##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
 FORM 10-Q X
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2004 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from ____________ to _____________. Commission File Number 1-31824 FIRST POTOMAC REALTY TRUST  MARYLAND
(State or other jurisdiction of
incorporation or organization)
    
    37-1470730
(I.R.S. Employer
Identification No.)
 7200 Wisconsin Avenue, Suite 310, Bethesda, MD 20814
(Address of principal executive offices) (Zip Code) (301) 986-9200
(Registrants telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.   YES  x    NO  o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).   YES  x    NO  o As of November 9, 2004, there were 14,154,000 common shares of beneficial
interest, par value $.001 per share, outstanding.    1




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FIRST POTOMAC REALTY TRUST
FORM 10-Q INDEX PagePart I:
    
    Financial InformationItem 1.
    
    Financial StatementsCondensed Consolidated Balance Sheets
as of September 30, 2004 (unaudited) and December 31, 2003
    
    
    3Condensed, Consolidated and Combined
Statements of Operations (unaudited) for the Three and Nine Months Ended September 30, 2004 and 2003
    
    
    4Condensed, Consolidated, and Combined
Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2004 and 2003
    
    
    5Notes to Condensed, Consolidated, and Combined Financial Statements (unaudited)
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3.
    
    Quantitative and Qualitative Disclosure about Market Risk
    
    
    23Item 4.
    
    Controls and Procedures
    
    
    23Part II:
    
    Other InformationItem 6.
    
    Exhibits and Reports on Form 8-K
    
    
    24Signatures
 2




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FIRST POTOMAC REALTY TRUST
Condensed Consolidated Balance Sheets September 30, 2004(Unaudited)
    
    December 31, 2003Assets:Rental property, net
    
    $
    359,524,453
    
    
    $
    208,334,677Assets held for sale
    
    
    6,203,274
    
    
    
    Cash and cash equivalents
    
    
    20,206,033
    
    
    
    16,307,508Escrows and reserves
    
    
    5,203,815
    
    
    
    3,422,473Accounts and other receivables, net of
allowance for doubtful accounts of
$235,701 and $144,711, respectively
    
    
    1,446,364
    
    
    
    575,362Accrued straight-line rents, net of
allowance for doubtful accounts of
$4,674 and $0, respectively
    
    
    2,126,200
    
    
    
    1,805,679Deferred costs, net
    
    
    3,763,572
    
    
    
    3,205,534Prepaid expenses and other assets
    
    
    2,614,819
    
    
    
    773,040Intangible assets, net
    
    
    18,905,125
    
    
    
    9,723,735Total assets
    
    $
    419,993,655
    
    
    $
    244,148,008Liabilities:Accounts payable and accrued expenses
    
    $
    3,076,526
    
    
    $
    1,525,992Accrued interest
    
    
    702,540
    
    
    
    151,861Rents received in advance
    
    
    1,509,452
    
    
    
    801,640Tenant security deposits
    
    
    2,466,673
    
    
    
    1,025,645Mortgage loans
    
    
    210,483,938
    
    
    
    127,840,126Deferred market rent, net
    
    
    3,776,863
    
    
    
    803,428Total liabilities
    
    
    222,015,992
    
    
    
    132,148,692Minority interests
    
    
    19,189,586
    
    
    
    19,866,928Shareholders equity:Common stock, $0.001 par value, 100,000,000
shares authorized: 14,154,000 and
8,634,000 issued and outstanding,
respectively
    
    
    14,154
    
    
    
    8,634Additional paid-in capital
    
    
    209,309,652
    
    
    
    117,525,629Deficit
    
    
    (30,535,729
    )
    
    
    (25,401,875
    )Total shareholders equity
    
    
    178,788,077
    
    
    
    92,132,388Total liabilities and shareholders equity
    
    $
    419,993,655
    
    
    $
    244,148,008
 See accompanying notes to condensed, consolidated, and combined financial statements. 3




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FIRST POTOMAC REALTY TRUST
Condensed, Consolidated, and Combined Statements of Operations
(Unaudited) Three Months Ended September 30,
    
    Nine Months Ended September 30,2004
    
    2003
    
    2004
    
    2003Revenues:Rental
    
    $
    10,556,176
    
    
    $
    3,178,937
    
    
    $
    24,240,006
    
    
    $
    10,582,122Tenant reimbursements and other
    
    
    1,626,363
    
    
    
    757,708
    
    
    
    3,665,784
    
    
    
    2,184,915Total revenue
    
    
    12,182,539
    
    
    
    3,936,645
    
    
    
    27,905,790
    
    
    
    12,767,037Operating expenses:Property operating
    
    
    2,424,329
    
    
    
    652,930
    
    
    
    5,479,230
    
    
    
    1,702,376Real estate taxes and insurance
    
    
    1,122,437
    
    
    
    252,900
    
    
    
    2,585,263
    
    
    
    1,040,829General and administrative
    
    
    951,689
    
    
    
    754,504
    
    
    
    2,843,445
    
    
    
    1,975,526Depreciation and amortization
    
    
    3,811,330
    
    
    
    1,197,691
    
    
    
    8,961,169
    
    
    
    3,385,018Total operating expenses
    
    
    8,309,785
    
    
    
    2,858,025
    
    
    
    19,869,107
    
    
    
    8,103,749Operating income
    
    
    3,872,754
    
    
    
    1,078,620
    
    
    
    8,036,683
    
    
    
    4,663,288Other expenses (income):Interest expense
    
    
    3,327,609
    
    
    
    2,920,748
    
    
    
    7,844,370
    
    
    
    8,660,356Interest and other income
    
    
    (107,749
    )
    
    
    8,540
    
    
    
    (171,880
    )
    
    
    (37,610
    )Equity in earnings (losses) of investees
    
    
    
    
    
    
    (201,097
    )
    
    
    
    
    
    
    64,069Total other expenses
    
    
    3,219,860
    
    
    
    2,728,191
    
    
    
    7,672,490
    
    
    
    8,686,815Income (loss) from continuing operations
before minority interests
    
    
    652,894
    
    
    
    (1,649,571
    )
    
    
    364,193
    
    
    
    (4,023,527
    )Minority interests
    
    
    (66,806
    )
    
    
    59,009
    
    
    
    (34,374
    )
    
    
    205,541Income (loss) from continuing operations
    
    
    586,088
    
    
    
    (1,590,562
    )
    
    
    329,819
    
    
    
    (3,817,986
    )Income from discontinued operations
    
    
    71,073
    
    
    
    
    
    
    
    98,866
    
    
    
    Net Income (loss)
    
    $
    657,161
    
    
    $
    (1,590,562
    )
    
    $
    428,685
    
    
    $
    (3,817,986
    )Basic and diluted net income per share:Continuing operations
    
    $
    0.04
    
    
    
    
    
    
    $
    0.03Discontinued operations
    
    
    0.01
    
    
    
    
    
    
    
    0.01Net income
    
    $
    0.05
    
    
    
    
    
    
    $
    0.04Weighted average common shares
outstanding  basic
    
    
    14,154,000
    
    
    
    
    
    
    
    10,648,599Weighted average common shares
outstanding  diluted
    
    
    14,283,720
    
    
    
    
    
    
    
    10,768,305
 See accompanying notes to condensed, consolidated, and combined financial statements. 4




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FIRST POTOMAC REALTY TRUST
Condensed, Consolidated, and Combined Statements of Cash Flows
(Unaudited) Nine Months Ended September 30,2004
    
    2003Cash flow from operating activitiesNet income (loss)
    
    $
    428,685
    
    
    $
    (3,817,986
    )Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation and amortization
    
    
    9,840,594
    
    
    
    3,438,438Amortization of deferred market rent
    
    
    (356,992
    )
    
    
    (53,420
    )Minority interests
    
    
    34,374
    
    
    
    (205,541
    )Equity in losses of investees
    
    
    
    
    
    
    64,069Changes in assets and liabilities:Escrows and reserves
    
    
    (1,781,342
    )
    
    
    1,573,166Accounts and other receivables, net
    
    
    (916,062
    )
    
    
    (469,159
    )Accrued straight-line rents
    
    
    (320,521
    )
    
    
    (174,737
    )Prepaid expenses and other assets
    
    
    (1,614,742
    )
    
    
    (1,180,382
    )Tenant security deposits
    
    
    1,441,028
    
    
    
    2,734Accounts payable and accrued expenses
    
    
    1,550,534
    
    
    
    2,378,190Accrued interest
    
    
    550,679
    
    
    
    827,104Rent received in advance
    
    
    707,812
    
    
    
    (344,577
    )Deferred costs
    
    
    (550,638
    )
    
    
    (685,717
    )Total adjustments
    
    
    8,584,724
    
    
    
    5,170,168Net cash provided by operating activities
    
    
    9,013,409
    
    
    
    1,352,182Cash flows from investing activitiesDistributions from investments in real estate entities
    
    
    
    
    
    
    2,729,209Purchase deposit on future acquisitions
    
    
    (350,000
    )
    
    
    Additions to rental property and other assets
    
    
    (81,077,563
    )
    
    
    (922,977
    )Net cash (used in) provided by investing activities
    
    
    (81,427,563
    )
    
    
    1,806,232Cash flows from financing activitiesFinancing costs
    
    
    (808,687
    )
    
