UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 2002
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from to
------------- --------------
Commission File Number 1-10709
-------
PS BUSINESS PARKS, INC.
-----------------------
(Exact name of registrant as specified in its charter)
California 95-4300881
---------- ----------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation) Identification Number)
701 Western Avenue, Glendale, California 91201-2397
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 244-8080
-------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Number of shares outstanding of each of the issuer's classes of common stock, as
of August 12, 2002:
Common Stock, $0.01 par value, 21,552,449 shares outstanding
PS BUSINESS PARKS, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION ----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2002 and December 31,
2001....................................................................................... 2
Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30,
2002 and 2001.............................................................................. 3
Condensed Consolidated Statement of Shareholders' Equity for the Six Months Ended June
30, 2002................................................................................... 4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2002
and 2001................................................................................... 5
Notes to Condensed Consolidated Financial Statements....................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................................... 21
Item 3. Quantitative and Qualitative Disclosures about Market Risk.......................... 39
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................... 40
Item 4. Submission of Matters to a Vote of Security Holders................................. 40
Item 6. Exhibits and Reports on Form 8-K.................................................... 41
1
PS BUSINESS PARKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2002 2001
---------------------- -------------------
(unaudited)
ASSETS
------
Cash and cash equivalents...................................... $ 704,000 $ 3,076,000
Marketable securities.......................................... 5,784,000 9,134,000
Real estate facilities, at cost:
Land...................................................... 288,799,000 288,792,000
Buildings and equipment................................... 962,537,000 948,899,000
---------------------- -------------------
1,251,336,000 1,237,691,000
Accumulated depreciation.................................. (149,748,000) (121,609,000)
---------------------- -------------------
1,101,588,000 1,116,082,000
Property held for disposition, net............................. 9,629,000 9,498,000
Land held for development or sale.............................. 11,378,000 10,629,000
---------------------- -------------------
1,122,595,000 1,136,209,000
Investment in joint venture.................................... 764,000 974,000
Rent receivable................................................ 1,860,000 745,000
Interest receivable............................................ 5,000 137,000
Note receivable................................................ 200,000 7,450,000
Deferred rent receivables...................................... 11,338,000 9,601,000
Intangible assets, net......................................... 528,000 679,000
Other assets................................................... 2,625,000 1,950,000
---------------------- -------------------
Total assets..................................... $ 1,146,403,000 $ 1,169,955,000
======================= ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Accrued and other liabilities..................................... $ 36,852,000 $ 39,822,000
Deferred gain on property disposition............................. - 5,366,000
Line of credit.................................................... 10,000,000 100,000,000
Unsecured note payable............................................ 50,000,000 -
Note payable to affiliate......................................... - 35,000,000
Mortgage notes payable............................................ 27,932,000 30,145,000
---------------------- -------------------
Total liabilities........................................ 124,784,000 210,333,000
Minority interest:
Preferred units.......................................... 197,750,000 197,750,000
Common units............................................. 165,197,000 162,141,000
Shareholders' equity:
Preferred stock, $0.01 par value, 50,000,000 shares authorized, 6,840 shares
issued and outstanding at June 30, 2002 (4,840
shares issued and outstanding at December 31, 2001)............. 170,988,000 121,000,000
Common stock, $0.01 par value, 100,000,000 shares authorized,
21,549,449 shares issued and outstanding at June 30, 2002
(21,539,783 shares issued and outstanding at December 31, 2001) 215,000 215,000
Paid-in capital................................................ 421,083,000 422,161,000
Cumulative net income.......................................... 205,034,000 174,860,000
Comprehensive gain............................................. 13,000 108,000
Cumulative distributions....................................... (138,661,000) (118,613,000)
---------------------- -------------------
Total shareholders' equity............................... 658,672,000 599,731,000
---------------------- -------------------
Total liabilities and shareholders' equity.......... $ 1,146,403,000 $ 1,169,955,000
====================== ===================
See accompanying notes.
2
PS BUSINESS PARKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
--------------------------------------- -----------------------------------
2002 2001 2002 2001
-------------------- ------------------ ----------------- -----------------
Revenues:
Rental income................................. $ 50,930,000 $ 40,281,000 $ 101,274,000 $ 78,674,000
Facility management fees primarily from
affiliates................................... 191,000 168,000 386,000 329,000
Business services............................. 28,000 76,000 69,000 233,000
Equity in income of joint venture............. 207,000 - 249,000 -
Interest and other income..................... 355,000 557,000 600,000 1,321,000
-------------------- ------------------ ----------------- -----------------
51,711,000 41,082,000 102,578,000 80,557,000
-------------------- ------------------ ----------------- -----------------
Expenses:
Cost of operations............................. 13,626,000 10,475,000 27,452,000 20,846,000
Cost of facility management.................... 45,000 37,000 90,000 73,000
Cost of business services...................... 112,000 129,000 288,000 313,000
Depreciation and amortization.................. 14,313,000 9,733,000 28,290,000 19,379,000
General and administrative..................... 1,068,000 992,000 2,204,000 2,120,000
Interest expense.............................. 1,432,000 157,000 2,983,000 394,000
-------------------- ------------------ ----------------- -----------------
30,596,000 21,523,000 61,307,000 43,125,000
-------------------- ------------------ ----------------- -----------------
Income before gain on disposal of real estate,
gain on investments and minority interest........ 21,115,000 19,559,000 41,271,000 37,432,000
Gain on disposition of real estate............. - - 5,366,000 -
Gain on investment in marketable securities.... - - 25,000 15,000
Income before minority interest.................. 21,115,000 19,559,000 46,662,000 37,447,000
Minority interest in income - preferred units.. (4,413,000) (3,186,000) (8,825,000) (6,373,000)
Minority interest in income - common units..... (3,230,000) (3,543,000) (7,663,000) (6,779,000)
-------------------- ------------------ ----------------- -----------------
Net income....................................... $ 13,472,000 $ 12,830,000 $ 30,174,000 $ 24,295,000
==================== ================== ================= =================
Net income allocation:
Allocable to preferred shareholders............ $ 3,933,000 $ 1,903,000 $ 7,550,000 $ 3,175,000
Allocable to common shareholders............... 9,539,000 10,927,000 22,624,000 21,120,000
-------------------- ------------------ ----------------- -----------------
$ 13,472,000 $ 12,830,000 $ 30,174,000 $ 24,295,000
==================== ================== ================= =================
Net income per common share:
Basic.......................................... $ 0.44 $ 0.48 $ 1.05 $ 0.93
==================== ================== ================= =================
Diluted........................................ $ 0.44 $ 0.48 $ 1.04 $ 0.92
==================== ================== ================= =================
Weighted average common shares outstanding:
Basic.......................................... 21,549,000 22,610,000 21,546,000 22,814,000
==================== ================== ================= =================
Diluted........................................ 21,799,000 22,679,000 21,774,000 22,885,000
==================== ================== ================= =================
See accompanying notes.
3
PS BUSINESS PARKS, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED June 30, 2002
(Unaudited)
Preferred Stock Common Stock
---------------------- --------------------------- Paid-in
Shares Amount Shares Amount Capital
-------- ------------- ------------ -------------- ---------------
Balances at December 31, 2001............ 4,840 $121,000,000 21,539,783 $ 215,000 $422,161,000
Issuance of preferred stock............ 2,000 50,000,000 - - (1,674,000)
Repurchase of preferred stock.......... - (12,000) - - -
Exercise of stock options.............. - - 9,666 - 226,000
Unrealized loss - depreciation in
marketable securities............... - - - - -
Net income............................ - - - - -
Distributions paid:
Preferred stock................... - - - - -
Common stock...................... - - - - -
Adjustment to reflect minority interest
to underlying ownership interest....... - - - - 370,000
-------- ------------- ------------ -------------- ---------------
Balances at June 30, 2002................ 6,840 $170,988,000 21,549,449 $ 215,000 $421,083,000
======== ============= ============ ============== ===============
Other
Cumulative Comprehensive Cumulative Shareholders'
Net Income Loss Distributions Equity
---------------- ---------------- ------------------- ------------------
Balances at December 31, 2001............ $174,860,000 108,000 $(118,613,000) $ 599,731,000
Issuance of preferred stock............ - - - 48,326,000
Repurchase of preferred stock.......... - - - (12,000)
Exercise of stock options.............. - - - 226,000
Unrealized loss - depreciation in
marketable securities............... - (95,000) - (95,000)
Net income............................ 30,174,000 - - 30,174,000
Distributions paid:
Preferred stock................... - - (7,550,000) (7,550,000)
Common stock...................... - - (12,498,000) (12,498,000)
Adjustment to reflect minority interest
to underlying ownership interest....... - - 370,000
---------------- ---------------- ------------------- ------------------
Balances at June 30, 2002................ $205,034,000 $ 13,000 $(138,661,000) $ 658,672,000
================ ================ =================== ==================
See accompanying notes.
4
PS BUSINESS PARKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months
Ended June 30,
------------------------------------------
2002 2001
--------------------- --------------------
Cash flows from operating activities:
Net income....................................................... $ 30,174,000 $ 24,295,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Gain on sale of marketable securities........................ (25,000) (15,000)
Gain on disposition of properties............................ (5,366,000) -
Gain on disposition of joint venture properties.............. (148,000) -
Depreciation and amortization expense........................ 28,290,000 19,379,000
Minority interest in income.................................. 16,488,000 13,152,000
Increase in receivables and other assets..................... (3,543,000) (495,000)
Increase in accrued and other liabilities.................... 1,356,000 3,445,000
--------------------- --------------------
Total adjustments....................................... 37,052,000 35,466,000
--------------------- --------------------
Net cash provided by operating activities.................. 67,226,000 59,761,000
--------------------- --------------------
Cash flows from investing activities:
Investment in marketable securities.......................... - (9,440,000)
Proceeds from sale of joint venture properties............... 553,000 -
Proceeds from liquidation of investments..................... 3,232,000 6,079,000
Acquisition of real estate facilities........................ (728,000) (90,425,000)
Proceeds from note receivable................................ 7,250,000 -
Capital improvements to real estate facilities............... (11,194,000) (3,840,000)
Development of real estate facilities........................ (2,603,000) (7,626,000)
--------------------- --------------------
Net cash used in investing activities...................... (3,490,000) (105,252,000)
--------------------- --------------------
Cash flows from financing activities:
Proceeds from unsecured note payable......................... 50,000,000 -
Repayment of borrowings from line of credit.................. (90,000,000) -
Principal payments on mortgage notes payable................. (2,213,000) (408,000)
Repayment of borrowings from an affiliate.................... (35,000,000) -
Net proceeds from the issuance of preferred stock............ 48,326,000 64,526,000
Redemption of common operating partnership units............. - (808,000)
Exercise of stock options.................................... 226,000 1,331,000
Repurchase of common stock................................... - (17,391,000)
Repurchase of preferred stock................................ (12,000) -
Distributions paid to preferred shareholders................. (7,550,000) (3,175,000)
Distributions paid to minority interests - preferred units... (8,824,000) (6,373,000)
Distributions paid to common shareholders.................... (15,729,000) (13,214,000)
Distributions paid to minority interests - common units...... (5,332,000) (4,238,000)
--------------------- --------------------
Net cash provided by (used in) financing activities........ (66,108,000) 20,250,000
--------------------- --------------------
Net decrease in cash and cash equivalents........................... (2,372,000) (25,241,000)
Cash and cash equivalents at the beginning of the period............ 3,076,000 49,295,000
--------------------- --------------------
Cash and cash equivalents at the end of the period.................. $ 704,000 $ 24,054,000
===================== ====================
See accompanying notes.
5
PS BUSINESS PARKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Six Months
Ended June 30,
---------------------------------
2002 2001
---------------- ----------------
Supplemental schedule of non cash investing and financing
activities:
Adjustment to reflect minority interest to underlying ownership
interest:
Minority interest - common units................................ $ (370,000) $ (1,184,000)
Paid-in capital................................................. 370,000 1,184,000
Unrealized gain/loss:
Marketable securities........................................... 95,000 836,000
Other comprehensive (loss) income............................... (95,000) (836,000)
See accompanying notes.
