UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended December 31, 1999.
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
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Commission File Number 1-10709
PS BUSINESS PARKS, INC.
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(Exact name of registrant as specified in its charter)
CALIFORNIA 95-4300881
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(State or other Jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
701 Western Avenue, Glendale, California 91201-2397
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 244-8080
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Securities registered pursuant to Section 12(b) of the Act
Title of Name of each exchange
each class on which register
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Common Stock, $0.01 par value...... American Stock Exchange
Depositary Shares Each Representing
1/1000 of a Shares of 9 1/4
Cumulative Preferred Stock,
Series A, $0.01 par value........ American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act
None
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(Title of class)
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 22, 2000:
Common Stock, $0.01 par value, $240,580,298 (computed on the basis of $20.375
per share which was the reported closing sale price of the Company's Common
Stock on the American Stock Exchange on March 22, 2000).
The number of shares outstanding of the registrant's class of common stock, as
of March 22, 2000:
Common Stock, $0.01 par value, 23,433,061 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement to be filed in connection with the annual
shareholders' meeting to be held in 2000 are incorporated by reference into Part
III.
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PART I.
ITEM 1. BUSINESS
Forward-Looking Statements
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When used within this document, the words "expects," "believes,"
anticipates," "should," "estimates," and similar expressions are intended to
identify "forward-looking statements" within the meaning of that term in Section
27A of the Securities Exchange Act of 1933, as amended, and in Section 21F of
the Securities Exchange Act of 1934, as amended. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors. Actual results
could differ materially from those set forth in the forward-looking statements
as a result of various factors. Such factors include, but are not limited to a
change in economic conditions in the various markets served by the Company's
operations which would adversely affect the level of demand for rental of
commercial space and the cost structure of the Company, general real estate
investment risks, competition, risks associated with acquisition and development
activities and debt financing, environmental matters, general uninsured losses
and seismic activity. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to publicly release the result of any revisions to
these forward-looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
The Company
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PS Business Parks, Inc. (the "Company") is a self-advised and
self-managed real estate investment trust ("REIT") that acquires, develops, owns
and operates commercial properties, primarily multi-tenant office industrial or
"flex" space. 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 December 31, 1999, a 72.5% partnership interest.
Substantially all of the remaining partnership interest is owned by Public
Storage, Inc. ("PSI") and its affiliates. As of December 31, 1999, PSI and its
affiliates owned 27.0% of the Operating Partnership.
In a March 17, 1998 merger (the "Merger") of American Office Park
Properties, Inc. ("AOPP") with and into the Company (formerly "Public Storage
Properties XI, Inc."), 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 two properties
that combined mini-warehouse and commercial space for 11 commercial properties
owned by PSI.
As of December 31, 1999, the Company and the Operating Partnership
owned 125 commercial properties in 11 states containing approximately 12.4
million square feet of commercial space, representing a 13% increase in
commercial square footage between December 31, 1998 and December 31, 1999. In
addition, the Operating Partnership manages, on behalf of PSI and affiliated
entities, an additional 37 commercial properties (approximately 1.0 million net
rentable square feet) at December 31, 1999.
For financial accounting purposes, the Merger was accounted for as a
reverse acquisition whereby AOPP was deemed to have acquired Public Storage
Properties XI, Inc. However, PS Business Parks, Inc. (formerly Public Storage
Properties XI, Inc.) is the continuing legal entity and registrant for both
Securities and Exchange Commission filing purposes and income tax reporting
purposes.
AOPP was originally organized in 1986 as a California corporation to
serve as the manager of the commercial properties owned by PSI and its related
entities. In January 1997, AOPP was reorganized to succeed to the commercial
property business of PSI, becoming a fully integrated, self-advised and
self-managed REIT. AOPP conducted substantially all of its business as the sole
general partner of the Operating Partnership.
In January 1997, as part of a reorganization, PSI and its consolidated
partnerships transferred 35 commercial properties to AOPP and the Operating
Partnership. During April 1997, PSI transferred four additional commercial
properties to the Operating Partnership. During the remainder of 1997, AOPP
acquired six properties containing approximately 2 million square feet of
commercial space from the Acquiport Corporations, subsidiaries
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of the New York State Common Retirement Fund, and four properties containing
approximately 0.6 million square feet of commercial space from other third
parties. At December 31, 1997, AOPP and the Operating Partnership owned 49
properties located in 10 states. The Operating Partnership also managed an
additional 49 properties owned by PSI and its related entities (including the 13
properties acquired in the Merger). As of December 31, 1997, AOPP owned a 35.4%
partnership interest in the Operating Partnership. The balance of the Operating
Partnership was owned by PSI, its consolidated partnerships and certain third
parties.
During 1998, the Company completed the Merger and acquired
approximately 4.9 million square feet of commercial space, including 2.3 million
square feet of space located in Oregon and Texas from Principal Mutual Life
Insurance Company in May 1998 and 1.8 million square feet of commercial space
located in California, Maryland, Virginia and Texas from other unaffiliated
third parties.
During 1999, the Company acquired approximately 1.3 million square feet
from unaffiliated third parties and completed development on two properties
totaling 127,000 square feet. These additions continued to increase the
Company's presence in existing markets, which the Company believes have the
characteristics necessary for long-term growth. The Company acquired 483,000
square feet in Texas, 405,000 square feet in Northern Virginia/Maryland, 211,000
square feet in Northern California and 200,000 square feet in Arizona.
The Company has elected to be taxed as a REIT under the Internal
Revenue Code (the "Code"), commencing with its taxable year ended December 31,
1990. 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 Company's principal executive offices are located at 701 Western
Avenue, Glendale, California 91201-2397. Its telephone number is (818) 244-8080.
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. Tenants who are renting industrial space also occupy
most of the office 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 freestanding properties). A property is typically
divided into units ranging in size from 500 to 10,000 square feet. Leases
generally range from one to ten years and some tenants have options to extend
the original terms of their leases. Facilities are managed through either
on-site management or area offices central to the facilities. Parking is open or
covered. The ratio of parking spaces to rentable square feet ranges from two to
six 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 at this time. Although the Company currently operates properties in
13 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 for the
development of commercial properties. In general, the Company will acquire land
that is adjacent to existing commercial properties that the Company owns or is
acquiring. The Company currently has six facilities in various stages of
development.
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Operating Partnership
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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
directs 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
under the terms of a cost sharing and administrative services agreement with an
affiliate of PSI. See "Cost Allocation and Administrative Services."
The Company's interest in the Operating Partnership entitles it to
share in cash distributions from, and 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).
Summary of the Operating Partnership Agreement
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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 (other than preferred units) 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 year 2000.
Preferred Units: As of December 31, 1999, the Operating Partnership had
5,310,000 preferred units outstanding with distribution rates ranging from 8
3/4% to 8 7/8%. The Operating Partnership has the right to redeem the preferred
units on or after the fifth anniversary of the issuance date at the original
capital contribution plus the cumulative priority return, as defined, to the
redemption date to the extent not previously distributed. The preferred units
are exchangable for Cumulative Redeemable Preferred Stock of the respective
series of PS Business Parks, Inc. on or after the tenth anniversary of the date
of issuance at the option of the Operating Partnership or majority of the
holders of the preferred units.
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Redemption of Partnership Interests: Subject to certain limitations
described below, each limited partner other than the 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 (other than holders of preferred units). This right may be
exercised on at 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 10 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 obligation 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
Agreement would under no circumstances enable or require the Company to engage
in a business combination which required the approval of
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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 standards 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 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.
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Cost Allocation and Administrative Services
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Pursuant to a cost sharing and administrative services agreement, PSCC,
Inc. ("PSCC") 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 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 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 until January 2002. The Company has no
intention to terminate this agreement. The Company, PSI and certain other
property owners own the capital stock of PSCC. 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
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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 Senior Vice President and Chief Financial Officer of PSI until
December 1996 and is currently an employee of PSI. The Company engages
additional executive personnel who 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
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The Company continues to manage commercial properties owned by PSI and
its affiliates, which are generally adjacent to mini-warehouses, for a fee of 5%
of the gross revenues of such properties in addition to reimbursement of direct
costs. The property management contract with PSI is for a seven-year term with
the term extended one year each anniversary. The property management contracts
with affiliates of PSI are cancelable by either party upon sixty days notice.
Management
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Ronald L. Havner, Jr. (42), President, Chairman and Chief Executive
Officer, heads the Company's senior management team. Mr. Havner has been
President and Chief Executive Officer of the Company or AOPP since December
1996. He became Chairman of the Company in March 1998. He was Senior Vice
President and Chief Financial Officer of PSI from 1992 until December 1996. The
Company's executive management includes: Jack Corrigan (39), Vice President and
Chief Financial Officer and Michael Lynch (47), Vice President-Acquisitions and
Development.
REIT Structure
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If certain detailed conditions imposed by the Code and the related
Treasury Regulations are met, an entity, such as PS Business Parks, Inc., that
invests principally in real estate and that otherwise would be taxed as a
corporation may elect to be treated as a REIT. The most important consequence to
PS Business Parks, Inc. of being treated as a REIT for federal income tax
purposes is that this enables PS Business Parks, Inc. to deduct dividend
distributions to its shareholders, thus effectively eliminating the "double
taxation" (at the corporate and shareholder levels) that typically results when
a corporation earns income and distributes that income to shareholders in the
form of dividends.
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Investment Objective - Growth in Funds from Operations per Share
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The Company's primary objective is to maximize shareholder value by
achieving long term growth in funds from operations per share. The Company
intends to continue achieving this objective through internal growth of existing
facilities combined with acquisitions of quality commercial properties in growth
markets and submarkets. The Company intends to continue investing in properties
and markets that have characteristics which enable them to be competitive in the
short and long term. The Company seeks markets with above average population
growth, education levels and personal income. In addition, the Company targets
properties in those markets where it believes supply is constrained and where
properties are close to important services and have easy access to major
transportation arteries.
The Company attempts to limit the risk in its portfolio through
attracting a diversified tenant base, both in size and industry focus. The
Company's focus is on properties with easily reconfigured space and therefore
appeals to a wide range of potential tenants. Such property flexibility also
allows the Company to better serve existing tenants by accommodating their
inevitable expansion and contraction needs. In addition, the Company's
experience is that such property flexibility helps it maintain high occupancy
rates including periods when market conditions are less favorable.
By focusing on properties with easily reconfigured space and a wide
range of tenants, the Company seeks to control capital expenditures associated
with re-leasing space. The Company also attempts to limit tenant improvement
expenditures to those that are appropriate for a high number of users.
The Company seeks to provide a superior level of service to its tenants
in order to achieve high occupancy and rental rates, as well as low turnover.
The Company's property management offices are primarily located on-site,
providing tenants with convenient access to management. On-site staff enables
the Company's properties to be well maintained and to convey a sense of quality,
order and security. The Company has significant experience in acquiring
properties managed by others and thereafter improving tenant satisfaction,
occupancy levels, renewal rates and rental income by implementing the Company's
tenant service programs.
Competition
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Significant Competition among Commercial Properties: Competition in the
market areas in which many of the Company's properties are located is
significant and has reduced the occupancy levels and rental rates of, and
increased the operating expenses of, certain of these properties. Competition
may be accelerated by any increase in availability of funds for investment in
real estate. Barriers to entry are relatively low for those with the necessary
capital and the Company will be competing for property acquisitions and tenants
with entities that have greater financial resources than the Company. Recent
increases in development of commercial properties are expected to further
intensify competition among operators in certain market areas in which the
Company operates.
The Company believes that the significant operating and financial
experience of its executive officers and directors combined with the Company's
capital structure, national investment scope, geographic diversity and economies
of scale should enable the Company to continue to compete effectively with other
entities.
Business Attributes
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The Company believes it possesses several distinguishing
characteristics that enable it to compete effectively in the Office/Warehouse,
"flex" space industry. The Company's facilities are part of a comprehensive
system encompassing standardized procedures and integrated reporting and
information networks. The Company believes it possesses the most experienced
property operations group within this industry. The Company has a strong track
record of growing revenues and net operating income for the properties it has
operated for at least eight years. The Company is diversified geographically and
by tenant. In addition, the Company has a consistent record of acquiring
properties in selected markets at prices believed to be below replacement costs
and which enables the Company to execute its growth strategies.
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Financially, the Company has adopted a conservative policy
characterized by a low payout ratio and minimal debt levels. These attributes
are complemented by sponsorship from PSI, a widely known and respected REIT.
Growth Strategies
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The Company's growth strategies focus on improving the operating
performance of its existing properties and on increasing its ownership of
"flex-space" facilities through additional investments. Major elements of these
strategies are as follows:
Increase Net Cash Flow of Existing Properties: The Company seeks to
increase the net cash flow generated by its existing properties by (i)
increasing average occupancy rates and (ii) achieving higher levels of realized
monthly rents per occupied square foot and (iii) reducing its operating cost
structure by improving operating efficiencies and economies of scale. The
Company believes that its proactive property management personnel and systems
combined with strong markets and increasing economies of scale will enhance the
Company's ability to meet these goals.
Acquire Properties Owned or Operated by Others: The Company believes
its presence in and knowledge of its markets enhances its ability to identify
attractive acquisition opportunities and capitalize on the overall fragmentation
in the "flex" space industry. The Company maintains local market information on
rates, occupancies and competition in each of the markets in which it operates.
The Company believes that the ten largest operators manage less than 15% of the
total space of the 900 million square feet of "flex" space facilities in the
United States as noted by Torto Wheaton Research. Similar to 1999, the Company
expects third party acquisitions to be its most significant growth area during
fiscal 2000, if attractive investment opportunities continue to be available.
Develop Properties in Existing Markets: The Company's development
strategy is to selectively construct new properties next to existing business
parks. The properties are being developed using the expertise of local
development companies. The Company plans to keep development activities below
10% of its portfolio.
Financing of the Company's Growth Strategies
- --------------------------------------------
Retain Operating Cash Flow: The Company seeks to retain significant
funds (after funding its distributions and capital improvements) for additional
investments and debt reduction. During the year ended December 31, 1999, the
Company distributed 41% of its funds from operations ("FFO") allocable to common
stock and retained $38.1 million which was available for principal payments on
debt and reinvestment into real estate assets. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations-Liquidity and Capital
Resources."
Revolving Line of Credit: The Company currently has an unsecured $100
million ("Credit Facility") with Wells Fargo Bank, which the Company uses as a
temporary source of acquisition financing. The Company seeks to ultimately
finance all acquisitions with permanent capital to eliminate refinancing and
interest rate risk.
Access to Acquisition Capital: The Company believes that its strong
financial position enables it to access capital to finance its growth. In 1998,
the Company issued approximately $322 million of common equity and common
operating partnership units to finance its acquisitions. In 1999, the Company
issued approximately $188 million of preferred equity and preferred operating
partnership units to finance its acquisitions. The Company targets a leverage
ratio of 40% (defined as debt and preferred equity as a percentage of market
capitalization). In addition, the Company targets a ratio of FFO to combined
fixed charges and preferred distributions of 3.0 to 1.0. Fixed charges include
interest expense and capitalized interest. Preferred distributions include
amounts paid to preferred shareholders and preferred OP unitholders. As of
December 31, 1999 and for the year then ended, the leverage ratio was 24% and
the FFO to combined fixed charges and preferred distributions ratio was 7.4 to
1.0. The Company plans to add leverage to its capital structure primarily
through the use of preferred stock, but may assume debt in connection with
acquisitions. This policy is subject to change depending upon market conditions.
9
<PAGE>
Investments in Real Estate Facilities
- -------------------------------------
As of December 31, 1999, the Company had a total of 125 real estate
facilities (12.4 million square feet) compared to 106 real estate facilities
(10.9 million square feet) at December 31, 1998. The increase in the number of
facilities was due to the acquisitions of facilities from unaffiliated third
parties and the development of two properties.
Restrictions on Transactions with Affiliates
- --------------------------------------------
The Company's Bylaws provide that the Company may engage in
transactions with affiliates provided that a purchase or sale transaction with
an affiliate is (i) approved by a majority of the Company's independent
directors and (ii) fair to the Company based on an independent appraisal or
fairness opinion.
Borrowings
- ----------
In August 1999, the Company extended its unsecured line of credit with
Wells Fargo Bank. The Credit Facility has a borrowing limit of $100 million and
an expiration date of August 6, 2002. The expiration date may be extended by one
year on each anniversary of the Credit Facility. Interest on outstanding
borrowings is payable monthly. At the option of the Company, the rate of
interest charged is equal to (i) the prime rate or (ii) a rate ranging from the
London Interbank Offered Rate ("LIBOR") plus 0.75% to 1.35% depending on the
Company's credit rating and coverage ratios, as defined (currently LIBOR plus
1.00%). In addition, the Company is required to pay an annual commitment fee of
0.25%.
Under covenants of the Credit Facility, the Company is required to (i)
maintain a balance sheet leverage ratio (as defined) of less than 0.50 to 1.00,
(ii) maintain interest and fixed charge coverage ratios (as defined) of not less
than 2.25 to 1.0 and 1.75 to 1.0, respectively, (iii) maintain a minimum total
shareholder's equity (as defined) and (iv) limit distributions to 95% of funds
from operations. In addition, the Company is limited in its ability to incur
additional borrowings (the Company is required to maintain unencumbered assets
with an aggregate book value equal to or greater than two times the Company's
unsecured recourse debt) or sell assets. The Company was in compliance with the
covenants of the Credit Facility at December 31, 1999.
As of December 31, 1999, the Company had outstanding mortgage notes
payable balances of approximately $37 million and no balance outstanding on the
Credit Facility. See Notes 6 and 7 to the consolidated financial statements for
a summary of the Company's borrowings at December 31, 1999.
The Company has broad powers to borrow in furtherance of the Company's
objectives. The Company has incurred in the past, and may incur in the future,
both short-term and long-term indebtedness to increase its funds available for
investment in real estate, capital expenditures and distributions.
Employees
- ---------
As of December 31, 1999, the Company employed 105 individuals,
primarily personnel engaged in property operations. The Company believes that
its relationship with its employees is good and none of the employees are
represented by a labor union.
Federal Income Tax
- ------------------
The Company believes that it has operated, and intends to continue to
operate, in such a manner as to qualify as a REIT under the Code, but no
assurance can be given that it will at all times so qualify. To the extent that
the Company continues to qualify as a REIT, it will not be taxed, with certain
limited exceptions, on the taxable income that is distributed to its
shareholders.
10
<PAGE>
Insurance
- ---------
The Company believes that its properties are adequately insured.
Facilities operated by the Company have historically carried comprehensive
insurance, including fire, earthquake, liability and extended coverage from
nationally recognized carriers.
Impact of Year 2000
- -------------------
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations-Impact of Year 2000."
11
<PAGE>
ITEM 2. PROPERTIES
As of December 31, 1999, the Company owned approximately 11.0 million
square feet of "flex" space and 1.4 million square feet of suburban office
concentrated primarily in seven major markets including Southern and Northern
California, Southern and Northern Texas, Virginia, Maryland, and Oregon. The
weighted average occupancy rate as of December 31, 1999 was 96.2%.
