-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RDjVezkn0Qsuta1rhKflKzQJKTG4u5NfpgiDlFjHTXSyWZTENJQPFs8g8JZT9WZD 6ZFUcqtRVcaovUaH4N8fPg== 0000318380-03-000011.txt : 20030515 0000318380-03-000011.hdr.sgml : 20030515 20030514210507 ACCESSION NUMBER: 0000318380-03-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PUBLIC STORAGE INC /CA CENTRAL INDEX KEY: 0000318380 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 953551121 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08389 FILM NUMBER: 03700839 BUSINESS ADDRESS: STREET 1: 701 WESTERN AVE STREET 2: STE 200 CITY: GLENDALE STATE: CA ZIP: 91201-2349 BUSINESS PHONE: (818) 244-8080 MAIL ADDRESS: STREET 1: 701 WESTERN AVE STREET 2: SUITE 200 CITY: GLENDALE STATE: CA ZIP: 91201 FORMER COMPANY: FORMER CONFORMED NAME: STORAGE EQUITIES INC DATE OF NAME CHANGE: 19920703 10-Q 1 q103psi.txt PUBLIC STORAGE, INC. 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 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 March 31, 2003 -------------- 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: 1-8389 ------ PUBLIC STORAGE, INC. -------------------- (Exact name of registrant as specified in its charter) California 95-3551121 - ----------------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 701 Western Avenue, Glendale, California 91201-2349 - ----------------------------------------- ---------------------- (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. [X] Yes [ ] No Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). [X] Yes [ ] No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of May 12, 2003: Common Stock, $.10 Par Value - 125,279,447 shares - ------------------------------------------------- Depositary Shares Each Representing 1/1,000 of a Share of Equity Stock, Series - ------------------------------------------------------------------------------ A, $.01 Par Value - 8,776,102 depositary shares (representing 8,776.102 shares - ------------------------------------------------------------------------------ of Equity Stock, Series A) - -------------------------- Equity Stock, Series AA, $.01 Par Value - 225,000 shares - -------------------------------------------------------- Equity Stock, Series AAA, $.01 Par Value - 4,289,544 shares - ----------------------------------------------------------- PUBLIC STORAGE, INC. INDEX Pages ----- PART I. FINANCIAL INFORMATION --------------------- Item 1. Financial Statements Condensed Consolidated Balance Sheets at March 31, 2003 and December 31, 2002 1 Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2003 and 2002 2 Condensed Consolidated Statement of Shareholders' Equity for the Three Months Ended March 31, 2003 3 Condensed Consolidated Statements of Cash Flows for the Three months Ended March 31, 2003 and 2002 4 Notes to Condensed Consolidated Financial Statements 5-31 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 32-55 Item 2A. Risk Factors 55-59 Item 3. Quantitative and Qualitative Disclosures about Market Risk 59 Item 4. Controls and Procedures 60 PART II. OTHER INFORMATION (Items 2 - 4 are not applicable) ----------------- Item 1. Legal Proceedings 61 Item 5. Other Items 62 Item 6. Exhibits and Reports on Form 8-K 62-68 PUBLIC STORAGE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except share data)
March 31, December 31, 2003 2002 --------------- --------------- (Unaudited) ASSETS ------ Cash and cash equivalents.................................................... $ 55,017 $ 103,124 Real estate facilities, at cost: Land...................................................................... 1,310,487 1,304,881 Buildings................................................................. 3,687,444 3,683,645 --------------- --------------- 4,997,931 4,988,526 Accumulated depreciation.................................................. (1,024,002) (987,546) --------------- --------------- 3,973,929 4,000,980 Construction in process................................................... 75,781 87,516 Land held for development................................................. 17,807 17,807 Real estate facilities held for sale, net of accumulated depreciation (Note 4) 15,421 - --------------- --------------- 4,082,938 4,106,303 Investment in real estate entities........................................... 331,557 329,679 Goodwill..................................................................... 78,204 78,204 Intangible assets, net....................................................... 116,242 117,893 Notes receivable, including amounts due from related parties................. 24,281 24,324 Other assets................................................................. 76,955 84,135 --------------- --------------- Total assets................................................... $ 4,765,194 $ 4,843,662 =============== =============== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Line of credit borrowings.................................................... $ 25,000 $ - Notes payable................................................................ 89,111 115,867 Accrued and other liabilities................................................ 129,511 129,327 --------------- --------------- Total liabilities................................................... 243,622 245,194 Minority interest: Preferred partnership interests........................................... 285,000 285,000 Other partnership interests............................................... 153,401 154,499 Commitments and contingencies Shareholders' equity: Cumulative Preferred Stock, $0.01 par value, 50,000,000 shares authorized, 6,958,486 shares issued (in series) and outstanding, (9,258,486 at December 31, 2002) at liquidation preference............................ 1,759,525 1,817,025 Common Stock, $0.10 par value, 200,000,000 shares authorized, 124,134,290 shares issued and outstanding (116,991,455 at December 31, 2002)........ 12,413 11,699 Equity Stock, Series A, $0.01 par value, 200,000,000 shares authorized, 8,776.102 shares issued and outstanding................................. - - Class B Common Stock, $0.10 par value, no shares are issued and outstanding (7,000,000 at December 31, 2002)........................................ - 700 Paid-in capital........................................................... 2,374,635 2,371,194 Cumulative net income..................................................... 2,106,646 2,030,007 Cumulative distributions paid............................................. (2,170,048) (2,071,656) --------------- --------------- Total shareholders' equity.......................................... 4,083,171 4,158,969 --------------- --------------- Total liabilities and shareholders' equity..................... $ 4,765,194 $ 4,843,662 =============== ===============
See accompanying notes. 1 PUBLIC STORAGE, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Amounts in thousands, except net income per share amounts) (Unaudited)
For the Three Months Ended March 31, --------------------------------- 2003 2002 ---------------- ---------------- Revenues: Rental income: Self-storage facilities.............................. $ 189,571 $ 188,525 Commercial properties................................ 2,846 2,956 Containerized storage facilities..................... 9,481 8,198 Tenant reinsurance premiums.............................. 5,215 4,575 Interest and other income................................ 1,699 1,708 ---------------- ---------------- 208,812 205,962 Expenses: Cost of operations: Self-storage facilities.............................. 65,315 58,439 Commercial properties................................ 1,193 1,092 Containerized storage facilities..................... 6,377 5,957 Tenant reinsurance................................... 2,699 2,293 Depreciation and amortization............................ 45,920 43,399 General and administrative............................... 4,250 4,000 Interest expense......................................... 453 1,102 ---------------- ---------------- 126,207 116,282 Income before equity in earnings of real estate entities, minority interest in income, discontinued operations and gain on disposition of real estate investments.................. 82,605 89,680 Equity in earnings of real estate entities (Note 6)........... 4,687 9,256 Minority interest in income: Preferred partnership interests.......................... (6,726) (6,726) Other partnership interests.............................. (3,942) (4,616) ---------------- ---------------- Income before discontinued operations and gain on disposition of real estate investments.................................... 76,624 87,594 Discontinued operations (Note 4).............................. 1 (139) Gain on disposition of real estate investments................ 14 - ---------------- ---------------- Net income.................................................... $ 76,639 $ 87,455 ================ ================ Net income allocation: Allocable to preferred shareholders...................... $ 37,022 $ 35,840 Allocable to Equity Stock, Series A...................... 5,375 5,375 Allocable to common shareholders......................... 34,242 46,240 ---------------- ---------------- $ 76,639 $ 87,455 ================ ================ Per common share: Net income per share - Basic............................. $ 0.28 $ 0.38 ================ ================ Net income per share - Diluted........................... $ 0.27 $ 0.37 ================ ================ Net income per depositary share of Equity Stock, Series A - Basic and Diluted...................................... $ 0.61 $ 0.61 ================ ================ Weighted average common shares - Basic................... 124,078 121,946 ================ ================ Weighted average common shares - Diluted................. 125,232 124,065 ================ ================ Weighted average depositary shares of Equity Stock, Series A - Basic and Diluted.................................... 8,776 8,776 ================ ================
