SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT No. 1
Current Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) April 17, 1998
(Amending Form 8-K dated March 17, 1998)
PS BUSINESS PARKS, INC.
-----------------------
(Exact name of registrant as specified in its charter)
California 1-10709 95-4300881
- ------------------------------ ------------- ------------------------
(State or Other Jurisdiction (Commission I.R.S. Employer
of Incorporation) File Number) Identification Number)
701 Western Avenue, Glendale, California 91201-2397
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 244-8080
--------------
PUBLIC STORAGE PROPERTIES XI, INC.
----------------------------------
(Former name or former address, if changed since last report)
<PAGE>
Item 7. Financial Statements and Exhibits
(a)(i) Financial Statements
--------------------
Report of Independent Auditors
Balance Sheets as of December 31, 1997 and 1996
For the period April 1, 1997 through December 31, 1997, the
period January 1, 1997 through March 31, 1997, and the years
ended December 31, 1996 and December 31, 1995:
Consolidated Statements of Income
Consolidated Statements of Shareholders' Equity
Consolidated Statements of Cash Flow
Notes to Consolidated Financial Statements
(a)(ii) Management's Discussion and Analysis of Financial Condition
-------------------------------------------------------------
and the Results of Operations
-----------------------------
(b) Pro forma Consolidated Financial Statements
-------------------------------------------
(c) Exhibits
--------
23. Consent of Independent Auditors.
27. Financial Data Schedule
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 hereunto duly authorized.
PS BUSINESS PARKS, INC.
Date: April 17, 1998 By: /s/ Ronald L. Havner, Jr.
--------------------------
Ronald L. Havner, Jr.
President and Chief Executive Officer
<PAGE>
Item 7 (a) (i)
- --------------
REPORT OF INDEPENDENT AUDITORS
------------------------------
The Board of Directors and Shareholders
PS Business Parks, Inc. (successor to American Office Park Properties, Inc.)
We have audited the accompanying consolidated balance sheets of PS Business
Parks, Inc. as of December 31, 1997 and 1996, and the related consolidated
statements of income, shareholders' equity, and cash flows for the period from
April 1, 1997 through December 31, 1997, from January 1, 1997 through March 31,
1997, and the years ended December 31, 1996 and 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of PS
Business Parks, Inc. at December 31, 1997 and 1996, and the results of its
operations and its cash flows for the period from April 1, 1997 through December
31, 1997, from January 1, 1997 through March 31, 1997, and the years ended
December 31, 1996 and 1995 in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Los Angeles, California
February 23, 1998 except for Note 9 as to which the date is March 18, 1998
<PAGE>
PS BUSINESS PARKS, INC.
(SUCCESSOR TO AMERICAN OFFICE PARK PROPERTIES, INC.)
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
-------------------- ------------------
ASSETS
------
<S> <C> <C>
Cash and cash equivalents............................. $ 3,884,000 $ 919,000
Real estate facilities, at cost:
Land............................................. 91,754,000 -
Buildings........................................ 226,466,000 -
-------------------- ------------------
318,220,000 -
Accumulated depreciation......................... (3,982,000) -
-------------------- ------------------
314,238,000
Intangible assets, net................................ 3,272,000 -
Receivable from affiliate............................. - 827,000
Other assets.......................................... 2,060,000 195,000
-------------------- ------------------
Total assets............................ $ 323,454,000 $ 1,941,000
==================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Accrued and other liabilities............................ $ 8,331,000 $ 207,000
Note payable to affiliate................................ 3,500,000 -
Minority interest........................................ 168,665,000 -
Shareholders' equity:
Preferred Stock, $0.10 par value,
$15,010,000 aggregate liquidation
preference, 100,000,000 shares authorized,
899,608 shares outstanding at December 31,
1996 (none at December 31, 1997)..................;. - 90,000
Common stock, $0.10 par value, 100,000,000
shares authorized, 7,728,309 shares issued
and outstanding at December 31, 1997
(94,697 shares issued and outstanding
at December 31, 1996)............................... 773,000 9,000
Paid-in capital....................................... 142,581,000 1,484,000
Retained earnings..................................... 3,154,000 151,000
Cumulative distributions.............................. (3,550,000) -
-------------------- ------------------
Total shareholders' equity...................... 142,958,000 1,734,000
-------------------- ------------------
Total liabilities and shareholders' equity. $ 323,454,000 $ 1,941,000
==================== ==================
</TABLE>
See accompanying notes.
2
<PAGE>
PS BUSINESS PARKS, INC.
(SUCCESSOR TO AMERICAN OFFICE PARK PROPERTIES, INC.)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Periods (Note 2) For the Years Ended December 31,
---------------------------------------- ----------------------------------------
April 1, 1997 January 1, 1997
through through
December 31, 1997 March 31, 1997 1996 1995
------------------- ------------------ ------------------- -------------------
Revenues:
<S> <C> <C> <C> <C>
Rental income.............. $ 24,364,000 $ 5,805,000 $ - $ -
Facility management fees
primarily from affiliates. 709,000 247,000 2,133,000 2,044,000
Interest and other income.. 424,000 29,000 43,000 37,000
------------------- ------------------ ------------------- -------------------
25,497,000 6,081,000 2,176,000 2,081,000
------------------- ------------------ ------------------- -------------------
Expenses:
Cost of operations.......... 9,837,000 2,493,000 - -
Cost of facility management. 129,000 60,000 514,000 570,000
Depreciation and
amortization.............. 4,375,000 820,000 - -
General and administrative.. 1,248,000 213,000 1,143,000 319,000
Interest expense........... 1,000 - - -
------------------- ------------------ ------------------- -------------------
15,590,000 3,586,000 1,657,000 889,000
------------------- ------------------ ------------------- -------------------
Income before minority
interest and income taxes. 9,907,000 2,495,000 519,000 1,192,000
Minority interest in income... (6,753,000) (1,813,000) - -
------------------- ------------------ ------------------- -------------------
Income before income taxes.... 3,154,000 682,000 - -
Income tax expense............ - - (216,000) (472,000)
------------------- ------------------ ------------------- -------------------
Net income.................... $ 3,154,000 $ 682,000 $ 303,000 $ 720,000
=================== ================== =================== ===================
Net income per share:
Basic..................... $ 0.92 $ 0.31 $ 0.32 $ 0.80
=================== ================== =================== ===================
Diluted................... $ 0.92 $ 0.31 $ 0.32 $ 0.80
=================== ================== =================== ===================
Weighted average shares outstanding:
Basic..................... 3,414,069 2,192,848 946,956 905,472
=================== ================== =================== ===================
Diluted................... 3,426,574 2,192,848 946,956 905,472
=================== ================== =================== ===================
</TABLE>
See accompanying notes.
3
<PAGE>
PS BUSINESS PARKS, INC.
(SUCCESSOR TO AMERICAN OFFICE PARK PROPERTIES, INC.)
STATEMENTS OF SHAREHOLDERS' EQUITY
For the periods from January 1, 1997 through March 31, 1997
and April 1, 1997 through December 31, 1997 and for the years
ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
Preferred Stock Common Stock
----------------------- ----------------------
Shares Amount Shares Amount Paid-in Capital
---------- ----------- --------- --------- ---------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1994............... - $ - 2,950 $ 3,000 $ -
Issuance of common stock for cash........ - - 47,348 5,000 785,000
Exchange of common stock for preferred
stock.................................. 899,608 90,000 (2,950) (3,000) (87,000)
Net income............................... - - - - -
Distributions............................ - - - - -
---------- ----------- ----------- --------- ---------------
Balances at December 31, 1995............... 899,608 90,000 47,348 5,000 698,000
Issuance of common stock for cash ....... - - 47,349 5,000 785,000
Net income............................... - - - - -
Distributions............................ - - - - -
---------- ----------- ----------- --------- ---------------
Balances at December 31, 1996............... 899,608 90,000 94,697 10,000 1,483,000
Issuance of preferred stock in exchange
for real estate facilities............. 1,198,680 120,000 - - 19,880,000
Net income................................ - - - - -
Issuance of common stock for cash......... - - 4,797 - 80,000
Adjustment to reflect cost of PSI's
investment in PSBP..................... - - - - 12,361,000
Exchange of preferred stock for common
stock.................................. (2,098,288) (210,000) 2,098,288 210,000 833,000
Adjustment to reflect minority interests'
to underlying ownership interest....... - - - - 1,813,000
---------- ----------- ----------- --------- ---------------
Balances at March 31, 1997.................. - - 2,197,782 220,000 36,450,000
Issuance of common stock for cash......... - - 2,025,769 203,000 33,597,000
Issuance of common stock in exchange for
real estate facilities................. - - 3,504,758 350,000 75,624,000
Net income................................ - - - - -
Distributions............................. - - - - -
Adjustment to reflect minority interests'
to underlying ownership interest....... - - - - (3,090,000)
---------- ----------- ----------- --------- ---------------
Balances at December 31, 1997............... - $ - 7,728,309 $ 773,000 $ 142,581,000
========== =========== =========== ========= ===============
</TABLE>
<TABLE>
<CAPTION>
Retained Accumulated Shareholders'
Earnings Distributions Equity
------------- -------------- ----------------
<S> <C> <C> <C>
Balances at December 31, 1994............... $ 343,000 $ - $ 346,000
Issuance of common stock for cash........ - - 790,000
Exchange of common stock for preferred
stock.................................. - - -
Net income............................... 720,000 - 720,000
Distributions............................ (815,000) - (815,000)
------------- -------------- ----------------
Balances at December 31, 1995............... 248,000 - 1,041,000
Issuance of common stock for cash ....... - - 790,000
Net income............................... 303,000 - 303,000
Distributions............................ (400,000) - (400,000)
------------- -------------- ----------------
Balances at December 31, 1996............... 151,000 - 1,734,000
Issuance of preferred stock in exchange
for real estate facilities............. - - 20,000,000
Net income................................ 682,000 - 682,000
Issuance of common stock for cash......... - - 80,000
Adjustment to reflect cost of PSI's
investment in PSBP..................... - - 12,361,000
Exchange of preferred stock for common
stock.................................. (833,000) - -
Adjustment to reflect minority interests'
to underlying ownership interest....... - - 1,813,000
------------- -------------- ----------------
Balances at March 31, 1997.................. - - 36,670,000
Issuance of common stock for cash......... - - 33,800,000
Issuance of common stock in exchange for
real estate facilities................. - - 75,974,000
Net income................................ 3,154,000 - 3,154,000
Distributions............................. - (3,550,000) (3,550,000)
Adjustment to reflect minority interests'
to underlying ownership interest....... - - (3,090,000)
------------- -------------- ----------------
Balances at December 31, 1997............... $ 3,154,000 $ (3,550,000) $ 142,958,000
============= ============== ================
</TABLE>
See accompanying notes.
4
<PAGE>
PS BUSINESS PARKS, INC.