The following table contains information about properties owned by the
Company and the Operating Partnership as of December 31, 1999:
<TABLE>
<CAPTION>
Rentable Square Footage
-----------------------------------------------------------
Number of Occupancy at
City Properties Flex Office Total December 31, 1999
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Arkansas
Little Rock........... 1 91,064 - 91,064 90.3%
-----------------------------------------------------------------------------------------------------
1 91,064 - 91,064 90.3%
-----------------------------------------------------------------------------------------------------
Arizona
Mesa.................. 1 78,038 - 78,038 100.0%
Phoenix............... 1 199,581 - 199,581 98.4%
Tempe................. 3 291,264 - 291,264 98.2%
-----------------------------------------------------------------------------------------------------
5 568,883 - 568,883 98.5%
-----------------------------------------------------------------------------------------------------
Northern California
Hayward............... 1 406,712 - 406,712 100.0%
Monterey.............. 1 - 12,003 12,003 96.5%
Sacramento............ 2 364,507 - 364,507 88.1%
San Jose.............. 2 387,631 - 387,631 97.6%
San Ramon............. 2 - 52,149 52,149 100.0%
So. San Francisco..... 2 93,775 - 93,775 100.0%
-----------------------------------------------------------------------------------------------------
10 1,252,625 64,152 1,316,777 96.0%
-----------------------------------------------------------------------------------------------------
Southern California
Buena Park............ 1 317,312 - 317,312 100.0%
Carson................ 1 77,255 - 77,255 96.3%
Cerritos.............. 2 394,610 31,270 425,880 96.5%
Culver City........... 1 146,402 - 146,402 99.0%
Laguna Hills.......... 2 613,947 - 613,947 100.0%
Lake Forest........... 1 296,597 - 296,597 98.4%
Lakewood.............. 1 - 56,902 56,902 94.5%
Monterey Park......... 1 199,056 - 199,056 91.4%
San Diego............. 7 377,880 232,808 610,688 98.6%
Signal Hill........... 2 178,146 - 178,146 96.1%
Studio City........... 1 22,092 - 22,092 100.0%
Torrance.............. 2 147,220 - 147,220 97.2%
-----------------------------------------------------------------------------------------------------
22 2,770,517 320,980 3,091,497 97.9%
-----------------------------------------------------------------------------------------------------
Kansas
Overland Park......... 1 61,836 - 61,836 89.9%
-----------------------------------------------------------------------------------------------------
1 61,836 - 61,836 89.9%
-----------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Rentable Square Footage
-----------------------------------------------------------
Number of Occupancy at
City Properties Flex Office Total December 31, 1999
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Maryland
Baltimore (1)......... 1 - 237,638 237,638 97.7%
Beltsville............ 1 307,791 - 307,791 100.0%
Gaithersburg.......... 1 - 28,994 28,994 96.5%
Landover (2).......... 2 379,471 - 379,471 100.0%
Largo................. 1 149,918 - 149,918 100.0%
-----------------------------------------------------------------------------------------------------
6 837,180 266,632 1,103,812 99.4%
-----------------------------------------------------------------------------------------------------
Oklahoma
Broken Arrow.......... 1 87,895 - 87,895 92.1%
Tulsa................. 1 56,566 - 56,566 86.4%
-----------------------------------------------------------------------------------------------------
2 144,461 - 144,461 89.9%
-----------------------------------------------------------------------------------------------------
Oregon
Beaverton............. 15 880,186 186,770 1,066,956 98.6%
Milwaukee............. 2 101,578 - 101,578 93.3%
-----------------------------------------------------------------------------------------------------
17 981,764 186,770 1,168,534 98.1%
-----------------------------------------------------------------------------------------------------
Tennessee
Nashville............. 2 138,004 - 138,004 95.5%
-----------------------------------------------------------------------------------------------------
2 138,004 - 138,004 95.5%
-----------------------------------------------------------------------------------------------------
Texas
Austin................ 15 831,404 - 831,404 94.6%
Dallas................ 2 236,997 - 236,997 98.9%
Garland............... 1 36,458 - 36,458 100.0%
Houston............... 2 176,977 131,214 308,191 79.7%
Las Colinas (1)....... 12 843,112 - 843,112 91.9%
Mesquite.............. 1 56,541 - 56,541 93.3%
Missouri City......... 1 66,000 - 66,000 100.0%
Pasadena.............. 1 154,000 - 154,000 99.2%
Plano................. 1 184,809 - 184,809 100.0%
Richardson............ 2 116,800 - 116,800 95.1%
San Antonio........... 2 - 199,269 199,269 82.1%
-----------------------------------------------------------------------------------------------------
40 2,703,098 330,483 3,033,581 92.6%
-----------------------------------------------------------------------------------------------------
Virginia
Alexandria............ 3 154,782 53,737 208,519 97.9%
Chantilly (2)......... 5 315,080 38,502 353,582 94.0%
Herndon (2)........... 2 193,623 50,750 244,373 99.1%
Lorton................ 1 246,520 - 246,520 94.6%
Springfield........... 2 59,756 90,374 150,130 97.5%
Sterling (2).......... 4 295,625 - 295,625 100.0%
Woodbridge............ 1 113,629 - 113,629 96.8%
-----------------------------------------------------------------------------------------------------
18 1,379,015 233,363 1,612,378 97.0%
-----------------------------------------------------------------------------------------------------
Washington
Renton................ 1 27,912 - 27,912 100.0%
-----------------------------------------------------------------------------------------------------
1 27,912 - 27,912 100.0%
-----------------------------------------------------------------------------------------------------
Totals - 11 states.... 125 10,956,359 1,402,380 12,358,739 96.2%
=====================================================================================================
</TABLE>
(1) The Company owns two properties that are subject to a ground lease in
Baltimore, Maryland and Las Colinas, Texas.
(2) Nine commercial properties serve as collateral to mortgage notes payable.
See detailed listing in Schedule III.
13
<PAGE>
Each of these properties will continue to be used for its current
purpose. 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.
The Company has risks that tenants will default on leases and declare
bankruptcy. Management believes these risks are mitigated through its geographic
diversity and its diverse tenant base. As of December 31, 1999, tenants
occupying approximately 22,000 square feet of commercial space have declared
bankruptcy. However, all of the bankrupt tenants remain current on their monthly
rental payments. In the Company's opinion, risk of loss due to property damage
is adequately covered by insurance.
As of December 31, 1999, 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.
The following table sets forth the lease expirations for the properties
owned as of December 31, 1999:
<TABLE>
<CAPTION>
Percentage of Total
Annual Base Rents
Rentable Square Footage Annual Base Rents Under Represented by Expiring
Year of Lease Expiration Subject to Expiring Leases Expiring Leases Leases
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1999 3,410,000 $34,329,000 27.2%
2000 2,430,000 27,191,000 21.5%
2001 2,129,000 21,761,000 17.2%
2002 1,397,000 16,572,000 13.1%
2003 1,040,000 11,644,000 9.2%
Thereafter 1,119,000 14,780,000 11.8%
- ----------------------------------------------------------------------------------------------------------------------
Total 11,525,000 $126,277,000 100.0%
======================================================================================================================
</TABLE>
Environmental Matters: Compliance with laws and regulations relating to
the protection of the environment, including those regarding the discharge of
material into the environment, has not had any material effects upon the capital
expenditures, earnings or competitive position of the Company.
The properties contributed by PSI and affiliates during 1997 and 1998
were each subject to environmental audits within the two-year period ended
December 31, 1995. In addition, for each of the properties acquired subsequent
to December 31, 1995, and for each parcel of land purchased for development, an
environmental investigation was conducted as part of the acquisition due
diligence process. The environmental investigations have not revealed any
environmental liability that the Company believes would have a material adverse
effect on the Company's business, assets or results of operations, nor is the
Company aware of any potentially material environmental liability, except as
discussed below.
The Company acquired a property in Beaverton, Oregon ("Creekside Corporate
Park") in May 1998. A property adjacent to Creekside Corporate Park is currently
the subject of an environmental remedial investigation/feasibility study that is
being conducted by the current and past owners of the property, pursuant to an
order issued by the Oregon Department of Environmental Quality ("ODEQ"). As part
of that study, ODEQ ordered the property owners to sample soil and groundwater
on the Company's property to determine the nature and extent of contamination
resulting from past industrial operations at the property subject to the study.
The Company, which is not a party of the Order on Consent, executed separate
Access Agreements with the property owners to allow access to its property to
conduct the required sampling and testing. While the sampling and testing is
ongoing, preliminary results indicate that the contamination from the property
subject to the study have migrated onto a portion of Creekside Corporate Park
owned by the Company.
14
<PAGE>
There is no evidence that any past or current use of the Creekside
Corporate Park property contributed in any way to the There is no evidence that
any past or current use of the Creekside Corporate Park property contributed in
any way to the contamination that is the subject of the current investigation.
Nevertheless, the parties to the Order on Consent are studying potential removal
or remedial measures to address any contamination detected during the current
investigation, including any contamination on or under the Creekside Corporate
Park property. Because of the preliminary nature of the investigation, the
Company cannot predict the outcome of the investigation, nor can it estimate the
costs of any remediation or removal activities that may be required.
The Company believes that it bears no responsibility or liability for
the contamination. In the event the Company is ultimately deemed responsible for
any costs relating to this matter, the Company believes that the party from whom
the property was purchased will be responsible for any expenses or liabilities
that the Company may incur as a result of this contamination.
Although the environmental investigations conducted to date have not
revealed any environmental liability that the Company believes would have a
material adverse effect on the Company's business, assets or results of
operations, and the Company is not aware of any such liability, it is possible
that these investigations did not reveal all environmental liabilities or that
there are material environmental liabilities of which the Company is unaware. No
assurances can be given that (i) future laws, ordinances, or regulations will
not impose any material environmental liability, or (ii) the current
environmental condition of the Properties has not been, or will not be, affected
by tenants and occupants of the Properties, by the condition of properties in
the vicinity of the Properties, or by third parties unrelated to the Company.
Properties under Development: The Company plans to develop office and
"flex" properties that are located within or adjacent to existing parks. The
properties will be developed using the expertise of local development companies.
The development program is designed to enhance the Company's existing portfolio.
In June 1999, the Company completed a 61,000 square foot flex facility
in its park in the Las Colinas submarket of Dallas, Texas. In July 1999, the
Company completed a 66,000 square foot office building in its Woodside Business
Park located in the Beaverton submarket of Portland, Oregon, adjacent to
existing facilities of approximately 400,000 square feet. There was no
pre-leasing on either development. In August 1999, the Dallas facility was 100%
leased to facilitate the expansion of an existing tenant. As of March 2000, the
Beaverton facility was approximately 83% leased.
The following table sets forth certain information regarding the
Company's properties under development as of December 31, 1999:
<TABLE>
<CAPTION>
Estimated Rentable Square
Property Name Location Completion Date Feet Amount Invested
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Creekside Beaverton, OR April 2000 22,000 $ 1,964,000
Lafayette Chantilly, VA October 2000 136,000 1,627,000
Royal Tech 17 Las Colinas, TX September 2000 100,000 2,000
Royal Tech 18 Las Colinas, TX October 2001 100,000 2,000
Woodside Beaverton, OR TBD 136,000 2,954,000
Pinnacle Chantilly, VA TBD 91,000 2,067,000
------------------ -----------------
585,000 $ 8,616,000
================== =================
</TABLE>
The Creekside project is located within the Company's Creekside
Corporate Park where it has 600,000 square feet of existing flex/office space.
The building is a single story office/flex building with glass exterior walls on
four sides. It is zoned for office, R&D, assembly and light industrial. The
Company currently has approximately 1,067,000 square feet of rentable space in
Beaverton, Oregon. The project is expected to cost approximately $3.9 million.
Rent stabilization is expected by November 2000.
15
<PAGE>
The Lafayette project consists of two single story flex buildings with
glass storefront on three sides of the building. The Lafayette project consists
of two single story flex buildings with glass storefront on three sides of the
building. Typical building depth is a highly efficient 110 feet which can easily
accommodate either multiple small tenants or full building users. The Company
currently has approximately 354,000 square feet of rentable space in Chantilly,
VA. The project is expected to cost approximately $11.9 million. Rent
stabilization is expected by April 2001.
Subsequent to year end, the Company acquired 21 acres of land in Las
Colinas, Texas just east of the Dallas Ft. Worth International Airport with
frontage along I-635 (LBJ Freeway). The Company will develop 200,000 square feet
of single story brick and glass office/flex in two phases for an estimated cost
of $24 million. The first phase of approximately 100,000 square feet is expected
to be shell complete by September 2000. The second phase will commence upon
lease up of the first phase. The Company currently has approximately 843,000
square feet of rentable space in Las Colinas, TX.
The Company owns 8 acres of vacant land in the Woodside Corporate Park
purchased in 1998. The land is permitted for a three building complex.
In the second quarter of 1999, 6.4 acres of land located in Chantilly,
Virginia was purchased as part of a package of other properties that included
297,000 square feet of flex space. The proposed development is a four story
office building.
16
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
On November 3, 1999, the Company filed an action entitled PS Business
Parks, Inc. v. Larry Howard, et al. (Case No. BC219580) in the Los Angeles
Superior Court seeking damages in excess of $1 million, as well as equitable
relief. The complaint alleges that Mr. Howard and entities controlled by him
engaged in unfair trade practices, including (1) negotiating kickbacks, secret
rebates and/or unearned discounts from third party suppliers for "providing"
Company business to those suppliers and (2) disrupting the Company's
relationship with various suppliers. Mr. Howard is not an officer, employee or
authorized agent of the Company.
On or about February 14, 2000, Mr. Howard and entities controlled by
him filed a cross-complaint against the Company, Public Storage, Inc., and
several other cross-defendants alleging, among other things, (1) interference
with Mr. Howard's contractual relations with various third party suppliers, (2)
violation of Title VII of the Civil Rights Act and (3) abuse of process. None of
the cross-complainants assigned any dollar amount in the cross-complaint to the
claims. The Company intends to vigorously contest the claims in the
cross-complaint.
Mary Jayne Howard, former executive vice president of the Company, is
married to Mr. Howard. On March 7, 2000, Ms. Howard ceased employment with the
Company. Ronald L. Havner, Jr., Chief Executive Officer of the Company, assumed
Ms. Howard's operational responsibilities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matter to a vote of security holders in
the fourth quarter of the fiscal year ended December 31, 1999.
ITEM 4A. EXECUTIVE OFFICERS
The following is a biographical summary of the executive officers of
the Company:
Ronald L. Havner, Jr., age 42, has been Chairman, President and Chief
Executive Officer of the Company since March 1998. From December 1996 until
March 1998, Mr. Havner was Chairman, President and Chief Executive Officer of
AOPP. He was Senior Vice President and Chief Financial Officer of PSI, an
affiliated REIT, and Vice President of the Company and certain other REITs
affiliated with PSI, until December 1996. Mr. Havner became an officer of PSI in
1986, prior to which he was in the audit practice of Arthur Andersen & Company.
He is a member of the American Institute of Certified Public Accountants
(AICPA), the National Association of Real Estate Investments Trusts (NAREIT) and
the Urban Land Institute (ULI) and a Director of Business Machine Security, Inc.
and Mobile Storage Group, Inc.
Jack E. Corrigan, age 39, a certified public accountant, has been Vice
President, Chief Financial Officer and Secretary of the Company since June 1998.
From February 1991 until June 1998, Mr. Corrigan was a partner of LaRue,
Corrigan & McCormick with responsibility for the audit and accounting practice.
He was Vice President and Controller of PSI (formerly Storage Equities, Inc.)
from 1989 until February 1991.
J. Michael Lynch, age 47, has been Vice President-Director of
Acquisitions and Development of the Company since June 1998. Mr. Lynch was Vice
President of Acquisitions and Development of Nottingham Properties, Inc. from
1995 until May 1998. He has 16 years of real estate experience, primarily in
acquisitions and development. From 1988 until 1995, Mr. Lynch was a development
project manager for The Parkway Companies. From 1983 until 1988, he was an
Assistant Vice President, Real Estate Investment Department of First Wachovia
Corporation.
17
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
a. Market Price of the Registrant's Common Equity:
The Common Stock (formerly Common Stock Series A) of the Company (then
known as Public Storage Properties XI, Inc.) began trading on the American Stock
Exchange on March 27, 1991 under the symbol PSM. In connection with the March
1998 merger of AOPP into the Company, the Company changed its name from Public
Storage Properties XI, Inc. to PS Business Parks, Inc. and the Company's Common
Stock Series A was reclassified as Common Stock and began trading on the
American Stock Exchange under the symbol PSB.
The following table sets forth the high and low sales prices of the
Common Stock (formerly Common Stock Series A) on the American Stock Exchange for
the applicable periods:
Range
------------------------------------
Year Quarter High Low
- ------------------- ----------------- ----------------- ---------------
1999 1st $23-3/4 $21-3/8
2nd 26-3/8 21-5/8
3rd 26 21-7/8
4th 24-1/8 20-1/4
1998 1st 24-1/2 20-1/2
2nd 25-3/4 22-5/16
3rd 26-5/8 18-7/16
4th 24-3/8 18
As of March 24, 2000, there were approximately 744 holders of record of
the Common Stock.
b. Dividends
Holders of Common Stock are entitled to receive distributions when and
if declared by the Company's Board of Directors out of any funds legally
available for that purpose. The Company is required to distribute at least 95%
of its net taxable ordinary income prior to the filing of the Company's tax
return and 85%, subject to certain adjustments, during the calendar year, to
maintain its REIT status for federal income tax purposes. It is management's
intention to pay distributions of not less than this required amount.
Distributions paid per share of Common Stock for 1999 and 1998 amounted
to $1.00 and $1.10, respectively (distributions paid prior to March 17, 1998
refer to distributions paid on the AOPP common stock).
Since the second quarter of 1998, the Company has declared regular
quarterly dividends of $0.25 per common share. This reflects a decrease from the
quarterly dividend of $0.34 per common share which was paid to the previous
shareholders of Public Storage Properties XI, Inc. through the first quarter of
1998. The Board of Directors has established a distribution policy to maximize
the retention of operating cash flow and only distribute the minimum amount
required for the Company to maintain its tax status as a REIT.
18
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA (1)
<TABLE>
<CAPTION>
For the Years Ended For the Years Ended
December 31, For the Periods (2) December 31,
------------------------ -------------------------------- ------------------------
April 1, 1997 January 1, 1997
through through
December 31, March 31,
1999 1998 1997 1997 1996 1995
----------- ------------ ------------- ---------------- ----------- -----------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental income................................. $ 125,327 $ 88,320 $ 24,364 $ 5,805 $ - $ -
Facility management fees...................... 471 529 709 247 2,133 2,044
Interest income............................... 2,815 1,411 424 29 43 37
----------- ------------ ------------- ---------------- ----------- -----------
28,613 90,260 25,497 6,081 2,176 2,081
----------- ------------ ------------- ---------------- ----------- -----------
Expenses:
Cost of operations............................ 34,891 26,073 9,837 2,493 - -
Cost of facility management................... 94 77 129 60 514 570
Depreciation and amortization................. 29,762 18,908 4,375 820 - -
General and administrative.................... 3,153 2,233 1,248 213 1,143 319
Interest expense.............................. 3,153 2,361 1 - - -
----------- ------------ ------------- ---------------- ----------- -----------
71,053 49,652 15,590 3,586 1,657 889
----------- ------------ ------------- ---------------- ----------- -----------
Income before minority interest, income
taxes and extraordinary item................. 57,560 40,608 9,907 2,495 519 1,192
Minority interest in income - preferred units. (4,156) - - - - -
Minority interest in income - common units.... (11,954) (11,208) (6,753) (1,813) - -
----------- ------------ ------------- ---------------- ----------- -----------
Income before income taxes and extraordinary
item......................................... 41,450 29,400 3,154 682 519 1,192
Income tax expense (3)........................ - - - - (216) (472)
----------- ------------ ------------- ---------------- ----------- -----------
Income before extraordinary item.............. 41,450 29,400 3,154 682 303 720
Extraordinary item, net of minority interest.. (195) - - - - -
----------- ------------ ------------- ---------------- ----------- -----------
Net income.................................... $ 41,255 $ 29,400 $ 3,154 $ 682 $ 303 $ 720
=========== ============ ============= ================ =========== ===========
Net income allocation: $ 3,406 $ - $ - $ - $ - $ -
Allocable to preferred shareholders........... 37,849 29,400 3,154 682 303 720
----------- ------------ ------------- ---------------- ----------- -----------
Allocable to common shareholders.............. $ 41,255 $ 29,400 $ 3,154 $ 682 $ 303 $ 720
=========== ============ ============= ================ ============ ===========
- -----------------------------------------------------------------------------------------------------------------------------------
Per Common Share:
- -----------------
Distribution.................................. $ 1.00 $ 1.10 $ 0.68 $ 0.00 $ 0.43 $ 0.90
Net income - Basic............................ $ 1.60 $ 1.52 $ 0.92 $ 0.31 $ 0.32 $ 0.80
Net income - Diluted.......................... $ 1.60 $ 1.51 $ 0.92 $ 0.31 $ 0.32 $ 0.80
Weighted average common shares - Basic........ 23,641 19,361 3,414 2,193 947 905
Weighted average common shares - Diluted...... 23,709 19,429 3,426 2,193 947 905
- -----------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data:
- -------------------
Total assets.................................. $ 903,741 $ 709,414 $323,454 $ 136,922 $ 1,941 $ 1,110
Total debt.................................... 37,066 50,541 3,500 - - -
Minority interest - preferred units........... 132,750 - - - - -
Minority interest - common units.............. 157,199 153,015 168,665 97,180 - -
Preferred stock............................... 55,000 - - - - -
Common shareholders' equity................... $ 500,531 $ 489,905 $142,958 $ 36,670 $ 1,734 $ 1,041
- -----------------------------------------------------------------------------------------------------------------------------------
Other Data:
- -----------
Net cash provided by operating activities..... $ 88,440 $ 60,228 $ 13,597 $ 5,840 $ 413 $ 950
Net cash used in investing activities......... (131,318) (308,646) (47,105) (582) - -
Net cash provided by (used in) financing 111,030 250,602 31,443 (228) (378) (84)
activities...................................