    
    Proceeds from debt
    
    
    18,000,000
    
    
    
    982,305Repayments of debt
    
    
    (26,393,921
    )
    
    
    (2,831,007
    )Dividends to shareholders
    
    
    (5,562,539
    )
    
    
    (169,704
    )Distributions to minority interests
    
    
    (711,717
    )
    
    
    Distributions to partners
    
    
    
    
    
    
    (218,556
    )Proceeds from issuance of stock, net
    
    
    91,789,543
    
    
    
    252,112Net cash provided by (used in) financing activities
    
    
    76,312,679
    
    
    
    (1,984,850
    )Net increase in cash and cash equivalents
    
    
    3,898,525
    
    
    
    1,173,564Cash and cash equivalents at beginning of year
    
    
    16,307,508
    
    
    
    670,277Cash and cash equivalents at end of period
    
    $
    20,206,033
    
    
    $
    1,843,841
 See accompanying notes to condensed, consolidated and combined financial statements. 5




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FIRST POTOMAC REALTY TRUST NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS (1) Summary of Significant Accounting Policies (a) Description of Business First Potomac Realty Trust (the Company) is a self-managed,
self-administered Maryland real estate investment trust (REIT). The Company
focuses on owning and operating industrial and flex properties in the
Washington, D.C. metropolitan area and other major markets in Virginia and
Maryland, which we collectively refer to as the southern Mid-Atlantic region. The results of operations for the three and nine months ended September
30, 2004, represent the Companys third complete quarter of earnings and
activities subsequent to its initial public offering completed in the fourth
quarter of 2003. The results of operations for the three and nine months ended
September 30, 2003, are based on the combined historical statements of
operations of the First Potomac Predecessor (as defined below). The Company was formed in July 2003 to be the successor general partner to
First Potomac Realty Investment Trust, Inc. (Trust, Inc.), the former general
partner of First Potomac Realty Investment Limited Partnership, the Companys
operating partnership (FPR or the Operating Partnership). The pre-IPO
operations of Trust, Inc., the Operating Partnership and First Potomac
Management, Inc. (FPM), the property management company that managed all of
the Companys assets prior to the initial public offering, are referred to
herein as First Potomac Predecessor. The Company owns all of its properties
and conducts its business through the Operating Partnership. At September 30,
2004, the Company was the sole general partner of and owns a 91% interest in
the Operating Partnership. The remaining interests in the Operating
Partnership consist of limited partnership interests that are presented as
minority interests. On October 28, 2003, the Company closed its initial public offering. The
Company sold 7.5 million common shares of beneficial interest at $15.00 per
share, raising net proceeds of approximately $102.0 million. On November 21,
2003, the Company sold an additional 1.1 million shares to cover
over-allotments resulting in additional net proceeds of approximately $15.5
million. Prior to the end of the second quarter of 2004, the Company had fully
used the net proceeds from the IPO to (i) acquire additional properties ($67.0
million); (ii) repay debt, accrued interest and prepayment fees ($48.0 million)
including $7.0 million of debt in the first quarter of 2004; and (iii) acquire
joint venture interests held by an institutional partner in four of the
Companys properties ($3 million). On June 23, 2004, the Company closed on a
follow-on offering of 5.5 million common shares at $17.60 per share, resulting
in net proceeds of approximately $92.0 million. The Company has used all of
the net proceeds of the follow-on offering to (i) acquire properties ($74.0
million) and (ii) repay borrowings on the Companys revolving line of credit
($18.0 million). As of September 30, 2004, the Company owned a 34-property portfolio
consisting of 71-buildings totaling approximately 4.5 million square feet. On
July 16, 2004, the Company acquired a 14-property, 26 building,
1.4-million-square-foot portfolio located primarily in the Maryland suburbs of
Washington, D.C. for total consideration of $123.0 million consisting of cash
proceeds from the follow-on offering of $45.6 million and the assumption of
$77.4 million of mortgage debt. On August 5, 2004, the Company acquired a
three-building, 82,000-square-foot flex property located in the Maryland
suburbs of Washington, D.C. for total cash consideration of $9.8 million
consisting of cash proceeds from the follow-on offering. On October 22, 2004,
the Company acquired a 124,000-square-foot, industrial flex property in
Haymarket, Virginia for total cash consideration of $10.8 million consisting of
cash proceeds from the follow-on offering. Also on October 22, 2004, the
Company acquired two properties, Norfolk Commerce Park II and Crossways II, for
$18.5 million. Norfolk Commerce Park II is a 128,000 square-foot flex property
in Norfolk, Virginia, and Crossways II is an 85,000 square-foot flex property
in Chesapeake, Virginia. The two properties were financed with proceeds raised
from the Companys follow-on offering and the assumption of $7.6 million of
mortgage debt, increasing the Companys portfolio to 75 buildings totaling
approximately 4.9 million square feet. (b) Principles of Consolidation and Combination Financial statements for the Companys operations in 2003 relate to First
Potomac Predecessor. The combined financial statements of First Potomac
Predecessor include the financial statements of Trust, Inc., FPR and FPM as
these entities were under the common control of a single group of owners, Louis
and Douglas Donatelli, father and son (the Control Group). Prior to the
initial public offering, Trust, Inc. was the sole general partner of FPR. FPM
managed all the properties held by 6




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FPR. The Control Group owned 80 percent of Trust, Inc., 48 percent of FPR
(representing 100 percent of the voting interests) and 64 percent of FPM.
Ownership interests acquired from the Control Group were recorded at their
historical cost basis. Acquisitions of ownership interests of other parties
were recorded at fair value and allocated between buildings, tenant
improvements, intangible assets and in-place leases in accordance with SFAS No.
141 Business Combinations. The 2004 consolidated financial statements of the Company include the
accounts of the Company, the Operating Partnership, the subsidiaries of the
Operating Partnership and FPM Management LLC, which succeeded to the business
of FPM. All intercompany balances and transactions have been eliminated in
consolidation. We have condensed or omitted certain information and footnote disclosures
normally included in financial statements presented in accordance with U.S.
generally accepted accounting principles, or GAAP, in the accompanying
unaudited condensed consolidated and combined financial statements. We believe
the disclosures made are adequate to prevent the information presented from
being misleading. However, the unaudited condensed consolidated and combined
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in our Annual Report on Form
10-K for the year ended December 31, 2003 and as amended from time to time in
other filings with the Securities and Exchange Commission. In our opinion, the accompanying unaudited condensed consolidated and
combined financial statements reflect all adjustments necessary to present
fairly our financial position as of September 30, 2004 and the results of our
operations for the quarter and year-to-date ended September 30, 2004 and 2003
and cash flows for year-to-date September 30, 2004 and 2003. Interim results
are not necessarily indicative of full year performance due in part to the
impact of mid-year acquisitions. (c) Revenue Recognition The Company generates substantially all of its revenue from leases on its
industrial and flex properties. The Company recognizes rental revenue on a
straight-line basis over the life of the respective leases in accordance with
SFAS No. 13, Accounting for Leases. Accrued straight-line rents represent
the difference between rental revenue recognized on a straight-line basis over
the term of the respective lease agreements and the rental payments
contractually due for leases that contain abatement or fixed periodic
increases. The Company considers current information and events regarding the
tenants ability to pay their obligations in determining if accrued
straight-line rents are ultimately collectible. The uncollectible portion of
accrued straight-line rents is charged to rental revenues in the period in
which the determination is made. Tenant leases generally contain provisions under which the tenants
reimburse the Company for a portion of property operating expenses and real
estate taxes incurred by the Company. The Company records a provision for
losses on estimated uncollectible accounts receivable based on its analysis of
risk of loss on specific accounts. (d) Intangibles Other intangible assets include the value of tenant or customer
relationships, and the origination value of leases in accordance with SFAS No.
141, Business Combinations. Customer relationship values are determined
based on our evaluation of the speci?c characteristics of each tenants lease
and our overall relationship with the tenant. Characteristics we consider
include the nature and extent of our existing business relationships with the
tenant, growth prospects for developing new business with the tenant, the
tenants credit quality and expectations of lease renewals. The value of
customer relationship intangible assets is amortized to expense over the lesser
of the initial lease term and any expected renewal periods or the remaining
useful life of the building. We determine the fair value of the cost of
acquiring existing tenants by estimating the lease commissions avoided by
having in-place tenants and avoided lost operating income for the estimated
period required to lease the space occupied by existing tenants at the
acquisition date. The cost of acquiring existing tenants is amortized to
expense over the initial term of the respective leases. Should a tenant
terminate its lease, the unamortized portion of the in-place lease value is
charged to expense on the date of termination. Deferred market rent liability consists of the net effect of leases with
above or below market rents. Above market and below market in-place lease
values are determined on a lease by lease basis based on the present value
(using an interest rate which reflects the risks associated with the leases
acquired) of the difference between (a) the contractual amounts to be paid
under the lease and (b) our estimate of the fair market lease rate for the
corresponding space over the remaining non-cancellable terms of the related
leases. The capitalized below market lease values are amortized as an increase
to rental income over the initial term and any below market renewal periods of
the related leases. Capitalized above market lease values are amortized as a
decrease to rental income over the initial term of the related leases. In conjunction with the initial public offering and related formation
transactions, First Potomac Management, Inc. 7




