UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ended March 31, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
----------------- ----------------
Commission File Number 1-10709
PS BUSINESS PARKS, INC.
-----------------------
(Exact name of registrant as specified in its charter)
California 95-4300881
---------- ----------
(State or Other Jurisdiction I.R.S. Employer
of Incorporation) 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
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Number of shares outstanding of each of the issuer's classes of common stock, as
- --------------------------------------------------------------------------------
of May 7, 1998: Common Stock, $.01 par value, 18,609,850 shares outstanding
- ---------------------------------------------------------------------------
<PAGE>
PS BUSINESS PARKS, INC.
INDEX
This amendment number 1 amends the following items of the Form 10-Q for the
three months ended March 31, 1998.
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed consolidated balance sheets at March 31, 1998
and December 31, 1997 2
Condensed consolidated statements of income for the three
months ended March 31, 1998 and 1997 3
Condensed consolidated statement of shareholder's equity for
the three months ended March 31, 1998 4
Condensed consolidated statements of cash flows for the
three months ended March 31, 1998 and 1997 5-6
Notes to condensed consolidated financial statements 7-15
PART II. OTHER INFORMATION
Item 5. Other Information 16-28
Item 6. Exhibits & Reports on Form 8-K 29
<PAGE>
PS BUSINESS PARKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------------ -----------------
(unaudited)
ASSETS
------
<S> <C> <C>
Cash and cash equivalents............................. $ 11,259,000 $ 3,884,000
Real estate facilities, at cost:
Land............................................. 122,784,000 91,754,000
Buildings and equipment.......................... 301,042,000 226,466,000
------------------ -----------------
423,826,000 318,220,000
Accumulated depreciation......................... (6,133,000) (3,982,000)
------------------ -----------------
417,693,000 314,238,000
Intangible assets, net................................ 1,808,000 3,272,000
Other assets.......................................... 2,233,000 2,060,000
------------------ -----------------
Total assets............................ $ 432,993,000 $ 323,454,000
================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Accrued and other liabilities............................ $ 10,069,000 $ 8,331,000
Mortgage notes payable................................... 14,526,000 -
Note payable to affiliate................................ - 3,500,000
------------------ -----------------
Total liabilities..................................... 24,595,000 11,831,000
Minority interest........................................ 140,904,000 168,665,000
Shareholders' equity:
Preferred Stock, $0.01 par value, 50,000,000
shares authorized, none outstanding at March 31, 1998 and
December 31, 1997................................... - -
Common stock, $0.01 par value, 100,000,000 shares
authorized 14,020,965 shares issued and outstanding
at March 31, 1998 (7,728,309 shares issued and
outstanding at December 31, 1997)................... 1,402,000 773,000
Paid in capital....................................... 266,237,000 142,581,000
Cumulative net income................................. 7,484,000 3,154,000
Cumulative distributions.............................. (7,629,000) (3,550,000)
------------------ -----------------
Total shareholders' equity...................... 267,494,000 142,958,000
------------------ -----------------
Total liabilities and shareholders' equity. $ 432,993,000 $ 323,454,000
================== =================
</TABLE>
See accompanying notes.
2
<PAGE>
PS BUSINESS PARKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended March 31,
------------------------------------
1998 1997
----------------- ----------------
Revenues:
<S> <C> <C>
Rental income........................................................ $ 14,353,000 $ 5,805,000
Facility management fees primarily from affiliates................... 202,000 247,000
Interest and other income............................................ 233,000 29,000
----------------- ----------------
14,788,000 6,081,000
----------------- ----------------
Expenses:
Cost of operations.................................................... 4,627,000 2,493,000
Cost of facility management........................................... 25,000 60,000
Depreciation and amortization......................................... 2,300,000 820,000
General and administrative............................................ 445,000 213,000
Interest expense..................................................... 247,000 -
----------------- ----------------
7,644,000 3,586,000
----------------- ----------------
Income before minority interest......................................... 7,144,000 2,495,000
Minority interest in income........................................... (2,814,000) (1,813,000)
----------------- ----------------
Net income.............................................................. $ 4,330,000 $ 682,000
================= ================
Net income per share:
Basic................................................................. $ 0.38 $ 0.31
================= ================
Diluted............................................................... $ 0.38 $ 0.31
================= ================
Weighted average shares outstanding:
Basic................................................................. 11,314,469 2,192,848
================= ================
Diluted............................................................... 11,357,036 2,192,848
================= ================
</TABLE>
See accompanying notes.
3
<PAGE>
PS BUSINESS PARKS, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the three months ended March 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
--------------- ------------
Shares Amount Shares Amount Paid-in Capital
------ ------ ----------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1997............. - $ - 7,728,309 $ 773,000 $ 142,581,000
Issuances of common stock:
Conversion of OP Units............. - - 1,785,008 179,000 32,844,000
Private offering, net of costs..... - - 2,185,189 219,000 47,381,000
Exercise of stock options.......... - - 39,021 3,000 648,000
In connection with a business
combination...................... - - 2,283,438 228,000 46,582,000
Net income............................. - - - - -
Distributions ($0.347 per common share)
- - - - -
Adjustment to reflect minority
interest to underlying ownership - - - - (3,799,000)
interest.............................
------ ------ ----------- ------------- ---------------
Balances at March 31, 1998................ - $ - 14,020,965 $ 1,402,000 $ 266,237,000
====== ====== =========== ============= ===============
</TABLE>
<TABLE>
<CAPTION>
Total
Cumulative Cumulative Shareholders'
Net Income Distributions Equity
------------ --------------- ---------------
<S> <C> <C> <C>
Balances at December 31, 1997............. $ 3,154,000 $ (3,550,000) $ 142,958,000
Issuances of common stock:
Conversion of OP Units............. - - 33,023,000
Private offering, net of costs..... - - 47,600,000
Exercise of stock options.......... - - 651,000
In connection with a business
combination...................... - - 46,810,000
Net income............................. 4,330,000 - 4,330,000
Distributions ($0.347 per common share)
- (4,079,000) (4,079,000)
Adjustment to reflect minority
interest to underlying ownership - - (3,799,000)
interest.............................
------------ --------------- ---------------
Balances at March 31, 1998................ $ 7,484,000 $ (7,629,000) $ 267,494,000
============ =============== ===============
</TABLE>
See accompanying notes.
