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 [Fee Required]
For the fiscal year ended December 31, 2002
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or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
For the transition period from to
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Commission File Number 0-14475
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PS PARTNERS IV, LTD
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(Exact name of registrant as specified in its charter)
California 95-3931619
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
701 Western Avenue
Glendale, California 91201-2394
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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:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
(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
--- ---
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 Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to the Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) Yes [ ] No [ X ]
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DOCUMENTS INCORPORATED BY REFERENCE
NONE
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, which may
cause the actual results and performance of the Partnership to be materially
different from those expressed or implied in the forward looking statements.
Such factors are described in Item 1A, "Risk Factors" and include changes in
general economic conditions and in the markets in which the Partnership operates
and the impact of competition from new and existing storage and commercial
facilities and other storage alternatives, which could impact rents and
occupancy levels at the Partnership's facilities; the impact of the regulatory
environment as well as national, state, and local laws and regulations, which
could increase the Partnership's expense and reduce the Partnership's cash
available for distribution; and economic uncertainty due to the impact of war or
terrorism could adversely affect our business plan. We disclaim any obligation
to publicly release the results of any revisions to these forward-looking
statements reflecting new estimates, events or circumstances after the date of
this report.
General
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PS Partners IV, Ltd. (the "Partnership") is a publicly held limited
partnership formed under the California Uniform Limited Partnership Act.
Commencing in December 1984, 128,000 units of limited partnership interest (the
"Units") were offered to the public in an interstate offering. The offering was
completed in July 1985.
The Partnership has reported annually to the Securities and Exchange
Commission on Form 10-K which includes financial statements certified by
independent public accountants. The Partnership has also reported quarterly to
the Securities and Exchange Commission on Form 10-Q and includes unaudited
financial statements with such filings. The Partnership expects to continue such
reporting.
The Partnership was formed to invest in and operate existing
self-service facilities offering storage space for personal and business use
(the "mini-warehouses") and to invest up to 40% of the net proceeds of the
offering in and operate existing office and industrial properties. The
Partnership's real estate investments consist of wholly-owned facilities and an
investment in a general partnership (SEI/PSP IV Joint Ventures, the "Joint
Venture") with Public Storage, Inc. ("PSI"), a real estate investment trust
("REIT") organized as a corporation under the laws of California.
The Partnership's general partners (the "General Partners") are PSI and
B. Wayne Hughes ("Hughes"). Hughes is the chairman of the board, was chief
executive officer of PSI through November 7, 2002, and Hughes and members of his
family (the "Hughes Family") are the major shareholders of PSI. The Partnership
is managed, and its investment decisions are made by Hughes and the executive
officers and directors of PSI. The limited partners of the Partnership have no
right to participate in the management or conduct of its business affairs. PSI
believes that it is the largest operator of mini-warehouse facilities in the
United States.
Through 1996, the business parks of the Joint Venture were managed by
Public Storage Commercial Properties Group, Inc. ("PSCPG") pursuant to a
Management Agreement. In January 1997, the Joint Venture and PSI and other
related partnerships transferred a total of 35 business parks to PS Business
Parks, L.P. ("PSBPLP"), formerly known as American Office Park Properties, L.P.,
an operating partnership formed to own and operate business parks in which PSI
has a significant interest. Included among the properties transferred were the
business parks of the Joint Venture in exchange for a partnership interest in
PSBPLP. Until March 17, 1998, the general partner of PSBPLP was American Office
Park Properties, Inc., an affiliate of PSI. On March 17, 1998, American Office
Park Properties, Inc. was merged into Public Storage Properties XI, Inc., which
changed its name to PS Business Parks, Inc. ("PSBP"). PSBP is a REIT affiliated
with PSI, and is publicly traded on the American Stock Exchange. As a result of
the merger, PSBP became the general partner of PSBPLP (which changed its name
from American Office Park Properties, L.P. to PS Business Parks, L.P.). See Item
13.
2
PSI's current relationship with the Partnership includes (i) the joint
ownership of the Joint Venture which owns 32 of the Partnership's 33 properties
and 599,340 operating partnership units in PSBPLP, (ii) PSI is a co-general
partner along with Hughes, who is chairman of the board, and was chief executive
officer of PSI through November 7, 2002, (iii) as of December 31, 2002, PSI
owned approximately 58.7% of the Partnership's limited partnership units, and
(iv) PSI is the operator of the 33 properties in which the Partnership has an
interest (these 33 properties are referred to collectively hereinafter as the
"Mini-Warehouse Properties").
Partnership Reorganization
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On December 18, 2002, the Partnership entered into an Agreement and
Plan of Reorganization with Public Storage, Inc. (NYSE:PSA). Under the Agreement
and Plan of Reorganization, each of the Partnership units held by the public
will be converted into the right to receive a value of $442 in PSA common stock
or, at the limited partner's election, in cash. The transaction is expected to
close in the second quarter of 2003.
Investment Objectives and Policies
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The Partnership's objectives are to (i) preserve and protect invested
capital, (ii) maximize the potential for appreciation in value of its
investments, (iii) provide Federal income tax deductions so that during the
early years of property operations a portion of cash distributions may be
treated as a return of capital for tax purposes, and therefore, may not
represent taxable income to the limited partners, and (iv) provide for cash
distributions from operations.
The Partnership will terminate on December 31, 2038, unless dissolved
earlier. Under the terms of the general partnership agreement with PSI, PSI has
the right to require the Partnership to sell all of the properties owned by the
Joint Venture (see Item 12(c)).
Following are the Partnership's investment practices and policies. The
Partnership does not anticipate making any additional investments other than
maintenance capital expenditures and does not anticipate liquidating the
investments it now holds. While a vote of the limited partners is generally
required to change the Partnership's investment policies, PSI holds a majority
of the limited partnership units, and as a result, the General Partners could
change these policies through PSI's vote.
* Our investments consists of (i) a wholly-owned self-storage
facility and (ii) an interest in the Joint Venture which owns 32
self storage facilities and 599,340 operating partnership units in
PSBPLP. All of these investments are in real estate or real estate
entities holding real estate located in the United States. See
"mini-warehouses" and Item 2 "Properties" for further information.
These investments were acquired both for income and capital gains.
* There is no limitation on the amount or percentage of assets which
can be invested in any specific person.
* The Partnership does not anticipate borrowing money, issuing
senior securities, making loans to other persons, investing in the
securities of other issuers for the purpose of exercising control,
underwriting the securities of other issuers, engaging in the
purchase and sale of investments, offering securities in exchange
for property, or repurchasing or otherwise reacquiring its
outstanding securities.
Competition
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Competition in the market areas in which the Partnership operates is
significant and affects the occupancy levels, rental rates and operating
expenses of certain of the Partnerships facilities. Recent increases in
development of mini-warehouse facilities have intensified the competition among
mini-warehouse operators in many market areas in which the Partnership operates.
In recent years consolidation has occurred in the fragmented mini-warehouse
industry.
3
The Partnership believes that the significant operating and financial
experience of PSI's officers and directors, combined with the Partnership's
geographic diversity, economies of scale and the "Public Storage" name, should
enable the Partnership to continue to compete effectively with other entities.
Business Attributes
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Under PSI operation, the Partnership's facilities are part of a
comprehensive distribution system encompassing standardized procedures,
integrated reporting and information networks and centralized marketing. This
distribution system is designed to maximize revenue through pricing and
occupancy. The distribution system was significantly enhanced during 1996 with
the introduction and implementation of the national telephone reservation center
and new facility management software.
National telephone reservation system: Commencing in early 1996, PSI
began to implement a national telephone reservation system designed to provide
added customer service and maximize utilization of available mini-warehouse
space. Customers calling either the PSI's toll-free telephone referral system,
(800) 44-STORE, or a mini-warehouse facility are directed to the national
reservation system where a representative discusses with the customer space
requirements, price and location.
PSI believes that the national telephone reservation system has
enhanced the Partnership's ability to effectively market mini-warehouses and is
primarily responsible for the Partnership's increasing occupancy levels and
realized rental rates experienced at the mini-warehouse facilities during the
past three years.
Economies of scale: PSI is the largest provider of mini-warehouse space
in the industry. As of December 31, 2002, PSI operated 1,433 mini-warehouse
facilities (including 30 managed for third parties) in 37 states and had over
661,000 spaces rented. The size and scope of PSI's operations have enabled it to
achieve a consistently high level of profit margins and low level of
administrative costs relative to revenues.
Brand name recognition: The Partnership's operations are conducted
under the "Public Storage" brand name, which the Partnership believes is the
most recognized and established name in the mini-warehouse industry. PSI manages
mini-warehouse operations conducted in 37 states, giving it national recognition
and prominence. PSI focuses its operations within those states in the major
metropolitan markets. This concentration establishes PSI as one of the dominant
providers of storage space in each market that it operates in and enables it to
use a variety of promotional activities, such as television and radio
advertising as well as targeted discounting and referrals, which are generally
not economically viable to its competitors.
Mini-warehouses
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Mini-warehouses, which comprise the majority of the Partnership's
investments, are designed to offer accessible storage space for personal and
business use at a relatively low cost. A user rents a fully enclosed space which
is for the user's exclusive use and to which only the user has access on an
unrestricted basis during business hours. On-site operation is the
responsibility of resident managers who are supervised by area managers. Some
mini-warehouses also include rentable uncovered parking areas for vehicle
storage. Leases for mini-warehouse space may be on a long-term or short-term
basis, although typically spaces are rented on a month-to-month basis. Rental
rates vary according to the location of the property and the size of the storage
space.
Users of space in mini-warehouses include both individuals and large
and small businesses. Individuals usually employ this space for storage of,
among other things, furniture, household appliances, personal belongings, motor
vehicles, boats, campers, motorcycles and other household goods. Businesses
normally employ this space for storage of excess inventory, business records,
seasonal goods, equipment and fixtures.
4
The Mini-Warehouse Properties generally consist of three to seven
buildings containing an aggregate of between 294 to 847 storage spaces, most of
which have between 25 and 400 square feet and an interior height of
approximately 8 to 12 feet.
The Mini-Warehouse Properties experience minor seasonal fluctuations in
the occupancy levels of mini-warehouses with occupancies higher in the summer
months than in the winter months. The Partnership believes that these
fluctuations result in part from increased moving activity during the summer.
The Mini-Warehouse Properties are geographically diversified and are
generally located in heavily populated areas and close to concentrations of
apartment complexes, single family residences and commercial developments.
However, there may be circumstances in which it may be appropriate to own a
property in a less populated area, for example, in an area that is highly
visible from a major thoroughfare and close to, although not in, a heavily
populated area. Moreover, in certain population centers, land costs and zoning
restrictions may create a demand for space in nearby less populated areas.
As with most other types of real estate, the conversion of
mini-warehouses to alternative uses in connection with a sale or otherwise would
generally require substantial capital expenditures. However, the Partnership and
the Joint Venture do not intend to convert the Mini-Warehouse Properties to
other uses.
Mini-warehouse Property Operator
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The Mini-Warehouse Properties are managed by PSI pursuant to a
Management Agreement.
Under the supervision of the Partnership and the Joint Venture, PSI
coordinates the operation of the facilities, establishes rental policies and
rates, directs marketing activity and directs the purchase of equipment and
supplies, maintenance activity, and the selection and engagement of all vendors,
supplies and independent contractors.
PSI engages, at the expense of the property owner, employees for the
operation of the owner's facilities, including resident managers, assistant
managers, relief managers, and billing and maintenance personnel. Some or all of
these employees may be employed on a part-time basis and may also be employed by
other persons, partnerships, REITs or other entities owning facilities operated
by PSI.
In the purchasing of services such as advertising (including broadcast
media advertising) and insurance, PSI attempts to achieve economies by combining
the resources of the various facilities that it operates. Facilities operated by
PSI have historically carried comprehensive insurance, including fire,
earthquake, liability and extended coverage.
PSI has developed systems for space inventory, accounting and handling
delinquent accounts, including a computerized network linking PSI operated
facilities. Each project manager is furnished with detailed operating procedures
and typically receives facilities management training from PSI. Form letters
covering a variety of circumstances are also supplied to the project managers. A
record of actions taken by the project managers when delinquencies occur is
maintained.
The Mini-warehouse Properties are typically advertised via signage,
yellow pages, flyers and broadcast media advertising (television and radio) in
geographic areas in which many of the facilities are located. Broadcast media
and other advertising costs are charged to the facilities located in geographic
areas affected by the advertising. From time to time, PSI adopts promotional
programs, such as temporary rent reductions, in selected areas or for individual
facilities.
For as long as the Management Agreement is in effect, PSI has granted
the Partnership and the Joint Venture a non-exclusive license to use two PSI
service marks and related designs, including the "Public Storage" name, in
conjunction with rental and operation of facilities managed pursuant to the
Management Agreement. Upon termination of the Management Agreement, the
Partnership and the Joint Venture would no longer have the right to use the
service marks and related designs. The General Partners believe that the loss of
the right to use the service marks and related designs could have a material
adverse effect on the Partnership's business.
5
The Management Agreement with PSI provides that the Management
Agreement may be terminated without cause upon 60 days written notice by the
Partnership or six months notice by PSI.
Other Business Activities
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A Corporation that reinsures policies against losses to goods stored by
tenants in PSI's storage facilities was purchased by PSI from Mr. Hughes and
members of his family (the "Hughes Family") on December 31, 2001. We believe
that the availability of insurance reduces our potential liability to tenants
for losses to their goods from theft or destruction. This Corporation receives
the premiums and bears the risks associated with the re-insurance.