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contributed all of the capital interests in FPM Management LLC, the
entity that manages our properties, to the Operating Partnership. The $2.1
million fair value of the in-place workforce acquired has been classified as
goodwill from third parties in accordance with SFAS No. 141,
Business
Combinations. Goodwill is assessed for impairment at the beginning of our
fiscal year and in interim periods if certain events, such as the loss of key
personnel, occur indicating the carrying value is impaired. The Company will
recognize an impairment loss when the discounted expected future cash
flows
associated with management contracts is less than the carrying cost of the
goodwill in accordance with SFAS No. 142, Goodwill and Other Intangibles.
No events occurred during the three and nine months ended September 30, 2004
to cause us to test for impairment. (e) Income Taxes Prior to the initial public offering, the combined companies operated as a
limited partnership or elected to be taxed as subchapter S corporations for
federal income tax purposes. As a result, the Company was not subject to
federal income taxation at the corporate level as taxable income was the direct
responsibility of the partners or shareholders. Accordingly, no provision was
made for state or federal income taxes in the accompanying combined financial
statements for periods prior to the IPO. In conjunction with its initial public offering, the Company elected to be
taxed as a REIT. To maintain its status as a REIT, the Company is required to
distribute at least 90% of its ordinary taxable income annually to its
shareholders. The Company intends to make timely distributions sufficient to
satisfy the annual distribution requirements and to avoid corporate income tax
and any nondeductible excise tax. Through September 30, 2004, the Company has
not generated any taxable income or loss through a taxable REIT subsidiary.
Accordingly, no provision was made for state or federal income taxes in the
accompanying combined financial statements for periods subsequent to the IPO. (f) Minority Interests Minority interests relates to the interests in the Operating Partnership
not owned by the Company. Upon completion of the initial public offering and
contribution of the net proceeds to the Operating Partnership, the Company
owned 86% of the outstanding Operating Partnership units. Subsequent to the
completion of the follow-on offering that closed on June 23, 2004, the Company
owned 91% of the units outstanding. The remaining interests in the Operating
Partnership are owned by limited partners who contributed properties and other
assets to the Operating Partnership in exchange for Operating Partnership
units. Limited partners will have the right to tender their units for
redemption beginning 12 months after the closing of the initial public offering
in exchange for, at the Companys option, common shares of the Company or an
equivalent amount of cash. Unitholders receive distributions per unit
equivalent to the dividend per common share. As of November 9, 2004, no
limited partners have tendered their units for redemption. (g) Income Per Share Basic earnings per share (EPS) is calculated by dividing net income by
the weighted average number of the Companys common shares outstanding.
Diluted EPS is computed after adjusting the basic EPS computation for the
effect of diluted common equivalent shares outstanding during the period. The
effect of stock options, if dilutive, is computed using the treasury stock
method. The following table sets forth the computation of the Companys basic and
diluted earnings per share from continuing operations and income available to
common shareholders: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Numerator for basic and diluted per share calculations:Income (loss) from continuing operations
    
    $
    586,088
    
    
    $
    (1,590,562
    )
    
    $
    329,819
    
    
    $
    (3,817,986
    )Income from discontinued operations
    
    
    71,073
    
    
    
    
    
    
    
    98,866
    
    
    
    Net income (loss)
    
    $
    657,161
    
    
    $
    (1,590,562
    )
    
    $
    428,685
    
    
    $
    (3,817,986
    )
 8




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##### 



Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Denominator for basic and diluted per share
calculations:Weighted average shares outstanding  basic:
    
    
    14,154,000
    
    
    
    
    
    
    
    10,648,599
    
    
    
    Effect of dilutive shares:Employee stock option awards
    
    
    129,720
    
    
    
    
    
    
    
    119,706
    
    
    
    Denominator for diluted per share amounts
    
    
    14,283,720
    
    
    
    
    
    
    
    10,768,305
    
    
    
    Basic and diluted net income per share:Continued operations
    
    $
    0.04
    
    
    
    
    
    
    $
    0.03
    
    
    
    Discontinued operations
    
    
    0.01
    
    
    
    
    
    
    
    0.01
    
    
    
    Net income
    
    $
    0.05
    
    
    
    
    
    
    $
    0.04
    
    
    
    
 (h) Stock Based Compensation In compliance with SFAS No. 123, Accounting for Stock Based
Compensation, the Company has elected to follow the intrinsic value-based
method of accounting prescribed by the Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees, and related interpretations, in
accounting for its fixed plan share options. As such, compensation expense
would be recorded only if the current market price of the underlying shares on
the date of grant exceeded the exercise price. No compensation expense has been recognized for the three and nine months
ended September 30, 2004 for options granted under the Equity Compensation Plan
adopted by the Board of Trustees in 2003. Under SFAS No. 123, compensation
expense of $53,093 and $149,357 would have been recorded during the three and
nine months ended September 30, 2004 for the Equity Compensation Plan based
upon the fair value of the option awards. Pro forma net income and net income per share would have been as follows
(unaudited): Three Months Ended
    
    Nine Months EndedSeptember 30, 2004
    
    September 30, 2004Net income, as reported
    
    $
    657,161
    
    
    $
    428,685Add: total stock-based compensation included in
reported net income
    
    
    
    
    
    
    Deduct: total stock-based employee compensation
expense determined under fair value based method for
all awards, net of minority interests
    
    
    (53,093
    )
    
    
    (149,357
    )Pro forma net income
    
    $
    604,068
    
    
    $
    279,328Net income per share, as reported  basic and diluted
    
    $
    0.05
    
    
    $
    0.04Pro forma net income per share  basic and diluted
    
    $
    0.04
    
    
    $
    0.03
 (i) Derivatives The Company has interest rate cap agreements in the notional amount of
$25.5 million providing that the maximum interest rate payable, or cap,
attributable to the LIBOR portion of the interest rate, exclusive of the spread
is 5% through November and December 2005. The Companys cap agreements have
not been designated as cash flow hedges and are recorded at fair value as a
component of prepaid and other assets. The Company recognized an increase in
interest expense of $0.1 million for the three and nine months ended September
30, 2004 related to the decline in fair market value of these caps. (j) Use of Estimates The preparation of financial statements requires management of the Company
to make a number of estimates and assumptions relating to the reported amounts
of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the period. Actual results could differ from those
estimates. (k) Reclassifications Certain prior year amounts have been reclassified to conform to the
current year presentation. 9




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##### 



(2) Rental Property Rental property represents 33 industrial and flex rental properties
located in Maryland and Virginia. Rental property is comprised of the
following: September 30,
    
    December 31,2004
    
    2003(unaudited)Land
    
    $
    88,525,382
    
    
    $
    46,329,766Buildings and improvements
    
    
    278,819,212
    
    
    
    166,366,219Tenant improvements
    
    
    6,773,987
    
    
    
    3,410,698Furniture, fixtures and equipment
    
    
    9,711,745
    
    
    
    10,253,915383,830,326
    
    
    
    226,360,598Less: accumulated depreciation
    
    
    (24,305,873
    )
    
    
    (18,025,921
    )$
    359,524,453
    
    
    $
    208,334,677
 On April 27, 2004, the Company acquired Herndon Corporate Center, a
127,000-square-foot, single-story flex property in Herndon, Virginia, for $20.5
million. The acquisition was financed with the Companys available cash,
borrowings under the Companys revolving line of credit and the assumption of a
$9.1 million, fixed-rate first mortgage loan, fair valued at $8.9 million. The
property is currently 97% leased to 14 tenants, with the U.S. Government being
the largest tenant, occupying 23% of the space. On June 4, 2004, the Company acquired Aquia Commerce Center I & II, a
64,000-square-foot, two-building flex property in Stafford, Virginia, for $11.2
million. The acquisition was financed with the Companys available cash,
borrowings under the Companys revolving line of credit and the assumption of a
$1.0 million, fixed-rate first mortgage loan whose outstanding principal
balance approximated its fair value. The property is currently 100% leased to
the U.S. Government. On July 16, 2004, the Company acquired a 14-property, 26-building,
1.4-million-square-foot portfolio concentrated in the Maryland suburbs of
Washington, D.C. for total consideration of $123 million. The portfolio is
comprised primarily of industrial and flex properties and was 94% leased at
acquisition. The acquisition was financed, in part, by the assumption of a
$77.4 million fixed-rate first mortgage loan, fair valued at $81.0 million,
collateralized by all of the properties in the portfolio. The remaining
balance of the purchase price was funded by proceeds from the Companys June
follow-on offering. On August 5, 2004, the Company acquired Airpark Place, a three-building,
82,000-square-foot flex/warehouse property in Gaithersburg, Maryland for $9.8
million. The property is currently 93% leased to 22 tenants at acquisition.
The acquisition was financed with proceeds raised from the Companys June
follow-on offering. The aggregate contractual purchase cost of properties acquired in 2004 was
allocated as follows: Herndon
    
    Aquia
    
    Suburban
    
    Airpark PlaceCorporate
    
    Commerce
    
    Maryland
    
    BusinessCenter
    
    Center I & II
    
    Portfolio
    
    Center
    
    TotalLand
    
    $
    4,100,000
    
    
    $
    1,772,960
    
    
    $
    33,355,650
    
    
    $
    2,646,000
    
    
    $
    41,874,610In-place lease intangibles
    
    
    1,963,143
    
    
    
    1,137,137
    
    
    