4
<PAGE>
PS BUSINESS PARKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended March 31,
------------------------------------
1998 1997
----------------- ----------------
Cash flows from operating activities:
<S> <C> <C>
Net income................................................. $ 4,330,000 $ 682,000
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization expense.................. 2,300,000 820,000
Minority interest in income............................ 2,814,000 1,813,000
Increase in other assets............................... (521,000) 358,000
Increase in accrued and other liabilities.............. 371,000 388,000
----------------- ----------------
Total adjustments................................. 4,964,000 3,379,000
----------------- ----------------
Net cash provided by operating activities............ 9,294,000 4,061,000
----------------- ----------------
Cash flows from investing activities:
Payment received from sellers for net property
operating liabilities assumed....................... - 1,779,000
Acquisition of real estate facilities.................. (38,754,000) -
Acquisition cost of business combination............... (424,000) -
Capital improvements to real estate facilities......... (857,000) (582,000)
----------------- ----------------
Net cash used in investing activities................ (40,035,000) 1,197,000
----------------- ----------------
Cash flows from financing activities:
Repayment of note payable to affiliate................. (3,500,000) -
Increase in receivable from affiliate.................. - (308,000)
Net proceeds from the issuance of common stock......... 48,251,000 80,000
Dividends paid to shareholders......................... (4,079,000) -
Distributions to minority interests.................... (2,556,000) -
----------------- ----------------
Net cash provided by (used in) financing activities.. 38,116,000 (228,000)
----------------- ----------------
Net increase in cash and cash equivalents..................... 7,375,000 5,030,000
Cash and cash equivalents at the beginning of the period...... 3,884,000 919,000
----------------- ----------------
Cash and cash equivalents at the end of the period............ $ 11,259,000 $ 5,949,000
================= ================
</TABLE>
See accompanying notes.
5
<PAGE>
PS BUSINESS PARKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended March 31,
------------------------------------
1998 1997
----------------- ----------------
Supplemental schedule of non cash investing and financial activities:
Acquisitions of real estate facilities in exchange for preferred
stock, minority interests, and mortgage notes payable:
<S> <C> <C>
Real estate facilities................................. $ (16,680,000) $(117,180,000)
Other assets........................................... 800,000 -
Accrued and other liabilities.......................... 149,000 -
Minority interest...................................... 1,205,000 97,180,000
Preferred stock........................................ - 120,000
Paid in capital ....................................... - 19,880,000
Mortgage notes payable................................. 14,526,000 -
Business combination:
Real estate facilities................................. (48,000,000) -
Other assets........................................... (452,000) -
Accrued and other liabilities.......................... 1,218,000 -
Common stock........................................... 228,000 -
Paid in capital........................................ 46,582,000 -
Conversion of OP Units into shares of common stock:
Minority interest...................................... (33,023,000) -
Common stock........................................... 179,000 -
Additional paid in capital............................. 32,844,000 -
Adjustment to reflect minority interest to underlying ownership interest:
Minority interest...................................... 3,799,000 -
Additional paid in capital............................. (3,799,000) -
Exchange of preferred stock for common stock:
Preferred stock........................................ - (210,000)
Common stock........................................... - 210,000
Adjustment to acquisition cost (see Note 2):
Real estate facilities................................. (1,315,000) (7,146,000)
Accumulated depreciation............................... - (820,000)
Intangible assets...................................... 1,315,000 (4,395,000)
Paid in capital........................................ - 12,361,000
</TABLE>
See accompanying notes.
6
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
ORGANIZATION
PS Business Parks, Inc. ("PSB"), a California corporation, is the successor
to American Office Park Properties, Inc. ("AOPP") which merged with and
into Public Storage Properties XI, Inc. ("PSP 11") on March 17, 1998 (the
"Merger"). The name of the company was changed to "PS Business Parks, Inc."
in connection with the Merger. See Note 3 for a description of the Merger
and its terms.
Based upon the terms of the Merger, the transaction for financial reporting
and accounting purposes has been 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
filing purposes and income tax reporting purposes. All subsequent
references to PSB for periods prior to March 17, 1998 shall refer to AOPP.
PSB 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 PSB, representing a 95%
economic interest, and Hughes purchased all the voting common stock of PSB,
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 PSB.
On January 2, 1997, in connection with the reorganization of the commercial
property operations of PSI and affiliated entities, PSB formed a
partnership (the "Operating Partnership") whereby PSB 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 PSB in exchange for
shares of non-voting participating preferred stock, and such properties
were immediately contributed by PSB along with its commercial property
management operations and cash to the Operating Partnership for OP Units.
Subject to certain limitations as described in Note 7, holders of OP Units,
other than PSB, have the right to require PSB 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 PSB. As a result of the exchange, PSI owned a
majority of the voting common stock and effectively gained control of PSB
at that time.
DESCRIPTION OF BUSINESS
PSB is a fully-integrated, self-managed real estate investment trust
("REIT") that acquires, owns and operates commercial properties containing
commercial and industrial rental space. From 1986 through 1996, PSB's sole
business activity consisted of the management of commercial properties
owned by PSI and affiliated entities.
Commencing in 1997, PSB began to own and operate commercial properties for
its own behalf. At March 31, 1998, PSB and the Operating Partnership
7
<PAGE>
collectively owned and operated 65 commercial properties (approximately 7.6
million net rentable square feet) located in 11 states. In addition, the
Operating Partnership managed, on behalf of PSI and affiliated entities, 35
commercial properties (approximately 1.0 million net rentable square feet).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. The preparation of the
condensed consolidated financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the condensed consolidated
financial statements and accompanying notes. Actual results could differ
from estimates. In the opinion of management, all adjustments (consisting
of normal recurring accruals) necessary for a fair presentation have been
included. Operating results for the three months ended March 31, 1998 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 1998. For further information, refer to the consolidated
financial statements and footnotes of PSB for the year ended December 31,
1997 filed on Form 8-K/A dated April 17, 1998 (amending Form 8-K dated
March 17, 1998).
The condensed consolidated financial statements include the accounts of PSB
and the Operating Partnership. PSB, as the sole general of the Operating
Partnership, has full, exclusive and complete responsibility and discretion
in managing and controlling the Operating Partnership.
On March 31, 1997, PSB and PSI agreed to exchange the non-voting
participating preferred stock held by PSI for 2,098,288 shares of voting
common stock of PSB. After the exchange, PSI owned in excess of 95% of the
outstanding common voting common stock of PSB and PSB accounted for the
transaction as if PSI acquired PSB in a transaction accounted for as a
purchase. Accordingly, PSB reflected PSI's cost of its investment in PSB in
accordance with Accounting Principles Board Opinion No. 16. As a result of
PSI attaining control of PSB, the carrying value of PSB's assets and
liabilities were adjusted to reflect PSI's acquisition cost of its
controlling interest in PSB 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.
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 PSB was converted into common stock on a share
for share basis. In December 1997, PSB 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 to reflect the
stock dividend. 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, PSB'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 condensed 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:
PSB 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 PSB 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 PSB. The intangible assets are being amortized
over seven years. As properties managed are subsequently acquired by PSB,
the unamortized basis of intangible assets related to such property is
included in the cost of acquisition of such property. During April 1997,
PSB acquired four properties from PSI and included in the cost of real
estate facilities for such properties is $730,000 of cost previously
classified as intangible assets. In connection with the Merger, PSB
acquired 13 properties and included in the cost of such properties is
$1,315,000 (which is net of accumulated amortization of $228,000) of costs
previously classified as intangible assets. Intangible assets at March 31,
1998 are net of accumulated amortization of $314,000.
EVALUATION OF ASSET IMPAIRMENT:
In 1995, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("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.
