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, 2003 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 (IRS Employer of incorporation or organization) Identification Number) 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 November 10, 2003 was 49,630,338.
Franklin Street Properties Corp. Form 10-Q Quarterly Report September 30, 2003 Table of Contents Page ---- Part I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002............................. 3 Consolidated Statements of Income for the three and nine months ended September 30, 2003 and 2002..... 4 Consolidated Statements of Cash Flows for the nine months ended September 30, 2003 and 2002.......... 5 Notes to the Consolidated Financial Statements.......... 6-14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 15-27 Item 3. Quantitative and Qualitative Disclosures about Market Risk....................................... 28 Item 4. Controls and Procedures................................. 28 Part II. Other Information Item 1. Legal Proceedings....................................... 29 Item 2. Changes in Securities and Use of Proceeds............... 29 Item 3. Defaults upon Senior Securities......................... 29 Item 4. Submission of Matters to a Vote of Security Holders..... 29 Item 5. Other Information....................................... 29 Item 6. Exhibits and Reports on Form 8-K........................ 29 Signatures ........................................................ 30
PART I - FINANCIAL INFORMATION Item 1. Financial Statements Franklin Street Properties Corp. Consolidated Balance Sheets (unaudited) <TABLE> <CAPTION> September 30, December 31, (in thousands, except share and par value amounts) 2003 2002 =================================================================================================================== <S> <C> <C> Assets: Real estate investments, at cost: Land $ 71,398 $ 39,560 Buildings and improvements 404,541 154,785 Fixtures and equipment 777 930 - ------------------------------------------------------------------------------------------------------------------- 476,716 195,275 Less accumulated depreciation 23,200 21,999 - ------------------------------------------------------------------------------------------------------------------- Real estate investments, net 453,516 173,276 Acquired real estate leases, less accumulated amortization of $429 8,768 -- Cash and cash equivalents 68,663 22,316 Restricted cash 951 483 Tenant rent receivables, less allowance for doubtful accounts of $202 and $202, respectively 891 327 Straight-line rent receivable, less allowance for doubtful accounts of $360 and $360, respectively 3,511 3,057 Prepaid expenses and other 1,385 743 Deposits on real estate assets 500 841 Office computers and furniture, net of accumulated depreciation of $449 and $389, respectively 381 234 Deferred leasing commissions, net of accumulated amortization of $496 and $289, respectively 1,053 659 - ------------------------------------------------------------------------------------------------------------------- Total Assets $ 539,619 $201,936 =================================================================================================================== Liabilities and Stockholders' Equity: Liabilities: Accounts payable and accrued expenses $ 8,969 $ 3,001 Dividends payable 21,341 -- Accrued compensation 2,017 1,287 Tenant security deposits 951 483 - ------------------------------------------------------------------------------------------------------------------- Total Liabilities 33,278 4,771 - ------------------------------------------------------------------------------------------------------------------- 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, 49,630,338 and 24,586,249 shares issued and outstanding 5 2 Additional paid-in capital 513,912 192,743 Earnings in excess of distributions (distributions in excess of earnings) (7,955) 4,420 Accumulated undistributed net realized gain on sale of properties 379 -- - ------------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity 506,341 197,165 - ------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $ 539,619 $201,936 =================================================================================================================== </TABLE> See accompanying notes to consolidated financial statements. 3
Franklin Street Properties Corp. Consolidated Statements of Income (Unaudited) <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, ---------------------- ---------------------- (in thousands, except per share amounts) 2003 2002 2003 2002 ============================================================================================================= <S> <C> <C> <C> <C> Revenue: Rental $17,767 $ 6,014 $32,606 $18,083 Syndication fees 6,019 4,153 11,426 9,890 Transaction fees 6,128 3,865 11,565 9,203 Sponsored REIT income 1,541 421 2,442 453 Other 248 280 853 589 - ------------------------------------------------------------------------------------------------------------- Total revenue 31,703 14,733 58,892 38,218 - ------------------------------------------------------------------------------------------------------------- Expenses: Rental operating expenses 3,540 1,393 7,125 4,105 Real estate taxes and insurance 2,325 676 4,229 1,954 Depreciation and amortization 3,219 1,068 5,464 3,136 Sponsored REIT expenses 1,365 296 2,006 313 Selling, general and administrative 1,376 1,194 4,124 4,096 Commissions 3,006 2,075 5,712 4,910 Shares issued as compensation -- 604 -- 604 Interest 257 297 795 647 - ------------------------------------------------------------------------------------------------------------- Total expenses 15,088 7,603 29,455 19,765 - ------------------------------------------------------------------------------------------------------------- Income before interest income and taxes on income 16,615 7,130 29,437 18,453 Interest income 130 66 238 185 - ------------------------------------------------------------------------------------------------------------- Income before taxes on income 16,745 7,196 29,675 18,638 Taxes on income 1,035 216 1,460 417 - ------------------------------------------------------------------------------------------------------------- Income from continuing operations 15,710 6,980 28,215 18,221 Income from discontinued operations 56 147 201 472 - ------------------------------------------------------------------------------------------------------------- Income before gain on sale of properties 15,766 7,127 28,416 18,693 Gain on sale of properties 4,914 -- 6,335 -- - ------------------------------------------------------------------------------------------------------------- Net income $20,680 $ 7,127 $34,751 $18,693 ============================================================================================================= Weighted average number of shares outstanding, basic and diluted 49,630 24,586 35,741 24,598 ============================================================================================================= Net income per share basic and diluted Continuing operations $ 0.32 $ 0.28 $ 0.79 $ 0.74 Discontinued operations -- 0.01 -- 0.02 Gain on sale of property 0.10 -- 0.18 -- - ------------------------------------------------------------------------------------------------------------- Net income per share, basic and diluted $ 0.42 $ 0.29 $ 0.97 $ 0.76 ============================================================================================================= </TABLE> See accompanying notes to consolidated financial statements. 4
Franklin Street Properties Corp. Consolidated Statements of Cash Flows (Unaudited) <TABLE> <CAPTION> Nine Months Ended September 30, -------------------------- (in thousands) 2003 2002 ============================================================================================================================= <S> <C> <C> Cash flows from operating activities: Net income $ 34,751 $ 18,693 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 5,808 3,515 Gain on sale of real estate assets (6,335) Stock issued as compensation -- 604 Changes in operating assets and liabilities: Restricted cash 30 9 Tenant rent receivables (312) 54 Straight-line rents, net (454) (1,036) Prepaid expenses and other assets, net (274) (472) Accounts payable and accrued expenses (5,114) 962 Accrued compensation 730 (315) Tenant security deposits (30) (9) Payment of deferred leasing costs (481) (608) - ----------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 28,319 21,397 - ----------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Cash acquired through issuance of common stock in the merger transaction 23,524 -- Purchase of real estate assets, office computers and furniture; capitalized merger costs (2,246) (1,078) Change in deposits on real estate assets 341 Proceeds from real estate assets held for syndication -- (49,956) Proceeds received on sale of real estate assets 21,815 -- - ----------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used for) investing activities 43,434 (51,034) - ----------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Distributions to stockholders (25,406) (22,879) Proceeds from bank note payable -- 50,000 - ----------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used for) financing activities (25,406) 27,121 - ----------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 46,347 (2,516) Cash and cash equivalents, beginning of period 22,316 24,357 - ----------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 68,663 $ 21,841 ============================================================================================================================= Supplemental disclosure of cash flow information: Cash paid for: Interest $ 795 $ 647 Income taxes 1,963 390 Non-cash investing and financing activities Assets acquired through issuance of common stock in the merger transaction, net 297,648 -- Capital expenditures included in accounts payable and accrued expenses -- 1,544 Dividends declared but not paid 21,341 -- </TABLE> 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. (the "Company" or "FSP Corp.") was formed as a Massachusetts limited partnership (the "Partnership") on February 4, 1997. Through June 30, 2001 the Partnership owned a 99% interest in FSP Investments LLC ("FSP Investments") and a 99% interest in FSP Property Management LLC ("FSP Property Management"). Effective July 1, 2001, a wholly-owned subsidiary of the Partnership purchased the remaining 1% ownership interest in FSP Investments and 1% ownership interest in FSP Property Management for an aggregate purchase price of approximately $32,000. In December 2001, the limited partners of the Partnership approved the conversion of the Partnership from a partnership into a corporation. 