396,945
============ ============
The accompanying notes are an integral part of these financial statements.
F-79
MONTAGUE BUSINESS CENTER
NOTES ACCOMPANYING THE STATEMENTS OF REVENUE OVER CERTAIN OPERATING EXPENSES
1. DESCRIPTION OF THE PROPERTY:
The accompanying statements of revenue over certain operating expenses
(the "Statements") include the operations of a commercial building located
in San Jose, California (the "Property"). These Statements are the results
of operations of the Property under the basis of accounting described in
Note 2 for the period and year described prior to the acquisition of the
Property by FSP Montague Business Center Corp. The Property consists of
two adjacent single-story Class "A" suburban office buildings containing
approximately 145,951 square feet located on approximately 9.95 acres of
land. The Property was sold to FSP Montague Business Center Corp. on
August 27, 2002.
2. BASIS OF ACCOUNTING:
The accompanying statements have been prepared on the accrual basis of
accounting. The Statements have been prepared in accordance with Rule 3-14
of Regulation S-X of the Securities and Exchange Commission for real
estate properties acquired or to be acquired. Accordingly, these
Statements exclude certain historical expenses not comparable to the
operations of the Property after acquisition such as amortization,
depreciation, interest, corporate expenses and certain other costs not
directly related to future operations of the Property.
3. REVENUE RECOGNITION:
Rental revenue includes income from leases, certain reimbursable expenses,
straight-line rent adjustments and other income associated with renting
the property. A summary of rental revenue is shown in the following table:
For the period
January 1, 2002 Year Ended
to August 26, 2002 December 31, 2001
------------------ -----------------
Income from leases $2,202,756 $2,731,934
Straight-line rent adjustment 245,307 679,196
Reimbursable expenses 317,190 411,195
Other income 7,441 --
----------- -----------
Total $2,772,694 $3,822,325
=========== ===========
Montague Business Center has retained substantially all of the risks and
benefits of the Property and accounts for its leases as operating leases.
Rental income from leases, which include rent concessions (including free
rent and tenant improvement allowances) and scheduled increases in rental
rates during the lease term, is recognized on a straight-line basis. The
Company does not have any percentage rent arrangements with its tenants.
Reimbursable costs are included in rental income in the period earned.
4. USE OF ESTIMATES:
The preparation of the Statements in conformity with the basis of
accounting described in Note 2 requires management to make estimates and
assumptions that affect the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
F-80
MONTAGUE BUSINESS CENTER
NOTES ACCOMPANYING THE STATEMENTS OF REVENUE OVER CERTAIN OPERATING EXPENSES
8. CONCENTRATIONS OF RISKS:
For the period January 1, 2002 to August 26, 2002, and for the year ended
December 31, 2001, rental income was from various lessees. As such, future
receipts are dependent upon the financial strength of the lessees and
their ability to perform under the lease agreements.
6. LEASES:
The Company, as lessor, has minimum future rentals due under
noncancellable operating leases as follows:
Year Ending
December 31, Amount
------------ ------------
2002 $ 1,269,000
2003 3,789,000
2004 3,982,000
2005 4,174,000
2006 4,390,000
-------------
$ 17,604,000
=============
In addition, the lessees are liable for real estate taxes and operating
expenses as direct expenses to them.
F-81
FSP Royal Ridge Corp.
Financial Statements
September 30, 2004
Table of Contents
Page
----
Financial Statements
Balance Sheet as of September 30, 2004 and December 31, 2003............... F-83
Statement of Income for the three and nine months ended September
30, 2004............................................................. F-84
Statement of Cash Flows for the nine months ended September
30, 2004 and 2003.................................................... F-85
Notes to Financial Statements.............................................. F-86
F-82
FSP Royal Ridge Corp.
Balance Sheet
(unaudited)
September 30, December 31,
(in thousands,except shares and par value amounts) 2004 2003
=============================================================================================================================
Assets:
Real estate investments, at cost:
Land $ 1,649 $ 1,649
Buildings and improvements 16,224 16,224
----------------------------------------------------------------------------------------------------------------------------
17,873 17,873
Less accumulated depreciation 687 375
----------------------------------------------------------------------------------------------------------------------------
Real estate investments, net 17,186 17,498
Acquired real estate leases, net of accumulated amortization of $260 and $143 858 975
Acquired favorable real estate lease, net of accumulated net amortization of $775 and $426 2,558 2,907
Cash and cash equivalents 2,510 2,251
Restricted cash 571 571
Step rent receivable 1,040 954
Prepaid expenses and other assets 9 14
----------------------------------------------------------------------------------------------------------------------------
Total assets $ 24,732 $ 25,170
=============================================================================================================================
Liabilities and stockholders' equity:
Liabilities:
Accounts payable and accrued expenses $ 475 $ 240
Distributions payable -- 536
----------------------------------------------------------------------------------------------------------------------------
Total liabilities 475 776
----------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 297.5 shares
authorized, issued and outstanding -- --
Common stock, $.01 par value, 1 share
authorized, issued and outstanding -- --
Additional paid-in capital 27,277 27,277
Retained deficit and distributions in excess of earnings (3,020) (2,883)
----------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 24,257 24,394
----------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 24,732 $ 25,170
=============================================================================================================================
See accompanying notes to financial statements.
F-83
FSP Royal Ridge Corp.
Statement of Income
(unaudited)
For the For the
Three Months Nine Months
Ended Ended
September 30, September 30,
------------------- -----------------------
(in thousands, except shares and per share amounts) 2004 2003 2004 2003
==================================================================================================================
Revenues:
Rental $ 769 $ 728 $2,286 $ 1,562
-----------------------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 290 209 693 488
Real Estate Taxes and insurance 81 66 250 214
Depreciation and amortization 143 130 429 367
Interest -- -- -- 1,731
==================================================================================================================
Total expenses 514 405 1,372 2,800
-----------------------------------------------------------------------------------------------------------------
Income (loss) before interest income 255 323 914 (1,238)
Interest income 9 4 27 16
-----------------------------------------------------------------------------------------------------------------
Net income (loss) before common distributions 264 327 941 (1,222)
Distributions paid to common shareholders -- 14 -- 14
-----------------------------------------------------------------------------------------------------------------
Net income (loss) attributable to preferred shareholders $ 264 $ 313 $ 941 $(1,236)
==================================================================================================================
Weighted average number of preferred shares outstanding,
basic and diluted 297.5 297.5 297.5 297.5
==================================================================================================================
Net income per preferred share, basic and diluted $ 887 $1,052 $3,163 $(4,155)
==================================================================================================================
See accompanying notes to financial statements.
F-84
FSP Royal Ridge Corp.
Statements of Cash Flows
(unaudited)
For the Nine Months Ended
(in thousands) September 30, 2004 September 30, 2003
==================================================================================================================
Cash flows from operating activities:
Net Income (loss) $ 941 $ (1,222)
Adjustments to reconcile net income (loss) to net cash provided by
(used for) operating activities:
Depreciation and amortization 429 367
Amortization of favorable lease 349 310
Changes in operating assets and liabilities:
Restricted cash -- (571)
Tenant rent receivables -- (2)
Step rent receivable (86) (932)
Prepaid expenses and other assets 5 (29)
Accounts payable and accrued expenses 235 469
------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 1,873 (1,610)
------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets -- (17,873)
Purchase of acquired real estate leases -- (1,118)
Purchase of acquired favorable real estate leases -- (3,333)
------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities -- (22,324)
------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock -- 29,760
Syndication costs -- (2,483)
Distributions to stockholders (1,614) (864)
Proceeds from long-term debt -- 24,250
Principal payments on long-term debt -- (24,250)
------------------------------------------------------------------------------------------------------------------
Net cash (used for) provided by financing activities (1,614) 26,413
------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 259 2,479
Cash and cash equivalents, beginning of period 2,251 --
------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 2,510 $ 2,479
==================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ -- $ 1,731
Disclosure of non-cash financing activities:
Distributions declared but not paid $ -- $ 525
See accompanying notes to financial statements.
F-85
FSP Royal Ridge Corp.
Notes to Financial Statements
(unaudited)
1. Organization and Basis of Presentation
FSP Royal Ridge Corp. (the "Company") was organized on December 20, 2002 as a
Corporation under the laws of the State of Delaware to purchase, own and operate
a six-story Class "A" suburban office building containing approximately 161,366
rental square feet of space located on approximately 13.2 acres of land in
Alpharetta, GA (the "Property). The Company acquired the Property on January 30,
2003.
BASIS OF PRESENTATION
The accompanying interim financial statements are unaudited; however, the
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and in conjunction with the rules and regulations of the Securities
and Exchange Commission. Accordingly, they do not include all of the disclosures
required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of management, all
adjustments (consisting solely of normal recurring matters) necessary for a fair
presentation of the financial statements for these interim periods have been
included.
These financial statements should be read in conjunction with the Company's
financial statements and notes thereto for its fiscal year ended December 31,
2003.
ESTIMATES AND ASSUMPTIONS
The Company prepares its financial statements and related notes in conformity
with accounting principles generally accepted in the United States of America
("GAAP"). These principles require management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
RECLASSIFICATIONS
Certain balances in the 2003 financial statements have been reclassified to
conform to the 2004 presentation.
2. Net Income Per Share
Basic net income per preferred share is computed by dividing net income
attributed to preferred shareholders by the weighted average number of preferred
shares outstanding during the period. Diluted net income per preferred share
reflects the potential dilution that could occur if securities or other
contracts to issue shares were exercised convertible into shares. There were no
potential dilutive shares outstanding at September 30, 2004 and 2003. Subsequent
to the completion of the offering of preferred shares, the holders of common
stock are not entitled to share in any income nor in any related distribution.
3. Income Taxes
The Company has elected to be taxed as a Real Estate Investment Trust ("REIT")
under Sections 856-860 of the Internal Revenue Code of 1986, as amended. In
order to qualify as a REIT, the Company is required to distribute at least 90%
of its taxable income to shareholders and to meet certain asset and income tests
as well as certain other requirements. The Company will generally not be liable
for federal income taxes, provided it satisfies these requirements. Even as a
qualified REIT, the Company is subject to certain state and local taxes on its
income and property.
F-86
FSP Royal Ridge Corp.
Notes to Financial Statements
(unaudited)
4. Related Party Transactions
The Company executed a management agreement with FSP Property Management LLC, an
affiliate of FSP, that provides for a management fee equal to 1% of collected
revenues and is cancelable with 30 days notice by either party. Fees incurred
under the agreement were $9,000 and $9,000 for the three months ended September
30, 2004 and 2003, respectively and $26,000 and $9,000 for the nine months ended
September 30, 2004 and 2003, respectively.
An acquisition fee of $149,000 and other costs of $111,000 were paid in the nine
months ended September 30, 2003 to an affiliate of the common shareholder. Such
fees were included in the cost of the real estate.
Syndication fees of $2,380,000 were paid in the nine months ended September 30,
2003 to an affiliate of the common shareholder for services related to
syndication of the Company's preferred stock.
During the nine months ended September 30, 2003, the Company borrowed and repaid
in full a note payable to FSP, principal of $24,250,000 with interest equal to
the Citizens Bank base rate. Interest paid to FSP was $20,000. The average
interest rate during the time the loan was outstanding was 4.50%.
A commitment fee of $1,711,000 was paid to FSP during the nine months ended
September 30, 2003 for obtaining the first mortgage loan. Such amount is
included in interest expense on the Statement of Operations.
The Company paid a distribution of $14,000 during the nine months ended
September 30, 2003 to the common shareholder relating to operating activities of
the Company prior to the completion of the offering of preferred shares.
5. Subsequent Events
On October 1, 2004 the Company declared a distribution of $1,787.00 per share of
preferred stock payable to holders of record as of October 1, 2004.
F-87
FSP Royal Ridge Corp.
Financial Statements
December 31, 2003
Table of Contents
Page
----
Financial Statements
Independent Auditor's Report.............................................. F-89
Balance Sheet as of December 31, 2003..................................... F-90
Statement of Operations for the year ended December 31, 2003.............. F-91
Statement of Changes in Stockholders' Equity for the year ended
December 31, 2003................................................... F-92
Statement of Cash Flows for the year ended December 31, 2003.............. F-93
Notes to the Financial Statements......................................... F-94
F-88
[LETTERHEAD OF BRAVER AND COMPANY, P.C.]
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
FSP Royal Ridge Corp.
We have audited the accompanying balance sheet of FSP Royal Ridge Corp. as of
December 31, 2003, and the related statements of operations, changes in
stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FSP Royal Ridge Corp. as of
December 31, 2003, and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States of America.
/s/ Braver and Company, P.C.
Newton, Massachusetts
January 23, 2004
F-89
FSP Royal Ridge Corp.
Balance Sheet
December 31,
(in thousands, except shares and par value amounts) 2003
======================================================================================================
Assets:
Real estate investments, at cost:
Land $ 1,649
Buildings and improvements 16,224
------------------------------------------------------------------------------------------------------
17,873
Less accumulated depreciation 375
------------------------------------------------------------------------------------------------------
Real estate investments, net 17,498
Acquired real estate leases, net of accumulated amortization of $143 975
Acquired favorable real estate leases, net of accumulated amortization of $426 2,907
Cash and cash equivalents 1,214
Cash-funded reserves 1,037
Restricted cash 571
Step rent receivable 954
Prepaid expenses and other assets 14
------------------------------------------------------------------------------------------------------
Total assets $ 25,170
======================================================================================================
Liabilities and stockholders' equity:
Liabilities:
Accounts payable and accrued expenses $ 240
Distributions payable 536
------------------------------------------------------------------------------------------------------
Total liabilities 776
------------------------------------------------------------------------------------------------------
Commitments and contingencies:
Stockholders' equity:
Preferred stock, $.01 par value, 297.5 shares
authorized, issued and outstanding --
Common stock, $.01 par value, 1 share
authorized, issued and outstanding --
Additional paid-in capital 27,277
Retained deficit and distributions in excess of earnings (2,883)
------------------------------------------------------------------------------------------------------
Total stockholders' equity 24,394
------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 25,170
======================================================================================================
See accompanying notes to financial statements.
F-90
FSP Royal Ridge Corp.
Statement of Operations
For the
Year Ended
(in thousands, except shares and per share amounts) December 31, 2003
================================================================================
Revenue:
Rental $ 2,264
--------------------------------------------------------------------------------
Total revenue 2,264
--------------------------------------------------------------------------------
Expenses:
Rental operating expenses 746
Real estate taxes and insurance 255
Depreciation and amortization 518
Interest 1,731
--------------------------------------------------------------------------------
Total expenses 3,250
--------------------------------------------------------------------------------
Loss before interest income (986)
Interest income 28
--------------------------------------------------------------------------------
Net loss before common distributions (958)
Distributions paid to common stockholder 14
--------------------------------------------------------------------------------
Net loss attributable to preferred shareholders $ (972)
================================================================================
Weighted average number of preferred shares outstanding,
basic and diluted 297.5
================================================================================
Net loss per preferred share, basic and diluted $ (3,267)
================================================================================
See accompanying notes to financial statements.
F-91
FSP Royal Ridge Corp.
Statement of Changes in Stockholders' Equity
For the year ended December 31, 2003
Retained Deficit
Additional and Distributions Total
Preferred Common Paid in in Excess of Stockholders'
(in thousands, except shares) Stock Stock Capital Earnings Equity
==========================================================================================================================
Private offering of 297.5 shares, net $ -- $ -- $ 27,277 $ -- $ 27,277
Distributions to stockholders -- -- -- (1,925) (1,925)
Net loss -- -- -- (958) (958)
--------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 $ -- $ -- $ 27,277 $ (2,883) $ 24,394
==========================================================================================================================
See accompanying notes to financial statements.
F-92
FSP Royal Ridge Corp.
Statement of Cash Flows
For the Year Ended
(in thousands) December 31, 2003
================================================================================
Cash flows from operating activities:
Net loss $ (958)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 518
Amortization of favorable leases 426
Changes in operating assets and liabilities:
Cash-funded reserve (1,037)
Restricted cash (571)
Step rent receivable (954)
Prepaid expenses and other assets (14)
Accounts payable and accrued expenses 240
--------------------------------------------------------------------------------
Net cash used for operating activities (2,350)
--------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets (17,873)
Purchase of acquired real estate leases (1,118)
Purchase of acquired favorable real estate leases (3,333)
--------------------------------------------------------------------------------
Net cash used for investing activities (22,324)
--------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock 29,760
Syndication costs (2,483)
Distributions to stockholders (1,389)
Proceeds from long-term debt 24,250
Principal payments on long-term debt (24,250)
--------------------------------------------------------------------------------
Net cash provided by financing activities 25,888
--------------------------------------------------------------------------------
Net increase in cash and cash equivalents 1,214
Cash and cash equivalents, beginning of period --
--------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 1,214
================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 1,731
Disclosure of non-cash financing activities:
Distributions declared but not paid $ 536
See accompanying notes to financial statements.
F-93
FSP Royal Ridge Corp.
Notes to Financial Statements
1. Organization
FSP Royal Ridge Corp. (the "Company") was organized on December 20, 2002 as a
Corporation under the laws of the State of Delaware to purchase, own and operate
a six-story Class "A" suburban office building containing approximately 161,366
rental square feet of space located on approximately 13.2 acres of land in
Alpharetta, GA (the "Property). The Company acquired the Property on January 30,
2003.
2. Summary of Significant Accounting Policies
BASIS OF PRESENTATION
The results of operations from inception to date are not necessarily indicative
of the results to be obtained for other interim periods or for the full fiscal
year.
ESTIMATES AND ASSUMPTIONS
The Company prepares its financial statements and related notes in conformity
with accounting principles generally accepted in the United States of America
("GAAP"). These principles require management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
REAL ESTATE AND DEPRECIATION
Real estate assets are stated at the lower of cost or fair value, as
appropriate, less accumulated depreciation.
Costs related to property acquisition and improvements are capitalized. Typical
capital items include new roofs, site improvements, various exterior building
improvements and major interior renovations. Funding for capital improvements
typically is provided by cash set aside at the time the Property was purchased.
Routine replacements and ordinary maintenance and repairs that do not extend the
life of the asset are expensed as incurred. Typical expense items include
interior painting, landscaping and minor carpet replacements. Funding for
repairs and maintenance items typically is provided by cash flows from operating
activities.
Depreciation is computed using the straight-line method over the assets'
estimated useful lives as follows:
Category Years
-------- -----
Building - Commercial 39
Building Improvements 15-39
Furniture & Equipment 5-7
F-94
FSP Royal Ridge Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
REAL ESTATE AND DEPRECIATION (continued)
The following schedule reconciles the cost of the Property as shown in the
Offering Memorandum as to the amounts shown on the Company's Balance Sheet:
(in thousands)
--------------
Price per Offering Memorandum $ 24,250
Plus: Acquisition fees 149
Plus: Other acquisition costs 111
Less: Closing credit for tenant improvements (3,251)
Less: Closing credit for free rent (1,270)
---------------------------------------------------------
Total Acquisition Costs $ 19,989
=========================================================
These costs are reported in the Company's Balance Sheet as follows:
Land $ 1,649
Building 13,889
Acquired real estate leases 1,118
Acquired favorable real estate leases 3,333
-----------------------------------------------------------
Total reported on Balance Sheet $ 19,989
===========================================================
The Company evaluates its assets used in operations by identifying indicators of
impairment and by comparing the sum of the estimated undiscounted future cash
flows for each asset to the asset's carrying value. When indicators of
impairment are present and the sum of the undiscounted future cash flows is less
than the carrying value of such asset, an impairment loss is recorded equal to
the difference between the asset's current carrying value and its fair value
based on discounting its estimated future cash flows. At December 31, 2003, no
such indicators of impairment were identified.
ACQUIRED REAL ESTATE LEASES
Acquired real estate leases represent the estimated value of legal and leasing
costs related to acquired leases that were included in the purchase price when
the Company acquired the property. Under SFAS No. 141 "Business Combinations",
which was approved by the Financial Accounting Standards Board ("FASB") in June
2001, the Company is required to segregate these costs from its investment in
real estate. The Company subsequently amortizes these costs on a straight-line
basis over the remaining life of the related leases. Amortization expense of
$143,000 is included in Depreciation and Amortization in the Company's Statement
of Operations for the period ended December 31, 2003.
Acquired real estate lease costs included in the purchase price of the Property
were $1,118,000 and are being amortized over the weighted-average period of
seven years in respect of the leases assumed. Detail of the acquired real estate
leases as of December 31, 2003:
(in thousands)
--------------
Cost $ 1,118
Accumulated amortization (143)
---------
Book value $ 975
=========
The estimated annual amortization expense for the five years succeeding December
31, 2003 are as follows:
(in thousands)
--------------
2004 $ 156
2005 $ 156
2006 $ 156
2007 $ 156
2008 $ 156
F-95
FSP Royal Ridge Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
ACQUIRED FAVORABLE REAL ESTATE LEASES
Acquired favorable real estate leases represent the value related to the leases
when the lease payments due under a tenant's lease exceed the market rate of the
lease at the date the Property was acquired. Under SFAS 141 the Company is
required to report this value separately from its investment in real estate. The
Company subsequently amortizes this amount on a straight-line basis over the
remaining life of the tenant's lease. Amortization of $426,000 is shown as a
reduction of rental income in the Company's Statement of Operations for the
period ended December 31, 2003.
The Acquired favorable real estate leases included in the purchase price of the
property was $3,333,000 and is being amortized over a period of seven years with
respect of the leases assumed. Details of the acquired favorable real estate
leases as of December 31, 2003:
(in thousands)
--------------
Cost $ 3,333
Accumulated amortization (426)
---------
Book value $ 2,907
=========
The estimated annual amortization expense for the five years succeeding December
31, 2003 are as follows:
2004 $ 465
2005 $ 465
2006 $ 465
2007 $ 465
2008 $ 465
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an initial
maturity of three months or less to be cash equivalents.
CASH-FUNDED RESERVES
The Company has set aside funds in anticipation of future capital needs of the
Property. These funds typically are used for the payment of real estate assets
and deferred leasing commissions; however, there is no legal restriction on
their use and they may be used for any Company purpose.
RESTRICTED CASH
Restricted cash represents funds held in escrow for tenant improvements.
MARKETABLE SECURITIES
The Company accounts for investments in debt securities under the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". The Company typically
classifies its debt securities as available-for-sale.
There were no investments in marketable securities at December 31, 2003.
F-96
FSP Royal Ridge Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
CONCENTRATION OF CREDIT RISKS
Cash, cash equivalents and short-term investments are financial instruments that
potentially subject the Company to a concentration of credit risk. The Company
maintains its cash balances and short-term investments principally in one bank
which the Company believes to be creditworthy. The Company periodically assesses
the financial condition of the bank and believes that the risk of loss is
minimal. Cash balances held with various financial institutions frequently
exceed the insurance limit of $100,000 provided by the Federal Deposit Insurance
Corporation.
For the period ended December 31, 2003 rental income was derived from various
tenants. As such, future receipts are dependent upon the financial strength of
the lessees and their ability to perform under the lease agreements.
The following tenants represent greater than 10% of total revenue:
Axis U.S Insurance 52%
Hagemeyer North America, Inc. 38%
FINANCIAL INSTRUMENTS
The Company estimates that the carrying value of cash and cash equivalents,
cash-funded reserves and restricted cash approximate their fair values based on
their short-term maturity and prevailing interest rates.
STEP RENT RECEIVABLE
Certain leases provide for fixed increases over the life of the lease. Rental
revenue is recognized on the straight-line basis over the related lease term;
however, billings by the Company are based on required minimum rentals in
accordance with the lease agreements. Step rent receivable, which is the
cumulative revenue recognized in excess of amounts billed by the Company, is $
954,000 at December 31, 2003.
SYNDICATION FEES
Syndication fees are selling commissions and other costs associated with the
initial offering of the Company's preferred shares. Such costs, in the amount of
$ 2,483,000 have been reported as a reduction in Stockholders' Equity in the
Company's Balance Sheet.
REVENUE RECOGNITION
The Company has retained substantially all of the risks and benefits of
ownership of the Company's commercial properties and accounts for its leases as
operating leases. Rental income from leases, which may include rent concession
(including free rent and tenant improvement allowances) and scheduled increases
in rental rates during the lease term, is recognized on a straight-line basis.
The Company does not have any percentage rent arrangements with its commercial
property tenants. Reimbursable costs are included in rental income in the period
earned. A schedule showing the components of rental revenue is shown below.
Period Ended
December 31,
(in thousands) 2003
===============================================
Income from leases $ 1,152
Straight-line rent adjustment 954
Reimbursable expenses 584
Amortization of favorable leases (426)
-----------------------------------------------
Total $ 2,264
===============================================
F-97
FSP Royal Ridge Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
INTEREST INCOME
Interest income is recognized when the related services are performed and the
earnings process is complete.
INCOME TAXES
The Company has elected to be taxed as a Real Estate Investment Trust ("REIT")
under the Internal Revenue Code of 1986, as amended. As a REIT, the Company
generally is entitled to a tax deduction for dividends paid to its shareholders,
thereby effectively subjecting the distributed net income of the Company to
taxation at the shareholder level only. The Company must comply with a variety
of restrictions to maintain its status as a REIT. These restrictions include the
type of income it can earn, the type of assets it can hold, the number of
shareholders it can have and the concentration of their ownership, and the
amount of the Company's taxable income that must be distributed annually.
NET INCOME PER SHARE
The Company follows Statement of Financial Accounting Standards No. 128
"Earnings per Share", which specifies the computation, presentation and
disclosure requirements for the Company's net income per share. Basic net income
per preferred share is computed by dividing net income by the weighted average
number of preferred shares outstanding during the period. Diluted net income per
preferred share reflects the potential dilution that could occur if securities
or other contracts to issue shares were convertible into shares. There were no
potential dilutive shares outstanding at December 31, 2003. Subsequent to the
completion of the offering of preferred shares, the holders of common stock are
not entitled to share in any income nor in any related distribution.
3. Recent Accounting Standards
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities". This statement was effective January 1, 2003. SFAS
No. 146 replaces current accounting literature and requires the recognition of
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. The adoption of
this statement did not have a material effect on the Company's financial
position, results of operations and cash flows.
F-98
FSP Royal Ridge Corp.
Notes to Financial Statements
4. Income Taxes
The Company files as a REIT under Sections 856-860 of the Internal Revenue Code
of 1986, as amended. In order to qualify as a REIT, the Company is required to
distribute at least 90% of its taxable income to shareholders and to meet
certain asset and income tests as well as certain other requirements. The
Company will generally not be liable for federal income taxes, provided it
satisfies these requirements. Even as a qualified REIT, the Company is subject
to certain state and local taxes on its income and property.
For the period ended December 31, 2003, the Company incurred a net operating
loss for income tax purposes of approximately $1,349,000 that can be carried
forward until it expires in the year 2023.
At December 31, 2003, the Company's net tax basis of its real estate assets was
$21,822,000.
The following schedule reconciles net income (loss) to taxable income subject to
dividend requirements:
Period Ended
December 31,
(in thousands) 2003
=================================================================
Net loss $ (958)
Add: Book depreciation and amortization 518
Amortization of favorable real estate leases 426
Deferred rent 99
Less: Tax depreciation and amortization (480)
Straight-line rents (954)
-----------------------------------------------------------------
Taxable loss(1) $ (1,349)
=================================================================
(1) A tax loss is not subject to a dividend requirement.
The following schedule reconciles cash distributions paid to the dividends paid
deduction:
Period Ended
December 31,
Per Preferred Per Common
(in thousands, except per share data) Total Share Share
========================================================================
Cash distributions paid $ 1,389 $ 4,623 $ 14,232
Less: Return of Capital (1,389) (4,623) (14,232)
------------------------------------------------------------------------
Dividends paid deduction $ -- $ -- $ --
========================================================================
F-99
FSP Royal Ridge Corp.
Notes to Financial Statements
5. Capital Stock
PREFERRED STOCK
Generally, each holder of Shares of Preferred Stock is entitled to receive
ratably all distributions, if any, declared by the Board of Directors out of
funds legally available. The right to receive distributions shall be
non-cumulative, and no right to distributions shall accrue by reason of the fact
that no distribution has been declared in any prior year. Each holder of Shares
will be entitled to receive, to the extent that funds are available therefore,
$100,000 per Share, before any payment to the holder of Common Stock, out of
distributions to stockholders upon liquidation, dissolution or the winding up of
the Company; the balance of any such funds available for distribution will be
distributed among the holders of Shares and the holder of Common Stock, pro rata
based on the number of shares held by each; provided, however, that for these
purposes, one share of Common Stock will be deemed to equal one-tenth of a share
of Preferred Stock.
In addition to certain voting rights provided in the corporate agreements, the
holder of Shares, acting by consent of at least 51%, shall have the further
right to approve or disapprove a proposed sale of the Property, the merger of
the Company with any other entity and amendments to the corporate charter. A
vote of the holders of 66.67% of the Shares is required for the issue of any
additional shares of capital stock. Holders of Shares have no redemption or
conversion rights.
COMMON STOCK
Franklin Street Properties Corp. ("FSP"), is the sole holder of the Company's
Common Stock. FSP has the right, as one class together with the holders of
Preferred Stock, to vote to elect the directors of the Company and to vote on
all matters except those voted by the holders of Shares of Preferred Stock.
Subsequent to the completion of the offering of the preferred shares the holders
of common shares are not entitled to share in any earnings nor any related
distributions.
6. Related Party Transactions
The Company executed a management agreement with FSP Property Management LLC, an
affiliate of FSP, that provides for a management fee equal to 1% of collected
revenues and is cancelable with 30 days notice by either party. For the period
ended December 31, 2003, fees incurred under the agreement were $17,605.
An acquisition fee of $149,000 and other costs of $111,000 were paid in 2003 to
an affiliate of the Common Shareholder. Such fees were included in the cost of
the real estate.
Syndication fees of $2,380,000 were paid in 2003 to an affiliate of the Common
Shareholder for services related to syndication of the Company's preferred
stock.