PSB 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. SFAS
No. 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. PSB adopted SFAS
No. 121 in 1996 and the adoption had no effect. PSB'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, 1997 of $3,500,000 reflects
amounts borrowed from PSI on that date. The note bore interest at 6.97% 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. SFAS No. 128
replaced the calculation of "primary" and "fully diluted" earnings per
share with "basic" and "diluted" 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:
During 1997, PSB 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, PSB is not taxed on that portion of its taxable
income which is distributed to its shareholders provided that PSB meets
certain tests. PSB believes it met these tests during 1997. 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 1997
and for the three months ended March 31, 1998. Accordingly, no provision
for income taxes has been made in the accompanying financial statements.
GENERAL AND ADMINISTRATIVE EXPENSE:
General and administrative expense includes legal and office expense, state
income taxes, executive salaries, cost of acquisition personnel and other
such administrative items. Such amounts include amounts incurred by PSI on
behalf of PSB, which were subsequently charged to PSB in accordance with
the allocation methodology pursuant to the cost allocation and
administrative services agreement between PSB and PSI.
RECLASSIFICATIONS:
Certain reclassifications have been made to the financial statements for
1997 in order to conform to the 1998 presentation.
10
<PAGE>
3. BUSINESS COMBINATION
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, the surviving corporation was renamed "PS Business
Parks, Inc." (PSB as defined in Note 1). In connection with the Merger:
* Each outstanding share of PSP11 common stock, which did not
elect cash, continued to be owned by current holders. A total
of 106,155 PSP11 common shares elected to receive cash of
$20.50 per share.
* 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.
The Merger has been accounted for as a reverse merger whereby PSB is
treated as the accounting acquirer using the purchase method. This has been
determined based upon the following: (i) the former shareholders and
unitholders of PSB owned in excess of 80% of the merged companies and (ii)
the business focus post-Merger will continue to be that of PSB'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
represented approximately 81% of its portfolio.
Allocations of the total acquisition cost to the net assets acquired were
made based upon the fair value of PSP11's assets and liabilities as of the
date of the Merger. The acquisition cost and the fair market values of the
assets acquired and liabilities assumed in the Merger are summarized as
follows:
Acquisition cost:
Issuance of common stock......... $46,810,000
Cash............................. 424,000
-----------
Total acquisition cost....... $47,234,000
===========
Allocation of acquisition cost:
Real estate facilities........... $48,000,000
Other assets..................... 452,000
Accrued and other liabilities.... (1,218,000)
-----------
Total allocation............. $47,234,000
===========
11
<PAGE>
The historical operating results of PSP11 prior to the Merger have not been
included in PSB's historical operating results. Pro forma data for the
three months ended March 31, 1998 and 1997 as though the Merger had been
effective at the beginning of fiscal 1997 are as follows:
Three months ended March 31,
1998 1997
------------- ------------
Revenues.............................. $ 16,666,000 $ 8,145,000
Net income............................ 5,115,000 1,410,000
Net income per share - basic.......... $ 0.39 $ 0.32
Net income per share - diluted........ 0.39 0.32
The pro forma data does not purport to be indicative either of the results
of operations that would have occurred had the Merger occurred at the
beginning of fiscal 1997 or future results of PSB.
4. REAL ESTATE FACILITIES
The activity in real estate facilities for the three months ended March 31,
1998 is as follows:
<TABLE>
<CAPTION>
Accumulated
Land Buildings Depreciation Total
------------ ------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Balances at December 31, 1997........ $ 91,754,000 $ 226,466,000 $ (3,982,000) $ 314,238,000
Property acquisitions................ 16,630,000 38,804,000 - 55,434,000
Acquired in connection with Merger... 14,400,000 33,600,000 - 48,000,000
Adjustment from intangible assets.... - 1,315,000 - 1,315,000
Capital improvements................. - 857,000 - 857,000
Depreciation expense................. - - (2,151,000) (2,151,000)
------------ ------------- ---------------- ---------------
Balances at March 31, 1998........... $122,784,000 $ 301,042,000 $ (6,133,000) $ 417,693,000
============ ============= ================ ===============
</TABLE>
On January 13, 1998, PSB purchased a commercial property from an
unaffiliated third party for approximately $22,518,000, consisting of
$22,325,000 cash (of which $500,000 was paid before December 31, 1997) and
the issuance of 8,428 OP Units having a value of approximately $193,000.
In March 1998, PSB purchased two commercial properties from unaffiliated
third parties for an aggregate cost of approximately $32,916,000, composed
of $17,377,000 cash (of which $300,000 was paid before December 31, 1997),
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.
12
<PAGE>
5. LEASING ACTIVITY
Future minimum rental revenues under non-cancelable leases as of March 31,
1998 with tenants for the above real estate facilities are as follows:
1998 (April - December) $ 42,761,000
1999 41,079,000
2000 27,079,000
2001 15,762,000
2002 9,047,000
Thereafter 10,118,000
--------------
$ 145,846,000
==============
6. MORTGAGE NOTES PAYABLE
Mortgage notes at March 31, 1998 consist of the following:
7-1/8 % mortgage note, secured by one commercial property,
principal and interest payable monthly, due May 2006 $9,036,000
8-1/8 % mortgage note, secured by one commercial property,
principal and interest payable monthly, due July 2005 5,490,000
-----------
$14,526,000
===========
7. MINORITY INTERESTS
In consolidation, PSB 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 of the consolidated operating results.
Subject to certain limitations described below, each limited partner other
than PSB 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 PSB, 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, PSB, 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 PSB common stock for each unit of limited
partnership interest redeemed.
A limited partner cannot exercise its redemption right if delivery of
shares of PSB 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.
13
<PAGE>
At March 31, 1998, there were 7,385,529 OP Units owned by minority
interests (7,305,352 were owned by PSI and affiliated entities and 80,177
were owned by unaffiliated third parties). On a fully converted basis,
assuming all 7,385,529 minority interest OP Units were converted into
shares of common stock of PSB at March 31, 1998, the minority interests
would own approximately 34.5% of the pro forma common shares outstanding.
At the end of each reporting period, PSB determines the amount of equity
(book value of net assets) which is allocable to the minority interest
based upon this pro forma ownership interest and an adjustment is made to
the minority interest, with a corresponding adjustment to Additional paid
in capital, to reflect the minority interests' equity.
8. 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.
The property management contract with PSI is for a seven year term 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.
9. SHAREHOLDERS' EQUITY
In addition to common and preferred stock, PSB is authorized to issue
100,000,000 shares of Equity Stock. The Articles of Incorporation provide
that the Equity Stock may be issued from time to time in one or more series
and gives the Board of Directors broad authority to fix the dividend and
distribution rights, conversion and voting rights, redemption provisions
and liquidation rights of each series of Equity Stock.
On January 7, 1998, a holder of OP Units exercised its option and converted
its 1,785,008 OP Units into an equal number of shares of PSB common stock.
The conversion resulted in an increase in shareholders' equity and a
corresponding decrease in minority interest of approximately $33,023,000,
representing the book value of the OP Units at the time of conversion.