See accompanying notes. 2 PUBLIC STORAGE, INC. CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Amounts in thousands, except share data) (Unaudited)
Cumulative Class B Common Preferred Stock Common Stock Stock Paid-in Capital --------------- --------------- --------------- --------------- Balances at December 31, 2002............................. $ 1,817,025 $ 11,699 $ 700 $ 2,371,194 Redemption of cumulative preferred stock, including redemption costs: Series B (2,300,000 shares)............................ (57,500) - - (17) Issuance of common stock: Exercise of Employee Stock Options (142,835 shares).... - 14 - 3,458 Conversion of Class B shares into Common Stock (7,000,000 shares)................................... - 700 (700) - Net income................................................ - - - - Cash distributions: Cumulative preferred stock (Note 10)................... - - - - Equity Stock, Series A ($0.61 per share)............... - - - - Common Stock ($0.45 per share)......................... - - - - --------------- --------------- --------------- --------------- Balances at March 31, 2003................................ $ 1,759,525 $ 12,413 $ - $ 2,374,635 =============== =============== =============== ===============
Total Cumulative Net Cumulative Shareholders' Income Distributions Equity --------------- --------------- --------------- Balances at December 31, 2002............................. $ 2,030,007 $ (2,071,656) $ 4,158,969 Redemption of cumulative preferred stock, including redemption costs: Series B (2,300,000 shares)............................ - - (57,517) Issuance of common stock: Exercise of Employee Stock Options (142,835 shares).... - - 3,472 Conversion of Class B shares into Common Stock (7,000,000 shares)................................... - - - Net income................................................ 76,639 - 76,639 Cash distributions: Cumulative preferred stock (Note 10)................... - (37,022) (37,022) Equity Stock, Series A ($0.61 per share)............... - (5,375) (5,375) Common Stock ($0.45 per share)......................... - (55,995) (55,995) --------------- --------------- --------------- Balances at March 31, 2003................................ $ 2,106,646 $ (2,170,048) $ 4,083,171 =============== =============== ===============
See accompanying notes. 3 PUBLIC STORAGE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) (Unaudited)
For the Three Months Ended March 31, ------------------------------------- 2003 2002 ---------------- ---------------- Cash flows from operating activities: Net income.......................................................... $ 76,639 $ 87,455 Adjustments to reconcile net income to net cash provided by operating activities: Loss (gain) included in equity in earnings of real estate investments (Note 6)......................................... 2,130 (2,241) Gain on sale of real estate investments......................... (14) - Depreciation and amortization................................... 45,920 43,399 Depreciation included in equity in earnings of real estate 6,294 6,371 entities..................................................... Minority interest in income..................................... 10,668 11,342 Depreciation associated with discontinued operations (Note 120 598 4)...................................................... Other........................................................... 5,158 5,225 ---------------- ---------------- Total adjustments.......................................... 70,276 64,694 ---------------- ---------------- Net cash provided by operating activities.............. 146,915 152,149 ---------------- ---------------- Cash flows from investing activities: Principal payments received on mortgage notes receivable............ 43 35,021 Business combinations (Note 3)...................................... - (152,327) Capital improvements to real estate facilities...................... (2,333) (3,968) Construction in process and acquisition of land held for development (24,184) (22,796) Acquisition of minority interests................................... - (437) Proceeds from the disposition of land and real estate facilities.... 7,713 - Investment in real estate entities.................................. (10,302) (6,861) Acquisition of real estate facilities............................... - (5,052) Other investments................................................... - (397) ---------------- ---------------- Net cash used in investing activities.................. (29,063) (156,817) ---------------- ---------------- Cash flows from financing activities: Borrowings (paydowns) on revolving line of credit................... 25,000 (25,000) Principal payments on notes payable................................. (26,756) (15,476) Net proceeds from the issuance of common stock...................... 3,472 7,094 Net proceeds from the issuance of preferred stock................... - 290,150 Repurchase of common stock.......................................... - (381) Redemption of preferred stock....................................... (57,517) - Distributions paid to shareholders.................................. (98,392) (96,260) Distributions paid to holders of preferred partnership units........ (6,726) (6,726) Distributions paid to minority interests............................ (5,588) (6,871) Investment of minority interests.................................... 548 1,072 ---------------- ---------------- Net cash (used in) provided by financing activities.... (165,959) 147,602 ---------------- ---------------- Net (decrease) increase in cash and cash equivalents..................... (48,107) 142,934 Cash and cash equivalents at the beginning of the period................. 103,124 49,347 ---------------- ---------------- Cash and cash equivalents at the end of the period....................... $ 55,017 $ 192,281 ================ ================ Supplemental schedule of non-cash investing and financing activities: Business combinations (Note 3): Real estate facilities.......................................... $ - $ (330,426) Other assets.................................................... - (2,175) Accrued and other liabilities................................... - 5,232 Minority interest............................................... - 14,806 Reduction in investment in real estate entities................. - 160,236
See accompanying notes. 4 PUBLIC STORAGE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 2003 (Unaudited) 1. Description of the Business Public Storage, Inc. (the "Company") is a California corporation, which was organized in 1980. We are a fully integrated, self-administered and self-managed real estate investment trust ("REIT") whose principal business activities include the acquisition, development, ownership and operation of self-storage facilities which offer storage spaces for lease, usually on a month-to-month basis, for personal and business use. In addition, to a much lesser extent, we have interests in commercial properties, containing commercial and industrial rental space, and interests in facilities that lease storage containers. We invest in real estate facilities by acquiring wholly owned facilities or by acquiring interests in real estate entities which own facilities. At March 31, 2003, we had direct and indirect equity interests in 1,406 storage facilities located in 37 states and operating under the "Public Storage" name. We also have direct and indirect equity interests in approximately 16.1 million net rentable square feet of commercial space located in 12 states. 2. Summary of Significant Account Policies Basis of Presentation --------------------- The consolidated financial statements include the accounts of the Company and 33 controlled entities (the "Consolidated Entities"). Collectively, the Company and the Consolidated Entities own a total of 1,379 real estate facilities, consisting of 1,370 self-storage facilities, six containerized storage facilities and three commercial properties. All intercompany transactions between the Company and any of the Consolidated Entities are eliminated in consolidation. At March 31, 2003, we had equity investments in seven limited partnerships in which we do not have a controlling interest. These limited partnerships collectively own 36 self-storage facilities, which are managed by the Company. In addition, we own approximately 45% of the common equity of PS Business Parks, Inc. ("PSB"), which owns and operates approximately 14.5 million net rentable square feet of commercial space at March 31, 2003. We do not control these entities. Accordingly, our investment in these limited partnerships and PSB (these entities are referred to collectively as the "Unconsolidated Entities") are accounted for using the equity method. Certain amounts previously reported have been reclassified to conform to the March 31, 2003 presentation, including Discontinued Operations (See note 4). Use of Estimates ---------------- The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. 