6
PS BUSINESS PARKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
1. Organization and description of business
PS Business Parks, Inc. ("PSB") was incorporated in the state of California
in 1990. As of June 30, 2002, PSB owned approximately 75% of the common
partnership units of PS Business Parks, L.P. (the "Operating Partnership"
or "OP"). The remaining common partnership units were owned by Public
Storage, Inc. ("PSI") and its affiliated entities. PSB, as the sole general
partner of the Operating Partnership, has full, exclusive and complete
responsibility and discretion in managing and controlling the Operating
Partnership. PSB and the Operating Partnership are collectively referred to
as the "Company."
The Company is a fully-integrated, self-advised and self-managed real
estate investment trust ("REIT") that acquires, develops, owns and operates
commercial properties containing commercial and industrial rental space. As
of June 30, 2002, the Company owned and operated approximately 14.8 million
net rentable square feet of commercial space located in 9 states. The
Company also managed approximately 1.7 million net rentable square feet on
behalf of PSI and its affiliated entities, third party owners and a joint
venture in which the Company held a 25% ownership interest (See Note 2).
2. Summary of significant accounting policies
Basis of presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and with
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by
accounting principles generally accepted in the United States for complete
financial statements. The preparation of the condensed consolidated
financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and
assumptions that affect the amounts reported in the condensed consolidated
financial statements and accompanying notes. Actual results could differ
from estimates. In the opinion of management, adjustments necessary for a
fair presentation have been included. Operating results for the three and
six months ended June 30, 2002 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2002. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2001.
The condensed consolidated financial statements include the accounts of PSB
and the Operating Partnership. All significant intercompany balances and
transactions have been eliminated in the condensed consolidated financial
statements.
Financial instruments
The methods and assumptions used to estimate the fair value of financial
instruments are described below. The Company has estimated the fair value
of financial instruments using available market information and appropriate
valuation methodologies. Considerable judgement is required in interpreting
market data to develop estimates of market value. Accordingly, estimated
fair values are not necessarily indicative of the amounts that could be
realized in current market exchanges.
7
PS BUSINESS PARKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
The Company considers all highly liquid investments with an original
maturity of three months or less at the date of purchase to be cash
equivalents. Due to the short period to maturity of the Company's cash and
cash equivalents, accounts receivable, other assets and accrued and other
liabilities, the carrying values as presented on the condensed consolidated
balance sheets are reasonable estimates of fair value. Based on borrowing
rates currently available to the Company, the carrying amount of debt
approximates fair value.
Financial assets that are exposed to credit risk consist primarily of cash
and cash equivalents and accounts receivable. Cash and cash equivalents,
which consist primarily of short-term investments, including commercial
paper, are only invested in entities with an investment grade rating.
Accounts receivable are not a significant portion of total assets and are
comprised of receivables from a large number of customers.
Marketable securities
Marketable securities are classified as "available-for-sale" in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 115,
Accounting for Certain Investments in Debt and Equity Securities.
Investments are reflected on the balance sheet at fair market value based
upon the quoted market price. The unrealized gain of $13,000 is excluded
from earnings and reported in a separate component of shareholders' equity.
Dividend income is recognized when earned.
Real estate facilities
Real estate facilities are recorded at cost. Costs related to the
renovation or improvement of the properties are capitalized. Expenditures
for repairs and maintenance are expensed as incurred unless the expenditure
is expected to benefit a period greater than 30 months and exceeds $5,000.
Buildings and equipment are depreciated on the straight-line method over
the estimated useful lives, which are generally 30 and 5 years,
respectively. Leasing costs in excess of $1,000 for leases with terms
greater than two years are capitalized and depreciated/amortized over their
estimated useful lives. Leasing costs for leases less than two years or
less than $1,000 are expensed as incurred.
Interest cost and property taxes incurred during the period of construction
of real estate facilities are capitalized. The Company capitalized $288,000
and $898,000 of interest expense during the six months ended June 30, 2002
and 2001, respectively. As of June 30, 2002, all developed properties had
been shell complete for at least one year. The Company has, therefore,
discontinued capitalization of interest on these facilities.
8
PS BUSINESS PARKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
Investment in joint venture
In October 2001, the Company formed a joint venture with an unaffiliated
investor to own and operate an industrial park in the City of Industry
submarket of Los Angles County. The park, consisting of 294,000 square feet
of industrial space, was acquired by the Company in December 2000 at a cost
of approximately $14.4 million. The property was contributed to the joint
venture at its original cost. The partnership is capitalized with equity
capital consisting of 25% from the Company and 75% from the unaffiliated
investor in addition to a mortgage note payable.
In May 2002, the joint venture disposed of two properties totaling 47,000
square feet for approximately $3 million ($2.8 million net of closing
costs). The Company recognized its 25% share of the gain on the
dispositions totaling $148,000 ($576,000 for the joint venture). The joint
venture may dispose of additional properties.
Summarized below is financial data for the joint venture as of June 30,
2002.
For the six months
and period ended
June 30, 2002
------------------
Total revenues.................................... $ 935,000
Gain on sale of real estate....................... $ 576,000
Cost of operations................................ 254,000
Depreciation and amortization..................... 158,000
Interest expense.................................. 193,000
Other expenses.................................... 4,000
------------------
Total expenses.................................. 609,000
------------------
Net income...................................... $ 902,000
==================
---------------------------------------------------------------------
Real estate, net................................. $12,571,000
Total assets..................................... 14,592,000
Notes payable.................................... 5,775,000
Total liabilities................................ 8,485,000
Partner's equity................................. 6,107,000
The Company's investment at June 30, 2002........ $ 764,000
The joint venture has a variable rate mortgage obligation of $5,775,000, which
currently bears interest at 5.45% per annum and is due on November 1, 2005.
Under certain conditions, the Company has guaranteed repayment of the mortgage.
The Company's investment is accounted for under the equity method in accordance
with APB 18, "Equity Method of Accounting for Investments." In accordance with
APB 18, the Company's share of the debt is netted against its share of the
assets in determining the investment in the joint venture of $764,000 and is not
included in the Company's total liabilities.
9
PS BUSINESS PARKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
Intangible assets
Intangible assets consist of property management contracts for properties
managed, but not owned, by the Company. The intangible assets are being
amortized over seven years. Intangible assets are net of accumulated
amortization of $1,629,000 and $1,477,000 at June 30, 2002 and December 31,
2001, respectively.
Evaluation of asset impairment
The Company evaluates its assets used in operations, by identifying
indicators of impairment and by comparing the sum of the estimated
undiscounted future cash flows for each asset to the asset's carrying
amount. When indicators of impairment are present and the sum of the
undiscounted future cash flows is less than the carrying value of such
asset, an impairment loss is recorded equal to the difference between the
asset's current carrying value and its value based on discounting its
estimated future cash flows. In addition, the Company evaluates its assets
held for disposition. Assets held for disposition are reported at the lower
of their carrying amount or fair value, less cost of dispositions. At June
30, 2002, no such indicators of impairment have been identified.
Loan from affiliate
The Company borrowed an aggregate of $35 million from PSI in 2001. The note
bore interest at 3.25% (per annum) and was repaid along with accrued
interest expense of $76,000 in January 2002. A portion of the proceeds from
the Series F preferred stock issuance described in Note 9 was used to repay
the note.
Revenue and expense recognition
All leases are classified as operating leases. Rental income is recognized
on a straight-line basis over the terms of the leases. Deferred rent
receivables represents rental revenue accrued on a straight-line basis in
excess of rental revenue currently billed. Reimbursements from tenants for
real estate taxes and other recoverable operating expenses are recognized
as revenues in the period the applicable costs are incurred.
Property management fees are recognized in the period earned.
The Company disposed of a property in San Diego for approximately $9
million in November 2001 and deferred a gain of $5,366,000 which was later
recognized in 2002 when the buyer of the property obtained third party
financing for the property and paid off most of its note to the Company.
The note receivable balance remaining as of June 30, 2002 and December 31,
2002 was $200,000 and $7,450,000, respectively.
10
PS BUSINESS PARKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
General and administrative expense
General and administrative expense includes executive compensation, office
expense, professional fees, state income taxes, cost of acquisition
personnel and other such administrative items.
Income taxes
The Company believes it has qualified and intends to continue to qualify as
a REIT, as defined in Section 856 of the Internal Revenue Code. As a REIT,
the Company is not subject to federal income tax to the extent that it
distributes its taxable income to its shareholders. A REIT must distribute
at least 90% of its taxable income each year. In addition, REIT's are
subject to a number of organizational and operating requirements. If the
Company fails to qualify as a REIT in any taxable year, the Company will be
subject to federal income tax (including any applicable alternative minimum
tax) based on its taxable income using corporate income tax rates. Even if
the Company qualifies for taxation as a REIT, the Company may be subject to
certain state and local taxes on its income and property and to federal
income and excise taxes on its undistributed taxable income. The Company
believes it met all organizational and operating requirements to maintain
its REIT status during 2001 and intends to continue to meet such
requirements for 2002. Accordingly, no provision for income taxes has been
made in the accompanying financial statements.
Net income per common share
Per share amounts are computed using the number of weighted average common
shares outstanding. "Diluted" weighted average common shares outstanding
includes the dilutive effect of stock options under the treasury stock
method. "Basic" weighted average common shares outstanding excludes such
effect. Earnings per share have been calculated as follows:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
---------------------------------- ---------------------------------
2002 2001 2002 2001
----------------- ---------------- ----------------- ---------------
Net income allocable to common shareholders.................... $ 9,539,000 $ 10,927,000 $ 22,624,000 $ 21,120,000
================= ================ ================= ===============
Weighted average common shares outstanding:
Basic weighted average common shares outstanding............ 21,549,000 22,610,000 21,546,000 22,814,000
Net effect of dilutive stock options - based on treasury
stock method using average market price................... 250,000 69,000 228,000 71,000
----------------- ---------------- ----------------- ---------------
Diluted weighted average common shares outstanding.......... 21,799,000 22,679,000 21,774,000 22,885,000
================= ================ ================= ===============
Basic earnings per common share................................ $ 0.44 $ 0.48 $ 1.05 $ 0.93
================= ================ ================= ===============
Diluted earnings per common share.............................. $ 0.44 $ 0.48 $ 1.04 $ 0.92
================= ================ ================= ===============
Reclassifications
Certain reclassifications have been made to the condensed consolidated
financial statements for 2001 in order to conform to the 2002 presentation.
11
PS BUSINESS PARKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
3. Real estate facilities
The activity in real estate facilities for the six months ended June 30,
2002 is as follows:
Accumulated
Land Buildings Depreciation Total
------------------- ----------------- ------------------ -----------------
Balances at December 31, 2001...... $ 288,792,000 $ 948,899,000 $ (121,609,000) $ 1,116,082,000
Developed projects................. 7,000 2,596,000 - 2,603,000
Capital improvements............... - 11,042,000 - 11,042,000
Depreciation expense............... - - (28,139,000) (28,139,000)
------------------- ----------------- ------------------ -----------------
Balances at June 30, 2002.......... $ 288,799,000 $ 962,537,000 $ (149,748,000) $ 1,101,588,000
=================== ================= ================== =================
During the six months ended June 30, 2002, the Company incurred $2,603,000
in development costs.
Two properties have been identified as not meeting the Company's ongoing
investment strategy and have been designated as a properties held for
disposition at June 30, 2002. These properties are currently being marketed
and the Company anticipates the net proceeds to approximate book value. The
following summarizes the condensed results of operations of the properties
held for disposition which are also included in the condensed consolidated
statements of income:
For the Six Months
Ended June 30,
-----------------------------------
2002 2001
---------------- ------------------
Rental income................... $ 1,125,000 $ 1,179,000
Cost of operations.............. (733,000) (713,000)
---------------- ------------------
Net operating income............ $ 392,000 $ 466,000
================ ==================
The Company may, at times, bring properties to market for disposition that
it may or may not ultimately sell. These properties are not included in
properties held for disposition due to the probability that the disposition
will not occur and the intent to maintain a management interest in the
property (see note 12).