In January 1998, PSB entered into an agreement with a group of
institutional investors under which PSB agreed to issue up to 6,744,074
shares of PSB common stock at $22.88 per share in cash (an aggregate of up
to $155,000,000) in separate tranches. The first tranche, representing
2,185,189 shares or $50.0 million, was issued in January 1998. The Company
incurred $2,400,000 in costs associated with the issuance. The remainder of
the common shares (4,558,885 common shares) were issued on May 6, 1998 and
the net proceeds ($105.0 million) were used to fund a portion of the cost
to acquire commercial properties in May 1998.
On March 31, 1998, PSB paid distributions to its common shareholders'
totaling $4,079,000, or $0.347 per common share.
14
<PAGE>
10. LINE OF CREDIT WITH PSI
PSB has entered into a line of credit agreement with PSI for borrowings up
to $50,000,000 with an interest rate of the London Interbank Offered Rate
("LIBOR") plus 1.25%. The credit agreement expires on December 31, 1998.
There were no amounts outstanding as of March 31, 1998. In addition, PSI
has provided PSB with additional funds, at the same interest rate, which
PSB required to acquire the property portfolio on May 4, 1998. At May 14,
1998, there was approximately $74.0 million outstanding on the lines of
credit as a result of borrowings to fund a portion of the acquisition cost
of properties acquired in May 1998.
11. SUBSEQUENT EVENTS
PROPERTY ACQUISITION
On May 4, 1998, the Company purchased 14 properties (approximately 1.0
million rentable square feet) located in Beaverton, Oregon and 14
properties (approximately 1.3 million rentable square feet) located in the
Dallas, Texas area. The properties were acquired from Principal Mutual Life
Insurance Company, an insurance company, and its affiliated companies. The
aggregate purchase price was approximately $190.5 million in cash. The
acquisition contains approximately 2,265,000 rentable square feet and
contains approximately 15 acres of land in the Beaverton market for future
development. In addition, the Company contracted to purchase an additional
property containing 56,000 square feet in Texas for approximately $5.7
million. The property is currently under construction and pre-leased.
15
<PAGE>
ITEM 5. OTHER INFORMATION
BUSINESS:
GENERAL. The Company is a self-managed, self-advised real estate investment
trust that acquires, owns and operates commercial properties. The Company is the
sole general partner of PS Business Parks, L.P. (the "Operating Partnership")
through which the Company conducts most of its activities and owned, as of May
6, 1998, an approximate 66% partnership interest. Substantially all of the
remaining partnership interest is owned by Public Storage, Inc. ("PSI") and its
affiliates.
In a March 1998 merger (the "Merger") with American Office Park Properties, Inc.
("AOPP"), the Company acquired the commercial property business previously
operated by AOPP and was renamed "PS Business Parks, Inc." Concurrent with the
Merger, the Company exchanged 11 mini-warehouses and 2 properties that combine
mini-warehouse and commercial space for 11 commercial properties owned by PSI.
In May 1998, the Company acquired from The Principal Mutual Life Insurance
Company and certain of its affiliates, a portfolio consisting of 28 commercial
properties (approximately 2,265,000 net rentable square feet) located in Oregon
and Texas.
As of May 6, 1998, the Company and the Operating Partnership owned 93 commercial
properties in 11 states containing approximately 9.9 million square feet of
space. The Operating Partnership also manages 35 commercial properties
(approximately 1.0 million square feet of space) in which it has no ownership
interest.
The Company has elected to be taxed as a REIT under the Internal Revenue Code of
1986, as amended, commencing with its taxable year ended December 31, 1997. To
the extent that the Company continues to qualify as a REIT, it will not be
taxed, with certain limited exceptions, on the net income that is distributed
currently to its shareholders.
The commercial properties owned by the Company and the Operating Partnership
generally include both business park (industrial/flex space) and office space.
The industrial space is used for, among other things, light manufacturing and
assembly, storage and warehousing, distribution and research and development
activities. Most of the office space is occupied by tenants who are also renting
industrial space. The commercial properties typically consist of one to ten
one-story buildings located on three to 20 acres and contain from approximately
10,000 to 500,000 square feet of rentable space (more than 50,000 square feet in
the case of the free-standing properties). A property is typically divided into
units ranging in size from 500 to 10,000 square feet. Leases generally range
from one to five years and some tenants have options to extend the original
terms of their leases. The larger facilities have on-site management. Parking is
open or covered, and the ratio of spaces to rentable square feet ranges from
three to four per thousand square feet, depending upon the use of the property
and its location. Office space generally requires a greater parking ratio than
most industrial uses. The Company may acquire properties that do not have these
characteristics.
The Company intends to continue to acquire commercial properties located
throughout the United States. The Company's policy of acquiring commercial
properties may be changed by its Board of Directors without shareholder
approval. However, the Board of Directors has no intention to change this
policy. Although the Company currently operates properties in 11 states, it may
expand its operations to other states. Properties are acquired both for income
and potential capital appreciation; there is no limitation on the amount that
can be invested in any specific property. Although there is no limitation on
mortgage debt, the Company has no current intention to incur significant debt
(other than short-term borrowings from time to time (including from PSI) to fund
acquisitions). The Company may acquire land on which it develops commercial
properties, particularly land which is adjacent to existing commercial
properties which the Company acquires. However, the Company has no current
intention to engage in a significant amount of development.
16
<PAGE>
OPERATING PARTNERSHIP. The properties in which the Company has an equity
interest generally will be owned by the Operating Partnership. This structure
enables the Company to acquire interests in additional properties in
transactions that could defer the contributors' tax consequences. This structure
also enabled PSI and its consolidated partnerships to contribute interests in
their properties and to defer until a later date the tax liabilities that they
otherwise would have incurred if they had received Common Stock.
As the general partner of the Operating Partnership, the Company has the
exclusive power under the Operating Partnership Agreement to manage and conduct
the business of the Operating Partnership. The Board of Directors will direct
the affairs of the Operating Partnership by managing the Company's affairs. The
Operating Partnership will be responsible for, and pay when due, its share of
all administrative and operating expenses of the properties it owns.
The Company's interest in the Operating Partnership entitles it to share in cash
distributions from, and in the profits and losses of, the Operating Partnership
in proportion to the Company's economic interest in the Operating Partnership
(apart from tax allocations of profits and losses to take into account
pre-contribution property appreciation or depreciation). Substantially all of
the economic interest in the Operating Partnership which is not held by the
Company is held by PSI and its consolidated partnerships as limited partners.
SUMMARY OF THE OPERATING PARTNERSHIP AGREEMENT. The following summary of the
Operating Partnership Agreement is qualified in its entirety by reference to the
Operating Partnership Agreement, which has been filed as an exhibit with the
Securities and Exchange Commission.