    10,450,921
    
    
    
    362,547
    
    
    
    13,913,748Building and tenant
improvements
    
    
    14,466,870
    
    
    
    8,477,399
    
    
    
    82,120,669
    
    
    
    6,948,144
    
    
    
    112,013,082Deferred revenue and other
    
    
    (30,013
    )
    
    
    (187,496
    )
    
    
    (2,927,240
    )
    
    
    (156,691
    )
    
    
    (3,301,440
    )Total
    
    $
    20,500,000
    
    
    $
    11,200,000
    
    
    $
    123,000,000
    
    
    $
    9,800,000
    
    
    $
    164,500,000
 10




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##### 



Pro Forma Financial Information (unaudited) The unaudited pro forma financial information set forth below presents
results as if all of the Companys 2004 and 2003 acquisitions, the initial
public offering and the follow-on offering occurred on January 1, 2003. The unaudited pro forma information is not necessarily indicative of the
results that actually would have occurred nor does it intend to indicate future
operating results. For the Three Months Ended September 30,2004
    
    2003Pro forma total revenues
    
    $
    12,900,546
    
    
    $
    12,478,546Pro forma net income (loss)
    
    
    800,210
    
    
    
    (223,026
    )Pro forma diluted earnings (loss) per share
    
    $
    0.06
    
    
    $
    (0.02
    )
 For the Nine Months Ended September 30,2004
    
    2003Pro forma total revenues
    
    $
    38,359,474
    
    
    $
    37,435,148Pro forma net income (loss)
    
    
    2,322,248
    
    
    
    (669,077
    )Pro forma diluted earnings (loss) per share
    
    $
    0.16
    
    
    $
    (0.05
    )
 (3) Discontinued Operations Assets Held for Sale During the quarter ended September 30, 2004, the Company entered into a
definitive agreement to sell 6251 Ammendale Road located in Beltsville,
Maryland, for approximately $8.5 million to an unrelated third party. As a
result, operating results for that asset are reflected as discontinued
operations on the Companys Condensed, Consolidated and Combined Statement of
Operations for the three and nine months ended September 30, 2004, and the
property is classified as held for sale as of September 30, 2004. The
disposition is expected to be completed by December 31, 2004, subject to
customary due diligence and closing conditions. The following table sets forth
the balance sheet detail of the property as of September 30, 2004. Land
    
    $
    1,145,269Building and improvements
    
    
    5,082,699Accumulated depreciation
    
    
    (184,465
    )Accounts receivable
    
    
    45,060Deferred cost, net
    
    
    19,271Prepaid assets
    
    
    95,440Total assets
    
    $
    6,203,274
 The Company will have no continuing involvement with this property after
the sale, and the operating results have been classified as discontinued
operations for the three and nine month periods ended September 30, 2004. The
Company anticipates recognition of a gain upon sale, as the fair value of the
property exceeds its carrying value. Operating results of the property
classified as discontinued operations are summarized as follows: For the three
    
    For the nine monthsmonths ended
    
    endedSeptember 30, 2004
    
    September 30, 2004Revenue
    
    $
    238,590
    
    
    $
    627,072Property expenses
    
    
    116,859
    
    
    
    347,966Depreciation and amortization
    
    
    50,658
    
    
    
    180,240$
    71,073
    
    
    $
    98,866
 11




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##### 



(4) Mortgage Loans The Companys borrowings consist of the following: September 30,
    
    December 31,2004
    
    2003Fixed-rate mortgage debt
with interest rates ranging
from 5.3% to 8.5% maturing
at various dates through
February 2013
    
    $
    184,983,938
    
    
    $
    95,340,126Floating rate mortgage debt
with interest rates of LIBOR
+ 2.35% to 2.45%, with
$10,500,000 maturing in
November 2005 and
$15,000,000 ($22,000,000 at
December 31, 2003) maturing
in December 2006
    
    
    25,500,000
    
    
    
    32,500,000$
    210,483,938
    
    
    $
    127,840,126
 (a) Lines of Credit On December 31, 2003 the Company entered into a $50 million secured
revolving credit facility agreement with Fleet National Bank as managing
administrative agent. The facility has a three-year term with a one-year
extension option. The Company has the option to increase the facility by up to
an additional $50 million prior to December 31, 2005. Availability under the
facility is based upon the value of unencumbered assets that the Company
pledges to secure the facility. The Company had no borrowings outstanding and
available credit of $35 million under this facility at September 30, 2004.
Borrowings under the facility bear interest at LIBOR plus 190 to 250 basis
points. Interest rate payable under the facility depends upon the ratio of the
Companys total indebtedness to the Companys total asset value. The acquisition of Herndon Corporate Center on April 27, 2004 was financed
in part by a $4.5 million borrowing on the Companys revolving line of credit.
On May 26, 2004, the Company borrowed an additional $4.5 million to partially
finance the earnest money deposit for the 14-property portfolio located
primarily in suburban Maryland. With the acquisition of Aquia Commerce Center
I & II on June 4, 2004, the Company borrowed an additional $9.0 million on the
revolving line of credit. On June 23, 2004, the Company closed on its
follow-on offering of 5,520,000 common shares and raised net proceeds of
approximately $92 million. The Company used $18 million of the net proceeds to
pay down the outstanding balance on the revolving line of credit. Interest
expense on the revolving line of credit was $31,944 and $141,842 respectively
for the three and nine months ended September 30, 2004. Interest expense on
the revolving line of credit borrowings ranged from 3.25% to 3.29% for the
three and nine months ended September 30, 2004. The Company had no borrowings
outstanding on the line of credit at September 30, 2004. On October 22, 2004,
the Company borrowed an additional $9.0 million on the revolving line of credit
to partially finance the acquisition of the industrial/flex property in
Haymarket, Virginia. (b) Mortgage Debt The Companys mortgage debt is recourse solely to specific assets. The
Company had 29 properties that secured mortgage debt at September 30, 2004. Future minimum principal payments on the Companys mortgage loans as of
September 30, 2004, including amortization of the fair value impact on
principal balances, are as follows: 2004
    
    $
    751,1312005
    
    
    14,158,3202006
    
    
    18,845,0332007
    
    
    3,897,4282008
    
    
    83,966,123Thereafter
    
    
    88,865,903$
    210,483,938
 12




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##### 



(5) Segment Information The Company operates in one segment, industrial and flex office
properties. All of the Companys properties are located in the southern
Mid-Atlantic region of the United States of America. (6) Supplemental Disclosure of Cash Flow Information Supplemental disclosures of cash flow information for the nine months
ended September 30 are as follows: 2004
    
    2003Cash paid for interest on indebtedness
    
    $
    6,649,356
    
    
    $
    7,042,878Issuance of units in exchange for limited
partnership interests
    
    
    
    
    
    
    2,575,133
 On April 27, 2004, the Company acquired Herndon Corporate Center for $20.5
million net of the assumption of a $9.1 million mortgage, fair valued at $8.9
million, with the balance paid in cash. On June 4, 2004, the Company acquired
Aquia Commerce Center I & II for $11.2 million net of the assumption of a $1.0
million mortgage that approximated its fair value with the balance paid in
cash. On July 16, 2004, the Company acquired a 14-property portfolio
concentrated in suburban Maryland of Washington, D.C. for $123.0 million net of
the assumption of a $77.4 million mortgage, fair valued at $81.0 million, with
the balance paid in cash using proceeds from the follow-on offering completed
in June 2004. On August 5, 2004, the Company acquired Airpark Place for $9.8
million using proceeds from the follow-on offering. The additions to rental
property and other assets are net of the non-cash assumption of these
mortgages. (7) Subsequent Events On October 22, 2004, the Company acquired a 124,000-square-foot industrial
flex property in Haymarket, Virginia, for $10.8 million. The property is 100%
leased to one tenant. The acquisition was financed with proceeds raised from
the Companys June follow-on offering and borrowings under the Companys
revolving line of credit. On October 22, 2004, the Company acquired two properties for $18.5
million. The Norfolk Commerce Park II building contains 128,000 square feet
and was 93.7% leased to seven tenants. The Crossways II building contains
85,000 square feet and was 100% leased to five tenants. The properties were
financed with net proceeds raised from the Companys June follow-on offering
and the assumption of a $7.6 million fixed-rate mortgage loan collateralized by
Norfolk Commerce Park II. The loan bears interest at 6.9% and matures on
August 7, 2008. 13