During 2003, the Company borrowed and repaid in full a note payable to FSP,
principal of $24,250,000, with interest equal to the Citizens Bank base rate.
Interest paid to FSP was $20,000. The average interest rate during the time the
loan was outstanding was 4.50%.
A commitment fee of $1,711,000 was paid to FSP for obtaining the first mortgage
loan. Such amount is included in interest expense on the Statement of
Operations.
The Company paid a distribution of $14,000 to the common shareholder relating to
operating activities of the Company prior to the completion of the offering of
preferred shares.
F-100
FSP Royal Ridge Corp.
Notes to Financial Statements
7. Commitments and Contingencies
The Company, as lessor, has minimum future rentals due under non-cancelable
operating leases as follows:
Year Ending
(in thousands) December 31, Amount
------------ ---------
2004 $ 2,198
2005 2,040
2006 2,071
2007 2,123
2008 2,176
Thereafter 6,750
---------
$ 17,358
=========
In addition, the lessees are liable for real estate taxes and certain operating
expenses of the Property.
Upon acquiring the commercial rental property in January 2003, the Company was
assigned the lease agreements between the seller of the Property and the
existing tenants. The original lease periods range from two to ten years with
renewal options.
F-101
SCHEDULE III
ROYAL RIDGE
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2003
Initial Cost
---------------------------------
Costs
Capitalized
Buildings (Disposals)
Improvements Subsequent
and to
Description Encumbrances (1) Land Equipment Acquisition
---------------- ---- --------- ------------
(in thousands)
Royal Ridge, Alpharetta, GA 1,649 16,224 --
Historical Costs
--------------------------------------------------------------------------------------
Buildings Total Costs,
Improvements Net of Depreciable
and Accumulated Accumulated Life Date of
Description Land Equipment Total (2) Depreciation Depreciation Years Acquisition
---- --------- --------- ------------ ------------ ----- -----------
(in thousands)
Royal Ridge, Alpharetta, GA 1,649 16,224 17,873 375 17,498 5-39 2003
(1) There are no encumbrances on the above properties.
(2) The aggregate cost for Federal Income Tax purposes is $21,822.
F-102
Royal Ridge
The following table summarizes the changes in the Company's real estate
investments and accumulated depreciation:
December 31,
---------------
(in thousands) 2003
==========================================================================
Real estate investments, at cost:
Balance, beginning of period $ --
Acquisitions 17,873
Improvements --
Dispositions --
--------------------------------------------------------------------------
Balance, end of period $17,873
==========================================================================
Accumulated depreciation:
Balance, beginning of period $ --
Depreciation 375
Dispositions --
--------------------------------------------------------------------------
Balance, end of period $ 374
==========================================================================
F-103
ROYAL RIDGE
FOR THE PERIOD JANUARY 1, 2003 TO JANUARY 29, 2003 AND
FOR THE YEAR ENDED DECEMBER 31, 2002
CONTENTS
PAGE
Independent auditors' report F-105
Statements of revenue over certain operating expenses F-106
Notes accompanying the statements of revenue over certain
operating expenses F-107
F-104
INDEPENDENT AUDITORS' REPORT
To the Stockholders
FSP Royal Ridge Corp.
We have audited the accompanying statements of revenue over certain operating
expenses (the "Statements") of Royal Ridge for the period January 1, 2003 to
January 29, 2003 and for the year ended December 31, 2002. These Statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these Statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the Statements
are free of material misstatements. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the Statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall Statements'
presentation. We believe that our audits provide a reasonable basis for our
opinion.
The accompanying Statements were prepared to comply with the requirements of
Rule 3-14 of Regulation S-X of the Securities and Exchange Commission, and
exclude certain expenses described in Note 2 and, therefore, are not intended to
be a complete presentation of the Property's revenue and expenses.
In our opinion, these Statements referred to above present fairly, in all
material respects, the revenue over certain operating expenses (as described in
Note 2) of Royal Ridge for the period January 1, 2003 to January 29, 2003 and
for the year ended December 31, 2002, in conformity with the basis of accounting
described in Note 2.
/s/ Braver and Company, P.C.
Newton, Massachusetts
February 28, 2004
F-105
ROYAL RIDGE
STATEMENTS OF REVENUE OVER CERTAIN OPERATING EXPENSES
FOR THE PERIOD JANUARY 1, 2003 TO JANUARY 29, 2003 AND
FOR THE YEAR ENDED DECEMBER 31, 2002
2003 2002
--------- ---------
REVENUE:
Rental income $ 1,195 $ 3,084
--------- ---------
CERTAIN OPERATING EXPENSES (Note 2):
Taxes and insurance 19,046 184,096
Management fees 2,652 33,212
Administrative 4,736 62,264
Operating and maintenance 87,616 526,358
--------- ---------
114,050 805,930
--------- ---------
Excess of certain operating expenses over revenue $(112,855) $(802,846)
========= =========
The accompanying notes are an integral part of these financial statements.
F-106
ROYAL RIDGE
NOTES ACCOMPANYING THE STATEMENTS OF REVENUE OVER CERTAIN OPERATING EXPENSES
1. DESCRIPTION OF THE PROPERTY:
The accompanying statements of revenue over certain operating expenses
(the "Statements") include the operations of a commercial building located
in Alpharetta, Georgia (the "Property"). These Statements are the results
of operations of the Property under the basis of accounting described in
Note 2 for the period and year described prior to the acquisition of the
Property by FSP Royal Ridge Corp. The Property consists of a six-story
Class "A" institutional quality suburban office tower containing
approximately 161,366 square feet located on approximately 13.2 acres of
land. The Property was sold to FSP Royal Ridge Corp. on January 30, 2003.
No financial information is provided for 2001. The property was
constructed in 2001 and there were no leases or tenants until 2002.
2. BASIS OF ACCOUNTING:
The accompanying Statements have been prepared on the accrual basis of
accounting. The Statements have been prepared in accordance with Rule 3-14
of Regulation S-X of the Securities and Exchange Commission for real
estate properties acquired or to be acquired. Accordingly, these
Statements exclude certain historical expenses not comparable to the
operations of the Property after acquisition such as amortization,
depreciation, interest, corporate expenses and certain other costs not
directly related to future operations of the Property.
3. REVENUE RECOGNITION:
Rental revenue includes income from leases, certain reimbursable expenses,
and other income associated with renting the property. A summary of rental
revenue is shown in the following table:
For the period Year Ended
January 1, 2003 to December 31,
January 29, 2003 2002
--------------- ---------------
Reimbursable expenses $ -- $ 3,084
Other income 1,195 --
--------------- ---------------
Total $ 1,195 $ 3,084
=============== ===============
Royal Ridge has retained substantially all of the risks and benefits of
the Property and accounts for its leases as operating leases. Rental
income from leases, which includes rent concessions (including free rent
and tenant improvement allowances) and scheduled increases in rental rates
during the lease term, is recognized on a straight-line basis. However,
for the year ended December 31, 2002 and for the period January 1, 2003 to
January 29, 2003, Royal Ridge did not recognize any rental revenue due to
a "free rent" provision in its lease agreements. Had Royal Ridge
recognized the rental revenue under a straight-line basis, such revenue
would have been written off as uncollectible upon the sale of the Property
as described in Note 1. The Company does not have any percentage rent
arrangements with its tenants. Reimbursable costs are included in rental
income in the period earned.
4. USE OF ESTIMATES:
The preparation of the Statements in conformity with the basis of
accounting described in Note 2 requires management to make estimates and
assumptions that affect the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
F-107
ROYAL RIDGE
NOTES ACCOMPANYING THE STATEMENTS OF REVENUE OVER CERTAIN OPERATING EXPENSES
5. CONCENTRATIONS OF RISKS:
For the period January 1, 2003 to January 29, 2003, and for the year ended
December 31, 2002, rental income was received from three lessees. As such,
future receipts are dependent upon the financial strength of these lessees
and their ability to perform under the lease agreements
6. LEASES:
The Company, as lessor, has minimum future rentals due under
noncancellable operating leases as follows:
Year Ending
December 31, Amount
------------ -------------
2003 $ 1,153,000
2004 2,198,000
2005 2,040,000
2006 2,071,000
2007 2,123,000
Thereafter 8,926,000
-------------
$ 18,511,000
=============
In addition, the lessees are liable for real estate taxes and operating
expenses as direct expenses to them.
F-108
Appendix A
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
FRANKLIN STREET PROPERTIES CORP.,
MONTAGUE ACQUISITION CORP.,
ADDISON CIRCLE ACQUISITION CORP.,
ROYAL RIDGE ACQUISITION CORP.,
COLLINS CROSSING ACQUISITION CORP.,
FSP MONTAGUE BUSINESS CENTER CORP.,
FSP ADDISON CIRCLE CORP.,
FSP ROYAL RIDGE CORP.,
AND
FSP COLLINS CROSSING CORP.
August 13, 2004
TABLE OF CONTENTS (to be updated)
ARTICLE 1 THE MERGERS..........................................................1
1.1 The Mergers..............................................................1
1.2 The Closing..............................................................2
1.3 Effective Time...........................................................2
1.4 Additional Action........................................................2
1.5 Dissenting Shares........................................................2
1.6 No Further Rights........................................................3
1.7 Withholding Rights.......................................................3
ARTICLE 2 MERGER CONSIDERATION.................................................3
2.1 Cancellation of Target Stock.............................................3
2.2 Merger Consideration.....................................................4
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE
ACQUISITION SUBSIDIARIES.............................................5
3.1 Due Organization; Authority..............................................5
3.2 Authorization; Validity; Effect of Agreement.............................5
3.3 Capitalization...........................................................6
3.4 No Violation.............................................................6
3.5 FSP Investments LLC; Due Organization....................................7
3.6 Financial Statements.....................................................7
3.7 SEC Documents............................................................8
3.8 Litigation...............................................................8
3.9 Taxes....................................................................8
3.10 Full Disclosure..........................................................9
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE TARGET REITS...................9
4.1 Due Organization; Authority.............................................10
4.2 Authorization; Validity; Effect of Agreement............................10
4.3 Financial Statements....................................................10
4.4 Contracts and Commitments...............................................11
4.5 No Violation............................................................11
4.6 Litigation..............................................................12
4.7 Title to Assets.........................................................12
4.8 Real Property...........................................................12
4.9 Real Property Leases....................................................14
4.10 Compliance with Laws; Permits; Environmental Matters....................14
4.11 Taxes...................................................................16
4.12 No Existing Discussions.................................................17
4.13 Full Disclosure.........................................................17
ARTICLE 5 COVENANTS AND ADDITIONAL AGREEMENTS.................................17
5.1 Conduct of Business.....................................................17
5.2 Other Actions...........................................................17
5.3 Approval of Target REIT Stockholders....................................17
5.4 Consents and Approvals..................................................18
5.5 No Solicitation.........................................................18
ARTICLE 6 CONDITIONS TO EACH PARTY'S OBLIGATIONS TO EFFECT THE MERGERS........21
ARTICLE 7 TERMINATION AND WAIVER..............................................22
7.1 Termination.............................................................22
7.2 Effect of Termination...................................................23
7.3 Extension; Waiver.......................................................23
7.4 No Survival of Representations and Warranties...........................23
ARTICLE 8 MISCELLANEOUS.......................................................24
8.1 Assignment..............................................................24
8.2 Risk of Loss............................................................24
8.3 Fees and Expenses.......................................................24
8.4 Entire Agreement; Modifications; Amendments.............................25
8.5 Notices.................................................................25
8.6 Interpretation..........................................................26
8.7 Captions................................................................26
8.8 Counterparts............................................................26
8.9 Binding Effect..........................................................26
8.10 Attorneys' Fees.........................................................27
8.11 No Waiver; Severability.................................................27
8.12 No Joint and Several Liability..........................................27
8.13 Applicable Law..........................................................27
Exhibit A--List of Properties
Exhibit B--Merger Consideration
Exhibit C--Tax Representations
AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER (this "Agreement") is made and
entered into as of August 13, 2004 by and among Franklin Street Properties Corp.
(the "Company"), a Maryland corporation, the wholly-owned acquisition
subsidiaries of the Company, each a Delaware corporation (each an "Acquisition
Subsidiary" and, collectively, the "Acquisition Subsidiaries"), listed on the
signature pages hereto and the other corporations, each a Delaware corporation
(each, a "Target REIT" and, collectively, the "Target REITs"), also listed on
the signature pages hereto.
RECITALS
WHEREAS, the Target REITs are the owners of certain real properties
listed on Exhibit A hereto (each such property, including any buildings,
structures or other improvements situated thereon, a "Property" and,
collectively, the "Properties");
WHEREAS, the board of directors of the Company (the "Company
Board"), boards of directors of each of the Acquisition Subsidiaries (such
boards of directors, collectively, the "Acquisition Boards of Directors") and
the boards of the directors of each of the Target REITs (such boards of
directors, collectively, the "Target Boards of Directors") believe that it is in
the best interests of the Company, each of the Acquisition Subsidiaries and each
of the Target REITs, respectively, and their respective stockholders, to
consummate, and have approved, the business combination transaction provided for
herein, pursuant to which each Target REIT will be merged with and into an
Acquisition Subsidiary, with the respective Acquisition Subsidiary continuing as
the surviving entity (each such transaction, a "Merger" and, collectively, the
"Mergers");
WHEREAS, the Company Board, the Acquisition Boards of Directors and
the Target Boards of Directors have agreed to effect the transactions provided
for herein upon the terms and subject to the conditions set forth herein;
WHEREAS, the Company, the Acquisition Subsidiaries and the Target
REITs desire to make certain representations, warranties and agreements in
connection with the Mergers.
NOW, THEREFORE, in consideration of the foregoing and of the
representations, warranties, covenants and agreements contained herein, the
parties hereto hereby agree as follows:
ARTICLE 1 THE MERGERS
1.1 The Mergers. Subject to the terms and conditions of this Agreement, at
the Effective Time (as hereinafter defined), each Target REIT will be merged
with and into an Acquisition Subsidiary in accordance with the applicable
A-1
provisions of the Delaware General Corporation Law ("DGCL"), and the separate
existence of each Target REIT shall thereupon cease. Each Acquisition Subsidiary
shall continue as the surviving entity of the Mergers (each a "Surviving
Corporation" and collectively, the "Surviving Corporations"). The parties hereby
agree that FSP Montague Business Center Corp. will merge with and into Montague
Acquisition Corp.; FSP Addison Circle Corp. will merge with and into Addison
Circle Acquisition Corp; FSP Royal Ridge Corp. will merge with and into Royal
Ridge Acquisition Corp.; and FSP Collins Crossing Corp. will merge with and into
Collins Crossing Acquisition Corp.
1.2 The Closing. Subject to the terms and conditions of this Agreement,
the closing of the Mergers (the "Closing") shall take place at the offices of
Wilmer Cutler Pickering Hale and Dorr LLP, 60 State Street, Boston,
Massachusetts at 9:00 a.m., local time, on December 30, 2004 or at such other
time and date following the day on which the last of the conditions set forth in
Article 6 shall be fulfilled or waived in accordance herewith. The holders of
preferred stock in the Target REITs ("Target Stock") are hereinafter referred to
as the "Target REIT Stockholders." The holders of common stock of the Company,
$0.0001 par value per share ("Common Stock"), are hereinafter referred to as the
"Company Stockholders." The date on which the Closing occurs is hereinafter
referred to as the "Closing Date." After giving effect to the Mergers, the
Company and Acquisition Subsidiaries are hereinafter referred to as the
"Combined Company."
1.3 Effective Time. If all of the conditions to a particular Merger set
forth in Article 6 shall have been fulfilled or waived in accordance herewith
with respect to the Company and the applicable Target REIT and this Agreement
shall not have been terminated as provided in Article 7 or Section 8.2(b), the
parties hereto shall promptly cause to be properly executed, verified and
delivered for filing on the Closing Date a certificate of merger satisfying the
requirements of the DGCL for such Merger (a "Certificate of Merger"). A Merger
shall become effective upon the acceptance for record of its Certificate of
Merger by the Secretary of State of the State of Delaware in accordance with the
DGCL or at such later time upon which the parties hereto shall have agreed and
designated in such filing in accordance with applicable law as the effective
time of the Mergers (the "Effective Time").
1.4 Additional Action. The Surviving Corporations may, at any time from
and after the Effective Time, take any action, including executing and
delivering any document, in the name and on behalf of either the respective
Target REIT or the respective Acquisition Subsidiary, in order to consummate and
give effect to the transactions contemplated by this Agreement.
1.5 Dissenting Shares.
(a) For purposes of this Agreement, "dissenting shares" means Target
Stock held as of the Effective Time by a Target REIT Stockholder who has not
voted such Target Stock in favor of the adoption of this Agreement and the
Merger with respect to such Target REIT and with respect to which appraisal
shall have been duly demanded and perfected in accordance with Section 262 of
the DGCL and not effectively withdrawn or forfeited prior to the Effective Time.
A-2
Dissenting shares shall not be converted into or represent the right to receive
the Merger Consideration (as defined below) unless the Target REIT Stockholder
holding such dissenting shares shall have forfeited his or her right to
appraisal under the DGCL or properly withdrawn his or her demand for appraisal.
If such Target REIT Stockholder has so forfeited or withdrawn his or her right
to appraisal of dissenting shares, then (i) as of the occurrence of such event,
such holder's dissenting shares shall cease to be dissenting shares and shall be
converted into and represent the right to receive the Merger Consideration
payable in respect of such Target Stock pursuant to Section 2.2 hereof, and (ii)
promptly following the occurrence of such event, the Company or the Surviving
Corporation shall deliver to such Target REIT Stockholder shares of Common Stock
and any cash in lieu of fractional shares of Target Stock, if applicable, to
which such holder is entitled pursuant to Section 2.2 hereof.
(b) Each Target REIT shall give the Company (i) prompt notice of any
written demands for appraisal of any Target Stock, withdrawals of such demands,
and any other instruments that relate to such demands received by the respective
Target REIT and (ii) the opportunity to direct all negotiations and proceedings
with respect to demands for appraisal under the DGCL. No Target REIT shall,
except with the prior written consent of the Company, make any payment with
respect to any demands for appraisal of Target Stock or offer to settle or
settle any such demands.
1.6 No Further Rights. From and after the Effective Time, no Target Stock
shall be deemed to be outstanding, and holders of certificates formerly
representing Target Stock shall cease to have any rights with respect thereto
except as provided herein or by law.
1.7 Withholding Rights. Notwithstanding any provision of this Agreement,
each of the Company and any Acquisition Subsidiary shall be entitled to deduct
and withhold from the payments to be made pursuant to this Agreement, as
applicable, such amounts as it reasonably determines that it is required to
deduct and withhold with respect to the making of such payments under the Code
or any other applicable provision of law and to collect Forms W-8 or W-9, as
applicable, or similar information from the Target REIT Stockholders and any
other recipients of payments hereunder. To the extent the amounts are so
withheld by either the Company or any Acquisition Subsidiary, such withheld
amounts shall be treated for all purposes of this Agreement as having been paid
to the holder of the Target REIT shares in respect of which such deduction and
withholding was made by the Company or the Acquisition Subsidiary.
ARTICLE 2 MERGER CONSIDERATION
2.1 Cancellation of Target Stock. As a result of the Mergers and without
any action on the part of the Target REIT Stockholders, all Target Stock in each
Target REIT with respect to which a Merger has become effective shall cease to
be outstanding, shall be canceled and retired and shall cease to exist and each
Target REIT Stockholder shall thereafter cease to have any rights with respect
to such Target Stock (other than with respect to any dissenting shares).
A-3
2.2 Merger Consideration.
(a) At the Effective Time, by virtue of the Mergers and without any
further action by the Company, any Acquisition Subsidiary or any Target REIT,
each Target REIT Stockholder in each Target REIT with respect to which a Merger
has become effective shall receive for each share (or fraction thereof) of
Target Stock of such Target REIT that such Target REIT Stockholder holds of
record, that number of shares of Common Stock in the Combined Company set forth
on Exhibit B attached hereto opposite the name of the applicable Target REIT
(the "Merger Consideration"). At the Effective Time, by virtue of the Mergers
and without any further action by any party, each share of common stock, $.0001
par value per share, of each Target REIT held by the Company shall be cancelled
and shall cease to exist and no stock of the Company or other consideration
shall be delivered in exchange therefor, and the Company hereby waives any right
that it may have under the certificate of incorporation of each Target REIT or
otherwise to receive any consideration in the Mergers in respect of such shares
of Target REIT common stock.
(b) No certificate or scrip representing fractional shares of Common
Stock shall be issued upon the surrender of Target Stock, and such fractional
share interests shall not entitle the owner thereof to vote or to any other
rights of a stockholder of the Company. Notwithstanding any other provision of
this Agreement, each holder of shares of Target Stock converted pursuant to the
Mergers who would otherwise have been entitled to receive a fraction of a share
of Common Stock (after taking into account all Target Stock certificates
registered in the name of or delivered by such holder) shall receive, in lieu
thereof, cash (without interest) in an amount equal to such fractional part of a
share of Common Stock multiplied by $17.70, such amount to be rounded up to the
nearest whole cent.
(c) The Company shall issue certificates representing shares of
Common Stock upon the surrender of Target Stock as soon as practicable after the
Effective Time.
(d) The directors and officers of each Acquisition Subsidiary
immediately prior to the Effective Time shall be the initial directors and
officers of the respective Surviving Corporations, each to hold office in
accordance with the Certificate of Incorporation and Bylaws of such Surviving
Corporation. The certificate of incorporation and by-laws of each Acquisition
Subsidiary immediately prior to the Effective Time shall be the initial
certificate of incorporation and by-laws of the respective Surviving
Corporation, except that the name of each Surviving Corporation shall be amended
to be the name of the respective Target REIT immediately prior to the Effective
Time.
(e) The Merger Consideration, including any cash in lieu of
fractional shares, shall be adjusted to reflect any reclassification, stock
split, reverse split, stock dividend, reorganization, recapitalization or other
like change with respect to Common Stock or Target Stock occurring (or for which
a record date is established) after the date hereof and prior to the Effective
Time.
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ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE ACQUISITION
SUBSIDIARIES
Each of the Company and the Acquisition Subsidiaries, jointly and
severally, represents and warrants to the Target REITs that the statements
contained in this Article 3 are true and correct, except as set forth in the
disclosure schedule delivered at or prior to the execution hereof to each of the
Target REITs (the "Company Disclosure Schedule"). The Company Disclosure
Schedule shall be arranged in paragraphs corresponding to the numbered and
letter paragraphs contained in this Article 3, and the disclosures in any
paragraph of the Company Disclosure Schedule shall also be deemed to qualify all
other paragraphs in this Article 3.
3.1 Due Organization; Authority.
(a) Each of the Company and the Acquisition Subsidiaries is a
corporation duly organized and validly existing under the laws of the state of
its incorporation. The Company (i) has the authority to conduct its business as
currently conducted and to own and operate the properties that it now owns and
operates, and (ii) is duly licensed or qualified to do business in, and is in
good standing under the laws of, all jurisdictions in which the transaction of
its business makes such qualification necessary, except where the failure to be
so licensed or qualified would not reasonably be expected to have a material
adverse effect on the business, assets, prospects, results of operations or
financial condition of the Company (a "Company Material Adverse Effect").
(b) Each of the Company and the Acquisition Subsidiaries has
provided each Target REIT with a true and complete copy of its articles or
certificate of incorporation and bylaws, each as amended to date.
(c) Each Acquisition Subsidiary was formed solely for the purpose of
engaging in the transactions contemplated hereby, has engaged in no other
business activities or operations and owns no assets.
3.2 Authorization; Validity; Effect of Agreement. Each of the Company and
the Acquisition Subsidiaries has all requisite power, authority and legal right
to enter into this Agreement and to perform its obligations hereunder. The
execution and delivery of this Agreement by the Company and the Acquisition
Subsidiaries and the consummation by the Company and the Acquisition
Subsidiaries of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of the Company and the Acquisition
Subsidiaries, respectively, and this Agreement is a legal, valid and binding
obligation of the Company and the Acquisition Subsidiaries, enforceable against
them in accordance with its terms.
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3.3 Capitalization. The authorized capital stock of the Company consists
of 180,000,000 shares of Common Stock of which approximately 49,629,762 shares
are issued and outstanding as of the date hereof and 20,000,000 shares of
preferred stock, $0.0001 par value per share, of which no shares are issued and
outstanding as of the date hereof. Immediately following the consummation of the
Mergers, approximately 60,524,756 shares of Common Stock will be issued and
outstanding and no shares of preferred stock will be issued and outstanding. The
rights and privileges of each class of the Company's capital stock are as set
forth in the Company's certificate of incorporation, as amended to date. All
shares of the Company's Common Stock issuable pursuant to this Agreement, when
issued on the terms and conditions set forth in this Agreement, will be duly
authorized, validly issued, fully paid and nonassessable and not subject to or
issued in violation of any purchase option, call option, right of first refusal,
preemptive right, subscription right or any similar right under any provision of
the DGCL or the Company's certificate of incorporation or by-laws.
3.4 No Violation.
(a) Neither the execution and delivery by the Company or the
Acquisition Subsidiaries of this Agreement, nor the consummation by the Company
or the Acquisition Subsidiaries of the transactions contemplated hereby and
compliance by the Company or the Acquisition Subsidiary with the provisions
hereof, will: (i) conflict with or violate any provision of the articles or
certificates of incorporation or bylaws, each as amended to date of the Company
or the Acquisition Subsidiaries; (ii) require on the part of the Company or the
Acquisition Subsidiaries or any Subsidiary (as defined below) of the Company any
consent, approval or authorization of, or declaration, filing or registration
with, any governmental or regulatory authority, except (x) the filing of a
registration statement on Form S-4 with the Securities and Exchange Commission
(the "SEC"), (y) the filing of the Certificates of Merger in accordance with the
DGCL or (z) where the failure to obtain any such consent, approval or
authorization of, or declaration, filing or registration with, any governmental
or regulatory authority would not reasonably be expected to have a Company
Material Adverse Effect and would not adversely affect the consummation of the
transactions contemplated hereby; (iii) conflict with, result in a breach of,
constitute (with or without due notice or lapse of time or both) a default
under, result in the acceleration of obligations under, create in any party the
right to terminate, modify or cancel, or require any notice, consent or waiver
under, any contract or instrument to which the Company or any Subsidiary of the
Company is a party or by which the Company or any Subsidiary of the Company is
bound or to which any of their assets is subject, except for (A) any conflict,
breach, default, acceleration, termination, modification or cancellation which
would not have a Company Material Adverse Effect and would not adversely affect
the consummation of the transactions contemplated hereby or (B) any notice,
consent or waiver the absence of which would not have a Company Material Adverse
Effect and would not adversely affect the consummation of the transactions
contemplated hereby; (iv) result in the imposition of any mortgage, pledge,
security interest, encumbrance, charge or other lien (whether arising by
contract or by operation of law) upon any property or assets of the Company or
any Subsidiary of the Company; or (v) violate any order, writ, injunction,
decree, statute, rule or regulation applicable to the Company, the Acquisition
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Subsidiaries or any Subsidiary of the Company or any of their properties or
assets. For purposes of this Agreement, "Subsidiary" shall mean any corporation,
partnership, trust, limited liability company or other non-corporate business
enterprise in which the Company holds stock or other ownership interests
representing more than 50% of the voting power of all outstanding stock or
ownership interests of such entity.
(b) Except as expressly contemplated by this Agreement, no other
action is required to be taken by the Company or the Acquisition Subsidiaries to
permit the execution, delivery and performance of (i) this Agreement, (ii) all
other documents and certificates expressly contemplated hereby, and (iii) the
transactions contemplated hereby, and no consent or approval of any third party
or governmental authority is or was required or appropriate in connection with
the execution of this Agreement, or to consummate the transactions expressly
contemplated hereunder, except such as have been obtained or will be obtained
prior to the Closing.
3.5 FSP Investments LLC; Due Organization. FSP Investments LLC ("FSP
Investments"), a wholly-owned subsidiary of the Company, is a limited liability
company duly organized and validly existing under the laws of the Commonwealth
of Massachusetts. FSP Investments is duly registered with the SEC as a
broker/dealer pursuant to Section 15 of the Securities Exchange Act of 1934, as
amended.
3.6 Financial Statements.
(a) The Company has previously delivered or made available to each
of the Target REITs the following financial statements (collectively, the
"Company Financial Statements"): (i) consolidated statements of income for the
twelve months ended December 31, 2003 (audited), (ii) consolidated statements of
cash flows for the twelve months ended December 31, 2003 (audited), (iii)
consolidated balance sheet as of December 31, 2003 (audited), (iv) consolidated
statements of income for the six months ended June 30, 2004 (unaudited), (v)
consolidated statements of cash flows for the six months ended June 30, 2004
(unaudited) and (vi) the consolidated balance sheet as of June 30, 2004
(unaudited) (the "Company Balance Sheet"). The Company Financial Statements have
been prepared in accordance with generally accepted auditing principles
("GAAP"), applied on a basis consistent with prior periods (except as otherwise
noted therein), and present fairly the financial position and results of
operations of the Company as of their respective dates and for the periods
presented therein (subject, in the case of unaudited interim financial
statements, to normal year-end adjustments).
(b) The Company has no liability of any nature, whether known or
unknown, accrued or unaccrued, absolute or contingent, asserted or unasserted,
except liabilities (i) stated or adequately reserved against on the Company
Balance Sheet or the notes thereto, (ii) incurred in the ordinary course of
business and not required under GAAP to be reflected on the Company Balance
Sheet, (iii) incurred after the date of the Company Balance Sheet in the
ordinary course of business consistent with the terms of this Agreement or (iv)
which would not reasonably be expected to have a Company Material Adverse
Effect.