Funds from operations (4)..................... $ 76,353 $ 57,430 $ 14,282 $ 3,315 $ 303 $ 720
FFO per share................................. $ 2.45 $ 2.14 $ 1.33 $ 0.41 $ 0.32 $ 0.80
Square footage owned at end of period......... 12,359 10,930 6,009 3,014 - -
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The selected financial data for periods prior to March 17, 1998 refers to
AOPP.
(2) See Note 2 of the Notes to Consolidated Financial Statements.
(3) During 1997, the Company qualified and intends to qualify as a REIT, as
defined in Section 856 of the Internal Revenue Code. As a REIT, the Company is
not subject to federal income tax to the extent that it distributes its taxable
income to its shareholders.
(4) Funds from operations ("FFO") is defined as net income, computed in
accordance with generally accepted accounting principles ("GAAP") before
depreciation, amortization, minority interest in income, straight line rent
adjustments and extraordinary or non-recurring items. 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 the Company many not be
comparable to FFO computed and disclosed by other REITs.
19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of the results of operations and
financial condition of PS Business Parks, Inc. (the "Company") should be read in
conjunction with the selected financial data and the Company's consolidated
financial statements and notes thereto included elsewhere in the form 10-K.
References to the Company for periods prior to March 17, 1998 refer to AOPP.
Forward-Looking Statements: When used within this document, the words
"expects," "believes," anticipates," "should," "estimates," and similar
expressions are intended to identify "forward-looking statements" within the
meaning of that term in Section 27A of the Securities Exchange Act of 1933, as
amended, and in Section 21F of the Securities Exchange Act of 1934, as amended.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors. Actual results could differ materially from those set forth
in the forward-looking statements as a result of various factors. Such factors
include, but are not limited to a change in economic conditions in the various
markets served by the Company's operations which would adversely affect the
level of demand for rental of commercial space and the cost structure of the
Company, general real estate investment risks, competition, risks associated
with acquisition and development activities and debt financing, environmental
matters, general uninsured losses and seismic activity. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date hereof. The Company undertakes no obligation to publicly
release the result of any revisions to these forward-looking statements to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
Overview: During 1999 and 1998, the Company focused on increasing cash
flow from its existing core portfolio of properties, expanded its presence in
existing markets through strategic acquisition and developments and strengthened
its balance sheet primarily through the issuance of common and preferred
stock/units at reasonable prices. By maintaining low leverage, the Company
facilitated future growth.
During 1999, the Company added approximately 1.3 million square feet to
its portfolio at an aggregate cost of approximately $103 million. These
acquisitions increase the Company's presence in its existing markets, which the
Company believes have the characteristics necessary for long-term growth. The
Company acquired 483,000 square feet in Texas for approximately $32 million,
405,000 square feet in Northern Virginia/Maryland market for approximately $41
million, 211,000 square feet in Northern California for approximately $17
million and 200,000 square feet in Arizona for approximately $13 million.
During 1998, the Company added 4.9 million square feet to its
portfolio. The cost of these acquisitions was approximately $378 million. The
acquisitions added square footage to each of the Company's existing core
markets. The Company acquired 1,687,000 square feet in Texas at an aggregate
cost of approximately $102 million; 1,001,000 square feet in Portland, Oregon at
an aggregate cost of approximately $115 million; 1,442,000 square feet in the
Northern Virginia/Maryland market at an aggregate cost of approximately $108
million; 422,000 square feet in Southern California at an aggregate cost of
approximately $25 million and 307,000 square feet in Northern California at an
aggregate cost of approximately $25 million. In addition, the Company acquired
62,000 square feet in the Merger at an aggregate cost of approximately $3
million in a market the Company does not consider a core market.
Comparison of 1999 to 1998
- --------------------------
Results of Operations: Net income for the year ended December 31, 1999
was $41,255,000 compared to $29,400,000 for the same period in 1998. Net income
allocable to common shareholders (net income less preferred stock dividends) for
the year ended December 31, 1999 was $37,849,000 compared to $29,400,000 for the
same period in 1998. Net income per common share on a diluted basis was $1.60
(based on weighted average diluted common shares outstanding of 23,709,000) for
the year ended December 31, 1999 compared to net income per common share on a
diluted basis of $1.51 (based on weighted average diluted common shares
outstanding of 19,429,000) for the year ended December 31, 1998. The increases
in net income and net income per share reflect the Company's significant growth
in its asset base through the acquisition of commercial properties in addition
to increased net operating income from its stabilized base of properties.
20
<PAGE>
The Company's property operations account for almost all of the net
operating income earned by the Company. The following table presents the
pre-depreciation operating results of the properties for the years ended
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998 Change
-------------- ------------- -----------
<S> <C> <C> <C>
Rental income:
Facilities owned throughout each period (50 facilities owned
throughout each period, 6.4 million net rentable square
feet).................................................... $63,356,000 $58,755,000 7.8%
Facilities acquired subsequent to January 1998 (75
facilities, 6.0 million net rentable square feet)........ 61,971,000 29,565,000 109.6%
-------------- ------------- -----------
Total rental income........................................... $125,327,000 $88,320,000 41.9%
============== ============= ===========
Cost of operations (excluding depreciation):
Facilities owned throughout each period....................... $19,297,000 $18,855,000 2.3%
Facilities acquired subsequent to January 1998................ 15,594,000 7,218,000 116.0%
-------------- ------------- -----------
Total cost of operations...................................... $34,891,000 $26,073,000 33.8%
============== ============= ===========
Net operating income (rental income less cost of operations):
Facilities owned throughout each period....................... $44,059,000 $39,900,000 10.4%
Facilities acquired subsequent to January 1998................ 46,377,000 22,347,000 107.5%
-------------- ------------- -----------
Total net operating income.................................... $90,436,000 $62,247,000 45.3%
============== ============= ===========
</TABLE>
Rental income and rental income less cost of operations or net
operating income ("NOI") prior to depreciation are summarized for the year ended
December 31, 1999 by major geographic regions below:
<TABLE>
<CAPTION>
Square Percent Rental Percent Percent
Region Footage of Total Income of Total NOI of Total
- ------------------------ -------------- ---------- ------------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Southern California.... 3,091,000 25.0% $33,962,000 27.1% $25,426,000 28.1%
Northern California.... 1,317,000 10.7% 12,376,000 9.9% 9,176,000 10.1%
Southern Texas......... 1,031,000 8.3% 9,899,000 7.9% 6,430,000 7.1%
Northern Texas......... 2,003,000 16.2% 16,094,000 12.8% 10,868,000 12.0%
Virginia............... 1,612,000 13.0% 18,824,000 15.0% 13,679,000 15.1%
Maryland............... 1,104,000 8.9% 13,615,000 10.9% 9,642,000 10.7%
Oregon................. 1,169,000 9.5% 14,684,000 11.7% 11,465,000 12.8%
Other.................. 1,032,000 8.4% 5,873,000 4.7% 3,750,000 4.1%
-------------- ---------- ------------- --------- ------------- ---------
12,359,000 100.0% $125,327,000 100.0% $90,436,000 100.0%
============== ========== ============= ========= ============= =========
</TABLE>
Supplemental Property Data and Trends: In order to evaluate the
performance of the Company's overall portfolio, management analyzes the
operating performance of a consistent group of 62 properties (7.2 million net
rentable square feet). These 62 properties in which the Company currently has an
ownership interest (herein referred to as the "Same Park" facilities) have been
managed by the Company since January 1998. The following table summarizes the
pre-depreciation historical operating results of the "Same Park" facilities
excluding the effects of accounting for rental income on a straight-line basis.
21
<PAGE>
Beginning with the first quarter of 2000, the Company will add 48
properties acquired in 1998 totaling approximately four million square feet to
its "Same Park" facilities. These properties will have been owned and operated
for the comparable periods and will provide a more comprehensive analysis of the
portfolio's operations. In addition, the Company will subtract two properties
totaling approximately 392,000 square feet that it plans to sell during the next
twelve months. The "Same Park" facilities will then total 10.8 million square
feet and represent approximately 87% of the square footage of the Company's
existing portfolio.
"Same Park" Facilities (62 Properties)
--------------------------------------
<TABLE>
<CAPTION>
Year Ended
December 31,
------------------------------------
1999 1998 (4) Change
---------------- ---------------- -----------
<S> <C> <C> <C>
Rental income (1).................................... $ 72,641,000 $ 67,191,000 8.1%
Cost of operations................................... 22,838,000 22,491,000 1.5%
---------------- ---------------- -----------
Net operating income................................. $ 49,803,000 $ 44,700,000 11.4%
================ ================ ===========
Gross margin (2)..................................... 68.6% 66.5% 2.1%
Weighted average for period:
----------------------------
Occupancy........................................ 96.5% 94.5% 2.0%
Annualized realized rent per sq. ft.(3) ......... $10.45 $9.87 5.9%
</TABLE>
- --------------
(1) Rental income does not include the effect of straight-line accounting.
(2) Gross margin is computed by dividing property net operating income by rental
income.
(3) Realized rent per square foot represents the actual revenues earned per
occupied square foot.
(4) Operations for the year ended December 31, 1998 represent the historical
operations of the 62 properties; however, the Company did not own all of the
properties throughout the periods presented and therefore such operations are
not reflected in the Company's historical operating results. All such properties
were owned effective March 17, 1998.
The following table summarizes the "Same Park" operating results by major
geographic region for the year ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
Revenues Revenues Percent NOI NOI Percent
Region 1999 1998 Increase 1999 1998 Increase
- ------------------------ -------------- ------------ ------------- --------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Southern California..... $32,510,000 $29,189,000 11.4% $23,678,000 $20,317,000 16.5%
Northern California..... 8,337,000 7,673,000 8.7% 6,113,000 5,406,000 13.1%
Southern Texas.......... 4,158,000 3,832,000 8.5% 2,161,000 1,928,000 12.1%
Northern Texas.......... 2,952,000 2,825,000 4.5% 1,574,000 1,531,000 2.8%
Virginia................ 9,119,000 8,634,000 5.6% 6,102,000 5,654,000 7.9%
Maryland................ 9,065,000 8,662,000 4.7% 6,152,000 5,858,000 5.0%
Arizona................. 2,812,000 2,730,000 3.0% 1,737,000 1,749,000 (0.7%)
Other................... 3,688,000 3,646,000 1.1% 2,286,000 2,257,000 1.2%
-------------- ------------ ------------- ------------ -------------- -----------
$72,641,000 $67,191,000 8.1% $49,803,000 $44,700,000 11.4%
============== ============ ============= ============ ============== ===========
</TABLE>
22
<PAGE>
The increases noted above reflect the performance of the Company's
existing markets. All major markets reflected increases in rental rates. There
were some corresponding increases in operating expenses in Texas and Arizona due
primarily to property tax increases.
Facility Management Operations: The Company's facility management
accounts for a small portion of the Company's net operating income. During the
year ended December 31, 1999, $377,000 in net operating income was recognized
from facility management operations compared to $452,000 for the same period in
1998. Facility management fees have decreased due to the Company's acquisition
of properties previously managed.
Interest and Other Income: Interest and other income reflects earnings
on cash balances. Interest and other income was $2,815,000 for the year ended
December 31, 1999 compared to $1,411,000 for the same period in 1998. The
increase is attributable to increased average cash balances primarily due to the
Company's issuance of preferred stock and preferred units in its Operating
Partnership. Average cash balances for the year ended December 31, 1999 were
approximately $51.2 million, compared to $28.2 million for the same period in
1998.
Cost of Operations: Cost of operations for the year ended December 31,
1999 was $34,891,000 compared to $26,073,000 for the same period in 1998. The
increase is due primarily to the growth in the total square footage of the
Company's portfolio of properties. Cost of operations as a percentage of rental
income decreased from 29.5% for the year ended December 31, 1998 to 27.8% for
the year ended December 31, 1999 as a result of increasing revenues combined
with controlled expenses. Controlled expenses resulted from the economies of
scale achieved through the acquisition of properties in existing markets. Cost
of operations consists primarily of property taxes ($10,931,000), property
maintenance ($6,051,000), utilities ($6,020,000) and direct payroll ($5,607,000)
for the year ended December 31, 1999.
Depreciation and Amortization Expense: Depreciation and amortization
expense for the year ended December 31, 1999 was $29,762,000 compared to
$18,908,000 for the same period in 1998. The increase is due to the acquisition
of real estate facilities in 1998 and 1999.
General and Administrative Expense: General and administrative expense
was $3,153,000 for the year ended December 31, 1999 compared to $2,233,000 for
the same period in 1998. The increase is due primarily to the growth in the size
of the Company. Included in general and administrative costs are acquisition
costs and abandoned transaction costs. Acquisition expenses for 1999 and 1998
were $430,000 and $844,000, respectively. Abandoned transaction costs for 1999
and 1998 were $41,000 and $65,000, respectively.
Interest Expense: Interest expense was $3,153,000 for the year ended
December 31, 1999 compared to $2,361,000 for the same period in 1998. Interest
expense consists of $3,121,000 associated with mortgage notes and $1,021,000
associated with the line of credit and temporary financing of acquisitions, net
of $989,000 of interest expense capitalized to ongoing construction projects for
the year ended December 31, 1999.
Minority Interest in Income: Minority interest in income reflects the
income allocable to equity interests in the Operating Partnership which are not
owned by the Company. Minority interest in income for the year ended December
31, 1999 was $16,049,000 ($4,156,000 allocated to preferred unitholders and
$11,893,000 allocated to common unitholders) compared to $11,208,000 allocated
to common unitholders for the same period in 1998. The increase in minority
interest in income is due primarily to the issuance of preferred operating
partnership units and to a lesser extent, the issuance of additional common
units in connection with the acquisition of real estate facilities and improved
operating results.
23
<PAGE>
Comparison of 1998 to 1997
- --------------------------
Comparison with 1997 Results: On March 31, 1997, PSI exchanged its
non-voting preferred stock for voting common stock of AOPP in a transaction
accounted for as a purchase of AOPP by PSI. As a result of PSI attaining a 95%
ownership interest in AOPP voting common stock, the financial results for 1997
are presented separately for the period prior to the exchange transaction
(January 1, 1997 to March 31, 1997) and subsequent to the exchange transaction
(April 1, 1997 to December 31, 1997). To properly compare the operating results
for the year ended December 31, 1997 to the same period in the current year, the
amounts for 1997 have been combined as follows:
<TABLE>
<CAPTION>
April 1, 1997 January 1, 1997 For the Year
through through Ended
December 31, March 31, December 31,
1997 1997 1997
--------------- ---------------- ---------------
<S> <C> <C> <C>
Revenues:
Rental income............................................. $ 24,364,000 $ 5,805,000 $ 30,169,000
Facility management fees from affiliates.................. 709,000 247,000 956,000
Interest income........................................... 424,000 29,000 453,000
--------------- ---------------- ---------------
25,497,000 6,081,000 31,578,000
--------------- ---------------- ---------------
Expenses:
Cost of operations......................................... 9,837,000 2,493,000 12,330,000
Cost of facility management................................ 129,000 60,000 189,000
Depreciation and amortization.............................. 4,375,000 820,000 5,195,000
General and administrative................................. 1,248,000 213,000 1,461,000
Interest expense........................................... 1,000 - 1,000
--------------- ---------------- ---------------
15,590,000 3,586,000 19,176,000
--------------- ---------------- ---------------
Income before minority interest.............................. 9,907,000 2,495,000 12,402,000
Minority interest in income................................ (6,753,000) (1,813,000) (8,566,000)
--------------- ---------------- ---------------
Net income................................................... $ 3,154,000 $ 682,000 $ 3,836,000
=============== ================ ===============
</TABLE>
Results of Operations: Net income for the year ended December 31, 1998
was $29,400,000 compared to $3,836,000 for the same period in 1997. Net income
per common share on a diluted basis was $1.51 (based on weighted average diluted
common shares outstanding of 19,429,000) for the year ended December 31, 1998
compared to net income per common share on a diluted basis of $1.23 (based on
weighted average diluted common shares outstanding of 3,129,000) for the year
ended December 31, 1997, representing an increase of 22.7%. The increases in net
income and net income per share reflects the Company's significant growth in its
asset base through the acquisition of commercial properties and increase in net
operating income from the consistent group of properties.
24
<PAGE>
The Company's property operations account for almost all of the net
operating income earned by the Company. The following table presents the
pre-depreciation operating results of the properties for the years ended
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997 Change
---------------- ---------------- -----------
<S> <C> <C> <C>
Rental income:
Facilities owned throughout each period (35 facilities, 3.0
million net rentable square feet).......................... $25,045,000 $23,936,000 4.6%
Facilities acquired between March 31, 1997 and December 31,
1998 (71 facilities, 7.9 million net rentable square
feet).................................................... 63,275,000 6,233,000 915.2%
---------------- ---------------- -----------
Total rental income........................................... $88,320,000 $30,169,000 192.8%
================ ================ ===========
Cost of operations (excluding depreciation):
Facilities owned throughout each period....................... $10,023,000 $10,073,000 (0.5%)
Facilities acquired between March 31, 1997 and December 31,
1998..................................................... 16,050,000 2,257,000 611.1%
---------------- ---------------- -----------
Total cost of operations...................................... $26,073,000 $12,330,000 111.5%
================ ================ ===========
Net operating income (rental income less cost of operations):.
Facilities owned throughout each period....................... $15,022,000 $13,863,000 8.4%
Facilities acquired between March 31, 1997 and December 31,
1998..................................................... 47,225,000 3,976,000 1,087.8%
---------------- ---------------- -----------
Total net operating income.................................... $62,247,000 $17,839,000 248.9%
================ ================ ===========
</TABLE>
Rental income and rental income less cost of operations or net
operating income ("NOI") prior to depreciation are summarized for the year ended
December 31, 1998 by major geographic regions below:
<TABLE>
<CAPTION>
Square Percent Rental Percent Percent
Region Footage of Total Income of Total NOI of Total
- ------------------------ -------------- ------------ ------------- ------------ -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Southern California........ 3,085,000 28.2% $28,930,000 32.7% $20,803,000 33.4%
Northern California........ 1,105,000 10.1% 7,557,000 8.6% 5,513,000 8.9%
Virginia/Maryland.......... 2,315,300 21.2% 22,710,000 25.7% 15,864,000 25.5%
Texas...................... 2,489,700 22.8% 13,927,000 15.8% 8,865,000 14.2%
Oregon..................... 1,102,300 10.0% 9,725,000 11.0% 7,652,000 12.3%
Other...................... 832,600 7.7% 5,471,000 6.2% 3,550,000 5.7%
-------------- ------------ ------------- ------------ -------------- ---------
Total...................... 10,929,900 100.0% $88,320,000 100.0% $62,247,000 100.0%
============== ============ ============= ============ ============== =========
</TABLE>
25
<PAGE>
Supplemental Property Data and Trends: In order to evaluate the
performance of the Company's overall portfolio, management Supplemental Property
Data and Trends: In order to evaluate the performance of the Company's overall
portfolio, management analyzes the operating performance of a consistent group
of 51 properties (4.2 million net rentable square feet). These 51 properties
represent a mature group of properties that have been managed by the Company for
at least three years and, as of March 17, 1998, were owned by the Company. The
following table summarizes the pre-depreciation historical operating results of
the "Same Park" facilities excluding the effects of accounting for rental income
on a straight-line basis.