4. Leasing activity
The Company leases space in its real estate facilities to tenants under
non-cancelable leases generally ranging from one to ten years. Future
minimum rental revenues excluding recovery of expenses as of June 30, 2002
under these leases are as follows:
2002 (July - December).............. $ 81,156,000
2003................................ 148,215,000
2004................................ 115,270,000
2005................................ 82,107,000
2006................................ 50,552,000
Thereafter.......................... 83,069,000
------------------
$ 560,369,000
==================
12
PS BUSINESS PARKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
In addition to minimum rental payments, tenants pay reimbursements for
their pro rata share of specified operating expenses, which amounted to
$14,098,000 and $11,038,000 for the six months ended June 30, 2002 and
2001, respectively. These amounts are included as rental income and cost of
operations in the accompanying condensed consolidated statements of income.
Approximately 7% of the leased square footage have lease termination
options with approximately 3% exercisable through December 31, 2003. In
general, these leases provide for termination payments should the
termination options be exercised. The above table is prepared assuming such
options are not exercised.
5. Bank Loans
In September 2000, the Company extended its unsecured line of credit (the
"Credit Facility") with Wells Fargo Bank. The Credit Facility has a
borrowing limit of $100 million and an expiration date of August 6, 2003.
Interest on outstanding borrowings is payable monthly. At the option of the
Company, the rate of interest charged is equal to (i) the prime rate or
(ii) a rate ranging from the London Interbank Offered Rate ("LIBOR") plus
0.75% to LIBOR plus 1.35% depending on the Company's credit ratings and
coverage ratios, as defined (currently LIBOR plus 1.00%). In addition, the
Company is required to pay an annual commitment fee of 0.25% of the
borrowing limit. The Company had drawn $10 million and $100 million on its
line of credit at June 30, 2002 and December 31, 2001, respectively.
The Credit Facility requires the Company to meet certain covenants
including (i) maintain a balance sheet leverage ratio (as defined) of less
than 0.50 to 1.00, (ii) maintain interest and fixed charge coverage ratios
(as defined) of not less than 2.25 to 1.00 and 1.75 to 1.00, respectively,
(iii) maintain a minimum total shareholders' equity (as defined) and (iv)
limit distributions to 95% of funds from operations (as defined)for any
four consecutive quarters. In addition, the Company is limited in its
ability to incur additional borrowings (the Company is required to maintain
unencumbered assets with an aggregate book value equal to or greater than
two times the Company's unsecured recourse debt) or sell assets. The
Company was in compliance with the covenants of the Credit Facility at June
30, 2002.
In February 2002, the Company entered into a seven year $50 million
unsecured term note agreement with Fleet National Bank. The note bears
interest at LIBOR plus 1.45% per annum and is due on February 20, 2009. The
Company paid a one-time facility fee of 0.35% or $175,000 for the loan. The
Company used the proceeds from the loan to reduce the amount drawn on the
Credit Facility. During July, 2002, the Company entered into an interest
rate swap transaction which resulted in a fixed rate for the term loan
through July, 2004 at 4.46% per annum.
The unsecured note requires the Company to meet covenants that are
substantially the same as the covenants in the Credit Facility. The Company
was in compliance with the note covenants at June 30, 2002.
13
PS BUSINESS PARKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
6. Mortgage notes payable
Mortgage notes consist of the following: June 30, December 31,
2002 2001
------------------- --------------------
7.050% mortgage note, principal and interest payable monthly, due
May 2006...................................................... $ 8,271,000 $ 8,374,000
8.190% mortgage note, principal and interest payable monthly, due
March 2007.................................................... 6,177,000 6,283,000
7.290% mortgage note, principal and interest payable monthly, due
February 2009................................................. 6,107,000 6,164,000
7.280% mortgage note, principal and interest payable monthly, due
February 2003................................................. 3,992,000 4,059,000
8.000% mortgage note, principal and interest payable monthly, due
April 2003.................................................... 1,881,000 1,930,000
8.500% mortgage note, principal and interest payable monthly, due
July 2007..................................................... - 1,797,000
8.000% mortgage note, principal and interest payable monthly, due
April 2003.................................................... 1,504,000 1,538,000
------------------- --------------------
$27,932,000 $30,145,000
=================== ====================
At June 30, 2002, approximate principal maturities of mortgage notes
payable are as follows:
2002 (July - December).............. $ 428,000
2003................................ 7,811,000
2004................................ 631,000
2005................................ 680,000
2006................................ 7,890,000
Thereafter.......................... 10,492,000
-----------------
$ 27,932,000
=================
14
PS BUSINESS PARKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
7. Minority interests
Common partnership units
The Company presents the accounts of PSB and the Operating Partnership on a
consolidated basis. Ownership interests in the Operating Partnership, other
than PSB's interest, are classified as minority interest in the
consolidated financial statements. Minority interest in income consists of
the minority interests' share of the consolidated operating results.
Beginning one year from the date of admission as a limited partner and
subject to certain limitations described below, each limited partner other
than PSB has the right to require the redemption of its partnership
interest.
A limited partner that exercises its redemption right will receive cash
from the Operating Partnership in an amount equal to the market value (as
defined in the Operating Partnership Agreement) of the partnership
interests redeemed. In lieu of the Operating Partnership redeeming the
partner for cash, PSB, as general partner, has the right to elect to
acquire the partnership interest directly from a limited partner exercising
its redemption right, in exchange for cash in the amount specified above or
by issuance of one share of PSB common stock for each unit of limited
partnership interest redeemed.
A limited partner cannot exercise its redemption right if delivery of
shares of PSB common stock would be prohibited under the applicable
articles of incorporation, or if the general partner believes that there is
a risk that delivery of shares of common stock would cause the general
partner to no longer qualify as a REIT, would cause a violation of the
applicable securities laws, or would result in the Operating Partnership no
longer being treated as a partnership for federal income tax purposes.
At June 30, 2002, there were 7,305,355 common units owned by PSI and
affiliated entities and which are accounted for as minority interests. On a
fully converted basis, assuming all 7,305,355 minority interest common
units were converted into shares of common stock of PSB at June 30, 2002,
the minority interest units would convert into approximately 25% of the
common shares outstanding. At the end of each reporting period, the Company
determines the amount of equity (book value of net assets) which is
allocable to the minority interest based upon the ownership interest and an
adjustment is made to the minority interest, with a corresponding
adjustment to paid-in capital, to reflect the minority interests' equity in
the Company.
15
PS BUSINESS PARKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
Preferred partnership units
Through the Operating Partnership, the Company has issued the following
preferred units in separate private placement transactions:
Number of Preferred
Date of Issuance Series Units Face Value Distribution Rate
--------------------------- ----------- ----------------- ------------------ ------------------
April 1999 Series B 510 $ 12,750,000 8 7/8%
September 1999 Series C 3,200 80,000,000 8 3/4%
September 2001 Series E 2,120 53,000,000 9 1/4%
September 1999 Series X 1,600 40,000,000 8 7/8%
July 2000 Series Y 480 12,000,000 8 7/8%
----------------- ------------------
7,910 $ 197,750,000
================= ==================
The Operating Partnership has the right to redeem preferred units on or
after the fifth anniversary of the applicable issuance date at the original
capital contribution plus the cumulative priority return, as defined, to
the redemption date to the extent not previously distributed. The preferred
units are exchangeable for Cumulative Redeemable Preferred Stock of the
respective series of PS Business Parks, Inc. on or after the tenth
anniversary of the date of issuance at the option of the Operating
Partnership or a majority of the holders of the respective preferred units.
The Cumulative Redeemable Preferred Stock will have the same distribution
rate and par value as the corresponding preferred units and will otherwise
have equivalent terms to the other series of preferred stock described in
Note 9.
8. Property management contracts
The Operating Partnership manages industrial, office and retail facilities
for PSI and affiliated entities. These facilities, all located in the
United States, operate under the "Public Storage" or "PS Business Parks"
names. In addition, the Operating Partnership manages properties for third
party owners and a joint venture.
The property management contracts provide for compensation of a percentage
of the gross revenues of the facilities managed. Under the supervision of
the property owners, the Operating Partnership coordinates rental policies,
rent collections, marketing activities, the purchase of equipment and
supplies, maintenance activities, and the selection and engagement of
vendors, suppliers and independent contractors. In addition, the Operating
Partnership assists and advises the property owners in establishing
policies for the hire, discharge and supervision of employees for the
operation of these facilities, including property managers and leasing,
billing and maintenance personnel.
The property management contract with PSI is for a seven year term with the
term being extended one year on each anniversary. The property management
contracts with affiliates of PSI are cancelable by either party upon sixty
days notice.
16
PS BUSINESS PARKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
9. Shareholders' equity
Preferred stock
The Company issued the following series of preferred stock in separate
public placement transactions:
Number of Preferred
Date of Issuance Series Units Face Value Distribution Rate
--------------------------- ----------- ----------------- ------------------ ------------------
April 1999 Series A 2,200 $ 55,000,000 9 1/4%
September 1999 Series D 2,640 66,000,000 9 1/2%
September 2001 Series F 2,000 50,000,000 8 3/4%
----------------- ------------------
6,840 $ 171,000,000
================= ==================
Holders of the Company's preferred stock will not be entitled to vote on
most matters, except under certain conditions. In the event of a cumulative
arrearage equal to six quarterly dividends, the holders of the preferred
stock will have the right to elect two additional members to serve on the
Company's Board of Directors until all events of default have been cured.
At June 30, 2002, there were no dividends in arrears.
Except under certain conditions relating to the Company's qualification as
a REIT, the preferred stock is not redeemable prior to the following dates:
Series A - April 30, 2004, Series D - May 10, 2006 and Series F - January
28, 2007. On or after the respective dates, the respective series of
preferred stock will be redeemable, at the option of the Company, in whole
or in part, at $25 per depositary share, plus any accrued and unpaid
dividends.
The Company may re-purchase shares of its preferred stock from time to time
on the open market in separately negotiated transactions. During the
quarter ended June 30, 2002, the Company repurchased 500 shares of Series D
preferred stock with a face value of $12,500 for $12,823 or $25.65 per
share.
The Company paid $7,550,000 and $3,175,000 in distributions to its
preferred shareholders for the six months ended June 30, 2002 and 2001,
respectively.
Common Stock
The Company's Board of Directors has authorized the repurchase from time to
time of up to 4,500,000 shares of the Company's common stock on the open
market or in privately negotiated transactions. For the six months ended
June 30, 2002, the Company has not repurchased any common stock. Since the
inception of the program (March 2000), the Company has repurchased an
aggregate total of 2,321,711 shares of common stock at an aggregate cost of
approximately $60.5 million (average cost of $26.06 per share).
On March 31, 2000, a holder of common units in the Operating Partnership
exercised its option and converted its 107,517 common units into an equal
number of shares of PSB common stock. The conversion resulted in an
increase in shareholders' equity and a corresponding decrease in minority
interest of approximately $2,531,000, representing the book value of the
common units at the time of conversion.
The Company paid $12,498,000 ($0.58 per common share) and $13,214,000
($0.58 per common share) in distributions to its common shareholders for
the six months ended June 30, 2002 and 2001, respectively. Pursuant to
restrictions imposed by the Credit Facility, distributions may not exceed
95% of funds from operations, as defined, for any four consecutive
quarters.
17
PS BUSINESS PARKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
Equity stock
In addition to common and preferred stock, the Company is authorized to
issue 100,000,000 shares of Equity Stock. The Articles of Incorporation
provide that the Equity Stock may be issued from time to time in one or
more series and give the Board of Directors broad authority to fix the
dividend and distribution rights, conversion and voting rights, redemption
provisions and liquidation rights of each series of Equity Stock.