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3.7 SEC Documents. The Company has filed or will file all SEC Documents
(as defined below) on a timely basis. All of the SEC Documents (other than
preliminary materials), as of their respective filing dates, complied or will
comply in all material respects with all applicable requirements of the
Securities Act of 1933, as amended and the Securities Exchange Act of 1934, as
amended and, in each case, the rules and regulations promulgated thereunder
applicable to such SEC Documents. None of the SEC Documents, at the time of
filing contained or will contain any untrue statements of a material fact or
omitted to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading, except to the extent such statements have been
modified or superseded by later SEC Documents filed and publicly available. As
used herein, "SEC Documents" shall mean all reports, schedules, forms,
statements and other documents required to be filed by the Company with the SEC
on or after January 1, 2003 and prior to the Closing Date. No Subsidiary is
subject to the reporting requirements of Sections 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended.
3.8 Litigation. There are (i) no continuing orders, injunctions or decrees
of any court, arbitrator or governmental authority to which the Company is a
party or by which it is bound or, to the knowledge of the Company, to which any
of its directors, officers, employees or agents, in such capacity, is a party
or, to the knowledge of the Company, by which any of them is bound, and (ii) no
actions, suits, investigations or proceedings pending against the Company, or,
to the knowledge of the Company, against any of its directors, officers,
employees or agents, in such capacity, or, to the knowledge of the Company,
threatened against the Company or any of its directors, officers, employees or
agents, in such capacity, at law or in equity, or before or by any federal,
state or local commission, board, bureau, agency or instrumentality that would,
individually or in the aggregate, reasonably be expected to have a Company
Material Adverse Effect. For purposes of this Section 3.8 and Section 3.9 below,
any reference to the "Company" shall be deemed to include the Subsidiaries.
3.9 Taxes.
(a) The Company has paid, caused to be paid or accrued all federal,
state, local, foreign and other taxes, including without limitation, income
taxes, estimated taxes, alternative minimum taxes, excise taxes, sales taxes,
use taxes, value-added taxes, gross receipt taxes, franchise taxes, capital
stock taxes, employment and payroll-related taxes, withholding taxes, stamp
taxes, transfer taxes, windfall profit taxes, property taxes and environmental
taxes, whether or not measured in whole or in part by net income, and all
deficiencies, or other additions to tax, interest, fines and penalties
(collectively, "Taxes"), required to be paid or accrued by it through the date
hereof;
(b) The Company has timely filed or requested an extension of the
time to file all federal, state, local and foreign Tax returns required to be
filed by it through the date hereof, and all such returns completely and
accurately set forth the amount of any Taxes relating to the applicable period;
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(c) The Company has withheld and paid all Taxes required to have
been withheld and paid in connection with amounts paid or owing to any employee,
independent contractor, creditor, stockholder or other party;
(d) For all periods from its inception, the Company has qualified to
be treated as a "real estate investment trust" (a "REIT") within the meaning of
Sections 856-860 of the Internal Revenue Code of 1986, as amended (the "Code").
For the periods described in the preceding sentence, the Company has met all
requirements necessary to be treated as a REIT for purposes of the income Tax
provisions of those states in which the Company is subject to income Tax and
which provide for the taxation of a REIT in a manner similar to the treatment of
REITs under Sections 856-860 of the Code.
(e) Neither the Internal Revenue Service (the "IRS") nor any other
governmental authority is now asserting by written notice to the Company or, to
the knowledge of the Company, threatening to assert against the Company any
deficiency or claim for additional Taxes. There is no dispute or claim
concerning any Tax liability of the Company either claimed or raised in writing
by the IRS. There is no dispute or claim of a material nature concerning any Tax
liability of the Company either claimed or raised in writing by any governmental
authority other than the IRS, or, to the knowledge of the Company, which may be
claimed or raised by any federal or state governmental authority. No written
claim has ever been made by a Taxing authority in a jurisdiction where the
Company does not file reports and returns asserting that the Company is or may
be subject to Taxation by that jurisdiction.
3.10 Full Disclosure. The representations of the Company contained in this
Agreement do not contain any untrue statement of a material fact or omit to
state any material fact necessary to make the statements made herein not
misleading, and none of the information supplied or to be supplied by the
Company for inclusion in the Consent Solicitation/Prospectus to be distributed
to Target REIT Stockholders, pursuant to Section 5.3 hereof (the "Consent
Solicitation/Prospectus") contains any untrue statement of a material fact or
omits to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they are made, not misleading. If at any time prior to the Closing Date any
event relating to the Company should occur that is required to be described in
an amendment of or supplement to the Consent Solicitation/Prospectus, the
Company shall, together with the Target REITS, prepare, file and disseminate
such amendment or supplement. To the Company's knowledge, all of the
representations and warranties of each of the Target REITs set forth in this
Agreement are true and correct as of the date hereof.
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE TARGET REITS
Each of the Target REITs individually represents and warrants to the
Company that the statements contained in this Article 4 are true and correct as
to itself, except as set forth in the disclosure schedules delivered at or prior
to the execution hereof by each of the Target REITs to the Company (each, a
"Target REIT Disclosure Schedule" and, collectively, the "Target REITs
Disclosure Schedules"). Each Target REIT Disclosure Schedule shall be arranged
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in paragraphs corresponding to the numbered and letter paragraphs contained in
this Article 4, and the disclosures in any paragraph of any Target REIT
Disclosure Schedule shall also be deemed to qualify all other paragraphs in this
Article 4 with respect to that Target REIT. In the event that at the time of the
execution of this Agreement the Company has knowledge that any of the
representations or warranties of any Target REIT contained herein are not true
and correct, such Target REIT shall not be deemed to be in breach of this
Agreement in respect thereof, including without limitation for purposes of
Sections 6(f) and 7.1(c) below.
4.1 Due Organization; Authority.
(a) The Target REIT is a corporation duly organized and validly
existing under the laws of the State of Delaware. The Target REIT (i) has the
authority to conduct its business as currently conducted and to own and operate
the properties that it now owns and operates, and (ii) is duly licensed or
qualified to do business in, and is in good standing under the laws of, all
jurisdictions in which the transaction of its business makes such qualification
necessary, except where the failure to be so licensed or qualified would not
reasonably be expected to have a material adverse effect on the business,
assets, prospects, results of operations or financial condition of the Target
REIT (a "Target REIT Material Adverse Effect").
(b) The Target REIT has provided the Company and each other Target
REIT with a true and complete copy of its certificate of incorporation and
bylaws, each as amended to date.
4.2 Authorization; Validity; Effect of Agreement.
(a) The Target REIT has all requisite power, authority and legal
right to enter into this Agreement and to consummate the Mergers. The execution
and delivery of this Agreement by the Target REIT and, subject to the approval
of this Agreement by its Target REIT Stockholders, the consummation by the
Target REIT of its Merger have been duly authorized by all necessary corporate
action on the part of the Target REIT, and this Agreement is a legal, valid and
binding obligation of the Target REIT, enforceable against the Target REIT in
accordance with its terms.
4.3 Financial Statements.
(a) The Target REIT has previously delivered or made available to
the Company the following financial statements (collectively, the "Target REIT
Financial Statements"): (i) statement of income from date of inception through
December 31, 2003 (audited); (ii) statement of cash flows from date of inception
through December 31, 2003 (audited), (iii) a statement of income for the six
months ended June 30, 2004 (unaudited), (iv) a statement of cash flows for the
six months ended June 30, 2004 and (v) a balance sheet as of June 30, 2004
(unaudited) (the "Target REIT Balance Sheet"). The Target REIT Financial
Statements have been prepared in accordance with GAAP, applied on a basis
consistent with prior periods (except as otherwise noted therein), and present
fairly the financial position and results of operations of the Target REIT as of
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their respective dates and for the periods presented therein (subject, in the
case of unaudited interim financial statements, to normal year-end adjustments).
(b) The Target REIT has no liability of any nature, whether known or
unknown, accrued or unaccrued, absolute or contingent, asserted or unasserted,
except liabilities (i) stated or adequately reserved against on the Target REIT
Balance Sheet or the notes thereto, (ii) incurred in the ordinary course of
business and not required under GAAP to be reflected on the Target REIT Balance
Sheet, (iii) incurred after the date of the Target REIT Balance Sheet in the
ordinary course of business consistent with the terms of this Agreement or (iv)
which would not reasonably be expected to have a Target REIT Material Adverse
Effect.
4.4 Contracts and Commitments. The Target REIT has delivered or made
available to the Company a correct and complete copy of each contract to which
the Target REIT is a party that is material to the Target REIT (each a "Target
REIT Material Contract"). Each Target REIT Material Contract is in full force
and effect and neither the Target REIT nor, to the knowledge of the Target REIT,
the other party thereto is in breach or default thereunder, other than breaches
or defaults which would not, individually or in the aggregate, reasonably be
expected to have a Target REIT Material Adverse Effect.
4.5 No Violation.
(a) Neither the execution and delivery by the Target REIT of this
Agreement, nor the consummation by the Target REIT of its Merger and compliance
by the Target REIT with the provisions hereof, will: (i) conflict with or
violate any provision of its certificate of incorporation or bylaws; (ii)
require on the part of the Target REIT any consent, approval or authorization
of, or declaration, filing or registration with, any governmental or regulatory
authority, except (x) the filing of the Certificates of Merger or (y) where the
failure to obtain any such consent, approval or authorization of, or
declaration, filing or registration with, any governmental or regulatory
authority would not reasonably be expected to have a Target REIT Material
Adverse Effect and would not adversely affect the consummation of the
transactions contemplated hereby; (iii) conflict with, result in a breach of,
constitute (with or without due notice or lapse of time or both) a default
under, result in the acceleration of obligations under, create in any party the
right to terminate, modify or cancel, or require any notice, consent or waiver
under, any contract or instrument to which the Target REIT is a party or by
which the Target REIT is bound or to which any of its assets is subject, except
for (A) any conflict, breach, default, acceleration, termination, modification
or cancellation which would not have a Target REIT Material Adverse Effect and
would not adversely affect the consummation of the transactions contemplated
hereby or (B) any notice, consent or waiver the absence of which would not have
a Target REIT Material Adverse Effect and would not adversely affect the
consummation of the transactions contemplated hereby; (iv) result in the
imposition of any mortgage, pledge, security interest, encumbrance, charge or
other lien (whether arising by contract or by operation of law) upon any
property or assets of the Target REIT; or (v) violate any order, writ,
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injunction, decree, statute, rule or regulation applicable to the Target REIT or
any of its properties or assets.
(b) Except as expressly contemplated by this Agreement, no other
action is required to be taken by the Target REIT to permit the execution,
delivery and performance of (i) this Agreement, (ii) all other documents and
certificates expressly contemplated hereby, and (iii) the Mergers, and no
consent or approval of any third party or governmental authority is or was
required or appropriate in connection with the execution of this Agreement, or
to consummate the transactions expressly contemplated hereunder, except such as
have been obtained or will be obtained prior to the Closing.
4.6 Litigation. There are (i) no continuing orders, injunctions or decrees
of any court, arbitrator or governmental authority to which the Target REIT is a
party or by which it is bound or, to the knowledge of the Target REIT, to which
any of its directors, officers, employees or agents, in such capacity, is a
party or, to the knowledge of the Target REIT, by which any of them is bound,
and (ii) no actions, suits, investigations or proceedings pending against the
Target REIT, or, to the knowledge of the Target REIT, against any of its
directors, officers, employees or agents, in such capacity, or, to the knowledge
of the Target REIT, threatened against the Target REIT or any of its directors,
officers, employees or agents, in such capacity, at law or in equity, or before
or by any federal, state or local commission, board, bureau, agency or
instrumentality that would, individually or in the aggregate, reasonably be
expected to have a Target REIT Material Adverse Effect.
4.7 Title to Assets. The Target REIT has good and marketable title to the
assets reflected in the most recent Target REIT Balance Sheet and will hold good
and marketable title to such assets, and any assets acquired by the Target REIT
prior to the Effective Time, except for assets disposed of in the ordinary
course of business (which assets do not include its Property) and except as the
failure of the Target REIT to have such good and marketable title is not, in the
aggregate, material to the Target REIT. The assets reflected on the Target REIT
Balance Sheet include its Property. Except as otherwise disclosed in the Target
REIT Balance Sheet or related notes accompanying it, all the assets referred to
in the first sentence of this Section 4.7 are owned free and clear of any and
all material adverse claims, security interests, charges or other encumbrances
or restrictions of every nature, except liens for current taxes not yet due and
payable or landlords' liens as provided for in the relevant leases, or by
applicable law.
4.8 Real Property.
With respect to each parcel of Property owned by the Target REIT:
(a) the Target REIT has good and clear record and marketable title
to such parcel, insurable by a recognized national title insurance company at
standard rates, free and clear of any security interest, easement, covenant or
other restriction, except for recorded easements, covenants and other
restrictions which do not impair the uses, occupancy or value of such parcel for
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its existing use as an office building or warehouse/distribution center, as the
case may be (the "Intended Uses");
(b) there are no (i) pending or, to the knowledge of the Target
REIT, threatened condemnation proceedings relating to such parcel, (ii) pending
or, to the knowledge of the Target REIT, threatened litigation or administrative
actions relating to such parcel, or (iii) other matters affecting adversely the
Intended Uses or, occupancy or value thereof;
(c) the legal description for such parcel contained in the deed
thereof describes such parcel fully and adequately; the buildings and
improvements for the Intended Uses is permitted under applicable zoning and land
use laws, and such buildings and improvements are located within the boundary
lines of the described parcels of land, are not in violation of setback
requirements applicable to them, zoning laws and ordinances and do not encroach
on any easement which may burden the land; the land does not serve any adjoining
property for any purpose inconsistent with the use of the land; and such parcel
is not located within any flood plain or subject to any similar type restriction
for which any permits or licenses necessary to the use thereof have not been
obtained;
(d) there are no leases, subleases, licenses or agreements, written
or oral, granting to any party or parties (other than the Target REIT and those
tenants under leases described in Section 4.9) the right of use or occupancy of
any portion of such parcel, except for leases, subleases, licenses or agreements
which do not impair the Intended Uses;
(e) there are no outstanding options or rights of first refusal to
purchase such parcel, or any portion thereof or interest therein;
(f) all facilities located on such parcel are supplied with
utilities and other services necessary for the operation of such facilities,
including gas, electricity, water, telephone, sanitary sewer and storm sewer,
all of which services are adequate for the Intended Uses and in accordance with
all applicable laws, ordinances, rules and regulations and are provided via
public roads or via permanent, irrevocable, appurtenant easements benefiting
such parcel;
(g) such parcel abuts on and has direct vehicular access to a public
road or access to a public road via a permanent, irrevocable, appurtenant
easement benefiting such parcel;
(h) the Target REIT has received no notice of any, and, to the
knowledge of the Target REIT, there is no, proposed or pending proceeding to
change or redefine the zoning classification of all or any portion of the
parcels;
(i) the improvements constructed on the parcels are in good
condition and proper order, free of material roof leaks, untreated material
insect infestation, and material construction defects, and all mechanical and
utility systems servicing such improvements are in good condition and proper
working order, free of material defects; and
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(j) each parcel is an independent unit which does not rely on any
facilities (other than the facilities of public utility and water companies or
facilities as to which a permanent, irrevocable appurtenant easement exists
benefiting such parcel granting the use of such facilities) located on any other
property (i) to fulfill any zoning, building code or other municipal or
governmental requirement, (ii) for structural support or the furnishing of any
essential building systems or utilities, including, but not limited to electric,
plumbing, mechanical, heating, ventilating, and air conditioning systems, or
(iii) to fulfill the requirements of any lease. No building or other improvement
not included in the parcels relies on any part of the parcels to fulfill any
zoning, building code or other municipal or governmental requirement or for
structural support or the furnishing of any essential building systems or
utilities except with respect to utility or storm water facilities pursuant to
recorded easement agreements or declarations of common easements the use of
which do not impair the Intended Uses. Each of the parcels is assessed by local
property assessors as a tax parcel or parcels separate from all other tax
parcels.
4.9 Real Property Leases. The Target REIT has delivered or made available
to the Company complete and accurate copies of the leases and subleases (as
amended to date) of its Property. With respect to each such lease and sublease:
(a) the lease or sublease is legal, valid, binding, enforceable and
in full force and effect;
(b) the lease or sublease will continue to be legal, valid, binding,
enforceable and in full force and effect immediately following the Effective
Time in accordance with the terms thereof as in effect immediately prior to the
Effective Time;
(c) neither the Target REIT nor, to the knowledge of the Target
REIT, any other party, is in breach or violation of, or default under, any such
lease or sublease, and no event has occurred, is pending or, to the knowledge of
the Target REIT, is threatened, which, after the giving of notice, with lapse of
time, or otherwise, would constitute a breach or default by the Target REIT or,
to the knowledge of the Target REIT, any other party under such lease or
sublease;
(d) the Target REIT has not assigned, transferred, conveyed,
mortgaged, deeded in trust or encumbered any interest in the leasehold or
sublease-hold that have not been discharged; and
(e) the Target REIT is not aware of any Security Interest, easement,
covenant or other restriction applicable to the real property subject to such
lease, except for recorded easements, covenants and other restrictions which do
not materially impair the current uses or the occupancy by the Target REIT of
the property subject thereto.
4.10 Compliance with Laws; Permits; Environmental Matters.
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(a) The Target REIT has complied with all applicable Environmental
Laws (as defined below), except for violations of Environmental Laws that do not
and will not, individually or in the aggregate, have a Target REIT Material
Adverse Effect. There is no pending or, to the knowledge of the Target REIT,
threatened civil or criminal litigation, written notice of violation, formal
administrative proceeding, or investigation, inquiry or information request by
any court, arbitrational tribunal, administrative agency or commission or other
governmental or regulatory authority or agency (a "Governmental Entity"),
relating to any Environmental Law involving the Target REIT, except for
litigation, notices of violations, formal administrative proceedings or
investigations, inquiries or information requests that will not, individually or
in the aggregate, have a Target REIT Material Adverse Effect. For purposes of
this Agreement, "Environmental Law" means any federal, state or local law,
statute, rule or regulation or the common law relating to the environment or
occupational health and safety, including without limitation any statute,
regulation, administrative decision or order pertaining to (i) treatment,
storage, disposal, generation and transportation of industrial, toxic or
hazardous materials or substances or solid or hazardous waste; (ii) air, water
and noise pollution; (iii) groundwater and soil contamination; (iv) the release
or threatened release into the environment of industrial, toxic or hazardous
materials or substances, or solid or hazardous waste, including without
limitation emissions, discharges, injections, spills, escapes or dumping of
pollutants, contaminants or chemicals; (v) the protection of wild life, marine
life and wetlands, including without limitation all endangered and threatened
species; (vi) storage tanks, vessels, containers, abandoned or discarded
barrels, and other closed receptacles; (vii) health and safety of employees and
other persons; and (viii) manufacturing, processing, using, distributing,
treating, storing, disposing, transporting or handling of materials regulated
under any law as pollutants, contaminants, toxic or hazardous materials or
substances or oil or petroleum products or solid or hazardous waste. As used
above, the terms "release" and "environment" shall have the meaning set forth in
the Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("CERCLA").
(b) There have been no releases in violation of Environmental Laws
of any Materials of Environmental Concern (as defined below) into the
environment at any parcel of real property or any facility formerly or currently
owned, operated or controlled by the Target REIT. With respect to any such
releases of Materials of Environmental Concern, the Target REIT has given all
required notices to Governmental Entities (copies of which have been provided to
the Company). The Target REIT is not aware of any releases of Materials of
Environmental Concern at parcels of real property or facilities other than those
owned, operated or controlled by the Target REIT that could reasonably be
expected to have an impact on the real property or facilities owned, operated or
controlled by the Target REIT. For purposes of this Agreement, "Materials of
Environmental Concern" means any chemicals, pollutants or contaminants,
hazardous substances (as such term is defined under CERCLA), solid wastes and
hazardous wastes (as such terms are defined under the Resource Conservation and
Recovery Act), toxic materials, oil or petroleum and petroleum products or any
other material subject to regulation under any Environmental Law.
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(c) A complete and accurate copy of all documents (whether in hard
copy or electronic form) that contain any environmental reports, investigations
and audits relating to premises currently or previously owned or operated by the
Target REIT (whether conducted by or on behalf of the Target REIT or a third
party, and whether done at the initiative of the Target REIT or directed by a
Governmental Entity or other third party) which were issued or conducted during
the past five years and which the Target REIT has possession of or access to has
been provided or made available to the Company.
(d) The Target REIT is not aware of any material environmental
liability of any solid or hazardous waste transporter or treatment, storage or
disposal facility that has been used by the Target REIT.
4.11 Taxes.
(a) The Target REIT has paid, caused to be paid or accrued all
federal, state, local, foreign and other Taxes, required to be paid or accrued
by it through the date hereof;
(b) The Target REIT has timely filed or requested an extension of
the time to file all federal, state, local and foreign Tax returns required to
be filed by it through the date hereof, and all such returns completely and
accurately set forth the amount of any Taxes relating to the applicable period;
(c) The Target REIT has withheld and paid all Taxes required to have
been withheld and paid in connection with amounts paid or owing to any employee,
independent contractor, creditor, stockholder or other party;
(d) For all periods since its inception, the Target REIT has
qualified to be treated as a REIT within the meaning of Sections 856-860 of the
Code. For the periods described in the preceding sentence, the Target REIT has
met all requirements necessary to be treated as a REIT for purposes of the
income Tax provisions of those states in which the Target REIT is subject to
income Tax and which provide for the taxation of a REIT in a manner similar to
the treatment of REITs under Sections 856-860 of the Code.
(e) Neither the IRS nor any other governmental authority is now
asserting by written notice to the Target REIT or, to the knowledge of the
Target REIT, threatening to assert against the Target REIT any deficiency or
claim for additional Taxes. There is no dispute or claim concerning any Tax
liability of the Target REIT either claimed or raised in writing by the IRS.
There is no dispute or claim of a material nature concerning any Tax liability
of the Target REIT either claimed or raised in writing by any governmental
authority other than the IRS, or, to the knowledge of the Target REIT, which may
be claimed or raised by any federal or state governmental authority. No written
claim has ever been made by a Taxing authority in a jurisdiction where the
Target REIT does not file reports and returns asserting that the Target REIT is
or may be subject to Taxation by that jurisdiction.
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(f) Each of the representations set forth in Exhibit C is true,
accurate and complete.
4.12 No Existing Discussions. As of the date of this Agreement, no Target
REIT is engaged, directly or indirectly, in any discussions or negotiations with
any other party with respect to an Acquisition Proposal (as defined in Section
5.5(b).
4.13 Full Disclosure. The representations of the Target REIT contained in
this Agreement do not contain any untrue statement of a material fact or omit to
state any material fact necessary to make the statements made herein not
misleading, and none of the information supplied or to be supplied by the Target
REIT for inclusion in the Consent Solicitation/Prospectus contains any untrue
statement of a material fact or omits to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading. If at any time
prior to the Closing Date any event relating to the Target REIT should occur
that is required to be described in an amendment of or supplement to the Consent
Solicitation/Prospectus, the Target REIT promptly shall inform the Company and
assist in the preparation, filing, dissemination of such amendment or
supplement.
ARTICLE 5 COVENANTS AND ADDITIONAL AGREEMENTS
5.1 Conduct of Business. Prior to the Effective Time, or the earlier
termination of this Agreement, the Company and each Target REIT shall (i) carry
on its business in the ordinary course in substantially the same manner as
previously conducted, (ii) use its reasonable efforts to preserve intact its
present business organization and goodwill, (iii) maintain permits, licenses and
authorizations, (iv) preserve its relationships with third parties and (v) take
all actions necessary to continue to qualify as a REIT, including, without
limitations, the payment of dividends.
5.2 Other Actions. Neither the Company, any Acquisition Subsidiary nor any
Target REIT shall take or omit to take any action that would result in any of
the representations and warranties of the Company, such Acquisition Subsidiary
or such Target REIT, respectively, made in or pursuant to this Agreement
becoming untrue or incomplete, in any of the covenants and agreements of the
Company, such Acquisition Subsidiary or such Target REIT, respectively, being
breached, or in any of the conditions to the Closing not being satisfied;
provided, however, that nothing in this Agreement shall be construed to prohibit
or restrict the ability of the Company or any Target REIT to declare and/or pay,
consistent with past practice and custom, to the Company Stockholders or the
Target REIT Stockholders, as the case may be, dividends in respect of operations
(collectively, the "Dividends") through the Closing Date, each in accordance
with the terms of the distributing entity's organizational documents, each as
amended to date; provided, further, that upon the Effective Date, the Company
shall assume the obligation to pay any dividend declared but not paid by a
Target REIT prior to the Effective Date.
5.3 Approval of Target REIT Stockholders. Promptly following the execution
of this Agreement, the Company, together with the Target REITs, shall prepare
and the Company shall file a Consent Solicitation/Prospectus with the SEC, and
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the Target REITs shall as promptly as practicable following the effectiveness of
the Company's registration statement on Form S-4 distribute the Consent
Solicitation/Prospectus to the Target REIT Stockholders, asking the Target REIT
Stockholders to vote upon the adoption of this Agreement and the Mergers. Except
as permitted by Section 5.5 below, (a) the Consent Solicitation/Prospectus shall
contain the recommendation of the Target Boards of Directors that the Target
REIT Stockholders approve the adoption of this Agreement and the Mergers and (b)
each of the Target REITs, subject to and in accordance with applicable law,
shall use its respective reasonable best efforts to obtain such approval
described in this Section 5.3, including without limitation, by timely mailing
the Consent Solicitation/Prospectus to the Target REIT Stockholders of its
respective corporation. . The Company agrees (i) to vote or cause to be voted
any shares of Target REIT capital stock owned by the Company, including without
limitation any shares of Target REIT capital stock owned by a Subsidiary of the
Company, in favor of Mergers and the adoption of this Agreement and the Mergers
and (ii) to not transfer or cause or allow to be transferred any such shares
from the date hereof until following the earlier of the Effective Time or the
termination of this Agreement.
5.4 Consents and Approvals. The Company and the Target REITs shall each
use all reasonable efforts to take, or cause to be taken, all actions and to do,
or cause to be done, all other things necessary, proper or advisable to
consummate and make effective as promptly as practicable the transactions
contemplated by this Agreement, to obtain in a timely manner all necessary
consents, waivers, approvals, authorizations and orders and to make all
necessary registrations and filings, and otherwise to satisfy or cause to be
satisfied all conditions precedent to its obligations under this Agreement.
5.5 No Solicitation.
(a) Except as set forth in this Section 5.5, no Target REIT shall,
nor shall any of them authorize or permit any of their respective directors,
officers, employees, investment bankers, attorneys, accountants or other
advisors or representatives (such directors, officers, employees, investment
bankers, attorneys, accountants, other advisors and representatives,
collectively, "Representatives") to, directly or indirectly:
(i) solicit, initiate, encourage or take any other action to
facilitate any inquiries or the making of any proposal or offer that
constitutes, or could reasonably be expected to lead to, any Acquisition
Proposal, including without limitation (A) approving any transaction under
Section 203 of the DGCL that would require such approval in the absence of
Article TENTH of such Target REIT's charter, (B) approving any person becoming
an "interested stockholder" under Section 203 of the DGCL that would require
such approval in the absence of Article TENTH of such Target REIT's charter and
(C) amending or granting any waiver or release under any standstill or similar
agreement with respect to any Target Stock; or
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(ii) enter into, continue or otherwise participate in any
discussions or negotiations regarding, furnish to any person any information
with respect to, assist or participate in any effort or attempt by any person
with respect to, or otherwise cooperate in any way with, any Acquisition
Proposal.
Notwithstanding the foregoing, prior to the adoption of this Agreement by the
respective Target REIT Stockholders (the "Specified Time"), the Target REITs
may, to the extent necessary to act in a manner consistent with the respective
fiduciary obligations of the Target Board of Directors, as determined in good
faith by such respective Target Board of Directors, after consultation with
outside counsel, in response to a Superior Proposal that did not result from a
breach by the respective Target REIT of this Section 5.5, and subject to
compliance with Section 5.5(c), (x) furnish information with respect to such
Target REIT to the person making such Superior Proposal and its Representatives
pursuant to a customary confidentiality agreement and (y) participate in
discussions or negotiations with such person and its Representatives regarding
any Superior Proposal. Without limiting the foregoing, it is agreed that any
violation of the restrictions set forth in this Section 5.5(a) by any
Representative of any Target REIT, whether or not such person is purporting to
act on behalf of a Target REIT or otherwise, shall be deemed to be a breach of
this Section 5.5(a) by the respective Target REIT.
(b) No Target REIT Board of Directors nor any committee thereof
shall:
(i) except as set forth in this Section 5.5, withdraw or
modify, or publicly (or in a manner designed to become public) propose to
withdraw or modify, in a manner adverse to the Company or any other Target REIT,
its approval or recommendation with respect to the adoption of this Agreement
and approval of the Mergers contemplated hereby;
(ii) cause or permit its Target REIT to enter into any letter
of intent, memorandum of understanding, agreement in principle, acquisition
agreement, merger agreement or similar agreement constituting or relating to any
Acquisition Proposal (other than a confidentiality agreement referred to in
Section 5.5(a) entered into in the circumstances referred to in Section 5.5(a));
or
(iii) adopt, approve or recommend, or publicly propose to
adopt, approve or recommend, any Acquisition Proposal.
Notwithstanding the foregoing, a Target REIT Board of Directors may, in response
to a Superior Proposal that did not result from a breach by such Target REIT of
this Section 5.5, withdraw or modify its recommendation with respect to the
adoption of this Agreement and approval of the Mergers contemplated hereby if
such Target REIT Board of Directors determines in good faith (after consultation
with outside counsel) that its fiduciary obligations require it to do so, but
only at a time that is prior to the Specified Time and is after the fifth
business day following receipt by the Company of written notice advising it that
such Target Board of Directors desires to withdraw or modify the recommendation
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due to the existence of a Superior Proposal, specifying the material terms and
conditions of such Superior Proposal and identifying the person making such
Superior Proposal. Nothing in this Section 5.5 shall be deemed to (A) permit any
Target REIT to take any action described in clauses (ii) or (iii) of the first
sentence of this Section 5.5(b), (B) affect any obligation of the Company or the
Target REITs under this Agreement or (C) limit a Target REITs' respective
obligation to solicit consents from its Target REIT Stockholders, regardless of
whether such Target REIT Board of Directors has withdrawn or modified its
recommendation.