"Same Park" Facilities (51 Properties)
--------------------------------------
<TABLE>
<CAPTION>
Year Ended
December 31,
------------------------------------
1998 (4) 1997 (4) Change
---------------- ---------------- -----------
<S> <C> <C> <C>
Rental income (1).................................... $ 38,927,000 $ 36,760,000 5.9%
Cost of operations................................... 14,718,000 14,655,000 0.4%
---------------- ---------------- -----------
Net operating income................................. $ 24,209,000 $ 22,105,000 9.5%
================ ================ ===========
Gross margin (2)..................................... 62.2% 60.1% 2.1%
Weighted average for period:
---------------------------
Occupancy........................................ 95.1% 94.6% 0.5%
Annualized realized rent per sq. ft.(3) ......... $9.74 $9.24 5.4%
</TABLE>
- ------------------
(1) Rental income does not include the effect of straight-line accounting.
(2) Gross margin is computed by dividing property net operating income by rental
income.
(3) Realized rent per square foot represents the actual revenues earned per
occupied square foot.
(4) Operations for the year ended December 31, 1998 and 1997 represent the
historical operations of the 51 properties; however, the Company did not own all
of the properties throughout the periods presented and therefore such operations
are not reflected in the Company's historical operating results. All such
properties were owned effective March 17, 1998.
The following table summarizes the operating results displayed above by major
geographic regions:
<TABLE>
<CAPTION>
Revenues Revenues Percentage NOI NOI Percentage
1998 1997 Increase 1998 1997 Increase
------------ ----------- ---------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Southern California........ $14,965,000 $14,362,000 4.2% $9,639,000 $9,075,000 6.2%
Northern California........ 5,668,000 5,227,000 8.4% 3,836,000 3,472,000 10.5%
Virginia/Maryland.......... 5,271,000 4,953,000 6.4% 3,314,000 2,854,000 16.1%
Texas...................... 6,649,000 6,394,000 4.0% 3,407,000 3,206,000 6.3%
Arizona.................... 2,728,000 2,477,000 10.1% 1,731,000 1,488,000 16.3%
Other...................... 3,646,000 3,347,000 8.9% 2,282,000 2,010,000 13.5%
------------ ----------- ---------- ------------ ------------ ----------
$38,927,000 $36,760,000 5.9% $24,209,000 $22,105,000 9.5%
============ =========== ========== ============ ============ ==========
</TABLE>
The increases noted above reflect the performance of the Company's
existing markets. All major markets reflected increases in rental
rates without corresponding increases in expenses.
26
<PAGE>
Facility Management Operations: The Company's net operating income from
facility management accounts for a small portion of the Company's net operating
income. During the year ended December 31, 1998, $452,000 in net operating
income was recognized from facility management operations compared to $767,000
for the same period in 1997. Facility management fees have decreased due to the
Company's acquisition of properties previously managed.
Interest and Other Income: Interest and other income reflects earnings
on cash balances. Interest and other income was $1,411,000 for the year ended
December 31, 1998 compared to $453,000 for the same period in 1997. The increase
is attributable to increased average cash balances primarily due to the
Company's issuance of common stock in January and May 1998 and the timing of
investing these funds in newly acquired real estate facilities. Average cash
balances for the year ended December 31, 1998 were approximately $28 million,
compared to $9 million for the same period in 1997.
Cost of Operations: Cost of operations for the year ended December 31,
1998 was $26,073,000 compared to $12,330,000 for the same period in 1997. The
increase is due primarily to the growth in the total square footage of the
Company's portfolio of properties. Cost of operations as a percentage of rental
income decreased from 40.9% for the year ended December 31, 1997 to 29.5% for
the year ended December 31, 1998 as a result of economies of scale achieved
through the acquisition of properties in existing markets. Cost of operations
consists primarily of property taxes ($6,967,000), property maintenance
($4,643,000), utilities ($4,558,000) and direct payroll ($3,981,000) for the
year ended December 31, 1998.
Depreciation and Amortization Expense: Depreciation and amortization
expense for the year ended December 31, 1998 was $18,908,000 compared to
$5,195,000 for the same period in 1997. The increase is due to the acquisitions
of real estate facilities in 1997 and 1998.
General and Administrative Expense: General and administrative expense
was $2,233,000 for the year ended December 31, 1998 compared to $1,461,000 for
the same period in 1997. The increase is due to the increased size and
acquisition activities of the Company. Included in general and administrative
costs are acquisition costs and abandoned transaction costs. Acquisition
expenses for 1998 and 1997 were $844,000 and $177,000 respectively. Abandoned
transaction costs for 1998 and 1997 were $65,000 and $5,000, respectively.
Interest Expense: Interest expense was $2,361,000 for the year ended
December 31, 1998 compared to $1,000 for the same period in 1997. The increase
is attributable to mortgage notes assumed in connection with the acquisition of
real estate facilities totaling approximately $38 million ($1.5 million in
interest expense), temporary financing in connection with acquisitions ($0.5
million in interest expense), costs to establish the line of credit ($0.5
million) and commitment fees ($0.1 million) net of $268,000 of interest expense
capitalized to ongoing construction projects.
Minority Interest in Income: Minority interest in income reflects the
income allocable to equity interests in the Operating Partnership that are not
owned by the Company. Minority interest in income for the year ended December
31, 1998 was $11,208,000 compared to $8,566,000 for the same period in 1997. The
increase in minority interest in income is due to improved operating results and
the issuance of additional Operating Partnership units, primarily in connection
with the acquisition of real estate facilities on April 1, 1997.
27
<PAGE>
Liquidity and Capital Resources
- -------------------------------
Net cash provided by operating activities for the year ended December
31, 1999 and 1998 was $88,440,000 and $60,228,000, respectively. Management
believes that its internally generated net cash provided by operating activities
will continue to be sufficient to enable it to meet its operating expenses,
capital improvements, debt service requirements and maintain the current level
of distributions to shareholders.
The following table summarizes the Company'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 the Company to pay
distributions to shareholders, make principal payments on debt and to make
investments in real estate.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1999 1998
--------------- --------------
<S> <C> <C>
Net income............................................................ $41,255,000 $29,400,000
Depreciation and amortization......................................... 29,762,000 18,908,000
Minority interest in income........................................... 16,048,000 11,208,000
Change in working capital............................................. 1,375,000 712,000
--------------- --------------
Net cash provided by operating activities............................. 88,440,000 60,228,000
Maintenance capital expenditures...................................... (3,911,000) (3,376,000)
Tenant improvements................................................... (5,555,000) (5,258,000)
Capitalized lease commissions......................................... (2,213,000) (1,979,000)
--------------- --------------
Funds available for distribution to shareholders, minority interests,
acquisitions and other corporate purposes.......................... 76,761,000 49,615,000
Cash distributions to shareholders and minority interests............. (38,632,000) (29,904,000)
--------------- --------------
Excess funds available for principal payments on debt, investments in
real estate and other corporate purposes........................... $38,129,000 $19,711,000
=============== ==============
</TABLE>
The Company's capital structure is characterized by a low level of
leverage. As of December 31, 1999, the Company had eight fixed rate mortgage
notes payable totaling $37,066,000 which represented 4.2% of its total
capitalization (based on book value, including minority interests and debt). The
weighted average interest rate for the mortgage notes is 7.67%.
In August 1999, the Company extended its unsecured line of credit (the
"Credit Facility") with Wells Fargo Bank. The Credit Facility has a borrowing
limit of $100 million and an expiration date of August 6, 2002. The expiration
date may be extended by one year on each anniversary of the Credit Facility.
Interest on outstanding borrowings is payable monthly. At the option of the
Company, the rate of interest charged is equal to (i) the prime rate or (ii) a
rate ranging from the London Interbank Offered Rate ("LIBOR") plus 0.75% to
1.35% depending on the Company's credit ratings and coverage ratios, as defined
(currently LIBOR plus 1.00%). In addition, the Company is required to pay an
annual commitment fee of 0.25%.
The Company expects to fund its growth strategies with permanent
capital, including issuances of common and preferred stock and internally
generated retained cash flows. In addition, the Company may sell properties that
no longer meet its investment criteria. The Company may finance acquisitions on
a temporary basis with borrowings from its line of credit. The Company intends
to repay amounts borrowed under the credit facility from undistributed cash flow
or, as market conditions permit and as determined to be advantageous, from the
public or private placement of preferred and common stock or formation of joint
ventures. The Company targets a leverage ratio of 40% and a Funds From
Operations ("FFO") to combined fixed charges and preferred distributions ratio
of 3.0 to 1.0. As of December 31, 1999 and for the year then ended, the leverage
ratio was 24% and the FFO to combined fixed charges and preferred distributions
coverage ratio was 7.4 to 1.0.
28
<PAGE>
In April 1999, the Company completed a private placement of preferred
OP units and a public offering of depositary shares representing fractional
interest in perpetual preferred stock resulting in net proceeds totaling $65.6
million. The net proceeds from the placement of preferred OP units, completed
April 23, 1999 were approximately $12.5 million. The preferred OP units have a
preferred distribution rate of 8 7/8% on a stated value of $12.75 million. The
preferred OP units have equivalent terms to those of perpetual preferred stock.
Net proceeds from the public perpetual preferred stock offering completed April
30, 1999 were $53.1 million. The preferred stock has a dividend rate of 9 1/4%
on a stated value of $55 million. Proceeds from the issuances were used to pay
off borrowings from an affiliate and a portion was used to repay a mortgage note
payable of approximately $11 million. The remaining proceeds were used for
investment in real estate.
On September 3, 1999, the Operating Partnership completed a private
placement of 3,200,000 preferred units with a preferred distribution rate of 8
3/4%. The net proceeds from the placement of preferred units were approximately
$78 million. A portion of the proceeds was used to prepay a mortgage note
payable of approximately $8.5 million. On September 7 and 23, 1999, the
Operating Partnership completed private placements of 1,200,000 and 400,000
preferred units, respectively, with a preferred distribution rate of 8 7/8%. The
net proceeds from the placement of preferred units were approximately $39.2
million. At December 31, 1999, the Company had $74.2 million of proceeds from
these placements invested in short-term interest bearing accounts. The Company
will evaluate opportunities to invest this capital in real estate assets over
the next year.
In January 1998, the Company entered into an agreement with
institutional investors whereby the Company agreed to issue 6,774,072 shares of
its common stock for cash ($155 million) in separate tranches. The first
tranche, representing 2,185,187 share or $50 million, was issued in January
1998. The Company incurred $2.4 million in costs associated with the issuance.
The remainder of the common shares (4,588,885) was issued on May 6, 1998 and the
net proceeds ($105 million) were used to repay short-term borrowings.
In May 1998, the Company completed two common stock offerings, raising
net proceeds totaling $118.9 million. In the first offering, the Company sold
4,000,000 shares of common stock to an underwriter, resulting in approximately
$95.2 million of net proceeds. These shares were resold to various institutional
investors. A portion of the proceeds was used to retire debt incurred as a
result of a $190 million property portfolio acquisition. In the second common
stock offering, the Company sold 1,025,800 common shares to an underwriter,
resulting in net proceeds of $23.7 million. These proceeds were used for
subsequent acquisitions of commercial properties.
Funds from Operations: FFO is defined as net income, computed in
accordance with generally accepted accounting principles ("GAAP"), before
depreciation, amortization, minority interest in income, straight line rent
adjustments and extraordinary or non-recurring items. FFO is presented because
the Company 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 or 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 make distributions or debt
principal payments. Also, FFO as computed and disclosed by the Company may not
be comparable to FFO computed and disclosed by other REITs.
FFO for the Company is computed as follows:
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
<S> <C> <C>
Net income allocable to common shareholders............................... $37,849,000 $29,400,000
Extraordinary item, net of minority interest.............................. 195,000 -
Depreciation and amortization............................................. 29,762,000 18,908,000
Minority interest in income - common units................................ 11,954,000 11,208,000
Effects of straight line rents............................................ (3,407,000) (2,086,000)
--------------- ---------------
Consolidated FFO allocable to common shareholders and minority interests.. 76,353,000 57,430,000
FFO allocated to minority interests - common units........................ (18,248,000) (15,852,000)
--------------- ---------------
FFO allocated to common shareholders...................................... $58,105,000 $41,578,000
=============== ===============
</TABLE>
29
<PAGE>
Capital Expenditures: During 1999, the Company incurred $11.7 million
or $1.01 per weighted average square foot in maintenance capital expenditures,
tenant improvements and capitalized leasing commissions. In addition, the
Company made $3.2 million of renovation expenditures on two properties in Texas.
On a recurring annual basis, the Company expects $0.90 to $1.20 per square foot
in recurring capital expenditures ($11 - $15 million based on square footage at
December 31, 1999). In addition, the Company expects to make $1.0 million in
renovations on a property in Southern California.
During 1998, the Company incurred $10.6 million or $1.17 per weighted
average square foot in maintenance capital expenditures, tenant improvements and
capitalized leasing commissions. In addition, the Company made $0.5 million of
renovation expenditures.
Distributions: The Company has elected and intends to qualify as a REIT
for federal income tax purposes. In order to maintain its status as a REIT, the
Company must meet, among other tests, sources of income, share ownership and
certain asset tests. As a REIT, the Company is not taxed on that portion of its
taxable income that is distributed to its shareholders provided that at least
95% of its taxable income is distributed to its shareholders prior to filing of
its tax return.
The Board of Directors declared a quarterly dividend of $0.25 per
common share on March 2, 2000. The Board of Directors has established a
distribution policy to maximize the retention of cash flow. In addition, the
Board of Directors declared a quarterly dividend of $0.578125 per share on the
depositary shares each represent 1/1,000 of a share of 9 1/4% Cumulative
Preferred Stock, Series A. Distributions are payable on March 31, 2000 to
shareholders of record as of the close of business on March 15, 2000.
Impact of Year 2000 ("Y2K")
- ---------------------------
The "Y2K Issue" arises because many computerized systems use two digits
rather than four to identify a year. Any of the Company's computer programs or
hardware with the Y2K issue that have date sensitive applications or embedded
chips could recognize a date using "00" as the year 1900 rather than the year
2000. The same issue has been faced by the Company's outside vendors, including
those vendors in the banking and payroll processing areas. Any failure in these
areas could result in disruptions of operations.
As a result of the Company's assessment and remediation activities
conducted in recent years, the Company experienced no significant disruptions in
its operations, and believes that its information systems responded successfully
to the Y2K date change.
At this time, the Company is not aware of any material problems that
resulted from the Y2K date change at any of its outside vendors, including those
vendors in the banking and payroll processing areas.
The Company will continue to monitor its information systems and those
of its outside vendors throughout the year 2000 to ensure that any latent Y2K
Issues that may arise are addressed promptly.
There can be no assurance that the Company has identified all potential
Y2K Issues either within the Company's information systems, at its outside
vendors or at external agents. In addition, the impact of any unresolved or
unidentified Y2K Issues on governmental entities and utility providers and the
resulting impact upon the Company, as well as disruptions in the general
economy, may be material but cannot be reasonable determined or quantified.
30
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
To limit the Company's exposure to market risk, the Company principally
finances its operations and growth with permanent equity capital consisting
either of common or preferred stock. At December 31, 1999, the Company's debt as
a percentage of shareholders' equity (based on book values) was 6.7%.
The Company's market risk sensitive instruments include mortgage notes
payable which totaled $37,066,000 at December 31, 1999. Substantially all of the
Company's mortgage notes payable bear interest at fixed rates. See Note 7 of the
Notes to Consolidated Financial Statements for terms, valuations and approximate
principal maturities of the mortgage notes payable as of December 31, 1999.
Based on borrowing rates currently available to the Company, the carrying amount
of debt approximates fair value.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company (AOPP for periods prior to
March 17, 1998) at December 31, 1999 and 1998 and for the years ended December
31, 1999 and 1998, the period from April 1, 1997 through December 31, 1997 and
the period from January 1, 1997 through March 31, 1997 and the report of Ernst &
Young LLP, Independent Auditors, thereon and the related financial statement
schedule, are included elsewhere herein. Reference is made to the Index of
Financial Statements and Schedule in Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
31
<PAGE>
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item with respect to directors is
hereby incorporated by reference to the material appearing in the Company's
definitive proxy statement to be filed in connection with the annual
shareholders' meeting to be held in 2000 (the "Proxy Statement") under the
caption "Election of Directors." Information required by this item with respect
to executive officers is provided in Item 4A of this report. See "Executive
Officers."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is hereby incorporated by
reference to the material appearing in the Proxy Statement under the captions
"Compensation" and "Compensation Committee Interlocks and Insider
Participation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is hereby incorporated by
reference to the material appearing in the Proxy Statement under the captions
"Election of Directors-Security Ownership of Certain Beneficial Owners" and
"-Security Ownership of Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is hereby incorporated by
reference to the material appearing in the Proxy Statement under the caption
"Compensation Committee Interlocks and Insider Participation-Certain
Relationships and Related Transactions."
32
<PAGE>
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
a. 1. Financial Statements
The financial statements listed in the accompanying Index to Financial
Statements and Schedule hereof are filed as part of this report.
2. Financial Statements Schedule
The financial statements schedule listed in the accompanying Index to
Financial Statements and Schedule are filed as part of this report.
3. Exhibits
See Index to Exhibits contained herein.
b. Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated December 30, 1999
(filed January 10, 2000), as amended by Form 8-K/A dated December 30, 1999
(filed March 13, 2000) pursuant to Item 5, which filed Combined Statements
of Certain Revenues and Certain Expenses for the Monroe/Lafayette
Properties for the nine months ended September 30, 1999 and for the year
ended December 31, 1998, Combined Statements of Certain Revenues and
Certain Expenses for the Kohm Properties for the nine months ended
September 30, 1999 and for the year ended December 31, 1998, Statements of
Certain Revenues and Certain Operating Expenses for the Northpointe
Property for the nine months ended September 30, 1999 and for the year
ended December 31, 1998 and Combined Statements of Certain Revenues and
Certain Operating Expenses for the R&B Properties for the nine months
ended September 30, 1999 and for the year ended December 31, 1998.
c. Exhibits
See Index to Exhibits contained herein.
d. Financial Statement Schedules
Not applicable.
33
<PAGE>
PS BUSINESS PARKS, INC.
EXHIBIT INDEX
(Item 14(c))
2.1 Amended and Restated Agreement and Plan of Reorganization among
Registrant, American Office Park Properties, Inc. ("AOPP") and Public
Storage, Inc. ("PSI") dated as of December 17, 1997. Filed with
Registrant's Registration Statement No. 333-45405 and incorporated
herein by reference.
3.1 Restated Articles of Incorporation. Filed with Registrant's Registration
Statement No. 333-78627 and incorporated herein by reference.
3.2 Certificate of Determination of Preferences of 81/4% Series C Cumulative
Redeemable Preferred Stock of PS Business Parks, Inc. Filed with
Registrant's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1999 and incorporated herein by reference.
3.3 Certificate of Determination of Preferences of 8 7/8% Series X
Cumulative Redeemable Preferred Stock of PS Business Parks, Inc. Filed
with Registrant's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1999 and incorporated herein by reference.
3.4 Amendment to Certificate of Determination of Preferences of 8 7/8%
Series X Cumulative Redeemable Preferred Stock of PS Business Parks,
Inc. Filed with Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1999 and incorporated herein by
reference.
3.5 Restated Bylaws. Filed with Registrant's Current Report on Form 8-K
dated March 17, 1998 and incorporated herein by reference.
10.1 Amended Management Agreement between Storage Equities, Inc. and Public
Storage Commercial Properties Group, Inc. dated as of February 21, 1995.
Filed with PSI's Annual Report on Form 10-K for the year ended December
31, 1994 and incorporated herein by reference.
10.2 Registrant's 1997 Stock Option and Incentive Plan. Filed with
Registrant's Registration Statement No. 333-48313 and incorporated
herein by reference.
10.3 Agreement of Limited Partnership of PS Business Parks, L.P. Filed with
Registrant's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1998 and incorporated herein by reference.
10.4 Merger and Contribution Agreement dated as of December 23, 1997 among
Acquiport Two Corporation, Acquiport Three Corporation, New York State
Common Retirement Fund, American Office Park Properties, L.P., AOPP and
AOPP Acquisition Corp. Three. Filed with Registrant's Registration
Statement No. 333-45405 and incorporated herein by reference.
10.5 Agreement Among Shareholders and Company dated as of December 23, 1997
among Acquiport Two Corporation, AOPP, American Office Park Properties,
L.P. and PSI. Filed with Registrant's Registration Statement No.