A subsidiary of PSI sells locks and boxes and rents trucks to the
general public and tenants to be used in securing their spaces and moving their
goods. We believe that the availability of locks and boxes for sale and the
rental of trucks promote the rental of spaces.
Federal Income Tax
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PS Partners IV, Ltd. is treated as a partnership for federal income tax
purposes with the taxable income of the entity allocated to each partners in
accordance with the partnership agreement.
Employees
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There are approximately 120 persons who render services on behalf of
the Partnership and the Joint Venture. These persons include resident managers,
assistant managers, relief managers, district managers, and administrative
personnel. Some of these employees may be employed on a part-time basis and may
also be employed by other persons, partnerships, REITs or other entities owning
facilities operated by PSI or PSBPLP.
ITEM 1A. Risk Factors.
In addition to the other information in our Form 10-K, you should
consider the following factors in evaluating the Partnership:
PUBLIC STORAGE CONTROLS US.
Public Storage owns approximately 58.7% of our outstanding limited
partnership units and is our general partner. Consequently, Public Storage
controls matters submitted to a vote of our unitholders, including amending our
organizational documents, dissolving the Partnership and approving other
extraordinary transactions.
SINCE OUR BUSINESS CONSISTS PRIMARILY OF ACQUIRING AND OPERATING REAL ESTATE, WE
ARE SUBJECT TO REAL ESTATE OPERATING RISKS.
The value of our investments may be reduced by general risks of real
estate ownership. Since we derive substantially all of our income from real
estate operations, we are subject to the general risks of owning real
estate-related assets, including:
* lack of demand for rental spaces or units in a locale;
* changes in general economic or local conditions;
* changes in supply of or demand for similar or competing facilities
in an area;
* potential terrorists attacks;
6
* the impact of environmental protection laws;
* changes in interest rates and availability of permanent mortgage
funds which may render the sale or financing of a property
difficult or unattractive; and
* changes in tax, real estate and zoning laws.
There is significant competition among self-storage facilities and from
other storage alternatives. Most of our properties are self-storage facilities,
which generated 94% of our rental revenue during 2002. Local market conditions
will play a significant part in how competition will affect us. Competition in
the market areas in which many of our properties are located from other
self-storage facilities and other storage alternatives is significant and has
affected the occupancy levels, rental rates and operating expenses of some of
our properties. Any increase in availability of funds for investment in real
estate may accelerate competition. Further development of self-storage
facilities may intensify competition among operators of self-storage facilities
in the market areas in which we operate.
We may incur significant environmental costs and liabilities. As an
owner of real properties, under various federal, state and local environmental
laws, we are required to clean up spills or other releases of hazardous or toxic
substances on or from our properties. Certain environmental laws impose
liability whether or not the owner knew of, or was responsible for, the presence
of the hazardous or toxic substances. In some cases, liability may not be
limited to the value of the property. The presence of these substances, or the
failure to properly remediate any resulting contamination, also may adversely
affect the owner's or operator's ability to sell, lease or operate its property
or to borrow using its property as collateral.
We have conducted preliminary environmental assessments on the
properties the Partnership has an interest in to evaluate the environmental
condition of, and potential environmental liabilities associated with, our
properties. These assessments generally consist of an investigation of
environmental conditions at the property (not including soil or groundwater
sampling or analysis), as well as a review of available information regarding
the site and publicly available data regarding conditions at other sites in the
vicinity. In connection with these property assessments, we have become aware
that prior operations or activities at some facilities or from nearby locations
have or may have resulted in contamination to the soil or groundwater at these
facilities. In this regard, some of our facilities are or may be the subject of
federal or state environment investigations or remedial actions. Although we
cannot provide any assurance, based on the preliminary environmental
assessments, we believe we have funds available to cover any liability from
environmental contamination or potential contamination and we are not aware of
any environmental contamination of our facilities material to our overall
business, financial condition or results of operation.
Property taxes can increase and cause a decline in yields on
investments. Each of our properties is subject to real property taxes. These
real property taxes may increase in the future as property tax rates change and
as our properties are assessed or reassessed by tax authorities. Such increases
could adversely impact the Partnership's profitability.
We must comply with the Americans with Disabilities Act and fire and
safety regulations, which can require significant expenditures: All our
properties must comply with the Americans with Disabilities Act and with related
regulations (the "ADA"). The ADA has separate compliance requirements for
"public accommodations" and "commercial facilities," but generally requires that
buildings be made accessible to persons with disabilities. Various state laws
impose similar requirements. A failure to comply with the ADA or similar state
laws could result in government imposed fines on us and the award of damages to
individuals affected by the failure. In addition, we must operate our properties
in compliance with numerous local fire and safety regulations, building codes,
and other land use regulations. Compliance with these requirements can require
us to spend substantial amounts of money, which would reduce cash otherwise
available for distribution to Partners. Failure to comply with these
requirements could also affect the marketability of our real estate facilities.
7
TERRORIST ATTACKS AND THE POSSIBILITY OF WIDER ARMED CONFLICT MAY HAVE AN
ADVERSE IMPACT ON OUR BUSINESS AND OPERATING RESULTS AND COULD DECREASE THE
VALUE OF OUR ASSETS.
Terrorist attacks and other acts of violence or war, such as those that
took place on September 11, 2001, could have a material adverse impact on our
business and operating results. There can be no assurance that there will not be
further terrorist attacks against the United States or its businesses or
interests. Attacks or armed conflicts that directly impact one or more of our
properties could significantly affect our ability to operate those properties
and thereby impair our operating results. Further, we may not have insurance
coverage for losses caused by a terrorist attack. Such insurance may not be
available, or if it is available and we decide to obtain such terrorist
coverage, the cost for the insurance may be significant in relationship to the
risk overall. In addition, the adverse effects that such violent acts and
threats of future attacks could have on the U.S. economy could similarly have a
material adverse effect on our business and results of operations. Finally,
further terrorist acts could cause the United States to enter into a wider armed
conflict, which could further impact our business and operating results.
8
ITEM 2. Properties.
The following table sets forth information as of December 31, 2002,
about the properties that the Partnership has an interest in:
Net Number
Rentable of Date of Ownership
Location Square Feet Spaces Acquisition Percentage
- -------- ----------- ------ ----------- ----------
ARIZONA
Scottsdale 44,300 555 07/12/85 50.9%
70th St.
CALIFORNIA
Milpitas 54,900 655 12/24/85 50.0
Pecten Ct.
N. Hollywood 28,900 469 06/07/85 50.0
Raymer St.
N. Hollywood 50,000 816 10/04/85 50.0
Whitsett Ave.
Pleasanton 71,700 577 12/17/85 50.0
Santa Rita Rd.
San Diego 50,900 644 07/11/85 50.0
Kearny Mesa Rd.
CONNECTICUT
Hartford 47,000 430 10/17/85 50.0
Roberts St.
INDIANA
Ft. Wayne 58,800 430 07/06/88 100.0
Illinois Rd.
Indianapolis 59,200 492 10/31/85 50.0
Elmwood
Indianapolis 59,100 525 10/31/85 50.0
Pike Plaza Rd.
KANSAS
Wichita 44,200 340 10/09/85 49.9
Carey Lane
Wichita 64,400 452 10/09/85 49.9
E. Harry
Wichita 41,400 294 10/09/85 49.9
E. Kellogg
Wichita 46,800 383 10/09/85 49.9
E. MacArthur
Wichita 107,500 799 10/09/85 49.9
S. Rock Road
Wichita 63,600 537 10/09/85 49.9
S. Tyler Rd.
Wichita 56,000 404 10/09/85 49.9
S. Woodlawn
Wichita 52,500 425 10/09/85 49.9
W. Maple
9
Net Number
Rentable of Date of Ownership
Location Square Feet Spaces Acquisition Percentage
- -------- ----------- ------ ----------- ----------
KENTUCKY
Florence 53,700 395 04/30/85 50.0%
Tanner Lane
MISSOURI
Joplin 56,500 437 10/09/85 49.9
S. Range Line
NEW HAMPSHIRE
Manchester 61,600 534 05/20/85 50.0
S. Willow II
NORTH CAROLINA
Concord 41,000 444 07/26/85 50.0
Highway 29
OHIO
Cincinnati 52,800 482 04/30/85 50.0
Colerain Ave.
Cincinnati 50,500 456 04/30/85 50.0
E. Kemper
Columbus 63,000 452 10/04/85 50.0
Ambleside Dr.
Columbus 56,900 393 09/25/85 50.0
Sinclair Rd.
Perrysburg 62,900 488 10/29/85 50.0
Helen Drive
OREGON
Milwaukie 50,600 478 05/17/85 49.8
McLoughlin II
Portland 35,100 440 10/02/85 50.0
SE 82nd St.
PENNSYLVANIA
Philadelphia 50,100 427 09/12/85 50.0
Tacony St.
TEXAS
Austin 66,700 847 04/18/85 50.0
S. First St.
WASHINGTON
Tacoma 47,400 521 05/23/85 50.0%
Phillips Rd. S.W.
WISCONSIN
Madison 71,500 395 09/18/85 50.0
Copps Avenue
10
The weighted average occupancy level for the Mini-Warehouse Properties
was 84% in 2002 and 86% in 2001. The annual average realized rent per square
foot for the Mini-Warehouse Properties was $8.85 in 2002 compared to $8.88 in
2001.
There are no mortgages or other encumbrances of any of the Properties.
The Partnership does not have any agreements to buy or sell any real
estate nor does it expect to further develop any of its facilities except for
capital improvements.
ITEM 3. Legal Proceedings.
Salaam, et. Al V. Public Storage, Inc. (filed February 2000)
------------------------------------------------------------
The plaintiffs in this case are suing the Company on behalf of
a purported class of California resident property managers who claim
that they were not compensated for all the hours they worked. The named
plaintiffs have indicated that their claims total less than $20,000 in
aggregate. This maximum potential liability can only be increased if a
class is certified or if claims are permitted to be brought on behalf
of the others under the California Unfair Business Practices Act. The
plaintiffs' motion for class certification was denied in August 2002;
the plaintiffs have appealed this denial. This denial does not deal
with the claim under the California Unfair Business Practices Act.
The Company is continuing to vigorously contest the claims in
this case and intends to resist any expansion beyond the named
plaintiffs on the grounds of lack of commonality of claims. The
Company's resistance will include opposing the plaintiffs' appeal of
the court's denial of class certification and opposing the claim on
behalf of others under the California Unfair Business Practices Act.
Henriquez v. Public Storage, Inc. (Filed June 2002; Dismissed January,
-----------------------------------------------------------------------
2003)
-----
The plaintiff in this case filed a suit against the Company on
behalf of a purported class of renters who rented self-storage units
from the Company. Plaintiff alleged that the Company misrepresents the
size of its units and sought damages and injunctive and declaratory
relief under California statutory and common law relating to consumer
protection, unfair competition, fraud and deceit and negligent
misrepresentation. In January 2003, the plaintiff caused this suit to
be dismissed. The plaintiff's attorney has advised that he anticipates
filing a similar suit against the Company on behalf of a new plaintiff.
However, the Company cannot presently determine the potential total
damages, if any, or the ultimate outcome of any such litigation. If a
new suit is filed, the Company intends to vigorously contest any claims
on which it is based.
Public Storage and the Partnership are parties to various claims,
complaints, and other legal actions that have arisen in the normal course of
business from time to time. We believe that the outcome of these other pending
legal proceedings, in the aggregate, will not have a material adverse effect
upon the operations or financial position of the Partnership.
ITEM 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the
fourth quarter of 2002.
11
PART II
ITEM 5. Market for the Partnership's Common Equity and Related Stockholder
Matters.
The Partnership has no common stock.
The Units are not listed on any national securities exchange or quoted
on the NASDAQ System, and there is no established public trading market for the
Units. Secondary sales activity for the Units has been limited and sporadic. The
General Partners monitor transfers of the Units (a) because the admission of the
transferee as a substitute limited partner requires the consent of the General
Partners under the Partnership's Amended and Restated Agreement of Limited
Partnership, (b) in order to ensure compliance with safe harbor provisions to
avoid treatment as a "publicly traded partnership" for tax purposes and (c)
because PSI has purchased Units. However, the General Partners do not have
information regarding the prices at which all secondary sale transactions in the
Units have been effectuated. Various organizations offer to purchase and sell
limited partnership interests (including securities of the type such as the
Units) in secondary sales transactions. Various publications such as The Stanger
Report summarize and report information (on a monthly, bimonthly or less
frequent basis) regarding secondary sales transactions in limited partnership
interests (including the Units), including the prices at which such secondary
sales transactions are effectuated.
Exclusive of the General Partners' interest in the Partnership, as of
December 31, 2002, there were approximately 2,361 record holders of Units.
In February 1997, PSI completed a cash tender offer, which had
commenced in December 1996, pursuant to which PSI acquired a total of 14,787
limited partnership units at $300 per Unit.
The Partnership makes quarterly distributions of all "Cash Available
for Distribution" and will make distributions of "Cash from Sales or
Refinancing". Cash Available for Distribution is cash flow from all sources less
cash necessary for any obligations or capital improvements, or reserves.
Reference is made to Items 6 and 7 hereof for information on the amount
of such distributions.
On December 18, 2002, the Partnership entered into an Agreement and
Plan of Reorganization with Public Storage, Inc. (NYSE:PSA). Under the Agreement
and Plan of Reorganization, each of the Partnership units held by the public
will be converted into the right to receive a value of $442 in PSA common stock
or, at the limited partner's election, in cash. The transaction is expected to
close in the second quarter of 2003.
12
ITEM 6. Selected Financial Data.