(SUCCESSOR TO AMERICAN OFFICE PARK PROPERTIES, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Periods (Note 2) For the Years Ended December 31,
----------------------------------- ----------------------------------
April 1, 1997 January 1,
through 1997 through
December 31, March 31,
1997 1997 1996 1995
---------------- --------------- --------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C> <C>
Net income...................................... $ 3,154,000 $ 682,000 $ 303,000 $ 720,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization expense....... 4,375,000 820,000 - -
Minority interest in income................. 6,753,000 1,813,000 - -
(Increase) decrease in other assets......... (1,465,000) (400,000) (28,000) 157,000
Increase in accrued and other liabilities... 780,000 2,925,000 138,000 73,000
---------------- --------------- --------------- ---------------
Total adjustments...................... 10,443,000 5,158,000 110,000 230,000
---------------- --------------- --------------- ---------------
Net cash provided by operating activities. 13,597,000 5,840,000 413,000 950,000
---------------- --------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of real estate facilities....... (44,122,000) - - -
Capital expenditures........................ (2,983,000) (582,000) - -
---------------- --------------- --------------- ---------------
Net cash used in investing activities..... (47,105,000) (582,000) - -
---------------- --------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable to affiliate..... 3,500,000 - - -
Decrease (increase) in receivable from
affiliate................................... 1,135,000 (308,000) (768,000) (59,000)
Net proceeds from the issuance of
common stock............................... 33,800,000 80,000 790,000 790,000
Dividends paid to shareholders.............. (3,550,000) - (400,000) (815,000)
Distributions to minority interests......... (3,442,000) - - -
---------------- --------------- --------------- ---------------
Net cash provided by (used in) financing
activities................................ 31,443,000 (228,000) (378,000) (84,000)
---------------- --------------- --------------- ---------------
Net (decrease) increase in cash and cash (2,065,000) 5,030,000 35,000 866,000
equivalents.......................................
Cash and cash equivalents at the beginning of
the period...................................... 5,949,000 919,000 884,000 18,000
---------------- --------------- --------------- ---------------
Cash and cash equivalents at the end of the period. $ 3,884,000 $ 5,949,000 $ 919,000 $ 884,000
================ =============== =============== ===============
</TABLE>
See accompanying notes.
5
<PAGE>
<TABLE>
<CAPTION>
For the Periods (Note 2) For the Years Ended December 31,
---------------------------------- ----------------------------------
April 1, 1997 January 1,
through 1997 through
December 31, March 31,
1997 1997 1996 1995
---------------- --------------- --------------- ---------------
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING
AND FINANCIAL ACTIVITIES:
Acquisitions of real estate facilities in exchange for preferred stock and
minority interests:
<S> <C> <C> <C> <C>
Real estate facilities................... $(146,207,000) $(117,180,000) $ - $ -
Intangible assets........................ 730,000 - - -
Accrued and other liabilities............ 4,419,000 - - -
Minority interest........................ 65,084,000 97,180,000 - -
Preferred stock.......................... 350,000 120,000 - -
Paid in capital ......................... 75,624,000 19,880,000 - -
Exchange of preferred stock for common stock:
Preferred Stock.......................... - (210,000) - -
Common Stock............................. - 210,000 - -
Adjustment to reflect PSI's acquisition cost:
Real estate facilities................... - (7,146,000) - -
Accumulated depreciation................. - (820,000) - -
Intangible assets........................ - (4,395,000) - -
Paid in capital.......................... - 12,361,000 - -
</TABLE>
See accompanying notes.
6
<PAGE>
PS BUSINESS PARKS INC.
(SUCCESSOR TO AMERICAN OFFICE PARK PROPERTIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
PS Business Parks, Inc. ("PSBP") is the successor to American
Office Park Properties, Inc. ("AOPP") and the survivor in the merger of
AOPP into Public Storage Properties XI, Inc. ("PSP11") on March 17,
1998. Based upon the terms of the merger (Note 9), for financial
reporting and accounting purposes the merger will be accounted for as a
reverse acquisition whereby AOPP is deemed to have acquired PSP11.
However, PSP11 is the continuing legal entity and registrant for both
Securities and Exchange Commission filing purposes and income tax
reporting purposes. All subsequent references to PSBP prior to March
17, 1998, refer to AOPP.
PSBP was organized in California in 1986 as a wholly-owned
subsidiary of Public Storage Management, Inc. ("PSMI"), a privately
owned company of B. Wayne Hughes and his family (collectively
"Hughes").
On November 16, 1995, Public Storage, Inc. ("PSI") acquired
PSMI in a business combination accounted for using the purchase method.
In connection with the transaction, PSI exchanged its common stock for
all of the non-voting participating preferred stock of PSBP,
representing a 95% economic interest, and Hughes purchased all the
voting common stock of PSBP, representing the remaining 5% economic
interest. During December 1996, Ronald L. Havner, Jr. (then an
executive officer of PSI) acquired all of Hughes' common stock in PSBP.
On January 2, 1997, in connection with the reorganization of
the commercial property operations of PSI and affiliated entities, PSBP
formed a partnership (the "Operating Partnership") whereby PSBP became
the general partner. Concurrent with the formation of the Operating
Partnership, PSI and affiliated entities contributed commercial
properties to the Operating Partnership in exchange for limited
partnership units ("OP Units"). In addition, PSI contributed commercial
properties to PSBP in exchange for shares of non-voting participating
preferred stock, and such properties were immediately contributed by
PSBP along with its commercial property management operations and cash
to the Operating Partnership for OP Units.
Subject to certain limitations as described in Note 5, holders
of OP Units, other than PSBP, have the right to require PSBP to redeem
such holders' OP Units at any time or from time to time beginning on
the date that is one year after the date on which such limited partner
is admitted to the Operating Partnership.
On March 31, 1997, PSI exchanged its non-voting participating
preferred stock into common shares of PSBP. As a result of the
exchange, PSI owned a majority of the voting common stock and
effectively gained control of PSBP at that time.
From 1986 through 1996, PSBP's sole business activities
consisted of the property management of commercial properties owned by
PSI and affiliated entities. Commencing in 1997, PSBP began to own and
operate commercial properties for its own behalf. At December 31, 1997,
PSBP and the Operating Partnership collectively owned and operated 49
commercial properties (approximately 6.0 million net rentable square
feet) located in 10 states. In addition, on December 31, 1997, the
Operating Partnership managed on behalf of PSI and affiliated entities
49 additional commercial properties (approximately 1.9 million net
rentable square feet).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation:
The financial statements for fiscal 1996 and 1995 include only
the accounts of PSBP. The consolidated financial statements for 1997
include the accounts of PSBP and the Operating Partnership. PSBP, as
7
<PAGE>
the sole general partner of the Operating Partnership, has full,
exclusive and complete responsibility and discretion in managing and
controlling the Operating Partnership. PSI owned approximately 53% of
the outstanding common stock of PSBP at December 31, 1997, with the
remainder owned primarily by a subsidiary of a state pension plan.
Historical financial data of PSP11 have not been included in the
historical financial statements of PSBP.
On March 31, 1997, PSBP and PSI agreed to exchange the
non-voting participating preferred stock held by PSI for 2,098,288
shares of voting common stock of PSBP. After the exchange, PSI owned in
excess of 95% of the outstanding common voting common stock of PSBP and
PSBP accounted for the transaction as if PSI purchased PSBP.
Accordingly, PSBP reflected PSI's cost of its investment in PSBP in
accordance with Accounting Principles Board Opinion No. 16. As a result
of PSI attaining control of PSBP, the carrying value of PSBP's assets
and liabilities were adjusted to reflect PSI's acquisition cost of its
controlling interest in PSBP of approximately $35 million. As a result,
the carrying value of real estate facilities was increased
approximately $8.0 million, intangible assets increased approximately
$4.4 million and paid in capital increased approximately $12.4 million.
Prior to March 31, 1997, control of PSBP was held by entities
other than PSI. As a result of PSI acquiring a majority of the voting
common stock and control of PSBP on March 31, 1997, the 1997
consolidated financial statements are presented separately for the
period prior to March 31, 1997 (January 1, 1997 through March 31, 1997)
and the period subsequent to March 31, 1997 (April 1, 1997 through
December 31, 1997) when control was held by PSI.
Stock-based compensation
In October 1995, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS")
No. 123 "Accounting for Stock-Based Compensation" ("Statement 123")
which provides companies an alternative to accounting for stock-based
compensation as prescribed under APB Opinion No. 25 ("APB 25").
Statement 123 encourages, but does not require companies to recognize
expense for stock-based awards based on their fair value at date of
grant. Statement 123 allows companies to continue to follow existing
accounting rules (intrinsic value method under APB 25) provided that
pro-forma disclosures are made of what net income and earnings per
share would have been had the new fair value method been used. The
Company has elected to adopt the disclosure requirements of Statement
123 but will account for stock-based compensation under APB 25.
Statement 123's disclosure requirements are applicable to stock-based
awards granted in fiscal years beginning after December 15, 1994.
Stock split and stock dividend:
On January 1, 1997, the number of outstanding shares of
preferred and common stock increased as a result of a 10 for 1 stock
split. In March 1997, the preferred stock of PSBP was converted into
common stock on a share for share basis. In December 1997, PSBP
declared a common stock dividend at a rate of .01583 shares for each
common share outstanding. Similarly, the Operating Partnership's
outstanding OP Units were adjusted in December 1997 to reflect an
increase of .01583 OP Units for each OP Unit outstanding. No adjustment
was made to the outstanding OP Units for the January 1997 stock split,
as the issuance of OP Units during 1997 already reflected the stock
split.
On March 17, 1998, in connection with the merger, PSBP's
common shares were converted into 1.18 shares of PSP11. Similarly,
holders of OP Units received an additional 0.18 OP Units for each
outstanding OP Unit held at the time of the merger.
8
<PAGE>
References in the consolidated financial statements and notes
thereto with respect to shares of preferred stock, common stock, stock
options, and OP Units and the related per share/per unit amounts have
been retroactively adjusted to reflect the January 1997 stock split,
the December 1997 stock dividend and the March 1998 conversion in
connection with the merger.
Cash and cash equivalents:
PSBP considers all highly liquid investments with an original
maturity of three months or less at the date of purchase to be cash
equivalents.
Real estate facilities:
Costs related to the improvements of properties are
capitalized. Expenditures for repair and maintenance are charged to
expense when incurred. After March 31, 1997, acquisition of facilities
from PSI and entities controlled by PSI are recorded at the
predecessor's basis until such time that PSBP is not controlled by PSI.
Buildings and equipment are depreciated on the straight line method
over the estimated useful lives, which is generally 25 and 5 years,
respectively.
Intangible assets:
Intangible assets consist of property management contracts for
properties managed, but not owned, by PSBP. The intangible assets are
being amortized over seven years. As properties managed are
subsequently acquired by PSBP, the unamortized basis of intangible
assets related to such property is included in the cost of acquisition
of such property. During April 1997, PSBP acquired four properties from
PSI and included in the cost of real estate facilities for such
properties are $730,000 of cost previously classified as intangible
assets. Intangible assets at December 31, 1997 are net of accumulated
amortization of $393,000, which reflects the amortization for the
period April 1, 1997 through December 31, 1997.
Evaluation of asset impairment:
In 1995, the FASB issued SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of" which requires impairment losses to be recorded on
long-lived assets. PSBP evaluates its assets used in operations, by
identifying indicators of impairment and by comparing the sum of the
estimated undiscounted future cash flows for each asset to the asset's
carrying amount. When indicators of impairment are present and the sum
of the undiscounted future cash flows is less than the carrying value
of such asset, an impairment loss is recorded equal to the difference
between the asset's current carrying value and its value based on
discounting its estimated future cash flows. Statement 121 also
addresses the accounting for long-lived assets that are expected to be
disposed of. Such assets are to be reported at the lower of their
carrying amount or fair value, less cost to sell. PSBP adopted
Statement 121 in 1996 and the adoption had no effect. PSBP's subsequent
evaluations have indicated no impairment in the carrying amount of its
assets.
Note payable to affiliate:
Note payable to affiliate at December 31, 1998 of $3,500,000
reflects borrowings from PSI which occurred on that date. The note
bears interest at 6.97% ($1,000 of interest expense was paid in 1997),
and was repaid on January 31, 1998.
