-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Q9J58Nx2wHFohlFfsEHiAShf1BJNzjPh588OhF727k2nNZrteFHIFvpn+anv56kA b3vt8Umu4gtrdMeQ0Ph+kw== 0001171520-04-000365.txt : 20041108 0001171520-04-000365.hdr.sgml : 20041108 20041108142245 ACCESSION NUMBER: 0001171520-04-000365 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041108 DATE AS OF CHANGE: 20041108 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRANKLIN STREET PROPERTIES CORP /MA/ CENTRAL INDEX KEY: 0001031316 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 042724223 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-32615 FILM NUMBER: 041125243 BUSINESS ADDRESS: STREET 1: 401 EDGEWATER PL STREET 2: STE 200 CITY: WAKEFIELD STATE: MA ZIP: 01880 BUSINESS PHONE: 7815571300 MAIL ADDRESS: STREET 1: 401 EDGEWATER PLACE STREET 2: STE 200 CITY: WAKEFIELD STATE: MA ZIP: 01880 FORMER COMPANY: FORMER CONFORMED NAME: FRANKLIN STREET PARTNERS LP DATE OF NAME CHANGE: 20010301 10-Q 1 eps1574.txt FRANKLIN STREET PROPERTIES CORP. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10 - Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2004 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period _________ to __________. Commission File Number: 0-32615 Franklin Street Properties Corp. (Exact name of registrant as specified in its charter) Maryland 04-3578653 (State or other jurisdiction of (IRS Employer Identification Number) incorporation or organization) 401 Edgewater Place, Suite 200 Wakefield, MA 01880-6210 (Address of principal executive offices) Registrant's telephone number: (781) 557-1300 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days. YES |X| NO |_| Indicate by check mark whether the registrant is an accelerated filer as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended. YES |X| NO |_| The number of shares of common stock outstanding as of October 29, 2004 was 49,629,763. Franklin Street Properties Corp. Form 10-Q Quarterly Report September 30, 2004 Table of Contents Part I. Financial Information Page ---- Item 1. Financial Statements Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003................................ 3 Consolidated Statements of Income for the three and nine months ended September 30, 2004 and 2003........ 4 Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and 2003............. 5 Notes to Consolidated Financial Statements.............. 6-15 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 16-28 Item 3. Quantitative and Qualitative Disclosures about Market Risk.......................................... 28 Item 4. Controls and Procedures................................. 29 Part II. Other Information Item 1. Legal Proceedings....................................... 30 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds...................................... 30 Item 3. Defaults upon Senior Securities......................... 30 Item 4. Submission of Matters to a Vote of Security Holders..... 30 Item 5. Other Information....................................... 30 Item 6. Exhibits................................................ 30-31 Signatures ........................................................ 32 PART I - FINANCIAL INFORMATION Item 1. Financial Statements Franklin Street Properties Corp. Consolidated Balance Sheets (Unaudited)
September 30, December 31, (in thousands, except shares and par value amounts) 2004 2003 ============================================================================================================== Assets: Real estate investments, at cost: Land $ 71,236 $ 71,236 Buildings and improvements 404,131 403,243 Fixtures and equipment 894 889 - -------------------------------------------------------------------------------------------------------------- 476,261 475,368 Less accumulated depreciation 34,064 25,836 - -------------------------------------------------------------------------------------------------------------- Real estate investments, net 442,197 449,532 Acquired real estate leases, net of accumulated amortization of $3,157 and $1,539 6,346 7,964 Investment in non-consolidated REITs 4,292 -- Assets held for syndication -- 4,117 Cash and cash equivalents 50,630 58,793 Restricted cash 1,039 982 Tenant rent receivables, less allowance for doubtful accounts of $386 and $155, respectively 552 881 Straight-line rent receivables, less allowance for doubtful accounts of $460 and $360, respectively 4,980 4,087 Prepaid expenses 3,475 806 Office computers and furniture, net of accumulated depreciation of $563 and $473, respectively 408 398 Deferred leasing commissions, net of accumulated amortization of $810 and $586, respectively 1,293 969 - -------------------------------------------------------------------------------------------------------------- Total assets $ 515,212 $528,529 ============================================================================================================== Liabilities and Stockholders' Equity: Liabilities: Bank note payable $ -- $ 4,117 Accounts payable and accrued expenses 8,574 5,030 Accrued compensation 1,050 1,545 Tenant security deposits 1,039 982 - -------------------------------------------------------------------------------------------------------------- Total liabilities 10,663 11,674 - -------------------------------------------------------------------------------------------------------------- Commitments and Contingencies Stockholders' Equity: Preferred Stock, $.0001 par value, 20,000,000 shares authorized, none issued or outstanding -- -- Common Stock, $.0001 par value, 180,000,000 shares authorized, 49,629,763 and 49,630,338 issued and outstanding 5 5 Additional paid-in capital 512,813 512,797 Treasury stock, 575 shares, at cost (10) -- Retained earnings (distributions in excess of earnings) (8,665) 3,647 Accumulated undistributed net realized gain on sale of properties 406 406 - -------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity 504,549 516,855 - -------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $ 515,212 $528,529 ==============================================================================================================
See accompanying notes to consolidated financial statements. 3 Franklin Street Properties Corp. Consolidated Statements of Income (Unaudited)
For the For the Three Months Ended Nine Months Ended September 30, September 30, ---------------------------------------------------- (in thousands, except per share amounts) 2004 2003 2004 2003 ==================================================================================================================================== Revenue: Rental $ 16,344 $17,767 $51,411 $32,606 Syndication fees 155 6,019 8,603 11,426 Transaction fees 467 6,128 9,209 11,565 Sponsored REIT revenue 23 1,541 2,357 2,442 Management fees and interest income from loans 185 247 803 837 Equity in earnings of investment in non-consolidated REITs 70 -- 182 -- Other 1 1 13 16 - ------------------------------------------------------------------------------------------------------------------------------------ Total revenue 17,245 31,703 72,578 58,892 - ------------------------------------------------------------------------------------------------------------------------------------ Expenses: Real estate operating expenses 3,496 3,540 10,267 7,125 Real estate taxes and insurance 2,135 2,325 6,702 4,229 Depreciation and amortization 3,287 3,219 9,984 5,464 Sponsored REIT expenses 15 1,365 1,693 2,006 Selling, general and administrative 1,626 1,376 4,920 4,124 Commissions 97 3,006 4,384 5,712 Interest -- 257 517 795 - ------------------------------------------------------------------------------------------------------------------------------------ Total expenses 10,656 15,088 38,467 29,455 - ------------------------------------------------------------------------------------------------------------------------------------ Income before interest income and taxes on income 6,589 16,615 34,111 29,437 Interest income 140 130 489 238 - ------------------------------------------------------------------------------------------------------------------------------------ Income before taxes on income 6,729 16,745 34,600 29,675 Income tax expense (benefit) (216) 1,035 760 1,460 - ------------------------------------------------------------------------------------------------------------------------------------ Income from continuing operations 6,945 15,710 33,840 28,215 Income from discontinued operations -- 56 -- 201 Gain on sale of properties, less applicable income tax -- 4,914 -- 6,335 - ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 6,945 $20,680 $33,840 $34,751 ==================================================================================================================================== Weighted average number of shares outstanding, basic and diluted 49,630 49,630 49,628 35,741 ==================================================================================================================================== Net income per share, basic and diluted, attributable to: Continuing operations $ 0.14 $ 0.32 $ 0.68 $ 0.79 Gain on sale of properties, less applicable income tax -- 0.10 -- 0.18 - ------------------------------------------------------------------------------------------------------------------------------------ Net income per share, basic and diluted $ 0.14 $ 0.42 $ 0.68 $ 0.97 ====================================================================================================================================
See accompanying notes to consolidated financial statements. 4 Franklin Street Properties Corp. Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended September 30, ------------------------ (in thousands) 2004 2003 ==================================================================================================================================== Cash flows from operating activities: Net income $ 33,840 $ 34,751 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization expense 9,984 5,808 Amortization of above market lease 176 -- Gain on sale of real estate assets -- (6,335) Equity in earnings from non-consolidated REITs (182) -- Distributions from non-consolidated REITs 147 -- Shares issued as compensation 162 -- Changes in operating assets and liabilities: Restricted cash (57) 30 Tenant rent receivables, net 329 (312) Straight-line rents, net (893) (454) Prepaid expenses and other assets, net (2,669) (274) Accounts payable and accrued expenses 3,534 (5,114) Accrued compensation (485) 730 Tenant security deposits 57 (30) Payment of deferred leasing commissions (548) (481) - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided by (used for) operating activities 43,395 28,319 - ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from investing activities: Cash acquired through issuance of common stock in merger transaction -- 23,524 Purchase of real estate assets, office computers and furniture, capitalized merger costs (993) (2,246) Investment in non-consolidated REITs (4,257) -- Change in deposits on real estate assets -- 341 Sale of assets held for syndication 4,117 -- Proceeds received on sales of real estate assets -- 21,815 - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided by (used for) investing activities (1,133) 43,434 - ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from financing activities: Distibutions to stockholders (46,152) (25,406) Proceeds from (payments to) bank note payable, net (4,117) -- Purchase of treasury stock (156) -- - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided by (used for) financing activities (50,425) (25,406) - ------------------------------------------------------------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents (8,163) 46,347 Cash and cash equivalents, beginning of period 58,793 22,316 - ------------------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents, end of period $ 50,630 $ 68,663 ==================================================================================================================================== Supplemental disclosure of cash flow information: Cash paid for: Interest $ 51 $ 795 Income taxes 1,450 1,963 Non-cash investing and financing activities: Dividends declared but not paid -- 21,341 Assets acquired through issuance of common stock in merger transaction, net -- 297,648