For the Years Ended December 31,
-----------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------- ------------- ------------- ------------- -------------
(In thousands, except per Unit data)
Total Revenues $ 465 $ 504 $ 527 $ 410 $ 433
Equity in earnings of real estate entities 3,774 3,765 3,262 2,920 2,608
Depreciation and amortization 75 76 70 69 66
Net income 3,876 3,902 3,418 2,974 2,696
Limited partners' share 3,382 3,254 3,127 2,434 2,471
General partners' share 494 648 291 540 225
Limited partners'
per unit data (a)
Net income $26.42 $25.42 $24.43 $19.02 $19.30
Cash distributions (b) $32.00 $42.80 $18.10 $35.84 $13.92
As of December 31,
- ------------------
Cash and cash equivalents $ 1,446 $ 1,741 $ 3,727 $ 2,337 $ 3,414
Total assets $ 16,297 $ 16,978 $ 19,181 $ 18,404 $ 20,524
(a) Limited partners' per unit data is based on the weighted average number of
units outstanding (128,000) during the year.
(b) The General Partners distributed, concurrent with the distributions for the
first quarter of 1999, a portion of the Partnership's operating reserve
estimated to be $21.92 per Unit. The General Partners distributed,
concurrent with the distribution for the second quarter of 2001, a portion
of the operating reserve estimated to be $18.45 per Unit. The General
Partner distributed, concurrent with the distribution for the third quarter
of 2002, a portion of the operating reserve estimated to be $6.96 per Unit.
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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, which may
cause the actual results and performance of the Partnership to be materially
different from those expressed or implied in the forward looking statements.
Such factors are described in Item 1A, "Risk Factors" and include changes in
general economic conditions and in the markets in which the Partnership operates
and the impact of competition from new and existing storage and commercial
facilities and other storage alternatives, which could impact rents and
occupancy levels at the Partnership's facilities; the impact of the regulatory
environment as well as national, state, and local laws and regulations, which
could increase the Partnership's expense and reduce the Partnership's cash
available for distribution; and economic uncertainty due to the impact of war or
terrorism could adversely affect our business plan. We disclaim any obligation
to publicly release the results of any revisions to these forward-looking
statements reflecting new estimates, events or circumstances after the date of
this report.
13
Critical Accounting Policies
- ----------------------------
IMPAIRMENT OF REAL ESTATE
Substantially all of our assets consist of real estate. We quarterly
evaluate our real estate for impairment. The evaluation of real estate for
impairment requires determining whether indicators of impairment exist, which is
a subjective process. When any indicators of impairment are found, the
evaluation then entails projections of future operating cashflows, which also
involves significant judgment. We have identified no such impairments at
December 31, 2002. However, future events, or facts and circumstances that
currently exist that we have not yet identified, could cause us to conclude in
the future that our real estate is impaired. Any resulting impairment loss could
have a material adverse impact on our financial condition and results of
operations.
ESTIMATED USEFUL LIVES OF LONG-LIVED ASSETS
Substantially all of our assets consist of depreciable, long-lived
assets. We record depreciation expense with respect to these assets based upon
their estimated useful lives. Any change in the estimated useful lives of those
assets, caused by functional or economic obsolescence or other factors, could
have a material adverse impact on our financial condition or results of
operations.
ACCRUALS FOR CONTINGENCIES
We are exposed to business and legal liability risks with respect to
events that have occurred, but in accordance with generally accepted accounting
principles we have not accrued for such potential liabilities because the loss
is either not probable or not estimable or because we are not aware of the
event. Future events and the result of pending litigation could result in such
potential losses becoming probable and estimable, which could have a material
adverse impact on our financial condition or results of operations. Some of
these potential losses, which we are aware of, are described in Note 9 to the
partnership's financial statements.
ACCRUALS FOR OPERATING EXPENSES
We accrue for property tax expense and other operating expenses based
upon estimates and historical trends and current and anticipated local and state
government rules and regulations. If these estimates and assumptions are
incorrect, our expenses could be misstated.
Results of Operations
- ---------------------
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001:
The Partnership's net income was $3,876,000 in 2002 compared to
$3,902,000 in 2001, representing a decrease of $26,000, or 0.7%. The decrease is
due primarily to the Partnership's share of decreased results in operations of
the mini-warehouses in which the Partnership has an interest (the
"Mini-Warehouse Properties").
Property Operations: Rental income for the Partnership's wholly-owned
mini-warehouse property was $320,000 in 2002 compared to $327,000 in 2001,
representing a decrease of $7,000, or 2.1%. Cost of operations (including
management fees) was $143,000 for 2002 as compared to $137,000 for 2001,
representing a decrease of $6,000 or 4.4%. Accordingly, for the Partnership's
wholly-owned mini-warehouse property, property net operating income decreased by
$13,000, or 6.8%, from $190,000 in 2001 to $177,000 in 2002.
Equity in earnings of real estate entities: Equity in earnings of real
estate entities was $3,774,000 in 2002 as compared to $3,765,000 during 2001,
representing an increase of $9,000, or 0.2%.
14
Depreciation and amortization: Depreciation and amortization decreased
$1,000, or 1.3%, from $76,000 in 2001 to $75,000 during 2002.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000:
The Partnership's net income was $3,902,000 in 2001 compared to
$3,418,000 in 2000, representing an increase of $484,000, or 12.4%. The increase
is due primarily to the Partnership's share of an improvement in operations of
the mini-warehouses in which the Partnership has an interest (the
"Mini-Warehouse Properties") and a decrease in depreciation allocated to the
Partnership with respect to the joint venture.
Property Operations: Rental income for the Partnership's wholly-owned
mini-warehouse property was $327,000 in 2001 compared to $319,000 in 2000,
representing an increase of $8,000, or 2.5%. Cost of operations (including
management fees) remained stable at $137,000 for 2001 and 2000. Accordingly, for
the Partnership's wholly-owned mini-warehouse property, property net operating
income increased by $8,000, or 4.4%, from $182,000 in 2000 to $190,000 in 2001.
Equity in earnings of real estate entities: Equity in earnings of real
estate entities was $3,765,000 in 2001 as compared to $3,262,000 during 2000,
representing an increase of $503,000, or 15.4%. The increase is due primarily to
the Partnership's share of an improvement in operations of the Mini-Warehouse
Properties and a decrease in depreciation allocated to the Partnership with
respect to the joint venture.
Depreciation and amortization: Depreciation and amortization increased
$6,000, or 8.6%, from $70,000 in 2000 to $76,000 during 2001.
Supplemental Property Data
- --------------------------
During 2002 and 2001, a majority of the Partnership's net income was
from the Partnership's share of the operating results of the Mini-Warehouse
Properties. Therefore, in order to evaluate the Partnership's operating results,
the General Partners analyze the operating performance of the Mini-Warehouse
Properties.
Year ended December 31, 2002 compared to the year ended December 31,
2001: Rental income for the Mini-Warehouse Properties was $13,457,000 in 2002
compared to $13,921,000 during 2001, representing a decrease of $464,000, or
3.3%. The decrease in rental income was primarily attributable to decreased
occupancy at the Partnership's Mini-Warehouse Properties. The annual average
realized rent per square foot was $8.85 in 2002 compared to $8.88 in 2001. The
weighted average occupancy level was 86% in 2001 and 84% in 2002. Cost of
operations (including management fees) decreased $5,000, or 0.1%, to $5,435,000
during 2002 from $5,440,000 in 2001. This decrease was primarily attributable to
a decrease in advertising expense. Accordingly, for the Mini-Warehouse
Properties, property net operating income decreased by $459,000, or 5.4%, from
$8,481,000 in 2001 to $8,022,000 during 2002.
Year ended December 31, 2001 compared to the year ended December 31,
2000: Rental income for the Mini-Warehouse Properties was $13,921,000 in 2001
compared to $13,183,000 during 2000, representing an increase of $738,000, or
5.6%. The increase in rental income was primarily attributable to increased
rental rates. The annual average realized rent per square foot was $8.88 in 2001
compared to $8.27 in 2000. The weighted average occupancy level was 88% in 2000
and 86% in 2001. Cost of operations (including management fees) increased
$124,000, or 2.3%, to $5,440,000 during 2001 from $5,316,000 in 2000. This
increase was primarily attributable to increases in advertising and property tax
expense. Accordingly, for the Mini-Warehouse Properties, property net operating
income increased by $614,000, or 7.8%, from $7,867,000 in 2000 to $8,481,000
during 2001.
Liquidity and Capital Resources
- -------------------------------
The Partnership has adequate sources of cash to finance its operations,
both on a short-term and a long-term basis, primarily by internally generated
cash from property operations and distributions from Real Estate Entities,
combined with cash on-hand at December 31, 2002 totaling $1,446,000.
15
Cash flows from operating activities and distributions from
Real Estate Entities (totaling $4,320,000 for the year ended December 31, 2002)
have been sufficient to meet all current obligations of the Partnership. Total
capital improvements for the Partnership's wholly-owned property were $17,000,
$5,000 and $35,000 in 2002, 2001 and 2000, respectively.
Total distributions paid to the General Partners and the limited
partners (including per Unit amounts) for 2002 and prior years were as follows:
Total Per Unit
-------------- ------------
2002 $4,598,000 $32.00
2001 6,149,000 42.80
2000 2,600,000 18.10
1999 5,150,000 35.84
1998 2,000,000 13.92
1997 2,000,000 13.92
1996 2,999,000 20.88
1995 4,899,000 34.10
1994 2,816,000 19.60
1993 2,442,000 17.00
1992 2,968,000 20.66
1991 3,607,000 25.11
1990 3,144,000 21.89
1989 3,097,000 21.56
1988 3,769,000 26.23
1987 3,770,000 26.23
1986 3,593,000 25.00
The Partnership, in prior years, made regular distributions based on
estimated cash available for distribution (cash flow from all sources, less cash
necessary for capital improvement needs and to establish reserves). The General
Partners would periodically make special distributions if cash available for
distribution exceeded its original estimates or if it adjusted the Partnership's
cash reserve levels. The General Partners distributed, concurrent with the
regular distribution for the third quarter of 2002, a special distribution of
$6.96 per Unit. Future distribution levels will be based on the General
Partners' estimate of on-going cash flow available for distributions (cash flows
from operations and distributions from Real Estate Entities less capital
improvements and necessary cash reserves). The Partnership does not anticipate
any material changes in its reserve requirements for capital improvements or
other items.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk.
None.
ITEM 8. Financial Statements and Supplementary Data.
The Partnership's financial statements are included elsewhere herein.
Reference is made to the Index to Financial Statements and Financial Statement
Schedules in Item 15(a).
ITEM 9. Disagreements on Accounting and Financial Disclosure.
None.
16
PART III
ITEM 10. Directors and Executive Officers of the Partnership.
The Partnership has no directors or executive officers.
The Partnership's General Partners are PSI and B. Wayne Hughes. PSI,
acting through its directors and executive officers, and Mr. Hughes manage and
make investment decisions for the Partnership. The Mini-Warehouse Properties are
managed by PSI pursuant to a Management Agreement. Through 1996, the business
parks owned by the Joint Venture were managed by a predecessor of PSBPLP,
pursuant to a Management Agreement. In January 1997, the Joint Venture
transferred its business parks to PSBPLP in exchange for a partnership interest
in PSBPLP.
The names of all directors and executive officers of PSI, the offices
held by each of them with PSI, and their ages and business experience during the
past five years are as follows:
Name Positions with PSI
- ---------------------- --------------------------------------------------
B. Wayne Hughes Chief Executive Officer (through November 7, 2002)
and Chairman of the Board
Ronald L. Havner, Jr. Chief Executive Officer (after November 7, 2002)
and Vice Chairman of the Board
Harvey Lenkin President and Director
Marvin M. Lotz Senior Vice President and Director
B. Wayne Hughes, Jr. Director
John Reyes Senior Vice President and Chief Financial Officer
Robert J. Abernethy Director
Dann V. Angeloff Director
William C. Baker Director
Thomas J. Barrack Jr. Director
Uri P. Harkham Director
Daniel C. Staton Director
B. Wayne Hughes, age 69, a general partner of the Partnership, has been
a director of PSI since its organization in 1980 and was President and Co-Chief
Executive Officer from 1980 until November 1991 when he became Chairman of the
Board and sole Chief Executive Officer. On November 7, 2002, Mr. Hughes resigned
as Chief Executive Officer of PSI. He remains as chairman of the board of
directors, and intends to focus on strategic and marketing initiatives. Mr.
Hughes has been active in the real estate investment field for over 30 years. He
is the father of B. Wayne Hughes, Jr.
Ronald L. Havner, Jr., age 45, was appointed Vice Chairman and Chief
Executive Officer of PSI on November 7, 2002. Mr. Havner has been employed by
PSI in various accounting and operational capacities since 1986 and served as
Senior Vice President and Chief Financial Officer from November 1991 until
December 1996 when be became Chairman, President and Chief Executive Officer of
PS Business Parks, Inc. (AMEX: symbol PSB) an affiliate of the Company. He is a
member of the National Association of Real Estate Investment Trusts (NAREIT) and
the Urban Land Institute (ULI) and a Director of Business Machine Security, Inc.
and Mobile Storage Group, Inc. Mr. Havner earned a Bachelor of Arts degree in
Economics from the University of California, Los Angeles.
Harvey Lenkin, age 66, has been employed by PSI for 25 years and became
President and a director of PSI in November 1991. Mr. Lenkin has been a director
of PS Business Parks, Inc. ("PSBP"), an affiliated REIT, since March 16, 1998
and was President of PSBP (formerly Public Storage Properties XI, Inc.) from
1990 until March 16, 1998. He is a member of the Board of Governors of the
National Association of Real Estate Investment Trusts (NAREIT).