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 a 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 approximately 25 million shares in a tax-free exchange for all the outstanding shares of the Target REITs. The mergers are being accounted for as a purchase and the acquired assets and liabilities are recorded at their fair value. The Company operates in two business segments: rental operations and investment services. FSP Investments provides real estate investment and broker/dealer services. FSP Investments' services include: (i) the organization of REITs (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 in private placements of preferred stock in Sponsored REITs. Properties The following table summarizes the Company's investment in real estate assets, excluding assets held for syndication: As of September 30, 2003 2002 --------- --------- Residential real estate Number of properties 4 4 Number of apartments 837 642 Commercial real estate Number of properties 24 13 Square feet 3,049,357 1,433,200 Basis of Presentation The unaudited consolidated financial statements of the Company include all the accounts of the Company and its wholly 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, 2002. 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 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 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. The results of operations for the interim periods presented in this quarterly report are not necessarily indicative of the results for other interim periods or for the full fiscal year. Certain prior period balances have been reclassified in order to conform to the current-year presentation. 6
Franklin Street Properties Corp. Notes to Consolidated Financial Statements (Unaudited) Recent Accounting Pronouncements In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"), Consolidation of Variable Interest Entities. The objective of this interpretation is to provide guidance on how to identify a variable interest entity ("VIE") and determine when the assets, liabilities, noncontrolling interests, and results of operations of a VIE need to be included in a company's consolidated financial statements. A company that holds variable interests in an entity will need to consolidate the entity if the company's interest in the VIE is such that the company will absorb a majority of the VIE's expected losses and/or receive a majority of the entity's expected residual returns, if they occur. FIN 46 also requires additional disclosures by primary beneficiaries and other significant variable interest holders. The provisions of this interpretation became effective for fiscal periods ending after December 15, 2003. The Company believes the impact will not be material to its financial position, results of operations or cash flows. 2. Investment Services Activity During the three months ended September 30, 2003, two Sponsored REITs, FSP Innsbrook Corp. and FSP 380 Interlocken Corp., acquired office buildings in Glen Allen, Virginia and Broomfield, Colorado, respectively. The Company sold on a best efforts basis, through private placements approximately $95.5 million in preferred stock in these Sponsored REITs in the three months ending September 30, 2003. The Company has in the past acquired by merger entities similar to the Sponsored REITs. The Company's business model includes the potential acquisition by merger in the future of Sponsored REITs. However, the Company has no legal or any other enforceable obligation to acquire or to offer to acquire any Sponsored REIT. In addition, any offer (and the related terms and conditions) that might be made in the future to acquire any Sponsored REIT would require the approval of the boards of directors of the Company and the Sponsored REIT, and the approval of the shareholders of the Sponsored REIT and may require the approval of the shareholders of the Company. 7
Franklin Street Properties Corp. Notes to Consolidated Financial Statements (Unaudited) 3. Related Party Transactions and Investments in Non-consolidated Entities The Company typically retains a non-controlling common stock ownership interest in Sponsored REITs that it has organized. These ownership interests have virtually no economic benefit or risk. At September 30, 2003, December 31, 2002, and September 30, 2002 the Company had ownership interests in seven, sixteen and fourteen Sponsored REITs, respectively. Summarized financial information for the Sponsored REITs is as follows: September 30, December 31, (unaudited) 2003 2002 ------------- ------------ in thousands) Balance Sheet Data: Real estate, net $ 228,322 $ 385,907 Other assets 33,345 39,465 Total liabilities (5,203) (6,554) --------- --------- Shareholders' equity $ 256,464 $ 418,818 ========= ========= <TABLE> <CAPTION> For the For the Three Months Ended Nine Months Ended September 30, September 30, 2003 2002 2003 2002 ----------------------------------------------------- (in thousands) <S> <C> <C> <C> <C> Operating Data: Rental revenue $ 9,077 $12,838 $ 19,934 $31,542 Other revenue 47 334 122 551 Operating and maintenance expenses (2,873) (2,540) (6,535) (9,326) Depreciation and amortization (1,441) (2,200) (3,708) (4,802) Interest expense and commitment fees (6,155) (4,893) (11,751) (8,937) ----------------------------------------------------- Net income (loss) $(1,345) $ 3,539 $ (1,938) $ 9,028 ===================================================== </TABLE> 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: For the For the Three Months Ended Nine Months Ended September 30, September 30, 2003 2002 2003 2002 ------------------------------------------ (in thousands) Revenue $ 1,541 $ 421 $ 2,442 $ 453 Expenses (1,365) (296) (2,006) (313) ------------------------------------------ Net income $ 176 $ 125 $ 436 $ 140 ========================================== 8
Franklin Street Properties Corp. Notes to Consolidated Financial Statements (Unaudited) 3. Related Party Transactions and Investments in Non-consolidated Entities (continued) The Company provided syndication and real estate acquisition advisory services for the Sponsored REITs in 2003 and 2002. For the three months ended September 30, 2003 and 2002, respectively, syndication fees were approximately $6.0 million and $4.2 million, and transaction fees were approximately $6.1 million and $3.9 million. For the nine months ended September 30, 2003 and 2002, respectively, syndication fees were approximately $11.4 million and $9.9 million, and transaction fees were approximately $11.6 million and $9.2 million. Asset management fee income charged by the Company to the Sponsored REITs amounted to approximately $85,000 and $172,000 for the three months ended September 30, 2003 and 2002, respectively, and $383,000 and $389,000 for the nine months ended September 30, 2003 and 2002, respectively, and is included in "Other revenue" in the Consolidated Statements of Income. Asset management fees range from 1% to 5% of collected rents and the applicable contracts are cancelable with 30 days' notice. 4. Bank note payable In August 2003 the Company amended its revolving credit facility (the "Credit Facility"). The amended Credit Facility increases the Company's unsecured line of credit from $50 million to $125 million and expires in August 2005. The minimum annual transaction fees payable to the bank increase from $125,000 to $350,000. Other terms and conditions are consistent with the prior Credit Facility. Borrowings under the Credit Facility bear interest at a rate of either the bank's base rate or a variable LIBOR rate, as defined, which was 2.37% per annum at September 30, 2003. There were no borrowings outstanding under the Credit Facility as of September 30, 2003 or December 31, 2002. 5. Net Income Per Share Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue shares were exercised or converted into shares. There were no potential dilutive shares outstanding at or during the periods ended September 30, 2003 and 2002. 6. Business Segments The Company operates in two business segments: rental operations (including real estate leasing, interim acquisition financing and asset/property management) and investment services (including 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, 2002. 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, certain non-cash compensation expenses, straight-line rent adjustments and gain or loss adjustments on the sale of real estate); plus investment services proceeds received from controlled partnerships; plus the net proceeds from the sale of surplus land; less purchases of property and equipment ("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, non-cash compensation, straight-line rent adjustments and the gain or loss adjustment on the sale of real estate are an adjustment to CAD as these are non-cash items included in net income. Proceeds from the sale of surplus land, 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 income. 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. 9