(c) Each Target REIT shall immediately advise the Company and the
other Target REITs orally, with written confirmation to follow promptly (and in
any event within 24 hours), of any Acquisition Proposal or any request for
nonpublic information in connection with any Acquisition Proposal, or of any
inquiry with respect to, or that could reasonably be expected to lead to, any
Acquisition Proposal, the material terms and conditions of any such Acquisition
Proposal or inquiry and the identity of the person making any such Acquisition
Proposal or inquiry. No Target REIT shall provide any information to or
participate in discussions or negotiations with the person or entity making any
Superior Proposal until five business days after such Target REIT has first
notified the Company and the other Target REITs of such Acquisition Proposal as
required by the preceding sentence. The Target REIT receiving an Acquisition
Proposal shall (i) keep the Company and the other Target REITs fully informed,
on a reasonably current basis, of the status and details (including any change
to the terms) of any such Acquisition Proposal or inquiry, (ii) provide to the
Company and the other Target REITs as soon as practicable after receipt or
delivery thereof copies of all correspondence and other written material sent or
provided to the Target REIT receiving an Acquisition Proposal from any third
party in connection with any Acquisition Proposal or sent or provided by such
Target REIT to any third party in connection with any Superior Proposal, and
(iii) if the Company shall make a counterproposal, consider and cause its
financial and legal advisors to negotiate on its behalf in good faith with
respect to the terms of such counterproposal. Contemporaneously with providing
any information to a third party in connection with any such Superior Proposal
or inquiry, the Target REIT receiving a Superior Proposal shall furnish a copy
of such information to the Company and the other Target REITs.
(d) Each Target REIT shall, and shall cause its Representatives to,
cease immediately all discussions and negotiations regarding any proposal that
constitutes, or could reasonably be expected to lead to, an Acquisition
Proposal. Each Target REIT shall use commercially reasonable efforts to have all
copies of all nonpublic information it and its Representatives have distributed
on or prior to the date of this Agreement to other potential purchasers returned
to such Target REIT as soon as possible.
(e) For purposes of this Agreement:
"Acquisition Proposal" means, with respect to any Target REIT,
(i) any inquiry, proposal or offer for a merger, consolidation, dissolution,
sale of substantial assets, tender offer, recapitalization, share exchange or
other business combination involving such Target REIT, (ii) any proposal for the
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issuance by such Target REIT of over 10% of its equity securities or (iii) any
proposal or offer to acquire in any manner, directly or indirectly, over 10% of
the equity securities or consolidated total assets of such Target REIT, in each
case other than the Mergers contemplated by this Agreement.
"Superior Proposal" means, with respect to any Target REIT,
any unsolicited, bona fide written proposal made by a third party to acquire
substantially all of the equity securities or assets of such Target REIT,
pursuant to a tender or exchange offer, a merger, a consolidation or a sale of
its assets, (i) on terms which such Target REIT's Board of Directors determines
in its good faith judgment to be more favorable from a financial point of view
to the stockholders of such Target REIT than the transactions contemplated by
this Agreement (after taking into account the written opinion with respect
thereto of a nationally recognized independent financial advisor), taking into
account all the terms and conditions of such proposal and this Agreement
(including any proposal by either the Company or such the Target REIT to amend
the terms of this Agreement) and (ii) that in the good faith judgment of the
Target REIT Board of Directors is reasonably capable of being completed on the
terms proposed, taking into account all financial, regulatory, legal and other
aspects of such proposal; provided, however, that no Acquisition Proposal shall
be deemed to be a Superior Proposal if any financing required to consummate the
Acquisition Proposal is not committed.
ARTICLE 6 CONDITIONS TO EACH PARTY'S OBLIGATIONS TO EFFECT THE MERGERS.
The respective obligations of the parties hereto to consummate the
Mergers pursuant to the terms of this Agreement are subject to satisfaction of
the following conditions precedent on or prior to the Closing Date. In the event
that one or more of these conditions are not satisfied on or prior to the
Closing Date, the party or parties whose obligations hereunder are subject to
the satisfaction of such condition or conditions may either elect to terminate
this Agreement or waive the satisfaction of such condition. The conditions are:
(a) this Agreement and the Mergers shall have been approved by the
holders of a majority of the shares of Target Stock of each Target REIT other
than a Target REIT with respect to which this Agreement has been terminated in
accordance with Section 8.2(b);
(b) all necessary consents, waivers, approvals, authorizations or
orders required to be obtained and the making of all filings required to be made
by any of the parties for the authorization, execution and delivery of this
Agreement and the consummation of the transactions contemplated thereby shall
have been obtained or made, as the case may be, on or prior to (and remaining in
effect at) the Closing Date;
(c) FSP Corp. and each of the Target REITs shall have received, on
or prior to the Closing Date, an opinion from Wilmer Cutler Pickering Hale and
Dorr LLP to the effect that each Merger will be treated for federal income tax
purposes as a reorganization within the meaning of Section 368(a) of the Code
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and confirming that, to the extent the matters discussed under the heading
"Material United States Federal Income Tax Considerations" in the Consent
Solicitation/Prospectus constitute matters of law, they are accurate in all
material respects (it being agreed that if Wilmer Cutler Pickering Hale and Dorr
LLP does not render such opinion, this condition shall nonetheless be satisfied
if another nationally recognized law firm renders such opinion, and that the
Company and the Target REITs shall use their respective reasonable best efforts
to obtain the opinion required by this subsection). Each of the Company and each
Target REIT agrees to provide customary representations to Wilmer Cutler
Pickering Hale and Dorr LLP (or such other law firm) in connection with the
issuance of such opinion;
(d) either the President and Chief Executive Officer or the Vice
President and Chief Operating Officer of the Company shall have delivered to
each of the Target REITs a certificate on behalf of the Company, dated as of the
Closing Date, to the effect that there have been no material adverse changes in
the financial condition of the Company between the date of the most recent
Company Financial Statements and the Closing Date, and the President of each of
the Target REITs shall have delivered to the Company a certificate on behalf of
each Target REIT, each dated as of the Closing Date, to the effect that there
have been no material adverse changes in the financial condition of such Target
REIT between the date of the most recent Target REIT Financial Statements for
such Target REIT and the Closing Date;
(e) there shall have been no statute, rule, order or regulation
enacted or issued by the United States or any State thereof, or by a court, that
prohibits the consummation of the Mergers; and
(f) the representations set forth in Section 3 and Section 4 hereof
are true and complete in all material respects; provided, however, that the
party whose representation was not true and correct shall have no right to not
consummate the Closing as a result thereof.
The conditions described in clause (b) above, may be waived by either the
Company or the Target REITs, as the case may be, in whole or in part if, in the
opinion of either the Company or the Target REITs, as the case may be, such
waiver does not materially affect the terms of the transaction, which waiver
shall not be unreasonably withheld.
ARTICLE 7 TERMINATION AND WAIVER
7.1 Termination. This Agreement may be terminated, and the Mergers may be
abandoned, at any time before the Closing Date, notwithstanding approval of the
Mergers by the Target REIT Stockholders:
(a) by the mutual written consent of the parties;
(b) by the Company or any Target REIT if the Mergers have not been
consummated by March 30, 2005 (which date may be extended by mutual agreement of
the parties);
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(c) by the Company or any Target REIT if the conditions to the
Mergers set forth in Article 6 of this Agreement are not satisfied or waived on
the Closing Date; provided, however, that in the event of the failure of the
conditions set forth in clause (g) of Article 6, the party whose representation
was not true and correct shall have no right to terminate this Agreement as a
result thereof;
(d) by the Company or any Target REIT, in the instance where the
Target REIT has received a Superior Proposal and the respective Target REIT
Board of Directors has withdrawn or modified its approval or recommendation with
respect to the adoption of this Agreement and approval of the Mergers
contemplated hereby, if at a meeting of Target REIT Stockholders (including any
adjournment or postponement thereof) or pursuant to a written consent in lieu of
a meeting, as contemplated by Section 5.3 above, the requisite vote of such
stockholders to adopt this Agreement and approve the Mergers contemplated hereby
shall not have been obtained within 75 days of mailing of the Consent
Solicitation/Prospectus.
If a casualty occurs with respect to the Property owned by a particular
Target REIT, the Company Board has the right to terminate the Agreement with
respect to such Target REIT and to consummate the Mergers with the remaining
Target REITs as provided in Section 8.2(b) hereof. In addition, the Company
Board has the right to terminate this Agreement with respect to a Target REIT if
(i) after the receipt by any Target REIT of an Acquisition Proposal, if the
Company requests that such Target REIT Board of Directors reconfirm its
recommendation of this Agreement or the Merger with the respective Target REIT
and such Target REIT Board of Directors fails to do so within five business days
after its receipt of the Company's request or (ii) such Target REIT Board of
Directors (or any committee thereof) shall have approved or recommended to its
Target REIT Stockholders an Acquisition Proposal.
7.2 Effect of Termination. In the event of termination of this Agreement
as provided in Section 7.1 hereof, this Agreement shall become void and there
shall be no liability or obligation on the part of any party hereto or its
respective affiliates, partners, directors or officers, except (i) with respect
to payment of expenses as described in Section 8.3 and (ii) to the extent that
such termination results from the willful breach of a party hereto of any of its
representations, warranties, covenants or agreements made in or pursuant to this
Agreement.
7.3 Extension; Waiver. At any time prior to the Closing Date, the parties
hereto may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(ii) waive any inaccuracies in the representations and warranties of the other
parties hereto contained herein or made in connection herewith, and (iii) waive
compliance with any of the agreements of the other parties hereto contained
herein. Any agreement on the part of a party hereto to any such extension or
waiver shall be valid only if set forth in an instrument in writing signed on
behalf of such party.
7.4 No Survival of Representations and Warranties. None of the
representations and warranties contained in this Agreement shall survive the
Closing Date.
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ARTICLE 8 MISCELLANEOUS
8.1 Assignment. The Company may not assign its rights or obligations under
this Agreement without the consent of the applicable Target REIT. None of the
Target REITs may assign their rights or obligations under this Agreement.
8.2 Risk of Loss.
(a) Risk of loss or damage to the assets owned by each Target REIT
(the "Assets") by condemnation, eminent domain or similar proceedings (or deed
in lieu thereof), or by fire or any other casualty, from the date hereof through
the Closing Date, will be on the Target REIT owning such Assets, and thereafter
will be on the Combined Company.
(b) In the event of loss or damage to the Assets that occurs prior
to the Closing Date, the applicable Target REIT shall use its commercially
reasonable efforts to effect a timely cure of such loss or damage prior to the
Closing Date. If the Target REIT is unable to effect such a timely cure, the
Target REIT shall so notify the Company, and thereafter, if such loss or damage
results in a Target REIT Material Adverse Effect, the Company and such Target
REIT shall use good faith efforts to amend this Agreement (without the need to
obtain the consent of any other Target REIT) to (A) reflect a decrease in the
amount of Merger Consideration to be issued with respect to the Target Stock of
such Target REIT based on such loss or damage and (B) extend the term of this
Agreement as reasonably necessary taking into account all financial, regulatory,
legal and other aspects of such amendment to this Agreement, including, but not
limited to, the need to resolicit the stockholders of such Target REIT with
respect to participation in the Mergers with the Merger Consideration adjusted
to reflect such loss or damage and consummate the Merger with such Target REIT
as soon as practicable thereafter; provided, however, that in the event the
Company and such Target REIT, after a good faith effort, cannot agree on a
decrease in the amount of Merger Consideration to be issued with respect to the
Target Stock of such Target REIT based on such loss or damage within a
reasonable period of time following notice of such loss or damage, the Company
shall have the unilateral right to amend this Agreement to terminate this
agreement with respect to such Target REIT and consummate the Mergers with the
other Target REITS.
8.3 Fees and Expenses. The costs associated with each independent
third-party appraisal of the fair market value of each Target REIT's real estate
("Appraisal") obtained by the respective Target Boards of Directors shall be
paid by the Target REIT owning the real estate that is the subject of the
Appraisal. The costs associated with investment banking advice and each fairness
opinion of each Target REIT (the "Fairness Opinions") obtained by the respective
Target Boards of Directors shall be paid by the Target REIT receiving such
advice and Fairness Opinion. The fees and expenses of each Target REIT's legal
counsel shall be paid by the respective Target REIT. All other expenses related
to the Mergers and the transactions contemplated hereby, including, without
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limitation, consulting, legal, accounting and administrative expenses, shall be
paid by the Company.
8.4 Entire Agreement; Modifications; Amendments.
(a) This Agreement embodies and constitutes the entire understanding
between the parties with respect to the transactions contemplated herein, and
all prior or contemporaneous agreements, understandings, representations and
statements, oral or written, are merged into this Agreement. Except as expressly
otherwise provided herein, neither this Agreement nor any provision hereof may
be waived, modified, amended, discharged or terminated except by an instrument
in writing signed by the party against which the enforcement of such waiver,
modification, amendment, discharge or termination is sought, and then only to
the extent set forth in such instrument.
(b) Subject to applicable law, this Agreement may be amended by the
Company and the Target REITs at any time prior to the filing of the Certificates
of Merger with the Secretary of State of the State of Delaware; provided,
however, that after approval by Target REIT Stockholders as provided in Section
6 above, without further approval of the Target REIT Stockholders of such Target
REIT, no amendment may be made that alters or changes (i) the amount or kind of
Merger Consideration which the Target REIT Stockholders in such Target REIT
shall be entitled to receive, (ii) the certificate of incorporation or bylaws of
such Target REIT or (iii) the terms and conditions of this Agreement, if such
alteration or change would have a material adverse effect on such Target REIT
Stockholders.
8.5 Notices. All notices, demands or other writings in this Agreement
provided to be given or made or sent, or which may be given or made or sent, by
either party hereto to the other may be given personally or may be delivered by
depositing the same in the U.S. mail, certified, return receipt requested,
postage prepaid or by delivering the same to an air courier service, postage
prepaid, properly addressed and sent to the address of such party as set forth
below, or such other address as either party may from time to time designate by
written notice to the other. Notice given by mail shall be considered effective
upon the expiration of five business days after deposit. Notice given in any
other manner shall be effective only if and when received by the addressee.
If to the Company:
Franklin Street Properties Corp.
401 Edgewater Place, Suite 200
Wakefield, Massachusetts 01880
Attention: George J. Carter
President and Chief Executive Officer
Fax: (800) 950-6288
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with a copy to:
Wilmer Cutler Pickering Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109
Attention: Kenneth A. Hoxsie, Esq.
Fax: (617) 526-5000
If to a Target REIT:
c/o Franklin Street Properties Corp.
401 Edgewater Place, Suite 200
Wakefield, Massachusetts 01880
Attention: William W. Gribbell and R. Scott
MacPhee, Members of the Special Committee
of the Board of Directors
Fax: (800) 950-6288
with a copy to:
Gehrke, Gish & Umana LLP
Two Faneuil Hall Marketplace
South Market Building, 4th Floor
Boston, Massachusetts 02109
Attention: William S. Gehrke, Esq.
Fax: (617) 507-8177
8.6 Interpretation. Words of any gender used in this Agreement shall be
held and construed to include any other gender, and words of a singular number
shall be held to include the plural and vice versa, unless the context requires
otherwise.
8.7 Captions. The captions used in this Agreement are for convenience only
and shall not be deemed to construe or to limit the meaning of the language of
this Agreement.
8.8 Counterparts. This Agreement may be executed in any number of
identical counterparts. If so executed, each of such counterparts is to be
deemed an original for all purposes, and all such counterparts shall
collectively constitute one agreement, but in making proof of this Agreement it
shall not be necessary to produce or account for more than one such counterpart.
8.9 Binding Effect. Subject to the restrictions on assignment contained in
Section 8.1 hereof, this Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective heirs, legal representatives,
successors and assigns.
A-26
8.10 Attorneys' Fees. Subject to the requirements of Section 8.12 hereof,
should any party hereto employ an attorney or attorneys to enforce any of the
provisions hereof or to protect its interest in any manner arising under this
Agreement, or to recover damages for the breach hereof, the nonprevailing party
or parties in any action pursued in courts of competent jurisdiction (the
finality of which action is not legally contested) agrees to pay to the
prevailing party or parties all reasonable costs, damages and expenses,
including attorneys' fees, expended or incurred in connection therewith;
provided, however, that if more than one item is disputed and the final decision
is against each party as to one or more of the disputed items, then such costs,
expenses and attorneys' fees shall be apportioned in accordance with the
monetary values of the items decided against each party.
8.11 No Waiver; Severability. The failure of any party hereto to enforce
at any time any of the provisions of this Agreement shall in no way be construed
to be a waiver of any such provision, and shall in no way affect the validity of
this Agreement or any part hereof or the right of any party thereafter to
enforce each and every such provision. No waiver of any breach of this Agreement
shall be held to be a waiver of any other or subsequent breach. If any provision
of this Agreement, or the application thereof to any person or circumstances
shall, for any reason and to any extent, be invalid or unenforceable, but the
extent of the invalidity or unenforceability does not destroy the basis of the
bargain between the parties as contained herein, the remainder of this Agreement
and the application of such provision to other persons or circumstances shall
not be affected thereby but rather shall be enforced to the greatest extent
permitted by law.
8.12 No Joint and Several Liability. If one of the Target REITs defaults
under, or is in breach of, any of its representations, warranties or covenants
contained in this Agreement, such Target REIT shall be accountable to the
Company and shall be liable for the damages caused by such default or breach to
the extent provided in Section 7.2 hereof. Each Target REIT hereunder has
undertaken obligations and made representations, warranties, disclosures and
covenants herein and in and pursuant to the exhibits hereto solely with respect
to itself and the Property owned by it. Nothing contained herein, however, is
intended to make any of the Target REITs jointly and severally liable for the
default or breach by any of the other Target REITs, and with respect to any such
default and breach such shall be solely the obligation and responsibility of the
Target REIT responsible for the default or breach, and no Target REIT shall be
liable to any other Target REIT hereunder.
8.13 Applicable Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware.
[Remainder of Page Intentionally Left Blank]
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IN WITNESS WHEREOF, this Agreement has been executed by each of the parties as
of the date first set forth above.
COMPANY:
FRANKLIN STREET PROPERTIES CORP.
By: /s/ George J. Carter
------------------------
Name: George J. Carter
Title: President and Chief Executive Officer
ACQUISITION SUBSIDIARIES:
MONTAGUE ACQUISITON CORP.
By: /s/ George J. Carter
------------------------
Name: George J. Carter
Title: President
ADDISON CIRCLE ACQUISITION CORP.
By: /s/ George J. Carter
------------------------
Name: George J. Carter
Title: President
ROYAL RIDGE ACQUISITION CORP.
By: /s/ George J. Carter
------------------------
Name: George J. Carter
Title: President
COLLINS CROSSING ACQUISITION CORP.
By: /s/ George J. Carter
------------------------
Name: George J. Carter
Title: President
A-28
TARGET REITS:
FSP MONTAGUE BUSINESS CENTER CORP.
By: /s/ George J. Carter
-------------------------
Name: George J. Carter
Title: President
FSP ADDISON CIRCLE CORP.
By: /s/ George J. Carter
-------------------------
Name: George J. Carter
Title: President
FSP ROYAL RIDGE CORP.
By: /s/ George J. Carter
-------------------------
Name: George J. Carter
Title: President
FSP COLLINS CROSSING CORP.
By: /s/ George J. Carter
-------------------------
Name: George J. Carter
Title: President
A-29
Exhibit A
Name and Address Property
---------------- --------
FSP MONTAGUE BUSINESS CENTER CORP. Office/R&D Building in San Jose, CA
2730-2760 Junction Ave
404-410 East Plumeria Drive
San Jose, CA 95134
FSP ADDISON CIRCLE CORP. Office Building in Addison, TX
15601 N. Dallas Parkway
Dallas, Tx 75001
FSP ROYAL RIDGE CORP. Office Building in Alpharetta, GA
11690 Great Oaks Way
Alpharetta, Ga. 30022
FSP COLLINS CROSSING CORP. Office Building in Richardson, TX
1500 & 1600 Greenville Ave
Richardson, Tx 75080
A-30
Exhibit B
Shares of Common Stock for
Name each Share of Target Stock
---- --------------------------
FSP MONTAGUE BUSINESS CENTER CORP. 5,649.72
FSP ADDISON CIRCLE CORP. 5,948.67
FSP ROYAL RIDGE CORP. 6,055.79
FSP COLLINS CROSSING CORP. 6,167.63
A-31
Exhibit C
Each Target REIT hereby makes the representations set forth below, which such
Target REIT understands will be relied upon by Wilmer Cutler Pickering Hale and
Dorr LLP in rendering a legal opinion with respect to the discussion set forth
under "Material United States Federal Income Tax Considerations" in the Consent
Solicitation/Prospectus. Notwithstanding anything to the contrary that may be
expressed or implied herein, each Target REIT makes no representations regarding
any matter for any periods commencing on or after the Effective Time (as defined
in the Agreement). Each Target REIT has made or has caused to be made such
investigations as are necessary to certify the accuracy of the information set
forth herein. To the extent the representations and statements in this letter
involve matters of law, each Target REIT acknowledges that Gehrke, Gish & Umana
LLP and Wilmer Cutler Pickering Hale and Dorr LLP has reviewed such matters with
it.
1. The Target REIT has operated in accordance with (a) the Certificate of
Incorporation of the Target REIT, as amended through the date hereof (the
"Certificate of Incorporation"), (b) the By-Laws of the Target REIT as
amended through the date hereof, (c) the applicable state law under which
the Target REIT is organized, and (d) the representations in this Exhibit.
2. The Target REIT is not a bank (within the meaning of Section 581 of the
Internal Revenue Code of 1986, as amended (the "Code")), financial
institution (described in Section 591 of the Code), small business
investment company operating under the Small Business Act of 1958,
business development corporation (within the meaning of Section
582(c)(2)(B) of the Code) or insurance company (subject to Subchapter L of
Subtitle A, Chapter 1 of the Code).
3. The Target REIT's taxable year for federal income tax purposes is the
calendar year. The Target REIT made the election specified in Section
856(c) of the Code to be a real estate investment trust ("REIT") under the
Code, effective for its first taxable year. The Target REIT's election to
be taxed as a REIT has not been revoked or terminated.
4. For each taxable year after its first taxable year, (A) the beneficial
ownership of the Target REIT has been held by 100 or more persons for at
least 335 days for a taxable year of 12 months (or during a proportionate
part of a taxable year of less than 12 months), and (B) at no time during
the last half of such taxable year has more than 50% in value of the
Target REIT's outstanding stock been owned, directly or indirectly (taking
into account the constructive ownership rules applicable under Section 542
of the Code as modified by Section 856(h) of the Code) by or for five or
fewer individuals. Compliance with the 100 person test set forth in (A)
above shall be determined in accordance with the Investment Company Act of
1940 by disregarding the ownership of shares by any person who (i)
acquired such shares as a gift or bequest pursuant to a legal separation
or divorce; (ii) is the estate of any person making such transfer to the
A-32
estate; or (iii) is a company established exclusively for the benefit of
(or wholly owned by) either the person making such transfer or a person
described in (i) or (ii).
5. The Target REIT at all times has been managed by one or more trustees or
directors, and the beneficial ownership in the Target REIT has been
evidenced by transferable shares.
6. With the exception of the restrictions imposed on the transfers of the
Target REIT capital stock under the Certificate of Incorporation, there
are no restrictions on the transfer of the Target REIT's capital stock,
other than restrictions imposed by applicable securities law.
7. At least 75% of the gross income of the Target REIT for each of its
taxable years consisted of amounts from the following sources:
(A) Rents from real property.
(i) Rents from real property shall include the following:
(a) Rents from interests in real property;
(b) Rent attributable to personal property leased under,
or in connection with, a lease of real property, but only if the rent
attributable to such personal property for the taxable year does not
exceed 15% of the total rent received for the real and personal property
under the lease (determined by the ratio of the average of the "adjusted
bases" of the personal property subject to the lease at the beginning and
end of the year to the average of the total "adjusted bases" of all
property subject to the lease at the beginning and end of the year); and
(c) Charges for services customarily furnished or
rendered in connection with the rental of real property, whether or not
separately stated.
(ii) Rents from real property shall exclude the following:
(a) Amounts received or accrued for, or in connection
with, the use of real property (or deemed to be for use of real property
under Code Section 856(d)), the determination of which depends in whole or
in part on the income or profits derived by any person from such property
(except such amounts as may be based on a fixed percentage or percentages
of receipts or sales if such rental provisions conform with normal
business practice and are not used as a means to allow the Target REIT to
receive rents that depend in whole or in part on the income or profits
derived by any person from the property);
(b) Amounts received or accrued from any person in which
the Target REIT owns (A) in the case of a corporation, 10% or more of the
A-33
combined voting power of all classes of stock entitled to vote (and for
taxable years beginning after December 31, 2000, 10% or more of the total
value of shares of all classes of stock), or (B) in the case of an entity
other than a corporation, an interest of 10% or more in the assets or net
profits of such entity. For purposes of this paragraph, ownership will be
determined by taking into account the attribution rules of Code Section
318 (as modified by Code Section 856(d)(5));
(c) Any "impermissible tenant service income." For this
purpose, "impermissible tenant service income" generally shall include all
income received from a tenant if the Target REIT (directly or indirectly)
provides services to the tenant that (i) are not customarily rendered in
connection with the rental of space for occupancy only and (ii) are
rendered primarily for the convenience of the tenant; provided, however,
that if the greater of (X) the income derived from all such services to
the tenant or (Y) 150% of the cost of providing such services to the
tenant is less than 1% of the income received by the Target REIT with
respect to the property in which the tenant leased space, only such
greater amount shall be treated as impermissible tenant service income;
and provided further, however, that no income from the tenant shall be
treated as impermissible tenant service income if the impermissible
services are performed by an "independent contractor" within the meaning
of Section 856(d)(3) of the Code from whom the Target REIT derives no
income.
(B) Interest received or accrued that is attributable to obligations
held by the Target REIT that are secured by mortgages on real property or
on interests in real property;
(C) Gain realized upon the sale of real property (other than assets
or portions thereof considered to be stock in trade, included in inventory
or held for sale to customers in the ordinary course of a trade or
business ("Dealer Property"));
(D) Dividends and gain from the sale or other disposition of
transferable interests in other real estate investment trusts other than
interests that were Dealer Property;
(E) Abatements and refunds of real property taxes;
(F) Income and gain derived from "foreclosure property" (as defined
in Section 856(e) of the Code);
(G) Amounts (other than amounts the determination of which depends
in whole or in part on the income or profits of any other person) received
or accrued as consideration for entering into agreements (X) to make loans
secured by mortgages on real property or on interests in real property or
(Y) to purchase or lease real property;
A-34
(H) Gain from the sale or other disposition of real estate assets
that are Dealer Properties but which dispositions are excluded from
"prohibited transactions" as a result of Section 857(b)(6) (exempting
certain sales of real estate assets if held for at least four years); and
(I) "Qualified temporary investment income" as defined in Section
856(c)(5)(D) of the Code.
8. At least 95% of the gross income of the Target REIT for each of its
taxable years consisted of amounts from the following sources:
(A) Income specified in Sections 7(A) through (I) hereof;
(B) Dividends;
(C) Interest; and
(D) Gain from the sale or other disposition of stock and securities
other than Dealer Property.
9. The Target REIT was incorporated in a taxable year beginning after August
5, 1997.
10. During each of the Target REIT's taxable years, at least 75% of the total
value of the assets of the Target REIT has consisted of the following
types of assets:
(A) Land;
(B) Buildings, including wiring, plumbing systems, elevators,
escalators, and other structural components thereof, but not including any
personal property associated with such real property (such as furnishings,
appliances, draperies, equipment, machinery, etc.);
(C) Loans (including accrued interest thereon) directly secured by a
mortgage on real property of the type described in paragraphs (A) or (B)
above;
(D) Cash and cash items, including cash on hand, time and demand
deposits with financial institutions, and receivables arising in the
ordinary course of the Target REIT's operations (other than those
purchased from another person) but excluding bankers' acceptances,
repurchase agreements, and other similar instruments;
(E) Securities (including accrued interest thereon) issued or
guaranteed by the United States or by a person controlled or supervised by
and acting as an instrumentality of the United States, pursuant to any
authority granted by Congress, or any certificates of deposit for any of
the foregoing; and
A-35
(F) Equity interests in corporations which have made qualifying
elections to be taxed as real estate investment trusts under Sections 856
through 860 of the Code and continue to satisfy the requirements for such
treatment.
11. The Target REIT has not owned and will not own securities in any issuer
(other than a REIT or a "qualified REIT subsidiary" within the meaning of
Section 856(i) of the Code) that either (A) represent in excess of 10% of
the (i) voting power of the outstanding securities, or (ii) value of the
outstanding securities, of such issuer or (B) have an aggregate value in
excess of 5% of the value of the total assets of the Target REIT.
12. For each of its taxable years, the Target REIT distributed to its
shareholders at such times and in such manner as required by Code Sections
858, 561 and 563 at least 90% of its ordinary REIT taxable income (as
defined in Section 857(b) of the Code, excluding any net capital gain) for
such taxable year.
13. The Target REIT does not have and has not had at the close of any taxable
year any undistributed "C corporation" earnings and profits.
14. The Target REIT has not made any distributions to its shareholders with
respect to its capital stock unless such distribution was pro-rata, with
no preference to any stock of a particular class as compared with other
stock of the same class, and it has not made any distributions that gave a
preference to one class of stock as compared with another class except to
the extent that the former is entitled (without reference to waivers of
their rights by shareholders) to such preference.