9
<PAGE>
Revenue and expense recognition:
All leases are classified as operating leases. Rental income
is recognized on a straight-line basis over the terms of the leases.
Reimbursements from tenants for real estate taxes and other recoverable
operating expenses are recognized as revenue in the period the
applicable costs are incurred.
Costs incurred in connection with leasing (primarily tenant
improvements and leasing commissions) are capitalized and amortized
over the lease period.
Property management fees are recognized in the period earned.
Net income per common share:
In 1997, the FASB issued SFAS No. 128, Earnings per Share.
Statement 128 replaced the calculation of "primary" and "fully diluted"
earnings per share with "basic" and "diluted" earnings per share.
PSBP's adoption of this accounting standard has no impact upon
previously reported earnings per share.
"Diluted" shares include the dilutive effect of stock options,
while "basic" shares exclude such effect. In addition, weighted average
shares utilized in computing basic and diluted earnings per share
includes the weighted average participating preferred shares, because
such shares were allocated income (subject to certain preferences upon
liquidation described below) on an equal per share basis with the
common shares.
Income taxes:
Prior to November 16, 1995, PSBP's earnings were included in
the consolidated federal and combined state income tax returns of PSMI.
Under the terms of a tax sharing agreement, taxes were allocated to
PSBP as though it filed separate federal and state tax returns. For
periods subsequent to November 16, 1995, separate federal and state
income tax returns were filed for PSBP.
Income taxes are accounted for under SFAS No. 109, "Accounting
for Income Taxes", which requires income taxes to be recorded using the
liability method. Under the liability method, deferred taxes are
provided for temporary differences between the financial reporting and
income tax bases of assets and liabilities, applying presently enacted
tax rates and laws. Taxes have been paid by PSI and PSMI on behalf of
PSBP, and are included in due from affiliate.
During 1997, PSBP qualified and intends to continue to qualify
as a real estate investment trust ("REIT"), as defined in Section 856
of the Internal Revenue Code. As a REIT, PSBP is not taxed on that
portion of its taxable income which is distributed to its shareholders
provided that PSBP meets certain tests. PSBP believes it has met these
tests during 1997; accordingly, no provision for income taxes has been
made in the accompanying financial statements. In addition, PSP11 (the
legal entity for income tax reporting purposes subsequent to the March
17, 1998 merger) believes it has also met the REIT tests during each of
1997, 1996 and 1995.
10
<PAGE>
The income tax provision for fiscal 1996 and 1995 is as
follows:
1996:
Federal $ 166,000
State 50,000
----------------------
$ 216,000
======================
1995:
Federal $ 372,000
State 100,000
----------------------
$ 472,000
======================
The income tax provision is different from that which would be
computed by applying the Federal income tax rate to income before taxes
as follows:
1996 1995
----------------- ----------------
Tax at statutory rate $ 177,000 $ 405,000
State income taxes 33,000 66,000
Other 6,000 1,000
----------------- ----------------
$ 216,000 $ 472,000
================= ================
Use of estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual
results could differ from those estimates.
General and administrative expense:
General and administrative expense includes legal expense,
office expense, state income taxes (in the case of 1997), executive
salaries, and other such administrative items. Such amounts include
amounts incurred by PSI on behalf of PSBP, which were subsequently
charged to PSBP.
3. REAL ESTATE FACILITIES
On January 2, 1997, concurrent with the formation of the
Operating Partnership, PSI and affiliated entities contributed 26
commercial properties (approximately 2.4 million square feet) to the
Operating Partnership in exchange for 5,824,383 OP Units. In addition,
PSI contributed 9 commercial properties to PSBP in exchange for
1,198,680 shares of non-voting participating preferred. PSBP
immediately contributed these 9 commercial properties (approximately
0.6 million square feet) to the Operating Partnership for 1,198,680 OP
Units. These transactions were accounted for as a purchase of
properties by PSBP and the Operating Partnership at fair value
(approximately $117.2 million in aggregate).
In April 1997, PSI contributed 4 commercial properties
(approximately 0.4 million square feet) to the Operating Partnership in
exchange for 1,480,968 OP Units. The cost of these properties was
recorded at PSI's carrying cost of approximately $23.9 million.
11
<PAGE>
In separate transactions in July, September, and December
1997, PSBP and the Operating Partnership acquired a total of four
commercial properties (approximately 0.6 million square feet) from
unaffiliated third parties. The aggregate purchase cost of these
facilities was approximately $47.5 million, consisting of the issuance
of 27,495 OP Units having a value of approximately $0.6 million and
$46.9 million in cash.
In addition, on December 24, 1997, PSBP and the Operating
Partnership issued 3,504,758 shares of PSBP common stock and 1,785,007
OP Units, respectively, to subsidiaries of a state pension plan, and
the subsidiaries, through a merger and contribution, transferred to
PSBP and the Operating Partnership a total of six commercial properties
(approximately 2.0 million net rentable square feet) and $1.0 million
in cash. The total cost of the six properties was approximately $118.9
million.
The activity in real estate facilities in 1997 is as follows:
<TABLE>
<CAPTION>
Accumulated
Land Buildings Depreciation Total
------------------ --------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Balances at December 31, 1996 $ - $ - $ - $ -
Acquisitions from affiliates 35,154,000 82,026,000 - 117,180,000
Capital improvements (Jan - Mar 1997) - 582,000 - 582,000
Depreciation expense (Jan - Mar 1997) - - (820,000) (820,000)
Adjustment to reflect PSI's acquisition
cost (Note 2) - 7,146,000 820,000 7,966,000
------------------ --------------- ---------------- -----------------
Balances at March 31, 1997 35,154,000 89,754,000 - 124,908,000
Acquisitions from:
PSI and affiliates 6,682,000 17,294,000 - 23,976,000
Third parties 49,918,000 116,435,000 - 166,353,000
Capital improvements (Apr - Dec 1997) - 2,983,000 - 2,983,000
Depreciation expense (Apr - Dec 1997) - - (3,982,000) (3,982,000)
------------------ --------------- ---------------- -----------------
Balances at December 31, 1997 $91,754,000 $226,466,000 $(3,982,000) $314,238,000
================== =============== ================ =================
</TABLE>
4. LEASING ACTIVITY
Future minimum rental revenues under non-cancelable leases as
of December 31, 1997 with tenants for the above real estate facilities
are as follows:
1998 $ 42,937,000
1999 30,527,000
2000 19,785,000
2001 11,005,000
2002 6,141,000
Thereafter 8,662,000
-------------------
$ 119,057,000
===================
12
<PAGE>
5. MINORITY INTERESTS
In consolidation, PSBP classifies ownership interests in the
Operating Partnership, other than its own, as minority interest on the
consolidated financial statements. Minority interest in income consists
of the minority interests' share (approximately 69% on a weighted
average basis of income before minority interest and income taxes for
the two periods comprising the year ended December 31, 1997) of the
consolidated operating results.
Subject to certain limitations described below, each limited
partner other than PSBP has the right to require the redemption of such
limited partner's partnership interests at any time or from time to
time beginning on the date that is one year after the date on which
such limited partner is admitted to the Operating Partnership.
Unless PSBP, as general partner, elects to assume and perform
the Operating Partnership's obligation with respect to a redemption
right, as described below, a limited partner that exercises its
redemption right will receive cash from the Operating Partnership in an
amount equal to the market value (as defined in the Operating
Partnership Agreement) of the partnership interests redeemed. In lieu
of the Operating Partnership redeeming the partner for cash, PSBP, as
general partner, has the right to elect to acquire the partnership
interest directly from a limited partner exercising its redemption
right, in exchange for cash in the amount specified above or by
issuance of one share of PSBP common stock for each unit of limited
partnership interest redeemed.
A limited partner cannot exercise its redemption right if
delivery of shares of PSBP common stock would be prohibited under the
applicable articles of incorporation, if the general partner believes
that there is a risk that delivery of shares of common stock would
cause the general partner to no longer qualify as a REIT, would cause a
violation of the applicable securities laws, or would result in the
Operating Partnership no longer being treated as a partnership for
federal income tax purposes.
At December 31, 1997, there were 9,117,854 OP Units owned by
minority interests (7,305,352 were owned by PSI and affiliated
entities, 1,785,007 were owned by a subsidiary of a state pension fund,
and 27,495 were owned by unaffiliated third parties). On a fully
converted basis, assuming all 9,117,854 OP Units were converted into
shares of common stock of PSBP at December 31, 1997, the minority
interests would own approximately 54% of the pro forma common shares
outstanding.
In January 1998, the subsidiary of the state pension plan
exercised its option to convert its OP Units into shares of common
stock of PSBP.
6. PROPERTY MANAGEMENT CONTRACTS
The Operating Partnership manages industrial, office and
retail facilities for PSI and entities affiliated with PSI, and third
party owners. These facilities, all located in the United States,
operate under the "Public Storage" or "PS Business Parks" name.
The property management contracts provide for compensation of
five percent of the gross revenue of the facilities managed. Under the
supervision of the property owners, the Operating Partnership
coordinates rental policies, rent collections, marketing activities,
the purchase of equipment and supplies, maintenance activities, and the
selection and engagement of vendors, suppliers and independent
contractors. In addition, the Operating Partnership assists and advises
the property owners in establishing policies for the hire, discharge
and supervision of employees for the operation of these facilities,
including property managers, leasing, billing and maintenance
personnel.
13
<PAGE>
The property management contract with PSI is for seven year
terms with the term being extended one year each anniversary. The
property management contracts with affiliates of PSI are cancelable by
either party upon sixty days notice.
7. SHAREHOLDERS' EQUITY
PSBP was initially capitalized with 2,500 shares of capital
stock. In connection with the November 16, 1995 merger between PSMI and
PSI, PSBP's Articles of Incorporation were amended authorizing PSBP to
issue only two classes of shares (i) 100,000 shares of $0.10 par value
preferred stock and (ii) 100,000 shares of $0.10 par value common
stock. PSBP's existing 2,500 shares of capital stock were, concurrent
with the amendment, exchanged for 899,608 shares of preferred stock.
The preferred stock participates fully on a share for share
basis in any dividends which the Board of Directors of PSBP declares
with respect to the common shares. Except under certain conditions, the
preferred stock has no voting rights on any matter requiring a vote of
shareholders. In the event of any liquidation, dissolution or winding
up of PSBP, the preferred stock shall be entitled to receive, in
preference to any payment on the common shares, an amount equal to
$16.69 per share. After this the common shares receive $16.69 per
share. Subsequent to the common shares receiving $16.69 per share, the
remainder is distributed ratably among the preferred and common
shareholders.
In connection with the November 16, 1995 merger, Hughes
purchased 47,348 shares of common stock of PSBP for cash totaling
$790,000.
In December 1996, PSBP issued 47,349 shares of common stock to
third parties for cash totaling $790,000. In addition, in December
1996, Ronald L. Havner, Jr. acquired all of the common shares of PSBP
held by B. Wayne Hughes.
In July 1997, PSBP issued 2,025,769 shares of common stock
primarily to PSI for cash totaling $33,800,000.
In December 1997, PSBP issued 3,504,758 shares of common stock
to a subsidiary of a state pension plan in connection with the
acquisition of commercial properties. PSBP incurred approximately
$3,300,000 in transaction costs.
As a REIT, PSBP must distribute to its shareholders in each
taxable year an amount at least equal to 95% of its REIT taxable
income. In November and December 1997, PSBP paid distributions to its
common shareholders totaling $2.1 million ($0.494 per common share) and
$1.5 million ($0.189 per common share), respectively. The
characterization of dividends for Federal income tax purposes is made
based upon earnings and profits of PSBP, as defined by the Internal
Revenue Code. Distributions declared by the Board of Directors in 1997
were characterized as ordinary income.