Franklin Street Properties Corp. Notes to Consolidated Financial Statements (Unaudited) 6. Business Segments (continued) The Company believes that in order to facilitate a clear understanding of the 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. Cash Available for Distribution by business segment is as follows (in thousands): <TABLE> <CAPTION> Investment Rental Operations Services Total ----------------- -------- ----- <S> <C> <C> <C> Three Months Ended March 31, 2003 Net income $ 5,656 $ 302 $ 5,958 Depreciation and amortization 901 30 931 Straight line rent 432 -- 432 Loss (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 $ 5,523 $ 332 $ 5,855 ======== ======= ======== Three Months Ended June 30, 2003 Net income $ 7,804 $ 309 $ 8,113 Depreciation and amortization 1,530 (23) 1,507 Straight line rent 208 -- 208 Capital expenditures (1,525) -- (1,525) Payment of deferred leasing costs (94) -- (94) Proceeds from funded reserve 615 -- 615 -------- ------- -------- Cash Available for Distribution $ 8,538 $ 286 $ 8,824 ======== ======= ======== 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 ======== ======= ======== </TABLE> 10
Franklin Street Properties Corp. Notes to Consolidated Financial Statements (Unaudited) 6. Business Segments (continued) <TABLE> <CAPTION> Investment Rental Operations Services Total ----------------- -------- ----- <S> <C> <C> <C> Three Months Ended March 31, 2002 Net income $ 4,475 $ (378) $ 4,097 Depreciation and amortization 1,075 71 1,146 Straight line rent (54) -- (54) Capital Expenditures (546) (2) (548) Proceeds from funded reserves 538 -- 538 -------- ------- -------- Cash Available for Distribution $ 5,488 $ (309) $ 5,179 ======== ======= ======== Three Months Ended June 30, 2002 Net income $ 6,487 $ 982 $ 7,469 Depreciation and amortization 1,130 37 1,167 Straight line rent (961) -- (961) Capital Expenditures (187) (8) (195) Payment of deferred leasing costs (531) -- (531) Proceeds from funded reserves 1,460 -- 1,460 -------- ------- -------- Cash Available for Distribution $ 7,398 $ 1,011 $ 8,409 ======== ======= ======== Three Months Ended September 30, 2002 Net income $ 6,541 $ 586 $ 7,127 Depreciation and amortization 1,171 31 1,202 Straight line rent (20) -- (20) Non-cash compensation -- 604 604 Capital expenditures (335) -- (335) Payment of deferred leasing costs (77) -- (77) Proceeds from funded reserves 810 -- 810 -------- ------- -------- Cash Available for Distribution $ 8,090 $ 1,221 $ 9,311 ======== ======= ======== Nine Months Ended September 30, 2002 Net income $ 17,503 $ 1,190 $ 18,693 Depreciation and amortization 3,376 139 3,515 Straight line rent (1,035) -- (1,035) Non-cash compensation -- 604 604 Capital expenditures (1,068) (10) (1,078) Payment of deferred leasing costs (608) -- (608) Proceeds from funded reserves 2,808 -- 2,808 -------- ------- -------- Cash Available for Distribution $ 20,976 $ 1,923 $ 22,899 ======== ======= ======== </TABLE> 11
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): <TABLE> <CAPTION> Investment Rental Operations Services Total ----------------- -------- ----- <S> <C> <C> <C> 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 Three Months Ended September 30, 2002: Revenue $ 33,700 $ 4,518 $ 38,218 Interest income 50 16 66 Interest expense 297 -- 297 Income from discontinued operations 147 -- 147 Capital expenditures 335 -- 335 Total assets at September 30, 2003 $247,153 $ 5,564 $252,717 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 Nine Months Ended September 30, 2002 Revenue $ 27,546 $10,672 $ 38,218 Interest income 135 50 185 Interest expense 647 -- 647 Income from discontinued operations 472 -- 472 Capital expenditures 1,068 10 1,078 Total assets at September 30, 2002 $247,153 $ 5,564 $252,717 </TABLE> 12
Franklin Street Properties Corp. Notes to Consolidated Financial Statements (Unaudited) 7. Cash Dividends Cash dividends per share are declared and paid based on the total outstanding shares as of the record date and are typically paid in the quarter following the quarter that CAD is generated. The Company declared and paid dividends as follows (in thousands, except per share amounts): Dividends Total Date Paid Per Share Dividends ---------------------- --------- ------------ February 14, 2003 $0.31 $ 7,635 May 15, 2003 $0.31 7,636 July 29, 2003 $0.31 10,135 -------- $ 25,406 ======== The Company declared a dividend of $0.31 per share on September 25, 2003 to shareholders of record as of September 30, 2003. The Company declared a special dividend of $0.12 per share on September 25, 2003 to shareholders of record as of September 30, 2003. 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"). In the case of TRSs, the Company's ownership of securities in all TRSs generally cannot exceed 20% of the value of all of the Company's assets and, when considered together with other non-real estate assets, cannot exceed 25% of the value of all of the Company's assets. Effective January 1, 2001, FSP Investments has elected to be treated as a TRS. As a result, it will be required to pay taxes on its net income like any other taxable corporation. 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 statements of income relates only to the taxable REIT subsidiary. The expense differs from the amounts computed by applying the Federal statutory rate of 35% to income before income taxes as follows: <TABLE> <CAPTION> For the For the Nine Months Nine Months Ended Ended (in thousands) September 30, 2003 September 30, 2002 ------------------- -------------------- <S> <C> <C> Federal income tax expense at statutory rate $ 1,246 $ 569 Increase in taxes resulting from: State income taxes, net of federal impact 214 89 Other -- (234) ---------- -------- $ 1,460 $ 424 ========== ======== </TABLE> 13
Franklin Street Properties Corp. Notes to Consolidated Financial Statements (Unaudited) 8. Income Taxes (continued) Other consists primarily of the tax benefit on cash bonuses accrued in 2001 but paid in 2002. Due to the conversion from a partnership into a corporation the bonus is treated as a permanent tax difference. No deferred income taxes were provided as there were no temporary differences between the financial reporting basis and the tax basis of the taxable REIT subsidiary. 9. Acquisitions On June 1, 2003, the Company issued approximately 25 million shares of common stock, $0.0001 par value per share in exchange for a 100% interest in the preferred stock of 13 Target REITs it acquired by merger. The results of operations for each of the Target REITs have been included in the Company's consolidated financial statements since that date. The aggregate purchase price was approximately $321.2 million. The value was determined based upon the fair value of the assets acquired. The following table summarizes the estimated fair value of the assets acquired at the date of acquisition: Value of Assets Acquired ---------------------------- (in thousands) Real estate assets $ 298,831 Value of acquired real estate leases 9,277 Cash 23,524 Other assets 1,120 Liabilities assumed (11,580) ---------- Total $ 321,172 ========== Pro forma operating results for the Company and the 13 Target 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 stock were issued on January 1, 2002 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. <TABLE> <CAPTION> For the Nine Months Ended September 30, 2003 2002 --------------------- <S> <C> <C> Revenue $ 77,295 $ 67,179 Expenses (39,792) (40,187) Interest income 354 435 Taxes on income (1,460) (417) --------------------- Net income from continuing operations 36,397 27,010 Income from discontinued operations 201 472 Gain on sale of property 6,335 -- --------------------- Net income $ 42,933 $ 27,482 ===================== Weighted average shares outstanding 49,630 49,630 ===================== Net income per share $ 0.87 $ 0.55 ===================== </TABLE> 14
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 the Company's Annual Report on Form 10-K for the year ended December 31, 2002. Historical results and percentage relationships set forth in the Consolidated Statements of Operations 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 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 the Company's forward-looking statements involve risks and uncertainty, including without limitation, changes in economic conditions in the markets in which the Company owns properties, expectations with respect to individual properties owned by the Company, 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 the Company, changes in government regulations, and expenditures that cannot be anticipated such as utility rate and usage increases, unanticipated repairs, additional staffing, insurance increases and real estate tax valuation reassessments. See 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. Critical Accounting Policies Real Estate Investments Real estate assets are stated at the lower of depreciated cost or fair value. The cost of each investment in real estate includes the purchase price of property, legal fees and other direct acquisition costs. Typical capital improvements include new roofs, site improvements, various exterior building improvements and major renovations. Funding for capital improvements typically is provided by cash reserves. The acquisition cost of each investment in real estate is allocated between the value of leases acquired with the property and the real property components, such as land, buildings and improvements. Acquisition cost allocations are based upon management's estimates and are typically guided by information received by independent real estate appraisal firms. Inappropriate allocation of acquisition costs could result in depreciation and amortization expenses that do not appropriately reflect the allocation of capital expenditures over future periods. The Company periodically reviews its properties to determine if the carrying amounts will be recovered from future operating cash flows. The evaluation of projected cash flows is highly subjective and is based in part on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results in future periods. Since cash flows on properties considered to be "long-lived assets to be held and used" as defined by FAS 144 are considered on an undiscounted basis to determine whether an asset has been impaired, the Company's established strategy of holding properties over the long term decreases the likelihood of recording an impairment loss. If the Company's strategy changes or market conditions otherwise dictate an earlier sale or disposal date, an impairment loss may be recognized. If the Company determines that impairment has occurred, the affected assets must be reduced to their fair value. No such impairment losses have been recognized to date. The Company classifies a property as "held for sale" upon the execution of a purchase and sale agreement provided that there are no significant contingencies to the sale and management believes that the sale or disposition is probable within one year. The Company reports the results of operations of its properties classified as discontinued operations in its statements of income if no significant continuing involvement exists after the sale or disposition. The Company typically retains a common stock ownership in a Sponsored REIT following a syndication, and earns an ongoing asset and/or property management fee; accordingly, transaction fee revenue and the results of operations are not classified as discontinued operations due to the Company's continuing involvement. 15