15. Except as set forth on Schedule 1 attached hereto, the Target REIT has
never owned any interest in any subsidiary, corporation, partnership,
limited liability company or other entity.
16. To the best of the Target REIT's knowledge, as a result of the Merger the
Company will not directly or indirectly own 10% or more of any tenant from
which the Target REIT collects rent.
17. To the best of the Target REIT's knowledge, as a result of the Merger the
Company will not own (i) more than 10% of the voting power of the
outstanding securities of any issuer, or (ii) more than 10% of the value
of the outstanding securities of any issuer.
18. To the best of the Target REIT's knowledge, any person who performs
services for tenants on behalf of the Target REIT and who is an
"independent contractor" within the meaning of Section 856(d)(3) of the
Code with respect to the Target REIT will be an "independent contractor"
with respect to the Company following the Merger.
19. Attached hereto as Schedule 2 is a list of all of the shareholders of the
Target REIT.
A-36
20. Attached hereto as Schedule 3 is a list of all securities held by the
Target REIT.
21. The Target REIT is not involved in, nor is it aware of, any proceeding,
dispute, audit or other undertaking, the outcome of which could cause any
of the foregoing representations to be incorrect in whole or in part,
either retroactively or prospectively.
A-37
Appendix B
GLOSSARY OF TERMS
Certain terms used in this Consent Solicitation/Prospectus have the
following meanings unless the context otherwise requires:
"Addison Circle" - FSP Addison Circle Corp., a real estate investment
trust and Delaware corporation.
"A.G. Edwards" - A. G. Edwards & Sons, Inc., the financial advisor to the
special committees, the target REITs and the target boards.
"AMEX" - The American Stock Exchange.
"appraisals" - the appraisals by third-party independent appraisers of the
real estate owned by each target REIT.
"appraisers" - BRE-Valuation and Advisory Services, Bryan E. Humphries and
Associates and Cushman & Wakefield of California, Inc.
"acquisition subsidiaries" - Montague Acquisition Corp., Addison Circle
Acquisition Corp., Royal Ridge Acquisition Corp. and Collins Crossing
Acquisition Corp., each a Delaware corporation.
"closing date" - the closing date of the mergers.
"Collins Crossing" - FSP Collins Crossing Corp., a real estate investment
trust and Delaware corporation.
"combined company" - FSP Corp., its subsidiaries and the acquisition
subsidiaries, after giving effect to the consummation of the mergers.
"Commission" - the Securities and Exchange Commission.
"effective date" - the effective date of the mergers, which is expected to
be on or about April 30, 2005 or as soon as practicable after the conditions to
the mergers are satisfied.
"equity securities" - FSP common stock and preferred stock.
"Exchange Act" - Securities Exchange Act of 1934, as amended.
"exchange ratio" - the number of shares of FSP common stock issuable in
exchange for each share of target stock.
"FASB" - the Financial Accounting Standards Board.
"FSP board" - the Board of Directors of FSP Corp.
B-1
"FSP common stock" - the common stock of FSP Corp., $0.0001 par value per
share.
"FSP Corp." - Franklin Street Properties Corp., a Maryland corporation.
"FSP Corp.'s properties" - the real properties owned by FSP Corp.,
directly and through its wholly owned subsidiaries.
"FSP Holdings" - FSP Holdings LLC, a Delaware limited liability company.
"FSP Investments" - FSP Investments LLC, a Massachusetts limited liability
company.
"FSP Property Management" - FSP Property Management LLC, a Massachusetts
limited liability company.
"GAAP" - generally accepted accounting principles.
"merger agreement" - the Agreement and Plan of Merger, dated August 13,
2004, among FSP Corp., the acquisition subsidiaries and the target REITs.
"merger consideration" - the approximately 10,894,994 shares of FSP common
stock to be issued in connection with the mergers.
"mergers" - the acquisition, by merger, of each target REIT by the related
wholly-owned acquisition subsidiary of FSP Corp.
"Montague" - FSP Montague Business Center Corp., a real estate investment
trust and Delaware corporation.
"record date" - August 13, 2004
"Royal Ridge" - FSP Royal Ridge Corp., a real estate investment trust and
Delaware corporation.
"Securities Act" - Securities Act of 1933, as amended.
"SFAS" - Statement of Financial Accounting Standards.
"special committees" - committees of each target board consisting of
Messrs. MacPhee and Gribbell, the only members of the target boards who were not
also members of the FSP board, which were established by each target board to,
among other things, evaluate and negotiate a potential acquisition by FSP Corp.
and recommend that the board of each target REIT accept or reject the FSP Corp.
acquisition.
"sponsored entities" - investment vehicles organized by FSP Investments,
which are typically syndicated through private placements exempt from
registration under the Securities Act.
B-2
"sponsored partnerships" - sponsored entities organized as limited
partnerships.
"sponsored REITs" - sponsored entities organized as corporations intended
to qualify for federal income tax purposes as real estate investment trusts,
including the target REITs.
"target boards" - the boards of directors of the Target REITs,
collectively.
"target REITs" - four real estate investment trusts, consisting of
Montague, Addison Circle, Royal Ridge and Collins Crossing.
"target REIT stockholders" - the holders of the target stock.
"target stock"- preferred stock of the target REITs.
B-3
Appendix C-1
August 11, 2004
Board of Directors
FSP Montague Business Center Corp.
401 Edgewater Place
Suite 200
Wakefield, MA 01880
Gentlemen:
You have requested our opinion as to the fairness, from a financial point of
view, to the preferred stockholders (the "Target Stockholders") of FSP Montague
Business Center Corp. (the "Target REIT") of the aggregate consideration the
Target Stockholders are to receive from Franklin Street Properties Corp. ("FSP")
in exchange for FSP's acquisition of the Target REIT (the "Transaction"). We
understand that, pursuant to a Merger Agreement (the "Agreement") to be entered
into by and among Franklin Street Properties Corp., Addison Circle Acquisition
Corp., Collins Crossing Acquisition Corp., Montague Acquisition Corp., Royal
Ridge Acquisition Corp., FSP Addison Circle Corp., FSP Collins Crossing Corp.,
FSP Montague Business Center Corp. and FSP Royal Ridge Corp., the Transaction
will be effected by the merger of Target REIT into a subsidiary of FSP, as a
result of which the outstanding shares of preferred stock of the Target REIT
held by Target Stockholders will be converted into the right to receive
1,886,791 shares of common stock of FSP and $3,799.30 in cash (the
"Consideration").
A.G. Edwards & Sons, Inc. ("A.G. Edwards"), as part of its investment banking
business, is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements and valuations for estate, corporate or
other purposes. Additionally, from time to time, A.G. Edwards has provided
services to FSP, including valuation and investment banking services. A.G.
Edwards may in the future provide valuation, investment banking and financial
advisory services to FSP and its affiliates for which we would expect to receive
compensation. A.G. Edwards is a full-service securities firm engaged, either
directly or through its affiliates, in securities trading, investment
management, financial planning and benefits counseling, financing and brokerage
activities for both companies and individuals. In the ordinary course of
business, A.G. Edwards and its affiliates may actively trade the securities of
FSP for their own account or for the accounts of their customers and,
accordingly, may at any time hold long or short positions of such securities.
However, A.G. Edwards is not aware of any present or contemplated relationship
between A.G. Edwards and FSP or any of FSP's affiliates, directors, officers or
stockholders or between A.G. Edwards and the Target REIT, its affiliates,
directors, officers or stockholders, that in our opinion would affect our
ability to render a fair and independent opinion in this matter.
C-1-1
Board of Directors
August 11, 2004
Page 2
A.G. Edwards acted as a financial advisor to the Special Committee of the Board
of Directors of the Target REIT (the "Special Committee") with respect to the
Transaction and has or will receive a fee from the Target REIT for its services,
including the delivery of this fairness opinion, pursuant to the terms of its
engagement letter with Target REIT dated July 22, 2004. The Target REIT has
agreed to indemnify A.G. Edwards for certain liabilities that may arise out of
the rendering of this opinion and any related activities as financial advisor to
the Target REIT and members of the Target REIT Board of Directors.
In connection with this opinion, A.G. Edwards has reviewed and considered such
financial and other matters as we have deemed relevant, including, among other
things:
i.) a review of the draft of the Agreement, dated August 9, 2004 and
discussions about the Agreement with the Target REIT's management
and Gehrke, Gish & Umana LLP ("Gehrke, Gish & Umana"), legal
counsel to the Target REIT and the Target REIT's Board of
Directors;
ii.) discussions with the Target REIT's and FSP's managements regarding
the past and current business operations, financial condition and
future prospects of the Target REITs and FSP, including the impact
of the Transaction (if any), as well as information relating to the
industries in which the Target REITs and FSP operate;
iii.) a review of certain audited and unaudited historical and interim
financial and operating statements and certain financial analyses
and forecasts for FSP prepared by FSP's management and reviewed
with the Special Committee, the views of FSP's management regarding
the past, current and future business operations of FSP, the
historical results thereof and the financial condition and future
prospects related to FSP, including the impact of the Transaction
(if any);
iv.) an appraisal of the property of the Target REIT dated July 14, 2004
prepared by a professional real estate valuation firm, which you
have advised us has real estate valuation expertise in the local
market for such property, which appraisal included, among other
things, analyses that valued the Target REIT's business prospects
based on a study of the current marketplace and business
fundamentals (the "Appraisal") and our discussions with such
professional real estate valuation firm;
v.) a review of certain other data, materials and reports pertaining to
FSP provided to us in our due diligence process;
vi.) a review of certain audited historical financial statements for the
Target REIT prepared by the Target REIT's management;
vii.) a general review of the current market environment as well as
information relating to the industries and the segments in which
the Target REIT and FSP operate;
C-1-2
Board of Directors
August 11, 2004
Page 3
viii.) a review of market data for equity securities of public companies
in the same or similar lines of business as those of FSP;
ix.) a review of the financial terms of certain acquisitions that A.G.
Edwards deems relevant for analytical purposes;
x.) a review of the implied valuation range of FSP's business based on
the discounted present values of its projected cash flows both
including and excluding expected synergies (as estimated by the
FSP's management);
xi.) conversations with the Special Committee, selected members of the
Target REIT's management and attorneys from Gehrke, Gish & Umana
regarding the nature and development of the terms of the
Transaction;
xii.) discussions with FSP's management regarding the expected financing
structure of the Transaction and FSP's target capital structure;
and
xiii.) a review of such other information, financial studies, analyses,
investigations and financial, economic and market criteria that
A.G. Edwards considers necessary or advisable.
In preparing its opinion, A.G. Edwards has assumed and relied upon, without
independent verification, the accuracy and completeness of all financial and
other information publicly available, furnished to, or otherwise discussed with
A.G. Edwards including financial statements and financial projections, as
provided by the management and/or representatives of FSP and the Target REIT.
With respect to financial information, financial projections and other
information provided to or otherwise discussed with A.G. Edwards, A.G. Edwards
has assumed and was advised by the management of the FSP and the Target REIT,
that such financial information, projections and other information were
reasonably prepared on a basis that reflects the best currently available
estimates and judgments of the management of FSP and the Target REIT, as to the
historical financial performance and the expected future financial performance
of FSP and the Target REIT, respectively, on a stand-alone basis and after
giving effect to the Transaction. A.G. Edwards was not engaged to, and therefore
did not, independently verify the accuracy or completeness of any of such
information, nor does it express any opinion with respect thereto. A.G. Edwards
has relied upon the assurances of the management of FSP and the Target REIT that
they are not aware of any facts that would make such information materially
inaccurate or misleading. A.G. Edwards performed no audit of assets or
liabilities and no appraisal of assets or liabilities of FSP or the Target REIT,
and has assumed the accuracy and completeness of the Appraisal. A.G. Edwards
also did not independently attempt to assess or value any of the intangible
assets of FSP or the Target REIT (including goodwill) nor did it make any
independent assumptions with respect to the application of intangible assets in
the Transaction. A.G. Edwards is not expressing any opinion as to what the value
of FSP common stock will be when issued to Target Stockholders pursuant to the
C-1-3
Board of Directors
August 11, 2004
Page 4
Transaction or the prices at which shares of FSP common stock will trade at any
time. A.G. Edwards has assumed that no legal or regulatory changes that occur
after the date hereof will have a material impact on the respective operations,
financial condition or future prospects of FSP or the Target REIT.
With your permission, A.G. Edwards has not attempted to value the Target REIT
and, instead, has assumed that the value of the Target REIT is equal to the sum
of the value of the Target REIT's property, as reflected in the Appraisal, plus
the Target REIT's cash reserves. We have made this assumption and not made an
independent valuation of the Target REIT because the value of an entity with one
asset consisting of real property at a single location, such as the Target REIT,
is not determined by standard financial models used to value businesses in
general but, instead, determined by the value of the property owned by the
entity. The value of that property is, in turn, determined by local real estate,
economic and governmental factors such as commercial lease rates in the area of
the property, the values of nearby commercial properties, economic prosperity in
the area and applicable zoning laws, all of which are more appropriately
assessed by a professional real estate appraiser who is an expert in assessing
these local factors.
In performing its analyses, A.G. Edwards made numerous assumptions with respect
to the real estate industry and general business and economic conditions that
are beyond the control of those managing and operating FSP or the Target REIT.
The analyses performed by A.G. Edwards are not necessarily indicative of actual
values or actual future results, which may be significantly more or less
favorable than suggested by such analyses.
For the purposes of rendering its opinion, A.G. Edwards has assumed in all
respects material to its analyses that the representations and warranties of
each party to be contained in the Agreement will be true and correct, that each
party will perform all of the covenants and agreements required to be performed
by it under the Agreement and that all conditions to the consummation of the
Transaction will be satisfied without any modification or waiver thereof. A.G.
Edwards has also assumed that all governmental, regulatory and other consents
and approvals contemplated by the Agreement will be obtained and that in the
course of obtaining any of those consents, no restrictions will be imposed or
waivers made that would have an adverse effect on the contemplated Transaction.
Additionally, A.G. Edwards assumed that the Transaction will be accounted for in
acordance with U.S. Generally Accepted Accounting Principles.
A.G. Edwards was not engaged to and did not review, nor is it expressing any
opinion with respect to, any alternative transaction or strategic alternatives
that may be available to the Target REITs or the Target Stockholders. A.G.
Edwards is not expressing any opinion as to what the value of the Target REIT's
preferred stock has been or will be. A.G. Edwards' opinion also does not address
the merits of the underlying decision by FSP or the Target REITs to engage in
the Transaction. Further, A.G. Edwards was not engaged to, and did not,
independently assess the tax and accounting implications to the Target REIT or
the Target Stockholders, and A.G. Edwards relied on management's assessment
thereof. A.G. Edwards understands that with respect to all legal matters
C-1-4
Board of Directors
August 11, 2004
Page 5
pertaining to the Target REIT and its Board of Directors and their review of the
Agreement, you have been advised by legal counsel.
A.G. Edwards' opinion is necessarily based on economic, market, financial and
other conditions and circumstances as in effect on, and the information made
available to it, as of the date hereof. A.G. Edwards' opinion as expressed
herein, in any event, is limited to the fairness, from a financial point of
view, as of the date hereof, to the Target Stockholders, of the Consideration
they are to receive from FSP pursuant to the Agreement. It should be understood
that subsequent developments may affect A.G. Edwards' opinion, and A.G. Edwards
does not have any obligation to update, revise or reaffirm its opinion and it
expressly disclaims any responsibility to do so.
It is understood that this letter is solely for the confidential use of the
Target REIT's Board of Directors and does not constitute a recommendation as to
how any director should vote with respect to the Transaction, and such opinion
does not represent a recommendation as to how any Target Stockholder should vote
with respect to the Transaction. This opinion may not be reproduced, summarized,
described, characterized, excerpted from, referred to or given to any other
person for any purpose without A.G. Edwards' prior written consent.
Based upon and subject to the foregoing, and based upon such other matters as we
consider relevant, it is A.G. Edwards' opinion that, as of the date hereof, the
Consideration to be received by the Target Stockholders from FSP pursuant to the
Agreement is fair, from a financial point of view, to the Target Stockholders.
Very truly yours,
A.G. EDWARDS & SONS, INC.
By: /s/Brian N. Hansen
-------------------
Brian N. Hansen
Director-Investment Banking
C-1-5
Appendix C-2
August 11, 2004
Board of Directors
FSP Addison Circle Corp.
401 Edgewater Place
Suite 200
Wakefield, MA 01880
Gentlemen:
You have requested our opinion as to the fairness, from a financial point of
view, to the preferred stockholders (the "Target Stockholders") of FSP Addison
Circle Corp. (the "Target REIT") of the aggregate consideration the Target
Stockholders are to receive from Franklin Street Properties Corp. ("FSP") in
exchange for FSP's acquisition of the Target REIT (the "Transaction"). We
understand that, pursuant to a Merger Agreement (the "Agreement") to be entered
into by and among Franklin Street Properties Corp., Addison Circle Acquisition
Corp., Collins Crossing Acquisition Corp., Montague Acquisition Corp., Royal
Ridge Acquisition Corp., FSP Addison Circle Corp., FSP Collins Crossing Corp.,
FSP Montague Business Center Corp. and FSP Royal Ridge Corp., the Transaction
will be effected by the merger of Target REIT into a subsidiary of FSP, as a
result of which the outstanding shares of preferred stock of the Target REIT
held by Target Stockholders will be converted into the right to receive
3,783,206 shares of common stock of FSP and $2,667.80 in cash (the
"Consideration").
A.G. Edwards & Sons, Inc. ("A.G. Edwards"), as part of its investment banking
business, is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements and valuations for estate, corporate or
other purposes. Additionally, from time to time, A.G. Edwards has provided
services to FSP, including valuation and investment banking services. A.G.
Edwards may in the future provide valuation, investment banking and financial
advisory services to FSP and its affiliates for which we would expect to receive
compensation. A.G. Edwards is a full-service securities firm engaged, either
directly or through its affiliates, in securities trading, investment
management, financial planning and benefits counseling, financing and brokerage
activities for both companies and individuals. In the ordinary course of
business, A.G. Edwards and its affiliates may actively trade the securities of
FSP for their own account or for the accounts of their customers and,
accordingly, may at any time hold long or short positions of such securities.
However, A.G. Edwards is not aware of any present or contemplated relationship
between A.G. Edwards and FSP or any of FSP's affiliates, directors, officers or
stockholders or between A.G. Edwards and the Target REIT, its affiliates,
directors, officers or stockholders, that in our opinion would affect our
ability to render a fair and independent opinion in this matter.
C-2-1
Board of Directors
August 11, 2004
Page 2
A.G. Edwards acted as a financial advisor to the Special Committee of the Board
of Directors of the Target REIT (the "Special Committee") with respect to the
Transaction and has or will receive a fee from the Target REIT for its services,
including the delivery of this fairness opinion, pursuant to the terms of its
engagement letter with Target REIT dated July 22, 2004. The Target REIT has
agreed to indemnify A.G. Edwards for certain liabilities that may arise out of
the rendering of this opinion and any related activities as financial advisor to
the Target REIT and members of the Target REIT Board of Directors.
In connection with this opinion, A.G. Edwards has reviewed and considered such
financial and other matters as we have deemed relevant, including, among other
things:
i.) a review of the draft of the Agreement, dated August 9, 2004 and
discussions about the Agreement with the Target REIT's management
and Gehrke, Gish & Umana LLP ("Gehrke, Gish & Umana"), legal
counsel to the Target REIT and the Target REIT's Board of
Directors;
ii.) discussions with the Target REIT's and FSP's managements regarding
the past and current business operations, financial condition and
future prospects of the Target REITs and FSP, including the impact
of the Transaction (if any), as well as information relating to the
industries in which the Target REITs and FSP operate;
iii.) a review of certain audited and unaudited historical and interim
financial and operating statements and certain financial analyses
and forecasts for FSP prepared by FSP's management and reviewed
with the Special Committee, the views of FSP's management regarding
the past, current and future business operations of FSP, the
historical results thereof and the financial condition and future
prospects related to FSP, including the impact of the Transaction
(if any);
iv.) an appraisal of the property of the Target REIT dated July 23, 2004
prepared by a professional real estate valuation firm, which you
have advised us has real estate valuation expertise in the local
market for such property, which appraisal included, among other
things, analyses that valued the Target REIT's business prospects
based on a study of the current marketplace and business
fundamentals (the "Appraisal") and our discussions with such
professional real estate valuation firm;
v.) a review of certain other data, materials and reports pertaining to
FSP provided to us in our due diligence process;
vi.) a review of certain audited historical financial statements for the
Target REIT prepared by the Target REIT's management;
vii.) a general review of the current market environment as well as
information relating to the industries and the segments in which
the Target REIT and FSP operate;
C-2-2
Board of Directors
August 11, 2004
Page 3
viii.) a review of market data for equity securities of public companies
in the same or similar lines of business as those of FSP;
ix.) a review of the financial terms of certain acquisitions that A.G.
Edwards deems relevant for analytical purposes;
x.) a review of the implied valuation range of FSP's business based on
the discounted present values of its projected cash flows both
including and excluding expected synergies (as estimated by the
FSP's management);
xi.) conversations with the Special Committee, selected members of the
Target REIT's management and attorneys from Gehrke, Gish & Umana
regarding the nature and development of the terms of the
Transaction;
xii.) discussions with FSP's management regarding the expected financing
structure of the Transaction and FSP's target capital structure;
and
xiii.) a review of such other information, financial studies, analyses,
investigations and financial, economic and market criteria that
A.G. Edwards considers necessary or advisable.
In preparing its opinion, A.G. Edwards has assumed and relied upon, without
independent verification, the accuracy and completeness of all financial and
other information publicly available, furnished to, or otherwise discussed with
A.G. Edwards including financial statements and financial projections, as
provided by the management and/or representatives of FSP and the Target REIT.
With respect to financial information, financial projections and other
information provided to or otherwise discussed with A.G. Edwards, A.G. Edwards
has assumed and was advised by the management of the FSP and the Target REIT,
that such financial information, projections and other information were
reasonably prepared on a basis that reflects the best currently available
estimates and judgments of the management of FSP and the Target REIT, as to the
historical financial performance and the expected future financial performance
of FSP and the Target REIT, respectively, on a stand-alone basis and after
giving effect to the Transaction. A.G. Edwards was not engaged to, and therefore
did not, independently verify the accuracy or completeness of any of such
information, nor does it express any opinion with respect thereto. A.G. Edwards
has relied upon the assurances of the management of FSP and the Target REIT that
they are not aware of any facts that would make such information materially
inaccurate or misleading. A.G. Edwards performed no audit of assets or
liabilities and no appraisal of assets or liabilities of FSP or the Target REIT,
and has assumed the accuracy and completeness of the Appraisal. A.G. Edwards
also did not independently attempt to assess or value any of the intangible
assets of FSP or the Target REIT (including goodwill) nor did it make any
independent assumptions with respect to the application of intangible assets in
the Transaction. A.G. Edwards is not expressing any opinion as to what the value
of FSP common stock will be when issued to Target Stockholders pursuant to the
C-2-3
Board of Directors
August 11, 2004
Page 4
Transaction or the prices at which shares of FSP common stock will trade at any
time. A.G. Edwards has assumed that no legal or regulatory changes that occur
after the date hereof will have a material impact on the respective operations,
financial condition or future prospects of FSP or the Target REIT.
With your permission, A.G. Edwards has not attempted to value the Target REIT
and, instead, has assumed that the value of the Target REIT is equal to the sum
of the value of the Target REIT's property, as reflected in the Appraisal, plus
the Target REIT's cash reserves. We have made this assumption and not made an
independent valuation of the Target REIT because the value of an entity with one
asset consisting of real property at a single location, such as the Target REIT,
is not determined by standard financial models used to value businesses in
general but, instead, determined by the value of the property owned by the
entity. The value of that property is, in turn, determined by local real estate,
economic and governmental factors such as commercial lease rates in the area of
the property, the values of nearby commercial properties, economic prosperity in
the area and applicable zoning laws, all of which are more appropriately
assessed by a professional real estate appraiser who is an expert in assessing
these local factors.
In performing its analyses, A.G. Edwards made numerous assumptions with respect
to the real estate industry and general business and economic conditions that
are beyond the control of those managing and operating FSP or the Target REIT.
The analyses performed by A.G. Edwards are not necessarily indicative of actual
values or actual future results, which may be significantly more or less
favorable than suggested by such analyses.
For the purposes of rendering its opinion, A.G. Edwards has assumed in all
respects material to its analyses that the representations and warranties of
each party to be contained in the Agreement will be true and correct, that each
party will perform all of the covenants and agreements required to be performed
by it under the Agreement and that all conditions to the consummation of the
Transaction will be satisfied without any modification or waiver thereof. A.G.
Edwards has also assumed that all governmental, regulatory and other consents
and approvals contemplated by the Agreement will be obtained and that in the
course of obtaining any of those consents, no restrictions will be imposed or
waivers made that would have an adverse effect on the contemplated Transaction.
Additionally, A.G. Edwards assumed that the Transaction will be accounted for in
acordance with U.S. Generally Accepted Accounting Principles.
A.G. Edwards was not engaged to and did not review, nor is it expressing any
opinion with respect to, any alternative transaction or strategic alternatives
that may be available to the Target REITs or the Target Stockholders. A.G.
Edwards is not expressing any opinion as to what the value of the Target REIT's
preferred stock has been or will be. A.G. Edwards' opinion also does not address
the merits of the underlying decision by FSP or the Target REITs to engage in
the Transaction. Further, A.G. Edwards was not engaged to, and did not,
independently assess the tax and accounting implications to the Target REIT or
the Target Stockholders, and A.G. Edwards relied on management's assessment
thereof. A.G. Edwards understands that with respect to all legal matters
C-2-4
Board of Directors
August 11, 2004
Page 5
pertaining to the Target REIT and its Board of Directors and their review of the
Agreement, you have been advised by legal counsel.
A.G. Edwards' opinion is necessarily based on economic, market, financial and
other conditions and circumstances as in effect on, and the information made
available to it, as of the date hereof. A.G. Edwards' opinion as expressed
herein, in any event, is limited to the fairness, from a financial point of
view, as of the date hereof, to the Target Stockholders, of the Consideration
they are to receive from FSP pursuant to the Agreement. It should be understood
that subsequent developments may affect A.G. Edwards' opinion, and A.G. Edwards
does not have any obligation to update, revise or reaffirm its opinion and it
expressly disclaims any responsibility to do so.
It is understood that this letter is solely for the confidential use of the
Target REIT's Board of Directors and does not constitute a recommendation as to
how any director should vote with respect to the Transaction, and such opinion
does not represent a recommendation as to how any Target Stockholder should vote
with respect to the Transaction. This opinion may not be reproduced, summarized,
described, characterized, excerpted from, referred to or given to any other
person for any purpose without A.G. Edwards' prior written consent.
Based upon and subject to the foregoing, and based upon such other matters as we
consider relevant, it is A.G. Edwards' opinion that, as of the date hereof, the
Consideration to be received by the Target Stockholders from FSP pursuant to the
Agreement is fair, from a financial point of view, to the Target Stockholders.
Very truly yours,
A.G. EDWARDS & SONS, INC.
By: /s/Brian N. Hansen
------------------
Brian N. Hansen
Director-Investment Banking
C-2-5
Appendix C-3
August 11, 2004
Board of Directors
FSP Royal Ridge Corp.
401 Edgewater Place
Suite 200
Wakefield, MA 01880
Gentlemen:
You have requested our opinion as to the fairness, from a financial point of
view, to the preferred stockholders (the "Target Stockholders") of FSP Royal
Ridge Corp. (the "Target REIT") of the aggregate consideration the Target
Stockholders are to receive from Franklin Street Properties Corp. ("FSP") in
exchange for FSP's acquisition of the Target REIT (the "Transaction"). We
understand that, pursuant to a Merger Agreement (the "Agreement") to be entered
into by and among Franklin Street Properties Corp., Addison Circle Acquisition
Corp., Collins Crossing Acquisition Corp., Montague Business Center Corp., Royal
Ridge Acquisition Corp., FSP Addison Circle Corp., FSP Collins Crossing Corp.,
FSP Montague Acquisition Corp. and FSP Royal Ridge Corp., the Transaction will
be effected by the merger of Target REIT into a subsidiary of FSP, as a result
of which the outstanding shares of preferred stock of the Target REIT held by
Target Stockholders will be converted into the right to receive 1,801,389 shares
of common stock of FSP and $3,707.70 in cash (the "Consideration").
A.G. Edwards & Sons, Inc. ("A.G. Edwards"), as part of its investment banking
business, is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements and valuations for estate, corporate or
other purposes. Additionally, from time to time, A.G. Edwards has provided
services to FSP, including valuation and investment banking services. A.G.
Edwards may in the future provide valuation, investment banking and financial
advisory services to FSP and its affiliates for which we would expect to receive
compensation. A.G. Edwards is a full-service securities firm engaged, either
directly or through its affiliates, in securities trading, investment
management, financial planning and benefits counseling, financing and brokerage
activities for both companies and individuals. In the ordinary course of
business, A.G. Edwards and its affiliates may actively trade the securities of
FSP for their own account or for the accounts of their customers and,
accordingly, may at any time hold long or short positions of such securities.
However, A.G. Edwards is not aware of any present or contemplated relationship
between A.G. Edwards and FSP or any of FSP's affiliates, directors, officers or
stockholders or between A.G. Edwards and the Target REIT, its affiliates,
directors, officers or stockholders, that in our opinion would affect our
ability to render a fair and independent opinion in this matter.
C-3-1
Board of Directors
August 11, 2004
Page 2
A.G. Edwards acted as a financial advisor to the Special Committee of the Board
of Directors of the Target REIT (the "Special Committee") with respect to the
Transaction and has or will receive a fee from the Target REIT for its services,
including the delivery of this fairness opinion, pursuant to the terms of its
engagement letter with Target REIT dated July 22, 2004. The Target REIT has
agreed to indemnify A.G. Edwards for certain liabilities that may arise out of
the rendering of this opinion and any related activities as financial advisor to
the Target REIT and members of the Target REIT Board of Directors.