ISSUANCE OF ADDITIONAL PARTNERSHIP INTERESTS. As the general partner of the
Operating Partnership, the Company is authorized to cause the Operating
Partnership from time to time to issue to partners of the Operating Partnership
or to other persons additional partnership units in one or more classes, and in
one or more series of any of such classes, with such designations, preferences
and relative, participating, optional, or other special rights, powers and
duties (which may be senior to the existing partnership units), as will be
determined by the Company, in its sole and absolute discretion. No such
additional partnership units, however, will be issued to the Company unless (i)
the agreement to issue the additional partnership interests arises in connection
with the issuance of shares of the Company, which shares have designations,
preferences and other rights, such that the economic interests are substantially
similar to the designations, preferences and other rights of the additional
partnership units that would be issued to the Company and (ii) the Company
agrees to make a capital contribution to the Operating Partnership in an amount
equal to the proceeds raised in connection with the issuance of such shares of
the Company.
CAPITAL CONTRIBUTIONS. No partner is required to make additional capital
contributions to the Operating Partnership, except the Company as the general
partner is required to contribute the net proceeds of the sale of equity
interests in the Company to the Operating Partnership. A limited partner may be
required to pay to the Operating Partnership any taxes paid by the Operating
Partnership on behalf of that limited partner. No partner is required to pay to
the Operating Partnership any deficit or negative balance which may exist in its
capital account.
DISTRIBUTIONS. The Company, as general partner, is required to distribute at
least quarterly the "available cash" (as defined in the Operating Partnership
Agreement) generated by the Operating Partnership for such quarter.
Distributions are to be made (i) first, with respect to any class of partnership
interests having a preference over other classes of partnership interests; and
(ii) second, in accordance with the partners' respective percentage interests on
the "partnership record date" (as defined in the Operating Partnership
Agreement). Commencing in 1998, the Operating Partnership's policy is to make
distributions per unit that are equal to the per share distributions made by the
Company with respect to its Common Stock, and in any case the per unit and per
share distributions will be equal during partnership years 1998, 1999 and 2000.
REDEMPTION OF PARTNERSHIP INTERESTS. Subject to certain limitations described
below, each limited partner other than the Company has the right to require the
redemption of such limited partner's unit. This right may be exercised on at
17
<PAGE>
least 10 days notice 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 otherwise contractually agreed by the general
partner).
Unless the Company, 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
"redemption amount" (as defined in the Operating Partnership Agreement generally
to reflect the average trading price of the Common Stock of the Company over a
specified ten day period) for the units redeemed. In lieu of the Operating
Partnership redeeming the partner for cash, the Company, as the general partner,
has the right to elect to acquire the units directly from a limited partner
exercising its redemption right, in exchange for cash in the amount specified
above as the "redemption amount" or by issuance of the "shares amount" (as
defined in the Operating Partnership Agreement generally to mean the issuance of
one share of the Company Common Stock for each unit of limited partnership
interest redeemed).
A limited partner cannot exercise its redemption right if delivery of shares of
Common Stock would be prohibited under the applicable articles of incorporation
or 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 or certain antitrust laws,
or would result in the Operating Partnership no longer being treated as a
partnership for federal income tax purposes.
MANAGEMENT. The Operating Partnership is organized as a California limited
partnership. The Company, as the sole general partner of the Operating
Partnership has full, exclusive and complete responsibility and discretion in
managing and controlling the Operating Partnership, except as provided in the
Operating Partnership Agreement and by applicable law. The limited partners of
the Operating Partnership have no authority to transact business for, or
participate in the management activities or decisions of, the Operating
Partnership except as provided in the Operating Partnership Agreement and as
permitted by applicable law. However, the consent of the limited partners
holding a majority of the interests of the limited partners (including limited
partnership interests held by the Company) generally will be required to amend
the Operating Partnership Agreement. Further, the Operating Partnership
Agreement cannot be amended without the consent of each partner adversely
affected if, among other things, the amendment would alter the partner's rights
to distributions from the Operating Partnership (except as specifically
permitted in the Operating Partnership Agreement), alter the redemption right,
or impose on the limited partners an obligations to make additional capital
contributions. The consent of all limited partners will be required to (i) take
any action that would make it impossible to carry on the ordinary business of
the Operating Partnership, except as otherwise provided in the Operating
Partnership Agreement; or (ii) possess Operating Partnership property, or assign
any rights in specific Operating Partnership property, for other than an
Operating Partnership purpose except as otherwise provided in the Operating
Partnership Agreement. In addition, without the consent of any adversely
affected limited partner, the general partner may not perform any act that would
subject a limited partner to liability as a general partner in any jurisdiction
or any other liability except as provided in the Operating Partnership Agreement
or under California law.
EXTRAORDINARY TRANSACTIONS. The Operating Partnership Agreement provides that
the Company may not engage in any business combination, defined to mean any
merger, consolidation or other combination with or into another person or sale
of all or substantially all of its assets, any reclassification, any
recapitalization (other than certain stock splits or stock dividends) or change
of outstanding shares of common stock, unless (i) the limited partners of the
Operating Partnership will receive, or have the opportunity to receive, the same
proportionate consideration per unit in the transaction as shareholders of the
Company (without regard to tax considerations); or (ii) limited partners of the
Operating Partnership (other than the general partner) holding at least 60% of
the interests in the Operating Partnership held by limited partners (other than
the general partner) vote to approve the business combination. In addition, the
Company, as general partner of the Operating Partnership, has agreed in the
Operating Partnership Agreement with the limited partners of the Operating
Partnership that it will not consummate a business combination in which the
Company conducted a vote of shareholders unless the matter is also submitted to
a vote of the partners. The foregoing provision of the Operating Partnership
18
<PAGE>
Agreement would under no circumstances enable or require the Company to engage
in a business combination which required the approval of shareholders if the
shareholders of the Company did not in fact give the requisite approval. Rather,
if the shareholders did approve a business combination, the Company would not
consummate the transaction unless the Company as general partner first conducts
a vote of partners of the Operating Partnership on the matter. For purposes of
the Operating Partnership vote, the Company shall be deemed to vote its
partnership interest in the same proportion as the shareholders of the Company
voted on the matter (disregarding shareholders who do not vote). The Operating
Partnership vote will be deemed approved if the votes recorded are such that if
the Operating Partnership vote had been a vote of shareholders, the business
combination would have been approved by the shareholders. As a result of these
provisions of the Operating Partnership, a third party may be inhibited from
making an acquisition proposal that it would otherwise make, or the Company,
despite having the requisite authority under its articles of incorporation, may
not be authorized to engage in a proposed business combination.
TAX PROTECTION PROVISIONS. The Operating Partnership Agreement provides that,
until 2007, the Operating Partnership may not sell any of 13 designated
properties in a transaction that will produce taxable gain for the contributing
partner without the prior written consent of PSI. The Operating Partnership is
not required to obtain PSI's consent if PSI and its affiliated partnerships do
not continue to hold at the time of the sale at least 30% of their original
interest in the Operating Partnership. Since PSI's consent is required only in
connection with a taxable sale of one of the 13 designated properties, the
Operating Partnership will not be required to obtain PSI's consent in connection
with a "like-kind" exchange or other nontaxable transaction involving one of
these properties.