5 Income Taxes ------------ For all taxable years subsequent to 1980, the Company qualified and intends to continue to qualify as a REIT, as defined in Section 856 of the Internal Revenue Code. As a REIT, we are not taxed on that portion of our taxable income, which is distributed to our shareholders, provided that we meet certain tests. We believe we will meet these tests during 2003 and, accordingly, no provision for income taxes has been made in the accompanying financial statements. Financial Instruments --------------------- The methods and assumptions used to estimate the fair value of financial instruments is described below. We have estimated the fair value of our financial instruments using available market information and appropriate valuation methodologies. Considerable judgment 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. For purposes of financial statement presentation, we consider all highly liquid debt instruments with a maturity of three months or less to be cash equivalents. Due to the short period to maturity of our cash and cash equivalents, accounts receivable, other assets, and accrued and other liabilities, the carrying values as presented on the consolidated balance sheets are reasonable estimates of fair value. The carrying amount of mortgage notes receivable approximates fair value because the aggregate mortgage notes receivable's applicable interest rates approximate current market rates for similar loans. Financial assets that are exposed to credit risk consist primarily of cash and cash equivalents, accounts receivable, and notes receivable. Cash equivalents, which consist of short-term investments, including commercial paper, are only invested in entities with an investment grade rating. Notes receivable are substantially all secured by real estate facilities that we believe are valued in excess of the related note receivable. Accounts receivable are not a significant portion of total assets and are comprised of a large number of individual customers. Real Estate Facilities ---------------------- Real estate facilities are recorded at cost. Costs associated with the acquisition, development, construction and improvement of properties are capitalized. Interest, property taxes, and other costs associated with development are capitalized as building cost. Expenditures for repairs and maintenance are charged to expense as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the buildings and improvements, which are generally between 5 and 25 years. Evaluation of Asset Impairment ------------------------------ In August 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). In June 2001, the FASB issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). We adopted both of these statements effective January 1, 2002. 6 With respect to goodwill, we evaluate impairment annually through a two-step process. In the first step, if the fair value of the reporting unit to which the goodwill applies is equal to or greater than the carrying amount of the assets of the reporting unit, including the goodwill, the goodwill is considered unimpaired and the second step is unnecessary. If, however, the carrying amount is less than the fair value of the reporting unit, the second step is performed. In this test, we compute the implied fair value of the goodwill based upon the allocations that would be made to the goodwill, other assets and liabilities of the reporting unit if a business combination transaction were consummated at the fair value of the reporting unit. An impairment loss is recorded to the extent that the implied fair value of the goodwill is less than the goodwill's carrying amount. Our evaluation identified no such impairments in our last annual evaluation at December 31, 2002. With respect to other long-lived assets, we evaluate such assets on a quarterly basis. We first evaluate these assets for indicators of impairment such as a) a significant decrease in the market price of a long-lived asset, b) a significant adverse change in the extent or manner in which a long-lived asset is being used or in its physical condition, c) a significant adverse change in legal factors or the business climate that could affect the value of the long-lived asset, d) an accumulation of costs significantly in excess of the amount originally projected for the acquisition or construction of the long-lived asset, or e) a current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of the long-lived asset. When any such indicators of impairment are noted, we compare the carrying value of these assets to the future estimated undiscounted cash flows attributable to these assets. If the asset's recoverable amount is less than the carrying value of the asset, then an impairment charge is booked for the excess of carrying value over the asset's fair value. Our evaluations identified no such impairments at March 31, 2003. Any long-lived assets which we expect to sell or otherwise dispose of prior to their previously estimated useful life are stated at what we estimate to be the lower of their estimated net realizable value or their carrying value. Accounting for Employee Stock Options ------------------------------------- We utilize the Fair Value Method (described below) of accounting for our employee stock options issued after December 31, 2001, and utilize the APB 25 Method (described below) for employee stock options issued prior to January 1, 2002. For the three months ended March 31, 2003, a total of $99,000 in compensation expense (none for the three months ended March 31, 2002) with respect to stock options was included in general and administrative expense. See Note 12 for a full discussion of our accounting policies with respect to employee stock options. Other Assets ------------ Other assets primarily consist of furniture, fixtures, equipment, and other such assets associated with the containerized storage operations, system development and computer software costs, assets associated with the truck rental business, accounts receivable, and prepaid expenses. Expenditures with respect to the containerized storage operations, system development and computer software costs, and truck rental business are included in "other investments" on the statements of cash flows. Accounts receivable from customers are net of allowances for doubtful accounts. Included in other assets with respect to the containerized storage business is furniture, fixtures, and equipment (net of accumulated depreciation) of $18,415,000 and $20,275,000 at March 31, 2003 and December 31, 2002, respectively. 7 Included in depreciation and amortization expense for the three months ended March 31, 2003 and 2002 is $2,086,000 and $1,227,000, respectively, related to depreciation of other assets. Included in discontinued operations - containerized storage is depreciation expense of $386,000 for the three months ended March 31, 2002, (none for the three months ended March 31, 2003) related to depreciation of furniture, fixtures, and equipment of the discontinued operations of the containerized storage business. We reevaluated the historical results with respect to wear and functional obsolescence of the containers and other assets used in the containerized storage business. Based upon the results of this review, we decreased the estimated useful lives with respect to these assets effective January 1, 2003. As a result of this change, depreciation with respect to these assets increased $404,000 in the quarter ended March 31, 2003 as compared to the same period in 2002. Other assets at March 31, 2003 also include $13,308,000 ($13,801,000 at December 31, 2002) in held to maturity debt securities owned by STOR-Re Mutual Insurance Company, Inc. ("STOR-Re") (see Note 3) stated at amortized cost. Accrued and Other Liabilities ----------------------------- Accrued and other liabilities consist primarily of trade payables, real and personal property tax accruals, accrued interest, and losses and loss adjustment liabilities, as discussed below. STOR-Re provides limited property and liability insurance coverage to the Company and affiliates of the Company. This entity accrues liabilities for losses and loss adjustment expense, which at March 31, 2003 totaled $22,617,000 ($22,911,000 at December 31, 2002). PS Insurance Company, Ltd. reinsures policies against claims for losses to goods stored by tenants in our self-storage facilities. This entity accrues liabilities for losses and loss adjustment expense, which at March 31, 2003 totaled $2,285,000 ($2,135,000 at December 31, 2002). These liabilities for losses and loss adjustment expenses include an amount determined from loss reports and individual cases and an amount, based on recommendations from an outside actuary using a frequency and severity method, for losses incurred but not reported. Determining the liability for unpaid losses and loss adjustment expense is based upon estimates and requires considerable judgment. While we believe that the amount provided for is adequate, the ultimate liability may be in excess of or less than the amounts provided. Intangible Assets and Goodwill ------------------------------ Intangible assets consist of property management contracts ($165,000,000) and the excess of acquisition cost over the fair value of net tangible and identifiable intangible assets or "goodwill" ($94,719,000) acquired in business combinations. Our goodwill has an indeterminate life and, accordingly, is not amortized. Our other intangibles are amortized over a 25 year period. Goodwill is net of accumulated amortization of $16,515,000 at March 31, 2003 and December 31, 2002. At March 31, 2003, property management contracts are net of accumulated amortization of $48,758,000 ($47,107,000 at December 31, 2002). Included in depreciation and amortization expense for each of the three months ended March 31, 2003 and 2002 is $1,651,000 with respect to the amortization of property management contracts. 