17
Marvin M. Lotz, age 60, became a director of PSI in May 1999. Mr. Lotz
has been a Senior Vice President of the Company since November 1995 and
President of the Property Management Division since 1988 with overall
responsibility for Public Storage's mini-warehouse operations. He had overall
responsibility for the Company's property acquisitions from 1983 until 1988.
B. Wayne Hughes, Jr., age 43 became director of PSI in January 1998. He
has been employed by PSI from 1989 to 2002 serving as Vice President -
Acquisitions of PSI from 1992 to 2002. Mr. Hughes, Jr. is the president of a
firm that manufactures and distributes sweets. He is the son of B. Wayne Hughes.
John Reyes, age 42, a certified public accountant, joined PSI in 1990
and was Controller of PSI from 1992 until December 1996 when he became Chief
Financial Officer. He became a Vice President of PSI in November 1995 and a
Senior Vice President of PSI in December 1996. From 1983 to 1990, Mr. Reyes was
employed by Ernst & Young.
Robert J. Abernethy, age 63, has been President of American Standard
Development Company and of Self-Storage Management Company, which develop and
operate mini-warehouses, since 1976 and 1977, respectively. Mr. Abernethy has
been a director of PSI since its organization in 1980. He is a member of the
board of trustees of Johns Hopkins University, a director of Marathon National
Bank and a California Transportation Commissioner. Mr. Abernethy is a former
member of the board of directors of the Los Angeles County Metropolitan
Transportation Authority and the Metropolitan Water District of Southern
California and a former Planning Commissioner and Telecommunications
Commissioner and former Vice-Chairman of the Economic Development Commission of
the City of Los Angeles.
Dann V. Angeloff, age 67, has been President of the Angeloff Company, a
corporate financial advisory firm, since 1976. Mr. Angeloff is the general
partner of a limited partnership that owns a mini-warehouse operated by PSI and
which secures a note owned by PSI. Mr. Angeloff has been a director of PSI since
its organization in 1980. He is a director of AremisSoft Corporation, Balboa
Capital Corporation, Nicholas/Applegate Growth Equity Fund, ReadyPac Produce,
Inc., Royce Medical Company and xDimentional Technologies, Inc. He was a
director of SPI from 1989 until June 1996.
William C. Baker, age 69, became a director of PSI in November 1991.
Since 1970, Mr. Baker has been a partner in Baker & Simpson, a private
investment entity. From August 1998 through April 2000, he was President and
Treasurer of Meditrust Operating Company, a real estate investment trust. From
April 1996 to December 1998, Mr. Baker was Chief Executive Officer of Santa
Anita Companies which then operated the Santa Anita Racetrack. From April 1993
through May 1995, Mr. Baker was President of Red Robin International, Inc., an
operator and franchiser of casual dining restaurants in the United States and
Canada. From January 1992 through December 1995 he was Chairman and Chief
Executive Officer of Carolina Restaurant Enterprises, Inc., a franchisee of Red
Robin International, Inc. From 1991 to 1999, he was Chairman of the Board of
Coast Newport Properties, a real estate brokerage company. From 1976 to 1988, he
was a principal shareholder and Chairman and Chief Executive Officer of Del
Taco, Inc., an operator and franchiser of fast food restaurants in California.
Mr. Baker is a director of Callaway Golf Company, Meditrust Operating Company
and Meditrust Corporation.
Thomas J. Barrack, Jr., age 55, became a director of PSI in February
1998. Mr. Barrack has been the Chairman and Chief Executive Officer of Colony
Capital, Inc. since September, 1991. Colony Capital, Inc. is one of the largest
real estate investors in America, having acquired properties in the U.S., Europe
and Asia. Prior to founding Colony Capital, Inc., from 1987 to 1991, Mr. Barrack
was a principal with the Robert M. Bass Group, Inc., the principal investment
vehicle for Robert M. Bass of Fort Worth, Texas. From 1985 to 1987, Mr. Barrack
was President of Oxford Ventures, Inc., a Canadian-based real estate development
company. From 1984 to 1985 he was a Senior Vice President at E. F. Hutton
Corporate Finance in New York. Mr. Barrack was appointed by President Ronald
Reagan as Deputy Under Secretary at the U.S. Department of the Interior from
1982 to 1983. Mr. Barrack currently is a director of Continental Airlines, Inc.
and Kennedy-Wilson, Inc.
18
Uri P. Harkham, age 54, became a director of PSI in March 1993. Mr.
Harkham has been the President and Chief Executive Officer of the Jonathan
Martin Fashion Group, which specializes in designing, manufacturing and
marketing women's clothing, since its organization in 1976. Since 1978, Mr.
Harkham has been the Chairman of the Board of Harkham Properties, a real estate
firm specializing in buying and managing fashion warehouses in Los Angeles.
Daniel C. Staton, age 50, became a director of PSI on March 12, 1999 in
connection with the merger of Storage Trust Realty, a real estate investment
trust, with PSI. Mr. Staton was Chairman of the Board of Trustees of Storage
Trust Realty from February 1998 until March 12, 1999 and a Trustee of Storage
Trust Realty from November 1994 until March 12, 1999. He is President of Walnut
Capital Partners, an investment and venture capital company. Mr. Staton was the
Chief Operating Officer and Executive Vice President of Duke Realty Investments,
Inc. from 1993 to 1997 and a director of Duke Realty Investments, Inc. from 1993
until August 1999. From 1981 to 1983, Mr. Staton was a principal owner of Duke
Associates, the predecessor of Duke Realty Investments, Inc. Prior to joining
Duke Associates in 1981, he was a partner and general manager of his own moving
company, Gateway Van & Storage, Inc. in St. Louis, Missouri. Form 1986 to 1988,
Mr. Staton served as president of the Greater Cincinnati Chapter of the National
Association of Industrial and Office Parks.
Pursuant to Articles 16 and 17 of the Partnership's Amended Certificate
and Agreement of Limited Partnership (the "Partnership Agreement"), a copy of
which is included in the Partnership's prospectus included in the Partnership's
Registration Statement, File No. 2-92009, each of the General Partners continues
to serve until (i) death, insanity, insolvency, bankruptcy or dissolution, (ii)
withdrawal with the consent of the other general partner and a majority vote of
the limited partners, or (iii) removal by a majority vote of the limited
partners.
Each director of PSI serves until he resigns or is removed from office
by PSI, and may resign or be removed from office at any time with or without
cause. Each officer of PSI serves until he resigns or is removed by the board of
directors of PSI. Any such officer may resign or be removed from office at any
time with or without cause.
There have been no events under any bankruptcy act, no criminal
proceedings, and no judgments or injunctions material to the evaluation of the
ability of any director or executive officer of PSI during the past five years.
ITEM 11. Executive Compensation.
The Partnership has no subsidiaries, directors or officers. See Item 13
for a description of certain transactions between the Partnership and the
General Partners and their affiliates.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
(a) At March 10, 2003, PSI beneficially owned more than 5% or more of
the Units of the Partnership:
Title Amount of Percent
of Name and Address of Beneficial of
Class Beneficial Owner Ownership Class
- ---------------------- ----------------------------------------------- ----------------- -------
Units of Limited Public Storage, Inc.
Partnership 701 Western Avenue
Interest Glendale, CA 91201 (1) 75,149 Units (1) 58.7%
- ------------
(1) These Units are held of record by SEI Arlington Acquisition Corporation, a
wholly-owned subsidiary of PSI.
The Partnership is not aware of any other beneficial owners of more
than 5% of the Units.
(b) The Partnership has no officers and directors. The General Partners
of the Partnership are PSI and B. Wayne Hughes, the Chairman of PSI. These
general partners have the powers and duties of a general partner, such as
management, conduct and operation of the Partnership as denoted in the
Partnership agreement. In addition, they have the liabilities associated with
being a general partner of the Partnership.
19
The General Partners have contributed $646,000 to the capital of the
Partnership representing 1% of the aggregate capital contributions and as a
result participate in the distributions to the limited partners and in the
Partnership's profits and losses in the same proportion that the general
partners' capital contribution bears to the total capital contribution
(approximately $517,000 was contributed by PSI and approximately $129,000 was
contributed by Mr. Hughes). In addition, the General Partners' interest includes
additional distribution rights as outlined in Item 13. Certain Relationships and
Related Transactions. In 1993, Mr. Hughes sold his ownership and rights to
distributions from the Partnership to Public Storage. As such, Mr. Hughes
continues to act as a general partner but receives no compensation or other
consideration from the Partnership. Mr. Hughes has no other interests in the
Partnership.
(c) The Partnership knows of no contractual arrangements, the operation
of the terms of which may at a subsequent date result in a change in control of
the Partnership, except for articles 16, 17 and 21.1 of the Partnership's
Amended Certificate and Agreement of Limited Partnership, a copy of which is
included in the Partnership's prospectus included in the Partnership's
Registration Statement File No. 2-92009. Those articles provide, in substance,
that the limited partners shall have the right, by majority vote, to remove a
general partner and that a general partner may designate a successor with the
consent of the other general partner and a majority of the limited partners.
The Partnership owns interests in 33 properties (which exclude the
properties transferred to PSBPLP in January 1997); 32 of such properties are
held in a general partnership comprised of the Partnership and PSI. Under the
terms of the partnership agreement relating to the ownership of the properties,
PSI has the right to compel a sale of each property at any time after seven
years from the date of acquisition at not less than its independently determined
fair market value provided the Partnership receives its share of the net sales
proceeds solely in cash. As of December 31, 2002, PSI has the right to require
the Partnership to sell all of the Joint Venture's properties on these terms.
ITEM 13. Certain Relationships and Related Transactions.
The Partnership Agreement provides that the General Partners and their
affiliates are entitled to the following compensation:
1. Incentive distributions equal to 10% of Cash Flow from Operations.
2. Provided the limited partners have received distributions equal to
100% of their investment plus a cumulative 8% per year (not
compounded) on their investment (reduced by distributions other
than from Cash Flow from Operations), subordinated incentive
distributions equal to 15% of remaining Cash from Sales or
Refinancings.
3. Provided the limited partners have received distributions equal to
100% of their capital contributions plus a cumulative 6% per year
(not compounded) on their investment (reduced by distributions
other than distributions from Cash Flow from Operations),
brokerage commissions at the lesser of 3% of the sales price of a
property or 50% of a competitive commission.
During 2002, approximately $460,000 was paid to PSI with respect to
items 1, 2, and 3 above. Mr. Hughes was paid no amounts with respect to items 1,
2, and 3 and receives no compensation as general partner because PSI has
acquired Mr. Hughes' ownership and distribution rights in the Partnership. The
Partnership owns interests in 33 properties (which exclude the properties
transferred to PSBPLP in January 1997); 32 of such properties are held in a
general partnership comprised of the Partnership and PSI.
20
The Partnership and the Joint Venture have a Management
Agreement with PSI pursuant to which the Partnership and the Joint Venture pay
PSI a fee of 6% of the gross revenues of the mini-warehouse spaces operated for
the Partnership and the Joint Venture. For as long as the Management Agreement
is in effect, PSI has granted the Partnership and the Joint Venture a
non-exclusive license to use two PSI service marks and related designs,
including the "Public Storage" name, in conjunction with rental and operation of
facilities managed pursuant to the Management Agreement. Upon termination of the
Management Agreement, the Partnership and Joint Venture would no longer have the
right to use the service marks ad related designs. The General Partners believe
that the loss of the right to use the service marks and related designs could
have a material adverse effect on the Partnership's business. The Management
Agreement with PSI provides that the Management Agreement may be terminated
without cause upon 60 days written notice by the Partnership or 6 months notice
by PSI. During 2002, the Partnership and the Joint Venture paid fees of $805,000
to PSI pursuant to the Management Agreement.
The Partnership and PSI have joint ownership in SEI/PSP IV Joint
Ventures, which owns 32 of the 33 properties that the Partnership has an
interest in, as well as 599,340 operating partnership units in PSBPLP.
Pursuant to a Participation Agreement among PSI and the Partnership,
the Partnership manages SEI/PSP Partners IV Joint Ventures although PSI may
compel the sale of a property owned by the Joint Venture and each has a right of
first refusal to acquire the other's interest in the event of a proposed sale of
a property owned by the Joint Venture.
Through 1996, the Joint Venture business parks were managed by a
predecessor of PSBPLP pursuant to a Management Agreement which provides for the
payment of a fee by the Joint Venture of 5% of the gross revenues of the
commercial space operated for the Joint Venture. In January 1997, the Joint
Venture, PSI and other affiliated entities transferred a total of 35 business
parks to PSBPLP, an operating partnership formed to own and operate business
parks in which PSI has a significant interest. Included among the properties
transferred were the Joint Venture's business parks in exchange for a
partnership interest in PSBPLP. The general partner of PSBPLP is PS Business
Parks, Inc., a REIT traded on the American Stock Exchange. As of December 31,
2002, the Joint Venture owned approximately 2%, PSI and its subsidiaries
(excluding the Partnership) owned approximately 42% and Mr. Hughes and his
family owned less than 1% of the outstanding common partnership interests of
PSBPLP, respectively.
In addition, the Partnership combines its insurance purchasing power
with PSI through a captive insurance company controlled by PSI, STOR-Re Mutual
Insurance Corporation ("Stor-Re"). Stor-Re provides limited property and
liability insurance to the Partnership at commercially competitive rates. The
Partnership and PSI also utilize unaffiliated insurance carriers to provide
property and liability insurance in excess of Stor-Re's limitations.