8. STOCK OPTIONS
PSBP has a 1997 Stock Option Plan (the "Plan"). Under the
Plan, PSBP has granted non-qualified options to certain directors,
officers and key employees to purchase shares of PSBP's common stock at
a price equal to the fair market value of the common stock at the date
of grant. Generally, options under the Plan vest over a three-year
period from the date of grant at the rate of one-third per year and
expire ten years after the date of grant.
14
<PAGE>
At December 31, 1997, there were 1,500,000 options authorized
to grant. Information with respect to the Plan during 1997 is as
follows:
1997
-------------------------------
Number of Average Price
Options per Share
-------------- ---------------
Options outstanding January 1 - $ -
Granted 305,570 16.80
Exercised - -
Canceled - -
-------------- ---------------
Options outstanding December 31 305,570 $ 16.80
===============
Option price range at December 31 $16.69
to $22.88
Options exercisable at December 31 None
==============
Options available for grant at December 31 1,194,430
==============
PSBP adopted the disclosure requirement provision of SFAS No.
123 in accounting for stock-based compensation issued to employees. As
of December 31, 1997 there were 305,570 options outstanding that were
subject to SFAS No. 123 disclosure requirements. The fair value of
these options was estimated utilizing prescribed valuation models and
assumptions as of each respective grant date. Based on the results of
such estimates, management determined that there was no material effect
on net income or earnings per share for either of the two periods
comprising the year ended December 31, 1997. The remaining contractual
lives were 9.1 years at December 31, 1997.
9. SUBSEQUENT EVENTS
Property acquisitions:
On January 13, 1998, PSBP purchased a commercial property for
approximately $22,643,000, consisting of $22,450,000 cash and the
issuance of 8,428 OP Units having a value of approximately $193,000.
In March 1998, PSBP purchased two commercial properties from
unaffiliated third parties for an aggregate cost of approximately
$33,139,000, composed of $17,600,000 cash, the issuance of 44,250 OP
units having a value of approximately $1,013,000, and the assumption of
mortgage notes payable of $14,526,000.
Stock issuances to institutional investors:
In January 1998, PSBP entered into an agreement with a group
of institutional investors under which PSBP will issue up to 6,744,074
shares of PSBP common stock at $22.88 per share in cash (an aggregate
of up to $155,000,000) in separate traunches. The first tranche,
2,185,189 shares or $50.0 million, was issued in January 1998. The
remainder of the shares will be issued as the funds are required by
PSBP to purchase commercial properties.
15
<PAGE>
Line of credit with PSI:
PSBP has entered into a line of credit agreement with PSI for
$100,000,000 with an interest rate of the London Interbank Offered Rate
("LIBOR") plus 1.25%.
March 17, 1998 merger (unaudited):
On March 17, 1998, AOPP merged into PSP11, a publicly traded
real estate investment trust and an affiliate of PSI. Upon consummation
of the merger of AOPP into PSP11, each share of AOPP's common stock was
converted into 1.18 shares of PSP11 common stock. PSP11, the surviving
corporation, was renamed "PS Business Parks, Inc." (PSBP as defined in
Note 1). Under the merger transaction:
* Each outstanding share of PSP11 Common Stock continues to be
owned by current holders or converted into the right to receive
$20.50 in cash. The total amount of shares electing cash was
106,155. If a PSP11 shareholder did not elect cash, he or she
continues to own PSP11 Common Stock.
* Each share of PSP11 Common Stock Series B and each share of
PSP11 Common Stock Series C converted into .8641 share of PSP11
Common Stock.
* Each share of AOPP Common Stock converted into 1.18 shares of
PSP11 Common Stock.
* Concurrent with the merger, PSP11 exchanged 11 mini-warehouses
and two properties that combine mini-warehouse and commercial
space for 11 commercial properties owned by PSI. The fair value of
the real estate facilities owned by PSP11 was approximately $48
million.
Pro forma data (unaudited) for the year ended December 31,
1997 as though the merger, property acquisitions which occurred during
fiscal 1997 and during 1998 (as described above), had been effective at
the beginning of fiscal 1997 is as follows:
(in thousands except
per share data)
---------------------
Pro forma:
----------
Revenues............................................. $ 68,625
Net income........................................... 18,918
Net income per common share (Basic).................. $ 1.35
Net income per common share (Diluted)................ 1.35
Weighted average shares outstanding (Basic).......... 13,982
Weighted average shares outstanding (Diluted)........ 14,021
Total assets......................................... $ 427,872
Notes payable........................................ $ 14,526
Shareholders equity.................................. $ 266,952
16
<PAGE>
The pro forma data does not purport to be indicative either of
results of operations that would have occurred had the transactions
occurred at the beginning of fiscal 1997 or future results of
operations PSBP and the Operating Partnership.
10. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income" ("SFAS 130"), which establishes standards for the
reporting of comprehensive income and its components. This statement
requires a separate statement to report the components of comprehensive
income for each period reported. The provisions of this statement are
effective for fiscal years beginning after December 15, 1997. PSBP will
implement SFAS 130 for the fiscal year ended December 31, 1998, but
PSBP does not expect the impact to be material.
In July 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"), which
establishes standards for the way that public business enterprises
report information about operating segments in annual financial
statements and requires that those enterprises report selected
information about operating segments in interim financial reports
issued to shareholders. This statement is effective for periods
beginning after December 15, 1997. PSBP does not expect SFAS 131 to
have a significant impact upon its reporting presentation.
17
<PAGE>
Item 7(a)(ii) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements of PS Business Parks, Inc. ("PSBP") and notes
thereto included as Item 7 (a)(i) of this Form 8-K/A.
DESCRIPTION OF BUSINESS
The financial statements of PSBP include the accounts of PSBP and its
Operating Partnership (as defined later) which was formed in 1997. PSBP is the
general partner of the Operating Partnership.
PSBP is the successor to American Office Park Properties, Inc. ("AOPP")
and the survivor in the merger of AOPP into Public Storage Properties XI, Inc.
("PSP11") on March 17, 1998. Based upon the terms of the merger, for financial
reporting and accounting purposes, the merger will be accounted for as a reverse
acquisition whereby AOPP is deemed to have acquired PSP11. However, PSP11 is the
continuing legal entity and registrant for both Securities and Exchange
Commission filing purposes and income tax reporting purposes. All subsequent
references to PSBP prior to March 17, 1998, refer to AOPP.
PSBP was organized in California in 1986 as a wholly-owned subsidiary
of Public Storage Management, Inc. ("PSMI"), a privately owned company of B.
Wayne Hughes and his family (collectively "Hughes").
On November 16, 1995, Public Storage, Inc. ("PSI") acquired PSMI in a
business combination accounted for using the purchase method. In connection with
the transaction, PSI exchanged its common stock for all of the non-voting
participating preferred stock of PSBP, representing a 95% economic interest, and
Hughes purchased all the voting common stock of PSBP, representing the remaining
5% economic interest. During December 1996, Ronald L. Havner, Jr. (then an
executive officer of PSI) acquired all of Hughes' common stock in PSBP.
On January 2, 1997, in connection with the reorganization of the
commercial property operations of PSI and affiliated entities, PSBP formed a
partnership (the "Operating Partnership") whereby PSBP became the general
partner. Concurrent with the formation of the Operating Partnership, PSI and
affiliated entities contributed commercial properties to the Operating
Partnership in exchange for limited partnership units ("OP Units"). In addition,
PSI contributed commercial properties to PSBP in exchange for shares of
non-voting participating preferred stock, and such properties were immediately
contributed by PSBP along with its commercial property management operations and
cash to the Operating Partnership for OP Units.
On March 31, 1997, PSI exchanged its non-voting participating preferred
stock into common shares of PSBP. As a result of the exchange, PSI owned a
majority of the voting common stock and effectively gained control of PSBP at
that time.
From 1986 through 1996, PSBP's sole business activities consisted of
the property management of commercial properties owned by PSI and affiliated
entities. Commencing in 1997, PSBP began to own and operate commercial
properties for its own behalf. At December 31, 1997, PSBP and the Operating
Partnership collectively owned and operated 49 commercial properties
(approximately 6.0 million net rentable square feet) located in 10 states. In
addition, on December 31, 1997, the Operating Partnership managed on behalf of
PSI and affiliated entities 49 additional commercial properties (approximately
1.9 million net rentable square feet).
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31,
1996: On March 31, 1997, PSI exchanged its non-voting preferred stock for voting
common stock of PSBP in a transaction accounted for as a purchase of PSBP by
PSI. As a result of PSI attaining a 95% ownership interest in PSBP voting common
stock, the financial results for 1997 are presented separately for the period
prior to the exchange transaction for the period January 1, 1997 to March 31,
1997 and subsequent to the exchange transaction for the period April 1, 1997 to
December 31, 1997.
18
<PAGE>
To properly compare the operating results for the year ended December
31, 1997 to the same period in the prior year, the amounts for 1997 have been
combined as follows:
<TABLE>
<CAPTION>
January 1, 1997 - April 1, 1997 - Year ended
March 31, 1997 December 31, 1997 December 31, 1997
------------------- ----------------- -------------------
Revenues:
<S> <C> <C> <C>
Rental income $ 5,805,000 $ 24,364,000 $ 30,169,000
Facility management fees 247,000 709,000 956,000
Interest and other income 29,000 424,000 453,000
------------------- ----------------- -------------------
6,081,000 25,497,000 31,578,000
------------------- ----------------- -------------------
Expenses:
Cost of operations 2,493,000 9,837,000 12,330,000
Cost of facility management 60,000 129,000 189,000
Depreciation and amortization 820,000 4,375,000 5,195,000
General and administrative 213,000 1,248,000 1,461,000
Interest expense - 1,000 1,000
------------------- ----------------- -------------------
3,586,000 15,590,000 19,176,000
------------------- ----------------- -------------------
Net income before minority
interest 2,495,000 9,907,000 12,402,000
Minority interest (1,813,000) (6,753,000) (8,566,000)
------------------- ----------------- -------------------
Net income $ 682,000 $ 3,154,000 $ 3,836,000
=================== ================= ===================
</TABLE>
Net income for the year ended December 31, 1997 was $3,836,000 compared
to $303,000 for the year ended December 31, 1996, representing an increase of
$3,533,000. This significant increase in net income reflects PSBP's change in
business focus from being solely a manager of commercial properties to an
owner/operator as well as the continued management of commercial properties for
a fee. As indicated above, prior to 1997, PSBP owned no commercial properties.
Throughout fiscal 1997, PSBP acquired a total of 49 commercial facilities which
in the aggregate contributed property net operating income (rental income less
cost of operations and depreciation expense) of $13,037,000 during 1997. The
operating results reflects the aggregate operations of these facilities from the
date each property was acquired through the end of 1997 and is therefore not
representative of the operations of the facilities for the entire fiscal year.
During the year ended December 31, 1997, $767,000 in net
operating income was recognized from facility management operations compared to
$1,619,000 during the same period in 1996. During 1996, PSBP's property
management operations generated net operating income of $1,619,000 through the
management of a total of 88 commercial properties. In 1997, PSBP acquired 39 of
these 88 commercial properties and, as a result, PSBP no longer receives
property management fees on these properties after their acquisition.
Accordingly, PSBP's facility management operations decreased significantly in
1997 as compared to 1996, generating net operating income of $767,000 in 1997.
During the year ended December 31, 1997, general and administrative
expenses were $1,461,000 compared to $1,143,000 for the same period in 1996, a
$318,000 increase. The increase in general and administrative expenses is due to
an increase in salaries and other expenses related to the January 1997
reorganization and subsequent increased level of activities.