8 Revenue and Expense Recognition ------------------------------- Rental income, which is generally earned pursuant to month-to-month leases for storage space, is recognized as earned. Tenant reinsurance premiums are recognized as premiums are collected. Interest income is recognized as earned. Equity in earnings of real estate entities is recognized based on our ownership interest in the earnings of each of the unconsolidated real estate entities. We accrue for property tax expense based upon estimates and historical trends. If these estimates are incorrect, our property tax expense could be misstated. Cost of operations, general and administrative expense, interest expense, as well as television, yellow page, and other advertising expenditures are expensed as incurred. Accordingly, the amounts incurred in an interim period may not be indicative of the amounts to be incurred during a full year. Environmental Costs ------------------- Our policy is to accrue environmental assessments and/or remediation cost when it is probable that such efforts will be required and the related cost can be reasonably estimated. Our current practice is to conduct environmental investigations in connection with property acquisitions. Although there can be no assurance, we are not aware of any environmental contamination of any of our facilities which individually or in the aggregate would be material to our overall business, financial condition, or results of operations. Net Income per Common Share --------------------------- Dividends paid to our preferred shareholders totaling $37,022,000 and $35,840,000 for the three months ended March 31, 2003 and 2002, respectively, have been deducted from net income to arrive at net income allocable to our common shareholders. Net income allocated to our common shareholders has been further allocated among our two classes of common stock; our regular common stock and our Equity Stock, Series A. The allocation among each class was based upon the two-class method. Under the two-class method, earnings per share for each class of common stock is determined according to dividends declared (or accumulated) and participation rights in undistributed earnings. Under the two-class method, the Equity Stock, Series A was allocated net income of approximately $5,375,000 for each of the three months ended March 31, 2003 and 2002. The remaining $34,242,000 and $46,240,000 for the three months ended March 31, 2003 and 2002, respectively, was allocated to the regular common shares. Basic net income per share is computed using the weighted average common shares (prior to the dilutive impact of stock options outstanding). Diluted net income per common share is computed using the weighted average common shares outstanding (adjusted for stock options). Weighted average common shares excludes shares owned by the Consolidated Entities for the three months ended March 31, 2003 and 2002, as these shares of common stock are eliminated in consolidation (Note 10). Distributions per share of Class B common stock are equal to 97% of the per share distribution paid to the Company's regular common shares. As a result of this participation in distribution of earnings, for purposes of computing net income per common share, the Company includes 6,790,000 (7,000,000 x 97%) Class B common shares in the weighted average common equivalent shares for the three months ended March 31, 2002. 9 As of March 31, 2002, the remaining contingency for the conversion of the Class B common stock into regular common stock was satisfied (see Note 10) and the Class B common stock converted into 7,000,000 shares of common stock on January 1, 2003. As a result, beginning April 1, 2002, 7,000,000 Class B common shares are included in the weighted average common equivalent shares. 3. Business Combinations Development Joint Venture ------------------------- On January 16, 2002, we acquired the remaining 70% interest we did not own in a partnership (the "Development Joint Venture"). The aggregate cost of this business combination was $268,209,000, consisting of our pre-existing investment in the Development Joint Venture of $115,131,000 and cash of $153,078,000. This acquisition was completed in order to expand the Company's real estate investments. The Development Joint Venture was formed in April 1997 and was funded with equity capital consisting of 30% from the Company and 70% from an institutional investor and owns 47 storage facilities. Prior to January 16, 2002, we accounted for our investment in the Development Joint Venture using the equity method of accounting. STOR-Re Mutual Insurance Company, Inc. ("STOR-Re") -------------------------------------------------- As a result of obtaining a controlling ownership interest, effective July 1, 2002 we began consolidating STOR-Re. Accordingly, the assets and liabilities and operating results subsequent to July 1, 2002 of STOR-Re are included on our financial statements. Our investment in STOR-Re, which was previously classified as an Other Asset, was consolidated and the cash, other assets, and liabilities of STOR-Re are included in the financial statements. STOR-Re was formed in 1994 as an association captive insurance company owned by the Company and its affiliates. STOR-Re provides limited property and liability insurance to the Company and its affiliates. The Company also utilizes other insurance carriers to provide property and liability coverage in excess of STOR-Re's limitations. Prior to July 1, 2002, the insurance premiums paid to STOR-Re were included in property operating expenses. After June 30, 2002, the insured liabilities costs incurred by STOR-Re with respect to the Company and the Consolidated Entities facilities are presented as property operating expenses. The insured liability costs incurred by STOR-Re are substantially equivalent to the premiums paid by the Company and its affiliates; accordingly, the consolidation of STOR-Re had no material impact upon the Company's income statement. The net operating results of STOR-Re with respect to its insurance services provided to the Unconsolidated Entities are included in "interest and other income." Each of the transactions indicated above has been accounted for using the purchase method. Accordingly, allocations of our acquisition cost (consisting of our preexisting investment and the cost of acquisition of interests acquired in connection with the transaction) was allocated to the net assets acquired based upon the fair value of such assets and liabilities assumed with respect to the transactions. Accordingly, allocations of the total acquisition cost to the net assets acquired were made based upon the fair value of such assets and liabilities assumed. The historical operating results of the above acquisitions prior to each respective acquisition date have not been included in the Company's historical operating results. Pro forma data (unaudited) for the three months ended March 31, 2002 as though the business combinations above had been effective as of January 1, 2002 are as follows (amounts in thousands): 10 For the three months ended March 31, 2002 ------------------ Revenues................................. $ 207,152 Net income............................... $ 87,232 Net income per common share (Basic)...... $ 0.38 Net income per common share (Diluted).... $ 0.37 The pro forma data does not purport to be indicative either of results of operations that would have occurred had the transactions occurred at January 1, 2002 or the future results of operations of the Company. Certain pro forma adjustments were made to the combined historical amounts to reflect (i) expected reductions in general and administrative expenses, (ii) estimated increased interest expense from bank borrowings to finance the cash portion of the acquisition cost and (iii) estimated increase in depreciation expense. 4. Discontinued Operations SFAS No. 144, which was adopted by the Company on January 1, 2002, addresses accounting for discontinued operations. The Statement requires the segregation of all disposed components of an entity with operations that (i) can be distinguished from the rest of the entity and (ii) will be eliminated from the ongoing operations of the entity in a disposal transaction. During 2002, we adopted a business plan that included the closure of several non-strategic containerized storage facilities (the "Closed Facilities"), representing components of our containerized storage business. The related assets of the Closed Facilities (consisting primarily of storage containers) were deemed not recoverable from future operations, and as a result an asset impairment charge for the excess of these assets' net book value over their fair value was recorded during the third and fourth quarters of 2002 totaling $6,187,000. In addition, lease termination costs, representing the expected remaining lease liability following closure of the facilities, were recorded in the amount of $2,447,000 during the latter half of 2002. There are no significant assets or liabilities of the Closed Facilities, other than the remaining lease liabilities. In March 2003, we adopted a business plan to exit the Knoxville, Tennessee market and sell the four self-storage facilities (the "Knoxville Facilities") that we own in this market. In addition, we decided to sell an industrial facility that was previously used by one of the Closed Facilities. As of March 31, 2003, we had listed these real estate facilities for sale at prices that we believe approximate their fair market values, and expect to complete a sale of these facilities within a year with estimated net proceeds from the sale in excess of each facility's individual book value. In addition, during the fourth quarter of 2002, we sold a commercial facility. In accordance with SFAS 144, the historical operations of the Closed Facilities (including the asset impairment and lease termination costs), the Knoxville Facilities, and the sold commercial facility are classified as discontinued operations. The rental income, cost of operations, and depreciation expense with respect to these facilities for each period presented are included in the line-item "Discontinued Operations" on the income statement. In addition, the net book value ($15,421,000, which is net of $5,161,000 in accumulated depreciation at March 31, 2003) of the Closed Facilities and the industrial facility previously used by our containerized storage operations have been classified as "Real estate facilities held for sale" on our March 31, 2003 balance sheet. 