ITEM 14. Controls and Procedures
The Partnership maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in reports the
Partnership files and submits under the Exchange Act, is recorded, processed,
summarized and reported within the time periods specified in accordance with SEC
guidelines and that such information is communicated to the Partnership's
management, to allow timely decisions regarding required disclosure based on the
definition of "disclosure controls and procedures" in Rule 13a-14(c) of the
Exchange Act. In designing and evaluating the disclosure controls and
procedures, management recognized that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives.
Within 90 days prior to the date of this report, the Partnership
carried out an evaluation, under the supervision and with the participation of
the Partnership's management, of the effectiveness of the design and operation
of the Partnership's disclosure controls and procedures. Based upon this
evaluation, the Partnership's Chief Executive Officer and Chief Financial
Officer concluded that the Partnership's disclosure controls and procedures were
effective. There have been no significant changes in the Partnership's internal
controls or in other factors that could significantly affect the internal
controls subsequent to the date of the Partnership's evaluation.
21
PART IV
ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) List of Documents filed as part of the Report.
1. Financial Statements: See Index to Financial Statements and
Financial Statement Schedules.
2. Financial Statement Schedules: See Index to Financial Statements
and Financial Statement Schedules.
3. Exhibits: See Exhibit Index contained herein.
4. Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K.
The Partnership filed a Current Report on from 8-K dated
December 18, 2002 (filed December 20, 2002), pursuant to Item 5, in
connection with an Agreement and Plan of Reorganization by and among
Public Storage, Inc. ("PSI"), PS Partners IV Merger Co., Inc, and the
Partnership.
(c) Exhibits: See Exhibit Index contained herein.
22
PS PARTNERS IV, LTD.
INDEX TO EXHIBITS
(Item 15(c))
3.1 Amended Certificate and Agreement of Limited Partnership. Previously
filed with the Securities and Exchange Commission as Exhibit A to the
Partnership's Prospectus included in Registration Statement No.
2-92009 and incorporated herein by reference.
10.1 Second Amended and Restated Management Agreement dated November 16,
1995, between the Partnership and Public Storage Management, Inc.
Previously filed with the Securities and Exchange Commission as an
exhibit to PS Partners, Ltd.'s Annual Report on Form 10-K for the year
ended December 31, 1996 and incorporated herein by reference.
10.2 Amended Management Agreement dated February 21, 1995 between Storage
Equities, Inc. and Public Storage Commercial Properties Group, Inc.
Previously filed with the Securities and Exchange Commission as an
exhibit to the Partnership's Annual Report on Form 10-K for the year
ended December 31, 1994 and incorporated herein by reference.
10.3 Participation Agreement dated as of December 26, 1984, among Storage
Equities, Inc., the Partnership, Public Storage, Inc., B. Wayne Hughes
and Kenneth Q. Volk, Jr. Previously filed with the Securities and
Exchange Commission as an exhibit to Storage Equities, Inc. Annual
Report on Form 10-K for the year ended December 31, 1984 and
incorporated herein by reference.
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. Filed herewith.
99.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. Filed herewith.
99.3 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. Filed herewith.
99.4 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. Filed herewith.
23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Partnership has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PS PARTNERS IV, LTD.
Dated: March 28, 2003 By: Public Storage, Inc., General Partner
By: /s/ B. Wayne Hughes
--------------------
B. Wayne Hughes, Chairman of the Board
By: /s/ B. Wayne Hughes
-------------------
B. Wayne Hughes, General Partner
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
Partnership in the capacities and on the dates indicated.
Signature Capacity Date
- ------------------------------------- --------------------------------------------------- ----------------
/s/ B. Wayne Hughes Chairman of the Board of Public Storage, Inc. and March 28, 2003
- ------------------------------------ General Partner
B. Wayne Hughes
/s/ Ronald L. Havner, Jr. Vice Chairman of the Board and Chief Executive March 28, 2003
- ------------------------------------ Officer of Public Storage, Inc.
Ronald L. Havner, Jr.
/s/ Harvey Lenkin President and Director March 28, 2003
- ------------------------------------ of Public Storage, Inc.
Harvey Lenkin
/s/ Marvin M. Lotz Senior Vice President and Director March 28, 2003
- ------------------------------------ of Public Storage, Inc.
Marvin M. Lotz
/s/ B. Wayne Hughes, Jr. Vice President and Director March 28, 2003
- ------------------------------------ of Public Storage, Inc.
B. Wayne Hughes, Jr.
/s/ John Reyes Senior Vice President and Chief Financial Officer March 28, 2003
- ------------------------------------ of Public Storage, Inc. (principal financial
John Reyes officer and principal accounting officer)
/s/ Robert J. Abernethy Director of Public Storage, Inc. March 28, 2003
- ------------------------------------
Robert J. Abernethy
/s/ Dann V. Angeloff Director of Public Storage, Inc. March 28, 2003
- ------------------------------------
Dann V. Angeloff
/s/ William C. Baker Director of Public Storage, Inc. March 28, 2003
- ------------------------------------
William C. Baker
Director of Public Storage, Inc.
- ------------------------------------
Thomas J. Barrack, Jr.
/s/ Uri P. Harkham Director of Public Storage, Inc. March 28, 2003
- ------------------------------------
Uri P. Harkham
/s/ Daniel C. Staton Director of Public Storage, Inc. March 28, 2003
- ------------------------------------
Daniel C. Staton
24
PS PARTNERS IV, LTD.
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
(Item 15 (a))
Page
References
----------
PS PARTNERS IV, LTD.
Report of Independent Auditors F-1
Financial Statements and Schedule:
Balance Sheets as of December 31, 2002 and 2001 F-2 For the years ended
December 31, 2002, 2001 and 2000:
Statements of Income F-3
Statements of Partners' Equity F-4
Statements of Cash Flows F-5
Notes to Financial Statements F-6 - F-12
Schedule
Schedule III - Real Estate and Accumulated Depreciation F-13 - F-14
Financial Statements of 50 percent or less owned persons required pursuant to Rule 3-09:
PS BUSINESS PARKS, INC. - PS Business Parks, Inc. is a registrant with the Securities and
Exchange Commission and its filings can be accessed through the Securities and Exchange
Commission.
SEI/PSP IV JOINT VENTURES
Report of Independent Auditors F-15
Financial Statements:
Balance Sheets as of December 31, 2002 and 2001 F-16
For the years ended December 31, 2002, 2001 and 2000:
Statements of Income F-17
Statements of Partners' Equity F-18
Statements of Cash Flows F-19
Notes to Financial Statements F-20 - F-24
Schedule
Schedule III - Real Estate and Accumulated Depreciation F-25 - F-27
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 financial
statements or the notes thereto.
25
Report of Independent Auditors
The Partners
PS Partners IV, Ltd.
We have audited the balance sheets of PS Partners IV, Ltd. (the "Partnership")
as of December 31, 2002 and 2001 and the related statements of income, partners'
equity, and cash flows for each of the three years in the period ended December
31, 2002. Our audits also included the financial statement schedule listed in
the Index at Item 15(a). These financial statements and schedule are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements and 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 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 financial statements referred to above present fairly, in
all material respects, the financial position of PS Partners IV, Ltd. at
December 31, 2002 and 2001, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2002 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.
ERNST & YOUNG LLP
March 19, 2003
Los Angeles, CA
F-1
PS PARTNERS IV, LTD.
BALANCE SHEETS
December 31, 2002 and 2001
2002 2001
---------------------------------------
ASSETS
Cash and cash equivalents $ 1,446,000 $ 1,741,000
Rent and other receivables 62,000 55,000
Real estate facility, at cost:
Land 101,000 101,000
Buildings and equipment 1,594,000 1,577,000
---------------------------------------
1,695,000 1,678,000
Less accumulated depreciation (937,000) (862,000)
---------------------------------------
758,000 816,000
Investment in real estate entities 14,002,000 14,364,000
Other assets 29,000 2,000
---------------------------------------
$ 16,297,000 $ 16,978,000
=======================================
LIABILITIES AND PARTNERS' EQUITY
Accounts payable $ 219,000 $ 183,000
Advance payments from renters 15,000 10,000
Partners' equity:
Limited partners' equity, $500 per unit, 128,000
units authorized, issued and outstanding 15,820,000 16,534,000
General partner's equity 243,000 251,000
---------------------------------------
Total partners' equity 16,063,000 16,785,000
---------------------------------------
$ 16,297,000 $ 16,978,000
=======================================
See accompanying footnotes.
F-2
PS PARTNERS IV, LTD.
STATEMENTS OF INCOME
For the years ended December 31, 2002, 2001 and 2000
2002 2001 2000
---------------------------------------------------------------
REVENUE:
Rental income $ 320,000 $ 327,000 $ 319,000
Interest and other income 145,000 177,000 208,000
---------------------------------------------------------------
465,000 504,000 527,000
---------------------------------------------------------------
COSTS AND EXPENSES:
Cost of operations 124,000 117,000 117,000
Management fees 19,000 20,000 20,000
Depreciation and amortization 75,000 76,000 70,000
Administrative 145,000 154,000 164,000
---------------------------------------------------------------
363,000 367,000 371,000
---------------------------------------------------------------
Income before equity in earnings of real estate entities 102,000 137,000 156,000
Equity in earnings of real estate entities 3,774,000 3,765,000 3,262,000
NET INCOME $ 3,876,000 $ 3,902,000 $ 3,418,000
===============================================================
Limited partners' share of net income
($26.42, $25.42 and $24.43 per unit in
2002, 2001 and 2000, respectively) $ 3,382,000 $ 3,254,000 $ 3,127,000
General partners' share of net income 494,000 648,000 291,000
-----------------------------------------------------------------
$ 3,876,000 $ 3,902,000 $ 3,418,000
=================================================================
See accompanying footnotes.
F-3
PS PARTNERS IV, LTD.
STATEMENTS OF PARTNERS' EQUITY
For the years ended December 31, 2002, 2001 and 2000
Limited General
Partners Partners Total
---------------------------------------------------------------
Balances at December 31, 1999 $ 17,949,000 $ 265,000 $ 18,214,000
Net income 3,127,000 291,000 3,418,000
Distributions (2,317,000) (283,000) (2,600,000)
---------------------------------------------------------------
Balances at December 31, 2000 18,759,000 273,000 19,032,000
Net income 3,254,000 648,000 3,902,000
Distributions (5,479,000) (670,000) (6,149,000)
---------------------------------------------------------------
Balances at December 31, 2001 16,534,000 251,000 16,785,000
Net income 3,382,000 494,000 3,876,000
Distributions (4,096,000) (502,000) (4,598,000)
---------------------------------------------------------------
Balances at December 31, 2002 $ 15,820,000 $ 243,000 $ 16,063,000
===============================================================
See accompanying footnotes.
F-4
PS PARTNERS IV, LTD.
STATEMENTS OF CASH FLOWS
For the years ended December 31, 2002, 2001 and 2000
2002 2001 2000
-----------------------------------------------------------
Cash flows from operating activities:
Net income $ 3,876,000 $ 3,902,000 $ 3,418,000
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 75,000 76,000 70,000
Increase in rent and other receivables (7,000) (53,000) -
(Increase) decrease in other assets (27,000) 1,000 -
Increase (decrease) in accounts payable 36,000 49,000 (44,000)
Increase (decrease) in advance payments from renters 5,000 (5,000) 3,000
Equity in earnings of real estate entities (3,774,000) (3,765,000) (3,262,000)
-----------------------------------------------------------
Total adjustments (3,692,000) (3,697,000) (3,233,000)
-----------------------------------------------------------
Net cash provided by operating activities 184,000 205,000 185,000
-----------------------------------------------------------
Cash flows provided by investing activities:
Distributions from real estate entities 4,136,000 3,963,000 3,840,000
Additions to real estate facility (17,000) (5,000) (35,000)
-----------------------------------------------------------
Net cash provided by investing activities 4,119,000 3,958,000 3,805,000
-----------------------------------------------------------
Cash flows used in financing activities:
Distributions to partners (4,598,000) (6,149,000) (2,600,000)
-----------------------------------------------------------
Net cash used in financing activities (4,598,000) (6,149,000) (2,600,000)
-----------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (295,000) (1,986,000) 1,390,000
Cash and cash equivalents at the beginning of the period 1,741,000 3,727,000 2,337,000
-----------------------------------------------------------
Cash and cash equivalents at the end of the period $ 1,446,000 $ 1,741,000 $ 2,337,000
===========================================================
See accompanying footnotes.
F-5
PS PARTNERS IV, LTD.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002
1. Description of Partnership
PS Partners IV, Ltd. (the "Partnership") was formed with the
proceeds of an interstate public offering. PSI Associates II, Inc.
("PSA"), an affiliate of Public Storage Management, Inc., organized the
Partnership along with B. Wayne Hughes ("Hughes"). In September 1993,
Storage Equities, Inc., now known as Public Storage Inc. ("PSI")
acquired the interest of PSA relating to its general partner capital
contribution in the Partnership and was substituted as a co-general
partner in place of PSA.
In 1995, there was a series of mergers among Public Storage
Management, Inc. (which was the Partnership's mini-warehouse operator),
Public Storage, Inc. and their affiliates (collectively, "PSMI"),
culminating in the November 16, 1995 merger (the "PSMI Merger") of PSMI
into Storage Equities, Inc. In the PSMI Merger, Storage Equities, Inc.
was renamed Public Storage, Inc. and it acquired substantially all of
PSMI's United States real estate operations and became the operator of
the mini-warehouse properties in which the Partnership has an interest.
The Partnership has invested in existing mini-warehouse
storage facilities which offer self-service storage spaces for lease,
usually on a month-to-month basis, to the general public and, to a
lesser extent, in existing business park facilities which offer
industrial and office space for lease.