10. Recent accounting pronouncements
In October 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This
statement addresses financial accounting and reporting for the disposal of
long-lived assets and becomes effective for financial statements issued for
fiscal years beginning after December 15, 2001. The Company adopted SFAS
No. 144 on January 1, 2002 and its adoption did not have a significant
impact on the Company's consolidated financial statements.
11. Commitments and contingencies
Substantially all of the Company's properties have been subjected to Phase
I environmental reviews. Such reviews have not revealed, nor is management
aware of, any probable or reasonably possible environmental costs that
management believes would have a material adverse effect on the Company's
business, assets or results of operations, nor is the Company aware of any
potentially material environmental liability, except as discussed below.
The Company acquired a property in Beaverton, Oregon ("Creekside Corporate
Park") in May 1998. A portion of Creekside Corporate Park, as well as
properties adjacent to Creekside Corporate Park, were the subject of an
environmental investigation conducted by two current and past
owner/operators of an industrial facility on adjacent property, pursuant to
an Order on Consent issued by the Oregon Department of Environmental
Quality ("ODEQ"). Results of that investigation indicate that the
contamination from the industrial facility has migrated onto portions of
Creekside Corporate Park owned by the Company. There is no evidence that
the Company's past or current use of the Creekside Corporate Park property
contributed in any way to the contamination that is the subject of the
current investigation, nor has the ODEQ alleged any such contribution.
The Company, which is not a party to the Order on Consent, executed
separate Access Agreements with the two owner/operators to allow access to
portions of Creekside Corporate Park to conduct the required sampling and
testing, and to permit one of the owner/operators subject to the Order on
Consent to construct, install and operate a groundwater treatment system on
a portion of Creekside Corporate Park owned by the Company. Operation and
maintenance of this groundwater treatment system, which is required by the
Interim Remedial Action Plan approved by ODEQ, is the sole responsibility
of the owner/operator, and not the Company.
Based on the remedial investigation/feasibility study, ODEQ has selected a
final remedy that would include permanent treatment of contaminants in the
groundwater, including expanded groundwater extraction and treatment on all
parcels of the former industrial property, including portions of Creekside
Corporate Park. The estimated cost of this remedy is $2.8 million over a
30-year time period.
18
PS BUSINESS PARKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
ODEQ has commenced negotiations with the two owner/operators and the
Company, along with other similarly situated owners of property adjacent to
the industrial facility, to reach a settlement pursuant to which the
selected remedy be implemented. It is possible that the ODEQ could require
the Company to participate in the implementation of removal or remedial
actions that may be required on the Company's property, or to pay a portion
of the costs to do so. One of the two owner/operators that conducted the
investigation filed for Chapter 11 bankruptcy protection. It is not clear
at this point what impact, if any, this filing will have on the
negotiations regarding remedy implementation.
In the event the Company is ultimately deemed responsible for any costs
relating to this matter, the Company believes that it may have recourse
against the party from whom the property was purchased. In addition, the
Company believes it may have recourse against other potentially responsible
parties, including, but not limited to, one or both of the owner/operators
of the adjacent industrial facility. Based on recent discussions with the
ODEQ and other potentially responsible parties, the Company has estimated
its share of the costs of the remediation at $250,000. The Company has
accrued these estimated costs and included the expense in general and
administrative costs.
Although environmental investigations conducted to date on other properties
owned by the Company have not revealed any environmental liability that the
Company believes would have a material adverse effect on the Company's
business, assets or results of operations, and the Company is not aware of
any such liability, it is possible that these investigations did not reveal
all environmental liabilities or that there are material environmental
liabilities of which the Company is unaware. No assurances can be given
that (i) future laws, ordinances, or regulations will not impose any
material environmental liability, or (ii) the current environmental
condition of the Company's properties has not been, or will not be,
affected by tenants and occupants of the Company's properties, by the
condition of properties in the vicinity of the Company's properties, or by
third parties unrelated to the Company.
On November 3, 1999, the Company filed an action titled PS Business Parks,
Inc. v. Larry Howard et al. (Case No. BC219580) in Los Angeles Superior
Court seeking damages in excess of $1 million. The complaint alleges that
Mr. Howard and entities controlled by him engaged in unfair trade
practices. Some of the Company's claims have been dismissed on summary
adjudication, and the balance has been referred to the arbitration
proceedings described below for adjudication. Mr. Howard filed a
cross-complaint which the Company contested vigorously. Mr. Howard's
cross-complaint has been dismissed in binding arbitration.
On November 27, 2000, Mary Jayne Howard, a former officer of the Company
filed a demand for arbitration with the American Arbitration Association
alleging claims against the Company for breach of contract, gender
discrimination, marital discrimination, and wrongful termination based on
public policy. The demand seeks damages of approximately $2 million. The
Company plans to vigorously contest these claims. The Company has also
filed in the arbitration a cross-claim against Ms. Howard alleging that she
breached her fiduciary duties to the Company and committed fraud, among
other claims, seeking damages in excess of $1 million.
19
PS BUSINESS PARKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
On February 2, 2000, the Company filed an action against Mary Piper, its
former Vice President of operations, in Riverside County Superior Court,
alleging claims for breach of fiduciary duties, fraud and deceit,
constructive fraud, negligent misrepresentation, violation of Section 17000
of the Business and Professions Code, violation of Section 17200 of the
Business and Professions Code and culpable negligence. The Company's claims
arose from Ms. Piper's alleged participation in a plan that resulted in the
payment of improper kickbacks to Larry Howard, a former vendor of the
Company and the husband of Mary Jayne Howard, a former officer of the
Company. Ms. Piper subsequently filed a cross-complaint which the Company
intends to vigorously contest.
The Company currently is neither subject to any other material litigation
nor, to management's knowledge, is any material litigation currently
threatened against the Company other than routine litigation and
administrative proceedings arising in the ordinary course of business.
Management believes that these items will not have a material adverse
impact on the Company's condensed consolidated financial position or
results of operations.
12. Subsequent Event
During July, 2002, the Company entered into contracts to sell four
properties located in Texas, Kansas and Maryland totaling 386,000 square
feet. These properties include the two properties held for disposition (see
note 3). Net proceeds are expected to be approximately $23,825,000. Upon
the completion of the dispositions at the contracted sales price, the
Company will recognize gains on these dispositions totaling approximately
$3,000,000. There can be no assurance that these sales will be completed or
that the net proceeds or gains will be recognized. The following summarizes
the condensed results of operations of these properties under contract that
were not held for disposition at June 30, 2002. See note 3 for condensed
results of operations for those held for disposition at June 30, 2002
For the Six Months
Ended June 30,
-----------------------------------
2002 2001
---------------- ------------------
Rental income................... $ 989,000 $ 974,000
Cost of operations*............. (276,000) (272,000)
---------------- ------------------
Net operating income............ $ 713,000 $ 702,000
================ ==================
* Does not include depreciation expense of $230,000 for the six months ended
June 30, 2002 and 2001.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements: Forward-looking statements are made
throughout this Quarterly Report on Form 10-Q. For this purpose, any statements
contained herein that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the foregoing, the words
"believes," "anticipates," "plans," expects," "seeks," "estimates," and similar
expressions are intended to identify forward-looking statements. There are a
number of important factors that could cause the results of the Company to
differ materially from those indicated by such forward-looking statements,
including those detailed under the heading "Item 2A. Risk Factors." In light of
the significant uncertainties inherent in the forward-looking statements
included herein, the inclusion of such information should not be regarded as a
representation by us or any other person that our objectives and plans will be
achieved. Moreover, we assume no obligation to update these forward-looking
statements to reflect actual results, changes in assumptions or changes in other
factors affecting such forward-looking statements.
Overview
- --------
Critical Accounting Policies and Estimates: Our significant accounting
policies are described in Note 2 to the condensed consolidated financial
statements included in this Form 10-Q. We believe our most critical accounting
policies relate to revenue recognition, allowance for doubtful accounts,
impairment of long-lived assets, and depreciation, each of which we discuss
below.
Revenue Recognition: We recognize revenue in accordance with Staff
Accounting Bulletin No. 101 of the Securities and Exchange Commission,
Revenue Recognition in Financial Statements (SAB 101), as amended. SAB
101 requires that four basic criteria must be met before revenue can be
recognized.
- persuasive evidence of an arrangement exists;
- delivery has occurred or services rendered;
- the fee is fixed and determinable; and
- collectibility is reasonably assured.
Allowance for Doubtful Accounts: Rental revenue from our tenants is our
principal source of revenue. We monitor the collectibility of our
receivable balances including the deferred rent receivable on an
on-going basis. Based on these reviews, we establish a provision, and
maintain an allowance, for doubtful accounts for estimated losses
resulting from the possible inability of our tenants to make required
rent payments to us. An allowance for doubtful accounts is recorded
during each period and is netted against rental revenue in our
consolidated statements of operations. The allowance for doubtful
accounts, which represents the cumulative allowances less write-offs of
uncollectible rent, is netted against tenant and other receivables on
our consolidated balance sheets. If we incorrectly determine the
collectibility of our revenue, the timing and amount of our reported
revenue could be affected.
Impairment of Long-Lived Assets: Under GAAP, we are required to record
at fair value any of our long-lived assets that we have determined to
be permanently impaired. Our long-lived assets consist primarily of our
investments in real estate. The fair value of our investments in real
estate depends on the future cash flows from operations of the
properties. In assessing potential impairment for our investments, we
consider that factor. If the estimated future cash flow of the property
results in a determination that the fair value is less than our
carrying value, an impairment may be recognized if we determine the
loss to be permanent. As of June 30, 2002, the Company does not
consider any of its long-lived assets to be impaired. An impairment
loss could have a material adverse impact on our financial condition
and results of operations.
Depreciation: We compute depreciation on our buildings and equipment
using the straight-line method based on estimated useful lives of
generally 30 and 5 years. A significant portion of the acquisition cost
of each property is allocated to building and building components
(usually 80-85%). The allocation of the acquisition cost to building
and its components and the determination of the useful life are based
on management's estimates. If we do not allocate appropriately to
building or related components or incorrectly estimate the useful life
of our properties, the timing and/or the amount of depreciation expense
will be affected. In addition, the net book value of real estate assets
could be over or understated. The statement of cash flows, however,
would not be affected.
21
Accruals of Operating Expenses: The Company accrues for property tax
expenses, performance bonuses and other operating expenses each quarter
based on historical trends and anticipated disbursements. If these
estimates are incorrect, the timing of expense recognition will be
affected.
Effect of Economic Conditions on the Company's Operations: During 2001
and continuing into 2002, the Company has been affected by the slowdown in
economic activity in the United States in most of its primary markets. These
effects were exacerbated by the terrorist attacks of September 11, 2001 and the
related aftermath. These effects include a decline in occupancy rates, a
reduction in market rental rates throughout the portfolio and slower than
expected lease-up of the Company's development properties.
The reduction in occupancies and market rental rates has been the
result of several factors related to general economic conditions. There are more
businesses contracting than expanding, more businesses failing than starting-up
and general uncertainty for businesses, resulting in slower decision-making and
requests for shorter-term leases. There is also more competing vacant space,
including substantial amounts of sub-lease space, in many of the Company's
markets. Many of the Company's properties have lower vacancy rates than the
average rates for the markets in which they are located; consequently, the
Company may have difficulty in maintaining its occupancy rates as leases expire.
An extended economic slowdown will put additional downward pressure on
occupancies and market rental rates. The economic slowdown and the abundance of
space alternatives available to customers has led to pressure for greater rent
concessions, more generous tenant improvement allowances and higher broker
commissions.
These economic conditions have also resulted in the erosion of tenant
credit quality throughout the portfolio. As a result, more tenants are
contacting us regarding their economic viability, including those that could be
material to our revenue base and more tenants are electing to terminate their
leases early under lease termination options. To a certain extent, these
economic conditions have affected Worldcom, our tenth largest tenant. Worldcom
and two related entities make up 0.8% of the Company's revenues. Worldcom's
recent bankruptcy may adversely affect the continuity of that revenue. Several
other of our large customers have contacted us, requesting early termination of
their lease, rent reduction in space under lease, rent deferment or abatement.