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##### 



ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS The following discussion and analysis of the Companys and First Potomac
Predecessors financial condition and results of operations should be read in
conjunction with the financial statements and notes thereto appearing elsewhere
in this Form 10-Q. The discussion and analysis is derived from the
consolidated and combined operating results and activities of First Potomac
Realty Trust and First Potomac Predecessor (as defined below). The Company was formed in July 2003 to be the successor general partner to
First Potomac Realty Investment Trust, Inc. (Trust, Inc.), the former general
partner of First Potomac Realty Investment Limited Partnership (FPR), the
Companys operating partnership (Operating Partnership). The pre-IPO
operations of Trust, Inc., the Operating Partnership and First Potomac
Management, Inc. (FPM), property management company that managed all of the
Compnays assets prior to the initial public offering, are referred to herein
as First Potomac Predecessor. The Company owns all of its properties and
conducts its business through the Operating Partnership. At September 30,
2004, the Company was the sole general partner of and owned a 91% interest in
the Operating Partnership. The remaining interests in the Operating
Partnership consist of limited partnership interests owned by contributors of
properties to our Operating Partnership and are presented as minority
interests. The Company is a self-managed, self-administered Maryland real estate
investment trust (REIT). The Company focuses on owning and operating
industrial and flex properties in the Washington, D.C. metropolitan area and
other major markets in Virginia and Maryland, which we collectively refer to as
the southern Mid-Atlantic region. The Company strategically focuses on
acquiring properties that management believes can benefit from the Companys
intensive property management and seeks to reposition these properties to
increase their profitability and value. The Companys portfolio of properties
contains a mix of single-tenant and multi-tenant industrial and flex
properties. Industrial properties generally are used as warehouse, distribution
and manufacturing facilities, while flex properties combine office building
features with industrial property space. As of September 30, 2004, the Company
owned 34 properties which were approximately 94% leased to a total of 391
tenants in 443 leases. The Companys largest tenant is the U.S. Government,
representing 21% of the Companys annualized base rental revenue as of
September 30, 2004. The Company derives substantially all of its revenue from
leases on its properties. Executive Summary Net income for the Company for the third quarter of 2004 was $0.7 million,
or $0.05 per share, compared with a net loss of $1.6 million for First Potomac
Predecessor for the prior-year period. For the three months ended September
30, 2004, the Companys funds from operations were $4.6 million, or $0.29 per
diluted share. See Funds from Operations. In addition, the per share amount
reflects a higher weighted average share count resulting from its follow-on
offering of 5,520,000 common shares completed on June 23, 2004. Net income for the Company for the first nine months of 2004 was $0.4
million, or $0.04 per diluted share, compared with a net loss of $3.8 million
for First Potomac Predecessor for the prior-year period. For the nine months
ended September 30, 2004, the Companys funds from operations were $9.6
million, or $0.79 per diluted share. The following description is a summary of our acquisition activity during
the nine months ended September 30, 2004: On April 27, 2004, the Company acquired Herndon Corporate Center, a
127,000-square-foot, single-story flex property in Herndon, Virginia, for $20.5
million. The acquisition was financed with the Companys available cash,
borrowings under the Companys revolving line of credit and the assumption of a
$9.1 million, fixed-rate first mortgage loan. The Company paid off the
borrowing from the line of credit in June 2004. The property is currently 97%
leased to 14 tenants, with the U.S. Government being the largest tenant,
occupying 23% of the space. On June 4, 2004, the Company acquired Aquia Commerce Center I & II, a
64,000-square-foot, two-building flex property in Stafford, Virginia, for $11.2
million. The acquisition was financed with the Companys available cash,
borrowings under the Companys revolving line of credit and the assumption of a
$1.0 million, fixed-rate first mortgage loan. The Company paid off the
borrowing from the line of credit in June 2004. The property is currently 100%
leased to the U.S. Government. On July 16, 2004, the Company acquired a 14-property, 26-building,
1.4-million-square-foot portfolio concentrated in the Maryland suburbs of
Washington, D.C. for total consideration of $123 million. The portfolio is
comprised primarily of industrial and flex properties and was 94% leased at
acquisition. The acquisition was financed, in part, by the assumption of a
$77.4 million fixed-rate first mortgage loan collateralized by all of the
properties in the portfolio. The loan bears interest at 6.7% and matures in
September 2008. The remaining balance of the purchase price was funded by
proceeds from the 14




---



##### 



Companys June follow-on offering. On August 5, 2004, the Company acquired Airpark Place, a
three-building, 82,000-square-foot flex/warehouse property in Gaithersburg,
Maryland for $9.8 million. The property was 95% leased to 23 tenants at
acquisition. The acquisition was financed with proceeds raised from the
Companys June follow-on offering. On October 22, 2004, the Company acquired a 124,000-square-foot industrial
flex property in Haymarket, Virginia, for $10.8 million. The property is 100%
leased to one tenant. The acquisition was financed with proceeds raised from
the Companys June follow-on offering and borrowings under the Companys
revolving line of credit. On October 22, 2004, the Company acquired two properties for $18.5
million. The Norfolk Commerce Park II building contains 128,000 square feet
and was 93.7% leased to seven tenants. The Crossways II building contains
85,000 square feet and was 100% leased to five tenants. The properties were
financed with proceeds raised from the Companys June follow-on offering and
the assumption of a $7.6 million fixed-rate mortgage loan collateralized by
Norfolk Commerce Park II. The loan bears interest at 6.9% and matures on
August 7, 2008. Critical Accounting Policies and Estimates The Companys consolidated and combined financial statements are prepared
in accordance with accounting principles generally accepted in the United
States of America (GAAP) that require the Company to make certain estimates
and assumptions. Critical accounting policies and estimates are those that
require subjective or complex judgments and are the policies and estimates that
the Company deems most important to the portrayal of its financial condition
and results of operations. The use of different reasonable estimates or
assumptions in making these judgments could result in materially different
amounts being reported in our Consolidated Financial Statements. The
Companys critical accounting policies relate to revenue recognition, including
evaluation of the collectibility of accounts receivable, impairment of
long-lived assets and purchase accounting for acquisitions of real estate. The following section is a summary of certain aspects of these critical
accounting policies. Revenue Recognition Rental income with scheduled rent increases is recognized using the
straight-line method over the term of the leases. Accrued straight-line rents
included in the Companys consolidated and combined balance sheets represents
the aggregate excess of rental revenue recognized on a straight-line basis over
cash received under applicable lease provisions. The Companys leases generally
contain provisions under which the tenants reimburse the Company for a portion
of property operating expenses and real estate taxes incurred by it. Such
reimbursements are recognized in the period that the expenses are incurred.
Lease termination fees are recognized when the related leases are canceled and
the Company has no continuing obligation to provide services to such former
tenants. The Company must make estimates related to the collectibility of its
accounts receivable related to minimum rent, deferred rent, tenant
reimbursements, lease termination fees and other income. The Company
specifically analyzes accounts receivable and historical bad debts, tenant
concentrations, tenant creditworthiness and current economic trends when
evaluating the adequacy of the allowance for doubtful accounts receivable,
however, the Company cannot be certain its estimates regarding the
collectibility of its accounts receivable will be accurate. These estimates
have a direct impact on the Companys net income because a higher bad debt
allowance would result in lower net income and a lower bad debt allowance would
result in higher net income. Investments in Real Estate and Real Estate Entities Investments in real estate are recorded at cost. Improvements and
replacements are capitalized when they extend the useful life, increase
capacity, or improve the efficiency of the asset. Repairs and maintenance are
charged to expense as incurred. Depreciation and amortization are recorded on a straight-line basis over
the estimated useful lives as follows: Buildings and improvements
    
    39 yearsTenant improvements
    
    Shorter of the useful lives or the terms of the related leasesFurniture, fixtures, and equipment
    
    5 to 15 years
 15




---



##### 



The Company is required to make subjective assessments as to the useful
lives of its properties for purposes of determining the amount of depreciation
to record on an annual basis with respect to its rental properties. These
assessments have a direct impact on the Companys net income because if it were
to shorten the expected useful lives of its rental properties, the Company
would depreciate such investments over fewer years, resulting in more
depreciation expense and lower net income on an annual basis. When circumstances such as adverse market conditions indicate a possible
impairment of the value of a property, the Company reviews the recoverability
of the propertys carrying value. The review of recoverability is based on an
estimate of the future undiscounted cash flows (excluding interest charges)
expected to result from the real estate investments use and eventual
disposition. These cash flows consider factors such as expected future
operating income, trends and prospects, as well as the effects of leasing
demand, competition and other factors. If impairment exists due to the
inability to recover the carrying value of a real estate investment, an
impairment loss is recorded to the extent that the carrying value exceeds the
estimated fair value of the property. The Company is required to make
subjective assessments as to whether there are impairments in the values of its
investments in real estate, including any indirect investments in real estate
through entities that the Company does not control and which it accounts for
using the equity method of accounting. These assessments have a direct impact
on the Companys net income because recording an impairment loss results in an
immediate negative adjustment to net income. The Company estimates the fair value of rental properties using a
discounted cash flow analysis that includes projections of future revenues,
expenses and capital improvement costs, or a capitalization of the propertys
in place net operating income. These methodologies are similar to the income
approach that is commonly used by appraisers. The Company will classify a building as held for sale in the period in
which it has made the decision to dispose of the building, a binding agreement
to purchase the property has been signed under which the buyer has committed a
significant amount of nonrefundable cash and no significant financing
contingencies exist which could cause the transaction not to be completed in a
timely manner. If these criteria are met, the Company will record an
impairment loss if the fair value reduced by selling costs is lower than the
carrying amount of the building, and the Company will cease incurring
depreciation. The Company will classify the impairment loss, together with the
buildings operating results, as discontinued operations on its statement of
operations and classify the assets and related liabilities as held for sale on
the balance sheet. During the quarter ended September 30, 2004, the Company entered into a
definitive agreement to sell 6251 Ammendale Road located in Beltsville,
Maryland, for approximately $8.5 million to an unrelated third party. As a
result, operating results for that asset are reflected as discontinued
operations on the Companys Condensed, Consolidated and Combined Statement of
Operations for the three and nine months ended September 30, 2004, and the
property is classified as held for sale as of September 30, 2004. The
disposition is expected to be completed by December 31, 2004, subject to
customary due diligence and closing conditions. Purchase Accounting The Company is required to make subjective assessments as to the fair
value of assets and liabilities in connection with purchase accounting
adjustments recorded related to rental properties and additional interests in
real estate entities acquired. These assessments include allocating the
purchase price of real estate acquired to the fair value of the building, land,
tenant improvements, in-place leases and other intangibles. The Company allocates the components of real estate acquisitions using
relative fair values computed that are based on its estimates and assumptions.
These estimates and assumptions affect the amount of costs allocated between
land, building, tenant improvements, furniture, fixtures and equipment and
certain intangible assets. These allocations also impact depreciation expense
and gains or losses recorded on sales of real estate. The Company also values
in-place operating leases carrying rents above or below market as of the date
of the acquisition; it then amortizes such values over the lives of the related
leases. The Companys determination of these values requires it to estimate
market rents for each of the leases and make certain other assumptions. These
estimates and assumptions affect the recognition of rental revenue,
depreciation expense and amortization expense. 16