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Revenue Recognition Rental revenue is reported on a straight-line basis over the terms of the respective leases. Straight-line rent represents rental income earned in excess of rent payments received pursuant to the terms of the individual lease agreements. The Company maintains an allowance against straight-line rent for future potential tenant credit losses. The credit assessment is based on the estimated straight-line rental income that is recoverable over the term of the lease. The computation of this allowance is based on the tenants' payment history and current credit status. If the Company's estimates of collectibility differ from the cash received, the timing and amount of its reported revenue would likely be impacted. Investment banking services revenue (Syndication fees and Transaction fees) from the syndication of Sponsored REITs is recognized pursuant to the provisions of Statement of Financial Standards No. 66 "Accounting for Sales of Real Estate", and Statement of Position 92-1 "Accounting for Real Estate Syndication Income". Revenue is recognized provided the criteria for sale accounting in SFAS 66 are met. Depreciation and amortization expense The Company computes depreciation on its properties using the straight-line method based on an estimated useful life of 27.5 years for residential property and 39 years for non-residential property. The Company computes depreciation on building improvements on an estimated useful life of 15 to 39 years, and on furniture and fixtures on an estimated useful life of 5-7 years. The Company computes amortization expense on the value of leases acquired and deferred leasing costs based upon the remaining life of the related lease. The determination of the asset's useful life are based on management's estimates. Repairs and maintenance expenses Routine replacements and ordinary maintenance and repairs are expensed as incurred. Typical expense items include residential interior painting, landscaping, minor carpet replacements and residential appliances. The determination to expense an item rather than to capitalize and subsequently depreciate the item is based upon management's judgment of whether the repair extends the useful life of the asset. Funding for routine replacements, repairs and maintenance items are typically provided by cash flows from operating activities. Trends and Uncertainties Rental Operations The Company's average leased rate remained at 92% for the three months ended September 30, 2003. The Company does not anticipate a meaningful increase in rents or leasing activity in the Company's markets in the fourth quarter of 2003. Because the Company's properties are diversified by property type and by geography, the impact of national and global trends is different for each of the properties and is difficult to predict. There were no major lease expirations, terminations or new leases during the three months ended September 30, 2003 except at the Bollman property in Savage, Maryland, which was leased in July and is now 100% leased to Maines Paper & Food Service, Inc. Home Gold, a tenant occupying approximately 12% of the space in Piedmont Center in Greenville, South Carolina, filed for bankruptcy protection under Chapter 11 on April 7, 2003. Rent through and including April 2003 has been paid. No rent has been received for May 2003 through September 2003 and Home Gold has vacated the premises. Investment Services Unlike the Company's real estate business, which provides a rental revenue stream which is ongoing and recurring in nature, the Company's investment banking business is transactional in nature. The Company's acquisition executives continued to report significant competition for properties. Increased equity allocations to real estate as a more favored asset class, as well as low interest rate carrying costs on debt-financed properties, are contributing to this situation. Without the ability to acquire properties at attractive prices on behalf of the Sponsored REITs, the Company's investment banking activities may suffer. 16
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Trends and Uncertainties (continued) Investment Services (continued) The Company relies solely on its in-house investment executives to access interested investors who have capital they can afford to place in an illiquid investment in real estate for an indefinite period of time. Setbacks in the stock market or the general economy could have negative effects. Although terrorist activity has not significantly affected the Company's transactional business, further terrorist attacks, if they occur, may have an adverse effect on the willingness of investors to purchase interests in future Sponsored REITs. The following table summarizes property wholly owned by the Company, excluding discontinued operations and real estate assets held for syndication as of the dates indicated: As of September 30, 2003 2002 --------- --------- Residential real estate Number of properties 4 4 Number of apartments 837 642 Commercial real estate Number of properties 24 13 Square feet 3,049,357 1,433,200 17
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, 2003 and 2002: <TABLE> <CAPTION> Variance in Thousands of Dollars ------------------------------- For the three For the nine months ended months ended September 30, September 30 ------------- ------------ 2003 and 2002 2003 and 2002 ------------- ------------- <S> <C> <C> Rental operations Rental income $ 11,753 $ 14,523 Transaction income 1,992 1,971 Sponsored REIT income 1,120 1,989 Other (32) 266 -------- -------- Total rental operations revenue 14,833 18,749 -------- -------- Investment services Syndication income 1,866 1,536 Transaction income 271 391 Other -- (2) -------- -------- Total investment services revenue 2,137 1,925 -------- -------- Total revenue 16,970 20,674 -------- -------- Rental operations Rental operating expenses 2,147 3,020 Depreciation and amortization 2,157 2,435 Real estate taxes and insurance 1,649 2,275 Sponsored REIT expense 1,069 1,693 Selling, general and administrative 87 140 Interest Expense (40) 148 -------- -------- Total rental operations expenses 7,069 9,711 -------- -------- Investment Services Expenses Selling, general and administrative 95 (112) Commission expense 931 802 Stock/units issued as compensation (604) (604) Depreciation and amortization (6) (107) -------- -------- Total investment services expenses 416 (21) -------- -------- Total expenses 7,485 9,690 -------- -------- Income before interest income and taxes on income 9,485 10,984 Interest income 64 53 Taxes on income 819 1,043 -------- -------- Income from continuing operations 8,730 9,994 Income from discontinued operations (91) (271) Gain on sale of real estate from discontinued operations 4,914 6,335 -------- -------- Net income $ 13,553 $ 16,058 ======== ======== </TABLE> 18
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Comparison of the three months ended September 30, 2003 to the three months ended September 30, 2002: The Company completed the syndication of two Sponsored REITs with total gross proceeds of $95.5 million in the three months ended September 30, 2003, an increase of $34.6 million compared to total gross proceeds of $60.9 million in the comparable period in 2002 from the syndication of two Sponsored REITs. On June 1, 2003 the Company completed the acquisition by merger of 13 Sponsored REITs. The results of operations for these 13 properties are included in the results of the Company since the acquisition date. The Company operated 28 properties for the three months ended September 30, 2003 compared to 17 properties for the three-month period ended September 30, 2002. The results of operations for two properties that were sold in 2003 have been classified as discontinued operations for both periods. Net Income The Company's net income for the three months ended September 30, 2003 was $20.7 million, compared to $7.1 million during the comparable period in 2002, an increase of approximately $13.6 million, of which an increase of $8.7 million relates to continuing operations and $4.8 million to discontinued operations, including the gain on the sale of Reata. Revenue Total revenues increased $17.0 million, or 115%, to $31.7 million for the three months ended September 30, 2003, as compared to $14.7 million for the comparable period in 2002. Income from rental operations was $25.0 million for the three months ended September 30, 2003, an increase of $14.8 million, or 145%, compared to the three months ended September 30, 2002. The increase is attributable to: o