11 The following table summarizes the historical operations of the Knoxville Facilities, the Closed Facilities and the commercial property sold: Discontinued Operations: Three months ended March 31, - ------------------------ --------------------------------------- 2003 2002 Change ----------- ----------- ----------- (Amounts in thousands) Rental income (a): Knoxville Facilities............ $ 388 $ 382 $ 6 Closed Facilities............... 1,533 3,501 (1,968) Sold commercial facility........ - 115 (115) ----------- ----------- ----------- Total rental income........ 1,921 3,998 (2,077) ----------- ----------- ----------- Cost of operations (a): Knoxville Facilities............ 170 156 14 Closed Facilities............... 1,630 3,361 (1,731) Sold commercial facility........ - 22 (22) ----------- ----------- ----------- Total cost of operations... 1,800 3,539 (1,739) ----------- ----------- ----------- Depreciation (a): Knoxville Facilities............ 120 119 1 Closed Facilities............... - 450 (450) Sold commercial facility........ - 29 (29) ----------- ----------- ----------- Total depreciation ........ 120 598 (478) ----------- ----------- ----------- Net discontinued operations....... $ 1 $ (139) $ 140 =========== =========== =========== (a) These amounts represent the historical operations of the Knoxville Facilities, the Closed Facilities and the sold commercial facility, and include amounts previously classified as rental income, cost of operations, and depreciation expense in the financial statements in prior periods. 12 5. Real Estate Facilities Activity in real estate facilities during 2003 is as follows: In thousands ---------------- Operating facilities, at cost: Balance at December 31, 2002........................ $ 4,988,526 Newly developed facilities opened for operation..... 35,114 Disposition of real estate facilities............... (7,460) Transfer to real estate held for sale (Note 4)...... (20,582) Capital improvements................................ 2,333 ---------------- Balance at March 31, 2003........................... 4,997,931 ---------------- Accumulated depreciation: Balance at December 31, 2002........................ (987,546) Additions during the year........................... (42,183) Transfer to real estate held for sale (Note 4)...... 5,161 Disposition of real estate facilities............... 566 ---------------- Balance at March 31, 2003........................... (1,024,002) ---------------- Construction in process: Balance at December 31, 2002........................ 87,516 Current development................................. 24,184 Transfer to land held for development or sale....... (805) Newly developed facilities opened for operation..... (35,114) ---------------- Balance at March 31, 2003........................... 75,781 ---------------- Real estate facilities held for sale (Note 4): Balance at December 31, 2002........................ - Transfer from land and buildings.................... 20,582 Transfer from accumulated depreciation.............. (5,161) ---------------- Balance at March 31, 2003........................... 15,421 ---------------- Land held for development: Balance at December 31, 2002........................ 17,807 Transfer from construction in process............... 805 Disposition of land................................. (805) ---------------- Balance at March 31, 2003........................... 17,807 ---------------- Total real estate facilities........................... $ 4,082,938 ================ During the three months ended March 31, 2003, we opened five newly developed facilities (347,000 net rentable square feet) with an aggregate cost of $33,744,000, and incurred additional development costs amounting to $1,370,000 with respect to existing real estate facilities. During the first quarter of 2003, we sold two self-storage facilities and a parcel of land for an aggregate of $7,713,000 cash. The two self-storage facilities had been operated by the buyer pursuant to a lease arrangement, with the lease income with respect to these facilities included in "interest and other income." An aggregate gain of $14,000 was recorded from these sales. Construction in process at March 31, 2003 consists primarily of 15 self-storage facilities (853,000 net rentable square feet) and 25 expansion projects to existing self-storage facilities. In addition, we have nine parcels of land held for development or sale with total costs of approximately $17,807,000. 13 Our policy is to capitalize interest incurred on debt during the course of construction of our self-storage facilities. Interest capitalized during the three months ended March 31, 2003 and 2002, was $1,525,000 and $1,846,000, respectively. 6. Investment in Real Estate Entities At March 31, 2003, our investment in real estate entities consists of our ownership interests in seven partnerships, which principally own self-storage facilities, and our ownership interest in PSB. These interests are non-controlling interests of less than 50% and are accounted for using the equity method of accounting. Accordingly, earnings are recognized based upon our ownership interest in each of the partnerships. The accounting policies of these entities are similar to the Company's. For the three months ended March 31, 2003 and 2002, we recognized earnings from our investments of $4,687,000 and $9,256,000, respectively, and received cash distributions totaling $2,809,000 and $6,566,000, respectively. Equity in earnings for the three months ended March 31, 2003 includes a $2,130,000 reduction to equity in earnings with respect to PSB, representing our net pro rata share of PSB's impairment charges related to the impending sale of real estate offset partially by a gain on the sale of real estate assets. Equity in earnings for the three months ended March 31, 2002 includes our $2,241,000 pro-rata share of PSB's gain on disposition of real estate investments. There were no investments made in the real estate entities for the three months ended March 31, 2003. For the three months ended March 31, 2002, we acquired investments in the real estate entities totaling $41,000. The following table sets forth our investments in real estate entities at March 31, 2003 and December 31, 2002, and our equity in earnings of real estate entities for the three months ended March 31, 2003 and 2002 (amounts in thousands):
Equity in Earnings of Real Investments in Real Estate Estate Entities for the Three Entities at Months Ended March 31, -------------------------------- --------------------------------- March 31, December 31, 2003 2002 2003 2002 -------------- -------------- -------------- --------------- PSB (a)............................. $ 275,014 $ 273,790 $ 3,419 $ 7,114 Development Joint Venture (b)....... - - - 223 Other investments................... 56,543 55,889 1,268 1,919 -------------- -------------- -------------- --------------- Total............................. $ 331,557 $ 329,679 $ 4,687 $ 9,256 ============== ============== ============== ===============
(a) Equity in earnings for the three months ended March 31, 2003 includes a $2,130,000 reduction, representing our net pro rata share of PSB's impairment charges related to the impending sale of real estate offset partially by a gain on the sale of real estate assets. Equity in earnings for the three months ended March 31, 2002 includes $2,241,000, representing our pro-rata share of PSB's gain on disposition of real estate investments. (b) As described in Note 3, in the first quarter of 2002 we began consolidating the results of the Development Joint Venture and as a result eliminated our investment in the three months ended March 31, 2002. 14 Investment in PSB ----------------- On January 2, 1997, we reorganized our commercial property operations into an entity now known as PS Business Parks, Inc., a REIT traded on the American Stock Exchange, and an operating partnership controlled by PS Business Parks, Inc. (collectively, the REIT and the operating partnership are referred to as "PSB"). The Company and certain partnerships in which the Company has a controlling interest have a 45% common equity interest in PSB as of March 31, 2003. This 45% common equity interest is comprised of the ownership of 5,418,273 shares of common stock and 7,305,355 limited partnership units in the operating partnership; these limited partnership units are convertible at our option, subject to certain conditions, on a one-for-one basis into PSB common stock. Based upon PSB's trading price at March 31, 2003 ($29.75), the shares and units had a market value of approximately $378.5 million as compared to a book value of $275.0 million. At March 31, 2003, PSB owned and operated approximately 14.5 million net rentable square feet of commercial space. In addition, PSB manages 1,196,000 net rentable square feet of commercial space owned by the Company and affiliated entities pursuant to property management agreements. The following table sets forth the condensed statements of operations for the three months ended March 31, 2003 and for the same period in 2002, and the condensed balance sheets of PSB at March 31, 2003 and December 31, 2002. These amounts below represent 100% of PSB's balances and not our pro-rata share.