See accompanying notes to consolidated financial statements. 5 Franklin Street Properties Corp. Notes to Consolidated Financial Statements (Unaudited) 1. Organization, Properties, Basis of Presentation, and Recent Accounting Pronouncements Organization Franklin Street Properties Corp. (together with its subsidiaries, "FSP Corp." or the "Company," known as Franklin Street Partners Limited Partnership, or the "Partnership", prior to January 1, 2002) was formed as a Massachusetts limited partnership on February 4, 1997. In December 2001, the limited partners of the Partnership approved the conversion of the Partnership from a partnership into a corporation (the "Conversion"). The Conversion was effective January 1, 2002, and was accomplished as a tax-free reorganization by merging the Partnership with and into a wholly owned subsidiary, Franklin Street Properties Corp., with the subsidiary as the surviving entity. In 2002, the Company elected to be taxed as a real estate investment trust ("REIT"). As part of the Conversion, all of the Partnership's outstanding units were converted on a one-for-one basis into 24,586,249 shares of common stock of the Company. The Conversion was accounted for as a reorganization of affiliated entities, with assets and liabilities recorded at their historical costs. On May 30, 2003, the shareholders of the Company approved the Company's acquisition by merger of 13 REITs (the "Target REITs"). The mergers were effective June 1, 2003 and, as a result, the Company issued 25,000,091 shares in a tax-free exchange for all the outstanding preferred shares of the Target REITs. The mergers were accounted for as a purchase and the acquired assets and liabilities were recorded at their fair value. The Company operates in two business segments: real estate operations and investment banking/investment services. As part of the Company's real estate operations segment, FSP Property Management LLC, a wholly owned subsidiary of the Company, provides asset management and property management services for the Company's properties and for the Sponsored REITs (as defined below). As part of the Company's investment banking/investment services segment, FSP Investments LLC, a wholly owned subsidiary of the Company, provides real estate investment and broker/dealer services. FSP Investments' services include: (i) the organization of REIT entities (the "Sponsored REITs"), which are syndicated through private placements; (ii) the acquisition of real estate on behalf of the Sponsored REITs; and (iii) the sale of preferred stock in the Sponsored REITs. As of September 30, 2004, the Company had a non-controlling interest in 12 Sponsored REITs. Properties The following table summarizes the Company's investment in real estate assets, excluding assets held for syndication: As of September 30, 2004 2003 --------------- --------------- Residential real estate Number of properties 4 4 Number of apartments 837 837 Commercial real estate Number of properties 24 24 Square feet 3,049,357 3,049,357 6 Franklin Street Properties Corp. Notes to Consolidated Financial Statements (Unaudited) 1. Organization, Properties, Basis of Presentation and Recent Accounting Pronouncements (continued) Basis of Presentation The unaudited consolidated financial statements of the Company include all the accounts of the Company and its wholly and majority owned subsidiaries. All significant intercompany balances and transactions have been eliminated. These financial statements should be read in conjunction with the Company's financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for its fiscal year ended December 31, 2003, as filed with the Securities and Exchange Commission. 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. Operating results for the three and nine months ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004 or for any other period. Certain prior-year balances have been reclassified in order to conform to the current-year presentation. Recent Accounting Standards In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities." In December 2003, the FASB revised FIN 46 with certain modifications and clarifications. The objective of this interpretation is to provide guidance on how to identify a variable interest entity ("VIE") and determine when the assets, liabilities, non-controlling interests, and results of operations of a VIE need to be included in a company's consolidated financial statements. A VIE exists when either the total equity investment at risk is not sufficient to permit the entity to finance its activities by itself, or the equity investors lack one of three characteristics associated with owning a controlling financial interest. Application of this guidance was effective for all enterprises with VIEs created after January 31, 2003. In December 2003, FASB issued a revised FIN 46 which provided for the deferral of the effective date of the interpretation to January 1, 2004, for VIEs created prior to January 31, 2003. The adoption of FIN 46 had no effect on our financial statements. 2. Investment Banking/Investment Services Activity During the nine months ended September 30, 2004, the Company sold on a best efforts basis, through private placements, the preferred stock in the following Sponsored REITs:
Date Syndication Gross Proceeds Sponsored REIT Property Location Completed (in thousands) ------------------------------------- ----------------------- --------------------- ---------------- FSP Blue Lagoon Drive Corp. Miami, FL January 30, 2004(1) $ 3,925(2) FSP Eldridge Green Corp. Houston, TX March 25, 2004 45,250 FSP Highland Place I Corp. Englewood, CO May 13, 2004 21,000 FSP Satellite Place Corp. Duluth, GA June 21, 2004 27,700 FSP 1441 Main Street Corp. Columbia, SC July 26, 2004 37,000 ------------- Total $ 134,875 =============
1. The syndication of FSP Blue Lagoon Drive Corp. commenced in the fourth quarter of 2003. 2. Reflects gross proceeds received in 2004 by FSP Blue Lagoon Drive Corp., out of an aggregate of $54,975,000 raised in the syndication from outside investors. 7 Franklin Street Properties Corp. Notes to Consolidated Financial Statements (Unaudited) 2. Investment Banking/Investment Services Activity (continued) Of the $134,875,000 gross proceeds from the sale of preferred stock in the Sponsored REITs, approximately $49,175,000 was syndicated in the three months ended March 31, 2004; $83,050,000 was syndicated in the three months ended June 30, 2004; and $2,650,000 was syndicated in the three months ended September 30, 2004. The Company has in the past acquired by merger Sponsored REITs and entities similar to Sponsored REITs. On August 13, 2004 the Company entered into a merger agreement to acquire four Sponsored REITs (the "Merger Agreement"). The Company's business model for growth includes the potential acquisition by merger of Sponsored REITs in the future. However, except pursuant to the Merger Agreement, the Company has no legal or any other enforceable obligation to acquire or to offer to acquire any Sponsored REIT. In addition, any offer (and the related terms and conditions) that might be made in the future to acquire any Sponsored REIT would require the approval of the boards of directors of the Company and the Sponsored REIT and the approval of the shareholders of the Sponsored REIT, and any such acquisition may also require the approval of the shareholders of the Company. 3. Related Party Transactions and Investments in Non-consolidated Entities Syndication fees, Transaction fees and Sponsored REIT revenue and expenses: The Company typically purchases and retains a non-controlling common stock ownership interest in the Sponsored REITs that it has organized. These ownership interests have virtually no economic benefit or risk. At September 30, 2004, December 31, 2003 and September 30, 2003, the Company had ownership interests in twelve, eight and seven Sponsored REITs, respectively. Summarized financial information for these Sponsored REITs is as follows: September 30, December 31, (unaudited) 2004 2003 --------------- -------------- (in thousands) Balance Sheet Data: Real estate, net $ 374,243 $ 257,700 Other assets 49,857 53,646 Total liabilities (8,847) (18,129) -------------------------------- Shareholders' equity $ 415,253 $ 293,217 ================================
For the For the Three Months Ended Nine Months Ended September 30, September 30, 2004 2003 2004 2003 ---------------------------------------------------- (in thousands) Operating Data: Rental revenue $ 14,522 $ 9,077 $ 41,076 $ 19,934 Other revenue 141 47 383 122 Operating and maintenance expenses (5,684) (2,873) (13,896) (6,535) Depreciation and amortization (2,719) (1,441) (8,966) (3,708) Interest expense and commitment fees (154) (6,155) (8,403) (11,751) ---------------------------------------------------- Net income (loss) $ 6,106 $(1,345) $ 10,194 $ (1,938) ====================================================
The Company's proportionate share of revenue and expenses prior to completion of the syndication from these Sponsored REITs is shown in the following table: 8 Franklin Street Properties Corp. Notes to Consolidated Financial Statements (Unaudited) 3. Related Party Transactions and Investments in Non-consolidated Entities (continued) For the For the Three Months Ended Nine Months Ended September 30, September 30, 2004 2003 2004 2003 ------------------------------------------------------ (in thousands) Revenue $ 23 $ 1,541 $ 2,357 $ 2,442 Expenses (15) (1,365) (1,693) (2,006) ------------------------------------------------------ Net $ 8 $ 176 $ 664 $ 436 ====================================================== The Company provided syndication and real estate acquisition advisory services for Sponsored REITs in 2004 and 2003. For the three months ended September 30, 2004 and 2003, syndication fees were approximately $0.2 million and $6.0 million, respectively, and transaction fees were approximately $0.5 million and $6.1 million, respectively. For the nine months ended September 30, 2004 and 2003, syndication fees were approximately $8.6 million and $11.4 million, respectively, and transaction fees were approximately $9.2 million and $11.6 million, respectively. Management fees and interest income from loans: Asset management fees charged by the Company to the Sponsored REITs and reported as revenue by the Company amounted to approximately $183,000 and $85,000 for the three months ended September 30, 2004 and 2003, respectively, and $438,000 and $383,000 for the nine months ended September 30, 2004 and 2003, respectively. Asset management fees range from 1% to 5% of collected rents and the applicable contracts are cancelable with 30 days' notice. The Company is typically entitled to interest on funds advanced to Sponsored REITs. The Company recognized interest income of approximately $2,000 and $162,000 for the three months ended September 30, 2004 and 2003, respectively, and $365,000 and $454,000 for the nine months ended September 30, 2004 and 2003, respectively, relating to these loans. Equity in earnings of investment in non-consolidated REITs: In January 2004 the Company purchased 49.25 preferred shares or 8.22% of Blue Lagoon for $4,248,000 (which represented $4,925,000 at the offering price net of commissions of $394,000 and loan fees of $283,000 that were excluded). The Company recognized equity in earnings resulting from its interest in preferred stock of Blue Lagoon of $70,000 and $182,000 for the three and nine months ended September 30, 2004, respectively. The Company received $88,000 and $147,000 in dividends for the three and nine months ended September 30, 2004, respectively. 4. Bank Note Payable The Company has a revolving line of credit agreement (the "Loan Agreement") with a group of banks providing for borrowings at the Company's election of up to $125.0 million. Borrowings under the Loan Agreement bear interest at either the bank's base rate or a variable LIBOR rate, as defined. There were no borrowings at September 30, 2004, and as of December 31, 2003 there was $4,117,000 outstanding. The Loan Agreement includes restrictions on property liens and requires compliance with various financial covenants. Financial covenants include the maintenance of at least $1.5 million in operating cash accounts, a minimum tangible net worth and compliance with various debt and operating income ratios, as defined in the Loan Agreement. The Company was in compliance with the Loan Agreement's financial covenants as of September 30, 2004. The Loan Agreement matures on August 18, 2005. 