An increase in rental revenue of $11.8 million, which is comprised of an increase of $11.7 million of rental revenue from the 13 properties acquired by the Company in June 2003, and a net increase in rental revenue of $0.1 million on the remaining properties. The net increase on the remaining properties is comprised of an increase in straight-line rent revenue of $0.4 million, offset by a decrease in rental revenue of $0.3 million primarily as a result of vacancies in Blue Ravine and Bollman; o An increase in transaction fees of $2.0 million attributable to the syndication of two Sponsored REITs (with aggregate proceeds of $95.5 million) in 2003 as compared to the syndication of two Sponsored REITs (with aggregate proceeds of $60.9 million) for the comparable period in 2002; and o An increase in Sponsored REIT income of $1.1 million as a result of the Company's ownership percentage of Sponsored REITs for a greater period of time in 2003 than in the comparable period of 2002. Investment banking services revenue was $6.7 million for the three months ended September 30, 2003, an increase of $2.1 million, or 47%, compared to the three months ended September 30, 2002. This increase is attributable to the increase in syndication proceeds. Expenses Total expenses were $15.1 million for the three months ended September 30, 2003, an increase of $7.5 million, or 98%, compared to the three months ended September 30, 2002. Expenses for rental operations were $10.9 million for the three months ended September 30, 2003, a net increase of $7.1 million, or 183%, compared to the three months ended September 30, 2002. The increase is attributable to: o An increase in rental operating expenses of $2.1 million, which is comprised of an increase of $2.2 million from the 13 properties acquired by the Company in June 2003, offset by a decrease of $0.1 million from the remaining properties; o An increase in depreciation and amortization of $2.2 million, which is primarily attributable to the 13 properties acquired by the Company in June 2003; o An increase in real estate taxes and insurance of $1.6 million, which is primarily attributable to the 13 properties acquired by the Company in June 2003; o An increase of $1.1 million of Sponsored REIT expenses as a result of the Company's ownership percentage of Sponsored REITs in 2003 for a greater period of time in 2003 than in the comparable period in 2002; and o An increase in selling, general and administrative expense of $0.1 million, primarily attributable to an increase in personnel and miscellaneous office expenses. 19
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Expenses (continued) Expenses for investment banking services were $4.1 million for the three months ended September 30, 2003, an increase of $0.4 million, or 11.1%, compared to the three months ended September 30, 2002. The increase is primarily attributable to an increase in commissions of $0.9 million, relating to the increase in syndication fees discussed above; and an increase in selling, general and administrative expense of $0.1 million, primarily attributable to an increase in personnel and miscellaneous office expenses. This increase was offset by a decrease in shares issued as compensation of $0.6 million; there were no shares issued as compensation in 2003. Interest Income Interest income increased less than $0.1 million for the three months ended September 30, 2003, as compared to the comparable period in 2002. This increase is attributable to higher cash balances as a result of the 13 properties acquired in June 2003. Taxes Taxes on income were $1.0 million for the three months ended September 30, 2003, an increase of $0.8 million compared to the three months ended September 30, 2002. The taxes for 2002 on the taxable REIT subsidiary included certain benefits that will not occur in the future. Comparison of the nine months ended September 30, 2003 to the nine months ended September 30, 2002: The Company completed the syndication of four Sponsored REITs with total gross proceeds of $180.7 million in the nine months ended September 30, 2003, an increase of $34.2 million, compared to total gross proceeds of $146.5 million in the comparable period in 2002 from the syndication of five Sponsored REITs. On June 1, 2003 the Company completed the acquisition by merger of 13 Sponsored REITs. The results of operations for these 13 properties are included in the results for the period for four months. In addition, the Company operated another 15 properties for the complete nine-month period. The Company operated 15 properties for the nine months ended September 30, 2002. The results of operations for two properties that were sold in 2003 have been classified as discontinued operations for both periods and not included in continuing operations. Net Income The Company's net income for the nine months ended September 30, 2003 was $34.7 million, compared to $18.7 million during the comparable period in 2002, an increase of approximately $16.0 million, of which an increase of $10.0 million relates to continuing operations and $6.0 million to discontinued operations, including the gain on the sale of Reata and Weslayan Oaks. Revenue Total revenue increased $20.7 million, or 54%, to $58.9 million for the nine months ended September 30, 2003, as compared to $38.2 million for the comparable period in 2002. Income from rental operations was $46.3 million for the nine months ended September 30, 2003, an increase of $18.7 million, or 68%, compared to the nine months ended September 30, 2002. The increase is attributable to: o An increase in rental revenue of $14.5 million which is comprised of $15.5 million of rental revenue from the 13 properties acquired by the Company in June 2003, offset by a net decrease in rental revenue of $1.0 million on the remaining properties. The net decrease of $1.0 million on the remaining properties is comprised of an increase in rental revenue of $0.3 million, offset by a decrease in straight-line rent revenue of $1.3 million; o An increase in transaction fees of $2.0 million attributable to the syndication of four Sponsored REITs (with aggregate proceeds of $180.7 million) in 2003 as compared to five Sponsored REITs (with aggregate proceeds of $146.5 million) for the comparable period in 2002; o An increase in Sponsored REIT income of $2.0 million as a result of the Company's ownership percentage of Sponsored REITs for a greater period of time in 2003 than the comparable period in 2002; and o An increase in other income of $0.3 million primarily due to interest related to loans to the Sponsored REITs that were outstanding for a longer period of time in 2003 than the comparable period of 2002. Investment banking services revenue was $12.6 million for the nine months ended September 30, 2003; an increase of $1.9 million, or 18%, compared to the nine months ended September 30, 2002. This increase is attributable to the increase in gross syndication proceeds as discussed above. 20
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Expenses Total expenses were $29.5 million for the nine months ended September 30, 2003, an increase of $9.7 million, or 49%, compared to the nine months ended September 30, 2002. Expenses for rental operations were $20.4 million for the nine months ended September 30, 2003, a net increase of $9.7 million, or 91.2%, compared to the nine months ended September 30, 2002. The increase is attributable to: o An increase in rental operating expenses of $3.0 million, which is compromised of an increase of $2.9 million from the 13 properties acquired by the Company in June 2003 and an increase of $0.1 million from the remaining properties, primarily attributable to a miscellaneous increase in maintenance costs over the comparable period in 2002; o An increase in depreciation and amortization of $2.4 million, which is primarily attributable to the 13 properties acquired by the Company in June 2003; o An increase in real estate taxes and insurance of $2.3 million, which is comprised of an increase of $2.1 million from the 13 properties acquired by the Company in June 2003, and an increase of $0.2 million from the remaining properties as a result of tax rate increases and increases in the price of obtaining insurance; o An increase of $1.7 million of Sponsored REIT expenses as a result of the Company's ownership percentage of Sponsored REITs for a greater period of time in 2003 than in the comparable period in 2002; o An increase in selling, general and administrative expense of $0.2 million, primarily attributable to an increase in personnel and miscellaneous office expense; and o An increase in interest expense of $0.1 million for loans related to the to the Sponsored REITs that were outstanding for a longer period of time in 2003 than in the comparable period in 2002. Expenses for investment banking services were $9.1 million for the nine months ended September 30, 2003 and were consistent with the comparable period of 2002. Commission expense increased by $0.8 million as a result of increased syndication proceeds. This increase is offset by a decrease of $0.6 million in the expense related to shares issued as compensation (there were no shares issued as compensation in 2003) as well as minor decreases in general and administration expense and depreciation expense. Interest Income Interest income increased less than $0.1 million for the nine months ended September 30, 2003. This increase is attributable to higher cash balances as a result of the 13 properties acquired in June 2003. Taxes Taxes on income were $1.5 million for the nine moths ended September 30, 2003, an increase of $1.0 million compared to the nine months ended September 30, 2002. The taxes for 2002 on the Company's taxable REIT subsidiary included certain benefits that will not occur in the future. The Company expects a tax rate of approximately 41% for its taxable REIT subsidiary for 2003. Liquidity and Capital Resources Cash and cash equivalents were $68.7 million and $22.3 million at September 30, 2003 and December 31, 2002, respectively. This increase of $46.4 million is attributable to $28.3 million provided by operating activities and $43.4 million provided by investing activities, offset by $25.4 million provided by financing activities. Operating Activities The cash provided by the Company's operating activities of $28.3 million is primarily attributable to net income of $34.7 million, plus the add-back of $5.8 million from non-cash expenses related to depreciation and amortization, less $6.3 million relating to the gain on the sale of properties, less a $5.4 million net change in operating assets and liabilities, less payments for deferred leasing costs of $0.5 million. Investing Activities The Company's cash provided by investing activities of $43.4 million is attributable to $23.5 million in cash acquired as a result of the issuance of stock in the merger transaction, $21.8 million are proceeds from the sale of assets and $0.3 million for a decrease of deposits on real estate investments, offset by $2.2 million used for the purchase of real estate assets (including $1.0 million of capitalized merger costs), office computers and furniture. Financing Activities The Company's cash used by financing activities of $25.4 million is attributable to distributions to the Company's shareholders as dividends. 21