At this time, the Company cannot anticipate what impact, if any, the ultimate
outcome of these discussions will have on our operating results.
The Company's two development properties were 57% leased in the
aggregate as of June 30, 2002, but they have not been leased as rapidly as the
Company had anticipated. The development properties consist of a 141,000 square
foot flex development in Northern Virginia that was 78% leased, and a 97,000
square foot development in the Beaverton submarket of Portland, Oregon that was
26% leased.
Growth of the Company's Operations: During 2001 and continuing into
2002, the Company focused on increasing cash flow from its existing core
portfolio of properties, seeking to expand its presence in existing markets
through strategic acquisitions and developments and strengthening its balance
sheet, primarily through the issuance of preferred stock/units. The Company has
historically maintained low debt and overall leverage levels, including
preferred stock/units, which should give it the flexibility for future growth
without the issuance of additional common stock.
22
During the six months ended June 30, 2002, the Company did not complete
any acquisitions or dispositions of properties. The Company plans to continue to
seek to build its presence in existing markets by acquiring high quality
facilities in selected markets. The Company targets properties with below market
rents which may offer it growth in rental rates above market averages and which
offer the Company the ability to achieve economies of scale resulting in more
efficient operations.
During July, 2002, the Company entered into contracts to sell
properties located in Texas, Kansas and Maryland totaling 386,000 square feet.
These properties include the two properties held for disposition (see note 3).
Net proceeds are expected to be approximately $23,825,000. Upon the completion
of the dispositions, the Company will recognize gains on these dispositions
totaling approximately $3,000,000. There can be no assurance that these sales
will be completed or that the net proceeds or gains will be recognized.
During 2001, the Company added approximately 2.2 million square feet of
space to its portfolio at an aggregate cost of approximately $303 million. These
acquisitions increased the Company's presence in its existing markets. The
Company acquired 658,000 square feet in Northern Virginia for approximately $88
million, 685,000 square feet in Oregon for approximately $88 million and 905,000
square feet in Maryland for approximately $127 million. In addition, the Company
completed development of three properties totaling 339,000 square feet in
Northern Virginia, Portland and Dallas for approximately $28.5 million. The
Company also disposed of a property aggregating 77,000 square feet for
approximately $9 million. The Company also formed a joint venture to own and
operate an industrial park. This park, consisting of 294,000 square feet, was
acquired in December 2000 at a cost of approximately $14.4 million and was
contributed to the joint venture at its original cost for a 25% equity interest
in the joint venture.
Results of Operations
- ---------------------
Results of Operations: Net income for the three months ended June 30,
2002 was $13,472,000 compared to $12,830,000 for the same period in 2001. Net
income allocable to common shareholders (net income less preferred stock
dividends) for the three months ended June 30, 2002 was $9,539,000 compared to
$10,927,000 for the same period in 2001. Net income per common share on a
diluted basis was $0.44 for the three months ended June 30, 2002 compared to
$0.48 for the same period in 2001 (based on weighted average diluted common
shares outstanding of 21,799,000 and 22,679,000 at June 30, 2002 and 2001,
respectively). The decrease was the result of an increase in depreciation
expense as a result of property acquisitions in 2001. Net income for the six
months ended June 30, 2002 was $30,174,000 compared to $24,295,000 for the same
period in 2001. Net income allocable to common shareholders (net income less
preferred stock dividends) for the six months ended June 30, 2002 was
$22,624,000 compared to $21,120,000 for the same period in 2001. Net income per
common share on a diluted basis was $1.04 for the six months ended June 30, 2002
compared to $0.92 for the same period in 2001 (based on weighted average diluted
common shares outstanding of 21,774,000 and 22,885,000, respectively). Net
income allocable to common shareholders for the first six months of 2002
included recognizing a deferred gain on the disposition of a property of $5.4
million or $0.19 per share, and the Company's share of gains on disposition of
two buildings in its joint venture of $148,000 or less than $0.01 per share. The
net income per diluted share before the recognition of these gains on
dispositions was $0.85 or $0.07 less than the same period in 2001. The decrease
was the result of an increase in depreciation expense as a result of property
acquisitions in 2001, offset partially by the net operating income from the
acquired properties, net of financing costs.
23
The Company's property operations account for almost all of the net
operating income earned by the Company. The following table presents the
pre-depreciation operating results of the properties:
Three Months Ended
June 30,
-------------------------------
2002 2001 Change
-------------- -------------- ------------
Rental income:
"Same Park" facilities (12 million net rentable square feet) $38,829,000 $37,994,000 2.2%
Other facilities (2.8 million net rentable square feet)..... 12,101,000 2,287,000 429.1%
-------------- --------------
Total rental income......................................... $50,930,000 $40,281,000 26.4%
Cost of operations (excluding depreciation):
"Same Park" facilities...................................... $10,098,000 $9,846,000 2.6%
Other facilities............................................ 3,528,000 629,000 460.9%
-------------- --------------
Total cost of operations.................................... $13,626,000 $10,475,000 30.1%
============== ==============
Net operating income (rental income less cost of operations):
"Same Park" facilities...................................... $28,731,000 $28,148,000 2.1%
Other facilities............................................ 8,573,000 1,658,000 417.1%
-------------- --------------
Total net operating income.................................. $37,304,000 $29,806,000 25.2%
============== ==============
Six Months Ended
June 30,
-------------------------------
2002 2001 Change
-------------- -------------- ------------
Rental income:
"Same Park" facilities (12 million net rentable square feet) $77,209,000 $75,098,000 2.8%
Other facilities (2.8 million net rentable square feet)..... 24,065,000 3,576,000 573.1%
-------------- --------------
Total rental income......................................... $101,274,000 $78,674,000 28.7%
============== ==============
Cost of operations (excluding depreciation):
"Same Park" facilities...................................... $20,198,000 $19,581,000 3.2%
Other facilities............................................ 7,254,000 1,265,000 473.4%
-------------- --------------
Total cost of operations.................................... $27,452,000 $20,846,000 31.7%
============== ==============
Net operating income (rental income less cost of operations):
"Same Park" facilities...................................... $57,011,000 $55,517,000 2.7%
Other facilities............................................ 16,811,000 2,311,000 627.7%
-------------- --------------
Total net operating income.................................. $73,822,000 $57,828,000 27.7%
============== ==============
26
Rental income and rental income less cost of operations or net
operating income ("NOI") prior to depreciation are summarized for the three
months ended June 30, 2002 by major geographic region below:
Square Percent Rental Percent Percent
Region Footage of Total Income of Total NOI of Total
- ------------------------- ------------------- ------------- -------------- ----------- --------------- -------------
Southern California 3,177,000 21.4% $10,869,000 21.3% $8,305,000 22.2%
Northern California 1,495,000 10.0% 5,301,000 10.4% 4,174,000 11.2%
Southern Texas 1,032,000 7.0% 2,932,000 5.8% 1,776,000 4.8%
Northern Texas 1,951,000 13.2% 5,429,000 10.7% 3,865,000 10.4%
Virginia 2,621,000 17.7% 9,931,000 19.5% 6,985,000 18.7%
Maryland 1,771,000 12.0% 6,856,000 13.5% 5,091,000 13.6%
Oregon 1,973,000 13.3% 7,705,000 15.1% 5,966,000 16.0%
Other 797,000 5.4% 1,907,000 3.7% 1,142,000 3.1%
------------------- ------------- -------------- ----------- --------------- -------------
14,817,000 100.0% $50,930,000 100.0% $37,304,000 100.0%
=================== ============= ============== =========== =============== =============
Rental income and rental income less cost of operations or net
operating income ("NOI") prior to depreciation are summarized for the six months
ended June 30, 2002 by major geographic region below:
Square Percent Rental Percent Percent
Region Footage of Total Income of Total NOI of Total
- ------------------------- ------------------- ------------- -------------- ----------- --------------- -------------
Southern California 3,177,000 21.4% $21,509,000 21.2% $16,321,000 22.1%
Northern California 1,495,000 10.0% 10,563,000 10.4% 8,217,000 11.1%
Southern Texas 1,032,000 7.0% 5,707,000 5.6% 3,315,000 4.5%
Northern Texas 1,951,000 13.2% 10,859,000 10.7% 7,751,000 10.5%
Virginia 2,621,000 17.7% 19,876,000 19.7% 14,042,000 19.0%
Maryland 1,771,000 12.0% 13,680,000 13.5% 9,982,000 13.5%
Oregon 1,973,000 13.3% 15,345,000 15.2% 12,077,000 16.4%
Other 797,000 5.4% 3,735,000 3.7% 2,117,000 2.9%
------------------- ------------- -------------- ----------- --------------- -------------
14,817,000 100.0% $101,274,000 100.0% $73,822,000 100.0%
=================== ============= ============== =========== ================ =============
Supplemental Property Date and Trends: In order to evaluate the
performance of the Company's overall portfolio, management analyzes the
operating performance of a consistent group of properties constituting 12
million net rentable square feet ("Same Park" facilities). The Company currently
has an ownership interest in these properties and has owned and operated them
for the comparable periods. These properties do not include properties that have
been acquired or sold during 2001 and 2002. The "Same Park" facilities represent
approximately 81% of the weighted average square footage of the Company's
portfolio at June 30, 2002.
25
The following table summarizes the pre-depreciation historical
operating results of the "Same Park" facilities excluding the effects of
accounting for rental income on a straight-line basis.
"Same Park" Facilities (12.0 million square feet)
-------------------------------------------------
Three Months Ended
June 30,
------------------------------------
2002 2001 Change
------------------ ----------------- --------------
Rental income (1).................................... $ 38,237,000 $ 37,510,000 1.9%
Cost of operations................................... 10,098,000 9,846,000 2.6%
------------------ -----------------
Net operating income................................. $ 28,139,000 $ 27,664,000 1.7%
================== =================
Gross margin (2)..................................... 73.6% 73.8% (0.2%)
Weighted average for period:
Occupancy........................................ 94.7% 96.0% (1.3%)
Annualized realized rent per occupied sq. ft.(3). $13.50 $13.06 3.4%
Six Months Ended
June 30,
------------------------------------
2002 2001 Change
------------------ ----------------- --------------
Rental income (1).................................... $ 75,885,000 $ 74,256,000 2.2%
Cost of operations................................... 20,198,000 19,581,000 3.2%
------------------ -----------------
Net operating income................................. $ 55,687,000 $ 54,675,000 1.9%
================== =================
Gross margin (2)..................................... 73.4% 73.6% (0.2%)
Weighted average for period:
Occupancy........................................ 94.8% 96.3% (1.5%)
Annualized realized rent per occupied sq. ft.(3). $13.38 $12.89 3.8%
(1) Rental income does not include the effect of straight-line accounting.
(2) Gross margin is computed by dividing property net operating income by rental
income.
(3) Realized rent per square foot represents the actual revenues earned per
occupied square foot.
26
The following tables summarize the "Same Park" operating results by
major geographic region for the three months ended June 30, 2002 and 2001:
Revenues Revenues Increase NOI NOI Increase
Region 2002 2001 (Decrease) 2002 2001 (Decrease)
- ------------------------- ---------------- ------------- ------------- --------------- ------------ -------------
Southern California..... $10,735,000 $10,210,000 5.1% $8,130,000 $7,695,000 5.7%
Northern California..... 5,234,000 4,824,000 8.5% 4,090,000 3,686,000 10.9%
Southern Texas.......... 2,301,000 2,401,000 (4.2%) 1,458,000 1,695,000 (13.9%)
Northern Texas.......... 4,784,000 4,588,000 4.3% 3,310,000 3,109,000 6.5%
Virginia................ 6,130,000 6,694,000 (8.4%) 4,216,000 4,932,000 (14.5%)
Maryland................ 2,429,000 2,410,000 0.8% 2,025,000 1,873,000 8.1%
Oregon.................. 4,741,000 4,497,000 5.4% 3,805,000 3,613,000 5.3%
Other................... 1,883,000 1,886,000 (0.2%) 1,105,000 1,061,000 4.1%
---------------- ------------- ------------- --------------- ------------ -------------
$38,237,000 $37,510,000 1.9% $28,139,000 $27,664,000 1.7%
================ ============= ============= =============== ============ =============
The increases noted above reflect the performance of the Company's
existing markets. Northern California benefited from strong results in the
Sacramento portfolio combined with the renewals in 2001 of our three largest
leases in Northern California (Santa Clara County, Pycon and Decision One).