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##### 



Results of Operations Comparison of the Three and Nine months Ended September 30, 2004 to the
Three and Nine months Ended September 30, 2003 The results of operations for the three and nine months ended September
30, 2004, represent the Companys third complete quarter of earnings and
activities subsequent to the initial public offering completed in the fourth
quarter of 2003. The results of operations for the three and nine months ended
September 30, 2003, are based on the combined historical statements of
operations of First Potomac Predecessor. The Company acquired the remaining joint venture interests in the entities
that owned interests in Rumsey Center, Snowden Center, Greenbrier Technology II
and Norfolk Business Center (the IPO acquisitions) in connection with the
initial public offering. The IPO acquisitions increased the Companys
ownership to 100 percent of the interests in these properties, and it therefore
began consolidating the results of operations of these properties effective
November 1, 2003. Prior to this date, and throughout the third quarter of
2003, the Company accounted for its interests in these properties using the
equity method of accounting. The Company acquired four properties, Virginia Center, Interstate Plaza,
Alexandria Corporate Park and 6251 Ammendale Road, in the fourth quarter of
2003 subsequent to the closing of its initial public offering. During the
second quarter of 2004, the Company acquired Herndon Corporate Center and Aquia
Commerce Center I & II. The third quarter 2004 acquisitions include: a
14-property, 26-building, 1.4-million square-foot portfolio located primarily
in the Maryland suburbs of Washington, D.C. (the Suburban Maryland Portfolio,
comprised of Deer Park, 6900 English Muffin Way, Gateway Center, Gateway West,
4451 Georgia Pacific, 20270 Goldenrod Lane, 15 Wormans Mill Court, Girard
Business Center, Girard Place, Old Courthouse Square, Patrick Center, 7561
Lindbergh Drive, West Park and Woodlands Business Center) and Airpark Place
Business Center. Collectively, the properties acquired since the Companys IPO
are referred to as the Post-IPO acquisitions. The results of operations for
6251 Ammendale Road are excluded from the Post-IPO acquisitions and are
reflected as discontinued operations because the Company has entered into a
definitive agreement to sell that asset and the property meets the Companys
criteria to be classified as held for sale as of September 30, 2004. Total Revenues Rental revenue is summarized as follows: Three Months Ended
    
    Nine Months Ended
    
    Three Months
    
    Nine MonthsSeptember 30,
    
    September 30,
    
    
    
    
    
    Percent
    
    
    
    
    
    Percent2004
    
    2003
    
    2004
    
    2003
    
    Increase
    
    Change
    
    Increase
    
    ChangeRental income
    
    $
    10,556,176
    
    
    $
    3,178,937
    
    
    $
    24,240,006
    
    
    $
    10,528,122
    
    
    $
    7,377,239
    
    
    
    232
    %
    
    $
    13,711,884
    
    
    
    130
    %Tenant reimbursements & other
    
    $
    1,626,363
    
    
    $
    757,708
    
    
    $
    3,665,784
    
    
    $
    2,184,915
    
    
    $
    868,655
    
    
    
    115
    %
    
    $
    1,480,869
    
    
    
    68
    %
 Rental Revenues Rental revenue is comprised of contractual rent, including the impacts of
straight-line revenue, and deferred market rental revenue. Rental revenue
increased $7,377,239 and $13,711,884, respectively, for the three and nine
months ended September 30, 2004, compared to the same periods in 2003 primarily
as a result of the Post-IPO acquisitions, which, in the aggregate, contributed
$5,570,064 and $9,358,134, respectively, in rental revenue. The increase can
also be attributed to the consolidation of the results of the IPO acquisitions,
resulting in additional rental revenue of $1,319,299 and $3,921,486 during the
three and nine months ended September 30, 2004, respectively. These
investments were accounted for under the equity method in 2003. Average rental
rates on new leases and on renewal leases increased 15.9 % and 14.4%,
respectively, for leases executed during the three months ended September 30,
2004, and 10.1% and 12.8%, respectively, for new and renewal leases executed
during the nine months ended September 30, 2004. Prior to its initial public offering, the Companys portfolio was 93%
leased. Overall occupancy of the Companys properties, including the Post-IPO
acquisitions, was 94% at September 30, 2004. 17




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##### 



Tenant Reimbursement and Other Revenues Tenant reimbursement revenue includes operating and common area
maintenance costs reimbursed by the Companys tenants as well as incidental
other revenues such as late fees. Tenant reimbursements and other revenues
increased $868,655 and $1,480,869, respectively, during the three and nine
months ended September 30, 2004, compared with the same periods in 2003 due
primarily to impact from the Post-IPO acquisitions. These acquisitions
collectively resulted in $721,374 and $1,094,118 of additional tenant
reimbursement revenue during the three and nine months ended September 30,
2004, respectively. The consolidation of the IPO acquisitions contributed the
majority of the remaining increase in tenant reimbursement and other revenue. Total Expenses Property Operating Expenses Property operating expenses are summarized as follows: Three Months Ended
    
    Nine Months Ended
    
    Three Months
    
    Nine MonthsSeptember 30,
    
    September 30,
    
    
    
    
    
    Percent
    
    
    
    
    
    Percent2004
    
    2003
    
    2004
    
    2003
    
    Increase
    
    Change
    
    Increase
    
    ChangeProperty operating expenses
    
    $
    2,424,329
    
    
    $
    652,930
    
    
    $
    5,479,230
    
    
    $
    1,702,376
    
    
    $
    1,771,399
    
    
    
    271
    %
    
    $
    3,776,854
    
    
    
    222
    %Real estate taxes & insurance
    
    $
    1,122,437
    
    
    $
    252,900
    
    
    $
    2,585,263
    
    
    $
    1,040,829
    
    
    $
    869,537
    
    
    
    344
    %
    
    $
    1,544,434
    
    
    
    148
    %
 Property Operating Expenses.Property operating expenses increased
$1,771,399 and $3,776,854 for the three and nine months ended September 30,
2004, respectively, compared to 2003 due, in part, to $1,165,549 and $1,962,205
of property operating expenses for the Post-IPO acquisitions during the
respective periods. The consolidation of the IPO acquisitions resulted in an
increase of $297,534 and $875,527 in property operating expenses during the
three and nine months ended September 30, 2004, respectively. Increased
administrative and overhead costs, repairs and maintenance expense and higher
utility costs contributed the majority of the remaining increase. Real Estate Taxes and Insurance.Real estate taxes and insurance
increased $869,537 and $1,544,434 for the three and nine months ended September
30, 2004, respectively, compared to 2003 due primarily to $553,609 and $893,496
in real estate taxes and insurance costs for the Post-IPO acquisitions during
the respective periods. The remaining increase is due to the consolidation of
the IPO acquisitions, which resulted in $159,850 and $472,531 of additional
real estate taxes and insurance costs during the three and nine months ended
September 30, 2004, respectively. Real estate taxes and insurance expense on
the Companys pre-IPO portfolio increased as a result of generally higher
assessed values and tax rates, as well as higher insurance costs. Other Operating Expenses General and administrative expenses are summarized as follows: Three Months Ended
    
    Nine Months Ended
    
    Three Months
    
    Nine MonthsSeptember 30,
    
    September 30,
    
    
    
    
    
    Percent
    
    
    
    
    
    Percent2004
    
    2003
    
    2004
    
    2003
    
    Increase
    
    Change
    
    Increase
    
    ChangeGeneral & administrative
    
    $
    951,689
    
    
    $
    754,504
    
    
    $
    2,843,445
    
    
    $
    1,975,526
    
    
    $
    197,185
    
    
    
    26
    %
    
    $
    867,919
    
    
    
    44
    %
 General and administrative expenses increased in 2004 from 2003 primarily
due to increased personnel, resulting in additional compensation expense,
increased professional fees and increased investor and shareholder related
costs and accounting services associated with being a publicly held company.
The number of employees of the Company increased to 41 as of September 30, 2004
compared to 20 as of September 30, 2003. 18




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##### 



Real estate depreciation and amortization expenses are summarized as
follows: Three Months Ended
    
    Nine Months Ended
    
    Three Months
    
    Nine MonthsSeptember 30,
    
    September 30,
    
    
    
    
    