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Sources and Uses of Funds Our principal demands for liquidity are cash for operations, dividends to equity holders, debt repayments and expenses associated with indebtedness. As of September 30, 2003 we had approximately $33 million in liabilities. The Company has no permanent, long-term debt. In the near term, liquidity is generated from funds from ongoing real estate operations and transaction fees and commissions received in connection with the sale of shares in newly formed Sponsored REITs. The Company maintains an unsecured line of credit through Citizens Bank. In August 2003, the Company amended its Master Promissory Note and Loan Agreement (the "loan agreement"), which now provides for a revolving line of credit of up to $125 million. The loan agreement expires August 18, 2005. Borrowings under the loan bear interest at either the bank's base rate or a variable rate based on LIBOR. The Company typically uses the unsecured line of credit to provide each newly formed Sponsored REIT with the funds to purchase a property. The Company's loan agreement with the bank includes customary restrictions on property liens and requires compliance with various financial covenants. Financial covenants include maintaining minimum cash balances in operating accounts, maintaining a minimum tangible net worth and compliance with other various debt and income ratios. The Company was in compliance with all covenants as of September 30, 2003. The Company had no borrowings under its revolving credit facility as of September 30, 2003. Contingencies The Company is subject to various legal proceedings and claims which arise in the ordinary course of its business. Although occasional adverse decisions (or settlements) may occur, the Company believes that the final disposition of such matters will not have a material adverse effect on the financial position or results of operations of the Company. Related Party Transactions During the third quarter of 2003, the Company syndicated two Sponsored REITs. The Company retained a non-controlling common stock interest in these Sponsored REITs with virtually no economic benefit. The Company did not enter into any other significant transactions with related parties during the quarter ended September 30, 2003. For a discussion of transactions between the Company and related parties during 2002, see "Related Party Transactions" under Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - of the Company's Annual Report on Form 10-K for the year ended December 31, 2002. Economic Conditions The Company generally pays the ordinary annual operating expenses of its properties from the rental revenue generated by the properties. For the three months ended September 30, 2003, the rental income exceeded the expenses for each individual property, with the exception of the Bollman and Blue Ravine properties. The Bollman property in Savage, Maryland had been vacant, however, it was leased in July 2003. The Company expects that Bollman will produce sufficient revenue in the fourth quarter to cover its expense. The single tenant lease at the Blue Ravine property located in Folsom, California expired June 30, 2003, there is no new lease, and the Company expects that the property will not produce revenue to cover its expenses in the fourth quarter. In addition to rental income, the Company maintains cash reserves that may be used to fund unusual expenses or major capital improvements. The cash reserves included in cash and cash equivalents, which as of September 30, 2003 were approximately $14 million, are in excess of the known needs for extraordinary expenses or capital improvements for the real properties currently owned by the Company within the next few years. There are no external restrictions on these reserves, and they may be used for any Company purpose. Although there is no guarantee 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. The Company believes that it has adequate funds to cover unusual expenses and capital improvements, in addition to normal operating expenses. The Company's ability to maintain or increase its 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 the Company's 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. 22
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) As a result of its acquisition of 13 REITs, FSP Corp. may no longer qualify as a REIT. As a result of the combination of FSP Corp. with the 13 REITs it acquired by merger in June 2003, FSP Corp. might no longer qualify as a real estate investment trust under Section 856 of the Internal Revenue Code of 1986, as amended. FSP Corp. could lose its ability to so qualify for a variety of reasons relating to the nature of the assets acquired from the acquired REITs, the identity of the shareholders of the acquired REITs who become shareholders of FSP Corp. or the failure of one or more of the acquired REITs to have previously qualified as a real estate investment trust. FSP Corp. would incur adverse tax consequences if it failed to qualify as a REIT. If in any taxable year FSP Corp. does not qualify as a real estate investment trust, it would be taxed as a corporation and distributions to its stockholders would not be deductible by FSP Corp. in computing its taxable income. In addition, if FSP Corp. were to fail to qualify as a real estate investment trust, FSP Corp. could be disqualified from treatment as a real estate investment trust in the year in which such failure occurred and for the next four taxable years and, consequently, would be taxed as a corporation during such years. Failure to qualify for even one taxable year could result in a significant reduction of FSP Corp.'s cash available for distributions to its stockholders or could require FSP Corp. to incur indebtedness or liquidate investments in order to generate sufficient funds to pay the resulting federal income tax liabilities. In addition, timing differences between the receipt of income and payment of expenses and the inclusion and deduction of such amounts in arriving at taxable income of FSP Corp. could make it necessary for FSP Corp. to borrow in order to make certain distributions to its 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 FSP Corp. expects that it will be organized and will operate in a manner that will enable it to meet such requirements, no assurance can be given that it will succeed in doing so during the entire life of FSP Corp. In addition, you should note that if one or more of the acquired REITs did not qualify as a real estate investment trust immediately prior to the consummation of the mergers, FSP Corp. would be disqualified as a REIT as a result of the mergers. The anticipated benefits of FSP Corp.'s acquisition of the 13 REITs may not be realized and FSP Corp.'s operating results may be adversely affected. FSP Corp. acquired the 13 REITs in June 2003 with the expectation that the mergers would result in benefits, including: o FSP Corp.'s real estate portfolio would be substantially larger and more diverse both geographically and by tenant business than prior to the consummation of the mergers, reducing the dependence of an investment in FSP Corp. on the performance of a smaller group of assets. o FSP Corp.'s business would generate a greater percentage of its revenues from rentals from real properties and a lesser percentage from real estate investment banking/brokerage activities, constituting a more stable income stream than that received by FSP Corp. prior to the consummation of the mergers. o FSP Corp.'s larger portfolio of real estate would produce economies of scale, increase its purchasing power relating to goods and services and reduce the percentage that expenses constitute of gross revenue. o FSP Corp.'s larger portfolio of real properties and larger equity capitalization might increase the likelihood that FSP Corp. may eventually be able to provide liquidity for its equity investors through the public markets. Achieving the benefits of the mergers will depend in part on the sustainability of long-term tenants in the real properties owned by FSP Corp. and the ability of FSP Corp.'s key personnel to effectively manage the additional 13 properties. If the occupancy levels and creditworthiness of tenants are not maintained, FSP Corp. will not achieve the intended benefits of the mergers and the operating results of FSP Corp. may be adversely affected. If FSP Corp. is not able to collect sufficient rents from each of its owned real properties, FSP Corp. may suffer significant operating losses. A substantial portion of FSP Corp.'s revenues is generated by the rental income of its real properties. If FSP Corp.'s properties do not provide FSP Corp. a steady rental income, FSP Corp.'s revenues will decrease and may cause FSP Corp. to incur operating losses in the future. 23