Decreases reflected above were primarily due to declining occupancy levels and
declining rental rates. Southern Texas continued to experience declines in
occupancy. The decrease in Virginia is primarily the result of a building leased
to the U.S. Government that will not be occupied until October 2002. In
addition, vacancy rates increased and rents decreased in Virginia due to the
softness in the Herndon and Chantilly submarkets. Total revenues include rental
income that was determined to be uncollectible and was written-off in the amount
of $53,000 and $414,000 for the three months ended June 30, 2002 and 2001,
respectively.
The following tables summarize the "Same Park" operating results by
major geographic region for the six months ended June 30, 2002 and 2001:
Revenues Revenues Increase NOI NOI Increase
Region 2002 2001 (Decrease) 2002 2001 (Decrease)
- ------------------------- ---------------- ------------- ------------- --------------- ------------ -------------
Southern California..... $21,258,000 $20,203,000 5.2% $16,115,000 $15,169,000 6.2%
Northern California..... 10,305,000 9,348,000 10.2% 7,982,000 7,118,000 12.1%
Southern Texas.......... 4,508,000 4,751,000 (5.1%) 2,877,000 3,186,000 (9.7%)
Northern Texas.......... 9,570,000 9,294,000 2.9% 6,691,000 6,434,000 4.0%
Virginia................ 12,268,000 12,961,000 (5.3%) 8,490,000 9,478,000 (10.4%)
Maryland................ 4,759,000 4,878,000 (2.4%) 3,738,000 3,705,000 0.9%
Oregon.................. 9,527,000 9,033,000 5.5% 7,706,000 7,287,000 5.7%
Other................... 3,690,000 3,788,000 (2.6%) 2,088,000 2,298,000 (9.1%)
---------------- ------------- ------------- --------------- ------------ -------------
$75,885,000 $74,256,000 2.2% $55,687,000 $54,675,000 1.9%
================ ============= ============= =============== ============ =============
The increases noted above reflect the performance of the Company's
existing markets. Northern California benefited from strong results in the
Sacramento portfolio combined with the renewals in 2001 of our three largest
leases in Northern California (Santa Clara County, Pycon and Decision One).
Decreases reflected above were primarily due to declining occupancy levels and
declining rental rates. Southern Texas continued to experience declines in
occupancy. The decrease in Virginia is primarily the result of a building leased
to the U.S. Government that will not be occupied until October 2002. In
addition, vacancy rates increased and rents decreased in Virginia due to the
softness in the Herndon and Chantilly submarkets. The substantial decline in NOI
from our peripheral markets is primarily the result of the timing of certain
expenses during the first quarter. Total revenues include rental income that was
determined to be uncollectible and was written-off in the amount of $283,000 and
$497,000 for the three months ended June 30, 2002 and 2001, respectively.
27
Facility Management Operations: The Company's facility management
accounts for a small portion of the Company's net operating income. During the
three months ended June 30, 2002, $146,000 in net operating income was
recognized from facility management operations compared to $131,000 for the same
period in 2001. During the six months ended June 30, 2002, the Company generated
net operating income of $296,000 compared to $256,000 for the same period in
2001. Facility management fees have increased due to the increase in rental
rates of the properties managed by the Company and additional property brought
under management.
Business Services: Business services include construction management
fees and fees from telecommunications service providers. During the three months
ended June 30, 2002, Business Services generated a net operating loss of $84,000
compared to a net operating loss of $53,000 for the same period in 2001. During
the six months ended June 30, 2002, Business Services generated a net operating
loss of $219,000 compared to net operating loss of $80,000 for the same period
in 2001. Business services revenue have declined primarily due to the
bankruptcies of Darwin Networks, Winstar and Teligent, telecommunication service
providers.
Interest and Other Income: Interest and other income reflects earnings
on cash balances and dividends on marketable securities. Interest income was
$355,000 for the three months ended June 30, 2002 compared to $553,000 for the
same period in 2001. Interest income was $596,000 for the six months ended June
30, 2002 compared to $1,313,000 for the same period in 2001. The decrease is
attributable to lower average cash balances and interest rates. Average cash
balances and effective interest rates for the three months ended June 30, 2002
were approximately $27 million and 2.0% compared to $51 million and 4.3% for the
same period in 2001. Average cash balances and effective interest rates for the
six months ended June 30, 2002 were approximately $25 million and 2.1% compared
to $55 million and 4.8% for the same period in 2001.
Cost of Operations: Cost of operations for the three months ended June
30, 2002 was $13,626,000 compared to $10,475,000 for the same period in 2001.
Cost of operations for the six months ended June 30, 2002 was $27,452,000
compared to $20,846,000 for the same period in 2001. The increase is due
primarily to the growth in the square footage of the Company's portfolio of
properties. Cost of operations as a percentage of rental income for the six
months ended June 30, 2002 was fairly consistent at 27.1% compared to 26.5% for
the same period in 2001.
Depreciation and Amortization Expense: Depreciation and amortization
expense for the three months ended June 30, 2002 was $14,313,000 compared to
$9,733,000 for the same period in 2001. Depreciation and amortization expense
for the six months ended June 30, 2001 was $28,290,000 compared to $19,379,000
for the same period in 2001. The increase is primarily due to depreciation
expense on real estate facilities acquired or developed during 2001.
General and Administrative Expense: General and administrative expense
was $1,068,000 for the three months ended June 30, 2002 compared to $992,000 for
the same period in 2001. General and administrative expense was $2,204,000 for
the six months ended June 30, 2002 compared to $2,120,000 for the same period in
2001. Included in general and administrative costs are acquisition costs.
Acquisition expenses were $151,000 and $203,000 for the three months June 30,
2002 and 2001, respectively. Acquisition expenses were $314,000 and $317,000 for
the six months ended June 30, 2002 and 2001, respectively.
Interest Expense: Interest expense was $1,432,000 for the three months
ended June 30, 2002 compared to $157,000 for the same period in 2001. Interest
expense was $2,983,000 for the six months ended June 30, 2002 compared to
$394,000 for the same period in 2001. The increase is primarily attributable to
increased debt balances in 2002 due to the use of the Company's credit
facilities to fund acquisitions completed during the fourth quarter of 2001.
Interest expense of $144,000 and $486,000 was capitalized as part of building
costs associated with properties under development during the three months ended
June 30, 2002 and 2001, respectively. Interest expense of $288,000 and $898,000
was capitalized as part of building costs associated with properties under
development during the six months ended June 30, 2002 and 2001, respectively. As
of June 30, 2002, all developed properties had been shell complete for at least
one year. The Company has, therefore, discontinued capitalization of interest on
these facilities.
28
Gain on Disposition of Real Estate: Gain on sale of real estate was
$5,366,000 for the six months ended June 30, 2002. The Company disposed of a
property in San Diego for approximately $9 million in November 2001 and deferred
a gain of $5,366,000 which was later recognized in the first quarter of 2002
when the buyer of the property obtained third party financing for the property
and paid off most of its note to the Company.
Gain on Investment in Marketable Securities: Gain on investments in
marketable securities was $25,000 for the six months ended June 30, 2002
compared to $15,000 for the same period in 2001.
Minority Interest in Income: Minority interest in income reflects the
income allocable to equity interests in the Operating Partnership that are not
owned by the Company. Minority interest in income was $7,643,000 ($4,413,000
allocated to preferred unitholders and $3,230,000 allocated to common
unitholders) for the three months ended June 30, 2002 compared to $6,729,000
($3,186,000 allocated to preferred unitholders and $3,543,000 allocated to
common unitholders) for the same period in 2001. Minority interest income for
the six months ended June 30, 2001 was $16,488,000 ($8,825,000 allocated to
preferred unitholders and $7,663,000 allocated to common unitholders) compared
to $13,152,000 ($6,373,000 allocated to preferred unitholders and $6,779,000
allocated to common unitholders) for the same period in 2001. The increase in
minority interest in income is due primarily to the issuance of preferred
operating partnership units during 2001 and higher earnings at the Operating
Partnership level.
29
Liquidity and Capital Resources
- -------------------------------
Net cash provided by operating activities for the six months ended June
30, 2002 and 2001 was $67,226,000 and $59,761,000, respectively. Management
believes that the Company's internally generated net cash provided by operating
activities will continue to be sufficient to enable it to meet its operating
expenses, capital improvements and debt service requirements and to maintain the
current level of distributions to shareholders.
The following table summarizes the Company's cash flow from operating
activities:
Six Months Ended
June 30,
----------------------------------
2002 2001
----------------- ---------------
Net income.......................................................... $ 30,174,000 $ 24,295,000
Gain on sale of marketable securities............................... (25,000) (15,000)
Gain on disposal of properties...................................... (5,366,000) -
Gain on disposition of joint venture properties..................... (148,000) -
Depreciation and amortization....................................... 28,290,000 19,379,000
Minority interest in income......................................... 16,488,000 13,152,000
Change in working capital........................................... (2,187,000) 2,950,000
----------------- ---------------
Net cash provided by operating activities........................... 67,226,000 59,761,000
Maintenance capital expenditures.................................... (2,618,000) (1,223,000)
Tenant improvements................................................. (4,695,000) (1,638,000)
Capitalized lease commissions....................................... (1,049,000) (979,000)
----------------- ---------------
Funds available for distributions to shareholders, minority interests,
acquisitions and other corporate purposes......................... 58,864,000 55,921,000
Cash distributions to shareholders and minority interests........... (37,435,000) (27,000,000)
----------------- ---------------
Excess funds available for principal payments on debt, investments in
real estate and other corporate purposes.......................... $ 21,429,000 $ 28,921,000
================= ===============
The Company's capital structure is characterized by a relatively low
level of leverage. As of June 30, 2002, the Company had six fixed rate mortgage
notes payable totaling $27,932,000, which represented 1.9% of its total
capitalization (based on book value, including minority interest and debt). The
weighted average interest rate for the mortgage notes is 7.50% per annum.
The Company used its short-term borrowing capacity to complete
acquisitions totaling $303 million in 2001. The Company borrowed $100 million
from its line of credit and $35 million from PSI. The remaining balance was
funded from proceeds of the issuance of preferred stock and preferred units in
the operating partnership totaling $116 million and existing cash of $52
million. During January 2002, the Company issued 2,000,000 depositary shares,
each representing 1/1,000 of a share of 8 3/4% Cumulative Preferred Stock,
Series F, resulting in net proceeds of $48.3 million. This was used to repay PSI
and to increase financial flexibility.
In February 2002, the Company entered into a seven year $50 million
term loan agreement with Fleet National Bank. The note bears interest at LIBOR
plus 1.45% and is due on February 20, 2009. The Company paid a one-time fee of
0.35% or $175,000 for the facility. The Company used the proceeds of the loan to
reduce the amount drawn on its Credit Facility with Wells Fargo Bank. In July,
2002, the Company entered into an interest rate swap transaction which had the
effect of fixing the rate on the term loan for two years at 4.46% per annum.