In connection with this opinion, A.G. Edwards has reviewed and considered such
financial and other matters as we have deemed relevant, including, among other
things:
i.) a review of the draft of the Agreement, dated August 9, 2004 and
discussions about the Agreement with the Target REIT's management
and Gehrke, Gish & Umana LLP ("Gehrke, Gish & Umana"), legal
counsel to the Target REIT and the Target REIT's Board of
Directors;
ii.) discussions with the Target REIT's and FSP's managements regarding
the past and current business operations, financial condition and
future prospects of the Target REITs and FSP, including the impact
of the Transaction (if any), as well as information relating to
the industries in which the Target REITs and FSP operate;
iii.) a review of certain audited and unaudited historical and interim
financial and operating statements and certain financial analyses
and forecasts for FSP prepared by FSP's management and reviewed
with the Special Committee, the views of FSP's management
regarding the past, current and future business operations of FSP,
the historical results thereof and the financial condition and
future prospects related to FSP, including the impact of the
Transaction (if any);
iv.) an appraisal of the property of the Target REIT dated July 13,
2004 prepared by a professional real estate valuation firm, which
you have advised us has real estate valuation expertise in the
local market for such property, which appraisal included, among
other things, analyses that valued the Target REIT's business
prospects based on a study of the current marketplace and business
fundamentals (the "Appraisal") and our discussions with such
professional real estate valuation firm;
v.) a review of certain other data, materials and reports pertaining
to FSP provided to us in our due diligence process;
vi.) a review of certain audited historical financial statements for
the Target REIT prepared by the Target REIT's management;
vii.) a general review of the current market environment as well as
information relating to the industries and the segments in which
the Target REIT and FSP operate;
C-3-2
Board of Directors
August 11, 2004
Page 3
viii.) a review of market data for equity securities of public companies
in the same or similar lines of business as those of FSP;
ix.) a review of the financial terms of certain acquisitions that A.G.
Edwards deems relevant for analytical purposes;
x.) a review of the implied valuation range of FSP's business based on
the discounted present values of its projected cash flows both
including and excluding expected synergies (as estimated by the
FSP's management);
xi.) conversations with the Special Committee, selected members of the
Target REIT's management and attorneys from Gehrke, Gish & Umana
regarding the nature and development of the terms of the
Transaction;
xii.) discussions with FSP's management regarding the expected financing
structure of the Transaction and FSP's target capital structure;
and
xiii.) a review of such other information, financial studies, analyses,
investigations and financial, economic and market criteria that
A.G. Edwards considers necessary or advisable.
In preparing its opinion, A.G. Edwards has assumed and relied upon, without
independent verification, the accuracy and completeness of all financial and
other information publicly available, furnished to, or otherwise discussed with
A.G. Edwards including financial statements and financial projections, as
provided by the management and/or representatives of FSP and the Target REIT.
With respect to financial information, financial projections and other
information provided to or otherwise discussed with A.G. Edwards, A.G. Edwards
has assumed and was advised by the management of the FSP and the Target REIT,
that such financial information, projections and other information were
reasonably prepared on a basis that reflects the best currently available
estimates and judgments of the management of FSP and the Target REIT, as to the
historical financial performance and the expected future financial performance
of FSP and the Target REIT, respectively, on a stand-alone basis and after
giving effect to the Transaction. A.G. Edwards was not engaged to, and therefore
did not, independently verify the accuracy or completeness of any of such
information, nor does it express any opinion with respect thereto. A.G. Edwards
has relied upon the assurances of the management of FSP and the Target REIT that
they are not aware of any facts that would make such information materially
inaccurate or misleading. A.G. Edwards performed no audit of assets or
liabilities and no appraisal of assets or liabilities of FSP or the Target REIT,
and has assumed the accuracy and completeness of the Appraisal. A.G. Edwards
also did not independently attempt to assess or value any of the intangible
assets of FSP or the Target REIT (including goodwill) nor did it make any
independent assumptions with respect to the application of intangible assets in
the Transaction. A.G. Edwards is not expressing any opinion as to what the value
of FSP common stock will be when issued to Target Stockholders pursuant to the
C-3-3
Board of Directors
August 11, 2004
Page 4
Transaction or the prices at which shares of FSP common stock will trade at any
time. A.G. Edwards has assumed that no legal or regulatory changes that occur
after the date hereof will have a material impact on the respective operations,
financial condition or future prospects of FSP or the Target REIT.
With your permission, A.G. Edwards has not attempted to value the Target REIT
and, instead, has assumed that the value of the Target REIT is equal to the sum
of the value of the Target REIT's property, as reflected in the Appraisal, plus
the Target REIT's cash reserves. We have made this assumption and not made an
independent valuation of the Target REIT because the value of an entity with one
asset consisting of real property at a single location, such as the Target REIT,
is not determined by standard financial models used to value businesses in
general but, instead, determined by the value of the property owned by the
entity. The value of that property is, in turn, determined by local real estate,
economic and governmental factors such as commercial lease rates in the area of
the property, the values of nearby commercial properties, economic prosperity in
the area and applicable zoning laws, all of which are more appropriately
assessed by a professional real estate appraiser who is an expert in assessing
these local factors.
In performing its analyses, A.G. Edwards made numerous assumptions with respect
to the real estate industry and general business and economic conditions that
are beyond the control of those managing and operating FSP or the Target REIT.
The analyses performed by A.G. Edwards are not necessarily indicative of actual
values or actual future results, which may be significantly more or less
favorable than suggested by such analyses.
For the purposes of rendering its opinion, A.G. Edwards has assumed in all
respects material to its analyses that the representations and warranties of
each party to be contained in the Agreement will be true and correct, that each
party will perform all of the covenants and agreements required to be performed
by it under the Agreement and that all conditions to the consummation of the
Transaction will be satisfied without any modification or waiver thereof. A.G.
Edwards has also assumed that all governmental, regulatory and other consents
and approvals contemplated by the Agreement will be obtained and that in the
course of obtaining any of those consents, no restrictions will be imposed or
waivers made that would have an adverse effect on the contemplated Transaction.
Additionally, A.G. Edwards assumed that the Transaction will be accounted for in
acordance with U.S. Generally Accepted Accounting Principles.
A.G. Edwards was not engaged to and did not review, nor is it expressing any
opinion with respect to, any alternative transaction or strategic alternatives
that may be available to the Target REITs or the Target Stockholders. A.G.
Edwards is not expressing any opinion as to what the value of the Target REIT's
preferred stock has been or will be. A.G. Edwards' opinion also does not address
the merits of the underlying decision by FSP or the Target REITs to engage in
the Transaction. Further, A.G. Edwards was not engaged to, and did not,
independently assess the tax and accounting implications to the Target REIT or
the Target Stockholders, and A.G. Edwards relied on management's assessment
thereof. A.G. Edwards understands that with respect to all legal matters
C-3-4
Board of Directors
August 11, 2004
Page 5
pertaining to the Target REIT and its Board of Directors and their review of the
Agreement, you have been advised by legal counsel.
A.G. Edwards' opinion is necessarily based on economic, market, financial and
other conditions and circumstances as in effect on, and the information made
available to it, as of the date hereof. A.G. Edwards' opinion as expressed
herein, in any event, is limited to the fairness, from a financial point of
view, as of the date hereof, to the Target Stockholders, of the Consideration
they are to receive from FSP pursuant to the Agreement. It should be understood
that subsequent developments may affect A.G. Edwards' opinion, and A.G. Edwards
does not have any obligation to update, revise or reaffirm its opinion and it
expressly disclaims any responsibility to do so.
It is understood that this letter is solely for the confidential use of the
Target REIT's Board of Directors and does not constitute a recommendation as to
how any director should vote with respect to the Transaction, and such opinion
does not represent a recommendation as to how any Target Stockholder should vote
with respect to the Transaction. This opinion may not be reproduced, summarized,
described, characterized, excerpted from, referred to or given to any other
person for any purpose without A.G. Edwards' prior written consent.
Based upon and subject to the foregoing, and based upon such other matters as we
consider relevant, it is A.G. Edwards' opinion that, as of the date hereof, the
Consideration to be received by the Target Stockholders from FSP pursuant to the
Agreement is fair, from a financial point of view, to the Target Stockholders.
Very truly yours,
A.G. EDWARDS & SONS, INC.
By: /s/Brian N. Hansen
----------------------
Brian N. Hansen
Director-Investment Banking
C-3-5
Appendix C-4
August 11, 2004
Board of Directors
FSP Collins Crossing Corp.
401 Edgewater Place
Suite 200
Wakefield, MA 01880
Gentlemen:
You have requested our opinion as to the fairness, from a financial point of
view, to the preferred stockholders (the "Target Stockholders") of FSP Collins
Crossing Corp. (the "Target REIT") of the aggregate consideration the Target
Stockholders are to receive from Franklin Street Properties Corp. ("FSP") in
exchange for FSP's acquisition of the Target REIT (the "Transaction"). We
understand that, pursuant to a Merger Agreement (the "Agreement") to be entered
into by and among Franklin Street Properties Corp., Addison Circle Acquisition
Corp., Collins Crossing Acquisition Corp., Montague Business Center Corp., Royal
Ridge Acquisition Corp., FSP Addison Circle Corp., FSP Collins Crossing Corp.,
FSP Montague Acquisition Corp. and FSP Royal Ridge Corp., the Transaction will
be effected by the merger of Target REIT into a subsidiary of FSP, as a result
of which the outstanding shares of preferred stock of the Target REIT held by
Target Stockholders will be converted into the right to receive 3,422,704 shares
of common stock of FSP and $5,895.20 in cash (the "Consideration").
A.G. Edwards & Sons, Inc. ("A.G. Edwards"), as part of its investment banking
business, is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements and valuations for estate, corporate or
other purposes. Additionally, from time to time, A.G. Edwards has provided
services to FSP, including valuation and investment banking services. A.G.
Edwards may in the future provide valuation, investment banking and financial
advisory services to FSP and its affiliates for which we would expect to receive
compensation. A.G. Edwards is a full-service securities firm engaged, either
directly or through its affiliates, in securities trading, investment
management, financial planning and benefits counseling, financing and brokerage
activities for both companies and individuals. In the ordinary course of
business, A.G. Edwards and its affiliates may actively trade the securities of
FSP for their own account or for the accounts of their customers and,
accordingly, may at any time hold long or short positions of such securities.
However, A.G. Edwards is not aware of any present or contemplated relationship
between A.G. Edwards and FSP or any of FSP's affiliates, directors, officers or
stockholders or between A.G. Edwards and the Target REIT, its affiliates,
directors, officers or stockholders, that in our opinion would affect our
ability to render a fair and independent opinion in this matter.
C-4-1
Board of Directors
August 11, 2004
Page 2
A.G. Edwards acted as a financial advisor to the Special Committee of the Board
of Directors of the Target REIT (the "Special Committee") with respect to the
Transaction and has or will receive a fee from the Target REIT for its services,
including the delivery of this fairness opinion, pursuant to the terms of its
engagement letter with Target REIT dated July 22, 2004. The Target REIT has
agreed to indemnify A.G. Edwards for certain liabilities that may arise out of
the rendering of this opinion and any related activities as financial advisor to
the Target REIT and members of the Target REIT Board of Directors.
In connection with this opinion, A.G. Edwards has reviewed and considered such
financial and other matters as we have deemed relevant, including, among other
things:
i.) a review of the draft of the Agreement, dated August 9, 2004 and
discussions about the Agreement with the Target REIT's management
and Gehrke, Gish & Umana LLP ("Gehrke, Gish & Umana"), legal
counsel to the Target REIT and the Target REIT's Board of
Directors;
ii.) discussions with the Target REIT's and FSP's managements regarding
the past and current business operations, financial condition and
future prospects of the Target REITs and FSP, including the impact
of the Transaction (if any), as well as information relating to
the industries in which the Target REITs and FSP operate;
iii.) a review of certain audited and unaudited historical and interim
financial and operating statements and certain financial analyses
and forecasts for FSP prepared by FSP's management and reviewed
with the Special Committee, the views of FSP's management
regarding the past, current and future business operations of FSP,
the historical results thereof and the financial condition and
future prospects related to FSP, including the impact of the
Transaction (if any);
iv.) an appraisal of the property of the Target REIT dated July 23,
2004 prepared by a professional real estate valuation firm, which
you have advised us has real estate valuation expertise in the
local market for such property, which appraisal included, among
other things, analyses that valued the Target REIT's business
prospects based on a study of the current marketplace and business
fundamentals (the "Appraisal") and our discussions with such
professional real estate valuation firm;
v.) a review of certain other data, materials and reports pertaining
to FSP provided to us in our due diligence process;
vi.) a review of certain audited historical financial statements for
the Target REIT prepared by the Target REIT's management;
vii.) a general review of the current market environment as well as
information relating to the industries and the segments in which
the Target REIT and FSP operate;
C-4-2
Board of Directors
August 11, 2004
Page 3
viii.) a review of market data for equity securities of public companies
in the same or similar lines of business as those of FSP;
ix.) a review of the financial terms of certain acquisitions that A.G.
Edwards deems relevant for analytical purposes;
x.) a review of the implied valuation range of FSP's business based on
the discounted present values of its projected cash flows both
including and excluding expected synergies (as estimated by the
FSP's management);
xi.) conversations with the Special Committee, selected members of the
Target REIT's management and attorneys from Gehrke, Gish & Umana
regarding the nature and development of the terms of the
Transaction;
xii.) discussions with FSP's management regarding the expected financing
structure of the Transaction and FSP's target capital structure;
and
xiii.) a review of such other information, financial studies, analyses,
investigations and financial, economic and market criteria that
A.G. Edwards considers necessary or advisable.
In preparing its opinion, A.G. Edwards has assumed and relied upon, without
independent verification, the accuracy and completeness of all financial and
other information publicly available, furnished to, or otherwise discussed with
A.G. Edwards including financial statements and financial projections, as
provided by the management and/or representatives of FSP and the Target REIT.
With respect to financial information, financial projections and other
information provided to or otherwise discussed with A.G. Edwards, A.G. Edwards
has assumed and was advised by the management of the FSP and the Target REIT,
that such financial information, projections and other information were
reasonably prepared on a basis that reflects the best currently available
estimates and judgments of the management of FSP and the Target REIT, as to the
historical financial performance and the expected future financial performance
of FSP and the Target REIT, respectively, on a stand-alone basis and after
giving effect to the Transaction. A.G. Edwards was not engaged to, and therefore
did not, independently verify the accuracy or completeness of any of such
information, nor does it express any opinion with respect thereto. A.G. Edwards
has relied upon the assurances of the management of FSP and the Target REIT that
they are not aware of any facts that would make such information materially
inaccurate or misleading. A.G. Edwards performed no audit of assets or
liabilities and no appraisal of assets or liabilities of FSP or the Target REIT,
and has assumed the accuracy and completeness of the Appraisal. A.G. Edwards
also did not independently attempt to assess or value any of the intangible
assets of FSP or the Target REIT (including goodwill) nor did it make any
independent assumptions with respect to the application of intangible assets in
the Transaction. A.G. Edwards is not expressing any opinion as to what the value
of FSP common stock will be when issued to Target Stockholders pursuant to the
C-4-3
Board of Directors
August 11, 2004
Page 4
Transaction or the prices at which shares of FSP common stock will trade at any
time. A.G. Edwards has assumed that no legal or regulatory changes that occur
after the date hereof will have a material impact on the respective operations,
financial condition or future prospects of FSP or the Target REIT.
With your permission, A.G. Edwards has not attempted to value the Target REIT
and, instead, has assumed that the value of the Target REIT is equal to the sum
of the value of the Target REIT's property, as reflected in the Appraisal, plus
the Target REIT's cash reserves. We have made this assumption and not made an
independent valuation of the Target REIT because the value of an entity with one
asset consisting of real property at a single location, such as the Target REIT,
is not determined by standard financial models used to value businesses in
general but, instead, determined by the value of the property owned by the
entity. The value of that property is, in turn, determined by local real estate,
economic and governmental factors such as commercial lease rates in the area of
the property, the values of nearby commercial properties, economic prosperity in
the area and applicable zoning laws, all of which are more appropriately
assessed by a professional real estate appraiser who is an expert in assessing
these local factors.
In performing its analyses, A.G. Edwards made numerous assumptions with respect
to the real estate industry and general business and economic conditions that
are beyond the control of those managing and operating FSP or the Target REIT.
The analyses performed by A.G. Edwards are not necessarily indicative of actual
values or actual future results, which may be significantly more or less
favorable than suggested by such analyses.
For the purposes of rendering its opinion, A.G. Edwards has assumed in all
respects material to its analyses that the representations and warranties of
each party to be contained in the Agreement will be true and correct, that each
party will perform all of the covenants and agreements required to be performed
by it under the Agreement and that all conditions to the consummation of the
Transaction will be satisfied without any modification or waiver thereof. A.G.
Edwards has also assumed that all governmental, regulatory and other consents
and approvals contemplated by the Agreement will be obtained and that in the
course of obtaining any of those consents, no restrictions will be imposed or
waivers made that would have an adverse effect on the contemplated Transaction.
Additionally, A.G. Edwards assumed that the Transaction will be accounted for in
acordance with U.S. Generally Accepted Accounting Principles.
A.G. Edwards was not engaged to and did not review, nor is it expressing any
opinion with respect to, any alternative transaction or strategic alternatives
that may be available to the Target REITs or the Target Stockholders. A.G.
Edwards is not expressing any opinion as to what the value of the Target REIT's
preferred stock has been or will be. A.G. Edwards' opinion also does not address
the merits of the underlying decision by FSP or the Target REITs to engage in
the Transaction. Further, A.G. Edwards was not engaged to, and did not,
independently assess the tax and accounting implications to the Target REIT or
the Target Stockholders, and A.G. Edwards relied on management's assessment
thereof. A.G. Edwards understands that with respect to all legal matters
C-4-4
Board of Directors
August 11, 2004
Page 5
pertaining to the Target REIT and its Board of Directors and their review of the
Agreement, you have been advised by legal counsel.
A.G. Edwards' opinion is necessarily based on economic, market, financial and
other conditions and circumstances as in effect on, and the information made
available to it, as of the date hereof. A.G. Edwards' opinion as expressed
herein, in any event, is limited to the fairness, from a financial point of
view, as of the date hereof, to the Target Stockholders, of the Consideration
they are to receive from FSP pursuant to the Agreement. It should be understood
that subsequent developments may affect A.G. Edwards' opinion, and A.G. Edwards
does not have any obligation to update, revise or reaffirm its opinion and it
expressly disclaims any responsibility to do so.
It is understood that this letter is solely for the confidential use of the
Target REIT's Board of Directors and does not constitute a recommendation as to
how any director should vote with respect to the Transaction, and such opinion
does not represent a recommendation as to how any Target Stockholder should vote
with respect to the Transaction. This opinion may not be reproduced, summarized,
described, characterized, excerpted from, referred to or given to any other
person for any purpose without A.G. Edwards' prior written consent.
Based upon and subject to the foregoing, and based upon such other matters as we
consider relevant, it is A.G. Edwards' opinion that, as of the date hereof, the
Consideration to be received by the Target Stockholders from FSP pursuant to the
Agreement is fair, from a financial point of view, to the Target Stockholders.
Very truly yours,
A.G. EDWARDS & SONS, INC.
By: /s/Brian N. Hansen
-------------------
Brian N. Hansen
Director-Investment Banking
C-4-5
Appendix D
Section 262 of the Delaware General Corporation Law
ss.262. Appraisal rights.
(a) Any stockholder of a corporation of this State who holds shares of stock
on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares
through the effective date of the merger or consolidation, who has
otherwise complied with subsection (d) of this section and who has neither
voted in favor of the merger or consolidation nor consented thereto in
writing pursuant toss.228 of this title shall be entitled to an appraisal
by the Court of Chancery of the fair value of the stockholder's shares of
stock under the circumstances described in subsections (b) and (c) of this
section. As used in this section, the word "stockholder" means a holder of
record of stock in a stock corporation and also a member of record of a
nonstock corporation; the words "stock" and "share" mean and include what
is ordinarily meant by those words and also membership or membership
interest of a member of a nonstock corporation; and the words "depository
receipt" mean a receipt or other instrument issued by a depository
representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the
depository.
(b) Appraisal rights shall be available for the shares of any class or series
of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to ss. 251 (other than a merger effected pursuant to ss.
251(g) of this title), ss. 252, ss. 254, ss. 257, ss. 258, ss. 263 or ss.
264 of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date
fixed to determine the stockholders entitled to receive notice of
and to vote at the meeting of stockholders to act upon the agreement
of merger or consolidation, were either (i) listed on a national
securities exchange or designated as a national market system
security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or (ii) held of record by
more than 2,000 holders; and further provided that no appraisal
rights shall be available for any shares of stock of the constituent
corporation surviving a merger if the merger did not require for its
approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of ss. 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or
series of stock of a constituent corporation if the holders thereof
are required by the terms of an agreement of merger or consolidation
pursuant to ss.ss. 251, 252, 254, 257, 258, 263 and 264 of this
title to accept for such stock anything except:
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a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in
respect thereof;
b. Shares of stock of any other corporation, or depository
receipts in respect thereof, which shares of stock (or
depository receipts in respect thereof) or depository receipts
at the effective date of the merger or consolidation will be
either listed on a national securities exchange or designated
as a national market system security on an interdealer
quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of
this paragraph; or
d. Any combination of the shares of stock, depository receipts
and cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a., b. and
c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under ss. 253 of this title is not owned
by the parent corporation immediately prior to the merger, appraisal
rights shall be available for the shares of the subsidiary Delaware
corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of
any class or series of its stock as a result of an amendment to its
certificate of incorporation, any merger or consolidation in which the
corporation is a constituent corporation or the sale of all or
substantially all of the assets of the corporation. If the certificate of
incorporation contains such a provision, the procedures of this section,
including those set forth in subsections (d) and (e) of this section,
shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days
prior to the meeting, shall notify each of its stockholders who was
such on the record date for such meeting with respect to shares for
which appraisal rights are available pursuant to subsection (b) or
(c) hereof that appraisal rights are available for any or all of the
shares of the constituent corporations, and shall include in such
notice a copy of this section. Each stockholder electing to demand
the appraisal of such stockholder's shares shall deliver to the
corporation, before the taking of the vote on the merger or
consolidation, a written demand for appraisal of such stockholder's
shares. Such demand will be sufficient if it reasonably informs the
corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such
stockholder's shares. A proxy or vote against the merger or
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consolidation shall not constitute such a demand. A stockholder
electing to take such action must do so by a separate written demand
as herein provided. Within 10 days after the effective date of such
merger or consolidation, the surviving or resulting corporation
shall notify each stockholder of each constituent corporation who
has complied with this subsection and has not voted in favor of or
consented to the merger or consolidation of the date that the merger
or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to ss. 228 or
ss. 253 of this title, then either a constituent corporation before
the effective date of the merger or consolidation or the surviving
or resulting corporation within 10 days thereafter shall notify each
of the holders of any class or series of stock of such constituent
corporation who are entitled to appraisal rights of the approval of
the merger or consolidation and that appraisal rights are available
for any or all shares of such class or series of stock of such
constituent corporation, and shall include in such notice a copy of
this section. Such notice may, and, if given on or after the
effective date of the merger or consolidation, shall, also notify
such stockholders of the effective date of the merger or
consolidation. Any stockholder entitled to appraisal rights may,
within 20 days after the date of mailing of such notice, demand in
writing from the surviving or resulting corporation the appraisal of
such holder's shares. Such demand will be sufficient if it
reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation,
either (i) each such constituent corporation shall send a second
notice before the effective date of the merger or consolidation
notifying each of the holders of any class or series of stock of
such constituent corporation that are entitled to appraisal rights
of the effective date of the merger or consolidation or (ii) the
surviving or resulting corporation shall send such a second notice
to all such holders on or within 10 days after such effective date;
provided, however, that if such second notice is sent more than 20
days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal
rights and who has demanded appraisal of such holder's shares in
accordance with this subsection. An affidavit of the secretary or
assistant secretary or of the transfer agent of the corporation that
is required to give either notice that such notice has been given
shall, in the absence of fraud, be prima facie evidence of the facts
stated therein. For purposes of determining the stockholders
entitled to receive either notice, each constituent corporation may
fix, in advance, a record date that shall be not more than 10 days
prior to the date the notice is given, provided, that if the notice
is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no
record date is fixed and the notice is given prior to the effective
date, the record date shall be the close of business on the day next
preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied
with subsections (a) and (d) hereof and who is otherwise entitled to
D-3
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the
effective date of the merger or consolidation, any stockholder shall have
the right to withdraw such stockholder's demand for appraisal and to
accept the terms offered upon the merger or consolidation. Within 120 days
after the effective date of the merger or consolidation, any stockholder
who has complied with the requirements of subsections (a) and (d) hereof,
upon written request, shall be entitled to receive from the corporation
surviving the merger or resulting from the consolidation a statement
setting forth the aggregate number of shares not voted in favor of the
merger or consolidation and with respect to which demands for appraisal
have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days
after such stockholder's written request for such a statement is received
by the surviving or resulting corporation or within 10 days after
expiration of the period for delivery of demands for appraisal under
subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register
in Chancery in which the petition was filed a duly verified list
containing the names and addresses of all stockholders who have demanded
payment for their shares and with whom agreements as to the value of their
shares have not been reached by the surviving or resulting corporation. If
the petition shall be filed by the surviving or resulting corporation, the
petition shall be accompanied by such a duly verified list. The Register
in Chancery, if so ordered by the Court, shall give notice of the time and
place fixed for the hearing of such petition by registered or certified
mail to the surviving or resulting corporation and to the stockholders
shown on the list at the addresses therein stated. Such notice shall also
be given by 1 or more publications at least 1 week before the day of the
hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The
forms of the notices by mail and by publication shall be approved by the
Court, and the costs thereof shall be borne by the surviving or resulting
corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become
entitled to appraisal rights. The Court may require the stockholders who
have demanded an appraisal for their shares and who hold stock represented
by certificates to submit their certificates of stock to the Register in
Chancery for notation thereon of the pendency of the appraisal
proceedings; and if any stockholder fails to comply with such direction,
the Court may dismiss the proceedings as to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the
merger or consolidation, together with a fair rate of interest, if any, to
be paid upon the amount determined to be the fair value. In determining
such fair value, the Court shall take into account all relevant factors.
In determining the fair rate of interest, the Court may consider all
relevant factors, including the rate of interest which the surviving or
D-4
resulting corporation would have had to pay to borrow money during the
pendency of the proceeding. Upon application by the surviving or resulting
corporation or by any stockholder entitled to participate in the appraisal
proceeding, the Court may, in its discretion, permit discovery or other
pretrial proceedings and may proceed to trial upon the appraisal prior to
the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or
resulting corporation pursuant to subsection (f) of this section and who
has submitted such stockholder's certificates of stock to the Register in
Chancery, if such is required, may participate fully in all proceedings
until it is finally determined that such stockholder is not entitled to
appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation
to the stockholders entitled thereto. Interest may be simple or compound,
as the Court may direct. Payment shall be so made to each such
stockholder, in the case of holders of uncertificated stock forthwith, and
the case of holders of shares represented by certificates upon the
surrender to the corporation of the certificates representing such stock.
The Court's decree may be enforced as other decrees in the Court of
Chancery may be enforced, whether such surviving or resulting corporation
be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed upon
the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and
the fees and expenses of experts, to be charged pro rata against the value
of all the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection
(d) of this section shall be entitled to vote such stock for any purpose
or to receive payment of dividends or other distributions on the stock
(except dividends or other distributions payable to stockholders of record
at a date which is prior to the effective date of the merger or
consolidation); provided, however, that if no petition for an appraisal
shall be filed within the time provided in subsection (e) of this section,
or if such stockholder shall deliver to the surviving or resulting
corporation a written withdrawal of such stockholder's demand for an
appraisal and an acceptance of the merger or consolidation, either within
60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an
appraisal shall cease. Notwithstanding the foregoing, no appraisal
proceeding in the Court of Chancery shall be dismissed as to any
stockholder without the approval of the Court, and such approval may be
conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented
to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
D-5
Appendix E
FRANKLIN STREET PROPERTIES CORP.
ARTICLES OF INCORPORATION
ARTICLE I
INCORPORATOR
The undersigned, Kenneth A. Hoxsie, whose address is c/o Hale and Dorr
LLP, 60 State Street, Boston, Massachusetts 02109, being at least eighteen years
of age, acting as incorporator, does hereby form a corporation under the General
Laws of the State of Maryland.
ARTICLE II
NAME
The name of the corporation (hereinafter, the "Corporation") is
FRANKLIN STREET PROPERTIES CORP.
ARTICLE III
PURPOSES
The purposes for which and any of which the Corporation is formed and the
business and objects to be carried on and promoted by it are:
(1) To engage in business as a real estate investment trust, qualifying as
such under Sections 856 through 860 of the Internal Revenue Code of 1986, as
amended, or any successor statute (the "Code" and any references herein to
provisions of the Code shall include the successors to such provisions) and to
perform any and all activities and functions in connection therewith or related
thereto.
(2) To engage in and perform any other activities or functions which may
awfully be performed by a business corporation organized under the General Laws
of the State of Maryland.
The foregoing enumerated purposes and objects shall be in no way limited
or restricted by reference to, or inference from, the terms of any other clause
of this or any other Article of the Charter of the Corporation, and each shall
be regarded as independent; and they are intended to be and shall be construed
as powers as well as purposes and objects of the Corporation and shall be in
addition to and not in limitation of the general powers of corporations under
the General Laws of the State of Maryland.