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) FSP Corp.'s level of dividends may fluctuate. Because FSP Corp.'s investment banking 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 FSP Corp.'s not being able to maintain or grow dividend levels in the future. The real properties held by FSP Corp. may significantly decrease in value. As of September 30, 2003, FSP Corp. owns 28 properties. Some or all of these properties may decline in value. To the extent FSP Corp.'s real properties decline in value, its stockholders could lose some or all the value of their investments. FSP Corp. may borrow more than it is capable of reasonably repaying under its recently increased line of credit. In August 2003, FSP Corp. amended its revolving credit facility with Citizens Bank to increase its line of credit from $50 million to $125 million. If FSP Corp. borrows heavily against this line of credit, FSP Corp. may experience difficulties repaying it, particularly if FSP Corp.'s cash flows are substantially reduced for any reason. The increased line of credit may create a greater likelihood that FSP Corp. will not be able to sustain its debt obligations under such line of credit and cause a default thereunder. FSP Corp. faces risks in continuing to attract investors for Sponsored REITs. FSP Corp.'s investment banking business continues to depend upon its ability to attract purchasers of equity interests in Sponsored REITs. FSP Corp.'s success in this area will depend on the propensity and ability of investors who have previously invested in Sponsored REITs to continue to invest in future Sponsored REITs and on FSP Corp.'s ability to expand the investor pool for the Sponsored REITs by identifying new potential investors. Moreover, FSP Corp.'s investment banking business may be impacted to the extent existing Sponsored REITs incur losses or have operating results that fail to meet investors' expectations. FSP Corp. expects that its investment banking business will account for a smaller percentage of its overall revenue on a going forward basis due to the expected increase in the percentage of revenues derived from rents as a result of its acquisition of 13 REITs. FSP Corp. faces risks in owning and operating real property. An investment in FSP Corp. is subject to the risks incident to the ownership and operation of real estate-related assets. These risks include the fact that real estate investments are generally illiquid, which may impact FSP Corp.'s ability to vary its portfolio in response to changes in economic and other conditions, as well as the risks normally associated with: o changes in general and local economic conditions; o the supply or demand for particular types of properties in particular markets; o changes in market rental rates; o the impact of environmental protection laws; and o changes in tax, real estate and zoning laws. Certain significant costs, such as real estate taxes, utilities, insurance and maintenance costs, generally are not reduced even when a property's rental income is reduced. In addition, environmental and tax laws, interest rate levels, the availability of financing and other factors may affect real estate values and property income. Furthermore, the supply of commercial and multi-family residential space fluctuates with market conditions. FSP Corp. faces risks from tenant defaults or bankruptcies. If any of FSP Corp.'s tenants defaults on its lease, FSP Corp. may experience delays in enforcing its rights as a landlord and may incur substantial costs in protecting its investment. In addition, at any time, a tenant of one of FSP Corp.'s properties may seek the protection of bankruptcy laws, which could result in the rejection and termination of such tenant's lease and thereby cause a reduction in cash available for distribution to FSP Corp.'s stockholders. 24
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) FSP Corp. may encounter significant delays in reletting vacant space, resulting in losses of income. When leases expire, FSP Corp. will incur expenses and may not be able to re-lease the space on the same terms. Certain leases provide tenants the right to terminate early if they pay a fee. If FSP Corp. is unable to re-lease space promptly, if the terms are significantly less favorable than anticipated or if the costs are higher, FSP Corp. may have to reduce its distributions to its stockholders. FSP Corp. faces risks from geographic concentration. The properties in FSP Corp.'s portfolio are distributed among the major geographic segments by aggregate square footage to be owned by FSP Corp., as follows: Southwest - 26%; Northeast - 31%; Midwest - 19%; West - 16%; and Southeast - 8%. However, within certain of those segments, a large concentration exists within a particular city and its immediately surrounding area; specifically, Houston, Texas - 18% and Washington, DC - 14%. FSP Corp. is likely to face risks to the extent that any of these areas suffer deteriorating economic conditions. FSP Corp. competes with national, regional and local real estate operators and developers, which could adversely affect FSP Corp.'s cash flow. Competition exists in every market in which FSP Corp.'s properties are located and in every market in which FSP Corp.'s properties will be located. FSP Corp. competes with, among others, national, regional and numerous local real estate operators and developers. Such competition may adversely affect the percentage of leased space and the rental revenues of FSP Corp.'s properties, which could adversely affect FSP Corp.'s cash flow from operations and its ability to make expected distributions to its stockholders. Some of FSP Corp.'s competitors may have more resources than FSP Corp. or other competitive advantages. Competition may be accelerated by any increase in availability of funds for investment in real estate. To the extent that the properties of FSP Corp. continue to operate profitably, this will likely stimulate new development of competing properties. For example, decreases in interest rates tend to increase the availability of funds and therefore can increase competition. The extent to which FSP Corp. is affected by competition will depend in significant part on local market conditions. There is limited potential for an increase in leased space gains in FSP Corp.'s properties. FSP Corp. anticipates that future increases in revenue from its properties will be primarily the result of scheduled rental rate increases or rental rate increases as leases expire. Properties with higher rates of vacancy are generally located in soft economic markets so that it may be difficult to realize increases in revenue when vacant space is re-leased. FSP Corp. is subject to possible liability relating to environmental matters, and FSP Corp. cannot assure you that it has identified all possible liabilities. Under various federal, state and local laws, ordinances and regulations, an owner or operator of real property may become liable for the costs of removal or remediation of certain hazardous substances released on or in its property. Such laws may impose liability without regard to whether the owner or operator knew of, or caused, the release of such hazardous substances. The presence of hazardous substances on a property may adversely affect the owner's ability to sell such property or to borrow using such property as collateral, and it may cause the owner of the property to incur substantial remediation costs. In addition to claims for cleanup costs, the presence of hazardous substances on a property could result in the owner incurring substantial liabilities as a result of a claim by a private party for personal injury or a claim by an adjacent property owner for property damage. In addition, FSP Corp. cannot assure you that: o future laws, ordinances or regulations will not impose any material environmental liability; o the current environmental conditions of FSP Corp.'s properties will not be affected by the condition of properties in the vicinity of such properties (such as the presence of leaking underground storage tanks) or by third parties unrelated to FSP Corp.; o the current environmental conditions of FSP Corp.'s properties will not be affected by mold or other environmental pollutants that could affect indoor air quality; o tenants will not violate their leases by introducing hazardous or toxic substances into FSP Corp.'s properties that could expose FSP Corp. to liability under federal or state environmental laws; or o environmental conditions, such as the growth of bacteria and toxic mold in heating and ventilation systems or on walls, will not occur at FSP Corp.'s properties and pose a threat to human health. 25