The Partnership has ownership interests in 33 properties in 15
states (collectively referred to as the "Mini-Warehouse Properties"),
which exclude three properties transferred to PS Business Parks, L.P.
("PSBPLP") in January 1997. Thirty-two of the properties are owned by
SEI/PSP IV Joint Ventures (the "Joint Venture"), a general partnership
between the Partnership and PSI. The Partnership is the managing
general partner of the Joint Venture, with ownership interests in the
individual properties of the Joint Venture ranging from 49.8% to 50.9%.
As used hereinafter, the Joint Venture and PSBPLP are referred
to as the "Real Estate Entities."
2. Summary of Significant Accounting Policies and Partnership Matters
Basis of Presentation
---------------------
The financial statements include the accounts of the
Partnership. The accounts of the Joint Venture, which the Partnership
does not control, are not consolidated with the Partnership and the
Partnership's interest in the Joint Venture is accounted for on the
equity method.
The Partnership does not control the Joint Venture because PSI
has significant control rights with respect to the management of the
properties, including the right to compel the sale of each property in
the Joint Venture and the right to require the Partnership to submit
operating budgets.
Under the terms of the general partnership agreement of the
Joint Venture all depreciation and amortization with respect to each
property is allocated solely to the Partnership until the limited
partners recover their initial capital contribution. Thereafter, all
depreciation and amortization is allocated solely to PSI until it
recovers its initial capital contribution. All remaining depreciation
and amortization is allocated to the Partnership and PSI in proportion
to their ownership percentages.
F-6
Under the terms of the partnership agreements, PSI has the
right to compel the sale of each property in the general partnerships
at any time after seven years from the date of acquisition at not less
than its independently determined fair market value provided the
Partnership receives its share of the net proceeds solely in cash.
PSI's right to require the Partnership to sell all of the properties
owned jointly with the Partnership has been exercisable in all periods
presented.
Under the terms of the general partnership agreement of the
Joint Venture, for property acquisitions in which PSI issued
convertible securities to the sellers for its interest, PSI's rights to
receive cash flow distributions from the partnership for any year after
the first year of operation are subordinated to cash distributions to
the Partnership equal to a cumulative annual 7% of its cash investment
(not compounded). These agreements also specify that upon sale or
refinancing of a property for more than its original purchase price,
distribution of proceeds to PSI is subordinated to the return to the
Partnership of the amount of its cash investment and the 7%
distribution described above.
Mini-Warehouse Facilities
-------------------------
Cost of land includes appraisal fees and legal fees related to
acquisition and closing costs. Buildings, land improvements and
equipment reflect costs incurred through December 31, 2002 and 2001 to
develop mini-warehouse facilities which provide self-service storage
spaces for lease, usually on a month-to-month basis, to the general
public. The buildings and equipment are generally depreciated on a
straight-line basis over estimated useful lives of 25 and 5 years,
respectively.
Revenue and Expense Recognition
-------------------------------
Property rents are recognized as earned. Advertising costs of
$13,000, $14,000 and $3,000 in 2002, 2001 and 2000, respectively, are
expensed as incurred.
Allocation of Net Income or Loss
--------------------------------
The General Partners' share of net income or loss consists of
an amount attributable to their 1% capital contribution and an
additional percentage of cash flow (as defined, see Note 5) which
relates to the General Partners' share of cash distributions as set
forth in the Partnership Agreement. All remaining net income or loss is
allocated to the limited partners.
Per Unit Data
-------------
Per unit data is based on the number of limited partnership
units (128,000) outstanding during the year.
Cash Distributions
------------------
The Partnership Agreement provides for quarterly distributions
of cash flow from operations (as defined). Cash distributions per unit
were $32.00, $42.80 and $18.10 for 2002, 2001 and 2000, respectively.
Cash and Cash Equivalents
-------------------------
For financial statement purposes, the Partnership considers
all highly liquid investments purchased with a maturity of three months
or less to be cash equivalents.
F-7
Environmental Cost
------------------
Substantially all of the real estate facilities in which the
Partnership has an interest were acquired prior to the time that it was
customary to conduct extensive environmental investigations in
connection with the property acquisitions. Although there can be no
assurance, the Partnership is not aware of any environmental
contamination of the Mini-Warehouse Properties which individually or in
the aggregate would be material to the Partnership's overall business,
financial condition, or results of operations.
Segment Reporting
-----------------
Effective January 1, 1998, the Partnership adopted SFAS No.
131, "Disclosure 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 No. 131 also establishes standards for related
disclosures about products and services, geographic areas and major
customers. The Partnership only has one reportable segment as defined
within SFAS No. 131, therefore the adoption of SFAS No. 131 had no
effect on the Partnership's disclosures.
Use of Estimates
----------------
The preparation of the 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 financial statements and accompanying notes. Actual
results could differ from those estimates.
Impairment of long-lived assets
-------------------------------
We evaluate our real estate for impairment on a quarterly
basis. We first evaluate these assets for indicators of impairment such
as a) a significant decrease in the market price of real estate, b) a
significant adverse change in the extent or manner in which real estate
is being used or in its physical condition, c) a significant adverse
change in legal factors or the business climate that could affect the
value of the real estate, d) an accumulation of costs significantly in
excess of the amount originally projected for the acquisition of
construction of the real estate, or e) a current-period operating or
cash flow loss combined with a history of operating or cash flow losses
or a projection or forecast that demonstrates continuing losses
associated with the use of the real estate. When any such indicators of
impairment are noted, we compare the carrying value of the real estate
to the future estimated undiscounted cash flows attributable to the
real estate. If the real estate's recoverable amount is less than the
carrying value of the asset, then an impairment charge is booked for
the excess of carrying value over the real estate's fair value. Our
evaluations have indicated no impairment.
Any real estate which we expect to sell or dispose of prior to
their previously estimated useful life are stated at the lower of their
estimated net realizable value or their carrying value, less cost to
sell, and are evaluated throughout the sale process for impairment.
Recent Accounting Pronouncements and Guidance
---------------------------------------------
As of March 20, 2003, there have been no recent accounting
pronouncements and guidance, which were not effective for
implementation prior to December 31, 2002, that would have a material
impact upon the operations of the Joint Venture.
F-8
3. Real Estate Facilities
In January 1997, the Partnership, the Joint Venture and PSI
and other related partnerships transferred a total of 35 business parks
to PSBLP, an operating partnership formed to own and operate business
parks in which PSI has a significant interest. Included among the
properties transferred were the Partnership's and the Joint Venture's
business parks in exchange for a partnership interest in PSBLP. The
general partner of PSBLP is PS Business Parks, Inc. ("PSBP").
4. Investment in Real Estate Entities
During 2002, 2001 and 2000, the Partnership recognized earnings
from the Real Estate Entities of $3,774,000, $3,765,000 and $3,262,000,
respectively, and received cash distributions totaling $4,136,000,
$3,963,000 and $3,840,000, respectively from the Real Estate Entities.
Equity in earnings for 2002 and 2000 includes $112,000 and $108,000,
respectively, representing the Partnership's share of a gain on sale of
real estate investments recorded by PSBPLP.
The accounting policies of the Real Estate Entities are
similar to that of the Partnership. Summarized combined financial data
with respect to the Real Estate Entities are as follows:
For the Year Ended December 31,
-----------------------------------
2002 2001
--------------- ---------------
(Amount in thousands)
For the year ended December 31,
------------------------------
Total revenue........................................ $ 215,541 $ 179,635
Gain on real estate investments...................... 8,164 8
Cost of operations and other expenses................ (68,759) (54,605)
Depreciation and amortization........................ (60,258) (42,258)
Discontinued operations.............................. 1,296 1,395
Minority interest.................................... (32,170) (27,489)
--------------- ---------------
Net income......................................... $ 63,814 $ 56,686
=============== ===============
At December 31,
---------------
Total assets (primarily real estate)................. $ 1,208,431 $ 1,223,031
Total debt........................................... 70,279 165,145
Other liabilities.................................... 37,969 46,201
Total minority interests............................ 385,219 359,891
Total equity......................................... 714,964 651,794
The increase in the size of the combined financial position and
operating results, respectively, of the Real Estate Entities for the
year ended December 31, 2002 and at December 31, 2001, respectively, as
compared to prior periods, is the result of additional properties
acquired by PSBPLP during 2001 and 2002.
Financial statements of the Joint Venture are filed with the
Partnership's Form 10-K for 2002, in Item 15. PS Business Parks, Inc.
is a registrant with the Securities and Exchange Commission, and its
filings can be accessed through the Securities and Exchange Commission.
F-9
5. General Partners' Equity
PSI and Hughes are general partners of the Partnership. In
1993, Hughes sold his ownership in and rights to distributions from the
Partnership to PSI. As such, Hughes continues to act as a general
partner but receives no compensation, distributions or other
consideration from the Partnership. Hughes has no other interest in the
Partnership.
As such, PSI has a 1% interest in the Partnership with respect
to the General Partners' contributed capital and an additional 10%
interest in cash distributions attributable to operations, exclusive of
distributions attributable to sales and refinancing proceeds.
Proceeds from sales and refinancings will be distributed
entirely to the limited partners until the limited partners recover
their investment plus a cumulative 8% annual return (not compounded);
thereafter, PSI has a 15% interest in remaining proceeds.
6. Related Party Transactions
The Partnership has a management agreement with PSI whereby
PSI operates the Mini-Warehouse Properties for a fee equal to 6% of the
facilities' monthly gross revenue (as defined). For 2002, 2001 and
2000, the Partnership paid PSI $19,000, $20,000 and $20,000,
respectively, pursuant to this management agreement.
The Management Agreement between the Partnership and PSI
provides that the Management Agreement may be terminated without cause
upon 60 days written notice by the Partnership or six months notice by
PSI.
In addition, the Partnership combines its insurance purchasing
power with PSI through a captive insurance company controlled by PSI,
STOR-Re Mutual Insurance Corporation ("Stor-Re"). Stor-Re provides
limited property and liability insurance to the Partnership at
commercially competitive rates. The Partnership and PSI also utilize
unaffiliated insurance carriers to provide property and liability
insurance in excess of Stor-Re's limitations.
In January 1997, the Joint Venture transferred its business
park facilities to PSBPLP in exchange for a partnership interest in
PSBPLP. PSI has a significant economic interest in PSBPLP.
7. Leases
The Partnership has invested primarily in existing
mini-warehouse storage facilities which offer self-service storage
spaces for lease to the general public. Leases for such space are
usually on a month-to-month basis.
8. Taxes Based on Income
Taxes based on income are the responsibility of the individual
partners and, accordingly, the Partnership's financial statements do
not reflect a provision for such taxes.
Unaudited taxable net income was $3,273,000, $5,746,000 and
$4,568,000 for the years ended December 31, 2002, 2001 and 2000,
respectively. The difference between taxable income and book income is
primarily related to timing differences in depreciation expense.
F-10
9. Partnership Reorganization
On December 18, 2002, the Partnership entered into an
Agreement and Plan of Reorganization with Public Storage, Inc.
(NYSE:PSA). Under the Agreement and Plan of Reorganization, each of the
Partnership units held by the public will be converted into the right
to receive a value of $442 in PSA common stock or, at the limited
partner's election, in cash. The transaction is expected to close in
the second quarter of 2003 (unaudited).
10. Supplementary Quarterly Financial Data (Unaudited)
Three Months Ended
-------------------------------------------------------------------------------
March 31, 2002 June 30, 2002 September 30, 2002 December 31, 2002
---------------- -------------- ------------------ -----------------
Rental Income $ 78,000 $ 78,000 $ 81,000 $ 83,000
Cost of Operations $ 53,000 $ 56,000 $ 56,000 $ 53,000
Net Income $ 1,052,000 $ 931,000 $ 983,000 $ 910,000
Net Income Per Unit $ 7.44 $ 6.51 $ 6.13 $ 6.34
Three Months Ended
-------------------------------------------------------------------------------
March 31, 2001 June 30, 2001 September 30, 2001 December 31, 2001
---------------- -------------- ------------------ -----------------
Rental Income $ 80,000 $ 79,000 $ 87,000 $ 81,000
Cost of Operations $ 52,000 $ 53,000 $ 57,000 $ 51,000
Net Income $ 936,000 $ 982,000 $ 942,000 $ 1,042,000
Net Income Per Unit $ 6.62 $ 4.85 $ 6.59 $ 7.36
11. Commitments and Contingencies
Salaam, et. Al V. Public Storage, Inc. (filed February 2000)
------------------------------------------------------------
The plaintiffs in this case are suing the Company on
behalf of a purported class of California resident property
managers who claim that they were not compensated for all the
hours they worked. The named plaintiffs have indicated that
their claims total less than $20,000 in aggregate. This
maximum potential liability can only be increased if a class
is certified or if claims are permitted to be brought on
behalf of the others under the California Unfair Business
Practices Act. The plaintiffs' motion for class certification
was denied in August 2002; the plaintiffs have appealed this
denial. This denial does not deal with the claim under the
California Unfair Business Practices Act.
The Company is continuing to vigorously contest the
claims in this case and intends to resist any expansion beyond
the named plaintiffs on the grounds of lack of commonality of
claims. The Company's resistance will include opposing the
plaintiffs' appeal of the court's denial of class
certification and opposing the claim on behalf of others under
the California Unfair Business Practices Act.
F-11
Henriquez v. Public Storage, Inc. (Filed June 2002; Dismissed
--------------------------------------------------------------
January, 2003)
--------------
The plaintiff in this case filed a suit against the
Company on behalf of a purported class of renters who rented
self-storage units from the Company. Plaintiff alleged that
the Company misrepresents the size of its units and sought
damages and injunctive and declaratory relief under California
statutory and common law relating to consumer protection,
unfair competition, fraud and deceit and negligent
misrepresentation. In January 2003, the plaintiff caused this
suit to be dismissed. The plaintiff's attorney has advised
that he anticipates filing a similar suit against the Company
on behalf of a new plaintiff. However, the Company cannot
presently determine the potential total damages, if any, or
the ultimate outcome of any such litigation. If a new suit is
filed, the Company intends to vigorously contest any claims on
which it is based.