    Percent
    
    
    
    
    
    Percent2004
    
    2003
    
    2004
    
    2003
    
    Increase
    
    Change
    
    Increase
    
    ChangeDepreciation & amortization
    
    $
    3,811,330
    
    
    $
    1,197,691
    
    
    $
    8,961,169
    
    
    $
    3,385,018
    
    
    $
    2,613,639
    
    
    
    218
    %
    
    $
    5,576,151
    
    
    
    165
    %
 Depreciation and amortization expense increased $2,613,639 and $5,576,151,
respectively, for the three and nine months ended September 30, 2004, compared
to 2003 primarily due to depreciation and amortization associated with the
Post-IPO acquisitions, resulting in $1,902,546 and $3,194,668, respectively, in
depreciation and amortization expense. The remaining increase was due
primarily to $843,196 and $2,633,415, respectively, of depreciation and
amortization expense for the IPO acquisitions during the three and nine months
ended September 30, 2004. Interest Expense Interest expense on indebtedness is summarized as follows: Three Months Ended
    
    Nine Months Ended
    
    Three Months
    
    Nine MonthsSeptember 30,
    
    September 30,
    
    
    
    
    
    Percent
    
    
    
    
    
    Percent2004
    
    2003
    
    2004
    
    2003
    
    Increase
    
    Change
    
    (Decrease)
    
    ChangeInterest expense
    
    $
    3,327,609
    
    
    $
    2,920,748
    
    
    $
    7,844,370
    
    
    $
    8,660,356
    
    
    $
    406,861
    
    
    
    14
    %
    
    $
    (815,986
    )
    
    
    9
    %
 Interest expense increased $406,861 for the three months ended September
30, 2004, and decreased $815,986 for the nine months ended September 30, 2004,
compared to the same periods in 2003. The increase in interest expense for the
three months ended September 30, 2004, is primarily due to $1,267,447 of
interest expense associated with mortgages assumed with the Post-IPO
acquisitions of the Suburban Maryland Portfolio, Herndon Corporate Center and
Aquia Commerce Center I & II. The IPO acquisitions further contributed
$416,685 of mortgage interest expense during the same period. The increase in
mortgage interest expense for the three months ended September 30, 2004
compared to 2003 was offset by the $1,187,938 decrease in interest expense from
mezzanine indebtedness that was paid in full in October 2003 with proceeds from
the Companys initial public offering. The decrease in interest expense for
the nine months ended September 30, 2004 compared to 2003 was due to the
elimination of $3.5 million in interest expense related to debt paid off using
proceeds from the IPO. The decrease was offset by $2.6 million of mortgage
interest expense on mortgages assumed subsequent to our IPO. Minority Interests Minority interests subsequent to the initial public offering reflect the
ownership of the Operating Partnership held by parties other than the Company.
At September 30, 2004, 9% of the interests in the Operating Partnership were
owned by limited partners, or minority interests. Minority interest expense
for 2004 represents the limited partners allocable share of the Companys
earnings. Minority interests at September 30, 2003, reflect interests held by
parties other than the Company in the joint venture entities that owned
Crossways Commerce Center I, Crossways Commerce Center II, the Coast Guard
Building and Newington Business Park Center. The minority interests share of earnings was $34,374 for the nine months
ended September 30, 2004 compared to minority interests share of losses of
$205,541 in the same period in 2003. Allocation of net income for the three
and nine months ended September 30, 2004 are to the limited partnership
interests in the Operating Partnership. Minority interests for the three and
nine months ended September 30, 2003, represented the allocation of net loss to
the minority owners of the joint venture entities that owned Crossways Commerce
Center I, Crossways Commerce Center II, the Coast Guard Building and Newington
Business Park Center. Liquidity and Capital Resources The Company expects to meet short-term liquidity requirements generally
through working capital, net cash provided by operations, and, if necessary,
borrowings on its revolving credit facility. As a REIT, the Company is
required to distribute at least 90% of its taxable income to its stockholders
on an annual basis. The Company also regularly requires capital to invest in
its existing portfolio of properties for capital projects. These capital
projects include routine capital improvements and leasing-related costs,
including tenant improvements and leasing commissions. 19




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##### 



As of September 30, 2004, the Company had used the net proceeds from the
initial public offering to (i) repay debt, accrued interest and prepayment fees
($48 million), including $7 million of debt in the first quarter of 2004
associated with the partial paydown and restructuring of the mortgage
encumbering its Rumsey Center and Snowden Center properties; (ii) acquire joint
venture interests held by an institutional partner in four of the Companys
properties ($3 million); and (iii) acquire additional properties ($67
million). The Company closed on a follow-on offering of 5,520,000 common
shares on June 23, 2004, raising additional net proceeds of approximately $92
million. The Company has fully used these net proceeds to (i) acquire
properties ($74 million) and (ii) repay borrowings in the second quarter of
2004 on the Companys revolving line of credit ($18 million). On December 31, 2003, the Company entered into a $50 million secured
revolving credit facility agreement with Fleet National Bank as managing
administrative agent. The facility has a three-year term with a one-year
extension option. The Company has the option to increase the facility by up to
an additional $50 million prior to December 31, 2005. Availability under the
facility is based upon the value of unencumbered assets that the Company
pledges to secure the facility. Alexandria Corporate Park and Virginia Center
were the first assets pledged as security, and the Company had $35 million
available under this facility at September 30, 2004. Borrowings under the
facility bear interest at LIBOR plus 190 to 250 basis points. The exact
interest rate payable under the facility depends upon the ratio of the
Companys total indebtedness to the Companys total asset value. On April 27,
2004 the Company borrowed $4.5 million to partially fund the acquisition of
Herndon Corporate Center, a 127,000 square-foot, single-story flex property
located in Herndon, Virginia. On May 26, 2004, the Company borrowed an
additional $4.5 million to partially finance the earnest money deposit for the
Suburban Maryland Portfolio acquisition. With the acquisition of Aquia
Commerce Center I & II on June 4, 2004, the Company borrowed an additional $9
million on the revolving line of credit. The Company paid off the $18 million
line of credit borrowings in June 2004 using proceeds from the follow-on
offering that closed on June 23, 2004. The Company had no outstanding
borrowings on the line of credit at September 30, 2004 and through the date of
this filing on November 9, 2004. The Company is currently negotiating the terms of a new unsecured
revolving line of credit that would replace the existing facility. The Company
anticipates incurring a fourth quarter 2004 charge of approximately $0.7
million as a result of writing-off the unamortized costs associated with the
existing revolving line of credit. All of the Companys outstanding debt contains customary, affirmative
covenants including financial reporting, standard lease requirements and
certain negative covenants, all of which the Company met as of September 30,
2004. The Company is also subject to cash management agreements with most of
its lenders. These agreements generally require that income generated by the
subject property be deposited into a clearing account and then swept into a
cash collateral account for the benefit of the lender from which cash is
distributed only after funding capital improvement, leasing and maintenance
reserves and payment of debt service, insurance, taxes, capital expenditures
and leasing costs. The Company intends to meet long-term liquidity requirements for
non-recurring capital improvements through net cash from operations, long-term
secured and unsecured indebtedness, including borrowings under its revolving
credit facility, and the issuance of equity and debt securities. The
Companys ability to raise funds through sales of debt and equity securities is
dependent on, among other things, general economic conditions, general market
conditions for REITs, rental rates, occupancy levels, market perceptions and
the trading price of the Companys shares. The Company will continue to
analyze which source of capital is most advantageous to it at any particular
point in time, but the capital markets may not be consistently available on
terms that are attractive, or at all. The Company also intends to fund property acquisitions and other
non-recurring capital improvements using borrowings, by potentially refinancing
properties in connection with their acquisition, and by assuming existing
indebtedness on acquired properties as well as potentially raising equity
through joint ventures. The Company could also issue units of limited
partnership interest in its Operating Partnership to fund a portion of the
purchase prices for some of its future property acquisitions. Cash Flows Consolidated cash flow information is summarized as follows: Nine Months Ended September 30,2004
    
    2003
    
    ChangeCash and cash equivalents
    
    $
    20,206,033
    
    
    $
    1,843,841
    
    
    $
    18,362,192Cash provided by operating activities
    
    
    9,013,409
    
    
    
    1,352,182
    
    
    
    7,661,227Cash (used in) provided by investing activities
    
    
    (81,427,563
    )
    
    
    1,806,232
    
    
    
    (83,233,795
    )Cash provided by (used in) financing activities
    
    
    76,312,679
    
    
    
    (1,984,850
    )
    