INDEMNIFICATION. The Operating Partnership Agreement provides that the Company
and its officers and directors will be indemnified and held harmless by the
Operating Partnership for any act performed for, or on behalf of, the Operating
Partnership, or in furtherance of the Operating Partnership's business unless it
is established that (i) the act or omission of the indemnified person was
material to the matter giving rise to the proceeding and either was committed in
bad faith or was the result of active and deliberate dishonesty; (ii) the
indemnified person actually received an improper personal benefit in money,
property or services; or (iii) in the case of any criminal proceeding, the
indemnified person had reasonable cause to believe that the act or omission was
unlawful. The termination of any proceeding by judgment, order or settlement
does not create a presumption that the indemnified person did not meet the
requisite standard of conduct set forth above. The termination of any proceeding
by conviction or upon a plea of nolo contendere or its equivalent, or an entry
of an order of probation prior to judgment, creates a rebuttable presumption
that the indemnified person did not meet the requisite standard of conduct set
forth above. Any indemnification so made shall be made only out of the assets of
the Operating Partnership.
DUTIES AND CONFLICTS. The Operating Partnership Agreement allows the Company to
operate the Operating Partnership in a manner that will enable the Company to
satisfy the requirements for being classified as a REIT. The Company intends to
conduct all of its business activities, including all activities pertaining to
the acquisition, management and operation of properties, through the Operating
Partnership. However, the Company may own, directly or through subsidiaries,
interest in Operating Partnership properties that do not exceed 1% of the
economic interest of any property, and if appropriate for regulatory, tax, or
other purposes, the Company also may own, directly or through subsidiaries,
interests in assets that the Operating partnership otherwise could acquire, if
the Company grants to the Operating Partnership the option to acquire the assets
within a period not to exceed three years in exchange for the number of
partnership units that would be issued if the Operating Partnership had acquired
the assets at the time of acquisition by the Company.
TERM. The Operating Partnership will continue in full force and effect until
December 31, 2096 or until sooner dissolved upon the withdrawal of the general
partner (unless the limited partners elect to continue the Operating
Partnership), or by the election of the general partner (with the consent of the
holders of a majority of the partnerships interests if such vote is held before
January 1, 2056), in connection with a merger, by the sale or other disposition
of all or substantially all of the assets of the Operating Partnership, or by
judicial decree.
COST ALLOCATION AND ADMINISTRATIVE SERVICES. Pursuant to a cost sharing and
administrative services agreement, PSCC, Inc. has been formed to serve as a
cooperative cost allocation and administrative services clearing house that
performs centralized administrative services for the Company, PSI and other
property owners affiliated with PSI. These services include accounting and
19
<PAGE>
finance, employee relations, management information systems, legal, office
services, marketing, administration and property management training. In
addition, to take advantage of economies of scale, PSCC purchases many supplies
and services for the benefit of multiple property owners and allocates the costs
of these supplies and services to the benefited property owners and employs and
administers the payroll for employees required for the operation of the
properties and the ownership entities. As to the Company, this agreement is not
terminable for five years. The Company has no intention to terminate this
agreement. The capital stock of PSCC is owned by the Company, PSI and certain
other property owners. Since the Company owns less than 10% of the capital stock
of PSCC, the Company does not control the operations and activities of PSCC.
Under this agreement, PSCC allocates costs to the Company in accordance with a
methodology that is intended to fairly allocate charges among participating
entities.
COMMON OFFICERS AND DIRECTORS. Harvey Lenkin, the president of PSI, is a
director of both the Company and PSI. Ronald L. Havner, Jr., the chairman and
chief executive officer of the Company, was a senior vice president and chief
financial officer of PSI until December 1996 and is currently an employee of
PSI. Mary Jayne Howard, the executive vice president of the Company, was a
senior vice president of PSI until December 1996. John Reyes, Obren B. Gerich,
David Goldberg, Sarah Hass, A. Timothy Scott and David P. Singelyn, executive
officers of PSI, are vice presidents of the Company. The Company intends to
engage additional executive personnel who will render services exclusively for
the Company. However, it is expected that officers of PSI will continue to
render services for the Company as requested.
MANAGEMENT AGREEMENT. The Company continues to manage commercial properties
owned by PSI and affiliates, which are generally adjacent to mini-warehouses,
for a fee of 5% of the gross revenues of such properties.
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PROPERTIES
The following table contains information as of May 6, 1998 about properties
owned by the Company and the Operating Partnership.
<TABLE>
<CAPTION>
Rentable Square Footage
----------------------------------------------------
Occupancy at
City Business Park Office Total March 31, 1998
------------------------------- ------------- ---------- ---------- ----------------
ARKANSAS
<S> <C> <C> <C> <C>
Little Rock 91,100 - 91,100 95%
------------- ---------- ---------- ----------------
1 91,100 - 91,100 95%
------------- ---------- ---------- ----------------
ARIZONA
Tempe 22,900 - 22,900 98%
Tempe 199,800 - 199,800 99%
Mesa 78,000 - 78,000 100%
Tempe 68,600 - 68,600 99%
------------- ---------- ---------- ----------------
4 369,300 - 369,300 99%
------------- ---------- ---------- ----------------
NORTHERN CALIFORNIA
San Ramon - 27,500 27,500 86%
So. San Francisco 41,400 - 41,400 98%
So. San Francisco 52,300 - 52,300 100%
San Jose 173,200 - 173,200 100%
Sacramento 153,500 - 153,500 92%
San Ramon 24,600 - 24,600 86%
------------- ---------- ---------- ----------------
6 445,000 27,500 472,500 95%
------------- ---------- ---------- ----------------
SOUTHERN CALIFORNIA
Torrance 115,200 - 115,200 96%
Monterey Park 199,100 - 199,100 95%
Monterey - 12,000 12,000 96%
Cerritos - 31,300 31,300 81%
San Diego 107,600 - 107,600 99%
Torrance 32,000 - 32,000 80%
Signal Hill 69,800 - 69,800 95%
Lakewood - 56,900 56,900 100%
San Diego - 75,300 75,300 94%
Culver City 145,400 - 145,400 88%
Signal Hill 108,400 - 108,400 100%
Carson 77,600 - 77,600 95%
Studio City 22,100 - 22,100 100%
Buena Park 317,300 - 317,300 61%
Cerritos 394,600 - 394,600 93%
Hayward 406,700 - 406,700 98%
Lake Forest 296,600 - 296,600 98%
Laguna Hills 513,100 - 513,100 93%