Public Storage and the Partnership are parties to various
claims, complaints, and other legal actions that have arisen in the
normal course of business from time to time. We believe that the
outcome of these other pending legal proceedings, in the aggregate,
will not have a material adverse effect upon the operations or
financial position of the Partnership.
F-12
PS PARTNERS IV, LTD.
SCHEDULE III - REAL ESTATE
AND ACCUMULATED DEPRECIATION
Costs
Initial Cost subsequent
---------------------------------to acquisition
Date Building & Building &
Acquired Description Land Improvement Improvements
- ---------------------------------------------------------------------------------------------------
7/88 Fort Wayne $101,000 $1,524,000 $70,000
=================================================
At December 31, 2002
----------------------------------------------------------------
Date Building & Accumulated
Acquired Description Land Improvements Total Depreciation
- ------------------------------------------------------------------------------------------------------------------
7/88 Fort Wayne $101,000 $1,594,000 $1,695,000 $937,000
================================================================
F-13
PS PARTNERS IV, LTD.
REAL ESTATE RECONCILIATION
SCHEDULE III (CONTINUED)
(A) The following is a reconciliation of cost and related accumulated
depreciation.
Gross Carrying Cost Reconciliation
Years Ended December 31,
-----------------------------------
2002 2001
-----------------------------------
Balance at beginning of the period $ 1,678,000 $ 1,673,000
Additions during the period:
Improvements, etc. 17,000 5,000
-----------------------------------
Balance at the close of the period $ 1,695,000 $ 1,678,000
===================================
Accumulated Depreciation Reconciliation
Years Ended December 31,
----------------------------------
2002 2001
----------------------------------
Balance at beginning of the period $ 862,000 $ 786,000
Additions during the period:
Depreciation 75,000 76,000
-----------------------------------
Balance at the close of the period $ 937,000 $ 862,000
===================================
(B) The aggregate cost of real estate for Federal income tax purposes is
$1,249,000 (unaudited).
F-14
Report of Independent Auditors
The Partners
SEI/PSP IV Joint Ventures
We have audited the balance sheets of the SEI/PSP IV Joint Ventures ("the Joint
Venture") as of December 31, 2002 and 2001 and the related statements of income,
partners' equity and cash flows for each of the three years in the period ended
December 31, 2002. Our audits also included the financial statement schedule
listed in the Index at Item 15 (a). These financial statements and schedule are
the responsibility of the Joint Ventures' management. Our responsibility is to
express an opinion on these financial statements and 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 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 financial statements referred to above present fairly, in
all material respects, the financial position of the SEI/PSP IV Joint Ventures
at December 31, 2002 and 2001, and the results of its operations and cash flows
for each of the three years in the period ended December 31, 2002, 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.
ERNST & YOUNG LLP
March 19, 2003
Los Angeles, CA
F-15
SEI/PSP IV JOINT VENTURES
BALANCE SHEETS
For the years ended December 31, 2002 and 2001
2002 2001
--------------------------------------
ASSETS
Cash and cash equivalents $ 242,000 $ 243,000
Rent and other receivables 157,000 340,000
Real estate facilities, at cost:
Land 14,300,000 14,327,000
Buildings and equipment 49,173,000 48,165,000
--------------------------------------
63,473,000 62,492,000
Less accumulated depreciation (34,324,000) (31,724,000)
--------------------------------------
29,149,000 30,768,000
Investment in real estate entity 21,993,000 21,641,000
Other assets 88,000 84,000
--------------------------------------
$ 51,629,000 $ 53,076,000
======================================
LIABILITIES AND PARTNERS' EQUITY
Accounts payable $ 715,000 $ 696,000
Advance payments from renters 352,000 317,000
Partners' equity:
PS Partners IV, Ltd. 14,002,000 14,364,000
Public Storage, Inc. 36,560,000 37,699,000
--------------------------------------
Total partners' equity 50,562,000 52,063,000
--------------------------------------
$ 51,629,000 $ 53,076,000
======================================
See accompanying notes
F-16
SEI/PSP IV JOINT VENTURES
STATEMENTS OF INCOME
For the years ended December 31, 2002, 2001 and 2000
2002 2001 2000
------------------------------------------------------
REVENUE:
Rental income $ 13,137,000 $ 13,594,000 $ 12,864,000
COSTS AND EXPENSES:
Cost of operations 4,506,000 4,485,000 4,406,000
Management fees 786,000 818,000 773,000
Depreciation and amortization 2,600,000 2,578,000 2,482,000
------------------------------------------------------
7,892,000 7,881,000 7,661,000
------------------------------------------------------
Income before equity in earnings of real estate entity 5,245,000 5,713,000 5,203,000
Equity in earnings of real estate entity 1,139,000 1,103,000 1,189,000
NET INCOME $ 6,384,000 $ 6,816,000 $ 6,392,000
======================================================
Partners' share of net income:
PS Partners IV, Ltd.'s share $ 3,774,000 $ 3,765,000 $ 3,262,000
Public Storage Inc.'s share 2,610,000 3,051,000 3,130,000
------------------------------------------------------
$ 6,384,000 $ 6,816,000 $ 6,392,000
======================================================
See accompanying notes
F-17
SEI/PSP IV JOINT VENTURES
STATEMENTS OF PARTNERS' EQUITY
For the years ended December 31, 2002, 2001 and 2000
PS Partners Public Storage
IV, Ltd. Inc. Total
-------------------------------------------------------------
Balances at December 31, 1999 $ 15,140,000 $ 39,030,000 $ 54,170,000
Net income 3,262,000 3,130,000 6,392,000
Distributions (3,840,000) (3,727,000) (7,567,000)
-------------------------------------------------------------
Balances at December 31, 2000 14,562,000 38,433,000 52,995,000
Net income 3,765,000 3,051,000 6,816,000
Distributions (3,963,000) (3,785,000) (7,748,000)
-------------------------------------------------------------
Balances at December 31, 2001 14,364,000 37,699,000 52,063,000
Net income 3,774,000 2,610,000 6,384,000
Distributions (4,136,000) (3,749,000) (7,885,000)
-------------------------------------------------------------
Balances at December 31, 2002 $ 14,002,000 $ 36,560,000 $ 50,562,000
=============================================================
See accompanying notes
F-18
SEI/PSP IV JOINT VENTURES
STATEMENTS OF CASH FLOWS
For the years ended December 31, 2002, 2001 and 2000
2002 2001 2000
-------------------------------------------------
Cash flows from operating activities:
Net income $ 6,384,000 $ 6,816,000 $ 6,392,000
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 2,600,000 2,578,000 2,482,000
Decrease (increase) in rent and other receivables 183,000 (248,000) (10,000)
(Increase) decrease in other assets (4,000) 37,000 (3,000)
Increase in accounts payable 19,000 10,000 21,000
Increase (decrease) in advance payments from renters 35,000 (86,000) (2,000)
Equity in earnings of real estate entity (1,139,000) (1,103,000) (1,189,000)
-------------------------------------------------
Total adjustments 1,694,000 1,188,000 1,299,000
-------------------------------------------------
Net cash provided by operating activities 8,078,000 8,004,000 7,691,000
-------------------------------------------------
Cash flows used in investing activities:
Distributions from real estate entity 787,000 624,000 599,000
Additions to real estate facilities (981,000) (957,000) (683,000)
-------------------------------------------------
Net cash used in investing activities (194,000) (333,000) (84,000)
-------------------------------------------------
Cash flows used in financing activities:
Distributions to partners (7,885,000) (7,748,000) (7,567,000)
-------------------------------------------------
Net cash used in financing activities (7,885,000) (7,748,000) (7,567,000)
-------------------------------------------------
Net (decrease) increase in cash and cash equivalents (1,000) (77,000) 40,000
Cash and cash equivalents at the beginning of the period 243,000 320,000 280,000
-------------------------------------------------
Cash and cash equivalents at the end of the period $ 242,000 $ 243,000 $ 280,000
=================================================
See accompanying notes
F-19
SEI/PSP IV JOINT VENTURES
NOTES TO FINANCIAL STATEMENTS
December 31, 2002
1. Description of Partnership
SEI/PSP IV Joint Ventures (the "Joint Venture") was formed on
December 31, 1990 in connection with the consolidation of 23 separate
general partnerships between Public Storage Inc. ("PSI") and PS
Partners IV, Ltd. ("PSP IV"). The Joint Venture, through its
predecessor general partnerships, invested in existing mini-warehouse
facilities which offer self-service storage spaces for lease, usually
on a month-to-month basis, to the general public and, to a lesser
extent, in existing business park facilities which offer industrial and
office space for lease.
The Joint Venture owns 32 properties (referred to hereinafter
as the "Mini-Warehouses"), which excludes three properties which were
transferred to PS Business Parks, L.P. ("PSBPLP") in January 1997. PSP
IV is the managing general partner of the Joint Venture, with its
ownership interests in the properties of the Joint Venture ranging from
49.8% to 50.9%.
2. Summary of Significant Accounting Policies and Partnership Matters
Basis of Presentation
---------------------
The financial statements include the accounts of the Joint
Venture.
Under the terms of the general partnership agreement of the
Joint Venture, for property acquisitions in which PSI issued
convertible securities to the sellers for its interest, PSI's right to
receive cash flow distributions for any year after the first year of
operation are subordinated to cash distributions to PSP IV equal to a
cumulative annual 7% of its cash investment (not compounded). In
addition, upon sale or refinancing of a property for more than its
original purchase price, distribution of proceeds to PSI is
subordinated to the return to PSP IV of the amount of its cash
investment and the 7% distribution described above.
Mini-Warehouse Facilities
-------------------------
Cost of land includes appraisal fees and legal fees related to
acquisition and closing costs. Buildings, land improvements and
equipment reflect costs incurred through December 31, 2002 and 2001 to
develop mini-warehouse facilities which provide self-service storage
spaces for lease, usually on a month-to-month basis, to the general
public. The buildings and equipment are generally depreciated on a
straight-line basis over estimated useful lives of 25 and 5 years,
respectively.
Revenue and Expense Recognition
-------------------------------
Property rents are recognized as earned. Advertising costs of
$674,000, $751,000 and $589,000 in 2002, 2001 and 2000, respectively,
are expensed as incurred.
Allocation of Net Income to PSP IV and PSI
------------------------------------------
Net income prior to depreciation is allocated to PSP IV and
PSI based upon their relative ownership interest in each property and
the results of each property.
Under the terms of the general partnership agreement of the
Joint Venture all depreciation and amortization with respect to each
Joint Venture is allocated solely to PSP IV until it recovers its
initial capital contribution. Thereafter, all depreciation and
amortization is allocated solely to PSI until it recovers its initial
capital contribution. All remaining depreciation and amortization is
allocated to PSP IV and PSI in proportion to their ownership
percentages.
F-20
Cash Distributions
------------------
The general partnership agreement of the Joint Venture
provides for regular distributions of cash flow from operations (as
defined).
Cash and Cash Equivalents
-------------------------
For financial statement purposes, the Joint Venture considers
all highly liquid investments purchased with a maturity of three months
or less to be cash equivalents.
Environmental Cost
------------------
Substantially all of the real estate facilities in which the
Joint Venture has an interest were acquired prior to the time that it
was customary to conduct extensive environmental investigations in
connection with the property acquisitions. Although there can be no
assurance, the Joint Venture is not aware of any environmental
contamination of the Mini-Warehouses which individually or in the
aggregate would be material to the Joint Venture's overall business,
financial condition, or results of operations.
Segment Reporting
-----------------
Effective January 1, 1998, the Joint Venture adopted SFAS No.
131, "Disclosure 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 No. 131 also establishes standards for related
disclosures about products and services, geographic areas and major
customers. The Joint Venture only has one reportable segment as defined
within SFAS No. 131, therefore the adoption of SFAS No. 131 had no
effect on the Joint Venture's disclosures.
Use of Estimates
----------------
The preparation of the 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 financial statements and accompanying notes. Actual
results could differ from those estimates.
Impairment of long-lived assets
-------------------------------
We evaluate our real estate for impairment on a quarterly
basis. We first evaluate these assets for indicators of impairment such
as a) a significant decrease in the market price of real estate, b) a
significant adverse change in the extent or manner in which real estate
is being used or in its physical condition, c) a significant adverse
change in legal factors or the business climate that could affect the
value of the real estate, d) an accumulation of costs significantly in
excess of the amount originally projected for the acquisition of
construction of the real estate, or e) a current-period operating or
cash flow loss combined with a history of operating or cash flow losses
or a projection or forecast that demonstrates continuing losses
associated with the use of the real estate. When any such indicators of
impairment are noted, we compare the carrying value of the real estate
to the future estimated undiscounted cash flows attributable to the
real estate. If the real estate's recoverable amount is less than the
carrying value of the asset, then an impairment charge is booked for
the excess of carrying value over the real estate's fair value. Our
evaluations have indicated no impairment.
F-21
Any real estate which we expect to sell or dispose of prior to
their previously estimated useful life are stated at the lower of their
estimated net realizable value or their carrying value, less cost to
sell, and are evaluated throughout the sale process for impairment.
Recent Accounting Pronouncements and Guidance
---------------------------------------------
As of March 20, 2003, there have been no recent accounting
pronouncements and guidance, which were not effective for
implementation prior to December 31, 2002, that would have a material
impact upon the operations of the Joint Venture.