ARTICLE IV
PRINCIPAL OFFICE IN MARYLAND
The present address of the principal office of the Corporation in the
State of Maryland is c/o The Corporation Trust Incorporated, 32 South Street,
Baltimore, Maryland 21202. The Corporation may have such other offices or places
E-1
of business within or without the State of Maryland as the Board of Directors of
the Corporation may determine.
ARTICLE V
RESIDENT AGENT
The name and address of the resident agent of the Corporation is The
Corporation Trust Incorporated, 32 South Street, Baltimore, Maryland 21201. Said
resident agent is a Maryland corporation.
ARTICLE VI
SHARES OF CAPITAL STOCK
Section 1. Authorized Shares of Capital Stock
(a) Authorized Shares. The total number of shares of capital stock
of all classes that the Corporation has authority to issue is 200,000,000
shares, consisting of
(i) 20,000,000 shares of Preferred Stock, par value $.0001 per
share (the "Preferred Shares"), which may be issued in one or more classes as
described in Section 3 of this Article VI; and
(ii) 80,000,000 shares of Common Stock, par value $.0001 per
share (the "Common Shares").
Each class of the Preferred Shares and the Common Shares shall each
constitute a separate class of capital stock of the Corporation.
(b) Terminology and Aggregate Par Value. The Common Shares and the
Preferred Shares are collectively referred to herein as the "Equity Shares." The
aggregate par value of all of the Corporation's authorized shares having par
value is $20,000.
(c) Increase or Decrease in Authorized Shares. The Board of
Directors of the Corporation may amend these Articles of Incorporation, without
any vote or consent of the stockholders, to increase or decrease the aggregate
number of Equity Shares or the number of Equity Shares of any class that the
Corporation has authority to issue.
Section 2. REIT-Related Restrictions and Limitations on the Equity Shares.
(a) Definitions. As used in this Article VI, the following terms
shall have the indicated meanings:
"Acquire" shall mean the acquisition of Beneficial Ownership
or Constructive Ownership of Equity Shares by any means, including without
limitation a Transfer or the exercise of or right to exercise any rights under
any option, warrant, convertible security, pledge or other security interest or
similar right to acquire Equity Shares, but shall not include the acquisition of
any such rights unless, as a result, the acquiror would be considered a
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Beneficial Owner or Constructive Owner, as defined below. The term "Acquisition"
shall have the correlative meaning.
"Beneficial Ownership" shall mean ownership of Equity Shares y
a Person who is or would be treated as an owner of such Equity Shares under
Section 542(a)(2) of the Code either actually or constructively through the
application of Section 544 of the Code, as modified by Section 856(h)(1)(B) of
the Code. The terms "Beneficially Own," "Beneficially Owned" and "Beneficial
Owner" shall have the correlative meanings.
"Board" shall mean the Board of Directors of the Corporation.
"Business Day" shall mean any day, other than a Saturday or
Sunday, that is neither a legal holiday nor a day on which banking institutions
in Boston, Massachusetts are authorized or required by law, regulation or
executive order to close.
"Charitable Beneficiary" shall mean one or more beneficiaries
of the Trust as determined pursuant to Section 2(e)(vi) of this Article VI.
"Constructive Ownership" shall mean ownership of Equity Shares
or any other interest in an entity by a Person who is or would be treated as an
owner thereof either actually or constructively through the application of
Section 318 of the Code, as modified by Section 856(d)(5) of the Code. The terms
"Constructively Own," "Constructively Owned" and "Constructive Owner" shall have
the correlative meanings.
"Market Price" shall mean the last reported sales price of the
Common Shares or Preferred Shares, as the case may be, on the trading day
immediately preceding the relevant date as reported on the principal exchange or
quotation system over or through which the Common Shares or Preferred Shares, as
the case may be, may be traded, or if not then traded over or through any
exchange or quotation system, then the fair market value of the Common Shares or
Preferred Shares, as the case may be, on the relevant date as determined in good
faith by the Board.
"Merger Date" shall mean the effective date of the merger of
Franklin Street Partners Limited Partnership with and into the Corporation.
"Ownership Limit" shall mean 9.8% of the number of shares or
value (whichever is more restrictive) of the outstanding Equity Shares. The
number and value of Equity Shares of the Corporation shall be determined by the
Board in good faith, which determination shall be conclusive for all purposes
hereof.
"Person" shall mean an individual, corporation, partnership,
limited liability company, association, estate, trust (including a trust
qualified under Section 401(a) or 501(c)(17) of the Code), a portion of a trust
permanently set aside for or to be used exclusively for the purposes described
in Section 642(c) of the Code, association, private foundation within the
meaning of Section 509(a) of the Code, joint stock company or other entity.
"Purported Beneficial Owner" shall mean, with respect to any
Acquisition or Transfer, the Person who would Beneficially Own or Constructively
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Own Equity Shares but for the limitations set forth in Section 2(b)(i) of this
Article VI applicable to such Acquisition or Transfer. The Purported Beneficial
Owner and the Purported Record Owner may be the same Person.
"Purported Record Owner" shall mean, with respect to any
Acquisition or Transfer, the Person who would have been the record holder of the
Equity Shares if such Acquisition or Transfer had not violated the provisions of
Section 2(b)(i) of this Article VI. The Purported Beneficial Owner and the
Purported Record Owner may be the same Person.
"Restriction Termination Date" shall mean the effective date,
as specified in a resolution of the Board, that it is no longer in the best
interests of the Corporation to attempt to, or continue to, qualify as a REIT or
that the restrictions and limitations on Beneficial Ownership, Constructive
Ownership or Transfer of Equity Shares set forth in this Section 2 are no longer
required in order for the Corporation to qualify as a REIT. If no such effective
date is specified in such resolution, the Restriction Termination Date shall be
the date on which such resolution is adopted by the Board.
"Transfer" shall mean any issuance, sale, transfer, gift,
assignment, devise or other disposition of, or any other event that would cause
a Person to Acquire Equity Shares or the right to vote or receive dividends on
Equity Shares, including (i) the granting of any option or entering into any
agreement for the sale, transfer or other disposition of Equity Shares or the
right to vote or receive dividends on Equity Shares, or (ii) the sale, transfer,
assignment or other disposition of any securities or rights convertible into or
exchangeable for Equity Shares, in each case whether voluntary or involuntary,
whether of record or Beneficially Owned or Constructively Owned, and whether by
operation of law or otherwise. A Transfer also includes any transfer of
interests in other entities, any change in the capital structure of the
Corporation and any change in the relationship between two or more Persons, that
results in a change in Beneficial Ownership or Constructive Ownership of Equity
Shares, whether by operation of law or otherwise. The terms "Transfers" and
"Transferred" shall have the correlative meanings.
"Trust" shall mean the trust created pursuant to Section
2(e)(i) of this Article VI.
"Trustee" shall mean the Person that is appointed by the
Corporation pursuant to Section 2(e)(i) of this Article VI to serve as trustee
of the Trust, and any successor thereto.
(b) Ownership Limitation and Transfer Restrictions with Respect to
Equity Shares.
(i) Merger Date and prior to the Restriction Termination Date:
(A) no Person shall Beneficially Own or Constructively
Own Equity Shares in excess of the Ownership Limit;
(B) no Person shall Acquire or Transfer Equity Shares to
the extent that such Acquisition or Transfer, if effective, would result in the
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outstanding Equity Shares being beneficially owned by fewer than 100 Persons
(determined without reference to any rules of attribution); and
(C) no Person shall Acquire or Beneficially Own or
constructively Own Equity Shares to the extent such Acquisition, Beneficial
Ownership or Constructive Ownership, if effective, would result in the
Corporation being "closely held" within the meaning of Section 856(h) of the
Code (without regard to whether the ownership interest is held during the last
half of a taxable year), or would otherwise result in the Corporation failing to
quality as a REIT (including without limitation Constructive Ownership that
would result in the Corporation owning, actually or constructively, an interest
in a tenant that is described in Section 856(d)(2)(B) of the Code if the income
derived by the Corporation from such tenant would cause the Corporation to fail
to satisfy any of the gross income requirements of Section 856(c) of the Code,
but not including beneficial ownership of Equity Shares by fewer than 100
Persons, which shall be governed by Section 2(b)(i)(B) above).
(ii) If, after the Merger Date and prior to the Restriction
Termination Date:
(A) any Transfer or Acquisition (other than an event
described in Section 2(b)(ii)(B) of this Article VI) (whether or not such
Transfer or Acquisition is the result of a transaction entered into through the
facilities of any national securities exchange or automated inter-dealer
quotation system) occurs which, if effective, would result in any Person
Beneficially Owning or Constructively Owning Equity Shares in violation of
Sections 2(b)(i)(A) or 2(b)(i)(C) of this Article VI, then (1) that number of
Equity Shares being Transferred or Acquired that otherwise would cause such
Person to violate Sections 2(b)(i)(A) or 2(b)(i)(C) of this Article VI (rounded
up to the nearest whole share) shall be automatically transferred to a Trust for
the benefit of a Charitable Beneficiary, as described in Section 2(e)(i) of this
Article VI, effective as of the close of business on the Business Day prior to
the date of such Transfer or Acquisition, and the Purported Beneficial Owner and
Purported Record Owner of such Equity Shares shall acquire no rights in such
Equity Shares, or (2) if the transfer to the Trust described in clause (1) of
this sentence would not be effective for any reason to prevent such Person from
Beneficially Owning or Constructively Owning Equity Shares in violation of
Sections 2(b)(i)(A) or 2(b)(i)(C) of this Article VI, then the Acquisition or
Transfer of that number of Equity Shares that otherwise would cause such Person
to violate Sections 2(b)(i)(A) or 2(b)(i)(C) of this Article VI (rounded up to
the nearest whole share) shall be void ab initio and the Purported Beneficial
Owner and Purported Record Owner shall acquire no rights in such Equity Shares.
The transfer of Equity Shares to the Trust pursuant to clause (1) of the
preceding sentence shall occur automatically and without further action of the
Corporation, the Trustee or any other Person; or
(B) any Transfer or Acquisition (whether or not such
Transfer or Acquisition is the result of a transaction entered into through the
facilities of any national securities exchange or automated inter-dealer
quotation system) occurs which, if effective, would result in any Person
beneficially owning Equity Shares in violation of Section 2(b)(i)(B) of this
Article VI, then such Transfer or Acquisition shall be void ab initio, and the
Purported Beneficial Owner and the Purported Record Owner of the Equity Shares
purportedly subject to such Acquisition or Transfer shall acquire no rights in
such Equity Shares.
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(c) The Corporation's Right to Redeem Shares. Except with respect to
Equity Shares whose transfer to a Trust has been effected in accordance with
Section 2(b)(ii)(A) of this Article VI (which Equity Shares shall be subject to
Section 2(e) of this Article VI following such transfer), the Corporation shall
have the right, but not the obligation, to redeem any Equity Shares that are
Acquired or Transferred, or are attempted to be Acquired or Transferred, in
violation of Section 2(b) of this Article VI, at a price per share equal to the
lesser of (i) the Market Price per share of the class of Equity Shares that
created such violation or attempted violation on the date of such violation or
attempted violation (or, in the case of a devise or gift, the Market Price at
the time of such devise or gift) and (ii) the Market Price per share of the
class of Equity Shares to which such Equity Shares relate on the date the
Corporation, or its designee, gives notice of such redemption. The Corporation
shall have the right to redeem any Equity Shares described in this Section 2(c)
for a period of 90 days after the later of (i) the date of the Acquisition or
Transfer or attempted Acquisition or Transfer and (ii) the date the Board
determines in good faith that an Acquisition or Transfer or attempted
Acquisition or Transfer has occurred, if the Corporation does not receive a
notice of such Transfer pursuant to Section 2(d) of this Article VI.
(d) Notice Requirements and General Authority of the Board of
Directors to Implement REIT-Related Restrictions and Limitations.
(i) Notice Requirements. After the Merger Date and prior to
theRestriction Termination Date:
(A) Any Person who Acquires or Transfers, or attempts or
intends to Acquire or Transfer, Equity Shares in violation of Section 2(b)(i) of
this Article VI, and any Person who is a Purported Record Owner or a Purported
Beneficial Owner of Equity Shares, shall immediately give written notice or, in
the event of a proposed, intended or attempted Acquisition or Transfer or other
event that would give rise to Beneficial Ownership or Constructive Ownership in
violation of Section 2(b)(i) of this Article VI, give at least 15 days' prior
written notice to the Corporation of such event, and shall provide to the
Corporation such other information as the Corporation may request in order to
determine the effect, if any, of such Acquisition or Transfer on the
Corporation's status as a REIT;
(B) Every Beneficial Owner or Constructive Owner of
Equity Shares and each Person (including the stockholder of record) who is
holding Equity Shares for a Beneficial Owner or Constructive Owner shall, on
demand, provide the Corporation in writing the information regarding their
ownership of such Equity Shares that the Corporation may be required to obtain
pursuant to regulations (as in effect from time to time) issued by the United
States Department of the Treasury under the Code. Each Beneficial Owner or
Constructive Owner of Equity Shares and each Person (including the stockholder
of record) who is holding Equity Shares for a Beneficial Owner or Constructive
Owner shall provide to the Corporation such additional information that the
Corporation may request in order to determine the effect, if any, of such
Beneficial Ownership or Constructive Ownership on the Corporation's status as a
REIT, including compliance with the Ownership Limit; and
(C) Each Person who is a Beneficial Owner or
Constructive Owner of Equity Shares and each Person (including the shareholder
of record) who is holding Equity Shares for a Beneficial Owner or Constructive
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Owner shall, on demand, provide the Corporation in writing such information that
the Corporation may request in order to determine the Corporation's status as a
REIT, to comply with the requirements of any taxing authority or governmental
agency, or to determine any such compliance.
(ii) Board Authority to Prevent Violation of Section 2(b)(i).
If the Board or any duly authorized committee thereof shall at any time
determine in good faith that a Transfer or other event has taken place that
results in a violation of Section 2(b)(i) of this Article VI or that a Person
intends to Acquire, has attempted to Acquire or may Acquire Beneficial Ownership
or Constructive Ownership of any Equity Shares in violation of Section 2(b)(i)
of this Article VI (whether or not such violation is intended), the Board or a
committee thereof shall take such action as it deems advisable to refuse to give
effect to or to prevent such Acquisition, Transfer or other event, including,
but not limited to, causing the Corporation to redeem Equity Shares, refusing to
give effect to such Acquisition, Transfer or other event on the books of the
Corporation, or instituting proceedings to enjoin such Acquisition, Transfer or
other event; provided, however, that any Transfers or attempted Transfers (or,
in the case of an event other than a Transfer, Beneficial Ownership or
Constructive Ownership) in violation of Section 2(b)(i) of this Article VI shall
automatically result in the transfer to the Trust described above where the
conditions to such transfer have been satisfied, and, where applicable, such
Transfer (or other event) shall be void ab initio as provided above in Sections
2(b)(ii)(A) and 2(b)(ii)(B) irrespective of any action (or nonaction) by the
Board or a committee thereof.
(iii) Each certificate for Equity Shares shall bear
substantially the following legends:
"The Corporation is authorized to issue capital stock of more
than one class, consisting of Common Shares and one or more classes of
Preferred Shares. The Board of Directors is authorized to determine the
preferences, limitations and relative rights of any class of Preferred
Shares before the issuance of any such Preferred Shares, or any class
thereof. The Corporation will furnish, without charge, to any shareholder
making a written request therefor, a written statement of the
designations, relative rights, preferences, conversion and other rights,
voting powers, restrictions, limitations as to dividends, qualifications
and terms and conditions of redemption applicable to each class of shares.
Requests for such written statement may be directed to the Secretary of
the Corporation at the principal office of the Corporation."
"The shares represented by this certificate are subject to
restrictions on Beneficial Ownership, Constructive Ownership and Transfer
for the purpose of the Corporation's maintenance of its status as a "real
estate investment trust" (a "REIT") under the Internal Revenue Code of
1986, as amended, or any successor statute (the "Code"). Subject to
certain further restrictions, and except as expressly provided in the
Corporation's Charter, (i) no Person may Beneficially Own or
Constructively Own shares of the Corporation's Common Shares or Preferred
Shares in excess of 9.8% in value or number of shares (whichever is more
restrictive) of the outstanding Common Shares or Preferred Shares,
respectively, of the Corporation, (ii) no Person may Transfer or Acquire
Equity Shares if such Transfer or Acquisition would result in the
Corporation being owned by fewer than 100 Persons and (iii) no Person may
Beneficially Own or Constructively Own Equity Shares that would result in
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the Corporation being "closely held" under Section 856(h) of the Code or
otherwise cause the Corporation to fail to qualify as a REIT. Any Person
who Beneficially Owns or Constructively Owns or attempts to Beneficially
or Constructively Own Equity Shares which causes or will cause a Person to
Beneficially Own or Constructively Own Equity Shares in violation of the
above restrictions must immediately notify the Corporation. If some or all
of the restrictions on transfer or ownership set forth in clauses (i) or
(iii) are violated by a purported Transfer of the Equity Shares
represented hereby, the Equity Shares represented hereby will be
automatically transferred to a Trustee of a Trust for the benefit of one
or more Charitable Beneficiaries. In addition, the Corporation may redeem
Equity Shares represented hereby if a purported Transfer violates the
restrictions described above. Furthermore, attempted Transfers in
violation of the restrictions described above may be void ab initio. A
Person who attempts to Beneficially or Constructively Own Equity Shares in
violation of the restrictions described above shall have no claim, cause
of action or any recourse whatsoever against a transferor of such Equity
Shares. All capitalized terms in this legend have the meanings defined in
the Charter of the Corporation, as the same may be amended from time to
time, a copy of which, including the restrictions on transfer and
ownership, will be furnished, without charge, to each holder of Equity
Shares who directs a request to the Secretary of the Corporation at the
principal office of the Corporation."
(iv) Absent a decision to the contrary by the Board (which the
Board may make in its sole and absolute discretion), the Equity Shares to be
affected by the remedies set forth in Sections 2(b)(ii) and 2(c) shall be as
follows: (1) if a Purported Beneficial Owner would have (but for the remedies
set forth in Sections 2(b)(ii) or 2(c), as applicable) Beneficially Owned or
Constructively Owned Equity Shares in violation of Section 2(b)(i) as a result
of an Acquisition of Equity Shares by such Purported Beneficial Owner, such
remedies (as applicable) shall apply first to the Equity Shares that, but for
such remedies, would have caused such violation and would have been directly
owned by such Purported Beneficial Owner, second to Equity Shares that, but for
such remedies, would have caused such violation but which would not have been
directly owned by such Purported Beneficial Owner, pro rata among the Persons
who actually attempted to Acquire such Equity Shares based upon the relative
value of what would have been the Purported Beneficial Owner's Beneficial
Ownership or Constructive Ownership interest in the Equity Shares such Person
attempted to acquire, third to other Equity Shares that are directly owned by
such Purported Beneficial Owner, and fourth to other Equity Shares that are
actually owned by such other Persons whose ownership of shares is attributed to
the Purported Beneficial Owner, pro rata among such Persons based upon the
relative value of the Purported Beneficial Owner's Beneficial Ownership or
Constructive Ownership interest in the Equity Shares so owned; and (2) if a
Purported Beneficial Owner would be in violation of Section 2(b)(i) as a result
of an event other than an Acquisition of Equity Shares by such Purported
Beneficial Owner, the remedies set forth in Sections 2(b)(ii) and 2(c) (as
applicable) shall apply first to Equity Shares that are directly owned by such
Purported Beneficial Owner and second to Equity Shares that are Beneficially or
Constructively Owned (but not directly owned) by such Person, pro rata among the
Persons who actually own such Equity Shares based upon the relative value of the
Purported Beneficial Owner's Beneficial Ownership or Constructive Ownership
interest in the Equity Shares so owned.
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(v) Subject to subparagraph f(iii) below, nothing contained in
this Article VI shall limit the authority of the Board to take such other action
as it deems necessary or advisable to protect the Corporation and the interests
of its stockholders by preserving the Corporation's status as a RETT.
(e) Transfers of Equity Shares in Trust
(i) Ownership in Trust. Upon any purported Transfer or
Acquisition described in Section 2(b)(ii) of this Article VI that causes Equity
Shares to be transferred to a Trust, such Equity Shares shall be deemed to have
been transferred to the Trustee in his or her capacity as trustee of a Trust for
the exclusive benefit of one or more Charitable Beneficiaries. Such transfer to
the Trustee shall be deemed to be effective as of the close of business on the
Business Day prior to the purported Transfer or Acquisition that results in a
transfer to the Trust pursuant to Section 2(b)(ii) of this Article VI. The
Trustee shall be appointed by the Corporation, and shall be a Person
unaffiliated with the Corporation, any Purported Beneficial Owner or any
Purported Record Owner. Each Charitable Beneficiary shall be designated by the
Corporation as provided in Section 2(e)(vi) of this Article VI. The Corporation
shall notify the Trustee of a transfer of Equity Shares to the Trust as soon as
practicable following discovery by the Corporation of such transfer.
(ii) Status of Equity Shares Held by the Trustee. Equity
Shares held by the Trustee shall be issued and outstanding shares of capital
stock of the Corporation. The Purported Beneficial Owner and Purported Record
Owner shall have no rights in the Equity Shares held by the Trustee. The
Purported Beneficial Owner and Purported Record Owner shall not benefit
economically from ownership of any Equity Shares held in trust by the Trust,
shall have no rights to dividends or other distributions and shall not possess
any rights to vote or other rights attributable to the Equity Shares held in the
Trust. The Purported Record Owner and the Purported Beneficial Owner shall
surrender to the Trustee any and all certificates representing Equity Shares
that have been transferred to the Trust, duly endorsed for transfer to the
Trustee.
(iii) Dividend and Voting Rights. The Trustee shall have all
voting rights and rights to dividends with respect to Equity Shares held in the
Trust, which rights shall be exercised for the exclusive benefit of the
Charitable Beneficiary. Any dividend or distribution with respect to such Equity
Shares paid to a Purported Beneficial Owner or Purported Record Owner prior to
the discovery by the Corporation that the Equity Shares have been transferred to
the Trustee shall be deemed to be held by the recipient thereof as agent for the
Trustee, and shall be paid to the Trustee upon demand, and any dividend or
distribution declared after the date of transfer to the Trustee but unpaid shall
be paid when due to the Trustee. Any dividends or distributions so paid to the
Trustee shall be held in trust for the Charitable Beneficiary. The Purported
Record Owner and Purported Beneficial Owner shall have no voting rights with
respect to Equity Shares held in the Trust and, subject to Maryland law,
effective as of the date the Equity Shares have been transferred to the Trustee,
the Trustee shall have the authority (at the Trustee's sole discretion) (1) to
rescind as void any vote cast by a Purported Record Owner or Purported
Beneficial Owner with respect to such Equity Shares prior to the discovery by
the Corporation that the Equity Shares have been transferred to the Trustee and
(2) to recast such vote in accordance with the desires of the Trustee acting for
the benefit of the Charitable Beneficiary; provided, however, that if the
Corporation has already taken irreversible corporate action, then the Trustee
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shall not have the authority to rescind and recast such vote. Notwithstanding
the provisions of this Article VI, until the Corporation has received
notification that Equity Shares have been transferred into a Trust, the
Corporation shall be entitled to rely on its share transfer and other
stockholder records for purposes of preparing lists of stockholders entitled to
vote at meetings, determining the validity and authority of proxies and
otherwise conducting votes of stockholders.
(iv) Sale of Shares by Trustee. Within 20 days of receiving
notice from the Corporation that Equity Shares have been transferred to the
Trust, the Trustee of the Trust shall use best efforts to sell the Equity Shares
held in the Trust to a person, designated by the Trustee, whose ownership of the
Equity Shares will not violate the ownership limitations set forth in Section
2(b)(i) of this Article VI. Upon such sale, the interest of the Charitable
Beneficiary in the Equity Shares sold shall terminate and the Trustee shall
distribute the net proceeds of the sale to the Purported Record Owner and to the
Charitable Beneficiary as provided in this Section 2(e)(iv). The Purported
Record Owner shall receive the lesser of (1) the price paid by the Purported
Record Owner for the Equity Shares or, if the Purported Record Owner did not
give value for the Equity Shares (through a gift, devise or other transaction),
the Market Price of the Equity Shares on the day of the event causing the Equity
Shares to be held in the Trust and (2) the price per share received by the
Trustee from the sale or other disposition of the Equity Shares held in the
Trust (net of any commissions and other expenses of sale). Any net sales
proceeds in excess of the amount payable to the Purported Record Owner shall be
immediately paid to the Charitable Beneficiary, together with any dividends or
other distributions thereon. If, prior to the discovery by the Corporation that
Equity Shares have been transferred to the Trustee, such Equity Shares are sold
by a Purported Record Owner then (X) such Equity Shares shall be deemed to have
been sold on behalf of the Trust, (Y) the proceeds of such sale shall be deemed
to be held by such Purported Record Owner or Purported Beneficial Owner as a
agent for the Trustee and (Z) to the extent that the Purported Record Owner
received an amount for such Equity Shares that exceeds the amount that such
Purported Record Owner was entitled to receive pursuant to this Section
2(e)(iv), such excess shall be paid to the Trustee upon demand.
(v) Purchase Right in Stock Transferred to the Trustee. Equity
Shares transferred to the Trustee shall be deemed to have been offered for sale
to the Corporation, or its designee, at a price per share equal to the lesser of
(1) the price paid by the Purported Record Owner for the Equity Shares in the
transaction that resulted in such transfer to the Trust (or, if the event which
resulted in the transfer to the Trust did not involve a purchase of such Equity
Shares, the Market Price of such Equity Shares on the day of the event which
resulted in the transfer of such Equity Shares to the Trust) and (2) the Market
Price on the date the Corporation, or its designee, accepts such offer. The
Corporation shall have the right to accept such offer until the Trustee has sold
the Equity Shares held in the Trust pursuant to Section 2(e)(iv) of this Article
VI. Upon such a sale to the Corporation, the interest of the Charitable
Beneficiary in the Equity Shares sold shall terminate and the Trustee shall
distribute the net proceeds of the sale to the Purported Record Owner (minus any
dividend or distribution paid to the Purported Record Owner that the Purported
Record Owner was obligated to pay to the Trustee but has not paid to the Trustee
at the time of the distribution of the proceeds) and any dividends or other
distributions held by the Trustee with respect to such Equity Shares, together
with any amounts described in the preceding parenthetical of this sentence, to
the Charitable Beneficiary.
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(vi) Designation of Charitable Beneficiaries. By written
notice to the Trustee, the Corporation shall designate one or more nonprofit
organizations to be the Charitable Beneficiary(ies) of the interest in the Trust
such that (1) the Equity Shares held in the Trust would not violate the
restrictions set forth in Section 2(b)(i) of this Article VI in the hands of
such Charitable Beneficiary and (2) each Charitable Beneficiary is an
organization described in Sections 170(b)(1)(A), 170(c)(2) and 501(c)(3) of the
Code.
(f) Exemptions.
(i) The Board, in its sole and absolute discretion, may exempt
a Person from the limit set forth in Section 2(b)(i)(A) (but not from Sections
2(b)(i)(B) or (C)) of this Article VI, if the Board obtains such representations
and undertakings from such Person and any other Person as the Board may deem
appropriate; and such Person agrees in writing that any violation or attempted
violation of such representations or undertakings (or other action which is
contrary to the restrictions contained in Section 2(b) of this Article VI) will
result in the application of the remedies set forth in Sections 2(b)(ii) and
2(c) of this Article VI, to the extent necessary to prevent or cure such
violation or action, to the Equity Shares Beneficially or Constructively Owned
by such Person.
(ii) Nothing in Section 2(f)(i) of this Article VI shall be
deemed to require the Board to consider a request for exemption from the
restrictions in Section 2(b)(i)(A) of this Article VI. Prior to granting any
exemption pursuant to Section 2(f)(i) of this Article VI, the Board may require
a ruling from the Internal Revenue Service, an opinion of counsel, or both, in
any case in form and substance satisfactory to the Board in its sole and
absolute discretion, as it may deem necessary or advisable in order to determine
or ensure the Corporation's status as a REIT. Notwithstanding the receipt of any
ruling or opinion, the Board may impose such conditions or restrictions as it
deems appropriate in connection with granting such exemption. If a member of the
Board requests that the Board grant an exemption pursuant to Section 2(f)(i) of
this Article VI with respect to such member or to any other Person if such Board
member would be considered to be the Beneficial or Constructive Owner of Equity
Shares owned by such Person, such member of the Board shall not participate in
the decision of the Board as to whether to grant such exemption.
(iii) Nothing in this Article VI shall preclude the settlement
of a transaction entered into through the facilities of any stock exchange on
which Equity Shares are listed for trading. The fact that the settlement of any
transaction is permitted shall not negate the effect of any other provision of
this Article VI, and any transferee in such a transaction shall be subject to
all of the provisions and limitations set forth in this Article VI.
(iv) Section 2(b)(i)(A) of this Article VI shall not apply to
the Acquisition of Equity Shares or rights, options or warrants for, or
securities convertible into, Equity Shares by an underwriter in a public
offering, provided that such underwriter makes a timely distribution of such
Equity Shares or rights, options or warrants for, or securities convertible
into, Equity Shares.
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Section 3. Preferred Shares.
(a) Authority to Designate and Fix Rights and Restrictions of
Preferred Shares. The Board of Directors may authorize the issuance from time to
time of the Preferred Shares in one or more separately designated classes
(hereinafter a "class"). Prior to issuance of any shares of a class of Preferred
Shares, by resolution the Board of Directors shall
(i) designate such class in order to distinguish it from all
other then outstanding classes of Preferred Shares;
(ii) set the number of Preferred Shares to be included in such
class; and
(iii) subject to the provisions of Sections 2 and 5 of this
Article VI, and to the express limitations, if any, of any other classes of
which shares are outstanding at the time, set the preferences, conversion or
other rights, voting powers, restrictions, limitations as to dividends or other
distributions, qualifications and terms and conditions of the redemption of the
shares of such class, provided that all shares of any class shall be alike in
every particular, except that shares of such class issued at different times may
accumulate dividends from different dates.