333-45405 and incorporated herein by reference.
10.6 Amendment to Agreement Among Shareholders and Company dated as of
January 21, 1998 among Acquiport Two Corporation, AOPP, American Office
Park Properties, L.P. and PSI. Filed with Registrant's Registration
Statement No. 333-45405 and incorporated herein by reference.
10.7 Non-Competition Agreement dated as of December 23, 1997 among PSI, AOPP,
American Office Park Properties, L.P. and Acquiport Two Corporation.
Filed with Registrant's Registration Statement No. 333-45405 and
incorporated herein by reference.
10.8 Employment Agreement between AOPP and Ronald L. Havner, Jr. dated as of
December 23, 1997. Filed with Registrant's Registration Statement No.
333-45405 and incorporated herein by reference.
34
<PAGE>
10.9 Employment Agreement between Registrant and J. Michael Lynch dated as of
May 20, 1998. Filed with Registrant's Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1998 and incorporated herein by
reference.
10.10 Common Stock Purchase Agreement dated as of January 23, 1998 among AOPP
and the Investors signatory thereto. Filed with Registrant's
Registration Statement No. 333-45405 and incorporated herein by
reference.
10.11 Registration Rights Agreement dated as of January 30, 1998 among AOPP
and the Investors signatory thereto. Filed with Registrant's
Registration Statement No. 333-45405 and incorporated herein by
reference.
10.12 Registration Rights Agreement dated as of March 17, 1998 between
Registrant and Acquiport Two Corporation ("Acquiport Registration Rights
Agreement"). Filed with Registrant's Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1998 and incorporated herein by
reference.
10.13 Letter dated May 20, 1998 relating to Acquiport Registration Rights
Agreement. Filed with Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1998 and incorporated herein by
reference.
10.14 Revolving Credit Agreement dated August 6, 1998 among PS Business Parks,
L.P., Wells Fargo Bank, National Association, as Agent, and the Lenders
named therein. Filed with Registrant's Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1998 and incorporated herein by
reference.
10.15 First Amendment to Revolving Credit Agreement dated as of August 19,
1999 among PS Business Parks, L.P., Wells Fargo Bank, National
Association, as Agent, and the Lenders named therein. Filed with
Registrant's Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1999 and incorporated herein by reference.
10.16 Form of Indemnity Agreement. Filed with Registrant's Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 1998 and incorporated
herein by reference.
10.17 Cost Sharing and Administrative Services Agreement dated as of November
16, 1995 by and among PSCC, Inc. and the owners listed therein. Filed
with Registrant's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1998 and incorporated herein by reference.
10.18 Amendment to Cost Sharing and Administrative Services Agreement dated as
of January 2, 1997 by and among PSCC, Inc. and the owners listed
therein. Filed with Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1998 and incorporated herein by
reference.
10.19 Accounts Payable and Payroll Disbursement Services Agreement dated as of
January 2, 1997 by and between PSCC, Inc. and American Office Park
Properties, L.P. Filed with Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 1998 and incorporated herein by
reference.
10.20 Amendment to Agreement of Limited Partnership of PS Business Parks, L.P.
Relating to 8 7/8% Series B Cumulative Redeemable Preferred Units, dated
as of April 23, 1999. Filed with Registrant's Quarterly Report on Form
10-Q for the quarterly period ended March 31, 1999 and incorporated
herein by reference.
10.21 Amendment to Agreement of Limited Partnership of PS Business Parks, L.P.
Relating to 9 1/4% Series A Cumulative Redeemable Preferred Units, dated
as of April 30, 1999. Filed with Registrant's Quarterly Report on Form
10-Q for the quarterly period ended March 31, 1999 and incorporated
herein by reference.
10.22 Amendment to Agreement of Limited Partnership of PS Business Parks, L.P.
Relating to 8 1/4% Series C Cumulative Redeemable Preferred Units, dated
as of September 3, 1999. Filed with Registrant's Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 1999 and
incorporated herein by reference.
35
<PAGE>
10.23 Amendment to Agreement of Limited Partnership of PS Business Parks, L.P.
Relating to 8 7/8% Series X Cumulative Redeemable Preferred Units, dated
as of September 7, 1999. Filed with Registrant's Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 1999 and
incorporated herein by reference.
10.24 Amendment to Agreement of Limited Partnership of PS Business Parks, L.P.
Relating to Additional 8 7/8% Series X Cumulative Redeemable Preferred
Units, dated as of September 23, 1999. Filed with Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 1999
and incorporated herein by reference.
11 Statement re: Computation of Earnings per Share. Filed herewith.
12 Statement re: Computation of Ratio of Earnings to Fixed Charges. Filed
herewith.
23 Consent of Independent Auditors. Filed herewith.
27 Financial Data Schedule. Filed herewith.
36
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 29, 2000
PS BUSINESS PARKS, INC.
BY: /s/ Ronald L. Havner, Jr.
-------------------------
Ronald L. Havner, Jr.
President, Chairman of the
Board and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
President, Chairman of the Board and
/s/ Ronald L. Havner, Jr. Chief Executive Officer (principal
- ------------------------- executive officer)
Ronald L. Havner, Jr. March 29, 2000
Vice President and Chief Financial
/s/ Jack E. Corrigan Officer (principal financial officer
- -------------------- and principal accounting officer)
Jack E. Corrigan March 29, 2000
/s/ Harvey Lenkin
- -----------------
Harvey Lenkin Director March 29, 2000
/s/ Vern O. Curtis
- ------------------
Vern O. Curtis Director March 29, 2000
/s/ James H. Kropp
- ------------------
James H. Kropp Director March 29, 2000
/s/ Jack D. Steele
- ------------------
Jack D. Steele Director March 29, 2000
/s/ Alan K. Pribble
- -------------------
Alan K. Pribble Director March 29, 2000
/s/ Arthur M. Friedman
- ----------------------
Arthur M. Friedman Director March 29, 2000
</TABLE>
37
<PAGE>
PS BUSINESS PARKS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
(Item 14(a)(3) and Item 14(c))
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Auditors.............................................................. F-1
Consolidated balance sheets as of December 31, 1999 and 1998................................ F-2
Consolidated statements of income for the years ended December 31, 1999 and 1998, the
period from April 1, 1997 through December 31, 1997 and the period from January 1, 1997
through March 31, 1997...................................................................... F-3
Consolidated statement of shareholders' equity for the years ended December 31, 1999 and
1998, the period from April 1, 1997 through December 31, 1997 and the period from January
1, 1997 through March 31, 1997 ............................................................. F-4
Consolidated statements of cash flows for the years ended December 31, 1999 and 1998, the
period from April 1, 1997 through December 31, 1997 and the period from January 1, 1997
through March 31, 1997 ..................................................................... F-5
Notes to consolidated financial statements.................................................. F-7
Schedule:
III - Real estate and accumulated depreciation.............................................. F-22
</TABLE>
All other schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements or notes thereto.
38
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
PS Business Parks, Inc.
We have audited the accompanying consolidated balance sheets of PS Business
Parks, Inc. as of December 31, 1999 and 1998, and the related consolidated
statements of income, shareholders' equity and cash flows for the years ended
December 31, 1999 and 1998, the period from April 1, 1997 through December 31,
1997 and the period from January 1, 1997 through March 31, 1997. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated 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, 1999 and 1998, and the consolidated results
of its operations and its cash flows for the years ended December 31, 1999 and
1998, the period from April 1, 1997 through December 31, 1997 and the period
from January 1, 1997 through March 31, 1997 in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/ ERNST & YOUNG LLP
Los Angeles, California
January 31, 2000
F-1
<PAGE>
PS BUSINESS PARKS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
--------------------- ------------------
ASSETS
------
<S> <C> <C>
Cash and cash equivalents................................................ $ 74,220,000 $ 6,068,000
Real estate facilities, at cost:
Land................................................................ 194,140,000 176,241,000
Buildings and equipment............................................. 636,261,000 536,697,000
--------------------- ------------------
830,401,000 712,938,000
Accumulated depreciation............................................ (50,976,000) (22,517,000)
--------------------- ------------------
779,425,000 690,421,000
Properties held for disposition, net..................................... 14,235,000 -
Construction in progress................................................. 8,616,000 7,716,000
--------------------- ------------------
802,276,000 698,137,000
Receivables.............................................................. 771,000 242,000
Deferred rent receivables................................................ 5,493,000 2,086,000
Intangible assets, net................................................... 1,282,000 1,583,000
Other assets............................................................. 19,699,000 1,298,000
--------------------- ------------------
Total assets............................................... $ 903,741,000 $ 709,414,000
===================== ==================
</TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Accrued and other liabilities............................................ $ 21,195,000 $ 15,953,000
Line of credit........................................................... - 12,500,000
Mortgage notes payable................................................... 37,066,000 38,041,000
--------------------- ------------------
Total liabilities................................................... 58,261,000 66,494,000
Minority interest:
Preferred units..................................................... 132,750,000 -
Common units........................................................ 157,199,000 153,015,000
Shareholders' equity:
Preferred stock, $0.01 par value, 50,000,000 shares authorized,
2,200 shares issued and outstanding at December 31, 1999
(none issued or outstanding at December 31, 1998)............... 55,000,000 -
Common stock, $0.01 par value, 100,000,000 shares authorized,
23,645,461 shares issued and outstanding at December 31,
1999, (23,635,650 shares issued and outstanding at December
31, 1998)....................................................... 236,000 236,000
Paid-in capital.................................................... 478,889,000 482,471,000
Cumulative net income.............................................. 73,809,000 32,554,000
Cumulative distributions........................................... (52,403,000) (25,356,000)
--------------------- ------------------
Total shareholders' equity...................................... 555,531,000 489,905,000
--------------------- ------------------
Total liabilities and shareholders' equity................. $ 903,741,000 $ 709,414,000
===================== ==================
</TABLE>
See accompanying notes.
F-2
<PAGE>
PS BUSINESS PARKS, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Year Ended
December 31, For the Periods (Note 2)
-------------------------------- -----------------------------------
April 1, 1997 January 1, 1997
through through
1999 1998 December 31, 1997 March 31, 1997
-------------- -------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Revenues:
Rental income..................................... $125,327,000 $ 88,320,000 $ 24,364,000 $ 5,805,000
Facility management fees from affiliates.......... 471,000 529,000 709,000 247,000
Interest and other income......................... 2,815,000 1,411,000 424,000 29,000
-------------- -------------- ----------------- ----------------
128,613,000 90,260,000 25,497,000 6,081,000
-------------- -------------- ----------------- ----------------
Expenses:
Cost of operations................................ 34,891,000 26,073,000 9,837,000 2,493,000
Cost of facility management....................... 94,000 77,000 129,000 60,000
Depreciation and amortization..................... 29,762,000 18,908,000 4,375,000 820,000
General and administrative........................ 3,153,000 2,233,000 1,248,000 213,000
Interest expense.................................. 3,153,000 2,361,000 1,000 -
-------------- -------------- ----------------- ----------------
71,053,000 49,652,000 15,590,000 3,586,000
-------------- -------------- ----------------- ----------------
Income before minority interest and extraordinary
item............................................ 57,560,000 40,608,000 9,907,000 2,495,000
Minority interest in income - preferred units..... (4,156,000) - - -
Minority interest in income - common units........ (11,954,000) (11,208,000) (6,753,000) (1,813,000)
-------------- -------------- ----------------- ----------------
Income before extraordinary item.................... 41,450,000 29,400,000 3,154,000 682,000
Extraordinary loss on early extinguishment of
debt, net of minority interest................... (195,000) - - -
-------------- -------------- ----------------- ----------------
Net income.......................................... $ 41,255,000 $ 29,400,000 $ 3,154,000 $ 682,000
============== ============== ================= ================
Net income allocation:
Allocable to preferred shareholders.............. $ 3,406,000 $ - $ - $ -
Allocable to common shareholders................. 37,849,000 29,400,000 3,154,000 682,000
-------------- -------------- ----------------- ----------------
$ 41,255,000 $ 29,400,000 $ 3,154,000 $ 682,000
============== ============== ================= ================
Net income per common share - basic:
Income before extraordinary item................. $ 1.61 $ 1.52 $ 0.92 $ 0.31
Extraordinary loss, net of minority interest..... (0.01) - - -
-------------- -------------- ----------------- ----------------
Net income....................................... $ 1.60 $ 1.52 $ 0.92 $ 0.31
============== ============== ================= ================
Net income per common share - diluted:
Income before extraordinary item................. $ 1.61 $ 1.51 $ 0.92 $ 0.31
Extraordinary loss, net of minority interest..... (0.01) - - -
-------------- -------------- ----------------- ----------------
Net income....................................... $ 1.60 $ 1.51 $ 0.92 $ 0.31
============== ============== ================= ================
Weighted average common shares outstanding:
Basic............................................ 23,641,000 19,361,000 3,414,000 2,193,000
============== ============== ================= ================
Diluted.......................................... 23,709,000 19,429,000 3,426,000 2,193,000
============== ============== ================= ================
</TABLE>
See accompanying notes.
F-3
<PAGE>
PS BUSINESS PARKS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Stock Common Stock
--------------------------- ---------------------------
Shares Amount Shares Amount Paid-in Capital
------------- ------------ ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1996................... 899,608 9,000 94,697 1,000 1,573,000
Issuance of preferred stock in exchange for
real estate facilities..................... 1,198,680 12,000 - - 19,988,000
Net income................................... - - - - -
Issuance of common stock for cash............ - - 4,797 - 80,000
Adjustment to reflect cost of PSI's
investment in PSB ......................... - - - - 13,194,000
Exchange of preferred stock for common stock (2,098,288) (21,000) 2,098,288 21,000 -
Adjustment to reflect minority interest to
underlying ownership interest ............ - - - - 1,813,000
------------- ------------ ------------ ------------ ---------------
Balances at March 31, 1997...................... - - 2,197,782 22,000 36,648,000
Issuance of common stock for cash............ - - 2,025,769 20,000 33,780,000
Issuance of common stock in exchange for real
estate facilities.......................... - - 3,504,758 35,000 75,939,000
Net income................................... - - - - -
Distributions paid........................... - - - - -
Adjustment to reflect minority interest to
underlying ownership interest.............. - - - - (3,090,000)
------------- ------------ ------------ ------------ ---------------
Balances at December 31, 1997................... - - 7,728,309 77,000 143,277,000
Issuance of common stock:
Conversion of OP units................... - - 1,785,007 18,000 33,005,000
Private offerings, net of costs.......... - - 6,774,072 68,000 152,533,000
Exercise of stock options................ - - 39,024 - 651,000
In connection with a business combination - - 2,283,438 23,000 46,787,000
Public offerings, net of costs........... - - 5,025,800 50,000 118,810,000
Net income................................... - - - - -
Distributions paid........................... - - - - -
Adjustment to reflect minority interest to
underlying ownership interest.............. - - - - (12,592,000)
------------- ------------ ------------ ------------ ---------------
Balances at December 31, 1998................... - - 23,635,650 236,000 482,471,000
Issuance of preferred stock, net of costs.... 2,200 55,000,000 - - (1,936,000)
Issuance of common stock..................... - - 9,811 - 179,000
Net income................................... - - - - -
Distributions paid:
Preferred stock.......................... - - - - -
Common stock............................. - - - - -
Adjustment to reflect minority interest to
underlying ownership interest.............. - - - - (1,825,000)
------------- ------------ ------------ ------------ ---------------
Balances at December 31, 1999................... 2,200 $55,000,000 23,645,461 $ 236,000 $ 478,889,000
============= ============ ============ ============ ===============
</TABLE>
<TABLE>
<CAPTION>
Cumulative Cumulative Shareholders'
Net Income Distributions Equity
------------- -------------- ---------------
<S> <C> <C> <C>
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 PSB ......................... (833,000) - 12,361,000
Exchange of preferred stock for common stock - - -
Adjustment to reflect minority interest 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 paid........................... - (3,550,000) (3,550,000)
Adjustment to reflect minority interest to
underlying ownership interest.............. - - (3,090,000)
------------- -------------- ---------------
Balances at December 31, 1997................... 3,154,000 (3,550,000) 142,958,000
Issuance of common stock:
Conversion of OP units................... - - 33,023,000
Private offerings, net of costs.......... - - 152,601,000
Exercise of stock options................ - - 651,000
In connection with a business combination - - 46,810,000
Public offerings, net of costs........... - - 118,860,000
Net income................................... 29,400,000 - 29,400,000
Distributions paid........................... - (21,806,000) (21,806,000)
Adjustment to reflect minority interest to
underlying ownership interest.............. - - (12,592,000)
------------- -------------- ---------------
Balances at December 31, 1998................... 32,554,000 (25,356,000) 489,905,000
Issuance of preferred stock, net of costs.... - - 53,064,000
Issuance of common stock..................... - - 179,000
Net income................................... 41,255,000 - 41,255,000
Distributions paid:
Preferred stock.......................... - (3,406,000) (3,406,000)
Common stock............................. - (23,641,000) (23,641,000)
Adjustment to reflect minority interest to
underlying ownership interest.............. - - (1,825,000)
------------- -------------- ---------------
Balances at December 31, 1999................... $73,809,000 $ (52,403,000) $ 555,531,000
============= ============== ===============
</TABLE>
See accompanying notes.
F-4
<PAGE>
PS BUSINESS PARKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Periods (Note 2)
---------------------------
For the Year For the Year April 1, 1997 January 1,
Ended Ended through 1997 through
December 31, December 31, December 31, March 31,
1999 1998 1997 1997
------------ ------------- ------------- ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income........................................................ $ 41,255,000 $ 29,400,000 $ 3,154,000 $ 682,000
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization expense......................... 29,762,000 18,908,000 4,375,000 820,000
Minority interest in income................................... 16,049,000 11,208,000 6,753,000 1,813,000
Increase in receivables and other assets...................... (3,868,000) (1,913,000) (1,465,000) (400,000)
Increase in accrued and other liabilities..................... 5,242,000 2,625,000 780,000 2,925,000
------------ ------------- ------------- ------------
Total adjustments........................................ 47,185,000 30,828,000 10,443,000 5,158,000
------------ ------------- ------------- ------------
Net cash provided by operating activities................... 88,440,000 60,228,000 13,597,000 5,840,000
------------ ------------- ------------- ------------
Cash flows from investing activities:
Other investments............................................. (18,470,000) - - -
Acquisition of real estate facilities......................... (82,087,000) (289,415,000) (44,122,000) -
Acquisition cost of business combination...................... - (424,000) - -
Construction in progress...................................... (14,550,000) (7,716,000) - -
Capital improvements to real estate facilities................ (16,211,000) (11,091,000) (2,983,000) (582,000)
------------ ------------- ------------- ------------
Net cash used in investing activities....................... (131,318,000) (308,646,000) (47,105,000) (582,000)
------------ ------------- ------------- ------------
Cash flows from financing activities:
Borrowings from an affiliate.................................. 41,400,000 179,000,000 3,500,000 -
Repayment of borrowings from an affiliate..................... (41,400,000) (182,500,000) - -
Borrowings from line of credit................................ 14,000,000 12,500,000 - -
Repayment of borrowings from line of credit................... (26,500,000) - - -
Principal payments on mortgage notes payable.................. (20,694,000) (606,000) - -
Decrease (increase) in receivable from affiliate.............. - - 1,135,000 (308,000)
Net proceeds from the issuance of common stock................ 179,000 272,112,000 33,800,000 80,000
Net proceeds from the issuance of preferred stock............. 53,064,000 - - -
Net proceeds from the issuance of preferred operating
partnership units........................................... 129,613,000 - - -
Distributions paid to preferred shareholders.................. (3,406,000) - - -
Distributions paid to minority interests - preferred units.... (4,156,000) - - -
Distributions paid to common shareholders..................... (23,641,000) (21,806,000) (3,550,000) -
Distributions paid to minority interests - common units....... (7,429,000) (8,098,000) (3,442,000) -
------------ ------------- ------------- ------------
Net cash provided by (used in) financing activities......... 111,030,000 250,602,000 31,443,000 (228,000)
------------ ------------- ------------- ------------
Net increase (decrease) in cash and cash equivalents................. 68,152,000 2,184,000 (2,065,000) 5,030,000
Cash and cash equivalents at the beginning of the period............. 6,068,000 3,884,000 5,949,000 919,000
------------ ------------- ------------- ------------
Cash and cash equivalents at the end of the period................... $ 74,220,000 $ 6,068,000 $ 3,884,000 $ 5,949,000
============ ============= ============= ============
Supplemental disclosures:
Interest paid................................................ $ 3,053,000 $ 2,629,000 $ 1,000 $ -
============ ============= ============= ============
</TABLE>
See accompanying notes.