30
The Company expects to return to its strategy of funding primarily with
permanent capital, including the issuance of common and preferred stock, and
internally generated retained cash flows and to a lesser extent with secured or
unsecured debt. In addition, the Company may sell properties that no longer meet
its investment criteria. The Company may finance acquisitions on a temporary
basis with borrowings from its Credit Facility. The Company targets a leverage
ratio of 40% (defined as debt and preferred equity as a percentage of market
capitalization). In addition, the Company targets a ratio of Funds from
Operations ("FFO") to combined fixed charges and preferred distributions of 3.0
to 1.0. As of June 30, 2002, the leverage ratio was 31% and the FFO to fixed
charges and preferred distributions coverage ratio was 3.6 to 1.0.
In September 2000, the Company extended its Credit Facility with Wells
Fargo Bank. The Credit Facility has a borrowing limit of $100 million and an
expiration date of August 6, 2003. Interest on outstanding borrowings is payable
monthly. At the option of the Company, the rate of interest charged is equal to
(i) the prime rate or (ii) a rate ranging from the London Interbank Offered Rate
("LIBOR") plus 0.75% to LIBOR plus 1.35% depending on the Company's credit
ratings and coverage ratios, as defined (currently LIBOR plus 1.00%). In
addition, the Company is required to pay an annual commitment fee of 0.25% of
the borrowing limit. As of June 30, 2002, the balance outstanding was $10
million, which was fully paid off in July 2002.
Funds from Operations: FFO is defined as net income, computed in
accordance with generally accepted accounting principles ("GAAP"), before
depreciation, amortization, minority interest in income, straight line rent
adjustments and extraordinary or non-recurring items. FFO is presented because
the Company considers FFO to be a useful measure of the operating performance of
a REIT which, together with net income and cash flows, provides investors with a
basis to evaluate the operating and cash flow performances of a REIT. FFO does
not represent net income or cash flows from operations as defined by GAAP. FFO
does not take into consideration scheduled principal payments on debt or capital
improvements. The Company believes that in order to facilitate a clear
understanding of the Company's operating results, FFO should be analyzed in
conjunction with net income as presented in the Company's consolidated financial
statements included elsewhere in this Form 10-Q. Accordingly, FFO is not
necessarily a substitute for cash flow or net income as a measure of liquidity
or operating performance or ability to make acquisitions and capital
improvements or ability to make distributions or debt principal payments.
31
Also, FFO as computed and disclosed by the Company may not be
comparable to FFO computed and disclosed by other REITs. FFO for the Company is
computed as follows:
Six Months Ended
June 30,
----------------------------------
2002 2001
----------------- ----------------
Net income allocable to common shareholders........................ $ 22,624,000 $ 21,120,000
Less: Gain on investment in marketable securities............... (25,000) (15,000)
Less: Gain on disposition of real estate........................ (5,366,000) -
Less: Equity income from sale of joint venture properties....... (148,000) -
Depreciation and amortization.................................... 28,290,000 19,379,000
Depreciation from joint venture.................................. 40,000 -
Minority interest in income - common units....................... 7,663,000 6,779,000
Less: Straight-line rent adjustment............................. (1,737,000) (883,000)
----------------- ----------------
Consolidated FFO allocable to common shareholders and minority
interests.......................................................... 51,341,000 46,380,000
FFO allocated to common minority interest - common units........... (12,989,000) (11,270,000)
----------------- ----------------
FFO allocated to common shareholders............................... $ 38,352,000 $ 35,110,000
================= ================
Capital Expenditures: On a recurring annual basis, the Company expects
to expend between $0.90 and $1.20 per square foot in recurring capital
expenditures ($13-$18 million based on square footage at June 30, 2002). In
addition, the Company expects to make $19 million in additional capital
expenditures in 2002. These investments include improvements to bring acquired
properties up to the Company's standards of $6.6 million, first generation
tenant improvements and leasing commissions on development properties of $7
million and the renovation of properties in Southern California, Northern
Virginia, Arizona and Maryland totaling $5.4 million. During the six months
ended June 30, 2002, the Company incurred approximately $14.7 million in capital
expenditures. These included $8.4 million in maintenance capital expenditures,
tenant improvements and capitalized leasing commissions, $0.9 million to bring
acquired properties up to the Company's standards, $2.6 million in first
generation tenant improvements and leasing commissions on developed properties
and $2.8 million in property renovations.
Stock Repurchase: The Company's Board of Directors has authorized the
repurchase from time to time of up to 4,500,000 shares of the Company's common
stock on the open market or in privately negotiated transactions. The Company
has not repurchased any common stock in 2002.
The Company may re-purchase shares of its preferred stock from time to
time on the open market in separately negotiated transactions. During the
quarter ended June 30, 2002, the Company repurchased 500 shares of Series D
preferred stock with a face value of $12,500 for $12,823 or $25.65 per share.
Distributions: The Company has elected and intends to qualify as a REIT
for federal income tax purposes. In order to maintain its status as a REIT, the
Company must meet, among other tests, sources of income, share ownership and
certain asset tests. As a REIT, the Company is not taxed on that portion of its
taxable income that is distributed to its shareholders provided that at least
90% of its taxable income is distributed to its shareholders prior to filing of
its tax return.
Related Party Transactions: At June 30, 2002, PSI owns 25% of the
outstanding shares of the Company's common stock (44% upon conversion of its
interest in the Operating Partnership) and 25% of the outstanding common units
of the Operating Partnership (100% of the common units not owned by the
Company). Ronald L. Havner, Jr., the Company's Chairman, President and Chief
Executive Officer, is also an employee of PSI. As of December 31, 2001, the
Company had $35 million in short-term borrowings from PSI. The notes bore
32
interest at 3.25% and were repaid as of January 28, 2002. Pursuant to a cost
sharing and administrative services agreement, the Company shares costs with PSI
and affiliated entities for certain insurance and administrative services. These
costs are allocated by PSI and its affiliates in accordance with a methodology
intended to fairly allocate those costs. In addition, the Company provides
property management services for properties owned by PSI and its affiliates for
a fee of 5% of the gross revenues of such properties in addition to
reimbursement of direct costs. Finally, in June 2002, the Company purchased land
adjacent to its Metro Park North facility from PSI at PSI's cost (approximately
$800,000).
33
ITEM 2A. RISK FACTORS
In addition to the other information in this Form 10-Q, the following
factors should be considered in evaluating our company and our business.
PSI has significant influence over us.
- --------------------------------------
PSI owns a substantial number of our shares and of the units of our
operating partnership: At June 30, 2002, PSI and its affiliates owned 25% of the
outstanding shares of our common stock (44% upon conversion of its interest in
our operating partnership) and 25% of the outstanding common units of our
operating partnership (100% of the common units not owned by us). Consequently,
PSI has the ability to significantly influence all matters submitted to a vote
of our shareholders, including electing directors, changing our articles of
incorporation, dissolving and approving other extraordinary transactions such as
mergers, and all matters requiring the consent of the limited partners of the
operating partnership. In addition, PSI's ownership may make it more difficult
for another party to take over our company without PSI's approval.
Provisions in our organizational documents may prevent changes in control.
- --------------------------------------------------------------------------
Our articles generally prohibit owning more than 7% of our shares: Our
articles of incorporation restrict the number of shares that may be owned by any
person (other than PSI and certain other specified shareholders), and the
partnership agreement of our operating partnership contains an anti-takeover
provision. No shareholder (other than PSI and certain other specified
shareholders) may own more than 7% of the outstanding shares of our common
stock, unless our board of directors waives this limitation. We imposed this
limitation to avoid, to the extent possible, a concentration of ownership that
might jeopardize our ability to qualify as a real estate investment trust, or
REIT. This limitation, however, also makes a change of control much more
difficult even if it may be favorable to our public shareholders. These
provisions will prevent future takeover attempts not approved by PSI even if a
majority of our public shareholders consider it to be in their best interests
because they would receive a premium for their shares over the shares' then
market value or for other reasons.
Our board can set the terms of certain securities without shareholder
approval: Our board of directors is authorized, without shareholder approval, to
issue up to 50,000,000 shares of preferred stock and up to 100,000,000 shares of
equity stock, in each case in one or more series. Our board has the right to set
the terms of each of these series of stock. Consequently, the board could set
the terms of a series of stock that could make it difficult (if not impossible)
for another party to take over our company even if it might be favorable to our
public shareholders. We can also cause our operating partnership to issue
additional interests for cash or in exchange for property.
The partnership agreement of our operating partnership restricts
mergers: The partnership agreement of our operating partnership provides that
generally we may not merge or engage in a similar transaction unless limited
partners of our operating partnership are entitled to receive the same
proportionate payments as our shareholders. In addition, we have agreed not to
merge with another entity unless the merger would have been approved had the
limited partners been able to vote together with our shareholders, which has the
effect of increasing PSI's influence over us due to PSI's ownership of operating
partnership units. These provisions may make it more difficult for us to merge
with another entity.
Our operating partnership poses additional risks to us.
- -------------------------------------------------------
Limited partners of our operating partnership, including PSI, have the
right to vote on certain changes to the partnership agreement. They may vote in
a way that is contrary to the interest of our shareholders. Also, as general
partner of our operating partnership, we are required to protect the interests
of the limited partners of our operating partnership. The interests of the
limited partners and of our shareholders may differ.
34
We cannot sell certain properties without PSI's approval.
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Before 2007, we may not sell 12 specified properties without PSI's
approval. Since PSI would be taxed on a sale of these properties, the interests
of PSI and our other shareholders may differ as to the best time to sell.
An institutional investor has registration rights.
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An institutional investor has the right to require registration of its
shares.
We would incur adverse tax consequences if we fail to qualify as a REIT.
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Our cash flow would be reduced if we fail to qualify as a REIT: While
we believe that we have qualified since 1990 to be taxed as a REIT, and will
continue to be qualified, we cannot be certain of doing so. To continue to
qualify as a REIT, we need to satisfy certain requirements under the federal
income tax laws relating to our income, assets, and distributions to
shareholders and shareholder base. In this regard, the share ownership limits in
our articles of incorporation do not necessarily ensure that our shareholder
base is sufficiently diverse for us to qualify as a REIT. For any year we fail
to qualify as a REIT, we would be taxed at regular corporate tax rates on our
taxable income unless certain relief provisions apply. Taxes would reduce our
cash available for distributions to shareholders or for reinvestment, which
could adversely affect us and our shareholders. Also we would not be allowed to
elect REIT status for five years after we fail to qualify unless certain relief
provisions apply.
Our cash flow would be reduced if our predecessor failed to qualify as
a REIT: For us to qualify to be taxed as a REIT, our predecessor, American
Office Park Properties, also needed to qualify to be taxed as a REIT. We believe
American Office Park Properties qualified as a REIT beginning in 1997 until its
March 1998 merger with us. If it is determined that it did not qualify as a
REIT, we could also lose our REIT qualification. Before 1997, our predecessor
was a taxable corporation and, to qualify as a REIT, was required to distribute
all of its cumulative retained profits before the end of 1996. Because a
determination of the precise amount of profits retained by a company over a
sustained period of time is very difficult, there is some risk that not all of
American Office Park Properties' profits were so distributed. While we believe
American Office Park Properties qualified as a REIT since 1997, we did not
obtain an opinion of an outside expert at the time of its merger with us.
We may need to borrow funds to meet our REIT distribution requirements:
To qualify as a REIT, we must generally distribute to our shareholders 90% of
our taxable income. Our income consists primarily of our share of our operating
partnership's income. We intend to make sufficient distributions to qualify as a
REIT and otherwise avoid corporate tax. However, differences in timing between
income and expenses and the need to make nondeductible expenditures such as
capital improvements and principal payments on debt could force us to borrow
funds to make necessary shareholder distributions.
Since we buy and operate real estate, we are subject to general real estate
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investment and operating risks.
- -------------------------------
Summary of real estate risks: We own and operate commercial properties
and are subject to the risks of owning real estate generally and commercial
properties in particular. These risks include:
o the national, state and local economic climate and real estate conditions,
such as oversupply of or reduced demand for space and changes in market
rental rates;
o how prospective tenants perceive the attractiveness, convenience and safety
of our properties;
o our ability to provide adequate management, maintenance and insurance;
o our ability to collect rent from tenants on a timely basis;
o the expense of periodically renovating, repairing and reletting spaces;
o increasing operating costs, including real estate taxes, insurance and
utilities, if these increased costs cannot be passed through to tenants;
35
o changes in tax, real estate and zoning laws;
o increase in new developments;
o tenant bankruptcies;
o sublease space; and
o concentration in non-rated private companies.