For the three months ended March 31, -------------------------------------- 2003 2002 ------------------ ------------------ (Amounts in thousands) Total revenue........................................ $ 48,469 $ 48,360 Gain on real estate investments...................... 1,076 5,366 Impairment charge with respect to impending asset (5,907) - sales............................................. Cost of operations and other expenses................ (15,393) (15,849) Depreciation and amortization........................ (13,685) (13,399) Discontinued operations.............................. 1,946 1,068 Minority interest.................................... (6,775) (8,844) ------------------ ------------------ Net income......................................... $ 9,731 $ 16,702 ================== ================== March 31, December 31, 2003 2002 ------------------ ------------------ (Amounts in thousands) Total assets (primarily real estate)................. $ 1,144,610 $ 1,156,802 Total debt........................................... 70,137 70,279 Other liabilities.................................... 33,214 36,902 Minority interest.................................... 384,615 385,219 Shareholders' equity................................. 656,644 664,402
Other Investments ----------------- The Other Investments consist primarily of an average 41% common equity ownership, which we owned during each of the three months ended March 31, 2003 and 2002, in seven limited partnerships (collectively, the "Other Investments") owning an aggregate of 36 storage facilities. For the three months ended March 31, 2002, we acquired additional equity interests in these entities from third parties for a total of $41,000. No equity interests in the other investments were acquired for the three months ended March 31, 2003. 15 The following table sets forth certain condensed financial information (representing 100% of these entities' balances and not our pro-rata share) with respect to Other Investments:
For the three months ended March 31, -------------------------------------- 2003 2002 ------------------ ------------------ (Amounts in thousands) Total revenue........................................ $ 6,380 $ 6,725 Cost of operations and other expenses................ (2,251) (2,425) Depreciation and amortization........................ (620) (630) ------------------ ------------------ Net income......................................... $ 3,509 $ 3,670 ================== ================== March 31, December 31, 2003 2002 ------------------ ------------------ (Amounts in thousands) Total assets (primarily storage facilities).......... $ 55,750 $ 56,731 Total debt........................................... 4,400 5,450 Other liabilities.................................... 699 1,121 Partners' equity..................................... 50,651 50,160
7. Revolving Line of Credit We have a $200 million revolving line of credit (the "Credit Agreement") that has a maturity date of October 31, 2004 and bears an annual interest rate ranging from the London Interbank Offered Rate ("LIBOR") plus 0.45% to LIBOR plus 1.50% depending on our credit ratings (currently LIBOR plus 0.45%). In addition, we are required to pay a quarterly commitment fee ranging from 0.20% per annum to 0.30% per annum depending on our credit ratings (currently the fee is 0.20% per annum). At March 31, 2003, we had borrowings on our line of credit totaling $25,000,000. As of May 13, 2003, outstanding borrowings had been reduced to $5,000,000. The Credit Agreement includes various covenants, the more significant of which requires us to (i) maintain a balance sheet leverage ratio of less than 0.50 to 1.00, (ii) maintain certain quarterly interest and fixed-charge coverage ratios (as defined) of not less than 2.50 to 1.0 and 1.75 to 1.0, respectively, and (iii) maintain a minimum total shareholders' equity (as defined). In addition, we are limited in our ability to incur additional borrowings (we are required to maintain unencumbered assets with an aggregate book value equal to or greater than two times our unsecured recourse debt). We were in compliance with all the covenants of the Credit Agreement at March 31, 2003. 16 8. Notes Payable Notes payable at March 31, 2003 and December 31, 2002 consist of the following:
Carrying Amount ------------------------------- December 31, March 31, 2003 2002 ------------- ------------- (Amounts in thousands) Unsecured senior notes: 7.08% note due November 2003............................ $ 10,000 $ 10,000 7.47% note due January 2004............................. 14,600 29,300 7.66% note due January 2007............................. 44,800 56,000 Mortgage notes payable: 10.55% mortgage notes secured by real estate facilities, principal and interest payable monthly, due August 2004 17,373 18,167 7.134% to 10.5% mortgage notes secured by real estate facilities, principal and interest payable monthly, due at varying dates between May 2004 and September 2028 2,338 2,400 ------------- ------------- Total notes payable.............................. $ 89,111 $ 115,867 ============= =============
All of our notes payable are fixed rate. The senior notes require interest and principal payments to be paid semi-annually and have various restrictive covenants, all of which have been met at March 31, 2003 and December 31, 2002. The 10.55% mortgage notes consist of five notes, which are cross-collateralized by 19 properties and are due to a life insurance company. Mortgage notes payable are secured by 24 real estate facilities having an aggregate net book value of approximately $55.9 million at March 31, 2003 and $56.4 million at December 31, 2002. At March 31, 2003, approximate principal maturities of notes payable are as follows: Unsecured Senior Notes Mortgage debt Total -------------- -------------- -------------- (in thousands) 2003 (remainder of)........ $ 10,000 $ 3,028 $ 13,028 2004....................... 25,800 15,063 40,863 2005....................... 11,200 156 11,356 2006....................... 11,200 170 11,370 2007....................... 11,200 185 11,385 Thereafter................. - 1,109 1,109 -------------- -------------- -------------- $ 69,400 $ 19,711 $ 89,111 ============== ============== ============== Weighted average rate...... 7.5% 10.1% 8.1% ============== ============== ============== 9. Minority Interest In consolidation, we classify ownership interests in the net assets of each of the Consolidated Entities, other than our own, as minority interest on the consolidated financial statements. Minority interest in income consists of the minority interests' share of the operating results of the Consolidated Entities. 17 Preferred Partnership Interests ------------------------------- During 2000, one of our consolidated operating partnerships issued an aggregate $365.0 million of preferred partnership units: March 17, 2000 - $240.0 million of 9.5% Series N Cumulative Redeemable Perpetual Preferred Units, March 29, 2000 - $75.0 million of 9.125% Series O Cumulative Redeemable Perpetual Preferred Units, and August 11, 2000 - $50.0 million of 8.75% Series P Cumulative Redeemable Perpetual Preferred Units. For each of the three months ended March 31, 2003 and 2002, the holders of the preferred units were paid distributions aggregating approximately $6,726,000 and received an equivalent allocation of minority interest in earnings. The following table summarizes the preferred partnership units outstanding at March 31, 2003 and December 31, 2002: Distribution Units Carrying Series Rate Outstanding Amount - --------------------- -------------- -------------- -------------- (Amounts in thousands) Series N............ 9.500% 9,600 $240,000 Series O............ 9.125% 1,800 45,000 -------------- -------------- Total............... 11,400 $285,000 ============== ============== These preferred units are not redeemable during the first 5 years after issuance; thereafter, at our option, we can call the units for redemption at the issuance amount plus any unpaid distributions. The units are not redeemable by the holder. Subject to certain condition, the Series N preferred units are convertible into shares of 9.5% Series N Cumulative Preferred Stock, and the Series O preferred units are convertible into shares of 9.125% Series O Cumulative Preferred Stock of the Company. Other Partnership Interests --------------------------- Minority interest at March 31, 2003 and December 31, 2002, and minority interest in income for the three months ended March 31, 2003 and 2002 with respect to the other partnership interests are as follows:
Minority interest in income for Minority interest at the three months ended ------------------------------ ------------------------------ March 31, December 31, March 31, March 31, Description of Minority Interest 2003 2002 2003 2002 - --------------------------------- ------------ ------------- ------------ ------------- (Amounts in thousands) Consolidated Development Joint Venture........................ $ 73,712 $ 75,432 $ 743 $ 307 Convertible Partnership Units... 6,232 6,274 65 89 Other consolidated partnerships.. 73,457 72,793 3,134 4,220 ------------ ------------- ------------ ------------- Total other partnership interests $ 153,401 $ 154,499 $ 3,942 $ 4,616 ============ ============= ============ =============