Depreciation and amortization expense was $5,195,000 for the year ended
December 31, 1997. No amounts for depreciation and amortization expense were
reported for the same period in 1996, as PSBP owned no real estate facilities
and did not have intangible assets.
Minority interest in income represents the income allocable to equity
interests in the Operating Partnership which are not owned by PSBP. During 1997,
$8,566,000 of income was allocated to the minority interest, representing their
pro rata share of income in the consolidated entities.
19
<PAGE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31,
1995. Net income for the year ended December 31, 1996 was $303,000 compared to
net income for the year ended December 31, 1995 of $720,000. The primary reason
for this decline in net income was an $824,000 increase in general and
administrative expense. Net operating income related to facility management
operations for the year ended December 31, 1996 was $1,619,000, a $145,000 or
9.8% increase from $1,474,000 reported for the year ended December 31, 1995. The
increase is due to a 4.4% increase in facility management fees earned combined
with a 9.8% decrease in cost of managing the facilities. The increase in
facility management fees is due to higher revenues at the facilities managed.
During 1996, revenues of the properties managed were $42.6 million compared to
$40.7 million for 1995 due to a 0.9% increase in occupancy levels (from 94.7% in
1995 to 95.6% in 1996) and a 3.5% increase in realized annual rental rates (from
$8.37 in 1995 to $8.66 in 1996). The reduction in cost of managing the
facilities is due mainly to a $47,000 decrease in salaries related to field
management personnel.
General and administrative expense for 1996 was $1,143,000 compared to
$319,000 in 1995. This increase of $824,000 includes legal expense of $456,000.
This includes approximately $407,000 of non-recurring legal expense related to
corporate planning issues. In addition, general and administrative expense for
1996 includes $533,000 in salaries related to direct and allocated costs from
PSI for management and support functions, including but not limited to
accounting, data processing and legal. In 1995, many of these support functions
were being provided by PSBP's parent.
LIQUIDITY AND CAPITAL RESOURCES
PSBP is characterized by low leverage and an increasing level of funds
available for distributions and investments. Net cash provided by operating
activities for the years ended December 31, 1997, 1996 and 1995 were
$19,437,000, $413,000 and $950,000, respectively. Management expects cash flows
from operations will be sufficient to fund capital expenditures and
distributions in the future. As of December 31, 1997, PSBP had $3,500,000 in
notes payable outstanding. These notes were paid in full in January 1998.
In addition to cash flow from operations, PSBP has entered into a line
of credit agreement with PSI for $100,000,000 which is available to fund
operations and future acquisitions. The line of credit bears interest at a rate
of the London Interbank Offered Rate ("LIBOR") plus 1.25%. PSBP has also entered
into an agreement with institutional investors whereby PSBP will issue up to
6,744,074 shares of its common stock for cash ($155,000,000). The cash will be
available for PSBP to use for acquisition purposes. (See Subsequent Events
below)
The following table summarizes PSBP's ability to make capital
improvements to maintain its facilities through the use of cash provided by
operating activities. The remaining cash flow is available to PSBP to pay
distributions to shareholders and acquire property interests.
<TABLE>
<CAPTION>
` Year ended December 31, 1997 Years ended December 31,
------------------------------------------------------- --------------------------
January 1, 1997 April 1, 1997
through through Year ended
March 31, 1997 December 31, 1997 December 31, 1997 1996 1995
----------------- ------------------ ----------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net income $ 682,000 $3,154,000 $3,836,000 $303,000 $720,000
Depreciation and amortization 820,000 4,375,000 5,195,000 - -
Change in working capital 2,525,000 (685,000) 1,840,000 110,000 230,000
Minority interest in income 1,813,000 6,753,000 8,566,000 - -
----------------- ------------------ ----------------- ------------ ------------
Net cash provided by operating 5,840,000 13,597,000 19,437,000 413,000 950,000
activities
Capital improvements to maintain
facilities (582,000) (2,983,000) (3,565,000) - -
----------------- ------------------ ----------------- ------------ ------------
Funds available for distributions
to shareholders and
acquisitions and other 5,258,000 10,614,000 15,872,000 413,000 950,000
corporate purposes
Cash distributions to
shareholders and minority interests - (6,992,000) (6,992,000) (400,000) (815,000)
----------------- ------------------ ----------------- ------------ -----------
Excess funds available for
acquisitions and other corporate
purposes $5,258,000 $3,622,000 $8,880,000 $13,000 $135,000
================= ================== ================= ============ ===========
</TABLE>
20
<PAGE>
Funds from operations (FFO) is defined by PSBP as net income (loss),
computed in accordance with generally accepted accounting principles (GAAP),
before depreciation, amortization and extraordinary or non-recurring items. FFO
is presented because PSBP considers FFO to be a useful measure of the operating
performance of a REIT which, together with net income and cash flows, provides
investors with a basis to evaluate the operating and cash flow performances of a
REIT. FFO does not represent net income or cash flows from operations as defined
by GAAP. FFO does not take into consideration scheduled principal payments on
debt and capital improvements. Accordingly, FFO is not necessarily a substitute
for cash flow or net income as a measure of liquidity or operating performance
or ability to make acquisitions and capital improvements or ability to pay
distributions or debt principal payments. Also, FFO as computed and disclosed by
PSBP may not be comparable to FFO computed and disclosed by other REITs.
Funds from operations for PSBP is computed as follows:
<TABLE>
<CAPTION>
Year ended December 31, 1997 Years Ended December 31,
------------------------------------------------------- --------------------------
January 1, 1997 April 1, 1997
through through Year ended
March 31, 1997 December 31, 1997 December 31, 1997 1996 1995
----------------- ------------------ ------------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net income $ 682,000 $ 3,154,000 $ 3,836,000 $ 303,000 $720,000
Minority interest in income 1,813,000 6,753,000 8,566,000 - -
Depreciation and amortization 820,000 4,375,000 5,195,000 - -
----------------- ------------------ ------------------ ------------ ------------
Subtotal 3,315,000 14,282,000 17,597,000 303,000 720,000
FFO allocated to minority
interests (2,408,000) (9,735,000) (12,143,000) - -
----------------- ------------------ ------------------ ------------ ------------
Funds from operations
allocated to shareholders $ 907,000 $ 4,547,000 $ 5,454,000 $ 303,000 $720,000
================= ================== ================== ============ ============
</TABLE>
Distributions. PSBP has elected and intends to qualify as a REIT for
federal income tax purposes. As a REIT, PSBP must meet, among other tests,
sources of income, share ownership and certain asset tests. In addition, PSBP is
not taxed on that portion of its taxable income which is distributed to its
shareholders provided that at least 95% of its taxable income is so distributed
to its shareholders prior to filing of its tax return. PSBP intends to meet its
distribution requirement by distributing the minimum amount required under the
distribution test.
SUBSEQUENT EVENTS
PROPERTY ACQUISITIONS. On January 13, 1998, PSBP purchased a commercial
property for approximately $22,643,000, consisting of $22,450,000 cash and the
issuance of 8,428 OP Units having a value of approximately $193,000.
In March 1998, PSBP purchased two commercial properties from
unaffiliated third parties for an aggregate cost of approximately $33,139,000,
composed of $17,600,000 cash, the issuance of 44,250 OP units having a value of
approximately $1,013,000, and the assumption of mortgage notes payable of
$14,526,000.
STOCK ISSUANCES TO INSTITUTIONAL INVESTORS. In January 1998, PSBP
entered into an agreement with a group of institutional investors under which
PSBP will issue up to 6,744,074 shares of PSBP common stock at $22.88 per share
in cash (an aggregate of up to $155,000,000) in separate traunches. The first
traunch, 2,185,189 or $50.0 million, was issued in January 1998. The remainder
of the shares will be issued as the funds are required by PSBP to purchase
commercial properties.
21
<PAGE>
Item 7 (b) PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following unaudited pro forma consolidated financial statements were
prepared to reflect the March 17, 1998 merger (the "Merger") of American Office
Park Properties, Inc. ("AOPP") and Public Storage Properties XI, Inc. ("PSP11"),
which is described in the Public Storage Properties XI, Inc. Proxy Statement and
Prospectus dated February 5, 1998 (the "Proxy Statement"). Pursuant to the
Merger:
*AOPP merged into PSP11.
*Each outstanding share of PSP11 Common Stock, with the exception
of 106,155 shares which elected to receive $20.50 in cash per
share, continues to be owned by current holders.
*Each share of PSP11 Common Stock Series B and each share of PSP11
Common Stock Series C converted into .8641 share of PSP11 Common
Stock.
*Each share of AOPP Common Stock converted into 1.18 shares of
PSP11 Common Stock.
*The surviving corporation in the Merger was renamed "PS Business
Parks, Inc. ("PSBP")."
*Concurrent with the Merger, PSP11 exchanged (the "Exchange") 11
mini-warehouses and two properties that combine mini-warehouse and
commercial space for 11 commercial properties owned by Public
Storage, Inc. ("PSI").
The Merger will be accounted for as a reverse merger whereby AOPP is treated as
the accounting acquirer using the purchase method. This has been determined
based upon the following:
*The former shareholders and unitholders of AOPP own in excess of
80% of the merged companies.
*The business focus post Merger will continue to be that of AOPP's
which includes the acquisition, ownership and management of
commercial properties. Prior to the Merger, PSP11's business focus
has been primarily on the ownership and operation of its
self-storage facilities which represent approximately 81% of its
portfolio.
In addition to adjustments to reflect the Merger, pro forma adjustments were
made to reflect the following transactions (all share and OP Unit amounts have
been adjusted to reflect the conversion factor of 1.18 pursuant to the Merger):
1. On April 1, 1997, AOPP LP (the "Operating Partnership") acquired
four commercial properties from PSI in exchange for 1,480,968 OP
Units.
2. On July 31, 1997, AOPP acquired two commercial properties from an
unaffiliated third party for cash totaling $33,750,000. AOPP
raised the cash for this acquisition by issuing 2,025,769 shares
of AOPP Common Stock primarily to PSI for cash totaling
$33,800,000.
3. On September 24, 1997, AOPP acquired one commercial property (the
"Largo Property") from an unaffiliated third party for an
aggregate cost of $10,374,000, consisting of cash of $10,050,000
and the issuance of 14,384 Operating Partnership units ("OP
Units") having a value of $324,000.
4. On December 10, 1997, AOPP purchased a commercial property (the
"Northpointe Property") for $3,875,000, consisting of cash of
$3,575,000 and the issuance of 13,111 OP Units having a value of
$300,000.
22
<PAGE>
5. On December 24, 1997, AOPP completed a transaction where AOPP
issued 1,785,007 OP Units and 3,504,758 shares of AOPP common
stock to a subsidiary of a state pension fund, and the subsidiary
of the state pension fund, through a merger and contribution,
transferred to AOPP six commercial properties (the "Acquiport
Properties" - $118,655,000) and $1,000,000 cash. The Company
incurred $3,300,000 in transaction costs. On January 9, 1998, the
subsidiary of the state pension fund exercised its option to
convert its OP Units into shares of AOPP common stock on a
one-for-one basis.
6. In January 1998, AOPP entered into an agreement in principle with
a group of institutional investors under which AOPP would issue
up to 6,744,074 shares of AOPP common stock at $22.88 per share
in separate tranches. The first tranche, 2,185,189 shares or
$50.0 million, was issued in January 1998. The remainder of the
shares are to be issued as the funds are required by AOPP, in
minimum increments of $20.0 million.