5. Net Income Per Share Basic net income per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue shares are convertible into shares. There were no potential dilutive shares outstanding at or during the periods ended September 30, 2004 and 2003. 9 Franklin Street Properties Corp. Notes to Consolidated Financial Statements (Unaudited) 6. Business Segments The Company operates in two business segments: real estate operations, which includes real estate leasing, interim acquisition financing and asset/property management and investment banking/investment services, which include real estate acquisition and broker/dealer services. The Company has identified these segments because this discrete information is the basis upon which management makes decisions regarding resource allocation and performance assessment. The accounting policies of the reportable segments are the same as those described in the "Significant Accounting Policies" set forth in Note 2 to the Company's audited financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2003. The Company's segments are located in the United States of America. The Company evaluates the performance of its reportable segments based on Cash Available for Distribution ("CAD") as management believes that CAD represents the most accurate measure of the reportable segment's activity and is the basis for distributions paid to equity holders. The Company defines CAD as: net income as computed in accordance with accounting principles generally accepted in the United States of America ("GAAP"); plus certain non-cash items included in the computation of net income (depreciation and amortization, gain or loss on the sale of real estate, equity in earnings from non-consolidated REITs net of cash received, certain non-cash compensation expenses and straight-line rent adjustments); plus the net proceeds from the sale of land; less capital expenditures and payments for deferred leasing commissions, plus proceeds from (payments to) cash reserves established at the acquisition date of the property. Depreciation and amortization, gain or loss on the sale of real estate, equity in earnings from non-consolidated REITs net of cash received, non-cash compensation and straight-line rents are an adjustment to CAD, as these are non-cash items included in net income. Capital expenditures, payments of deferred leasing commissions and the proceeds from (payments to) the funded reserve are an adjustment to CAD, as they represent cash items not reflected in net income. The funded reserve represents funds that the Company has set aside in anticipation of future capital needs. These reserves are typically used for the payment of capital expenditures, deferred leasing commissions and certain tenant allowances; however, there are no legal restrictions on their use and they may be used for any business purpose. CAD should not be considered as an alternative to net income (determined in accordance with GAAP), as an indicator of the Company's financial performance, nor as an alternative to cash flows from operating activities (determined in accordance with GAAP), nor as a measure of the Company's liquidity, nor is it necessarily indicative of sufficient cash flow to fund all of the Company's needs. Other real estate companies may define CAD in a different manner. It is at the Company's discretion to retain a portion of CAD for operational needs. We believe that in order to facilitate a clear understanding of the financial results of the Company, CAD should be examined in connection with net income and cash flows from operating, investing and financing activities in the consolidated financial statements. 10 Franklin Street Properties Corp. Notes to Consolidated Financial Statements (Unaudited) 6. Business Segments (continued) Cash Available for Distribution by business segment is as follows (in thousands):
Rental Investment Banking/ Operations Investment Services Totals ------------------ ------------------- ------------------ Three months ended March 31, 2003 Net Income $ 6,986 $ 302 $ 7,288 Depreciation and amortization 901 30 931 Straight line rent 432 -- 432 Gain on sale of property (1,421) -- (1,421) Capital expenditures (183) -- (183) Payment of deferred leasing costs (53) -- (53) Proceeds from funded reserve 191 -- 191 ------------------ ------------------ ------------------ Cash Available for Distribution $ 6,853 $ 332 $ 7,185 ================== ================== ================== Three months ended June 30, 2003 Net Income $ 6,474 $ 309 $ 6,783 Depreciation and amortization 1,530 (23) 1,507 Straight line rent 208 -- 208 Capital expenditures and capitalized merger costs (1,525) -- (1,525) Payment of deferred leasing costs (94) -- (94) Proceeds from funded reserve 615 -- 615 ------------------ ------------------ ------------------ Cash Available for Distribution $ 7,208 $ 286 $ 7,494 ================== ================== ================== Three months ended September 30, 2003 Net income $ 19,190 $ 1,490 $ 20,680 Depreciation and amortization 3,267 25 3,292 Straight line rent (1,015) -- (1,015) Gain on sale of property (4,914) -- (4,914) Capital expenditures; capitalized merger costs (331) (207) (538) Payment of deferred leasing costs (334) -- (334) Proceeds from funded reserve 824 -- 824 ------------------ ------------------ ------------------ Cash Available for Distribution $ 16,687 $ 1,308 $ 17,995 ================== ================== ================== Nine months ended September 30, 2003 Net income $ 32,650 $ 2,101 $ 34,751 Depreciation and amortization 5,698 32 5,730 Straight line rent (375) -- (375) Loss (gain) on sale of property (6,335) -- (6,335) Capital expenditures; capitalized merger costs (2,039) (207) (2,246) Payment of deferred leasing costs (481) -- (481) Proceeds from funded reserves 1,630 -- 1,630 ------------------ ------------------ ------------------ Cash Available for Distribution $ 30,748 $ 1,926 $ 32,674 ================== ================== ==================
11 Franklin Street Properties Corp. Notes to Consolidated Financial Statements (Unaudited) 6. Business Segments (continued) Cash Available for Distribution by business segment is as follows (in thousands):
Rental Investment Banking/ Operations Investment Services Totals ------------------ ------------------- ------------------ Three months ended March 31, 2004 Net Income $ 12,739 $ 480 $ 13,219 Depreciation and amortization 3,235 24 3,259 Straight line rent revenue (340) -- (340) Non-cash compensation expense -- 162 162 Capital expenditures (100) (17) (117) Payment of deferred leasing costs (151) -- (151) Equity in earnings from non-consolidated REITs, net of cash received (44) -- (44) Proceeds from funded reserves 251 -- 251 ------------------ ------------------ ------------------ Cash Available for Distribution $ 15,590 $ 649 $ 16,239 ================== ================== ================== Three months ended June 30, 2004 Net Income $ 12,780 $ 896 $ 13,676 Depreciation and amortization 3,501 55 3,556 Straight line rent revenue (514) -- (514) Capital expenditures (430) (72) (502) Payment of deferred leasing costs (101) -- (101) Payments to (proceeds from) funded reserve 531 -- 531 Equity in earnings from non-consolidated REITs, net of cash received (9) -- (9) ------------------ ------------------ ------------------ Cash Available for Distribution $ 15,758 $ 879 $ 16,637 ================== ================== ================== Three months ended September 30, 2004 Net Income $ 7,247 $ (302) $ 6,945 Depreciation and amortization 3,311 34 3,345 Straight line rent revenue (39) -- (39) Capital expenditures (363) (11) (374) Payment of merger costs (80) -- (80) Payment of deferred leasing costs (296) -- (296) Payments to (proceeds from) funded reserve 659 -- 659 Equity in earnings from non-consolidated REITs, net of cash received 18 -- 18 ------------------ ------------------ ------------------ Cash Available for Distribution $ 10,457 $ (279) $ 10,178 ================== ================== ================== Nine months ended September 30, 2004 Net Income $ 32,766 $ 1,074 $ 33,840 Depreciation and amortization 10,047 113 10,160 Straight line rent revenue (893) -- (893) Capital expenditures (893) (100) (993) Payment of merger costs (80) -- (80) Payment of deferred leasing costs (548) -- (548) Payments to (proceeds from) funded reserve 1,441 -- 1,441 Non-cash compensation -- 162 162 Equity in earnings from non-consolidated REITs, net of cash received (35) -- (35) ------------------ ------------------ ------------------ Cash Available for Distribution $ 41,805 $ 1,249 $ 43,054 ================== ================== ==================
12 Franklin Street Properties Corp. Notes to Consolidated Financial Statements (Unaudited) 6. Business Segments (continued) The following table is a summary of other financial information by business segment (in thousands):
Rental Investment Banking/ Operations Investment Services Totals ------------------ ------------------- ------------------ Three months ended September 30, 2004: Revenue $ 16,775 $ 470 $ 17,245 Interest Income 129 11 140 Interest Expense -- -- -- Capital Expenditures 363 11 374 Total assets at September 30, 2004 $ 511,641 $ 3,571 $ 515,212 Three months ended September 30, 2003: Revenue $ 25,048 $ 6,655 $ 31,703 Interest Income 112 18 130 Interest Expense 257 -- 257 Income from discontinued operations 56 -- 56 Gain on sale of property 4,914 -- 4,914 Capital Expenditures 331 207 538 Total assets at September 30, 2003 $ 529,800 $ 9,819 $ 539,619 Nine months ended September 30, 2004: Revenue $ 62,524 $ 10,054 $ 72,578 Interest Income 457 32 489 Interest Expense 517 -- 517 Capital Expenditures 893 100 993 Total assets at September 30, 2004 $ 511,641 $ 3,571 $ 515,212 Nine months ended September 30, 2003: Revenue $ 46,295 $ 12,597 $ 58,892 Interest Income 180 58 238 Interest Expense 795 -- 795 Income from discontinued operations 201 -- 201 Gain on sale of property 6,335 -- 6,335 Capital Expenditures 2,039 207 2,246 Total assets at September 30, 2003 $ 529,800 $ 9,819 $ 539,619
13 Franklin Street Properties Corp. Notes to Consolidated Financial Statements (Unaudited) 7. Cash Dividends The Company declared and paid dividends as follows (in thousands, except per share amounts): Dividends Per Total Quarter Paid Share Dividends ------------------------------- --------------- --------------- First Quarter of 2004 $0.31 $ 15,382 Second Quarter of 2004 0.31 15,385 Third Quarter of 2004 0.31 15,385 --------------- $ 46,152 =============== 8. Income Taxes The Company has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"). As a REIT, the Company generally is entitled to a tax deduction for 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 income that must be distributed annually. One such restriction is that the Company generally cannot own more than 10% of the voting power or value of the securities of any one issuer unless the issuer is itself a REIT or a "taxable REIT subsidiary" ("TRS"). The Company's ownership of securities in all TRSs generally cannot exceed 20% of the value of all of the Company's assets and, when considered together with other non-real estate assets, cannot exceed 25% of the value of all of the Company's assets. Effective January 1, 2001, FSP Investments has elected to be treated as a TRS. As a result, FSP Investments operates as a taxable corporation under the Code and has accounted for income taxes in accordance with the provisions of Statement of Financial Accounting Standard ("SFAS") No. 109, "Accounting for Income Taxes." Taxes are provided when FSP Investments has net profits for both financial statement and income tax purposes. Income taxes are recorded based on the future tax effects of the difference between the tax and financial reporting bases of the Company's assets and liabilities. In estimating future tax consequences, potential future events are considered except for potential changes in income tax law or in rates. The income tax expense reflected in the consolidated statement of income relates only to FSP Investments. The expense differs from the amounts computed by applying the Federal statutory rate of 35% to income before income taxes as follows:
For the For the Nine Months Nine Months Ended Ended (in thousands) September 30, 2004 September 30, 2003 ------------------ ------------------ Federal income tax expense at statutory rate $ 640 $ 1,235 Increase in taxes resulting from: State income taxes, net of federal impact 105 215 Other 15 10 ------------------ ------------------ $ 760 $ 1,460 ================== ==================
No deferred income taxes were provided as there were no material temporary differences between the financial reporting basis and the tax basis of FSP Investments. 14 Franklin Street Properties Corp. Notes to Consolidated Financial Statements (Unaudited) 9. Merger Transactions On June 1, 2003, the Company issued approximately 25 million shares of common stock, $0.0001 par value per share in exchange for all of the outstanding preferred stock of 13 Sponsored REITs it acquired by merger. The results of operations for each of the acquired Sponsored REITs have been included in the Company's consolidated financial statements since that date. The merger transactions were structured as exchanges of shares and no cash was involved. The aggregate purchase price for the 13 Sponsored REITs was approximately $321 million. On the acquisition date, for each Sponsored REIT, the increase between the appraised value of the property and the historical cost of the property was allocated to real estate investments and leases, including lease origination costs. Lease origination costs represent the value associated with acquiring an in-place lease (i.e. the market cost to execute a similar lease, including leasing commission, legal, vacancy, and other related costs). The value assigned to buildings approximates their replacement cost; the value assigned to land approximates its appraised value; and the value assigned to leases approximates their fair value. Other assets and liabilities are recorded at their historical costs, which approximates fair value. Pro forma operating results for the Company and the 13 Sponsored REITs the Company acquired during 2003 are shown in the following table. The results assume that the mergers occurred and the shares of the Company's common stock were issued on January 1, 2003 and are not necessarily indicative of what the Company's actual financial position or results of operations would have been for the period indicated, nor do they purport to represent the results of operations for any future period. For the Nine Months Ended September 30, (in thousands) 2003 ------------------ Revenue $ 77,295 Expenses (39,792) Interest income 354 Taxes on income (1,460) ------------------ Net income from continuing operations 36,397 Income from discontinued operations 201 Gain on sale of property 6,335 ------------------ Net income $ 42,933 ================== Weighted average shares outstanding 49,630 ================== Net income per share $ 0.87 ================== 10. Subsequent Events The Company declared a dividend of $0.31 per share on October 29, 2004, to shareholders of record on October 29, 2004. During October 2004 the Company borrowed approximately $117 million and repaid $16 million under its Loan Agreement. The Company used the borrowed funds to make interim mortgage loans to newly formed Sponsored REITs. 15 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report and in our Annual Report on Form 10-K for the year ended December 31, 2003. Historical results and percentage relationships set forth in the Consolidated Statements of Income contained in the financial statements, including trends which might appear, should not be taken as necessarily indicative of future operations. This discussion may also contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. For example, statements containing the words "believes," "anticipates," "plans," "expects," "estimates," "intends," "may," "will" and similar expressions may be forward-looking statements. For purposes of these Acts, any statement that is not a statement of historical fact may be deemed a forward-looking statement. The forward-looking statements found in this Quarterly Report on Form 10-Q are based on current judgments and current knowledge of management, which are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those indicated in such forward-looking statements. Accordingly, readers are cautioned not to place undue reliance on forward-looking statements. Investors are cautioned that our forward-looking statements involve risks and uncertainty, including without limitation, changes in economic conditions in the markets in which we own properties, expectations with respect to individual properties owned by us, changes in the demand by investors for investment in Sponsored REITs, risks of a lessening of demand for the types of real estate owned by us, changes in government regulations, and expenditures that cannot be anticipated such as utility rate and usage increases, unanticipated repairs, additional staffing, insurance increases and real estate tax valuation reassessments. See the factors set forth below under the caption, "Certain Factors That May Affect Future Results". Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We will not update any of the forward-looking statements after the date this quarterly report is filed to conform them to actual results or to changes in our expectations that occur after such date, other than as required by law. Overview FSP Corp. operates in two business segments: real estate operations and investment banking/investment services. The real estate operations segment involves real estate rental operations, leasing, interim acquisition financing and asset/property management services. The investment banking/investment services segment involves the provision of real estate investment and broker/dealer services that include the organization of Sponsored REITs, the acquisition of real estate on behalf of Sponsored REITs and the syndication of Sponsored REITs through sale of preferred stock in private placements. The main factor that affects our real estate operations is the broad economic market conditions in the United States. These market conditions affect the occupancy levels and the rent levels on both a national and local level. We have no influence on the national market conditions. We look to acquire quality properties in good locations in order to lessen the impact of downturns in the local markets and to take advantage of upturns in these same local markets when they occur. Our investment banking/investment services customers are primarily institutions and high net-worth individuals. To the extent that the broad capital markets affect these investors, our business is also affected. These investors have many investment choices. We must continually search for real estate at a price and at a competitive risk/reward rate of return that meets our customer's risk/reward profile for providing a stream of income and as a long-term hedge against inflation. Critical Accounting Policies We have certain critical accounting policies that are subject to judgments and estimates by our management and uncertainties of outcome that affect the application of these policies. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances. On an on-going basis, we evaluate our estimates. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current information. The accounting policies that we believe are most critical to the understanding of our financial position and results of operations, and that require significant management estimates and judgments, are discussed in Item 7, Management's Discussion and Analysis of Financial Conditions and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2003. 16 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Critical Accounting Policies (continued) Critical accounting policies are those that have the most impact on the reporting of our financial condition and results of operations and those requiring significant judgments and estimates. We believe that our judgments and assessments are consistently applied and produce financial information that fairly presents our results of operations. No changes to our critical accounting policies have occurred since our Annual Report on Form 10-K for the year ended December 31, 2003 except with respect to our accounting policy regarding "Ownership of Stock in a Sponsored REIT" as described below. This policy was originally reported on our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2004. Ownership of Stock in a Sponsored REIT We typically purchase and retain a common stock ownership in a Sponsored REIT following syndication, and earn an ongoing asset and/or property management fee. Accordingly, transaction fee revenue and our share of the operations of these Sponsored REITs are not classified as discontinued operations due to our continuing involvement. Our investment in non-consolidated REITs represents our investment in the common and preferred stock in Sponsored REITs. We account for these investments using the equity method of accounting as we exercise significant influence over, but do not control, these entities. Under the equity method of accounting we record our percentage share of net earnings from these investments and our investment balance of these entities is subsequently adjusted. Equity in the losses of these entities is not recognized to the extent that the investment balance would become negative. Dividends are recognized as income after the investment balance is reduced to zero. Under the equity method, accounting policy judgments made by the Sponsored REITs could have a material effect on our net income. Also, if we determine that there is an other than temporary decline in the fair value of any of these investments, the investment balance would be written down to fair value and the amount of the write down would be included in our earnings. In evaluating the fair value of these investments, we have considered, among other things, the financial condition and near term prospects of the investment, earnings trends, asset quality, asset valuation models, and the financial condition and prospects for its industry. Incorrect assumptions may incorrectly report the carrying value of the asset and incorrectly report revenue. Trends and Uncertainties Real Estate Operations Our portfolio of real properties averaged 90% leased at the end of the third quarter. Most of the leasing activity for the quarter consisted of lease renewals. The major lease renewals took place at Gateway Crossing in Columbia, Maryland where approximately 60,000 square feet of space was scheduled to expire during the quarter. Approximately 45,000 square feet out of the 60,000 square feet of space has been renewed on a long-term basis, and the balance is currently leased on a short-term basis. The lease at Lyberty Way in Westford, Massachusetts for 104,700 square feet expires on October 31, 2004, which represents approximately 1.4% of our revenue. We are currently marketing the space. We expect the competition for office tenants that we experienced in the first three quarters of the year to continue in the fourth quarter of 2004 and to cause leasing commissions, tenant improvement costs and rent concessions to remain high. We saw little change in rents in the third quarter in markets where we are actively leasing, but we cannot predict if that trend will continue or if there will be a change in rents during the fourth quarter. Our three Houston area apartment projects and our Baton Rouge apartment project have been able to maintain their occupancy rates. We, along with other Class A apartments in the local market, have lowered rents to draw tenants away from Class B apartments. We cannot predict how much longer these trends will continue or when the trends may reverse. Utility costs are expected to increase throughout the portfolio in the fourth quarter. While many of our leases allow us to pass the increase in utility costs on to the tenants, not all of our leases allow us to do so. We have to pay for 100% of utility costs if the space becomes vacant. 