18 Consolidated Development Joint Venture -------------------------------------- In November 1999, we formed a development joint venture (the "Consolidated Development Joint Venture") with a joint venture partner (PSAC Storage Investors, LLC) whose partners include an institutional investor and B. Wayne Hughes ("Mr. Hughes"), chairman of the Company, to develop approximately $100 million of self-storage facilities and to purchase $100 million of the Company's Equity Stock, Series AAA (see Note 10). In consolidation, the Equity Stock Series AAA and the related dividend income have been eliminated. At March 31, 2003, the Consolidated Development Joint Venture was fully committed having completed construction on 22 self-storage facilities for a total cost of approximately $108 million. The Consolidated Development Joint Venture is funded solely with equity capital consisting of 51% from the Company and 49% from PSAC Storage Investors, LLC. The accounts of the Consolidated Development Joint Venture are included in the Company's consolidated financial statements. The accounts of PSAC Storage Investors, LLC are not included in the Company's consolidated financial statements, as the Company has no ownership interest in this entity. Minority interests primarily represent the total contributions received from PSAC Storage Investors combined with the accumulated net income allocated to PSAC Storage Investors, LLC, net of cumulative distributions. The amounts included in our financial statements with respect to the minority interest in the Consolidated Development Joint Venture are denoted in the tables above. The term of the Consolidated Development Joint Venture is 15 years; however, during the sixth year PSAC Storage Investors has the right to cause an early termination of the partnership. If PSAC Storage Investors exercises this right, we then have the option, but not the obligation, to acquire their interest for an amount that will allow them to receive an annual return of 10.75%. If the Company does not exercise its option to acquire PSAC Storage Investors' interest, the partnership's assets will be sold to third parties and the proceeds distributed to the Company and PSAC Storage Investors in accordance with the partnership agreement. If PSAC Storage Investors does not exercise its right to early termination during the sixth year, the partnership will be liquidated 15 years after its formation with the assets sold to third parties and the proceeds distributed to the Company and PSAC Storage Investors in accordance with the partnership agreement. PSAC Storage Investors, LLC provides Mr. Hughes with a fixed yield of approximately 8.0% per annum on his preferred non-voting interest (representing an investment of approximately $64.1 million at March 31, 2003). In addition, Mr. Hughes receives 1% of the remaining cash flow of PSAC Storage Investors, LLC (estimated to be less than $50,000 per year). If PSAC Storage Investors, LLC does not elect to cause an early termination, Mr. Hughes' 1% interest in residual cash flow can increase to 10%. In consolidation, the Equity Stock, Series AAA owned by the joint venture and the related dividend income has been eliminated. Minority interests primarily represent the total contributions received from PSAC Storage Investors combined with the accumulated net income allocated to PSAC Storage Investors, net of cumulative distributions. Convertible Partnership Units ----------------------------- As of March 31, 2003 and December 31, 2002, one of our Consolidated Entities had approximately 237,935 convertible partnership units ("Convertible Units") outstanding, representing a limited partnership interest in the partnership. The Convertible Units are convertible on a one-for-one basis (subject to certain limitations) into common shares of the Company at the option of the unitholder. Minority interest in income with respect to the Convertible Units reflects an allocation of net income on a per unit basis equal to diluted earnings per common share. 19 Other Consolidated Partnerships ------------------------------- At March 31, 2003, the Other Consolidated Partnerships reflect common equity interests that the Company does not own in 25 entities owning an aggregate of 172 real estate facilities. During 2002, we acquired minority interests in the Consolidated Entities for an aggregate cash cost of $27,544,000 and issued an aggregate of 1,091,608 shares ($37,904,000) of our common stock; these acquisitions had the effect of reducing minority interest by $25,668,000, with the excess of cost over underlying book value ($39,780,000) allocated to real estate. In addition, during the three months ended June 30, 2002, we recorded the pending sale of a partnership interest in the Consolidated Entities for an aggregate of $1,450,000. We recorded a loss on sale of the interest in the amount of $1,839,000. As a result of this pending sale, minority interest increased by $3,289,000. This sale is subject to litigation; see Note 15. 10. Shareholders' Equity Cumulative Preferred Stock -------------------------- At March 31, 2003 and December 31, 2002, we had the following series of Cumulative Preferred Stock outstanding:
At March 31, 2003 At December 31, 2002 ------------------------------ ------------------------------ Dividend Shares Carrying Shares Carrying Series Rate Outstanding Amount Outstanding Amount - ----------------------------------- ----------- -------------- ------------- -------------- ------------- (Dollar amount in thousands) Series B 9.200% - $ - 2,300,000 $ 57,500 Series C Adjustable 1,200,000 30,000 1,200,000 30,000 Series D 9.500% 1,200,000 30,000 1,200,000 30,000 Series E 10.000% 2,195,000 54,875 2,195,000 54,875 Series F 9.750% 2,300,000 57,500 2,300,000 57,500 Series K 8.250% 4,600 115,000 4,600 115,000 Series L 8.250% 4,600 115,000 4,600 115,000 Series M 8.750% 2,250 56,250 2,250 56,250 Series Q 8.600% 6,900 172,500 6,900 172,500 Series R 8.000% 20,400 510,000 20,400 510,000 Series S 7.875% 5,750 143,750 5,750 143,750 Series T 7.625% 6,086 152,150 6,086 152,150 Series U 7.625% 6,000 150,000 6,000 150,000 Series V 7.500% 6,900 172,500 6,900 172,500 -------------- ------------- -------------- ------------- Total Cumulative Preferred Stock 6,958,486 $ 1,759,525 9,258,486 $ 1,817,025 ============== ============= ============== =============
On March 31, 2003, we redeemed all outstanding shares of our 9.20% Cumulative Preferred Stock, Series B at a redemption price of $25 per share for a total of $57,517,000 (including related redemption expenses). 20 During 2002, we issued our Series T, Series U and Series V Cumulative Preferred Stock: Series T - issued on January 18, 2002, net proceeds of $145,075,000, Series U - issued on February 19, 2002, net proceeds of $145,075,000 and Series V - issued September 30, 2002, net proceeds of $166,866,000. During 2002, we redeemed our Series A and Series J Cumulative Preferred Stock, at par, at a total cost of $45,643,000 and $150,018,000 (including related redemption costs), respectively. On August 30, 2002, in a privately negotiated transaction, we exchanged an aggregate of 86,000 shares (par value of $2,150,000) of our Preferred Stock, Series B for 86 shares (representing 86,000 depositary shares with a par value of $2,150,000) of our Preferred Stock, Series T. The Series C through Series V (collectively the "Cumulative Senior Preferred Stock") have general preference rights with respect to liquidation and quarterly distributions. Holders of the preferred stock, except under certain conditions and as noted below, will not be entitled to vote on most matters. In the event of a cumulative arrearage equal to six quarterly dividends or failure to maintain a Debt Ratio (as defined) of 50% or less, holders of all outstanding series of preferred stock (voting as a single class without regard to series) will have the right to elect two additional members to serve on the Company's Board of Directors until events of default have been cured. At March 31, 2003, there were no dividends in arrears and the Debt Ratio was 1.9%. Except under certain conditions relating to the Company's qualification as a REIT, the Senior Preferred Stock is not redeemable prior to the following dates: Series C - June 30, 1999, Series D - September 30, 2004, Series E - January 31, 2005, Series F - April 30, 2005, Series K - January 19, 2004, Series L - March 10, 2004, Series M - August 17, 2004, Series Q - January 19, 2006, Series R - September 28, 2006 , Series S - October 31, 2006, Series T - January 18, 2007, Series U - February 19, 2007 and Series V - September 30, 2007. On or after the respective dates, each of the series of Cumulative Senior Preferred Stock will be redeemable, at the option of the Company, in whole or in part, at $25 per share (or depositary share in the case of the Series K through Series V), plus accrued and unpaid dividends. Equity Stock ------------ The Company is authorized to issue 200,000,000 shares of Equity Stock. The Articles of Incorporation provide that the Equity Stock may be issued from time to time in one or more series and gives the Board of Directors broad authority to fix the dividend and distribution rights, conversion and voting rights, redemption provisions and liquidation rights of each series of Equity Stock. Equity Stock, Series A ---------------------- At March 31, 2003, we had 8,776,102 depositary shares outstanding, each representing 1/1,000 of a share of Equity Stock, Series A ("Equity Stock A"). The Equity Stock A ranks on a parity with common stock and junior to the Senior Preferred Stock with respect to general preference rights and has a liquidation amount which cannot exceed $24.50 per share. Distributions with respect to each depositary share shall be the lesser of: (i) five times the per share dividend on the Common Stock or (ii) $2.45 per annum. We have no obligation to pay distributions on the depositary shares if no distributions are paid to common shareholders. 21 Except in order to preserve the Company's federal income tax status as a REIT, we may not redeem the depositary shares before March 31, 2010. On or after March 31, 2010, we may, at our option, redeem the depositary shares at $24.50 per depositary share. If the Company fails to preserve its federal income tax status as a REIT, the depositary shares will be convertible at the option of the shareholder into .956 shares of common stock. The depositary shares are otherwise not convertible into common stock. Holders of depositary shares vote as a single class with our holders of common stock on shareholder matters, but the depositary shares have the equivalent of one-tenth of a vote per depositary share. Equity Stock, Series AA ----------------------- In June 1997, we contributed $22,500,000 (225,000 shares) of equity stock, now designated as Equity Stock, Series AA ("Equity Stock AA") to a partnership in which we are the general partner. The Company has a controlling interest in the partnership and therefore consolidates the accounts of the partnership. As a result, the Equity Stock AA is eliminated in consolidation. The Equity Stock AA ranks on a parity with our common stock and junior to the Cumulative Preferred Stock with respect to general preference rights and has a liquidation amount of ten times the amount paid to each common share up to a maximum of $100 per share. Quarterly distributions per share on the Equity Stock AA are equal to the lesser of (i) 10 times the amount paid per share of Common Stock or (ii) $2.20. We have no obligation to pay distributions on these shares if no distributions are paid to common shareholders. If