7. On January 13, 1998, AOPP purchased a commercial property (the
"Ammendale Property") for $22,643,000, consisting of cash of
$22,450,000 and the issuance of 8,428 OP Units having a value of
$193,000.
8. In March 1998, AOPP purchased two commercial properties (the
"March Acquisitions", referred to in the Proxy Statement dated
February 5, 1998 as the "Proposed Acquisition Properties") from
unaffiliated third parties for an aggregate cost of $33,139,000,
composed of $17,600,000 cash, the issuance of 44,250 OP Units
having a value of $1,013,000, and the assumption of mortgage
notes payable of $14,526,000.
The pro forma consolidated balance sheet at December 31, 1997 has been prepared
to reflect (i) the aforementioned acquisitions and proposed acquisitions of
commercial properties which occurred after December 31, 1997, (ii) the related
conversion of OP units to AOPP Common Stock by the subsidiary of the state
pension fund, (iii) the issuance of $50.0 million of AOPP Common Stock to
institutional investors, and (iv) the Merger transaction between AOPP and PSP11.
The pro forma consolidated statement of income for the year ended December 31,
1997 has been prepared assuming (i) the aforementioned acquisitions and proposed
acquisitions of commercial properties (ii) the issuance of $50.0 million of AOPP
Common Stock to institutional investors, and (iii) the Merger between AOPP and
PSP11, as if all such transactions were completed at the beginning of fiscal
1997.
The pro forma adjustments are based upon available information and upon certain
assumptions as set forth in the notes to the pro forma consolidated financial
statements that PSP11 and AOPP believe are reasonable in the circumstances. The
pro forma consolidated financial statements and accompanying notes should be
read in conjunction with the historical financial statements of PSP11, AOPP, and
certain financial information with respect to properties acquired and proposed
to be acquired pursuant to agreements in principle. (SEE "FINANCIAL STATEMENTS
- -ACQUIRED PROPERTIES, -PSI EXCHANGE PROPERTIES, -BALDON PROPERTIES, -LARGO
PROPERTY, -ACQUIPORT PROPERTIES, -PROPOSED ACQUISITION PROPERTIES, -NORTHPOINTE
PROPERTY, AND -AMMENDALE PROPERTY INCLUDED IN THE ABOVE REFERENCED PROXY
STATEMENT). The following pro forma consolidated financial statements do not
purport to represent what AOPP's results of operations would actually have been
if the transactions in fact had occurred at the beginning of fiscal 1997 or to
project AOPP's results of operations for any future date or period.
23
<PAGE>
PS BUSINESS PARKS, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
December 31, 1997
(Unaudited)
(Amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
AOPP
---------------------------------------------------------------
Pro Forma Adjustments
--------------------------------
Property Other AOPP
ASSETS AOPP Acquisitions Adjustments Pre-Merger PSP11
(Historical) (Note 1) (Note 2) (Pro Forma) (Historical)
------------ -------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 3,884 $ (40,050) $ 41,200 $ 5,034 $ 2,455
Real estate facilities, net of accumulated 314,238 55,782 - 370,020 25,937
depreciation
Intangible assets, net of accumulated amortization 3,272 - - 3,272 -
Other assets 2,060 - - 2,060 454
Purchase cost - - - - -
------------ -------------- ------------- ------------- ------------
Total assets $ 323,454 $ 15,732 $ 41,200 $ 380,386 $ 28,846
============ ============== ============= ============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued and other liabilities $ 8,331 $ - $ (2,900) $ 5,431 $ 1,475
Notes payable 3,500 14,526 (3,500) 14,526 -
Minority interest 168,665 1,206 (30,383) 139,488 -
Shareholder's equity:
Common stock , $.10 par value, 100,000,000
shares authorized 7,728,000 issued and
outstanding (13,981,938 pro forma shares
issued and outstanding) 773 398 1,171 -
Series A - - - - 18
Series B - - - - 2
Series C - - - - 5
Paid-in capital 142,581 77,585 220,166 32,421
Cumulative net income 3,154 - - 3,154 29,451
Cumulative distribution paid (3,550) - - (3,550) (34,526)
------------ -------------- ------------- ------------- ------------
Total shareholders' equity 142,958 - 77,983 220,941 27,371
------------ -------------- ------------- ------------- ------------
Total liabilities and shareholders' equity $ 323,454 $ 15,732 $ 41,200 $ 380,386 $ 28,846
============ ============== ============= ============= ============
Book value per share of common stock (Note 4) $ 18.50 $ 18.89 $ 10.83
============ ============= ============
Shares outstanding 7,728,309 11,698,505 2,527,008
============ ============= ============
</TABLE>
<TABLE>
<CAPTION>
Pro Forma Merger
Adjustments
----------------------------
PSBP
ASSETS Purchase Valuation Post-Merger
(Note 3) (Note 3) (Pro Forma)
------------ ------------ -------------
<S> <C> <C> <C>
Cash and cash equivalents $ (2,976) $ - $ 4,513
Real estate facilities, net of accumulated - 23,156 419,113
depreciation
Intangible assets, net of accumulated amortization - (1,540) 1,732
Other assets - - 2,514
Purchase cost 48,987 (48,987) -
------------ ------------ -------------
Total assets $ 46,011 $ (27,371) $ 427,872
============ ============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued and other liabilities $ - $ - $ 6,906
Notes payable - - 14,526
Minority interest - - 139,488
Shareholder's equity:
Common stock , $.10 par value, 100,000,000
shares authorized 7,728,000 issued and
outstanding (13,981,938 pro forma shares
issued and outstanding) 228 - 1,399
Series A - (18) -
Series B - (2) -
Series C - (5) -
Paid-in capital 45,783 (32,421) 265,949
Cumulative net income - (29,451) 3,154
Cumulative distribution paid - 34,526 (3,550)
------------ ------------ -------------
Total shareholders' equity 46,011 (27,371) 266,952
------------ ------------ -------------
Total liabilities and shareholders' equity $ 46,011 $ (27,371) $ 427,872
============ ============ =============
Book value per share of common stock (Note 4) $ 19.09
=============
Shares outstanding 13,981,942
=============
</TABLE>
See accompanying notes to pro forma consolidated balance sheet.
24
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
December 31, 1997
(Unaudited)
1. ACQUISITION OF REAL ESTATE FACILITIES
On January 13, 1998, AOPP purchased the Ammendale property for an aggregate
cost of $22,643,000 consisting of $22,450,000 cash and the issuance of
8,428 OP Units having a value of $193,000.
In March 1998, AOPP purchased one commercial property and had an agreement
in principle to purchase another commercial property (the "March
Acquisitions," referred to as the "Proposed Acquisition Properties" in the
Proxy Statement dated February 5, 1998) from unaffiliated third parties for
an aggregate cost of $33,139,000, composed of $17,600,000 cash, the
issuance of 44,250 OP Units having a value of $1,013,000, and the
assumption of mortgage notes payable of $14,526,000.
The following pro forma adjustments have been made to the pro forma
consolidated balance sheet as of December 31, 1997 to reflect the
acquisition and proposed acquisitions of the above commercial properties
and the related issuance of OP Units:
<TABLE>
<CAPTION>
in (000's)
-------------
* Cash and cash equivalents has been decreased to reflect the cash
portion of the acquisition cost of the properties purchased, as
follows:
<S> <C>
March Acquisitions................................................ $ (17,600)
Ammendale Property................................................ (22,450)
-------------
$ (40,050)
=============
* Real estate facilities has been adjusted to reflect the
acquisition cost of the facilities acquired:
March Acquisitions................................................ $ 33,139
Ammendale Property................................................ 22,643
-------------
$ 55,782
=============
* Notes payable has been increased to reflect the principal balance of
related notes expected to be assumed by AOPP in connection with the
March Acquisitions.................................................... $ 14,526
=============
* Minority interest has been increased to reflect the issuance
of 52,678 OP Units in connection with the acquisition of the
March
Acquisitions and Ammendale properties................................. $ 1,206
=============
</TABLE>
2. OTHER ADJUSTMENTS
On December 24, 1997, AOPP completed a transaction where AOPP issued
1,785,007 OP Units and 3,504,758 shares of AOPP common stock to
subsidiaries of a state pension fund, and the subsidiaries of the state
pension fund, through a merger and contribution, transferred to AOPP six
commercial properties ($118,655,000) and $1,000,000 cash. The Company
incurred a total of $3,300,000 in transaction costs. Approximately $400,000
of these costs were paid in December 1997 and approximately $2,900,000 were
paid in January 1998.
25
<PAGE>
On January 9, 1998, the subsidiary, which was issued OP Units, exercised
its option to convert the OP Units into shares of AOPP common stock on a
one-for-one basis.
In January 1998, AOPP entered into an agreement with a group of
institutional investors under which AOPP would issue up to 6,744,074 shares
of AOPP common stock at $22.88 per share in separate tranches. The first
traunche, 2,185,189 shares or $50.0 million, was issued in January 1998.
The remainder of the shares are to be issued as the funds are required by
AOPP, in minimum increments of $20 million. Funds from the first tranche
were utilized to repay a $3,500,000 loan due to PSI, to fund remaining
unpaid costs related to the subsidiary of a state pension fund transaction,
and to complete the real estate transactions that occurred in 1998.
The following pro forma adjustments have been made to reflect the issuance
of $50.0 million of AOPP Common Stock to institutional investors, the
conversion of the OP Units into shares of AOPP stock, AOPP's payoff of its
loan from PSI, and the payment of remaining transaction costs for the
subsidiary of the state pension fund transaction.
<TABLE>
<CAPTION>
(in 000's)
----------------
<S> <C>
*Cash and cash equivalents has been increased to reflect the net
proceeds from the issuance of common stock to institutional investors
(gross proceeds of $50,000,000 less estimated offering costs of $ 47,600
$2,400,000).............................................................
*Cash and cash equivalents have been decreased to reflect the
utilization of a portion of the proceeds from the
institutional investors to repay the $3,500,000 loan due to
PSI, and to reflect the
payment of $2,900,000 in transaction costs which were unpaid and
accrued at December 31, 1997............................................ (6,400)
----------------
$ 41,200
================
*Accounts payable and accrued liabilities have been reduced to reflect
the payment of transaction costs which were unpaid and accrued at
December 31, 1997....................................................... (2,900)
================
*Notes payable have been reduced to reflect the repayment of a
$3,500,000 loan due to PSI.............................................. $ (3,500)
================
*Common Stock has been adjusted to reflect the following items:
*Conversion of 1,785,007 OP Units into AOPP common stock............ $ 179
*Issuance of 2,185,189 shares of AOPP common stock to institutional
investors........................................................... 219
----------------
$ 398
================
*Paid in capital has been adjusted to reflect the following items:
*Conversion of 1,785,007 OP Units into AOPP common stock............ $ 30,204
*Issuance of 2,185,189 shares of AOPP common stock to institutional
investors........................................................... 47,381
----------------
$ 77,585
================
*Minority Interest has been adjusted to reflect the conversion of
1,785,007 OP Units into AOPP common stock............................... $ (30,383)
================
</TABLE>
26
<PAGE>
3. MERGER PRO FORMA ADJUSTMENTS
The Merger will be accounted for using the purchase method of accounting
with AOPP being the accounting acquirer. The total purchase cost will be
allocated to the acquired net assets of PSP11; first to the tangible and
identifiable intangible assets and liabilities acquired based upon their
respective fair values, and the remainder will be allocated to the excess
of purchase cost over fair value of assets acquired, if any. Upon
completion of the Merger, the outstanding shares of AOPP common stock were
converted into an aggregate of 11,698,505 shares of PSP11 Common Stock and
the surviving entity was renamed "PS Business Parks, Inc."