    
    78,297,529
 20




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##### 



Comparison of the Nine Months Ended September 30, 2004 to the Nine Months
Ended September 30, 2003 Net cash provided by operating activities increased $7,661,227 in 2004.
This increase was due largely to the increase in operating income provided by
acquired properties. The increase in escrows and reserves, prepaid expenses
and other assets was substantially offset by cash provided by the operations of
the Post-IPO acquisitions as well as cash flow from the IPO acquisitions, which
were consolidated beginning in the fourth quarter of 2003. Cash used in investing activities increased $83,233,795 in 2004 due
primarily to the acquisitions of Herndon Corporate Center, Aquia Commerce
Center I & II, the Suburban Maryland Portfolio and Airpark during the second
and third quarters of 2004 for approximately $167,000,000, net of the
$87,700,000 mortgage debt assumed and the $350,000 earnest money deposit,
included in prepaid expenses and other assets, paid by the Company in September
2004 for the acquisitions of the John Marshall Highway, Norfolk Commerce Park
II and Crossways II properties acquired by the Company on October 22, 2004.
The Company invested approximately $1,600,000 in capital and tenant improvement
costs during the nine months ended September 30, 2004. In 2003, the Company
received $2,729,209 in distributions from investments in real estate entities
(reflecting the Companys joint venture interests in the IPO acquisitions prior
to the initial public offering). The Company currently owns no joint venture
interests. Net cash provided by financing activities increased $78,297,529 in 2004
due primarily to the $91,789,543 million net proceeds from the follow-on
offering of 5,520,000 common shares that closed on June 23, 2004. Borrowings
of $18,000,000 under the Companys revolving line of credit were used to
finance the acquisition of Herndon Corporate Center, Aquia Commerce Center I &
II and to partially finance the earnest money deposit for the 14-property
portfolio acquired by the Company on July 16, 2004. In the first quarter of
2004, the Company repaid debt including interest and amortization of
$26,393,921 million including a $7,000,000 partial paydown of the $22,000,000
of mortgage debt that encumbered the Companys Rumsey Center and Snowden Center
properties and $18,000,000 to pay off the Companys revolving line of credit.
Additionally, the Company paid dividends and distributions to minority
interests of $6,274,257 in 2004. Dividends and Distributions The Company is required to distribute to its shareholders at least 90% of
its taxable income in order to qualify as a REIT, including taxable income we
recognize for tax purposes but with regard to which we do not receive
corresponding cash. Funds used by the Company to pay dividends on its common
shares are provided through distributions from the Operating Partnership. For
every common share of beneficial interest of the Company, the Operating
Partnership has issued to the Company and the Operating Partnerships limited
partners a corresponding common unit. As of September 30, 2004, the Company is
the sole general partner of and owns 91% of the Operating Partnerships units.
The remaining 9% of the units are held by various third-party limited partners
who have contributed properties to the Operating Partnership. As a general
rule, when the Company pays a common dividend, the Operating Partnership pays
an equivalent per unit distribution on all common units. The Companys current policy on dividends is generally to distribute 75% -
80% of its funds from operations as a dividend. See Funds from
Operations.  On August 10, 2004, the Company paid a dividend of $0.21 per common share
for the quarter ended June 30, 2004. On October 19, 2004, the Company declared
a dividend of $0.23 per common share for the Companys third quarter ended
September 30, 2004. The dividend is payable on November 10, 2004, to
shareholders of record on October 29, 2004. There were no accrued dividends
at September 30, 2004. Funds From Operations Investors and analysts following the real estate industry utilize funds
from operations (FFO) as a supplemental performance measure. The Company
considers FFO an appropriate supplemental measure given its wide use by and
relevance to investors and analysts. FFO, reflecting the assumption that real
estate asset values rise or fall with market conditions, principally adjusts
for the effects of GAAP depreciation and amortization of real estate assets,
which assume that the value of real estate diminishes predictably over time. 21




---



##### 



As defined by the National Association of Real Estate Investment Trusts,
or NAREIT in its March 1995 White Paper (as amended in November 1999 and April
2002), FFO represents net income (loss) (computed in accordance with GAAP),
excluding gains (losses) on sales of real estate, plus real estate-related
depreciation and amortization and after adjustments for unconsolidated
partnerships and joint ventures. We compute FFO in accordance with to NAREIT
definition, which may differ from the methodology for calculating FFO, or
similarly titled measures used by other companies, and this may not be
comparable to those presentations. FFO should not be viewed as a substitute
measure of the Companys operating performance to net income since it does not
reflect either depreciation and amortization costs or the level of capital
expenditures and leasing costs necessary to maintain the operating performance
of the Companys properties, which are significant economic costs that could
materially impact the Companys results of operations. The following table presents a reconciliation of net income to FFO
available to common share and unitholders for the three and nine month period
ended September 30, 2004. Funds From OperationsThree Months Ended
    
    Nine Months EndedSeptember 30, 2004
    
    September 30, 2004Net income
    
    $
    657,161
    
    
    $
    428,685Add: Real estate depreciation
and amortization
    
    
    3,811,330
    
    
    
    8,961,169Add: Discontinued operations
depreciations and
amortization
    
    
    50,658
    
    
    
    180,240Add: Minority interests
    
    
    66,806
    
    
    
    34,374FFO available to common share
and unitholders
    
    $
    4,585,955
    
    
    $
    9,604,468
 Forward Looking Statements This report contains forward-looking statements within the meaning of the
federal securities laws. Forward-looking statements, which are based on
certain assumptions and describe future plans, strategies and expectations of
the Company, are generally identifiable by use of the words believe,
expect, intend, anticipate, estimate, project or similar expressions.
The Companys ability to predict results or the actual effect of future plans
or strategies is inherently uncertain. Certain factors that could cause actual
results to differ materially from the Companys expectations include changes in
general or regional economic conditions; the Companys ability to timely lease
or re-lease space at current or anticipated rents; changes in interest rates;
changes in operating costs; the Companys ability to complete current and
future acquisitions; the Companys ability to sell additional common Shares;
and other risks detailed in the Companys Annual Report on Form 10-K. Many of
these factors are beyond the Companys ability to control or predict.
Forward-looking statements are not guarantees of performance. For
forward-looking statements herein, the Company claims the protection of the
safe harbor for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995. The Company assumes no obligation to update or
supplement forward-looking statements that become untrue because of subsequent
events. 22




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##### 



ITEM 3: QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT
MARKET RISK The Companys future income, cash flows and fair values relevant to
financial instruments are dependent upon prevailing market interest rates.
Market risk refers to the risk of loss from adverse changes in market interest
rates. The Company uses derivative financial instruments to manage, or hedge,
interest rate risks related to its borrowings. The Company does not use
derivatives for trading or speculative purposes and only enters into contracts
with major financial institutions based on their credit rating and other
factors. The Company had $25.5 million in variable rate debt, or 12%, of the total
$210.5 million debt outstanding as of September 30, 2004. For fixed rate debt, changes in interest rates generally affect the fair
value of debt but not the earnings or cash flow of the Company. The Company
estimates the fair value of its fixed rate mortgage debt outstanding at
September 30, 2004 to be $190.3 million compared to the $185.0 million carrying
value at that date. The Company uses interest rate protection, or cap agreements to reduce
the impact of interest rate changes on its variable rate debt. The Company had
interest rate cap agreements in the notional amount of $25.5 million as of
September 30, 2004. Under the terms of these agreements, the Company made an
initial premium payment to a counterparty in exchange for the right to receive
payments from the counterparty if interest rates exceed specified levels during
the term of the agreement. The Company is subject to market risk for changes
in interest rates and credit risk in the event of non-performance by the
counterparty to the cap agreement. The Company will only enter into these
agreements with highly rated institutional counterparts and does not expect
that any counterparties will fail to meet contractual obligations. The Company
recognized an increase in interest expense of $0.1 million for the three and
nine months ended September 30, 2004 as a result of the decline in fair market
value of these caps. ITEM 4: CONTROLS AND PROCEDURES The Company carried out an evaluation, with the participation of the
Companys management, including the Companys Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the Companys disclosure controls
and procedures (pursuant to Rule 13a-15(e) under the Securities Exchange Act of
1934) as of the end of the period covered by this report. Based upon that
evaluation, the Companys Chief Executive Officer and Chief Financial Officer
concluded that the Companys disclosure controls and procedures are effective
in timely alerting them to material information relating to the Company
(including its consolidated subsidiaries) required to be included in the
Companys periodic SEC filings. There has been no change in the Companys
internal control over financial reporting during the quarter ended September
30, 2004, that has materially affected, or is reasonably likely to materially
affect, the Companys internal control over financial reporting. 23




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##### 



PART II: OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits No.
    
    Description31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a
 14(a)/15d-14(a) of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.31.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a
 14(a)/15d-14(a) of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.32.1
    
    Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (This exhibit shall not be
deemed filed for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended, or otherwise subject to the
liability of that section. Further, this exhibit shall not be
deemed to be incorporated by reference into any filing under
the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended.)32.2
    
    Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (This exhibit shall not be
deemed filed for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended, or otherwise subject to the
liability of that section. Further, this exhibit shall not be
deemed to be incorporated by reference into any filing under
the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended.)
 24




---



##### 



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. Date: November 9, 2004
    
    /s/ Douglas J. DonatelliDouglas J. Donatelli
President and Chief Executive OfficerDate: November 9, 2004
    
    /s/ Barry H. BassBarry H. Bass
Senior Vice President and Chief Financial Officer
 25




---



##### 



EXHIBIT INDEX No.
    
    Description31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a
 14(a)/15d-14(a) of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.31.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a
 14(a)/15d-14(a) of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.32.1
    
    Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (This exhibit shall not be
deemed filed for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended, or otherwise subject to the
liability of that section. Further, this exhibit shall not be
deemed to be incorporated by reference into any filing under
the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended.)32.2
    
    Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (This exhibit shall not be
deemed filed for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended, or otherwise subject to the
liability of that section. Further, this exhibit shall not be
deemed to be incorporated by reference into any filing under
the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended.)