(b) Amendment of Terms. Subject to the provisions of Sections 2 and
5 of this Article VI and to the express limitations, if any, of any class of
Preferred Shares of which shares are outstanding at the time, by resolution the
Board of Directors may (i) increase or decrease (but not below the number of
Preferred Shares of such class then outstanding) the number of Preferred Shares
of any class; and (ii) alter the designation of, or classify or reclassify, any
unissued Preferred Shares of any class from time to time by setting or changing
the preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends or other distributions, qualifications or terms or
conditions of redemption of such class.
Section 4. Common Shares.
Subject to the provisions of Sections 2 and 5 of this Article VI, the
Common Shares shall have the following preferences, rights, powers,
restrictions, limitations and qualifications and such others as may be afforded
by law:
(a) Voting Rights. Except as may otherwise by required by law, and
subject to action, if any, by the Board of Directors, pursuant to Section 3 of
this Article VI, granting to the holders of one or more classes of Preferred
Shares exclusive voting powers with respect to specified matters, each holder of
Common Shares shall have one vote in respect of each Common Share held of record
on all matters to be voted upon by the stockholders.
(b) Dividend Rights. After provision(s) with respect to preferential
dividends on any then outstanding classes of Preferred Shares, if any, fixed by
the Board of Directors pursuant to Section 3 of this Article VI, shall have been
satisfied, and after satisfaction of any other requirements, if any, including
with respect to redemption rights and preferences, in any such classes of
Preferred Shares, then and thereafter the holders of Common Shares shall be
entitled to receive, ratably in proportion to the number of Common Shares held
by them, such dividends as may be declared from time to time by the Board of
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Directors out of funds legally available therefor. All distributions paid with
respect to the Common Shares shall be paid pro rata, with no preference to any
Common Share as compared with other Common Shares.
(c) Liquidation Rights. In the event of the voluntary or involuntary
liquidation, dissolution or winding-up of the Corporation, after distribution in
full of the preferential amounts, if any, fixed pursuant to Section 3 of this
Article VI, to be distributed to the holders of any then outstanding Preferred
Shares, and subject to the right, if any, of the holders of any outstanding
Preferred Shares to participate further in any liquidating distributions, all of
the assets of the Corporation, if any, remaining, of whatever kind available for
distribution to stockholders after the foregoing distributions have been made
shall be distributed to the holders of the Common Shares, ratably in proportion
to the number of Common Shares held by them.
(d) Purchase of Interests of Common Shares.
(i) The Corporation shall use its best efforts to redeem
Common Shares on an annual basis from holders of Common Shares desiring to have
such Common Shares redeemed upon the terms and conditions set forth below.
(ii) A holder of Common Shares wishing to have some or all of
his or her Common Shares redeemed by the Corporation must mail or deliver a
written request to the Corporation indicating his or her desire to have such
Common Shares redeemed for cash. Any such request must be received by the
Corporation on or before July 1 immediately preceding the January 1 date on
which the redemption is to be effective. The Corporation shall send the purchase
price for any Common Shares redeemed to the holder thereof no later than two
Business Days following such effective date. Any such request to have Common
Shares redeemed shall constitute an offer by the holder thereof to sell such
Common Shares and shall be irrevocable. If the Corporation does not have
sufficient funds to purchase all of the Common Shares so offered or is otherwise
prohibited from purchasing all of the Common Shares so offered, the Corporation
will redeem Common Shares in the order in which effective offers are received
from offerors to the extent that the Corporation has funds available therefor
and is not prohibited from redeeming Common Shares.
(iii) The purchase price for any Common Shares redeemed by the
Corporation will equal 90% of the Fair Market Value of the Common Shares. "Fair
Market Value" of a Common Share shall mean the fair market value as determined
by the Board of Directors in its sole and absolute discretion, after
consultation with an adviser selected by the Board of Directors. Any redemption
of Common Shares by the Corporation shall be effective as of January 1 of the
year following the year in which the corresponding offer was timely made
pursuant to Section 3(d)(ii). Any holder whose Common Shares are to be redeemed
shall execute and deliver such transfer and other documents and instruments as
the Corporation may reasonably request. Any Common Shares redeemed by the
Corporation shall be cancelled and shall be held in the treasury of the
Corporation.
(iv) In fulfilling the Corporation's obligation to use best
efforts to redeem Common Shares for which offers have been timely made pursuant
to Section 3(d)(ii), the Board of Directors shall be authorized to take such
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steps as it deems appropriate, in its sole discretion, including without
limitation the disposition of assets of the Corporation and incurring
indebtedness on behalf of the Corporation.
(v) Notwithstanding anything herein to the contrary, no Common
Shares shall be redeemed by the Corporation pursuant to this Section 3(d) if:
(A) The Corporation is insolvent or such redemption
would render the Corporation insolvent;
(B) Such redemption would impair the capital or
operations of the Corporation;
(C) Such redemption would contravene any provision of
federal or state securities laws;
(D) Such redemption would result in the Corporation's
failing to qualify as a REIT; or
(E) The Board of Directors determines such redemption
would otherwise not be in the best interests of the Corporation.
(vi) If the Corporation is unable to redeem some or all of the
Common Shares offered for redemption, the Corporation shall use its best efforts
to arrange for a purchase of such Common Shares by a third party or parties,
each of whom shall be an "accredited investor" within the meaning of Rule 501(a)
of Regulation D promulgated under the Securities Act of 1933, as amended, and
shall have a pre-existing relationship with the Corporation (an "Accredited
Investor"); provided, however, that no such purchase shall be effected if it
would not be permitted under the terms of Section 3(d)(v). In addition, the
Corporation shall have the right to satisfy its obligations under Section
3(d)(i) by arranging for the purchase of Common Shares by any such Accredited
Investor or Investors for the price set forth in Section 3(d)(iii).
(vii) Any request for redemption of Common Shares by a holder
thereof pursuant to Section 3(d)(ii) shall be binding on such holder's
successors, heirs and assigns.
(viii) The Corporation shall not be obligated to effect any
redemptions pursuant to this Section 3(d) during any period that the Common
Shares are listed for trading on a national securities exchange or the NASDAQ
National Market System.
Section 5. General Provisions.
(a) Interpretation and Ambiguities. In addition to the other powers
set forth in this Article VI, the Board shall have the power to interpret and to
construe the provisions of this Article VI, and in the case of an ambiguity in
the application of any of the provisions of this Article VI, including any
definition contained in Section 1, the Board shall have the power to determine
the application of the provisions of this Article VI with respect to any
situation based on the facts known to it, and any such interpretation,
construction and determination shall be final and binding on all interested
parties, including the stockholders.
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(b) Severability. If any provision of this Article VI or any
application of any such provision is determined to be void, invalid or
unenforceable by any court having jurisdiction over the issue, the validity and
enforceability of the remaining provisions shall not be affected and other
applications of such provision shall be affected only to the extent necessary to
comply with the determination of such court.
ARTICLE VII
BOARD OF DIRECTORS
The business and affairs of the Corporation shall be managed by a Board of
Directors which may exercise all of the powers of the Corporation except those
conferred on, or reserved to, the stockholders by law.
Section 1. Authorized Number and Initial Directors.
The number of directors of the Corporation initially shall be six (6),
which number may be increased or decreased pursuant to the By-Laws of the
Corporation but in no event shall be less than the minimum number required by
the General Laws of the State of Maryland. Each director shall hold office until
the next annual meeting of the stockholders of the Corporation and until his or
her successor shall have been elected and qualified or until his or her earlier
death, resignation, retirement or removal. The names and the respective Classes
(as defined in Section 2 below) of the directors who will serve until the first
annual meeting of stockholders of the Corporation and until their successors are
elected and qualified are as follows:
Janet P. Notopoulos Class I
R. Scott MacPhee Class I
Barbara J. Corinha Class II
William W. Gribbell Class II
George J. Carter Class III
Richard R. Norris Class III
Section 2. Classified Board.
The directors of the Corporation shall be and are hereby divided into
three Classes, designated "Class I," "Class II" and "Class III," respectively.
The number of directors in each Class shall be as nearly equal in number as
possible. Each director shall be elected by the stockholders and shall serve for
a term ending on the date of the third Annual Meeting of Stockholders following
the Annual Meeting at which such director was elected; provided, however, that
each initial director in Class I shall serve for a term ending on the date of
the Annual Meeting held in 2004; each initial director in Class II shall serve
for a term ending on the date of the Annual Meeting held in 2003; and each
initial director in Class III shall serve for a term ending on the date of the
Annual Meeting held in 2002.
Section 3. Effect of Increases and Decreases in the Authorized Number of
Directors.
In the event of any increase or decrease in the authorized number of
directors:
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(a) Each director then serving shall nevertheless continue as a
director of the Class of which such director is a member until the expiration of
such director's term or such director's prior death, retirement, resignation or
removal; and
(b) The newly created or eliminated directorships resulting from any
increase or decrease shall be apportioned by the Board of Directors among the
three Classes so as to keep the number of directors in each Class as nearly
equal as possible.
Section 4. Removal of Directors.
A director may be removed from office only for cause based on a material
breach of his duties or obligations to the Corporation, and then only by the
affirmative vote of the holders of at least two-thirds of the votes entitled to
be cast in the election of directors.
Section 5. Filling Vacancies.
Should a vacancy on the Board of Directors occur or be created (whether
arising through death, retirement, resignation or removal) other than through an
increase in the number of authorized directors, such vacancy shall be filled by
the affirmative vote of a majority of the remaining directors, even though less
than a quorum of the Board of Directors. A vacancy on the Board of Directors
resulting from an increase in the number of directors shall be filled by the
affirmative vote of a majority of the entire Board of Directors. A director so
elected to fill a vacancy shall serve for the remainder of the term of the Class
to which such director was elected.
ARTICLE VIII
PROVISIONS FOR DEFINING, LIMITING AND REGULATING CERTAIN
POWERS OF THE CORPORATION AND OF THE
SHAREHOLDERS AND DIRECTORS
The following provisions are hereby adopted for the purposes of defining,
limiting and regulating the powers of the Corporation and of the directors and
stockholders:
Section 1. Powers of Board of Directors.
The Board of Directors shall have the power from time to time and in its
sole discretion (a) to determine in accordance with sound accounting practice
what constitutes annual or other net profits, earnings, surplus or net assets in
excess of capital; (b) to fix and vary from time to time the amount to be
reserved as working capital, or determine that retained earnings or surplus
shall remain in the hands of the Corporation; (c) to set apart out of any funds
of the Corporation such reserve or reserves in such amount or amounts and for
such proper purposes as it shall determine and to abolish or redesignate any
such reserve or any part thereof; (d) to borrow or raise money upon any terms
for any corporate purposes; (e) to distribute and pay distributions or dividends
in stock, cash or other securities or property, out of surplus or any other
funds or amounts legally available therefor, at such times and to the
stockholders of record on such dates as it may, from time to time, determine;
and (f) to determine whether and to what extent and at what times and places and
under what conditions and regulations the books, accounts and documents of the
Corporation shall be open to the inspection of stockholders, except as otherwise
provided by statute or by the By-Laws of the Corporation, and, except as so
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provided, no stockholder shall have the right to inspect any book, account or
document of the Corporation unless authorized so to do by resolution of the
Board of Directors.
Section 2. Limitation of Liability.
The liability of the directors and officers of the Corporation to the
Corporation or its stockholders for money damages shall be limited to the
fullest extent permitted under the General Laws of the State of Maryland now or
hereafter in force, including, but not limited to, Section 5-349 of the Courts
and Judicial Proceedings Article of the Annotated Code of Maryland, or any
successor provision of law of similar import, and the directors and officers of
the Corporation shall have no liability whatsoever to the Corporation or its
stockholders for money damages except to the extent which such liability cannot
be limited or restricted under the General Laws of the State of Maryland now or
hereafter in force. Neither the amendment nor repeal of the foregoing sentence
of this Section 2 of Article VIII nor the adoption nor amendment of any other
provision of the Charter or By-Laws of the Corporation inconsistent with the
foregoing sentence shall apply to or affect in any manner the applicability of
the foregoing sentence with respect to any act or omission of any director or
officer occurring prior to any such amendment, repeal or adoption.
Section 3. Indemnification.
(A) Actions, Suits and Proceedings. The Corporation shall indemnify
each person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative, investigative or otherwise, whether or not by or in
the right of the Corporation, by reason of the fact that he is or was, or has
agreed to become, a director or officer of the Corporation, or is or was
serving, or has agreed to serve, at the request of the Corporation, as a
director, officer, partner, trustee, employee or agent of, or in a similar
capacity with, another corporation, partnership, joint venture, trust or other
enterprise (including any employee benefit plan) (all such persons being
referred to hereafter as an "Indemnitee"), or by reason of any action alleged to
have been taken or omitted in such capacity, against all expenses (including
attorneys' fees), judgments, penalties, fines and amounts paid in settlement
actually and reasonably incurred by him or on his behalf in connection with such
action, suit or proceeding and any appeal therefrom, unless (I) (a) the act or
omission of the Indemnitee was material to the matter giving rise to the
proceeding and (b)(i) was committed in bad faith or (ii) was the result of
active and deliberate dishonesty or (II) the Indemnitee actually received an
improper personal benefit in money, property or services or (III) with respect
to any criminal proceeding, the Indemnitee had reasonable cause to believe that
the act or omission was unlawful; provided, however, that if the action, suit or
proceeding was one by or in the right of the Corporation, no indemnification
shall be made in respect of any such action, suit or proceeding in which the
Indemnitee shall have been adjudged liable to the Corporation. The termination
of any action, suit or proceeding by judgment, order or settlement shall not, of
itself, create a presumption that the person did not meet the requisite standard
of conduct set forth in this Subsection A. The termination of any proceeding by
conviction, or a plea of nolo contendere or its equivalent, or an entry of an
order of probation prior to judgment creates a rebuttable presumption that the
Indemnitee did not meet the requisite standard of conduct. Notwithstanding the
foregoing, the Corporation shall not indemnify an Indemnitee in respect of any
action, suit or proceeding charging improper personal benefit to the Indemnitee,
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whether or not involving action in the Indemnitee's official capacity, in which
the Indemnitee was adjudged to be liable on the basis that personal benefit was
improperly received. Notwithstanding anything to the contrary in this Section,
except as set forth in Subsection F below, the Corporation shall not indemnify
an Indemnitee seeking indemnification in connection with a proceeding (or part
thereof) initiated by the Indemnitee unless the initiation thereof was approved
by the Board of Directors of the Corporation. Notwithstanding anything to the
contrary in this Section, the Corporation shall not indemnify an Indemnitee to
the extent such Indemnitee is reimbursed from the proceeds of insurance, and in
the event the Corporation makes any indemnification payments to an Indemnitee
and such Indemnitee is subsequently reimbursed from the proceeds of insurance,
such Indemnitee shall promptly refund such indemnification payments to the
Corporation to the extent of such insurance reimbursement.
(B) Indemnification for Expenses of Successful Party.
Notwithstanding the other provisions of this Section, to the extent that an
Indemnitee has been successful, on the merits or otherwise, in defense of any
action, suit or proceeding referred to in Subsection A of this Section, or in
defense of any claim, issue or matter therein, or on appeal from any such
action, suit or proceeding, he shall be indemnified against all expenses
(including attorneys' fees) actually and reasonably incurred by him or on his
behalf in connection therewith. Without limiting the foregoing, if any action,
suit or proceeding is disposed of, on the merits or otherwise (including a
disposition without prejudice), without (i) the disposition being adverse to the
Indemnitee, (ii) an adjudication that the Indemnitee was liable to the
Corporation, (iii) a plea of guilty or nolo contendere by, or the entry of an
order of probation prior to judgment with respect to, the Indemnitee, (iv) an
adjudication that the Indemnitee acted in bad faith or that his action was the
result of active and deliberate dishonesty, an adjudication that the Indemnitee
received an improper personal benefit in money, property or services, and (vi)
with respect to any criminal proceeding, an adjudication that the Indemnitee had
reasonable cause to believe his conduct was unlawful, the Indemnitee shall be
considered for the purposes hereof to have been wholly successful with respect
thereto.
(C) Notification and Defense of Claim. As a condition precedent to
his right to be indemnified, the Indemnitee must notify the Corporation in
writing as soon as practicable of any action, suit, proceeding or investigation
involving him for which indemnity will or could be sought. With respect to any
action, suit, proceeding or investigation of which the Corporation is so
notified, the Corporation will be entitled to participate therein at its own
expense and/or to assume the defense thereof at its own expense, with legal
counsel reasonably acceptable to the Indemnitee. After notice from the
Corporation to the Indemnitee of its election so to assume such defense, the
Corporation shall not be liable to the Indemnitee for any legal or other
expenses subsequently incurred by the Indemnitee in connection with such claim,
other than as provided below in this Subsection C. The Indemnitee shall have the
right to employ his own counsel in connection with such claim, but the fees and
expenses of such counsel incurred after notice from the Corporation of its
assumption of the defense thereof shall be at the expense of the Indemnitee
unless (i) the employment of counsel by the Indemnitee has been authorized by
the Corporation, (ii) counsel to the Indemnitee shall have reasonably concluded
that there may be a conflict of interest or position on any significant issue
between the Corporation and the Indemnitee in the conduct of the defense of such
action or (iii) the Corporation shall not in fact have employed counsel to
assume the defense of such action, in each of which cases the fees and expenses
of counsel for the Indemnitee shall be at the expense of the Corporation, except
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as otherwise expressly provided by this Section 3. The Corporation shall not be
entitled, without the consent of the Indemnitee, to assume the defense of any
claim brought by or in the right of the Corporation or as to which counsel for
the Indemnitee shall have reasonably made the conclusion provided for in clause
(ii) above.
(D) Advance of Expenses. Subject to the provisions of Subsection E
below, in the event that the Corporation does not assume the defense pursuant to
Subsection C of this Section of any action, suit, proceeding or investigation of
which the Corporation receives notice under this Section, any expenses
(including attorneys' fees) incurred by an Indemnitee in defending a civil or
criminal action, suit, proceeding or investigation or any appeal therefrom shall
be paid by the Corporation in advance of the final disposition of such matter;
provided, however, that the payment of such expenses incurred by an Indemnitee
in advance of the final disposition of such matter shall be made only upon
receipt of (i) a written affirmation by the Indemnitee of the Indemnitee's good
faith belief that the standard of conduct necessary for indemnification has been
met and (ii) an undertaking by or on behalf of the Indemnitee to repay all
amounts so advanced in the event that it shall ultimately be determined that the
Indemnitee is not entitled to be indemnified by the Corporation as authorized in
this Section. Such undertaking need not be secured and shall be accepted without
reference to the financial ability of the Indemnitee to make such repayment.
(E) Procedure for Indemnification. In order to obtain
indemnification or advancement of expenses pursuant to Subsections A, B or D of
this Section, the Indemnitee shall submit to the Corporation a written request,
including in such request such documentation and information as is reasonably
available to the Indemnitee and is reasonably necessary to determine whether and
to what extent the Indemnitee is entitled to indemnification or advancement of
expenses. Any such indemnification or advancement of expenses shall be made
promptly, and in any event within 60 days after receipt by the Corporation of
the written request of the Indemnitee, unless with respect to requests under
Subsections A or D the Corporation determines within such 60-day period that the
Indemnitee did not meet the applicable standard of conduct set forth in
Subsection A. Such determination shall be made in each instance by (a) a
majority vote of a quorum of the Board of Directors of the Corporation,
consisting of directors, not, at the time, parties to the proceeding
("disinterested directors"), or, if such a quorum cannot be obtained, then by a
majority vote of a committee of the directors, consisting solely of two or more
disinterested directors, who are duly designated to act in the matter by a
majority vote of the full Board of Directors, in which the directors who are
parties may participate, (b) a majority vote of a quorum of the outstanding
shares of stock of all classes entitled to vote for directors, voting as a
single class, which quorum shall consist of stockholders who are not at that
time parties to the action, suit or proceeding in question, (c) special legal
counsel (who may, to the extent permitted by law, be regular legal counsel to
the Corporation) selected by a majority vote of a quorum of the directors
consisting of disinterested directors, or by a majority vote of a committee
consisting of two or more disinterested directors, who are duly designated to
act in the matter by a majority vote of the full Board of Directors, in which
the directors who are parties may participate, or, if the requisite quorum of
the full Board of Directors cannot be obtained therefor and the committee cannot
be established, by a majority vote of the full Board of Directors, in which
directors who are parties may participate, or (d) a court of competent
jurisdiction.
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(F) Remedies. The right to indemnification or advances as granted by
this Section shall be enforceable by the Indemnitee in any court of competent
jurisdiction if the Corporation denies such request, in whole or in part, or if
no disposition thereof is made within the 60-day period referred to above in
Subsection E. Unless otherwise required by law, the burden of proving that the
Indemnitee is not entitled to indemnification or advancement of expenses under
this Section shall be on the Corporation. Neither the failure of the Corporation
to have made a determination prior to the commencement of such action that
indemnification is proper in the circumstances because the Indemnitee has met
the applicable standard of conduct, nor an actual determination by the
Corporation pursuant to Subsection E that the Indemnitee has not met such
applicable standard of conduct, shall be a defense to the action or create a
presumption that the Indemnitee has not met the applicable standard of conduct.
The Indemnitee's expenses (including attorneys' fees) incurred in connection
with successfully establishing his right to indemnification, in whole or in
part, in any such proceeding shall also be indemnified by the Corporation.
(G) Subsequent Amendment. No amendment, termination or repeal of
this Section or of the relevant provisions of the General Corporation Law of
Maryland or any other applicable laws shall affect or diminish in any way the
rights of any Indemnitee to indemnification under the provisions hereof with
respect to any action, suit, proceeding or investigation arising out of or
relating to any actions, transactions or facts occurring prior to the final
adoption of such amendment, termination or repeal.
(H) Other Rights. The indemnification and advancement of expenses
provided by this Section shall not be deemed exclusive of any other rights to
which an Indemnitee seeking indemnification or advancement of expenses may be
entitled under any law (common or statutory), agreement or vote of stockholders
or disinterested directors or otherwise, both as to action in his official
capacity and as to action in any other capacity while holding office for the
Corporation, and shall continue as to an Indemnitee who has ceased to be a
director or officer, and shall inure to the benefit of the estate, heirs,
executors and administrators of the Indemnitee. Nothing contained in this
Section shall be deemed to prohibit, and the Corporation is specifically
authorized to enter into, agreements with officers and directors providing
indemnification rights and procedures different from those set forth in this
Section. In addition, the Corporation may, to the extent authorized from time to
time by its Board of Directors, grant indemnification rights to other employees
or agents of the Corporation or other persons serving the Corporation and such
rights may be equivalent to, or greater or less than, those set forth in this
Section.
(I) Partial Indemnification. If an Indemnitee is entitled under any
provision of this Section to indemnification by the Corporation for some or a
portion of the expenses (including attorneys' fees), judgments, fines or amounts
paid in settlement actually and reasonably incurred by him or on his behalf in
connection with any action, suit, proceeding or investigation and any
appealtherefrom but not, however, for the total amount thereof, the Corporation
shall nevertheless indemnify the Indemnitee for the portion of such expenses
(including attorneys' fees), judgments, fines or amounts paid in settlement to
which the Indemnitee is entitled.
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(J) Insurance. The Corporation may purchase and maintain insurance,
at its expense, to protect itself and any director, officer, employee or agent
of the Corporation or any such person who, while a director, officer, employee
or agent of the Corporation, is or was serving at the request of the Corporation
as a director, officer, partner, trustee, employee or agent of another foreign
or domestic corporation, partnership, joint venture, trust or other enterprise
(including any employee benefit plan) against any expense, liability or loss
asserted against and incurred by him in any such capacity, or arising out of his
status as such, whether or not the Corporation would have the power to indemnify
such person against such expense, liability or loss under the General
Corporation Law of Maryland.
(K) Merger or Consolidation. If the Corporation is merged into or
consolidated with another corporation and the Corporation is not the surviving
corporation, the surviving corporation shall assume the obligations of the
Corporation under this Section with respect to any action, suit, proceeding or
investigation arising out of or relating to any actions, transactions or facts
occurring prior to the date of such merger or consolidation.
(L) Savings Clause. If this Section or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each Indemnitee as to any expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement in
connection with any action, suit, proceeding or investigation, whether civil,
criminal or administrative, including an action by or in the right of the
Corporation, to the fullest extent permitted by any applicable portion of this
Section that shall not have been invalidated and to the fullest extent permitted
by applicable law.
(M) Definitions. Terms used herein and defined in Section 2-418(a)
of the General Corporation Law of Maryland shall have the respective meanings
assigned to such terms in such Section 2-418(a).
(N) Subsequent Legislation. If the General Corporation Law of
Maryland is amended after adoption of this Section to expand further the
indemnification permitted to Indemnitees, then the Corporation shall indemnify
such persons to the fullest extent permitted by the General Corporation Law of
Maryland, as so amended.
Section 4. Board Authorization of Share Issuance.
The Board of Directors of the Corporation shall have the power in its sole
discretion and without limitation, to authorize the issuance at any time and
from time to time of shares of stock of the Corporation, with or without par
value, of any class now or hereafter authorized and of securities convertible
into or exchangeable for shares of the stock of the Corporation, with or without
par value, of any class now or hereafter authorized, for such consideration
(irrespective of the value or amount of such consideration) and in such manner
and by such means as said Board of Directors may deem advisable.
Section 5. Classification or Reclassification of Shares.
The Board of Directors shall have the power in its sole discretion and
without limitation to classify or reclassify, by articles supplementary, any
unissued shares of stock, whether now or hereafter authorized, by setting,
altering or eliminating in any one or more respects, from time to time before
the issuance of such shares, any feature of such shares, including but not
limited to the designation, preferences, conversion or other rights, voting
powers, qualifications and terms and conditions of redemption of, and
limitations as to dividends and any restrictions on, such shares.
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Section 6. Voting Requirements.
Notwithstanding any provision of law to the contrary, except as provided
in Article IX, the affirmative vote of the holders of a majority of the shares
of capital stock issued and outstanding and entitled to vote on any proposed
amendment of the Charter of the Corporation shall be sufficient, valid and
effective, after due authorization, approval and advice by the Board of
Directors, to approve and authorize such amendment. Notwithstanding any
provision of the law to the contrary, the affirmative vote of the holders of a
majority of the shares of capital stock issued and outstanding and entitled to
vote on any transaction for which approval of the stockholders is required by
Section 3-105 of the General Corporation Law of Maryland, or any successor
provision of law of similar import, in addition to any vote of the holders of
Preferred Shares required by the terms of then outstanding Preferred Shares,
shall be sufficient to give the approval required by Section 3-105 or such
successor provision.
Section 7. REIT Qualification.
The Board of Directors shall use its reasonable best efforts to cause the
Corporation and its shareholders to qualify for U.S. federal income tax
treatment in accordance with the provisions of the Code applicable to a REIT. In
furtherance of the foregoing, the Board of Directors shall use its reasonable
best efforts to take such actions as are necessary, and may take such actions as
in its sole judgment and discretion are desirable, to preserve the status of the
Corporation as a REIT, provided, however, that if the Board of Directors
determines in its discretion that it is no longer in the best interests of the
Corporation to continue to have the Corporation qualify as a REIT, the Board of
Directors may revoke or otherwise terminate the Corporation's REIT election
pursuant to Section 856(g) of the Code.
The enumeration and definition of particular powers of the Board of
Directors included in this Article VIII shall in no way be limited or restricted
by reference to or inference from the terms of any other clause of this or any
other Article of the Charter of the Corporation, or construed as or deemed by
inference or otherwise in any manner to exclude or limit any powers conferred
upon the Board of Directors under the General Laws of the State of Maryland now
or hereafter in force.
ARTICLE IX
AMENDMENTS
(a) Right to Amend Articles. Subject to the provisions hereof, the
Corporation reserves the right at any time, and from time to time, to amend,
alter, repeal, or rescind any provision contained herein, including but not
limited to the provisions setting forth the contract and other rights of the
issued and outstanding stock of the Corporation of any class, in the manner now
or hereafter prescribed by law, and other provisions authorized by the laws of
the State of Maryland at the time in force may be added or inserted, in the
manner now or hereafter prescribed by law; and all contract or other rights,
preferences and privileges of whatsoever nature conferred upon shareholders,
directors, officers, employees or any other persons whomsoever by and pursuant
to these Articles of Incorporation, in its present form or as hereafter amended,
are granted subject to this reservation.
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(b) Certain Amendments Requiring Special Shareholder Vote. Any
provision of law, these Articles of Incorporation, including, without
limitation, Article VIII, Section 7, or the By-Laws of the Corporation to the
contrary notwithstanding:
(i) no term or provision of these Articles of Incorporation
may be added, amended or repealed in any respect that would, in the
determination of the Board of Directors, cause the Corporation not to qualify as
a REIT under the Code unless the Board of Directors shall have determined in
accordance with Section 8 of Article VIII that it is no longer in the best
interests of the Corporation to continue to have the Corporation qualify as a
REIT;
(ii) Article VII, Section 2 (classification of directors) and
Section 5 (removal of directors); Article VII, Section 2 (limitation of
liability of officers and directors) and Section 3 (indemnification of officers
and directors); and this Article IX shall not be amended or repealed nor shall
any provision be adopted which is inconsistent with any of the foregoing; and
(iii) no provisions imposing cumulative voting in the election
of directors may be added to these Articles of Incorporation; unless in each
such case, in addition to any vote of the holders of Preferred Shares required
by the terms of then outstanding Preferred Shares, such action is approved by
the affirmative vote of the holders of not less than eighty percent (80%) of the
shares of capital stock of the Corporation issued and outstanding and entitled
to vote on the matter.
IN WITNESS WHEREOF, I have signed these Articles of Incorporation,
acknowledging the same to be my act on this 4th day of October, 2001.
/s/ Kenneth A. Hoxsie
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