In determining the cost of the Merger, AOPP evaluated as a measure of cost
of the Merger (i) the aggregate fair value of PSP11's net assets acquired,
(ii) the fair value of PSP11's Common Stock traded in the market, and (iii)
the cash election price of $20.50 per share of PSP11 Common Stock. AOPP
determined that the use of the cash price of $20.50 was a reliable measure
of the Merger cost; further, that such cash price was materially equivalent
to the Merger cost had either of the other alternatives been chosen, based
upon the following:
*The fair value of the net assets of PSP11 were readily
determinable as of August 15, 1997 (date the Merger was
announced). Substantially all of the PSP11 assets were comprised
of real estate facilities having current appraised values as
determined by independent appraisers. The estimated fair value
per share of PSP11 Common Stock at August 15, 1997 based upon the
fair values of the net assets was approximately $20.50 per share.
*Since AOPP is the accounting acquirer, AOPP's common stock
market price would have been an indicator of the Merger cost.
However, AOPP's common stock was not publicly traded,
accordingly, AOPP evaluated PSP11's common stock as a
determination of AOPP's implied common stock value. The market
price of PSP11's Common Stock from January 1, 1997 through August
15, 1997 ranged from $20-3/8 to $19-3/8. The closing price of
PSP11's Common Stock on August 15, 1997, was $20.00. PSP11's
trading price for the one month period after the announcement of
the proposed Merger traded in the range from $19-15/16 to
$20-9/16.
*Each outstanding share of PSP11 Common Stock with the exception
of 106,155 shares, which elected to receive $20.50 in cash per
share, continued to be owned by current holders.
In determining the fair value of the net assets to be acquired, historical
carrying values as of December 31, 1997 were used with respect to PSP11's
other assets and accrued liabilities since they approximate fair value and
appraised values were used for PSP11's real estate facilities. The
aggregate purchase cost and its preliminary allocation to the historical
assets and liabilities is as follows:
27
<PAGE>
<TABLE>
<CAPTION>
(in 000's)
-----------------
PURCHASE COST:
<S> <C>
*Issuance of 1,713,782 shares of Common Stock to PSP11's
Series A common shareholders (1,819,937 shares outstanding
less shares electing cash of 106,155) at $20.50 per share............ $ 35,133
*Issuance of 569,655 shares of Common Stock to the holders of
PSP11's Common Stock Series B and Series C (707,071 combined
shares outstanding less cancellation of 47,824 shares of
Series C the remaining of which is multiplied by the
conversion ratio of 0.8641) at $20.50 per share...................... 11,678
*Cash elections (106,155 shares of the Series A Common Stock of
PSP11 elected to receive $20.50 per share in cash in the Merger)..... 2,176
-----------------
Total Purchase Cost................................................. $ 48,987
=================
PRELIMINARY ALLOCATION OF PURCHASE COST:
Cash.................................................................. $ 2,455
Other assets.......................................................... 454
Accrued and other liabilities......................................... (1,475)
Real estate facilities (fair value of $48,000,000 less $447,000 of
excess aggregate fair values of net assets acquired over purchase
cost)............................................................... 47,553
-----------------
$ 48,987
=================
The following pro forma adjustments have been made to reflect the Merger as
of December 31, 1997:
PURCHASE ADJUSTMENTS:
*Cash and cash equivalents have been reduced to reflect the
cash necessary to satisfy cash elections ($2,176,000) combined
with estimated direct costs and expenses of the merger of $800,000.... $ (2,976)
=================
*Unallocated purchase cost has been increased to reflect the
aggregate purchase cost............................................... $ 48,987
=================
*Common stock has been increased to reflect the issuance of 2,283,437
shares with a par value of $0.10 per share............................ $ 228
=================
*Paid-in Capital has been increased to reflect the issuance of
common stock ($46,811,000 less par value of $228,000 and
estimated direct costs and expenses of the Merger of $800,000)......... $ 45,783
=================
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
(in 000's)
-----------------
VALUATION ADJUSTMENTS:
<S> <C>
*Unallocated purchase cost has been decreased to reflect the allocation
of the aggregate purchase cost.......................................... $ (48,987)
=================
*Real estate facilities has been increased to reflect the fair value of
the real estate facilities to be acquired in the Merger (purchase price
allocation of $47,553,000 plus related net historical cost of
management contracts on AOPP's books with respect to such properties
($1,540,000) less PSP11 historical net book value of $25,937,000)....... $ 23,156
=================
*AOPP's intangible assets have been reduced to reflect the
reclassification to real estate with respect to the above pro forma
adjustment.............................................................. $ (1,540)
=================
*PSP11's historical equity has been eliminated as follows:
Series A common stock................................................ $ (18)
Series B common stock................................................ (2)
Series C common stock................................................ (5)
Paid-in-capital...................................................... (32,421)
Cumulative net income................................................ (29,451)
Cumulative distributions............................................. 34,526
-----------------
$ (27,371)
=================
</TABLE>
EXCHANGE OF PROPERTIES
Concurrent with the Merger, PSP11 exchanged 11 mini-warehouses and two
properties that combine mini-warehouse and commercial space for 11 commercial
properties owned by PSI. The fair value of the mini-warehouse facilities is
approximately $42,400,000 compared to the fair value of the 11 commercial
properties received of $42,900,000. Through the pro forma adjustments above, the
commercial facilities are reflected on the pro forma consolidated balance sheet
at their fair approximate values as a result of the accounting acquisition of
PSP11 by AOPP. No additional adjustments have been made to reflect the Exchange
as the relative valuations are nearly the same.
29
<PAGE>
4. BOOK VALUE PER SHARE OF COMMON STOCK
Book value per share has been determined by dividing total shareholders'
equity by the outstanding shares of Common Stock. The following summarizes
the shares outstanding:
<TABLE>
<CAPTION>
Common shares
outstanding
-----------------
<S> <C>
*AOPP historical shares outstanding at December 31, 1997................ 7,728,309
*AOPP shares issued to subsidiary of state pension fund in connection
with conversion of its OP Units into common stock of AOPP............. 1,785,007
*Pro forma shares issued to institutional investors..................... 2,185,189
-----------------
Pre-Merger pro forma AOPP shares outstanding................ 11,698,505
*PSP11's Series A shares (see "Purchase cost" above).................... 1,713,782
*PSP11's Series B and C (see "Purchase cost" above)..................... 569,655
-----------------
Post-Merger pro forma AOPP shares outstanding............... 13,981,942
=================
</TABLE>
30
<PAGE>
PS BUSINESS PARKS, INC.
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
For the Year Ended December 31, 1997
(Unaudited)
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
AOPP
---------------------------------------------------------------
Pro Forma Adjustments
-----------------------------------------------
Acquisition of Acquisition of
real estate real estate Other AOPP
AOPP from affiliates from third adjustments Pre-Merger
(Historical) (Note 1) parties (Note 2) (Note 3) (Pro forma)
------------ --------------- ---------------- ------------- -------------
REVENUES:
Rental income:
<S> <C> <C> <C> <C> <C>
Commercial properties $ 30,169 $ 1,038 $ 27,024 $ - $ 58,231
Mini-warehouse properties - - - - -
Facility management fees 956 (52) - - 904
Interest and other income 453 - - - 453
------------ --------------- ---------------- ------------- -------------
31,578 986 27,024 - 59,588
------------ --------------- ---------------- ------------- -------------
EXPENSES:
Cost of operations:
Commercial properties 12,330 363 7,759 - 20,452
Mini-warehouse properties - - - - -
Cost of managing facilities 189 (12) - - 177
Depreciation and amortization 5,195 92 5,526 - 10,813
General and administrative 1,461 - - 300 1,761
Interest expense 1 - 1,105 - 1,106
------------ --------------- ---------------- ------------- -------------
19,176 443 14,390 300 34,309
------------ --------------- ---------------- ------------- -------------
Income before minority interest in
income 12,402 543 12,634 (300) 25,279
Minority interest in income (Note 7) (8,566) - - (1,217) (9,783)
------------ --------------- ---------------- ------------- -------------
Net income (loss) $3,836 $543 $12,634 $(1,517) $15,496
============ =============== ================ ============= =============
PER SHARE OF COMMON STOCK:
Net income (Note 4 and 6) $ 1.23 $ 1.32
============ =============
Weighted average shares (Note 4 and 6) 3,117 11,698
============ =============
</TABLE>
<TABLE>
<CAPTION>
Pro Forma
Merger
Adjustments
-------------
Exchange of
real estate PSBP
PSP11 facilities Post-Merger
(Historical) (Note 5) (Pro forma)
------------ -------------- -------------
REVENUES:
Rental income:
<S> <C> <C> <C>
Commercial properties $ 1,418 $ 8,008 $ 67,657
Mini-warehouse properties 6,143 (6,143) -
Facility management fees - (471) 433
Interest and other income 82 - 535
------------ -------------- -------------
7,643 1,394 68,625
------------ -------------- -------------
EXPENSES:
Cost of operations:
Commercial properties 682 3,271 24,405
Mini-warehouse properties 2,082 (2,082) -
Cost of managing facilities - (93) 84
Depreciation and amortization 1,198 146 12,157
General and administrative 201 - 1,962
Interest expense - - 1,106
------------ -------------- -------------
4,163 1,242 39,714
------------ -------------- -------------
Income before minority interest in
income 3,480 152 28,911
Minority interest in income (Note 7) - (210) (9,993)
------------ -------------- -------------
Net income (loss) $3,480 $(58) $18,918
============ ============== =============
PER SHARE OF COMMON STOCK:
Net income (Note 4 and 6) $ 1.38 $ 1.35
============ =============
Weighted average shares (Note 4 and 6) 2,527 13,982
============ =============
</TABLE>
See accompanying notes to pro forma consolidated statements of income.
31
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
For the Year Ended December 31, 1997
(Unaudited)
1. ACQUISITION OF REAL ESTATE FACILITIES FROM AFFILIATES
(THE "ACQUIRED PROPERTIES")
On April 1, 1997, the Operating Partnership acquired four commercial
properties from PSI in exchange for 1,480,968 OP Units.
The following pro forma adjustments have been made to the pro forma
consolidated statements of income to reflect the above as if the
transaction was completed as of January 1, 1997:
<TABLE>
<CAPTION>
(in 000's)
---------------
<S> <C>
*Rental income has been increased to reflect:
*the pro forma rental income as if the real estate facilities acquired on
April 1, 1997 were owned by AOPP throughout the entire period.................. $ 4,127
*less the rental income with respect to these properties included in AOPP's
historical amounts............................................................. (3,089)
---------------
Total incremental rental income............................................ $ 1,038
===============
*Facility management fee income has been decreased to eliminate
AOPP's historical management fee income (5% of rental income) with
respect to the commercial properties acquired on April 1, 1997, as
such fee is not collected
on owned facilities........................................................... $ (52)
===============
*Cost of operations has been increased as follows:
*To reflect the pro forma cost of operations as if the real
estate facilities acquired on April 1, 1997 were owned by AOPP
throughout the entire full period......................................... $ 1,227
*The above adjustment excludes facility management fees, accordingly, a
pro forma adjustment has been made to reflect the actual cost of
management................................................................ 41
*To eliminate cost of operations included in AOPP's historical amounts.... (905)
---------------
Total incremental cost of operations.................................. $ 363
===============
*Cost of managing facilities has been decreased to eliminate the
costs associated with the management fee income with respect to
the properties acquired on April 1, 1997. The reduction in
management fee income will result
in a reduction in cost of operations with respect to facility management...... $ (12)
===============
*Depreciation has been increased to reflect the incremental depreciation of
the commercial properties acquired on April 1, 1997........................... $ 92
===============
</TABLE>
32
<PAGE>
2. ACQUISITION OF REAL ESTATE FACILITIES FROM THIRD PARTIES
During 1997 and 1998, AOPP has completed the acquisition of several
properties and has an agreement in principle to acquire one additional
property:
*Baldon Properties: In July 1997, AOPP issued 2,025,769 shares
of common stock primarily to PSI for cash totaling $33,800,000.