F-5
<PAGE>
PS BUSINESS PARKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Periods (Note 2)
---------------------------
For the Year For the Year April 1, 1997 January 1,
Ended Ended through 1997 through
December 31, December 31, December 31, March 31,
1999 1998 1997 1997
------------ ------------- ------------- --------------
<S> <C> <C> <C> <C>
Supplemental schedule of non cash investing and financial activities:
Acquisitions of real estate facilities and associated assets and
liabilities in exchange for preferred stock, minority interest,
and mortgage notes payable:
Real estate facilities........................................ $(20,752,000) $(44,592,000) $(146,207,000) $(117,180,000)
Other assets (deposits on real estate acquisitions)........... - 800,000 - -
Accrued and other liabilities................................. - 3,531,000 4,419,000 -
Minority interest - common units.............................. 1,033,000 1,614,000 65,084,000 97,180,000
Preferred stock............................................... - - - 12,000
Common stock.................................................. - - 35,000 -
Paid-in capital............................................... - - 75,939,000 19,988,000
Mortgage notes payable........................................ 19,719,000 38,647,000 - -
Intangible assets............................................. - - 730,000 -
Business combination:
Real estate facilities........................................ - (48,305,000) - -
Other assets.................................................. - (452,000) - -
Accrued and other liabilities................................. - 1,523,000 - -
Common stock.................................................. - 23,000 - -
Paid-in capital............................................... - 46,787,000 - -
Conversion of OP units into shares of common stock:
Minority interest - common units.............................. - (33,023,000) - -
Common stock.................................................. - 18,000 - -
Paid-in capital............................................... - 33,005,000 - -
Adjustment to reflect minority interest to underlying ownership
interest:
Minority interest............................................. 1,825,000 12,592,000 3,090,000 (1,813,000)
Paid-in capital............................................... (1,825,000) (12,592,000) (3,090,000) 1,813,000
Exchange of preferred stock for common stock:
Preferred stock............................................... - - - (21,000)
Common stock.................................................. - - - 21,000
Adjustment to acquisition cost (see Note 2):
Real estate facilities........................................ - (1,315,000) - (7,145,000)
Accumulated depreciation...................................... - - - (820,000)
Intangible assets............................................. - 1,315,000 - (4,395,000)
Paid-in capital............................................... - - - 13,194,000
Cumulative net income......................................... - - - (833,000)
Capitalization of developed projects:
Real estate facilities........................................ 13,650,000 - - -
Construction in progress...................................... (13,650,000) - - -
</TABLE>
See accompanying notes.
F-6
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. Organization and description of business
Organization
PS Business Parks, Inc. ("PSB" or the "Company"), 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
Commission filing purposes and income tax reporting purposes. All
subsequent references to PSB or the Company for periods prior to March 17,
1998 shall refer to AOPP.
On January 2, 1997, in connection with the reorganization of the commercial
property operations of Public Storage, Inc. ("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 operating
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 8, 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.
Description of business
PSB is a fully integrated, self-managed real estate investment trust
("REIT") that acquires, owns, operates and develops 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 primarily by PSI and affiliated entities.
Commencing in 1997, PSB began to own and operate commercial properties on
its own behalf. At December 31, 1999, PSB and the Operating Partnership
collectively owned and operated 125 commercial properties (approximately
12.4 million net rentable square feet) located in 11 states. In addition,
the Operating Partnership managed 37 commercial properties (approximately
1.0 million net rentable square feet) on behalf of PSI and affiliated
entities.
2. Summary of significant accounting policies
Basis of presentation
The consolidated financial statements include the accounts of PSB and the
Operating Partnership. All significant intercompany balances and
transactions have been eliminated in the consolidated financial statements.
At December 31, 1999, PSB owned approximately 72.5% of the common units of
the Operating Partnership. PSB, as the sole general partner of the
Operating Partnership, has full, exclusive and complete responsibility and
discretion in managing and controlling the Operating Partnership.
Historical financial data of PSP11 have not been included in the historical
financial statements of PSB.
F-7
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
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.
Prior to March 31, 1997, control of PSB was held by entities other than
PSI. As a result of PSI acquiring a majority of the voting common stock and
control of PSB 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.
Use of estimates
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States 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.
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. The
carrying amount of cash and cash equivalents approximates fair value.
Real estate facilities
Real estate facilities are recorded at cost. Costs related to the
renovation or improvements of the properties are capitalized. Expenditures
for repairs and maintenance are expensed as incurred. Buildings and
equipment are depreciated on the straight-line method over the estimated
useful lives, which are generally 30 and 5 years, respectively.
Interest cost and property taxes incurred during the period of construction
of real estate facilities are capitalized. Construction in progress and
developed projects includes $1,257,000 and $268,000 of interest costs
capitalized at December 31, 1999 and 1998, respectively. The Company
capitalized $989,000 and $268,000 during the years ended December 31, 1999
and 1998, 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 properties. 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 (net of accumulated amortization of $194,000) of costs
previously classified as intangible assets. Intangible assets are net of
accumulated amortization of $874,000 and $573,000 at December 31, 1999 and
1998, respectively.
F-8
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
Evaluation of asset impairment
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. At
December 31, 1999, no such indicators of impairment have been identified.
Assets held for disposition are reported at the lower of carrying amount or
fair value less selling costs.
Note payable to and borrowings from affiliate
The Company borrowed $3.5 million from PSI during 1997. The notes bore
interest at 6.97% (per annum) and were repaid as of January 31, 1998.
The Company borrowed $179 million from PSI during 1998. The notes bore
interest at 6.91% (per annum) and were repaid as of May 27, 1998.
The Company borrowed $41.4 million from PSI during 1999. The notes bore
interest at 5.50% (per annum) and were repaid as of April 30, 1999.
Stock-based compensation
PSB has elected to adopt the disclosure requirements of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," but will continue to account for stock-based
compensation under Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees."
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 0.01583 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.
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/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.
F-9
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
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.
General and administrative expense
General and administrative expense includes executive compensation, office
expense, professional fees, state income taxes, 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 service agreement between PSB and PSI.
Acquisition costs
Internal acquisition costs are expensed as incurred.
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 subject to federal income tax to the
extent that it distributes its taxable income to its shareholders. In
addition, REITs are subject to a number of organizational and operating
requirements. If the Company fails to qualify as a REIT in any taxable
year, the Company will be subject to federal income tax (including any
applicable alternative minimum tax) based on its taxable income using
corporate income tax rates. Even if the Company qualifies for taxation as a
REIT, the Company may be subject to certain state and local taxes on its
income and property and to federal income and excise taxes on its
undistributed taxable income. PSB believes it met all organizational and
operating requirements to maintain its REIT status during 1999, 1998 and
1997. In addition, PSP11 (the legal entity for income tax reporting
purposes subsequent to the March 17, 1998 merger) believes it has also met
these requirements during 1998 and 1997. Accordingly, no provision for
income taxes has been made in the accompanying financial statements.
The difference between book income and taxable income primarily results
from timing differences consisting of depreciation expense and unearned
rental income.
Net income per common share
Per share amounts are computed using the weighted average common shares
outstanding. "Diluted" weighted average common shares outstanding include
the dilutive effect of stock options under the treasury stock method.
"Basic" weighted average common shares outstanding excludes such dilutive
effect. Earnings per share has been calculated as follows:
F-10
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO CONSOLIDATED STATEMENTS
DECEMBER 31, 1999
<TABLE>
<CAPTION>
For the Period For the Period
For the Year For the Year April 1 January 1
Ended Ended through through
December 31, December 31, December 31, March 31,
------------ ------------ -------------- --------------
1999 1998 1997 1997
------------ ------------ -------------- --------------
<S> <C> <C> <C> <C>
Net income allocable to common
shareholders.............................. $37,849,000 $29,400,000 $ 3,154,000 $ 682,000
============ ============ ============== ==============
Weighted average common shares outstanding:
Basic weighted average common shares
outstanding.............................. 23,641,000 19,361,000 3,414,000 2,193,000
Net effect of dilutive stock options -
based on treasury stock method using
average market price................... 68,000 68,000 12,000 -
------------ ------------ -------------- --------------
Diluted weighted average common shares
outstanding............................ 23,709,000 19,429,000 3,426,000 2,193,000
============ ============ ============== ==============
Basic earnings per common share............. $ 1.60 $ 1.52 $ 0.92 $ 0.31
============ ============ ============== ==============
Diluted earnings per common share........... $ 1.60 $ 1.51 $ 0.92 $ 0.31
============ ============ ============== ==============
</TABLE>
Segment Reporting
Effective January 1, 1998, PSB adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." SFAS No. 131
established standards for the way 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. SFAS 131 also establishes standards
for related disclosures about products and services, geographic areas, and
major customers. As management views the Company as operating in a single
segment as described in Note 1, the adoption of SFAS No. 131 did not affect
PSB's disclosure of segment information.
Reclassifications
Certain reclassifications have been made to the consolidated financial
statements for 1998 in order to conform to the 1999 presentation.
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:
o 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.
o Each share of PSP11 common stock Series B and each share of PSP11
common stock Series C converted into 0.8641 shares of PSP11 common
stock.
F-11
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO CONSOLIDATED STATEMENTS
DECEMBER 31, 1999
o Each share of AOPP common stock converted into 1.18 shares of PSP11
common stock.
o 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 each group
of real estate facilities 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............ $48,305,000
Other assets...................... 452,000
Accrued and other liabilities..... (1,523,000)
------------
Total allocation.............. $47,234,000
============
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 year
ended December 31, 1998 and 1997 as though the Merger and related exchange
of properties had been effective at the beginning of fiscal 1997 are as
follows:
For the Years Ended December 31,
1998 1997
-------------- --------------
Revenues............................... $ 92,137,000 $ 40,615,000
Net income............................. $ 30,159,000 $ 7,042,000
Net income per share - basic........... $ 1.52 $ 1.30
Net income per share - diluted......... $ 1.52 $ 1.30
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 of the future results of PSB.
F-12
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO CONSOLIDATED STATEMENTS
DECEMBER 31, 1999
4. Real estate facilities
The activity in real estate facilities for the years ended December 31,
1999 and 1998, the period from April 1, 1997 through December 31, 1997 and
the period from January 1, 1997 through March 31, 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
Adjustment to reflect PSI's
acquisition cost (Note 2).... - 7,146,000 820,000 7,966,000
Capital improvements.............. - 582,000 - 582,000
Depreciation expense.............. - - (820,000) (820,000)
------------- ------------- ---------------- ----------------
Balances at March 31, 1997.......... 35,154,000 89,754,000 - 124,908,000
Acquisition from affiliates....... 6,682,000 17,294,000 - 23,976,000
Acquisitions from third parties... 49,918,000 116,435,000 - 166,353,000
Capital improvements.............. - 2,983,000 - 2,983,000
Depreciation expense.............. - - (3,982,000) (3,982,000)
------------- ------------- ---------------- ----------------
Balances at December 31, 1997....... 91,754,000 226,466,000 (3,982,000) 314,238,000
Property acquisitions............. 70,087,000 263,920,000 - 334,007,000
Acquired in connection with the
Merger....................... 14,400,000 33,905,000 - 48,305,000
Adjustment from intangible assets. - 1,315,000 - 1,315,000
Capital improvements.............. - 11,091,000 - 11,091,000
Depreciation expense.............. - - (18,535,000) (18,535,000)
------------- ------------- ---------------- ----------------
Balances at December 31, 1998....... 176,241,000 536,697,000 (22,517,000) 690,421,000
Property acquisitions............. 18,705,000 84,134,000 - 102,839,000
Developed projects................ 3,725,000 9,925,000 - 13,650,000
Property held for disposition..... (4,531,000) (10,706,000) 1,002,000 (14,235,000)
Capital improvements.............. - 16,211,000 - 16,211,000
Depreciation expense.............. - - (29,461,000) (29,461,000)
------------- ------------- ---------------- ----------------
Balances at December 31, 1999....... $194,140,000 $636,261,000 $ (50,976,000) $ 779,425,000
============= ============= ================ ================
</TABLE>
The unaudited adjusted basis of real estate facilities for Federal income
tax purposes was approximately $712 million at December 31, 1999.
Certain properties have been identified as not meeting the Company's
ongoing investment strategy and have been designated as properties held for
disposition at December 31, 1999. These properties are currently being
marketed and the Company anticipates a gain on the sale in the next year.
The following summarizes the condensed results of operations of the
properties held for disposition which are included in the consolidated
statements of income for the years ended December 31, 1999 and 1998, the
period from April 1, 1997 through December 31, 1997 and the period from
January 1, 1997 through March 31, 1997. Historical operating results may
not be comparable since one of the properties held for disposition was
acquired during the periods presented.
F-13
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
<TABLE>
<CAPTION>
For the Period For the Period
For the Year For the Year April 1 January 1
Ended Ended through through
December 31, December 31, December 31, March 31,
------------ ------------ -------------- --------------
1999 1998 1997 1997
------------ ------------ -------------- --------------
<S> <C> <C> <C> <C>
Rental income............................... $ 4,283,000 $ 4,056,000 $ 1,761,000 $ 85,000
Cost of operations.......................... 1,605,000 1,661,000 756,000 45,000
------------ ------------ -------------- --------------
Net operating income........................ $ 2,678,000 $ 2,395,000 $ 1,005,000 $ 40,000
============ ============ ============== ==============
</TABLE>
5. Leasing activity
The Company leases space in its real estate facilities to tenants under
non-cancelable leases generally ranging from one to ten years. Future
minimum rental revenues excluding recovery of expenses as of December 31,
1999 under these leases are as follows:
2000.............................. $ 98,798,000
2001.............................. 73,313,000
2002.............................. 50,962,000
2003.............................. 34,177,000
2004.............................. 21,692,000
Thereafter........................ 38,941,000
--------------
$ 317,883,000
==============
In addition to minimum rental payments, tenants pay reimbursements for
their pro rata share of specified operating expenses, which amounted to
$16,591,000, $10,357,000, $2,597,000 and $509,000 for the years ended
December 31, 1999 and 1998, the period from April 1, 1997 through December
31, 1997 and the period from January 1, 1997 through March 31, 1997,
respectively. These amounts are included as rental income and cost of
operations in the accompanying statements of income.
6. Revolving line of credit
In August 1999, the Company extended its unsecured line of credit (the
"Credit Facility") with Wells Fargo Bank. The Credit Facility has a
borrowing limit of $100 million and an expiration date of August 6, 2002.
The expiration date may be extended by one year on each anniversary of the
Credit Facility. Interest on outstanding borrowings is payable monthly. At
the option of the Company, the rate of interest charged is equal to (i) the
prime rate or (ii) a rate ranging from the London Interbank Offered Rate
("LIBOR") plus 0.75% to 1.35% depending on the Company's credit ratings and
coverage ratios, as defined (currently LIBOR plus 1.00%). In addition, the
Company is required to pay an annual commitment fee of 0.25%. At December
31, 1999, the Company had $100 million available and no outstanding balance
on the line of credit. At December 31, 1998, the Company had $12.5 million
outstanding on the line of credit at an interest rate of 5.93%.
The Credit Facility requires the Company to meet certain covenants
including: (i) maintain a balance sheet leverage ratio (as defined) of less
than 0.50 to 1.00, (ii) maintain interest and fixed charge coverage ratios
(as defined) of not less than 2.25 to 1.0 and 1.75 to 1.0, respectively,
(iii) maintain a minimum total shareholder's equity (as defined) and (iv)
limit distributions to 95% of funds from operations. In addition, the
Company is limited in its ability to incur additional borrowings (the
Company is required to maintain unencumbered assets with an aggregate book
value equal to or greater than two times the Company's unsecured recourse
debt) or sell assets. The Company was in compliance with the covenants of
the Credit Facility at December 31, 1999.
F-14
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
7. Mortgage notes payable
Mortgage notes at December 31, 1999 and 1998 consist of the following:
<TABLE>
<CAPTION>
1999 1998
----------- ------------
<S> <C> <C>
7.625% mortgage note............................................... $ - $ 11,418,000
7.125% mortgage note, secured by one commercial property with an
approximate carrying amount of $19,642,000, principal and
interest payable monthly, due May 2006.......................... 8,751,000 8,905,000
8.400% mortgage note............................................... - 8,672,000
8.190% mortgage note, secured by one commercial property with an
approximate carrying amount of $12,897,000, principal and
interest payable monthly, due March 2007........................ 6,666,000 -
7.290% mortgage note, secured by one commercial property with an
approximate carrying amounts totaling $8,474,000, principal and
interest payable monthly, due February 2009..................... 6,372,000 -
8.125% mortgage note, secured by one commercial property with an
approximate carrying amount of $12,251,000, principal and
interest payable monthly, due July 2005......................... 5,327,000 5,416,000
7.280% mortgage note, secured by two commercial properties with
approximate carrying amounts totaling $7,998,000, principal and
interest payable monthly, due February 2003..................... 4,304,000 -
8.000% mortgage note, secured by one commercial property with an
approximate carrying amount of $5,658,000, principal and
interest payable monthly, due April 2003........................ 2,108,000 -
8.500% mortgage note, secured by one commercial property with an
approximate carrying amount of $3,601,000, principal and
interest payable monthly, due July 2007......................... 1,898,000 1,939,000
8.000% mortgage note, secured by one commercial property with an
approximate carrying amount of $3,426,000, principal and
interest payable monthly, due April 2003........................ 1,640,000 1,691,000
----------- ------------
$37,066,000 $38,041,000
=========== ============
</TABLE>
At December 31, 1999, approximate principal maturities of mortgage notes payable
are as follows:
2000.............................. $ 6,095,000
2001.............................. 829,000
2002.............................. 895,000
2003.............................. 7,870,000
2004.............................. 696,000
Thereafter........................ 20,681,000
----------------
$ 37,066,000
================
F-15
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
The mortgage notes have a weighted average interest rate of 7.67% and an
average maturity of 5.6 years. Based on borrowing rates currently available
to the Company, the carrying amount of debt approximates fair value.
On November 12, 1999, the Company prepaid a mortgage note payable of
approximately $8.5 million. The prepayment penalty of $195,000 (net of
minority interest of $61,000) is included as an extraordinary loss on early
extinguishment of debt for the year ended December 31, 1999.
8. Minority interests - common units
The Company presents the accounts of PSB and the Operating Partnership on a
consolidated basis. Ownership interests in the Operating Partnership, other
than PSB's interest, are classified as minority interest in the
consolidated financial statements. Minority interest in income consists of
the minority interests' share of the consolidated operating results.
Beginning one year from the date of admission as a limited partner and
subject to certain limitations described below, each limited partner other
than PSB has the right to require the redemption of its partnership
interest.
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.
At December 31, 1999, there were 7,443,356 OP units owned by minority
interests (7,305,355 were owned by PSI and affiliated entities and 138,001
were owned by unaffiliated third parties). On a fully converted basis,
assuming all 7,443,356 minority interest OP units were converted into
shares of common stock of PSB at December 31, 1999, the minority interests
would own approximately 23.9% of the 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 the
ownership interest and an adjustment is made to the minority interest, with
a corresponding adjustment to paid-in capital, to reflect the minority
interests' equity in the Company.
9. Minority interest - preferred units
On April 23, 1999, the Operating Partnership completed a private placement
of 510,000 preferred units with a preferred distribution rate of 8 7/8%.
The net proceeds from the placement of preferred units were approximately
$12.5 million and were used to repay borrowings from an affiliate.
On September 3, 1999, the Operating Partnership completed a private
placement of 3,200,000 preferred units with a preferred distribution rate
of 8 3/4%. The net proceeds from the placement of preferred units were
approximately $78 million and part of the proceeds was used to prepay a
mortgage note payable of approximately $8.5 million.
F-16
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
On September 7 and 23, 1999, the Operating Partnership completed private
placements of 1,200,000 and 400,000 preferred units, respectively, with a
preferred distribution rate of 8 7/8%. The net proceeds from the placement
of preferred units were approximately $39.2 million.