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) FSP Corp. is subject to compliance with the Americans With Disabilities Act and fire and safety regulations which could require FSP Corp. to make significant capital expenditures. All of FSP Corp.'s properties are required to comply with the Americans With Disabilities Act, and the regulations, rules and orders that may be issued thereunder (the "ADA"). The ADA has separate compliance requirements for "public accommodations" and "commercial facilities," but generally requires that buildings be made accessible to persons with disabilities. Compliance with ADA requirements might require, among other things, removal of access barriers and noncompliance could result in the imposition of fines by the U.S. government, or an award of damages to private litigants. In addition, FSP Corp. is required to operate its properties in compliance with fire and safety regulations, building codes and other land use regulations, as they may be adopted by governmental agencies and bodies and become applicable to FSP Corp.'s properties. Compliance with such requirements may require FSP Corp. to make substantial capital expenditures, which expenditures would reduce cash otherwise available for distribution to its stockholders. There are significant conditions to FSP Corp.'s obligation to redeem shares of its common stock, and any such redemption will result in the stockholders tendering shares receiving less than their fair market value. Under FSP Corp.'s redemption plan, it is only obligated to use its best efforts to redeem shares of its common stock from stockholders wishing to have them redeemed. There are significant conditions to FSP Corp.'s obligation to redeem shares of its common stock including: o FSP Corp. cannot be insolvent or be rendered insolvent by the redemption; o redemption cannot impair the capital or operations of FSP Corp.; o the redemption cannot contravene any provision of federal or state securities laws; o the redemption cannot result in FSP Corp.'s failing to qualify as a REIT; and o FSP Corp.'s management must determine that the redemption is in FSP Corp.'s best interests. Any redemption effected by FSP Corp. under this plan would result in the stockholders tendering shares of FSP common stock receiving 90% of the fair market value, as determined by FSP Corp.'s Board of Directors in its sole and absolute discretion, of such shares and not their full fair market value. FSP Corp. may lose capital investment or anticipated profits if an uninsured event occurs. FSP Corp. carries or its tenants carry comprehensive liability, fire and extended coverage with respect to each of the properties owned by FSP Corp., 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, FSP Corp. could lose both its capital invested in the property and anticipated profits. FSP Corp.'s stockholders may experience greater risks relating to diversification of portfolios following its acquisition of 13 REITs. The assets and liabilities of the acquired REITs and of FSP Corp. were combined as a result of the mergers. As a result of the mergers, the geographic diversity of the properties in which FSP Corp.'s stockholders own an interest changed. However, because the market for real estate may vary widely from one region of the country to another, the change in geographic diversity may expose FSP Corp. stockholders to different and greater risks than those to which they were previously exposed. Provisions in FSP Corp.'s organizational documents may prevent changes in control. FSP Corp.'s Articles of Incorporation (the "Articles") and Bylaws (the "Bylaws") contain provisions, described below, which may have the effect of discouraging a third party from making an acquisition proposal for FSP Corp. and may thereby inhibit a change of control of FSP Corp. under circumstances that could give the holders of FSP common stock the opportunity to realize a premium over the then-prevailing market prices. 26
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Provisions in FSP Corp.'s organizational documents may prevent changes in control. (continued) Ownership Limits. In order for FSP Corp. to maintain its qualification as a real estate investment trust, the holders of 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 FSP Corp., and no holder of common stock may acquire or transfer shares that would result in FSP Corp. being beneficially owned by fewer than 100 persons. Such ownership limit may have the effect of preventing an acquisition of control of FSP Corp. without the approval of FSP Corp.'s Board of Directors. Moreover, FSP Corp. will have the right to redeem any shares of its common stock that are acquired or transferred in violation of these provisions at the market price. In addition, the Articles give FSP Corp.'s 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. FSP Corp.'s Board of Directors is divided into three classes. The terms of these classes will expire in 2004, 2005 and 2006, respectively. Directors of each class are elected for a three-year term upon the expiration of the initial term of each class. The staggered terms for directors may affect the stockholders' ability to effect a change in control of FSP Corp. even if a change in control were in the stockholders' best interests. Preferred Stock. The Articles authorize FSP Corp.'s Board of Directors to issue up to 20,000,000 shares of preferred stock, par value $.0001 per share (the "Preferred Stock"), and to establish the preferences and rights of any such shares issued. The issuance of Preferred Stock could have the effect of delaying or preventing a change in control of FSP Corp. even if a change in control were in the stockholders' best interest. Increase of Authorized Stock. FSP Corp.'s 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 FSP Corp. has authority to issue. The ability to increase the number of authorized shares and issue such shares could have the effect of delaying or preventing a change in control of FSP Corp. even if a change in control were in the stockholders' best interest. Amendment of Bylaws. FSP Corp.'s Board of Directors has the sole power to amend the Bylaws. This power could have the effect of delaying or preventing a change in control of FSP Corp. even if a change in control were in the stockholders' best interests. Stockholder Meetings. The Bylaws require advance notice for stockholder proposals to be considered at annual meetings of stockholders and for stockholder nominations for election of directors at special meetings of stockholders. The Bylaws also provide that stockholders entitled to cast more than 50% of all the votes entitled to be cast at a meeting must join in a request by stockholders to call a special meeting of stockholders. These provisions could have the effect of delaying or preventing a change in control of FSP Corp. even if a change in control were in the best interests of the stockholders. Supermajority Votes Required. The Articles require the affirmative vote of the holders of no less than 80% of the shares of capital stock outstanding and entitled to vote in order (i) to amend the provisions of the Articles relating to the classification of directors, removal of directors, limitation of liability of officers and directors or indemnification of officers and directors or (ii) to amend the Articles to impose cumulative voting in the election of directors. These provisions could have the effect of delaying or preventing a change in control of FSP Corp. even if a change in control were in the stockholders' best interest. There is no public trading market for FSP Corp.'s securities. There is no public trading market for FSP Corp.'s common stock. FSP Corp. cannot assure you that any market will develop or that there will be any liquidity in a market for its common stock. 27
Item 3. Quantitative and Qualitative Disclosures about Market Risk The Company was not a party to any derivative financial instruments at or during the year ended December 31, 2002 or during the nine months ended September 30, 2003. The Company draws from time to time on its line of credit. These borrowings bear interest at a variable rate. The Company uses the funds it draws on its 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 the Company under its line of credit. Therefore, the Company believes that it has mitigated its interest rate risk with respect to its borrowings. Item 4. Controls and Procedures. The Company's management, with the participation of the Company's President and Chief Executive Officer and the Company's Vice President and Chief Operating Officer (equivalent of Chief Financial Officer), evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2003. Based on this evaluation, the Company's President and Chief Executive Officer and the Company's Vice President and Chief Operating Officer (equivalent of Chief Financial Officer) concluded that, as of September 30, 2003, the Company's disclosure controls and procedures were (1) designed to ensure that material information relating to the Company, including the Company's consolidated subsidiaries, is made known to the Company's President and Chief Executive Officer and the Company'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 the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. No change to the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended September 30, 2003 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 28
PART II - OTHER INFORMATION Item 1. Legal Proceedings: Not applicable. Item 2. Changes in Securities and Use of Proceeds: Not applicable. 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. Item 6. Exhibits and Reports on Form 8-K: (a) Exhibit 10.1 - Amended and restated Loan Agreement among Franklin Street Properties Corp. (and subsidiaries) and Citizens Bank of Massachusetts (agent) and Fleet National Bank (co-agent) dated as of August 18, 2003. Exhibit 31.1 - Certification by the Registrant's President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 31.2 -- Certification by the Registrant's Vice President, Chief Operating Officer (equivalent of Chief Financial Officer), Treasurer and Secretary pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 32.1 -- Certification by the Registrant's President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Exhibit 32.2 -- Certification by the Registrant's Vice President, Chief Operating Officer (equivalent of Chief Financial Officer), Treasurer and Secretary pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K. 1. On August 15, 2003, the Registrant filed a current report on Form 8-K/A to amend and restate Item 7 of its current report on Form 8-K dated June 4, 2003, to file certain financial statements and pro forma financial information 29
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 12, 2003 By: /s/ George J. Carter Chief Executive Officer and ---------------------- Director (Principal Executive George J. Carter Officer) November 12, 2003 By: /s/ Lloyd S. Dow Controller --------------------- (Principal Accounting Officer) Lloyd S. Dow 30