Laguna Hills 100,800 - 100,800 100%
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Rentable Square Footage
----------------------------------------------------
Occupancy at
City Business Park Office Total March 31, 1998
------------------------------- ------------- ---------- ---------- ----------------
<S> <C> <C> <C> <C>
San Diego 74,500 - 74,500 98%
San Diego 89,600 - 89,600 97%
San Diego 117,800 - 117,800 100%
San Diego 57,000 - 57,000 99%
San Diego 83,000 - 83,000 100%
------------- ---------- ---------- ----------------
24 3,328,200 175,500 3,503,700 92%
------------- ---------- ---------- ----------------
KANSAS
Overland Park 61,800 - 61,800 98%
------------- ---------- ---------- ----------------
1 61,800 - 61,800 98%
------------- ---------- ---------- ----------------
MARYLAND
Gaithersburg 29,000 - 29,000 94%
Largo 149,900 - 149,900 100%
Beltsville 307,800 - 307,800 100%
Landover - 254,200 254,200 94%
Baltimore (1) - 240,900 240,900 91%
------------- ---------- ---------- ----------------
5 486,700 495,100 981,800 96%
------------- ---------- ---------- ----------------
OKLAHOMA
Broken Arrow 87,900 - 87,900 91%
Tulsa 56,600 - 56,600 93%
------------- ---------- ---------- ----------------
2 144,500 - 144,500 92%
------------- ---------- ---------- ----------------
OREGON
Beaverton (2) 115,800 - 115,800 100%
Beaverton (2) 33,000 - 33,000 100%
Beaverton (2) 20,200 - 20,200 100%
Beaverton (2) 54,400 - 54,400 100%
Beaverton (2) 54,200 - 54,200 100%
Beaverton (2) - 45,800 45,800 98%
Beaverton (2) 75,200 - 75,200 100%
Beaverton (2) 117,900 - 117,900 100%
Beaverton (2) 35,900 - 35,900 94%
Beaverton (2) 131,000 - 131,000 100%
Beaverton (2) 43,000 - 43,000 83%
Beaverton (2) 54,300 - 54,300 100%
Beaverton (2) 85,900 - 85,900 100%
Beaverton (2) 94,100 - 94,100 100%
Milwaukee 61,400 - 61,400 99%
Milwaukee 40,200 - 40,176 99%
------------- ---------- ---------- ----------------
16 1,056,500 45,800 1,102,300 99%
------------- ---------- ---------- ----------------
TENNESSEE
Nashville 76,600 - 76,600 91%
Nashville 61,400 - 61,400 97%
------------- ---------- ---------- ----------------
2 138,000 - 138,000 94%
------------- ---------- ---------- ----------------
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Rentable Square Footage
----------------------------------------------------
Occupancy at
City Business Park Office Total March 31, 1998
------------------------------- ------------- ---------- ---------- ----------------
TEXAS
<S> <C> <C> <C> <C>
Pasadena (2) 154,000 - 154,000 100%
Richardson (2) 116,800 - 116,800 88%
Plano (2) 184,800 - 184,800 100%
Dallas (2) 193,300 - 193,300 85%
Dallas (2) 44,600 - 44,600 81%
Irving (2) 35,000 - 35,000 100%
Irving (2) 56,300 - 56,300 100%
Irving (2) 43,300 - 43,300 99%
Irving (2) 22,100 - 22,100 100%
Irving (2) 231,200 - 231,200 100%
Irving (2) 69,900 - 69,900 100%
Irving (2) 33,500 - 33,500 100%
Irving (2) 82,600 - 82,600 100%
Irving (2) 49,000 - 49,000 100%
Irving (2) 102,200 - 102,200 100%
Austin 199,800 - 199,800 89%
Houston - 130,600 130,600 98%
San Antonio - 155,800 155,800 85%
San Antonio - 43,400 43,400 93%
Mesquite 56,500 - 56,500 92%
Garland 36,500 - 36,400 96%
Missouri City 66,000 - 66,000 100%
------------- ---------- ---------- ----------------
23 1,177,400 329,800 2,107,200 95%
------------- ---------- ---------- ----------------
VIRGINIA
Alexandria 94,900 - 94,900 97%
Woodbridge 113,600 - 113,600 96%
Sterling 51,000 - 51,000 96%
Sterling 148,500 - 148,500 100%
Herndon 193,600 - 193,600 99%
Alexandria 53,700 - 53,700 99%
Alexandria 59,800 - 59,800 96%
Springfield 90,400 - 90,400 95%
Springfield 59,800 - 59,800 98%
------------- ---------- ---------- ----------------
9 865,300 - 865,300 98%
------------- ---------- ---------- ----------------
WASHINGTON
Renton 27,900 - 27,900 92%
------------- ---------- ---------- ----------------
1 27,900 - 27,900 92%
------------- ---------- ---------- ----------------
Totals - 11 states 93 8,791,700 1,073,700 9,865,400 95%
============= ========== ========== ================
</TABLE>
(1) Property is subject to a ground lease.
(2) Property acquired May 1998.
As of May 6, each of these properties is generating sufficient revenues to cover
its current operating expenses. Only two of the properties are subject to any
material mortgage, lien, or any encumbrance other than liens for taxes and
assessments not due or payable, utility easements or other immaterial liens or
encumbrances. The two properties are encumbered by mortgages in the aggregate
23
<PAGE>
amount of approximately $14,500,000 bearing interest at rates ranging from 71/8%
to 81/8% per year and maturing between 2005 and 2006. The carrying value of
these two properties is approximately $32.9 million at March 31, 1998
Each of these properties will continue to be used for its current purpose and,
in the Company's opinion, are adequately covered by insurance. Competition
exists in the market areas in which these properties are located, barriers to
entry are relatively low for competitors with the necessary capital and the
Company will be competing for properties and tenants with entities that have
greater financial resources than the Company. However, the Company believes that
the current overall demand for commercial space is strong.
As of May 6, 1998, none of these properties has a book value of more than 10% of
the Company's current total assets or accounts for more than 10% of its current
aggregate gross revenues. As of May 6, 1998, 85 (6 of which render services part
time) persons rendered services on behalf of the Company.
For the properties that the Company owned as of May 6, 1998, approximately 28%,
20% and 19% of the leases in place as of January 1, 1998 expire in the years
1998, 1999 and 2000, respectively.
In order to evaluate the ongoing performance of its properties, the Company
analyzes the operating performance of a consistent group of properties
representing 51 properties in which the Company currently has an equity interest
(the "Same Park" facilities) and which have been managed by the Operating
Partnership or its predecessor for at least the past three years. The following
table reflects information on the "Same Park" facilities:
<TABLE>
<CAPTION>
Three months ended
Years ended December 31, March 31,
------------------------------------ -------------------------
1995 1996 1997 1997 1998
----------- ----------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Weighted average occupancy level............ 95.1% 95.8% 95.8% 95.7% 95.5%
Realized annualized rent per occupied square
foot (1)................................. $8.45 $8.66 $9.13 $8.83 $9.36
</TABLE>
(1) Realized annualized rent per occupied square foot represents the actual
annualized revenue earned per occupied square foot.
24
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth information as of the dates indicated with
respect to the persons known to the Registrant to be the beneficial owners of
more than 5% of the outstanding shares of the Registrant's Common Stock:
Shares of Common Stock Beneficially Owned
<TABLE>
<CAPTION>
Name and Address Number of Shares Percent
<S> <C> <C>
Public Storage, Inc. ("PSI"), 4,914,428 26.4%
PS Texas Holdings, Ltd.,
PS GPT Properties, Inc.