The Operating Partnership has the right to redeem the preferred units on or
after the fifth anniversary of the issuance date at the original capital
contribution plus the cumulative priority return, as defined, to the
redemption date to the extent not previously distributed. The preferred
units are exchangeable for Cumulative Redeemable Preferred Stock of the
respective series of PS Business Parks, Inc. on or after the tenth
anniversary of the date of issuance at the option of the Operating
Partnership or majority of the holders of the preferred units. The
Preferred Stock will have the same distribution rate and par value as the
respective units and will have equivalent terms to those described in Note
11.
10. Property management contracts
The Operating Partnership manages industrial, office and retail facilities
for PSI and entities affiliated with PSI. 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.
11. 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 1,785,007 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 6,774,072
shares of common stock at $22.88 per share in cash (an aggregate of $155
million) in separate tranches. The first tranche, representing 2,185,187
shares or $50 million, was issued in January 1998. PSB incurred $2.4
million in costs associated with the issuance. The remainder of the common
shares (4,588,885 common shares) was issued on May 6, 1998 and the net
proceeds ($105 million) were used to fund a portion of the cost to acquire
commercial properties in May 1998.
F-17
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
In May 1998, PSB completed two common stock offerings, raising net proceeds
in aggregate totaling $118.9 million through the issuance of 5,025,800
common shares. A portion of the net proceeds was used in connection with a
$190 million property portfolio acquisition.
On April 30, 1999, PSB issued 2,200,000 depositary shares each representing
1/1,000 of a share of 9 1/4% Cumulative Preferred Stock, Series A. Net
proceeds from the public perpetual preferred stock offering were
approximately $53.1 million and were used to repay borrowings from an
affiliate and a mortgage note payable of approximately $11 million. The
remaining proceeds were used for investment in real estate.
Holders of the Company's preferred stock will not be entitled to vote on
most matters, except under certain conditions. In the event of a cumulative
arrearage equal to six quarterly dividends, the holders of the preferred
stock will have the right to elect two additional members to serve on the
Company's Board of Directors until all events of default have been cured.
At December 31, 1999, there were no dividends in arrears.
Except under certain conditions relating to the Company's qualification as
a REIT, the preferred stock is not redeemable prior to April 30, 2004. On
or after April 30, 2004, the preferred stock will be redeemable, at the
option of the Company, in whole or in part, at $25 per depositary share,
plus any accrued and unpaid dividends.
The Company paid distributions to its common shareholders totaling
$23,641,000 ($1.00 per common share), $21,806,000 ($1.10 per common share)
and $3,550,000 ($0.68 per common share) in 1999, 1998 and 1997,
respectively. The Company paid distributions to its preferred shareholders
totalling $3,406,000 (1.548090 per depositary share) in 1999. No preferred
distributions were paid in 1998 and 1997. Pursuant to restrictions on the
Credit Facility, distributions may not exceed 95% of funds from operations,
as defined.
12. Stock options
PSB has a 1997 Stock Option Plan (the "Plan"). Under the Plan, PSB has
granted non-qualified options to certain directors, officers and key
employees to purchase shares of PSB's common stock at a price no less than
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.
At December 31, 1999, there were 1,500,000 options authorized to grant.
Information with respect to the Plan is as follows:
<TABLE>
<CAPTION>
Weighted
Number of Exercise Average
Options Price Exercise Price
---------------- ---------------- -----------------
<S> <C> <C> <C>
Outstanding at December 31, 1996........... - - -
Granted............................... 305,570 $16.69 - 22.88 $16.80
Exercised............................. - - -
Canceled.............................. - - -
---------------- ---------------- -----------------
Outstanding at December 31, 1997........... 305,570 $16.69 - $22.88 $16.80
Granted............................... 222,500 22.88 - 25.00 24.01
Exercised............................. (39,024) 16.69 16.69
Canceled.............................. - - -
---------------- ---------------- -----------------
Outstanding at December 31, 1998........... 489,046 16.69 - 25.00 $20.09
Granted............................... 11,000 24.69 - 24.75 24.70
Exercised............................. (7,191) 16.69 16.69
Canceled.............................. (10,497) 16.69 - 25.00 18.67
---------------- ---------------- -----------------
Outstanding at December 31, 1999........... 482,358 $16.69 - $25.00 $20.28
================ ================ =================
</TABLE>
F-18
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
<TABLE>
<CAPTION>
Weighted
Number of Exercise Average
Options Price Exercise Price
---------------- ---------------- -----------------
<S> <C> <C> <C>
Exercisable at:
December 31, 1998..................... 62,828 $16.69 - $22.88 $16.87
December 31, 1999..................... 226,417 $16.69 - $25.00 $19.16
</TABLE>
PSB adopted the disclosure requirement provision of SFAS No. 123 in
accounting for stock-based compensation issued to employees. As of December
31, 1999 and 1998, there were 482,358 and 489,046 options outstanding,
respectively, 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 the years ended
December 31, 1999 and 1998, the period from April 1, 1997 through December
31, 1997 and the period from January 1, 1997 through March 31, 1997. The
remaining contractual lives were 7.9 and 8.9 years, respectively at
December 31, 1999 and 1998.
13. Recent accounting pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which is
required to be adopted in years beginning after June 15, 2000. This
statement provides a comprehensive and consistent standard for the
recognition and measurement of derivatives and hedging activites. The
Company is studying this statement to determine the effect of the
consolidated financial statements and will adopt this statement in the year
ended December 31, 2001.
14. Supplementary quarterly financial data (unaudited)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
---------------- -------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Revenues........................... $ 14,788,000 $ 21,911,000 $ 26,277,000 $ 27,284,000
Net income allocable to common
shareholders....................... $ 4,330,000 $ 7,046,000 $ 9,748,000 $ 8,276,000
Per share data:
---------------
Net income - Basic................. $0.38 $0.38 $0.41 $0.35
Net income - Diluted............... $0.38 $0.38 $0.41 $0.35
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
1999 1999 1999 1999
---------------- -------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Revenues........................... $ 29,251,000 $ 31,248,000 $ 33,281,000 $ 34,833,000
Income before extraordinary item... $ 9,442,000 $ 9,393,000 $ 9,383,000 $ 11,098,000
Net income allocable to common
shareholders....................... $ 9,442,000 $ 9,393,000 $ 9,383,000 $ 9,631,000
Per share data:
---------------
Income before extraordinary item -
Basic.............................. $0.40 $0.40 $0.40 $0.42
Income before extraordinary item -
Diluted............................ $0.40 $0.40 $0.40 $0.42
</TABLE>
F-19
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
15. Commitments and contingencies
PSB is subject to the risks inherent in the ownership and operation of
commercial real estate. These include, among others, the risks normally
associated with changes in the general economic climate, trends in the real
estate industry, creditworthiness of tenants, competition, changes in tax
laws, interest rate levels, the availability of financing and potential
liability under environmental and other laws.
Substantially all of the properties have been subjected to Phase I
environmental reviews. Such reviews have not revealed, nor is management
aware of, any probable or reasonably possible environmental costs that
management believes would be material to the consolidated financial
statements except as discussed below.
The Company acquired a property in Beaverton, Oregon ("Creekside Corporate
Park") in May 1998. A property adjacent to Creekside Corporate Park is
currently the subject of an environmental remedial
investigation/feasibility study that is being conducted by the current and
past owners of the property, pursuant to an order issued by the Oregon
Department of Environmental Quality ("ODEQ"). As part of that study, ODEQ
ordered the property owners to sample soil and groundwater on the Company's
property to determine the nature and extent of contamination resulting from
past industrial operations at the property subject to the study. The
Company, which is not a party of the Order on Consent, executed separate
Access Agreements with the property owners to allow access to its property
to conduct the required sampling and testing. The sampling and testing is
ongoing, and preliminary results from one area indicate that the
contamination from the property subject to the study may have migrated onto
a portion of Creekside Corporate Park owned by the Company.
There is no evidence that any past or current use of the Creekside
Corporate Park property contributed in any way to the contamination that is
the subject of the current investigation. Nevertheless, upon completion of
the study, it is likely that removal or remedial measures will be required
to address any contamination detected during the current investigation,
including any contamination on or under the Creekside Corporate Park
property. Because of the preliminary nature of the investigation, the
Company cannot predict the outcome of the investigation, nor can it
estimate the costs of any remediation or removal activities that may be
required.
The Company believes that it bears no responsibility or liability for the
contamination. In the event the Company is ultimately deemed responsible
for any costs relating to this matter, the Company believes that the party
from whom the property was purchased will be responsible for any expenses
or liabilities that the Company may incur as a result of this
contamination.
On November 3, 1999, the Company filed an action in the Los Angeles
Superior Court seeking damages in excess of $1 million, as well as
equitable relief. The complaint alleges that Mr. Howard and entities
controlled by him engaged in unfair trade practices, including (1)
negotiating kickbacks, secret rebates and/or unearned discounts from third
party suppliers for "providing" Company business to those suppliers and (2)
disrupting the Company's relationship with various suppliers (See Note 16).
PSB currently is neither subject to any other material litigation nor, to
management's knowledge, is any material litigation currently threatened
against PSB other than routine litigation and administrative proceedings
arising in the ordinary course of business. Based on consultation with
counsel, management believes that these items will not have a material
adverse impact on the Company's consolidated financial position or results
of operations.
F-20
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
16. Subsequent events
The Company loaned an aggregate of $77 million to PSI during the period of
January 5, 2000 through March 8, 2000. The notes bore interest at 5.9% per
year and were repaid as of March 20, 2000.
On or about February 14, 2000, Mr. Howard and entities controlled by him
filed a cross-complaint against the Company, Public Storage, Inc., and
several other cross-defendants alleging, among other things, (1)
interference with Mr. Howard's contractual relations with various third
party suppliers, (2) violation of Title VII of the Civil Rights Act and (3)
abuse of process. None of the cross-complainants assigned any dollar amount
in the cross-complaint to the claims. The Company intends to vigorously
contest the claims in the cross-complaint.
On March 2, 2000, the Board of Directors authorized the repurchase from
time to time of up to 1,000,000 shares of the Company's common stock on the
open market or in privately negotiated transactions. Purchases will be made
subject to market conditions and other investment opportunities available
to the Company. As of March 13, 2000, the Company repurchased 212,400
shares at an average price of $21.43 per share.
F-21
<PAGE>
PS BUSINESS PARKS, INC.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Cost
Capitalized
Subsequent to Gross Amount at Which Carried
Initial Cost to Company Acquisition at December 31, 1999
-------------------------------------------------------------------------
Buildings and Buildings and Buildings and
Description Location Encumbrances Land Improvements Improvements Land Improvements Totals
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
I-435................. Overland Park, KS $- $ 890 $2,176 $98 $890 $2,274 $3,164
Produce............... San Francisco, CA - 771 1,886 26 771 1,912 2,683
Crenshaw II........... Torrance, CA - 1,861 4,938 440 1,861 5,378 7,239
Airport............... San Francisco, CA - 897 2,387 90 897 2,477 3,374
Christopher Ave....... Gaithersburg, MD - 466 1,203 95 466 1,298 1,764
Monterey Park......... Monterey Park, CA - 3,078 7,862 330 3,078 8,192 11,270
Calle Del Oaks........ Monterey, CA - 282 706 110 282 816 1,098
Milwaukie I........... Milwaukie, OR - 690 1,754 345 690 2,099 2,789
Edwards Road.......... Cerritos, CA - 450 1,217 202 450 1,419 1,869
Milwaukie II.......... Milwaukie, OR - 435 1,103 167 435 1,270 1,705
Rainier............... Renton, WA - 330 889 153 330 1,042 1,372
Lusk.................. San Diego, CA - 1,500 3,738 355 1,500 4,093 5,593
Eisenhower............ Alexandria, VA - 1,440 3,635 329 1,440 3,964 5,404
McKellips............. Tempe, AZ - 195 522 39 195 561 756
Crenshaw.............. Torrance, CA - 450 1,131 87 450 1,218 1,668
Old Oakland Rd........ San Jose, CA - 3,458 8,765 428 3,458 9,193 12,651
Junipero.............. Signal Hill, CA - 900 2,510 53 900 2,563 3,463
Watson Plaza.......... Lakewood, CA - 930 2,360 106 930 2,466 3,396
Northgate Blvd........ Sacramento, CA - 1,710 4,567 341 1,710 4,908 6,618
Camino Del Rio S...... San Diego, CA - 930 2,388 364 930 2,752 3,682
Uplander.............. Culver City, CA - 3,252 8,157 1,375 3,252 9,532 12,784
University............ Tempe, AZ - 2,160 5,454 562 2,160 6,016 8,176
E. 28th Street........ Signal Hill, CA - 1,500 3,749 290 1,500 4,039 5,539
W. Main............... Mesa, AZ - 675 1,692 230 675 1,922 2,597
S. Edward............. Tempe, AZ - 645 1,653 345 645 1,998 2,643
Leapwood Ave.......... Carson, CA - 990 2,496 556 990 3,052 4,042
Downtown Center....... Nashville, TN - 660 1,681 478 660 2,159 2,819
Airport South......... Nashville, TN - 660 1,657 171 660 1,828 2,488
Great Oaks............ Woodbridge, VA - 1,350 3,398 180 1,350 3,578 4,928
W. Concord Cir........ Broken Arrow, OK - 840 2,174 114 840 2,288 3,128
John Barrow........... Little Rock, AR - 780 1,998 95 780 2,093 2,873
S. Peoria............. Tulsa, OK - 375 962 35 375 997 1,372
Ventura Blvd. II...... Studio City, CA - 621 1,530 168 621 1,698 2,319
Largo 95.............. Largo, MD - 3,085 7,332 398 3,085 7,730 10,815
Gunston............... Lorton, VA - 4,146 17,872 256 4,146 18,128 22,274
</TABLE>
Depreciable
Accumulated Date Lives
Description Location Depreciation Acquired (Years)
- -------------------------------------------------------------------------------
I-435................. Overland Park, KS $139 3/17/98 5-30
Produce............... San Francisco, CA 116 3/17/98 5-30
Crenshaw II........... Torrance, CA 567 4/12/97 5-30
Airport............... San Francisco, CA 239 4/12/97 5-30
Christopher Ave....... Gaithersburg, MD 132 4/12/97 5-30
Monterey Park......... Monterey Park, CA 803 1/1/97 5-30
Calle Del Oaks........ Monterey, CA 86 1/1/97 5-30
Milwaukie I........... Milwaukie, OR 242 1/1/97 5-30
Edwards Road.......... Cerritos, CA 142 1/1/97 5-30
Milwaukie II.......... Milwaukie, OR 87 1/1/97 5-30
Rainier............... Renton, WA 102 1/1/97 5-30
Lusk.................. San Diego, CA 403 1/1/97 5-30
Eisenhower............ Alexandria, VA 388 1/1/97 5-30
McKellips............. Tempe, AZ 55 1/1/97 5-30
Crenshaw.............. Torrance, CA 84 1/1/97 5-30
Old Oakland Rd........ San Jose, CA 902 1/1/97 5-30
Junipero.............. Signal Hill, CA 225 1/1/97 5-30
Watson Plaza.......... Lakewood, CA 239 1/1/97 5-30
Northgate Blvd........ Sacramento, CA 459 1/1/97 5-30
Camino Del Rio S...... San Diego, CA 271 1/1/97 5-30
Uplander.............. Culver City, CA 965 1/1/97 5-30
University............ Tempe, AZ 597 1/1/97 5-30
E. 28th Street........ Signal Hill, CA 392 1/1/97 5-30
W. Main............... Mesa, AZ 186 1/1/97 5-30
S. Edward............. Tempe, AZ 198 1/1/97 5-30
Leapwood Ave.......... Carson, CA 313 1/1/97 5-30
Downtown Center....... Nashville, TN 209 1/1/97 5-30
Airport South......... Nashville, TN 178 1/1/97 5-30
Great Oaks............ Woodbridge, VA 346 1/1/97 5-30
W. Concord Cir........ Broken Arrow, OK 217 1/1/97 5-30
John Barrow........... Little Rock, AR 202 1/1/97 5-30
S. Peoria............. Tulsa, OK 96 1/1/97 5-30
Ventura Blvd. II...... Studio City, CA 172 1/1/97 5-30
Largo 95.............. Largo, MD 638 9/24/97 5-30
Gunston............... Lorton, VA 1,510 6/17/98 5-30
F-22
<PAGE>
PS BUSINESS PARKS, INC.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Cost
Capitalized
Subsequent to Gross Amount at Which
Initial Cost to Company Acquisition Carried at December 31, 1999
----------------------------------------------------------------------
Buildings and Buildings and Buildings and
Description Location Encumbrances Land Improvements Improvements Land Improvements Totals
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Canada................... Lake Forest, CA - 5,508 13,785 890 5,508 14,675 20,183
Ridge Route.............. Laguna Hills, CA - 16,261 39,559 647 16,261 40,206 56,467
Lake Forest Commerce Park. Laguna Hills, CA - 2,037 5,051 167 2,037 5,218 7,255
Buena Park Industrial Cntr Buena Park, CA - 3,245 7,703 655 3,245 8,358 11,603
Cerritos Business Center.. Cerritos, CA - 4,218 10,273 581 4,218 10,854 15,072
Parkway Commerce Center... Hayward, CA - 4,398 10,433 654 4,398 11,087 15,485
Northpointe E............. Sterling, VA - 1,156 2,957 31 1,156 2,988 4,144
Ammendale................. Beltsville, MD - 4,278 18,380 721 4,278 19,101 23,379
Centrepointe.............. Landover, MD 8,751 3,801 16,708 949 3,801 17,657 21,458
Shaw Road................. Sterling, VA 5,327 2,969 10,008 474 2,969 10,482 13,451
Creekside-Phase 1......... Beaverton, OR - 4,519 13,651 354 4,519 14,005 18,524
Creekside-Phase 2 Bldg-4.. Beaverton, OR - 832 2,542 30 832 2,572 3,404
Creekside-Phase 2 Bldg-5.. Beaverton, OR - 521 1,603 - 521 1,603 2,121
Creekside-Phase 2 Bldg-1.. Beaverton, OR - 1,326 4,035 78 1,326 4,113 5,442
Creekside-Phase 3......... Beaverton, OR - 1,353 4,101 72 1,353 4,173 5,526
Creekside-Phase 5......... Beaverton, OR - 1,741 5,301 75 1,741 5,376 7,117
Creekside-Phase 6......... Beaverton, OR - 2,616 7,908 163 2,616 8,071 10,687
Creekside-Phase 7......... Beaverton, OR - 3,293 9,938 46 3,293 9,984 13,277