17 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) The following table summarizes property wholly owned by us as of the dates indicated: September 30, -------------------------- 2004 2003 Residential: Number of properties 4 4 Number of apartment units 837 837 Commercial: Number of properties 24 24 Square footage 3,049,357 3,049,357 Investment Banking/Investment Services Unlike our real estate operations business, which provides a rental revenue stream which is ongoing and recurring in nature, our investment banking/investment services business is transactional in nature. Both the number of Sponsored REIT syndications completed and the amount of equity raised in 2003 were below our expectations. Syndication business in the first three quarters of 2004 was also below already reduced expectations. The third quarter of 2004 had the worst investment banking activity in our Company's modern history as we completed the syndication of only one Sponsored REIT. Future business in this area is very unpredictable. Our property acquisition executives continue to be concerned about high valuation levels for prime commercial investment real estate for the remainder of 2004 and into 2005. We believe that a combination of factors, including relatively low interest rates, a recovering general economy and increased capital allocation to real estate assets, is increasing prices on many properties we would have an interest in acquiring. We believe this general price increase is causing capitalization rates to fall and prices per square foot to rise. Specifically, our acquisition executives fear that we will not be able to purchase enough property for the remainder of 2004 and at the start of 2005 at a price acceptable under our investment criteria to grow our overall investment banking/investment services business at targeted levels. In the first three quarters of 2004 investment demand by our client base exceeded our ability to acquire acceptable properties. If this situation continues into 2005, lower revenues from this business could reduce the cash available for distribution to stockholders as dividends. However, we believe that the same capital market forces that are causing higher real estate prices and difficulties in achieving property acquisition goals are also presenting some appealing opportunities for the dispositions of certain of our assets. Although our general intention is to hold our properties for long-term appreciation, if opportunities present themselves that are sufficiently attractive, we may take advantage of the market environment in 2004 and early 2005 and sell certain selected real estate assets. The sale of these assets could generate cash gains available for distribution to shareholders as dividends. We continue to rely solely on our in-house investment executives to access interested investors who have capital they can afford to place in an illiquid position for an indefinite period of time (i.e., invest in a Sponsored REIT). While we continue to expand our in-house sales force, uncertainties always exist as to whether we are capable, either through our existing client base or through new clients, of raising the amount of capital invested in Sponsored REITs to achieve future performance objectives. 18 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Results of Operations The following table shows variance in dollars for the three and nine months ended September 30, 2004 and 2003:
Variance Variance For the three For the nine (in thousands) months ended months ended September 30, September 30, 2004 and 2003 2004 and 2003 ------------- ------------- Revenue Rental operations Rental $ (1,423) $ 18,805 Transaction fees (5,341) (2,636) Sponsored REIT revenue (1,518) (85) Management fee and interest income from loans (62) (34) Equity in earnings of investment 70 182 Other -- (3) ------------- ------------- Total rental operations (8,274) 16,229 ------------- ------------- Investment banking/investment services Syndication fees (5,864) (2,823) Transaction fees (320) 280 ------------- ------------- Total investment banking/investment services revenue (6,184) (2,543) ------------- ------------- Total revenue (14,458) 13,686 ------------- ------------- Expenses Rental operations Rental operating expenses (44) 3,142 Real estate taxes and insurance (190) 2,473 Depreciation and amortization 75 4,439 Sponsored REIT expense (1,350) (313) Selling, general and administrative 483 391 Interest expense (257) (278) ------------- ------------- Total rental operations (1,283) 9,854 ------------- ------------- Investment banking/investment services Selling, general and administrative (249) 405 Commission expense (2,909) (1,328) Depreciation and amortization 9 81 ------------- ------------- Total investment banking/investment services (3,149) (842) ------------- ------------- Total expenses (4,432) 9,012 ------------- ------------- Income before interest income and taxes on income (10,026) 4,674 Interest income 10 251 Taxes on income (1,251) (700) ------------- ------------- Income from continuing operations (8,765) 5,625 Income from discontinued operations (56) (201) Gain on sale of real estate from discontinued operations (4,914) (6,335) ------------- ------------- Net income $ (13,735) $ (911) ============= =============
19 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Comparison of the three months ended September 30, 2004 to the three months ended September 30, 2003: We completed the partial syndication of one Sponsored REIT in the three months ended September 30, 2004. The gross proceeds generated by this syndication were $2.7 million, a decrease of $92.8 million compared to the gross proceeds of $95.5 million in the comparable period in 2003 from the syndication of two Sponsored REITs. We operated 28 properties for the three-month period ended September 30, 2004, and 2003. The results of operations for the two properties that were sold in 2003 have been classified as discontinued operations. Revenue Total revenues decreased $14.5 million, or 46%, to $17.2 million for the three months ended September 30, 2004, as compared to $31.7 million for the comparable period in 2003. Income from rental operations was $16.8 million for the three months ended September 30, 2004, a decrease of $8.3 million, or 33%, compared to the three months ended September 30, 2003. The decrease is primarily attributable to: o A decrease in rental revenue of $1.4 million relating to lower reimbursable expenses, expiring leases renewed at lower rates and slightly reduced occupancy rates; o A decrease in transaction fees of $5.3 million as a result of decreased syndication activity; and o A decrease in Sponsored REIT revenue of $1.5 million as a result of decreased syndication activity. Investment banking/investment services revenue was $0.5 million for the three months ended September 30, 2004, a decrease of $6.2 million, or 93%, compared to the three months ended September 30, 2003. The decrease is attributable to the decrease in syndication activity. Expenses Total expenses were $10.7 million for the three months ended September 30, 2004, a decrease of $4.4 million, or 29%, compared to the three months ended September 30, 2003. Expenses for rental operations were $9.7 million for the three months ended September 30, 2004, a decrease of $1.3 million, or 12%, compared to the three months ended September 30, 2003. The decrease is attributable to: o A decrease of real estate taxes of $0.2 million primarily as a result of reduced assessments; o A decrease of $1.4 million of Sponsored REIT expenses as a result of decreased syndication activity; and o A decrease in interest expense of $0.3 million as a result of decreased syndication activity. These expenses were offset by an increase in selling, general and administrative expenses of $0.5 million of which $0.2 million relates to expenses allocated from investment banking/investment services and the balance primarily relates to an increase in cost of corporate governance and related professional fees. Expenses for investment banking/investment services were $1.0 million for the three months ended September 30, 2004, a decrease of $3.1 million, or 76%, compared to the three months ended September 30, 2003. The increase is attributable to: o A decrease of $2.9 million of commission expenses relating to decreased syndication activity; o A decrease of $0.2 million in selling, general and administrative expenses primarily relating to expenses allocated to real estate operations costs; Interest income for the three month period ended September 30, 2004 was consistent with the comparable period of 2003. Taxes on income decreased $1.3 million as a result of decreased syndication activity. The tax rate was consistent with the comparable period of 2003. 20 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Comparison of the nine months ended September 30, 2004 to the nine months ended September 30, 2003: We completed the syndication of five Sponsored REITs in the nine months ended September 30, 2004. The gross proceeds generated by these syndications were $134.9 million, a decrease of $45.8 million compared to gross proceeds of $180.7 million in the comparable period in 2003 from the syndication of four Sponsored REITs. The results of operations for the 13 properties acquired in 2003 are included in our operating results for nine months in 2004 compared to four months in 2003. We operated 28 properties for the nine-month period ended September 30, 2004, and 15 properties for five months, and 28 properties for four months, in the comparable period of 2003. Increases in revenues and expenses related to rental operations for the nine months ended September 30, 2004 are primarily a result of these acquisitions. The results of operations for the two properties that were sold in 2003 have been classified as discontinued operations. Revenue Total revenue increased $13.7 million, or 23%, to $72.6 million for the nine months ended September 30, 2004, as compared to $58.9 million for the comparable period in 2003. Revenue from rental operations was $62.5 million for the nine months ended September 30, 2004, an increase of $16.2 million, or 35%, compared to the nine months ended September 30, 2003. The increase is primarily attributable to: o An increase in rental revenue of $18.8 million, primarily relating to the 13 properties acquired by the Company in June 2003, which includes a lease termination fee of approximately $1.2 million paid by a tenant; and o An increase in other revenue of $0.1 million primarily representing our proportionate share of income from FSP Blue Lagoon Drive Corp. in which we acquired an interest in preferred stock in January 2003. These increases are offset by a decrease in transaction income of $2.6 million and sponsored REIT income of $0.1 million, both as a result of our decreased syndication activity in 2004. Investment banking/investment services revenue was $10.1 million for the nine months ended September 30, 2004, a decrease of $2.5 million, or 20%, compared to the nine months ended September 30, 2003. The decrease is attributable to the decrease in gross syndication proceeds as discussed above. Expenses Total expenses were $38.5 million for the nine months ended September 30, 2004, an increase of $9.0 million, or 31%, compared to the nine months ended September 30, 2003. Expenses for rental operations were $30.2 million for the nine months ended September 30, 2004, a net increase of $9.9 million, or 48%, compared to the nine months ended September 30, 2003. The increase is attributable to: o An increase in rental operation expenses aggregating $10.1 million primarily related to the 13 properties acquired by the Company in June, 2003; and o An increase in selling, general and administrative expenses of $0.3 million primarily relating to an increase in costs for corporate governance and related professional fees. These expenses are offset by a decrease of $0.3 million of Sponsored REIT expenses as a result of decreased syndication activity; and a decrease in interest expense of $.03 million as a result of decreased syndication activity. Expenses for investment banking services were $8.3 million for the nine months ended September 30, 2004, a decrease of $0.8 million, or 9.3%, compared to the nine months ended September 30, 2003. The decrease is attributable to a decrease of $1.3 million in commissions and broker expenses as a result of decreased syndication activity. The decrease was offset by: o an increase of $0.1 million in office rents and occupancy expenses as a result of increasing office space in the third quarter of 2003; o An increase of $0.2 million relating to a investor relations consulting project; and o Expenses of $0.2 million as a result of the issuance of shares as compensation in 2004. No shares were issued in 2003. 