701 Western Avenue
Glendale, California 91201-2397(1)
Acquiport Two Corporation 5,289,765 28.4%
c/o Heitman Capital Management
Corporation
180 North LaSalle Street
Chicago, Illinois 60601,
New York State Common Retirement Fund
633 Third Avenue, 31st Floor
New York, New York 10017-6754(2)
State of Michigan Retirement Systems 1,311,111 7.0%
430 West Allegan
Lansing, Michigan 48901(3)
Cohen & Steers Capital
Management, Inc. 1,311,111 7.0%
757 Third Avenue
New York, New York 10017(3)(4)
Morgan Stanley Asset Management 1,092,593 5.9%
1221 Avenue of the Americas
New York, New York 10020(3)(4)
</TABLE>
- ---------------
(1) This information is as of May 7, 1998. The reporting persons listed above
have filed a joint Schedule 13D, amended as of March 17, 1998. The 4,914,428
shares of Common Stock beneficially owned by the reporting persons include (i)
4,533,367 shares as to which PSI has sole voting and dispositive power, (ii)
114,355 shares which PSI has an option to acquire (together with other
securities) from B. Wayne Hughes as trustee of the B.W. Hughes Living Trust and
as to which PSI has sole voting power (pursuant to an irrevocable proxy) and no
dispositive power and (iii) 266,706 shares held of record by PS Texas Holdings,
Ltd., a Texas limited partnership, as to which (a) PS GPT Properties, Inc., the
sole general partner of PS Texas Holdings, Ltd. and a wholly-owned subsidiary of
PSI, and (b) PSI, share voting and dispositive power.
The 4,914,428 shares of Common Stock in the above table does not include
7,305,355 units of limited partnership interest in the Operating Partnership
("Units") held by PSI and affiliated partnerships which (pursuant to the terms
25
<PAGE>
of the Operating Partnership Agreement") are redeemable for cash, or at the
Registrant's election, for shares of the Registrant's Common Stock on a
one-for-one basis. Upon conversion of such Units to Common Stock, PSI and its
affiliated partnerships would own 47.2% of the Common Stock.
(2) This information is as of March 17, 1998 and is based on a joint Schedule
13D dated March 17, 1998 filed by the reporting persons listed above (except
that the percent shown in the table is based on the shares of Common Stock
outstanding at May 7, 1998). The 5,289,765 shares of Common Stock beneficially
owned by the reporting persons are held of record by Acquiport Two Corporation.
New York State Common Retirement Fund, as the sole stockholder of Acquiport Two
Corporation, shares voting and dispositive power with respect to the 5,289,765
shares.
(3) This information is as of May 7, 1998. To the Registrant's best knowledge,
the persons listed as beneficial owners of the shares have sole voting and
investment power with respect to such shares.
(4) All shares of Common Stock held as agent for and for the benefit of certain
of such holder's clients.
26
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth information as of May 7, 1998 concerning the
beneficial ownership of the Registrant's Common Stock of each director of the
Registrant, B. Wayne Hughes (who was the Registrant's chief executive officer on
December 31, 1997) and all directors and executive officers as a group:
<TABLE>
<CAPTION>
Shares of Common Stock:
Beneficially Owned (1)
Shares Subject to Options (2)
------------------------------------------
Number of Shares
Name Percent
<S> <C> <C>
Ronald L. Havner, Jr. 71,448(1)(3) 0.4%
25,945(2) 0.1%
------
97,393 0.5%
Harvey Lenkin 313(1)(4) *
3,995(2) *
------
-
4,308 *
Vern O. Curtis 2,000(1) *
Arthur M. Friedman 100(1)(5) *
James H. Kropp 8,891(1)(6) *
Alan K. Pribble 2,000(1) *
Jack D. Steele 1,100(1)(7) *
B. Wayne Hughes 114,355(1)(8) 0.6%
All Directors and Executive Officers
as a Group (eight persons) 85,912(1)(3)(4) 0.5%
(5)(6)(7)(8)
45,922(2) 0.2%
-------
131,834 0.7%
- ---------------
* Less than 0.1%.
</TABLE>
(1) Shares of Common Stock beneficially owned as of May 7, 1998. Except as
otherwise indicated and subject to applicable community property and similar
statutes, the persons listed as beneficial owners of the shares have sole voting
and investment power with respect to such shares.
(2) Represents vested portion as of May 7, 1998, and portion of which will be
vested within 60 days of May 7, 1998, of shares of Common Stock subject to
options under the 1997 Stock Option and Incentive Plan which were assumed by the
Registrant in the Merger.
(3) Includes 500 shares held by a custodian of an IRA for Mrs. Havner as to
which she has investment power.
27
<PAGE>
(4) Includes 77 shares held by a custodian of an IRA for Mr. Lenkin as to which
he has investment power, 68 shares held by Mrs. Lenkin as to which she has
investment power and 76 and 62 shares held by Mrs. Lenkin as custodian for two
sons.
(5) Shares held by Mr. Friedman as trustee of Friedman Living Trust.
(6) Includes 8,391 shares held by a custodian of an IRA for Mr. Kropp as to
which he has investment power and 500 shares held by CWC Good Company Portfolio,
a general partnership of which Mr. Kropp is a general partner.
(7) Shares held by a custodian of a simplified employee pension for Mr. Steele
as to which he has investment power.
(8) Shares owned by B. Wayne Hughes as trustee of the B.W. Hughes Living Trust
as to Mr. Hughes has sole dispositive power and no voting power; PSI has an
option to acquire these shares and an irrevocable proxy to vote these shares.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following Exhibits are included herein:
(27) Financial Data Schedule
(b) Reports on Form 8-K
The Registrant filed a Current Report on Form 8-K/A dated
January 29, 1998 pursuant to Item 5 relating to the proposed
merger of American Office Park Properties, Inc. into the
Registrant.
The Registrant filed a Current Report on Form 8-K dated
March 17, 1998 (filed April 1, 1998) pursuant to Item 2 and Item
5 relating to the merger of American Office Park Properties, Inc.
into the Registrant.
The Registrant filed a Current Report on Form 8-K/A dated
April 17, 1998 (amending Form 8-K dated March 17, 1998) pursuant
to Item 7 which filed financial statements for PS Business Parks,
Inc. (successor to American Office Park Properties, Inc).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 19, 1998
PS BUSINESS PARKS, INC.
BY: /s/ Ronald L. Havner, Jr.
--------------------------
Ronald L. Havner, Jr.
President and Chief Financial Officer
28
<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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 11,259,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 11,259,000
<PP&E> 423,826,000
<DEPRECIATION> (6,133,000)
<TOTAL-ASSETS> 432,993,000
<CURRENT-LIABILITIES> 10,069,000
<BONDS> 0
0
0
<COMMON> 1,402,000
<OTHER-SE> 266,092,000
<TOTAL-LIABILITY-AND-EQUITY> 432,993,000
<SALES> 0
<TOTAL-REVENUES> 14,788,000
<CGS> 0
<TOTAL-COSTS> 4,652,000
<OTHER-EXPENSES> 2,992,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 247,000
<INCOME-PRETAX> 4,330,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,330,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,330,000
<EPS-PRIMARY> 0.38
<EPS-DILUTED> 0.38
</TABLE>