3. Real Estate Facilities
In January 1997, the Joint Venture, PSI and other affiliated
partnerships of PSI transferred a total of 35 business parks to PSBPLP,
an operating partnership formed to own and operate business parks in
which PSI has a significant interest. Included among the properties
transferred was the Joint Venture's business parks in exchange for a
partnership interest in PSBPLP. The general partner of PSBPLP is PS
Business Parks, Inc. ("PSBP").
4. Investment in real estate entity
In 2002, 2001 and 2000, the Joint Venture recognized
$1,139,000, $1,103,000 and $1,189,000 respectively, in equity in
earnings of real estate entities with respect to the investment in
PSBPLP, described in Note 3 above. Included in equity in earnings for
2002 and 2000 is $168,000 and $162,000, respectively, representing the
Joint Venture's share of PSBPLP's gains on sale of real estate
investments.
The accounting policies of PSBPLP are similar to that of the
Joint Venture. Summarized combined financial data with respect to
PSBPLP is as follows:
For the Year Ended December 31,
----------------------------------
2002 2001
--------------- --------------
(Amount in thousands)
For the year ended December 31,
------------------------------
Total revenue........................................ $ 201,265 $ 164,938
Gain on real estate investments...................... 8,164 8
Cost of operations and other expenses................ (63,467) (49,302)
Depreciation and amortization........................ (57,658) (39,680)
Discontinued operations.............................. 1,296 1,395
Minority interest.................................... (32,170) (27,489)
--------------- --------------
Net income......................................... $ 57,430 $ 49,870
=============== ==============
At December 31,
---------------
Total assets (primarily real estate)................. $ 1,156,802 $ 1,169,955
Total debt........................................... 70,279 165,145
Other liabilities.................................... 36,902 45,188
Preferred equity and preferred minority interests.... 388,563 318,750
Common equity........................................ 661,058 640,872
F-22
The increase in the size of the combined financial position and
operating results, respectively, of the Real Estate Entity for the year
ended December 31, 2001 and at December 31, 2002, respectively, as
compared to prior periods, is the result of additional properties
acquired by PSBLP during 2001 and 2002.
PS Business Parks, Inc., which owns PSBPLP, is a registrant
with the Securities and Exchange Commission, and its filings can be
accessed through the Securities and Exchange Commission.
5. Related Party Transactions
The Joint Venture has a management agreement with PSI whereby
PSI operates the Mini-Warehouses for a fee equal to 6% of the
facilities' monthly gross revenue (as defined). For 2002, 2001 and
2000, the Partnership paid PSI $786,000, $818,000 and $773,000,
respectively, pursuant to this management agreement.
The Management Agreement between the Partnership and PSI
provides that the Management Agreement may be terminated without cause
upon 60 days written notice by the Partnership or six months notice by
PSI.
In addition, the Partnership combines its insurance purchasing
power with PSI through a captive insurance company controlled by PSI,
STOR-Re Mutual Insurance Corporation ("Stor-Re"). Stor-Re provides
limited property and liability insurance to the Partnership at
commercially competitive rates. The Partnership and PSI also utilize
unaffiliated insurance carriers to provide property and liability
insurance in excess of Stor-Re's limitations.
In January 1997, the Joint Venture transferred its business
park facilities to PSBPLP in exchange for a partnership interest in
PSBPLP. PSI has a significant economic interest in PSBPLP and PSBP.
6. Leases
The Joint Venture has invested primarily in existing
mini-warehouse storage facilities which offer self-service storage
spaces for lease to the general public. Leases for such space are
usually on a month-to-month basis.
7. Taxes Based on Income
Taxes based on income are the responsibility of PSP IV and PSI
and, accordingly, the Joint Venture's financial statements do not
reflect a provision for such taxes.
Unaudited taxable net income was $2,322,000, $6,691,000 and
$5,072,000 for the years ended December 31, 2002, 2001 and 2000,
respectively. The difference between taxable income and book income is
primarily related to timing differences in depreciation expense.
F-23
8. Commitments and Contingencies
Salaam, et. Al V. Public Storage, Inc. (filed February 2000)
------------------------------------------------------------
The plaintiffs in this case are suing the Company on
behalf of a purported class of California resident property
managers who claim that they were not compensated for all the
hours they worked. The named plaintiffs have indicated that
their claims total less than $20,000 in aggregate. This
maximum potential liability can only be increased if a class
is certified or if claims are permitted to be brought on
behalf of the others under the California Unfair Business
Practices Act. The plaintiffs' motion for class certification
was denied in August 2002; the plaintiffs have appealed this
denial. This denial does not deal with the claim under the
California Unfair Business Practices Act.
The Company is continuing to vigorously contest the
claims in this case and intends to resist any expansion beyond
the named plaintiffs on the grounds of lack of commonality of
claims. The Company's resistance will include opposing the
plaintiffs' appeal of the court's denial of class
certification and opposing the claim on behalf of others under
the California Unfair Business Practices Act.
Henriquez v. Public Storage, Inc. (Filed June 2002; Dismissed
--------------------------------------------------------------
January, 2003)
--------------
The plaintiff in this case filed a suit against the
Company on behalf of a purported class of renters who rented
self-storage units from the Company. Plaintiff alleged that
the Company misrepresents the size of its units and sought
damages and injunctive and declaratory relief under California
statutory and common law relating to consumer protection,
unfair competition, fraud and deceit and negligent
misrepresentation. In January 2003, the plaintiff caused this
suit to be dismissed. The plaintiff's attorney has advised
that he anticipates filing a similar suit against the Company
on behalf of a new plaintiff. However, the Company cannot
presently determine the potential total damages, if any, or
the ultimate outcome of any such litigation. If a new suit is
filed, the Company intends to vigorously contest any claims on
which it is based.
Public Storage and the Partnership are parties to various
claims, complaints, and other legal actions that have arisen in the
normal course of business from time to time. We believe that the
outcome of these other pending legal proceedings, in the aggregate,
will not have a material adverse effect upon the operations or
financial position of the Partnership.
F-24
SEI/PSP IV JOINT VENTURES
SCHEDULE III - REAL ESTATE
AND ACCUMULATED DEPRECIATION
Costs
Initial Cost Subsequent
--------------------------------- to acquisition
Date Building & Building &
Acquired Description Land Improvement Improvements
---------------------------------------------------------------------------------------------------
4/85 Austin/ S. First $778,000 $1,282,000 $394,000
4/85 Cincinnati/ E. Kemper 232,000 1,573,000 363,000
4/85 Cincinnati/ Colerain 253,000 1,717,000 438,000
4/85 Florence/ Tanner Lane 218,000 1,477,000 409,000
5/85 Tacoma/ Phillips Rd. 396,000 1,204,000 322,000
5/85 Milwaukie/ Mcloughlin II 458,000 742,000 481,000
7/85 San Diego/ Kearny Mesa Rd 783,000 1,750,000 416,000
5/85 Manchester/ S. Willow II 371,000 2,129,000 (110,000)
6/85 N. Hollywood/ Raymer 967,000 848,000 303,000
7/85 Scottsdale/ 70th St 632,000 1,368,000 345,000
7/85 Concord/ Hwy 29 150,000 750,000 461,000
10/85 N. Hollywood/ Whitsett 1,524,000 2,576,000 443,000
10/85 Portland/ SE 82nd St 354,000 496,000 342,000
9/85 Madison/ Copps Ave. 450,000 1,150,000 427,000
9/85 Columbus/ Sinclair 307,000 893,000 339,000
9/85 Philadelphia/ Tacony St 118,000 1,782,000 291,000
10/85 Perrysburg/ Helen Dr. 110,000 1,590,000 (26,000)
10/85 Columbus/ Ambleside 124,000 1,526,000 22,000
10/85 Indianapolis/ Pike Place 229,000 1,531,000 305,000
10/85 Indianapolis/ Beach Grove 198,000 1,342,000 277,000
10/85 Hartford/ Roberts 219,000 1,481,000 503,000
10/85 Wichita/ S. Rock Rd. 501,000 1,478,000 243,000
10/85 Wichita/ E. Harry 313,000 1,050,000 56,000
10/85 Wichita/ S. Woodlawn 263,000 905,000 114,000
10/85 Wichita/ E. Kellogg 185,000 658,000 (36,000)
10/85 Wichita/ S. Tyler 294,000 1,004,000 128,000
Gross Carrying Amount
At December 31, 2002
----------------------------------------------------------------
Date Building & Accumulated
Acquired Description Land Improvements Total Depreciation
-----------------------------------------------------------------------------------------------------------------
4/85 Austin/ S. First $778,000 $1,676,000 $2,454,000 $1,184,000
4/85 Cincinnati/ E. Kemper 232,000 1,936,000 2,168,000 1,349,000
4/85 Cincinnati/ Colerain 253,000 2,155,000 2,408,000 1,490,000
4/85 Florence/ Tanner Lane 218,000 1,886,000 2,104,000 1,332,000
5/85 Tacoma/ Phillips Rd. 396,000 1,526,000 1,922,000 1,064,000
5/85 Milwaukie/ Mcloughlin II 458,000 1,223,000 1,681,000 861,000
7/85 San Diego/ Kearny Mesa Rd 783,000 2,166,000 2,949,000 1,550,000
5/85 Manchester/ S. Willow II 371,000 2,019,000 2,390,000 1,419,000
6/85 N. Hollywood/ Raymer 967,000 1,151,000 2,118,000 831,000
7/85 Scottsdale/ 70th St 632,000 1,713,000 2,345,000 1,169,000
7/85 Concord/ Hwy 29 150,000 1,211,000 1,361,000 872,000
10/85 N. Hollywood/ Whitsett 1,524,000 3,019,000 4,543,000 2,114,000
10/85 Portland/ SE 82nd St 354,000 838,000 1,192,000 607,000
9/85 Madison/ Copps Ave. 450,000 1,577,000 2,027,000 1,090,000
9/85 Columbus/ Sinclair 307,000 1,232,000 1,539,000 834,000
9/85 Philadelphia/ Tacony St 118,000 2,073,000 2,191,000 1,439,000
10/85 Perrysburg/ Helen Dr. 110,000 1,564,000 1,674,000 1,075,000
10/85 Columbus/ Ambleside 124,000 1,548,000 1,672,000 1,028,000
10/85 Indianapolis/ Pike Place 229,000 1,836,000 2,065,000 1,266,000
10/85 Indianapolis/ Beach Grove 198,000 1,619,000 1,817,000 1,127,000
10/85 Hartford/ Roberts 219,000 1,984,000 2,203,000 1,351,000
10/85 Wichita/ S. Rock Rd. 642,000 1,580,000 2,222,000 1,053,000
10/85 Wichita/ E. Harry 285,000 1,134,000 1,419,000 833,000
10/85 Wichita/ S. Woodlawn 263,000 1,019,000 1,282,000 705,000
10/85 Wichita/ E. Kellogg 185,000 622,000 807,000 455,000
10/85 Wichita/ S. Tyler 294,000 1,132,000 1,426,000 867,000
F-25
Costs
Initial Cost subsequent
--------------------------------- to acquisition
Date Building & Building &
Acquired Description Land Improvement Improvements
--------------------------------------------------------------------------------------------------
10/85 Wichita/ W. Maple 234,000 805,000 (50,000)
10/85 Wichita/ Carey Lane 192,000 674,000 23,000
10/85 Wichita/ E. Macarthur 220,000 775,000 (71,000)
10/85 Joplin/ S. Range Line 264,000 904,000 195,000
12/85 Milpitas 1,623,000 1,577,000 363,000
12/85 Pleasanton/ Santa Rita 1,226,000 2,078,000 462,000
---------------------------------------------------
TOTAL $14,186,000 $41,115,000 $8,172,000
===================================================
Gross Carrying Amount
At December 31, 2002
----------------------------------------------------------------
Date Building & Accumulated
Acquired Description Land Improvements Total Depreciation
-----------------------------------------------------------------------------------------------------------------
10/85 Wichita/ W. Maple 234,000 755,000 989,000 536,000
10/85 Wichita/ Carey Lane 192,000 697,000 889,000 496,000
10/85 Wichita/ E. Macarthur 220,000 704,000 924,000 500,000
10/85 Joplin/ S. Range Line 264,000 1,099,000 1,363,000 737,000
12/85 Milpitas 1,623,000 1,940,000 3,563,000 1,353,000
12/85 Pleasanton/ Santa Rita 1,227,000 2,539,000 3,766,000 1,737,000
------------------------------------------------------------------
TOTAL 14,300,000 $49,173,000 $63,473,000 $34,324,000
==================================================================
F-26
SEI/PSP IV JOINT VENTURES
REAL ESTATE RECONCILIATION
SCHEDULE III (CONTINUED)
(A) The following is a reconciliation of cost and related accumulated
depreciation.
Gross Carrying Cost Reconciliation
Years Ended December 31,
---------------------------------
2002 2001
---------------------------------
Balance at beginning of the period $ 62,492,000 $ 61,535,000
Additions during the period:
Improvements, etc. 981,000 957,000
---------------------------------
Balance at the close of the period $ 63,473,000 $ 62,492,000
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Accumulated Depreciation Reconciliation
Years Ended December 31,
---------------------------------
2002 2001
---------------------------------
Balance at beginning of the period $ 31,724,000 $ 29,146,000
Additions during the period:
Depreciation 2,600,000 2,578,000
---------------------------------
Balance at the close of the period $ 34,324,000 $ 31,724,000
=================================
(B) The aggregate cost of real estate for Federal income tax purposes is
$55,326,000 (unaudited).
F-27