21 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Interest income for the nine-month period ended September 30, 2004 was consistent with the comparable period of 2003. Taxes on income decreased $0.7 million as a result of decreased syndication activity. The tax rate was consistent with the comparable period of 2003. Liquidity and Capital Resources Cash and cash equivalents were $50.6 million and $58.8 million at September 30, 2004 and December 31, 2003, respectively. This decrease of $8.2 million is attributable to $43.4 million provided by operating activities; $1.1 million used for investing activities; and $50.4 million used for financing activities. Management believes that existing cash, cash anticipated to be generated internally by operations and cash anticipated to be generated by the sale of preferred stock in future Sponsored REITs will be sufficient to meet working capital requirements and anticipated capital expenditures for at least the next 12 months. Our line of credit matures on August 18, 2005, and management believes it will be renewed, extended or replaced with another facility. We borrow against the line of credit to make 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 subsequently repaid out of the offering proceeds. We believe that we will be able to repay all amount currently outstanding under the line of credit prior to its expiration in August 2005. Operating Activities The cash provided by our operating activities of $43.4 million is primarily attributable to net income of $33.8 million plus the add-back of $10.3 million from non-cash activity, principally consisting of depreciation and amortization, less a $0.2 million net change in operating assets and liabilities, less payments for deferred leasing costs of $0.5 million. Investing Activities Our cash used for investing activities of $1.1 million is attributable to $4.1 million in proceeds from the sale of assets held for syndication offset by $1.0 million used for the purchase of real estate assets, office computers and furniture, and a $4.3 million investment in non-consolidated [Sponsored] REITs. Financing Activities Our cash used for financing activities of $50.4 million is attributable to $4.1 million in payments on our line of credit, and $46.2 million of distributions to our stockholders as dividends; and $0.1 million used to purchase treasury stock. Sources and Uses of Funds Our principal demands for liquidity are cash for operations, dividends to stockholders, debt repayments and expenses associated with indebtedness. As of September 30, 2004 we had approximately $10.7 million in liabilities. We have no permanent, long-term debt. In the near term, liquidity is generated from funds from ongoing real estate operations and transaction fees and commissions received in connection with the sale of shares in new Sponsored REITs. Contingencies We are subject to various legal proceedings and claims that arise in the ordinary course of its business. Although occasional adverse decisions (or settlements) may occur, we believe that the final disposition of such matters will not have a material adverse effect on our financial position or results of operations. Assets Held For Syndication There were no assets held for syndication as of September 30, 2004. During October 2004 we borrowed approximately $117 million against and repaid $16 million on our line of credit. We use these borrowings to make interim mortgage loans to newly formed Sponsored REITs. The newly-formed Sponsored REITs use the funds to purchase real property, and the loan amounts have historically been repaid by the sale of the Sponsored REIT's preferred stock through private placements. Related Party Transactions In the three months ended September 30, 2004, we completed the syndication of one Sponsored REIT. We did not enter into any other significant transactions with related parties during the quarter ended September 30, 2004. For a discussion of transactions between us and related parties during 2003, see "Related Party Transactions" under Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - of our Annual Report on Form 10-K for the year ended December 31, 2003. 22 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Economic Conditions We generally pay the ordinary annual operating expenses of our properties from the rental revenue generated by the properties. For the nine months ended September 30, 2004, the rental income exceeded the expenses for each individual property, with the exception of Blue Ravine. The single tenant lease at the Blue Ravine property located in Folsom, California, expired June 30, 2003. We have not re-let the property and expect that the property will not produce revenue to cover its expenses in the fourth quarter. Management believes that cash and cash equivalents, as of September 30, 2004, are in excess of our known needs for extraordinary expenses or capital improvements within the next twelve months. Although there is no guarantee that we will be able to obtain the funds necessary for our future growth, we anticipate generating funds from continuing real estate operations and from fees and commissions from the sale of shares in newly formed Sponsored REITs. We believe that we have adequate funds to cover unusual expenses and capital improvements, in addition to normal operating expenses. Our ability to maintain or increase our level of dividends to stockholders, however, depends in part upon the level of interest on the part of investors in purchasing shares of Sponsored REITs and the level of rental income from our real properties. CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS The following important factors, among others, could cause actual results to differ materially from those indicated by forward-looking statements made in this Quarterly Report on Form 10-Q and presented elsewhere by management from time to time. If we are not able to collect sufficient rents from each of our owned real properties, we may suffer significant operating losses. A substantial portion of our revenue is generated by the rental income of our real properties. If our properties do not provide us with a steady rental income as a result of an inability to re-let space upon the termination of existing leases or of the inability of existing tenants to meet their obligations under existing leases, our revenues will decrease and may cause us to incur operating losses in the future. We face risks in continuing to attract investors for Sponsored REITs. Our investment banking/investment services business continues to depend upon its ability to attract purchasers of equity interests in Sponsored REITs. Our success in this area will depend on the propensity and ability of investors who have previously invested in Sponsored REITs to continue to invest in future Sponsored REITs and on our ability to expand the investor pool for the Sponsored REITs by identifying new potential investors. Moreover, our investment banking/investment services business may be affected to the extent existing Sponsored REITs incur losses or have operating results that fail to meet investors' expectations. If we are unable to fully syndicate a Sponsored REIT, we may be required to keep a balance outstanding on our line of credit or use our cash balance to repay our line of credit, which may reduce cash available for distribution to our stockholders. We typically draw on our line of credit to make an interim mortgage loan to a Sponsored REIT, so that it can acquire real property prior to the consummation of the offering of its equity interests; this interim loan is secured by a first mortgage of the real property acquired by the Sponsored REIT. Once the offering has been completed, the Sponsored REIT repays the loan out of the offering proceeds. If we are unable to fully syndicate a Sponsored REIT, the Sponsored REIT could be unable to fully repay the loan, and we would have to satisfy our obligation under our line of credit through other means. If we are required to use cash for this purpose, we would have less cash available for distribution to our stockholders. 23 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Failure to renew, replace or extend our line of credit could have a material adverse effect on the cash available for distribution to our stockholders and would limit our growth. Our line of credit matures in August 2005. We typically draw on our line of credit to make an interim mortgage loan to a Sponsored REIT, so that it can acquire real property prior to the consummation of the offering of its equity interests. Once the offering has been completed, the Sponsored REIT repays the loan out of the offering proceeds. An inability to renew, replace or extend our line of credit could result in difficulty financing growth in the investment banking/investment services segment of our business. It could also result in a reduction in the cash available for distribution to our stockholders because revenue for our investment banking/investment services segment is directly related to the amount of equity raised by Sponsored REITs which we syndicate. In addition, a significant part of our growth strategy is to acquire additional real properties by cash purchase or by acquisition of Sponsored REITs, and the loss of the line of credit would make it substantially more difficult to pursue acquisitions by either method. To the extent we have a balance outstanding on the line of credit on the date of its maturity; we would have to satisfy our obligation through other means. If we are required to use cash for this purpose, we would have less cash available for distribution to our stockholders. We may not be able to find properties that meet our criteria for purchase. Growth in our investment banking/investment services business is dependent on the ability of our acquisition executives to find properties for sale which meet our investment criteria. To the extent they fail to find such properties, we will be unable to syndicate offerings of Sponsored REITs to investors, and this segment of our business could have lower revenue, which would reduce the cash available for distribution to our stockholders. We are dependent on key personnel. We depend on the efforts of George Carter, our Chief Executive Officer, and our other executive officers. If they were to resign, our operations could be adversely affected. We do not have employment agreements with Mr. Carter or any other of our executive officers. Our level of dividends may fluctuate. Because our investment banking/investment services business is transactional in nature and real estate occupancy levels and rental rates can fluctuate, there is no predictable recurring level of revenue from such activities. As a result of this, the amount of cash available for distribution may fluctuate, which may result in us not being able to maintain or grow dividend levels in the future. The real properties held by us may significantly decrease in value. As of September 30, 2004, we owned 28 properties. Some or all of these properties may decline in value. To the extent our real properties decline in value, our stockholders could lose some or all the value of their investments. Although currently there is no public market for the shares of our common stock, the value of our common stock may still be adversely affected if the real properties held by us decline in value since these real properties represent the majority of our tangible assets. Moreover, if either we are forced to sell or lease the real property held by us below its initial purchase price or carrying costs or if we are forced to lease real property at below market rates because of its condition, our results of operations would be adversely affected and such negative results of operations may result in lower dividends being paid to holders of our common stock. We face risks in owning and operating real property. An investment in us is subject to the risks incident to the ownership and operation of real estate-related assets. These risks include the fact that real estate investments are generally illiquid, which may impact our ability to vary our portfolio in response to changes in economic and other conditions, as well as the risks normally associated with: o changes in general and local economic conditions; o the supply or demand for particular types of properties in particular markets; o changes in market rental rates; o the impact of environmental protection laws; and o changes in tax, real estate and zoning laws. 24 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. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) We face risks from tenant defaults or bankruptcies. If any of our tenants defaults on its lease, we may experience delays in enforcing our rights as a landlord and may incur substantial costs in protecting our investment. In addition, at any time, a tenant of one of our properties may seek the protection of bankruptcy laws, which could result in the rejection and termination of such tenant's lease and thereby cause a reduction in cash available for distribution to our stockholders. We may encounter significant delays in reletting vacant space, resulting in losses of income. When leases expire, we will incur expenses and may not be able to re-lease the space on the same terms. Certain leases provide tenants the right to terminate early if they pay a fee. If we are unable to re-lease space promptly, if the terms are significantly less favorable than anticipated or if the costs are higher, we may have to reduce distributions to our stockholders. We face risks from geographic concentration. The properties in our portfolio, by aggregate square footage, are distributed geographically as follows: Southwest - 26%, Northeast - 31%, Midwest - 19%, West - - 16% and Southeast 8%. However, within certain of those segments, we hold a larger concentration of our properties in Houston, Texas - 18% and Washington, DC - 13%. We are likely to face risks to the extent that any of these areas in which we hold a larger concentration of our properties suffer deteriorating economic conditions. We compete with national, regional and local real estate operators and developers, which could adversely affect our cash flow. Competition exists in every market in which our properties are located and in every market in which our properties will be located. We compete with, among others, national, regional and numerous local real estate operators and developers. Such competition may adversely affect the percentage of leased space and the rental revenues of our properties, which could adversely affect our cash flow from operations and our ability to make expected distributions to our stockholders. Some of our competitors may have more resources than we do or other competitive advantages. Competition may be accelerated by any increase in availability of funds for investment in real estate. For example, decreases in interest rates tend to increase the availability of funds and therefore can increase competition. To the extent that our properties continue to operate profitably, this will likely stimulate new development of competing properties. The extent to which we are affected by competition will depend in significant part on local market conditions. There is limited potential for an increase in leased space gains in our properties. We anticipate that future increases in revenue from our properties will be primarily the result of scheduled rental rate increases or rental rate increases as leases expire. Properties with higher rates of vacancy are generally located in soft economic markets so that it may be difficult to realize increases in revenue when vacant space is re-leased. We are subject to possible liability relating to environmental matters, and we cannot assure you that we have identified all possible liabilities. Under various federal, state and local laws, ordinances and regulations, an owner or operator of real property may become liable for the costs of removal or remediation of certain hazardous substances released on or in its property. Such laws may impose liability without regard to whether the owner or operator knew of, or caused, the release of such hazardous substances. The presence of hazardous substances on a property may adversely affect the owner's ability to sell such property or to borrow using such property as collateral, and it may cause the owner of the property to incur substantial remediation costs. In addition to claims for cleanup costs, the presence of hazardous substances on a property could result in the owner incurring substantial liabilities as a result 25 of a claim by a private party for personal injury or a claim by an adjacent property owner for property damage. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) In addition, we cannot assure you that: o future laws, ordinances or regulations will not impose any material environmental liability; o the current environmental conditions of our properties will not be affected by the condition of properties in the vicinity of such properties (such as the presence of leaking underground storage tanks) or by third parties unrelated to us; o tenants will not violate their leases by introducing hazardous or toxic substances into our properties that could expose us to liability under federal or state environmental laws; or o environmental conditions, such as the growth of bacteria and toxic mold in heating and ventilation systems or on walls, will not occur at our properties and pose a threat to human health. We are subject to compliance with the Americans With Disabilities Act and fire and safety regulations which could require us to make significant capital expenditures. All of our properties are required to comply with the Americans With Disabilities Act (ADA), and the regulations, rules and orders that may be issued thereunder. The ADA has separate compliance requirements for "public accommodations" and "commercial facilities," but generally requires that buildings be made accessible to persons with disabilities. Compliance with ADA requirements might require, among other things, removal of access barriers and noncompliance could result in the imposition of fines by the U.S. government, or an award of damages to private litigants. In addition, we are required to operate our properties in compliance with fire and safety regulations, building codes and other land use regulations, as they may be adopted by governmental agencies and bodies and become applicable to our properties. Compliance with such requirements may require us to make substantial capital expenditures, which expenditures would reduce cash otherwise available for distribution to its stockholders. There are significant conditions to our obligation to redeem shares of our common stock, and any such redemption will result in the stockholders tendering shares receiving less than their fair market value. Under our redemption plan, we are only obligated to use our best efforts to redeem shares of our common stock from stockholders wishing to have them redeemed. There are significant conditions to our obligation to redeem shares of our common stock including: o we cannot be insolvent or be rendered insolvent by the redemption; o the redemption cannot impair our capital or operations; o the redemption cannot contravene any provision of federal or state securities laws; o the redemption cannot result in our failing to qualify as a REIT; and o our management must determine that the redemption is in our best interests. Any redemption effected by us under this plan would result in those stockholders tendering shares of our common stock receiving 90% of the fair market value of such shares, as determined by our board of directors in its sole and absolute discretion, and not their full fair market value. If our common stock becomes listed for trading on the American Stock Exchange or any other national securities exchange or the NASDAQ National Market, we will no longer be obligated to effect any redemption. We may lose capital investment or anticipated profits if an uninsured event occurs. We carry or our tenants carry comprehensive liability, fire and extended coverage with respect to each of our properties, with policy specification and insured limits customarily carried for similar properties. There are, however, certain types of losses, such as from wars, pollution or earthquakes, that may be either uninsurable or not economically insurable (although the properties located in California all have earthquake insurance). Should an uninsured material loss occur, we could lose both capital invested in the property and anticipated profits. 26 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Contingent or unknown liabilities acquired in mergers or similar transactions could require us to make substantial payments. The properties which we acquired in mergers were acquired subject to liabilities and without any recourse with respect to liabilities, whether known or unknown. As a result, if liabilities were asserted against us based upon any of these properties, we might have to pay substantial sums to settle them, which could adversely affect our results of operations and financial condition and our cash flow and ability to make distributions to our stockholders. Unknown liabilities with respect to properties acquired might include: o liabilities for clean-up or remediation of environmental conditions; o claims of tenants, vendors or other persons dealing with the former owners of the properties; and o liabilities incurred in the ordinary course of business. We would incur adverse tax consequences if we failed to qualify as a REIT. If in any taxable year we do not qualify as a real estate investment trust, we would be taxed as a corporation and distributions to our stockholders would not be deductible by us in computing our taxable income. In addition, if we were to fail to qualify as a real estate investment trust, we could be disqualified from treatment as a real estate investment trust in the year in which such failure occurred and for the next four taxable years and, consequently, we would be taxed as a corporation during such years. Failure to qualify for even one taxable year could result in a significant reduction of our cash available for distribution to stockholders or could require us to incur indebtedness or liquidate investments in order to generate sufficient funds to pay the resulting federal income tax liabilities. In addition, timing differences between the receipt of income and payment of expenses and the inclusion and deduction of such amounts in arriving at taxable income could make it necessary for us to borrow in order to make certain distributions to our stockholders in satisfaction of the 90% distribution requirement applicable to real estate investment trusts. The provisions of the Internal Revenue Code governing the taxation of real estate investment trusts are very technical and complex, and although we expect that we will be organized and will operate in a manner that will enable us to meet such requirements, no assurance can be given that we will always succeed in doing so. In addition, you should note that if one or more of the REITs we acquired in June 2003 did not qualify as a real estate investment trust immediately prior to the consummation of the mergers, we would be disqualified as a REIT as a result of the mergers. Provisions in our organizational documents may prevent changes in control. Our Articles of Incorporation and Bylaws contain provisions, described below, which may have the effect of discouraging a third party from making an acquisition proposal for us and may thereby inhibit a change of control under circumstances that could otherwise give the holders of our common stock the opportunity to realize a premium over the then-prevailing market prices. Ownership Limits. In order for us to maintain our qualification as a real estate investment trust, the holders of our common stock may be limited to owning, either directly or under applicable attribution rules of the Internal Revenue Code, no more than 9.8% of the lesser of the value or the number of equity shares of us, and no holder of common stock may acquire or transfer shares that would result in our shares of common stock being beneficially owned by fewer than 100 persons. Such ownership limit may have the effect of preventing an acquisition of control of us without the approval of our board of directors. Moreover, we will have the right to redeem any shares of common stock that are acquired or transferred in violation of these provisions at the market price, which is determined by our board of directors. In addition, our Articles of Incorporation give our board of directors the right to refuse to give effect to the acquisition or transfer of shares by a stockholder in violation of these provisions. Staggered Board. Our board of directors is divided into three classes. The terms of these classes will expire in 2005, 2006 and 2007, respectively. Directors of each class are elected for a three-year term upon the expiration of the initial 27 term of each class. The staggered terms for directors may affect our stockholders' ability to effect a change in control even if a change in control were in the stockholders' best interests. Preferred Stock. Our Articles of Incorporation authorize our board of directors to issue up to 20,000,000 shares of preferred stock, par value $.0001 per share, and to establish the preferences and rights of any such shares issued. The issuance of preferred stock could have the effect of delaying or preventing a change in control even if a change in control were in our stockholders' best interest. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Increase of Authorized Stock. Our board of directors, without any vote or consent of the stockholders, may increase the number of authorized shares of any class or series of stock or the aggregate number of authorized shares we have authority to issue. The ability to increase the number of authorized shares and issue such shares could have the effect of delaying or preventing a change in control even if a change in control were in our stockholders' best interest. Amendment of Bylaws. Our board of directors has the sole power to amend our Bylaws. This power could have the effect of delaying or preventing a change in control even if a change in control were in our stockholders' best interests. Stockholder Meetings. Our Bylaws require advance notice for stockholder proposals to be considered at annual meetings of stockholders and for stockholder nominations for election of directors at special meetings of stockholders. Our Bylaws also provide that stockholders entitled to cast more than 50% of all the votes entitled to be cast at a meeting must join in a request by stockholders to call a special meeting of stockholders. These provisions could have the effect of delaying or preventing a change in control even if a change in control were in the best interests of our stockholders. Supermajority Votes Required. Our Articles of Incorporation require the affirmative vote of the holders of no less than 80% of the shares of capital stock outstanding and entitled to vote in order (i) to amend the provisions of our Articles of Incorporation relating to the classification of directors, removal of directors, limitation of liability of officers and directors or indemnification of officers and directors or (ii) to amend our Articles of Incorporation to impose cumulative voting in the election of directors. These provisions could have the effect of delaying or preventing a change in control even if a change in control were in our stockholders' best interest. There is no public trading market for our securities. There is no public trading market for our common stock, and we cannot assure you that any market will develop or that, if such a market develops, there will be any liquidity in such a market for our common stock. We have announced our intention to file an application for the listing of our stock on the American Stock Exchange. However, there is no assurance that we will file such application, or in the event that we do, that the American Stock Exchange will accept it. 28 Item 3. Quantitative and Qualitative Disclosures about Market Risk We were not a party to any derivative financial instruments at or during the three months ended September 30, 2004. We borrow from time to time on our line of credit. These borrowings bear interest at a variable rate. As of September 30, 2004, there were no borrowings outstanding under this line of credit. We have used the funds from our line of credit for the purpose of making interim mortgage loans to Sponsored REITs. These mortgage loans bear interest at the same variable rate payable by us under our line of credit. Therefore, we believe that we have mitigated our interest rate risk with respect to our borrowings. 29 Item 4. Controls and Procedures. Our management, with the participation of FSP Corp.'s President and Chief Executive Officer and FSP Corp.'s Vice President and Chief Operating Officer (equivalent of Chief Financial Officer), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(d) under the Exchange Act) as of September 30, 2004. Based on this evaluation, FSP Corp.'s President and Chief Executive Officer and FSP Corp.'s Vice President and Chief Operating Officer (equivalent of Chief Financial Officer) concluded that, as of September 30, 2004, our disclosure controls and procedures were (1) designed to ensure that material information relating to us, including our consolidated subsidiaries, is made known to FSP Corp.'s President and Chief Executive Officer and FSP Corp.'s Vice President and Chief Operating Officer (equivalent of Chief Financial Officer) by others within these entities, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. No change to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the quarter ended September 30, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 30 PART II - OTHER INFORMATION Item 1. Legal Proceedings: Not applicable. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds: (c) The following table provides information about purchases by Franklin Street Properties Corp. during the quarter ended September 30, 2004 of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act: ISSUER PURCHASES OF EQUITY SECURITIES
- ----------------------------------------------------------------------------------------------------------------- (a) (b) (c) (d) Total Number of Maximum Number (or Shares (or Units) Approximate Dollar Value) Purchased as Part of Shares (or Units) that Total Number of of Publicly May Yet Be Purchased Shares (or Units) Average Price Paid Announced Plans or Under the Plans or Period Purchased (1) per Share (or Unit) Programs (1) Programs (1) - ----------------------------------------------------------------------------------------------------------------- 07/01/04-07/31/04 0 N/A 0 0 - ----------------------------------------------------------------------------------------------------------------- 08/01/04-08/31/04 575 $17.70 0 0 - ----------------------------------------------------------------------------------------------------------------- 09/01/04-09/30/04 0 N/A 0 0 - ----------------------------------------------------------------------------------------------------------------- Total: 575 $17.70 0 0 - -----------------------------------------------------------------------------------------------------------------
(1) In connection with its entrance into an Agreement and Plan of Merger among FSP Corp., four wholly-owned acquisition subsidiaries of FSP Corp. and four Sponsored REITs, FSP Corp.'s Board of Directors authorized the redemption of all fractional shares of common stock outstanding and of record as of July 30, 2004, effective as of August 16, 2004. FSP Corp. sent a letter to its stockholders regarding this redemption on August 13, 2004, which was attached as Exhibit 99.1 to FSP Corp.'s Current Report on 8-K filed with the Securities and Exchange Commission on August 13, 2004. FSP Corp. does not have any publicly announced repurchase plans or programs. However, FSP Corp.'s Articles of Incorporation provide that FSP Corp. will use its best efforts to redeem shares of its common stock from stockholders who request such redemption. Any FSP Corp. stockholder wishing to have shares redeemed must make such a request no later than July 1 of any year for a redemption that would be effective the following January 1. This obligation is subject to significant conditions, including that (i) FSP Corp. cannot be insolvent or rendered insolvent by the redemption, (ii) the redemption cannot impair the capital or operations of FSP Corp., (iii) the redemption cannot contravene any provision of federal or state securities law, (iv) the redemption cannot result in FSP Corp.'s failing to qualify as a REIT, and (v) the management of FSP Corp. must determine that the redemption is in the best interest of FSP Corp. Redemptions pursuant to these provisions result in redeeming stockholders receiving cash in an amount of 90% of the fair market value of the stock redeemed, as determined by FSP Corp.'s Board of Directors. Item 3. Defaults Upon Senior Securities: Not applicable. Item 4. Submission of Matters to a Vote of Security Holders: Not applicable. Item 5. Other Information: Not applicable. 31 PART II - OTHER INFORMATION (Continued) Item 6. Exhibits: 2.1 Agreement and Plan of Merger, dated as of August 13, 2004, by and among the Registrant and the parties thereto (incorporated by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K dated August 13, 2004). 31.1 Certification of the President and Chief Executive Officer of the Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of the Vice President, Chief Operating Officer (equivalent of Chief Financial Officer), Treasurer and Secretary of the Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of the President and Chief Executive Officer of the Registrant pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of the Vice President, Chief Operating Officer (equivalent of Chief Financial Officer), Treasurer and Secretary of the Registrant pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Franklin Street Properties Corp. Date Signature Title November 8, 2004 /s/ George J. Carter Chief Executive Officer and ----------------------- Director (Principal Executive George J. Carter Officer) November 8, 2004 /s/ John G. Demeritt Senior Vice President ----------------------- (Principal Accounting Officer) John G. Demeritt 33 EX-31.1 2 ex31-1.txt Exhibit 31.1 CERTIFICATIONS I, George J. Carter, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Franklin Street Properties Corp.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared: b) [Not Applicable] c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 8, 2004 /s/ George J. Carter ------------------------------------- George J. Carter President and Chief Executive Officer EX-31.2 3 ex31-2.txt Exhibit 31.2 CERTIFICATIONS I, Barbara J. Fournier, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Franklin Street Properties Corp.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared: b) [Not Applicable] c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 8, 2004 /s/ Barbara J. Fournier --------------------------- Barbara J. Fournier Vice President, Chief Operating Officer (equivalent of Chief Financial Officer), Treasurer and Secretary EX-32.1 4 ex32-1.txt Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the quarterly report on Form 10-Q of Franklin Street Properties Corp. (the "Company") for the period ended September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, George J. Carter, President and Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company. Date: November 8, 2004 /s/ George J. Carter ------------------------------------- George J. Carter President and Chief Executive Officer EX-32.2 5 ex32-2.txt Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the quarterly report on Form 10-Q of Franklin Street Properties Corp. (the "Company") for the period ended September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, Barbara J. Fournier, Vice President, Chief Operating Officer (equivalent of Chief Financial Officer), Treasurer and Secretary of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company. Date: November 8, 2004 /s/ Barbara J. Fournier ------------------------ Barbara J. Fournier Vice President, Chief Operating Officer (equivalent of Chief Financial Officer), Treasurer and Secretary -----END PRIVACY-ENHANCED MESSAGE-----