Creekside-Phase 8......... Beaverton, OR - 1,140 3,644 26 1,140 3,670 4,810
Woodside-Phase 1.......... Beaverton, OR - 2,987 8,982 120 2,987 9,102 12,089
Woodside-Phase 2 Bldg-6... Beaverton, OR - 255 784 38 255 822 1,077
Woodside-Phase 2 Bldg-7&8. Beaverton, OR - 2,101 6,386 148 2,101 6,534 8,635
Woodside-Sequent 1........ Beaverton, OR - 2,890 8,672 27 2,890 8,699 11,589
Woodside-Sequent 5........ Beaverton, OR - 3,093 9,279 2 3,093 9,281 12,374
Northpointe G............. Sterling, VA 1,898 824 2,964 76 824 3,040 3,864
Spectrum 95............... Landover, MD - 1,610 7,129 201 1,610 7,330 8,940
Las Plumas................ San Jose, CA - 4,379 12,889 313 4,379 13,202 17,581
Lafayette................. Chantilly, VA - 671 4,179 4 671 4,183 4,854
Woodside-Greystone........ Beaverton, OR - 1,262 6,966 203 1,262 7,169 8,431
Dulles South.............. Chantilly, VA 1,945 599 3,098 - 599 3,098 3,697
Sullyfield Circle......... Chantilly, VA 2,359 774 3,712 3 774 3,715 4,489
Park East I & II.......... Chantilly, VA 6,666 2,324 10,875 14 2,324 10,889 13,213
Park East III............. Chantilly, VA 6,372 1,527 7,154 - 1,527 7,154 8,681
Northpointe Business Cntr. Sacramento, CA - 3,030 13,825 70 3,030 13,895 16,925
Corporate Park Phoenix.... Phoenix, AZ - 2,761 10,269 11 2,761 10,280 13,041
So. Shaver................ Pasadena, TX - 464 1,184 160 464 1,344 1,808
Lamar Boulevard........... Austin, TX - 2,528 6,596 1,652 2,528 8,248 10,776
N. Barker's Landing....... Houston, TX - 1,140 3,003 505 1,140 3,508 4,648
One Park Ten.............. San Antonio, TX - 1,500 4,266 3,026 1,500 7,292 8,792
Park Terrace.............. San Antonio, TX - 360 987 277 360 1,264 1,624
</TABLE>
Depreciable
Accumulated Date Lives
Description Location Depreciation Acquired (Years)
- -------------------------------------------------------------------------------
Canada................... Lake Forest, CA 723 12/23/97 5-30
Ridge Route.............. Laguna Hills, CA 2,783 12/23/97 5-30
Lake Forest Commerce Park. Laguna Hills, CA 628 12/23/97 5-30
Buena Park Industrial Cntr Buena Park, CA 622 12/23/97 5-30
Cerritos Business Center.. Cerritos, CA 784 12/23/97 5-30
Parkway Commerce Center... Hayward, CA 785 12/23/97 5-30
Northpointe E............. Sterling, VA 226 12/10/97 5-30
Ammendale................. Beltsville, MD 2,338 1/13/98 5-30
Centrepointe.............. Landover, MD 1,816 3/20/98 5-30
Shaw Road................. Sterling, VA 1,200 3/9/98 5-30
Creekside-Phase 1......... Beaverton, OR 1,380 5/4/98 5-30
Creekside-Phase 2 Bldg-4.. Beaverton, OR 250 5/4/98 5-30
Creekside-Phase 2 Bldg-5.. Beaverton, OR 157 5/4/98 5-30
Creekside-Phase 2 Bldg-1.. Beaverton, OR 410 5/4/98 5-30
Creekside-Phase 3......... Beaverton, OR 415 5/4/98 5-30
Creekside-Phase 5......... Beaverton, OR 537 5/4/98 5-30
Creekside-Phase 6......... Beaverton, OR 813 5/4/98 5-30
Creekside-Phase 7......... Beaverton, OR 985 5/4/98 5-30
Creekside-Phase 8......... Beaverton, OR 350 5/4/98 5-30
Woodside-Phase 1.......... Beaverton, OR 902 5/4/98 5-30
Woodside-Phase 2 Bldg-6... Beaverton, OR 91 5/4/98 5-30
Woodside-Phase 2 Bldg-7&8. Beaverton, OR 653 5/4/98 5-30
Woodside-Sequent 1........ Beaverton, OR 862 5/4/98 5-30
Woodside-Sequent 5........ Beaverton, OR 919 5/4/98 5-30
Northpointe G............. Sterling, VA 263 6/11/98 5-30
Spectrum 95............... Landover, MD 533 9/30/98 5-30
Las Plumas................ San Jose, CA 865 12/31/98 5-30
Lafayette................. Chantilly, VA 212 01/29/99 5-30
Woodside-Greystone........ Beaverton, OR 127 7/15/99 5-30
Dulles South.............. Chantilly, VA 82 6/30/99 5-30
Sullyfield Circle......... Chantilly, VA 106 6/30/99 5-30
Park East I & II.......... Chantilly, VA 316 6/30/99 5-30
Park East III............. Chantilly, VA 207 6/30/99 5-30
Northpointe Business Cntr. Sacramento, CA 347 7/29/99 5-30
Corporate Park Phoenix.... Phoenix, AZ 3 12/30/99 5-30
So. Shaver................ Pasadena, TX 130 1/1/97 5-30
Lamar Boulevard........... Austin, TX 799 1/1/97 5-30
N. Barker's Landing....... Houston, TX 351 1/1/97 5-30
One Park Ten.............. San Antonio, TX 702 1/1/97 5-30
Park Terrace.............. San Antonio, TX 124 1/1/97 5-30
F-23
<PAGE>
PS BUSINESS PARKS, INC.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Cost
Capitalized
Subsequent to Gross Amount at Which
Initial Cost to Company Acquisition Carried at December 31, 1999
----------------------------------------------------------------------
Buildings and Buildings and Buildings and
Description Location Encumbrances Land Improvements Improvements Land Improvements Totals
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
La Prada.................. Mesquite, TX - 495 1,235 95 495 1,330 1,825
NW Highway................ Garland, TX - 480 1,203 33 480 1,236 1,716
Quail Valley.............. Missouri City, TX - 360 918 78 360 996 1,356
Business Parkway I........ Richardson, TX - 759 3,372 199 759 3,571 4,330
The Summit................ Plano, TX - 1,536 6,654 838 1,536 7,492 9,028
Northgate II.............. Dallas, TX - 1,274 5,505 613 1,274 6,118 7,392
Empire Commerce........... Dallas, TX - 304 1,545 84 304 1,629 1,933
Royal Tech - Digital...... Las Colinas, TX - 319 1,393 9 319 1,402 1,721
Royal Tech - Springwood... Las Colinas, TX - 894 3,824 94 894 3,918 4,812
Royal Tech - Regent....... Las Colinas, TX - 606 2,615 233 606 2,848 3,454
Royal Tech - Bldg 7....... Las Colinas, TX - 246 1,061 - 246 1,061 1,307
Royal Tech - NFTZ......... Las Colinas, TX - 1,517 6,499 109 1,517 6,608 8,125
Royal Tech - Olympus...... Las Colinas, TX - 1,060 4,531 12 1,060 4,543 5,603
Royal Tech - Honeywell.... Las Colinas, TX - 548 2,347 7 548 2,354 2,902
Royal Tech - Bldg 12...... Las Colinas, TX - 1,466 6,263 7 1,466 6,270 7,736
Royal Tech - Bldg 13...... Las Colinas, TX - 955 4,080 50 955 4,130 5,085
Royal Tech - Bldg 14...... Las Colinas, TX - 2,010 10,242 - 2,010 10,242 12,251
Business Parkway II....... Richardson, TX - 40 196 4 40 200 241
Royal Tech - Bldg 15...... Irving, TX - 1,307 5,600 170 1,307 5,770 7,077
Westchase Corporate Park.. Houston, TX - 2,173 7,338 5 2,173 7,343 9,516
Ben White 1............... Austin, TX - 789 3,571 - 789 3,571 4,360
Ben White 5............... Austin, TX - 761 3,444 15 761 3,459 4,220
McKalla 3................. Austin, TX - 662 2,994 15 662 3,009 3,671
McKalla 4................. Austin, TX - 749 3,390 24 749 3,414 4,163
Mopac 6................... Austin, TX - 307 1,390 53 307 1,443 1,750
Waterford A............... Austin, TX - 597 2,752 - 597 2,752 3,349
Waterford B............... Austin, TX - 367 1,677 - 367 1,677 2,044
Waterford C............... Austin, TX - 1,144 5,225 2 1,144 5,227 6,371
McNeil 6.................. Austin, TX - 437 2,013 8 437 2,021 2,458
Rutland 11................ Austin, TX - 325 1,536 10 325 1,546 1,871
Rutland 12................ Austin, TX - 535 2,487 39 535 2,526 3,061
Rutland 13................ Austin, TX - 469 2,190 5 469 2,195 2,664
Rutland 14................ Austin, TX - 535 2,422 16 535 2,438 2,973
Rutland 19................ Austin, TX - 158 762 3 158 765 923
Royal Tech - Bldg 16..... Las Colinas, TX - 2,464 2,703 114 2,464 2,817 5,281
Monroe Business Center.... Herndon, VA - 5,926 13,944 892 5,926 14,836 20,762
B & O..................... Baltimore, MD - 4,067 9,522 1,776 4,067 11,298 15,365
Lusk II-R&D............... San Diego, CA - 1,081 2,644 133 1,081 2,777 3,858
Lusk II-Office............ San Diego, CA - 1,229 3,005 294 1,229 3,299 4,528
Norris Cn-Office.......... San Ramon, CA - 792 1,939 185 792 2,124 2,916
</TABLE>
Depreciable
Accumulated Date Lives
Description Location Depreciation Acquired (Years)
- -------------------------------------------------------------------------------
La Prada.................. Mesquite, TX 129 1/1/97 5-30
NW Highway................ Garland, TX 119 1/1/97 5-30
Quail Valley.............. Missouri City, TX 96 1/1/97 5-30
Business Parkway I........ Richardson, TX 359 5/4/98 5-30
The Summit................ Plano, TX 806 5/4/98 5-30
Northgate II.............. Dallas, TX 673 5/4/98 5-30
Empire Commerce........... Dallas, TX 140 5/4/98 5-30
Royal Tech - Digital...... Las Colinas, TX 133 5/4/98 5-30
Royal Tech - Springwood... Las Colinas, TX 380 5/4/98 5-30
Royal Tech - Regent....... Las Colinas, TX 287 5/4/98 5-30
Royal Tech - Bldg 7....... Las Colinas, TX 102 5/4/98 5-30
Royal Tech - NFTZ......... Las Colinas, TX 644 5/4/98 5-30
Royal Tech - Olympus...... Las Colinas, TX 441 5/4/98 5-30
Royal Tech - Honeywell.... Las Colinas, TX 228 5/4/98 5-30
Royal Tech - Bldg 12...... Las Colinas, TX 609 5/4/98 5-30
Royal Tech - Bldg 13...... Las Colinas, TX 403 5/4/98 5-30
Royal Tech - Bldg 14...... Las Colinas, TX 926 5/4/98 5-30
Business Parkway II....... Richardson, TX 17 5/4/98 5-30
Royal Tech - Bldg 15...... Irving, TX 459 11/4/98 5-30
Westchase Corporate Park.. Houston, TX 2 12/30/99 5-30
Ben White 1............... Austin, TX 219 12/31/98 5-30
Ben White 5............... Austin, TX 213 12/31/98 5-30
McKalla 3................. Austin, TX 186 12/31/98 5-30
McKalla 4................. Austin, TX 213 12/31/98 5-30
Mopac 6................... Austin, TX 93 12/31/98 5-30
Waterford A............... Austin, TX 156 1/06/99 5-30
Waterford B............... Austin, TX 57 5/20/99 5-30
Waterford C............... Austin, TX 178 5/20/99 5-30
McNeil 6.................. Austin, TX 115 1/6/9 5-30
Rutland 11................ Austin, TX 86 1/6/99 5-30
Rutland 12................ Austin, TX 147 1/6/99 5-30
Rutland 13................ Austin, TX 123 1/6/99 5-30
Rutland 14................ Austin, TX 151 12/31/98 5-30
Rutland 19................ Austin, TX 42 1/6/99 5-30
Royal Tech - Bldg 16..... Las Colinas, TX 56 7/1/99 5-30
Monroe Business Center.... Herndon, VA 1,483 8/1/97 5-30
B & O..................... Baltimore, MD 1,102 8/1/97 5-30
Lusk II-R&D............... San Diego, CA 173 3/17/98 5-30
Lusk II-Office............ San Diego, CA 217 3/17/98 5-30
Norris Cn-Office.......... San Ramon, CA 239 3/17/98 5-30
F-24
<PAGE>
PS BUSINESS PARKS, INC.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Cost
Capitalized
Subsequent to Gross Amount at Which Carried
Initial Cost to Company Acquisition at December 31, 1999
---------------------------------------------------------------------------
Buildings and Buildings and Buildings and
Description Location Encumbrances Land Improvements Improvements Land Improvements Totals
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Norris Cn-R&D......... San Ramon, CA - 696 1,703 79 696 1,782 2,478
Northpointe D......... Sterling, VA 1,640 787 2,882 9 787 2,891 3,678
Monroe II............. Herndon, VA 2,108 811 4,967 164 811 5,131 5,942
Kearny Mesa-Office.... San Diego, CA - 790 1,933 356 790 2,289 3,079
Kearny Mesa-R&D....... San Diego, CA - 2,108 5,156 146 2,108 5,302 7,410
Bren Mar-Office....... Alexandria, VA - 573 1,401 412 573 1,813 2,386
Lusk III.............. San Diego, CA - 1,906 4,662 217 1,906 4,879 6,785
Bren Mar-R&D.......... Alexandria, VA - 1,627 3,979 78 1,627 4,057 5,684
Alban Road-Office..... Springfield, VA - 989 2,418 527 989 2,945 3,934
Alban Road-R&D........ Springfield, VA - 948 2,318 110 948 2,428 3,376
------------------------------------------------------------------------------------------
$37,066 $198,671 $615,771 $31,196 $198,671 $646,967 $845,638
==========================================================================================
</TABLE>
Depreciable
Accumulated Date Lives
Description Location Depreciation Acquired (Years)
- -----------------------------------------------------------------------------
Norris Cn-R&D......... San Ramon, CA 12 3/17/98 5-30
Northpointe D......... Sterling, VA 252 6/11/98 5-30
Monroe II............. Herndon, VA 284 1/29/99 5-30
Kearny Mesa-Office.... San Diego, CA 156 3/17/98 5-30
Kearny Mesa-R&D....... San Diego, CA 322 3/17/98 5-30
Bren Mar-Office....... Alexandria, VA 158 3/17/98 5-30
Lusk III.............. San Diego, CA 301 3/17/98 5-30
Bren Mar-R&D.......... Alexandria, VA 246 3/17/98 5-30
Alban Road-Office..... Springfield, VA 199 3/17/98 5-30
Alban Road-R&D........ Springfield, VA 150 3/17/98 5-30
-----------
$51,978
===========
F-25
<PAGE>
PS BUSINESS PARKS, INC.
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1999
A summary of activity for real estate and accumulated depreciation is as
follows:
<TABLE>
<CAPTION>
Reconciliation of real estate:
Years Ended December 31,
-----------------------------------------------------
1999 1998 1997
--------------- ----------------- ------------------
<S> <C> <C> <C>
Balance at beginning of period...... $ 712,938,000 $ 318,220,000 $ -
Additions during period:
Acquisitions...................... 102,839,000 378,321,000 314,655,000
Developed projects................ 13,650,000 - -
Property held for disposition..... (15,237,000) - -
Additional costs relating to prior
year's acquisitions............ - 5,306,000 -
Improvements...................... 16,211,000 11,091,000 3,565,000
--------------- ----------------- ------------------
Balance at close of period.......... $ 830,401,000 $ 712,938,000 $ 318,220,000
=============== ================= ==================
Reconciliation of accumulated depreciation:
Years Ended December 31,
-----------------------------------------------------
1999 1998 1997
--------------- ----------------- ------------------
Balance at beginning of period...... $ 22,517,000 $ 3,982,000 $ -
Additions during period:
Property held for disposition..... (1,002,000) - -
Depreciation...................... 29,461,000 18,535,000 3,982,000
--------------- ----------------- ------------------
Balance at close of period.......... $ 50,976,000 $ 22,517,000 $ 3,982,000
=============== ================= ==================
</TABLE>
The unaudited adjusted basis of real estate facilities for Federal income tax
purposes was approximately $712 million at December 31, 1999.
F-26
<TABLE>
<CAPTION>
For the Period For the Period
For the Year For the Year April 1 January 1,
Ended Ended through through
December 31, December 31, December 31, March 31,
--------------- ---------------- ---------------- ---------------
Basic and Diluted Earnings Per Share: 1999 1998 1997 1997
--------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Net income allocable to common shareholders............... $ 37,849,000 $ 29,400,000 $ 3,154,000 $ 682,000
=============== ================ ================ ===============
Weighted average common shares outstanding:
Basic weighted average common shares outstanding....... 23,641,000 19,361,000 3,414,000 2,193,000
Net effect of dilutive stock options - based on
treasury stock method using average market price..... 68,000 68,000 12,000 -
--------------- ---------------- ---------------- ---------------
Diluted weighted average common shares outstanding..... 23,709,000 19,429,000 3,426,000 2,193,000
=============== ================ ================ ===============
Basic earnings per common share........................... $ 1.60 $ 1.52 $ 0.92 $ 0.31
=============== ================ ================ ===============
Diluted earnings per common share......................... $ 1.60 $ 1.51 $ 0.92 $ 0.31
=============== ================ ================ ===============
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------- --------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Net income......................... $ 41,255,000 $ 29,400,000 $ 3,836,000 $ 519,000 $ 1,192,000
Minority interest.................. 16,049,000 11,208,000 8,566,000 - -
Interest expense................... 3,153,000 2,361,000 1,000 - -
-------------- --------------- --------------- -------------- --------------
Earnings available to cover fixed
charges......................... $60,457,000 $ 42,969,000 $ 12,403,000 $ 519,000 $ 1,192,000
============== =============== =============== ============== ==============
Fixed charges (1).................. $ 4,142,000 $ 2,629,000 $ 1,000 $ - $ -
Preferred distributions............ 7,562,000 - - - -
-------------- --------------- --------------- -------------- --------------
Combined fixed charges and
preferred distributions......... $ 11,704,000 $ 2,629,000 $ 1,000 $ - $ -
============== =============== =============== ============== ==============
Ratio of earnings to fixed charges. 14.60 16.34 12,403 N/A N/A
============== =============== =============== ============== ==============
Ratio of earnings to combined fixed
charges and preferred
distributions................... 5.17 16.34 12,403 N/A N/A
============== =============== =============== ============== ==============
</TABLE>
Supplemental disclosure of Ratio of Funds from Operations ("FFO") to fixed
charges:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------- --------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
FFO................................ $ 76,353,000 $ 57,430,000 $ 17,597,000 $ 303,000 $ 720,000
Interest expense................... 3,153,000 2,361,000 1,000 - -
Minority interest in income -
preferred units................. 4,156,000 - - - -
Preferred dividends................ 3,406,000 - - - -
-------------- --------------- --------------- -------------- --------------
Adjusted FFO available to cover
fixed charges................... $ 87,068,000 $ 59,791,000 $ 17,598,000 $ 303,000 $ 720,000
============== =============== =============== ============== ==============
Fixed charges (1).................. $ 4,142,000 $ 2,629,000 $ 1,000 $ - $ -
Preferred distributions............ 7,562,000 - - - -
-------------- --------------- --------------- -------------- --------------
Combined fixed charges and
preferred distributions......... $ 11,704,000 $ 2,629,000 $ 1,000 $ - $ -
============== =============== =============== ============== ==============
Ratio of FFO to fixed charges...... 21.02 22.74 17,598 N/A N/A
============== =============== =============== ============== ==============
Ratio of FFO to combined fixed
charges and preferred
distributions................... 7.44 22.74 17,598 N/A N/A
============== =============== =============== ============== ==============
</TABLE>
(1) Fixed charges include interest expense plus capitalized interest.
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, and the Registration
Statement on Form S-3 (No. 333-78627) and in the related prospectus of our
report dated January 31, 2000 with respect to the consolidated financial
statement and schedule of PS Business Parks, Inc. included in the Annual Report
(Form 10-K) for the year ended December 31, 1999 filed with the Securities and
Exchange Commission.
/s/ ERNST & YOUNG LLP
Los Angeles, California
March 29, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
PS BUSINESS PARKS. INC.
EXHIBIT 27 - FINANCIAL DATA SCHEDULE
ARTICLE 5 OF REGULATION S-X
</LEGEND>
<CIK> 0000866368
<NAME> PS Business Parks, Inc.
<MULTIPLIER> 1
<CURRENCY> U.S.$
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 74,220,000
<SECURITIES> 0
<RECEIVABLES> 771,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 74,220,000
<PP&E> 830,401,000
<DEPRECIATION> (50,976,000)
<TOTAL-ASSETS> 903,741,000
<CURRENT-LIABILITIES> 21,195,000
<BONDS> 0
0
55,000,000
<COMMON> 236,000
<OTHER-SE> 500,295,000
<TOTAL-LIABILITY-AND-EQUITY> 903,741,000
<SALES> 0
<TOTAL-REVENUES> 128,613,000
<CGS> 0
<TOTAL-COSTS> 34,985,000
<OTHER-EXPENSES> 32,915,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,153,000
<INCOME-PRETAX> 41,450,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 41,450,000
<DISCONTINUED> 0
<EXTRAORDINARY> 195,000
<CHANGES> 0
<NET-INCOME> 41,255,000
<EPS-BASIC> 1.60
<EPS-DILUTED> 1.60
</TABLE>