Certain significant costs, such as mortgage payments, real estate
taxes, insurance and maintenance costs, generally are not reduced even when a
property's rental income is reduced. In addition, environmental and tax laws,
interest rate levels, the availability of financing and other factors may affect
real estate values and property income. Furthermore, the supply of commercial
space fluctuates with market conditions.
If our properties do not generate sufficient income to meet operating
expenses, including any debt service, tenant improvements, leasing commissions
and other capital expenditures, we may have to borrow additional amounts to
cover fixed costs, and we may have to reduce our distributions to shareholders.
During 2001 and 2002, we were affected by the slowdown in economic
activity in the United States in most of our primary markets. These effects were
exacerbated by the terrorist attacks of September 11, 2001 and the related
aftermath. These effects included a decline in occupancy rates and a reduction
in market rates throughout the portfolio, slower than expected lease-up of our
development properties, lower interest rates on invested cash and a rise in
insurance costs. An extended economic slowdown will put additional downward
pressure on occupancies and market rental rates and may lead to pressure for
greater rent concessions, or generous tenant improvement allowances and higher
broker commissions.
We may encounter significant delays in reletting vacant space,
resulting in losses of income: When leases expire, we will incur expenses and we
may not be able to release the space on the same terms. Certain leases provide
tenants with the right to terminate early if they pay a fee. Our properties as
of June 30, 2002 generally have lower vacancy rates than the average for the
markets in which they are located, and leases for 28% of our space expire in
2002 or 2003 (leases for 47% of the space occupied by small tenants expire in
such years). While we have estimated our cost of renewing leases that expire in
2002, our estimates could be wrong. If we are unable to release space promptly,
if the terms are significantly less favorable than anticipated or if the costs
are higher, we may have to reduce our distributions to shareholders.
Tenant defaults and bankruptcies may reduce our cash flow and
distributions: We may have difficulty in collecting from tenants in default,
particularly if they declare bankruptcy. This could reduce our cash flow and
distributions to shareholders.
We may be adversely affected by significant competition among
commercial properties: Many other commercial properties compete with our
properties for tenants and we expect that new properties will be built in our
markets. Also, we compete with other buyers, many of whom are larger than we
are, in seeking to acquire commercial properties. Therefore, we may not be able
to grow as rapidly as we would like.
36
We may be adversely affected if casualties to our properties are not
covered by insurance: We carry insurance on our properties that we believe is
comparable to the insurance carried by other operators for similar properties.
However, we could suffer uninsured losses that adversely affect us or even
result in loss of properties. We might still remain liable on any mortgage debt
related to that property.
The illiquidity of our real estate investments may prevent us from
adjusting our portfolio to respond to market changes: There may be delays and
difficulties in selling real estate. Therefore, we cannot easily change our
portfolio when economic conditions change. Also, tax laws limit a REIT's ability
to sell properties held for less than four years.
We may be adversely affected by governmental regulation of our
properties: Our properties are subject to various federal, state and local
regulatory requirements, such as state and local fire and safety codes. If we
fail to comply with these requirements, governmental authorities could fine us
or courts could award damages against us. We believe our properties comply with
all significant legal requirements. However, these requirements could change in
a way that would reduce our cash flow and ability to make distributions to
shareholders.
We may incur significant environmental remediation costs: Under various
federal, state and local environmental laws an owner or operator of real estate
interests may have to clean spills or other releases of hazardous or toxic
substances on or from a property. 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 exceed the value of
the property. The presence of toxic substances, or the failure to properly
remedy any resulting contamination, may make it more difficult for the owner or
operators to sell, lease or operate its property or to borrow money using its
property as collateral. Future environmental laws may impose additional material
liabilities on us.
We acquired a property in Beaverton, Oregon ("Creekside Corporate
Park") in May 1998 that was the subject of an environmental investigation
conducted by two current and past owner/operators of an industrial facility on
adjacent property, pursuant to an Order on Consent ("Order") issued by the
Oregon Department of Environmental Quality ("ODEQ"). There is no evidence that
our past or current use of the Creekside Corporate Park property contributed in
any way to the contamination that is the subject of the current investigation,
nor has the ODEQ alleged any such contribution, and we are not a party to the
Order.
Based on the results of the remedial investigation/feasibility study,
ODEQ has selected a final remedy that would include permanent treatment of
contaminants in the groundwater, including expanded groundwater extraction and
treatment on all parcels of the former industrial property, including portions
of Creekside Corporate Park. The estimated cost of this remedy is $2.8 million
over a 30-year time period. In the event we are ultimately deemed responsible
for any costs relating to this matter, we believe that the party from whom the
property was purchased will be responsible for any expenses or liabilities that
we may incur as a result of this contamination. In addition, we believe we may
have recourse against other potentially responsible parties, including, but not
limited to, one or both of the owner/operators of the adjacent industrial
facility. However, if we are deemed responsible for any expenses related to
removal or remedial actions on the property, and we are not successful in
obtaining reimbursement from one or more third parties, our operations and
financial condition could be harmed.
Based on recent discussions with the ODEQ and other potentially
responsible parties, the Company has estimated its share of the costs of the
remediation at $250,000. The Company has accrued these estimated costs and
included the expense in general and administrative costs.
We may be affected by the Americans with Disabilities Act: The
Americans with Disabilities Act of 1990 requires that access and use by disabled
persons of all public accommodations and commercial properties be facilitated.
Existing commercial properties must be made accessible to disabled persons.
While we have not estimated the cost of complying with this act, we do not
believe the cost will be material.
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Our ability to control our properties may be adversely affected by ownership
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through partnerships and joint ventures.
- ----------------------------------------
We own most of our properties through our operating partnership. Our
organizational documents do not limit our ability to invest funds with others in
partnerships or joint ventures. During 2001, we entered into a joint venture
arrangement that holds property subject to debt. This type of investment may
present additional risks. For example, our partners may have interests that
differ from ours or that conflict with ours, or our partners may become
bankrupt. In addition, the joint venture may default on its debt, which we have
guaranteed under certain circumstances. We believe this risk is mitigated by the
low level of debt (57% of the cost in the joint venture) and the financial
strength of our joint venture partner.
We can change our business policies and increase our level of debt without
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shareholder approval.
- ---------------------
Our board of directors establishes our investment, financing,
distribution and other business policies and may change these policies without
shareholder approval. Our organizational documents do not limit our level of
debt. A change in our policies or an increase in our level of debt could
adversely affect our operations or the price of our common stock.
We can issue additional securities without shareholder approval.
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We can issue preferred and common stock without shareholder approval.
Holders of preferred stock have priority over holders of common stock, and the
issuance of additional shares of common stock reduces the interest of existing
holders in our company.
Increases in interest rates may adversely affect the market price of our common
- --------------------------------------------------------------------------------
stock.
- ------
One of the factors that influences the market price of our common stock
is the annual rate of distributions that we pay on our common stock, as compared
with interest rates. Interest rates in late 2001 and early 2002 have been at
historically low levels. An increase in interest rates may lead purchasers of
REIT shares to demand higher annual distribution rates, which could adversely
affect the market price of our common stock.
Shares that become available for future sale may adversely affect the market
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price of our common stock.
- --------------------------
Substantial sales of our common stock, or the perception that
substantial sales may occur, could adversely affect the market price of our
common stock. Certain of our shareholders hold significant numbers of shares of
our common stock and, subject to compliance with applicable securities laws,
could sell their shares.
We depend on key personnel.
- ---------------------------
We depend on our executive officers, including Ronald L. Havner, Jr.,
our chief executive officer and president. The loss of Mr. Havner or other
executive officers could adversely affect our operations. We maintain no key
person insurance on our executive officers.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
To limit the Company's exposure to market risk, the Company principally
finances its operations and growth with permanent equity capital consisting of
either common or preferred stock. At June 30, 2002, the Company's debt as a
percentage of shareholders' equity (based on book values) was 13.3%.
The Company's market risk sensitive instruments include mortgage notes
payable which totaled $27,932,000 at June 30, 2002. All of the Company's
mortgage notes payable bear interest at fixed rates. See Note 6 of the Notes to
Consolidated Financial Statements for terms, valuations and approximate
principal maturities of the mortgage notes payable as of June 30, 2002. Based on
borrowing rates currently available to the Company, the carrying amount of debt
approximates fair value.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 3, 1999, the Company filed an action titled PS Business
Parks, Inc. v. Larry Howard et al. (Case No. BC219580) in Los Angeles Superior
Court seeking damages in excess of $1 million. The complaint alleges that Mr.
Howard and entities controlled by him engaged in unfair trade practices. Some of
the Company's claims have been dismissed on summary adjudication, and the
balance has been referred to the arbitration proceedings described below for
adjudication. Mr. Howard filed a cross-complaint which the Company contested
vigorously. Mr. Howard's cross-complaint has been dismissed in binding
arbitration.
On November 27, 2000, Mary Jayne Howard, a former officer of the
Company filed a demand for arbitration with the American Arbitration Association
alleging claims against the Company for breach of contract, gender
discrimination, marital discrimination, and wrongful termination based on public
policy. The demand seeks damages of approximately $2 million. The Company plans
to vigorously contest these claims. The Company has also filed in the
arbitration a cross-claim against Ms. Howard alleging that she breached her
fiduciary duties to the Company and committed fraud, among other claims, seeking
damages in excess of $1 million.
On February 2, 2000, the Company filed an action against Mary Piper,
its former Vice President of operations, in Riverside County Superior Court,
alleging claims for breach of fiduciary duties, fraud and deceit, constructive
fraud, negligent misrepresentation, violation of Section 17000 of Business and
Professions Code, violation of Section 17200 of the Business and Professions
Code and culpable negligence. The Company's claims arose from Ms. Piper's
alleged participation in a plan that resulted in the payment of improper
kickbacks to Larry Howard, a former vendor of the Company and the husband of
Mary Jayne Howard, a former officer of the Company. Ms. Piper subsequently filed
a cross-complaint which the Company intends to vigorously contest.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held an annual meeting of shareholders on May 14, 2002.
Proxies for the annual meeting were solicited pursuant to Regulation 14 under
the Securities Exchange Act of 1934. The annual meeting involved the following
matter:
Election of Directors
Number of Shares of Common Stock
----------------------------------
Voted For Withheld
----------------------------- ---------------- -----------------
Ronald L. Havner, Jr. 17,653,707 2,568,906
Harvey Lenkin 20,096,165 126,448
Vern O. Curtis 20,157,965 64,648
Arthur M. Friedman 20,157,965 64,648
James H. Kropp 20,096,165 126,448
Alan K. Pribble 20,157,965 64,648
Jack D. Steele 20,157,965 64,648
There was no solicitation in opposition to the management's nominees to
the Board of Directors listed in the proxy statement.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
12 Statement re: Computation of Ratio of Earnings to Fixed Charges.
Filed herewith.
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. Filed herewith.
(b) Reports on Form 8-K
The Registrant filed a Current Report on Form 8-K dated April 15, 2002
(filed April 16, 2002) pursuant to Item 9, relating to Regulation FD
Disclosure.
The Registrant filed a Current Report on Form 8-K dated May 30, 2002
(filed May 31, 2002) pursuant to Item 5, which filed certain exhibits
relating to the offering of 3,100,000 shares of common stock by
Acquiport Two Corporation.
The Registrant filed a Current Report on Form 8-K dated July 12, 2002
(filed July 15, 2002) pursuant to Item 9, relating to Regulation FD
Disclosure.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: August 13, 2002
PS BUSINESS PARKS, INC.
BY:/s/ Jack Corrigan
------------------------
Jack Corrigan
Vice President and Chief Financial Officer
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