AOPP used substantially all of the proceeds to acquire two
commercial properties in July 1997 from an unaffiliated third
party for $33,750,000 in cash.
*Largo Property: On September 24, 1997, AOPP acquired one
commercial property for an aggregate cost of $10,374,000,
consisting of $10,050,000 cash and the issuance of 14,384 OP
units having a value of $324,000.
*On December 10, 1997, AOPP purchased a commercial property (the
"Northpointe Property") for $3,875,000, consisting of cash of
$3,575,000 and the issuance of 13,111 OP units having a value of
$300,000.
*Acquiport Properties: On December 24, 1997, AOPP completed a
transaction where AOPP issued 1,785,007 OP Units and 3,504,758
shares of AOPP common stock to a subsidiary of a state pension
fund, and the subsidiary of the state pension fund, through a
merger and contribution, transferred to AOPP six commercial
properties ($118,655,000) and $1,000,000 cash. The Company
incurred $3,300,000 in transaction costs. In January 1998, the
subsidiary of the state pension fund exercised its option to
convert the OP units into shares of AOPP common stock.
*On January 13, 1998, AOPP purchased a commercial property (the
"Ammendale Property") for $22,643,000, consisting of cash of
$22,450,000 and the issuance of 8,428 OP units having a value of
$193,000.
*March Acquisition Properties: In March 1998, AOPP purchased two
commercial properties from unaffiliated third parties for an
aggregate cost of $33,139,000 consisting of cash totaling
$17,600,000, the issuance of 44,250 OP Units having a value of
$1,013,000 and the assumption of $14,526,000 of mortgage debt.
The following pro forma adjustments have been made to reflect the
operations of these properties as if such properties had been acquired
at the beginning of the year:
<TABLE>
<CAPTION>
(000's)
---------------
<S> <C>
*Rental income has been increased to reflect the pro forma rental
income of the properties, as if these facilities were owned by
AOPP throughout 1997:
*Rental income for 1997 for the following properties:
Baldon properties ....................................................... $ 6,570
Largo property........................................................... 1,343
Acquiport properties.................................................... 14,813
Northpointe Property..................................................... 631
Ammendale Property....................................................... 2,883
March Acquisitions....................................................... 3,916
*Less: the portion of rental income with respect to these properties which
has been included in AOPP's historical amounts.............................. (3,132)
---------------
$ 27,024
===============
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
(000's)
---------------
*Cost of operations has been increased to reflect the pro forma cost of
operations of these properties, as if they were owned by AOPP
throughout the entire period presented:
*Cost of operations for the entire year's properties'
historical operations:
<S> <C>
Baldon................................................................. $ 2,280
Largo.................................................................. 367
Acquiport Properties................................................... 3,059
Northpointe Property................................................... 125
Ammendale Property..................................................... 640
March Acquisitions..................................................... 1,089
Less: the portion of cost of operations with respect to these
properties which has been included in AOPP's historical amounts........ (1,157)
Plus: Pro forma adjustment to reflect additional estimated personnel
cost to manage the facilities and property taxes....................... 1,356
---------------
$ 7,759
===============
*Depreciation has been increased to reflect a full year's
depreciation expense....................................................... $ 5,526
===============
*Interest expense has been increased to reflect the historical
interest expense for each of the periods presented with
respect to the assumption
of mortgage notes payable ................................................ $ 1,105
3. OTHER PRO FORMA ADJUSTMENTS
*A pro forma adjustment has been made to increase general and
administrative expense to reflect additional costs with respect to
payroll as AOPP hires acquisition and executive personnel...................... $ 300
===============
*Many of the properties acquired were acquired by the consolidated
Operating Partnership in exchange for OP Units of AOPP. Such
ownership interests are represented as minority interest in the
consolidated financial statements. Accordingly, a pro forma
adjustment has been made to increase "Minority interest in income"
to reflect the incremental income associated with pro forma
adjustments allocable to the minority interest (representing the
difference between the pro forma amounts less the historical
amounts included in AOPP's historical financial statements).................... $ (1,217)
===============
</TABLE>
34
<PAGE>
4. NET INCOME PER COMMON SHARE (AOPP PRE-MERGER PRO FORMA)
HAS BEEN COMPUTED AS FOLLOWS:
<TABLE>
<CAPTION>
(000's)
<S> <C>
Historical net income......................................................... $ 3,836,000
Historical weighted average common shares..................................... 3,116,688
Historical net income per common share........................................ $ 1.23
Pro forma net income.......................................................... $ 15,496,000
Pro forma weighted average common shares (1).................................. 11,698,505
Pro forma net income per common share......................................... $ 1.32
---------------------------------------------------------------------------------------- ---------------------
(1)
Historical weighted average shares (common and equivalents)................... 3,116,688
Adjusted for:
Issuance of common shares in July 1997 in connection with
property acquisitions (2,025,769 shares less 851,507 included
in the historical
amounts)............................................................... 1,174,262
Issuance of common stock to subsidiary of a state pension fund on
December 24, 1997 (3,504,758 shares less 67,399 shares
included in the
historical amounts).................................................... 3,437,359
Issuance of common stock to subsidiary of a state pension fund in
connection with conversion of OP Units into common stock............... 1,785,007
Pro forma issuance of common stock to institutional investors............. 2,185,189
---------------
Total Pre-Merger pro forma weighted average shares................... 11,698,505
===============
</TABLE>
35
<PAGE>
5. PRO FORMA MERGER ADJUSTMENTS - EXCHANGE OF PROPERTIES:
Concurrent with the Merger, PSP11 exchanged 11 mini-warehouses and two
properties that combine mini-warehouse and commercial space for 11
commercial properties owned by PSI.
<TABLE>
<CAPTION>
(000's)
----------------
<S> <C>
*Rental income- commercial properties has been increased to
reflect the rental income with respect to the 11 commercial
properties received through
the Exchange.................................................................. $ 8,008
================
*Rental income- mini-warehouses has been decreased to eliminate
the rental income with respect to the 11 mini-warehouse
facilities and two properties that combine mini-warehouse and
commercial space given up through the Exchange................................ $ (6,143)
================
*A pro forma adjustment has been made to facility management fees to:
*eliminate the historical facility management fees related to 11
commercial properties acquired in the Exchange as such fee will no longer
be charged to these properties as AOPP will own them...................... $ (400)
*eliminate the historical facility management fees related to the two
commercial properties of PSP11 acquired in the Merger..................... (71)
----------------
$ (471)
================
*A pro forma adjustment has been made to cost of operations to:
*eliminate historical management fees paid to AOPP to manage
PSP11's two commercial properties which are included in
historical amounts and as a
result of the Merger will no longer be incurred........................... $ (71)
*reflect the cost of operations of the 11 commercial properties acquired
in the Exchange (before cost of management)............................... 3,249
*reflect the cost of management for PSP11's two commercial properties and
the 11 commercial properties acquired in the Exchange..................... 93
----------------
$ 3,271
================
*Cost of operations- mini-warehouses has been decreased to
eliminate the cost of operations with respect to the 11
mini-warehouse facilities and two properties that combine
mini-warehouse and commercial space given up through
the Exchange.................................................................. $ (2,082)
================
*Cost of managing facilities has been decreased to eliminate the
historical cost of managing the two PSP11 commercial properties
and the 11 commercial properties acquired in the Exchange, such
costs are reclassified to Cost of
operations- commercial properties............................................. $ (93)
================
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
*A pro forma adjustment has been made to depreciation expense to
reflect the:
<S> <C>
*Eliminate the historical depreciation expense of PSP11's facilities...... $ (1,198)
*Record depreciation expense based on the acquired cost of
the remaining PSP11 facilities ($47,553,000 cost, 30%
allocated to land, the remaining cost allocated to buildings,
depreciated straight-line over 25 years).................................. 1,344
----------------
$ 146
================
A pro forma adjustment has been made to increase the minority
interests' share of income based upon its pro rata ownership
interest in the above pro
forma adjustments............................................................. $ (210)
================
</TABLE>
37
<PAGE>
6. POST-MERGER PRO FORMA NET INCOME PER SHARE OF
COMMON STOCK HAS BEEN COMPUTED AS FOLLOWS:
<TABLE>
<CAPTION>
Year Ended
December 31, 1997
----------------------
<S> <C>
Post-Merger pro forma net income $ 18,918,000
Post-Merger pro forma weighted average common shares (1) 13,981,942
Pro forma net income per share of Common Stock $ 1.35
---------------------------------------------------------------------------------------------------------------------
(1)
Pre-Merger pro forma weighted average shares from Note 4 above 11,698,505
PSP11's Series A shares (see Note 4 to the Pro Forma Consolidated Balance Sheet) 1,713,782
PSP11's Series B and C (see Note 4 to the Pro Forma Consolidated Balance Sheet) 569,655
----------------------
Post-Merger pro forma weighted average Common Stock common shares 13,981,942
======================
7. MINORITY INTEREST:
Minority interest represents ownership interests of OP Units in the
consolidated Operating Partnership which are not owned by AOPP. The OP
Units, subject to certain conditions of the Operating Partnership
Agreement, are convertible into Common Shares of AOPP on a one-for-one
basis. Pro forma weighted average OP Units outstanding during each
period owned by minority interests totaled 7,385,527. The following
table summarizes the ownership interests:
Year Ended
December 31, 1997
----------------------
Pro forma AOPP Common Shares outstanding............................................. 13,981,942
Pro forma OP Units owned by minority interests which are
convertible into AOPP Common Shares................................................. 7,385,527
----------------------
Total AOPP Common Shares outstanding assuming conversion of OP Units................. 21,367,469
======================
Percentage ownership of AOPP Common Shares outstanding............................... 65.4%
Percentage ownership of minority interests........................................... 34.6%
----------------------
Total ownership interest........................................................ 100.0%
======================
</TABLE>
38
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement on
Form S-8 (No. 333-48313) of PS Business Parks, Inc., pertaining to the PS
Business Parks, Inc. 1997 Stock Option and Incentive Plan of our report dated
February 23, 1998 except for Note 9 as to which the date is March 18, 1998, with
respect to the consolidated financial statements of PS Business Parks, Inc.
(successor to American Office Park Properties, Inc.) included in the Current
Report on Form 8-K/A dated April 17, 1998 of PS Business Parks, Inc.
/s/ ERNST & YOUNG LLP
Los Angeles, California
April 17, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000866368
<NAME> PS BUSINESS PARKS. INC.
<MULTIPLIER> 1
<CURRENCY> U.S. $
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 3,884,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,884,000
<PP&E> 314,238,000
<DEPRECIATION> (3,982,000)
<TOTAL-ASSETS> 323,454,000
<CURRENT-LIABILITIES> 11,831,000
<BONDS> 0
0
0
<COMMON> 773,000
<OTHER-SE> 142,185,000
<TOTAL-LIABILITY-AND-EQUITY> 323,454,000
<SALES> 0
<TOTAL-REVENUES> 31,578,000
<CGS> 0
<TOTAL-COSTS> 12,519,000
<OTHER-EXPENSES> 6,656,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,000
<INCOME-PRETAX> 3,836,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,836,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,836,000
<EPS-PRIMARY> 1.23
<EPS-DILUTED> 1.23
</TABLE>