the Company determines that it is necessary to maintain its status as a Real Estate Investment Trust, subject to certain limitations it may cause the redemption of shares of Equity Stock, Series AA at a price of $100 per share. The shares are not otherwise redeemable or convertible into shares of any other class or series of the Company's capital stock. Other than as required by law, the Equity Stock, Series AA has no voting rights. Equity Stock, Series AAA ------------------------ In November 1999, we sold $100,000,000 (4,289,544 shares) of Equity Stock, Series AAA ("Equity Stock AAA") to a newly formed joint venture. We control the joint venture and consolidate the accounts of the joint venture, and accordingly the Equity Stock AAA is eliminated in consolidation. The Equity Stock AAA ranks on a parity with our common stock and junior to the Cumulative Preferred Stock (as defined below) with respect to general preference rights, and has a liquidation amount equal to 120% of the amount distributed to each common share. Annual distributions per share are equal to the lesser of (i) five times the amount paid per common share or (ii) $2.1564. We have no obligation to pay distributions on these shares if no distributions are paid to common stockholders. Upon liquidation of the Consolidated Development Joint Venture, at the Company's option either a) each share of Equity Stock, Series AAA shall convert into 1.2 shares of our common stock or b) the Company can redeem the Equity Stock, Series AAA at a per share amount equal to 120% of the market price of our common stock. In addition, if the Company determines that it is necessary to maintain its status as a Real Estate Investment Trust, subject to certain limitations it may cause the redemption of shares of Equity Stock, Series AAA at a per share amount equal to 120% of the market price of our common stock. The shares are not otherwise redeemable or convertible into shares of any other class or series of the Company's capital stock. Other than as required by law, the Equity Stock, Series AAA has no voting rights. 22 Common Stock ------------ At March 31, 2003, entities consolidated with the Company owned 548,732 common shares of the Company. These shares continue to be legally issued and outstanding. In the consolidation process, these shares and the related balance sheet amounts have been eliminated. In addition, these shares are not included in the computation of weighted average shares outstanding. The following chart reconciles the Company's legally issued and outstanding shares of common stock and the reported outstanding shares of common stock at March 31, 2003, December 31, 2002, and December 31, 2001:
Reconciliation of Common Shares - -------------------------------- At March At December At December Outstanding 31, 2003 31, 2002 31, 2001 - ----------- ------------- -------------- ------------- Legally issued and outstanding shares 124,683,022 117,540,187 115,499,647 Less - Shares owned by the Consolidated Entities that are eliminated in consolidation..... (548,732) (548,732) (537,732) ------------- -------------- ------------- Reported issued and outstanding shares.......................... 124,134,290 116,991,455 114,961,915 ============= ============== =============
The Company's Board of Directors authorized the repurchase from time to time of up to 25,000,000 shares of the Company's common stock on the open market or in privately negotiated transactions. From the initial authorization through March 31, 2003, we have repurchased a total of 21,497,020 shares of common stock at an aggregate cost of approximately $535.9 million. Class B Common Stock -------------------- The Class B Common Stock was converted into regular common stock on January 1, 2003. For 2002, the Class B Common Stock participated in distributions at the rate of 97% of the per share distributions on the Common Stock. Dividends --------- The following table summarizes dividends declared and paid during the three months ended March 31, 2003: 23 Distributions per Share or Depositary Share Total Distributions ---------------------- --------------------- Cumulative Preferred Stock: Series B...................... $0.554 $ 1,323,000 Series C...................... $0.422 506,000 Series D...................... $0.594 713,000 Series E...................... $0.625 1,372,000 Series F...................... $0.609 1,401,000 Series K...................... $0.516 2,372,000 Series L...................... $0.516 2,372,000 Series M...................... $0.547 1,230,000 Series Q...................... $0.538 3,709,000 Series R...................... $0.500 10,200,000 Series S...................... $0.492 2,830,000 Series T...................... $0.477 2,900,000 Series U...................... $0.477 2,860,000 Series V...................... $0.469 3,234,000 --------------------- 37,022,000 Common Stock: Equity Stock, Series A........ $0.613 5,375,000 Common........................ $0.450 55,995,000 --------------------- Total Dividends............ $ 98,392,000 ===================== The dividend rate on the Series C Preferred Stock for the first quarter of 2003 was equal to 6.75% per annum. The dividend rate per annum will be adjusted quarterly and will be equal to the highest of one of three U.S. Treasury indices (Treasury Bill Rate, Ten Year Constant Maturity Rate, or Thirty Year Constant Maturity Rate) multiplied by 110%. However, the dividend rate for any dividend period will neither be less than 6.75% per annum nor greater than 10.75%. The dividend rate for the quarter ending June 30, 2003 will be equal to 6.75% per annum. 11. Segment Information Description of each reportable segment -------------------------------------- Our reportable segments reflect significant operating activities that are evaluated separately by management. We have four reportable segments: self-storage operations, containerized storage operations, commercial property operations, and tenant reinsurance operations. The self-storage segment comprises the direct ownership, development, and operation of traditional storage facilities, and the ownership of equity interests in entities that own storage properties. The containerized storage operations represent another segment. The commercial property segment reflects our interest in the ownership, operation, and management of commercial properties. The vast majority of the commercial property operations are conducted through PSB, and to a much lesser extent the Company and certain of its unconsolidated subsidiaries own commercial space, managed by PSB, within facilities that combine storage and commercial space for rent. The tenant reinsurance segment reflects the operations of PS Insurance Company, Ltd., which reinsures policies against losses to goods stored by tenants in our self-storage facilities. 24 Measurement of segment profit or loss ------------------------------------- We evaluate performance and allocate resources based upon the net segment income of each segment. Net segment income represents net income in conformity with accounting principles generally accepted in the United States and our significant accounting policies as denoted in Note 2, before interest and other income, interest expense, corporate general and administrative expense, and minority interest in income. The accounting policies of the reportable segments are the same as those described in the Summary of Significant Accounting Policies. Interest and other income, interest expense, corporate general and administrative expense, and minority interest in income are not allocated to segments because management does not utilize them to evaluate the results of operations of each segment. Measurement of segment assets ----------------------------- No segment data relative to assets or liabilities is presented, because management does not consider the historical cost of the Company's real estate facilities and investments in real estate entities in evaluating the performance of operating management or in evaluating alternative courses of action. The only other types of assets that might be allocated to individual segments are trade receivables, payables, and other assets which arise in the ordinary course of business, but they are also not a significant factor in the measurement of segment performance. Presentation of segment information ----------------------------------- Our income statement provides most of the information required in order to determine the performance of each of the Company's four segments. The following tables reconcile the performance of each segment, in terms of segment revenues and segment income, to our consolidated revenues and net income. It further provides detail of the segment components of the income statement item, "Equity in earnings of real estate entities." The following table reconciles the performance of each segment, in terms of segment revenues, to our consolidated revenues.
Reconciliation of Revenues by Segment Three Months Ended March 31, - ------------------------------------- --------------------------------------------- 2003 2002 Change ------------- ------------- ------------- (Amounts in thousands) Self-storage facility rentals....... $ 189,571 $ 188,525 $ 1,046 Commercial property rentals......... 2,846 2,956 (110) Containerized storage rentals....... 9,481 8,198 1,283 Tenant reinsurance premiums......... 5,215 4,575 640 Interest and other income (not allocated to segments)............ 1,699 1,708 (9) ------------- ------------- ------------- Total revenues.................. $ 208,812 $ 205,962 $ 2,850 ============= ============= =============
25 The following table reconciles the performance of each segment to our consolidated net income. It further provides detail of the segment components of the income statement item, "Equity in earning of real estate entities."
Three months ended March 31, ----------------------- 2003 2002 Change ----------- ----------- ----------- (Amounts in thousands) Reconciliation of Net Income by Segment: Self-storage ------------ Self-storage net operating income......... $ 124,256 $ 130,086 $ (5,830) Self-storage depreciation................. (43,274) (41,249) (2,025) Equity in earnings - storage property operations............................. 1,428 2,094 (666) Equity in earnings - depreciation (self-storage) ........................ (265) (270) 5 Discontinued operations (Note 4) ......... 98 107 (9) ----------- ----------- ----------- Total self-storage segment net income. 82,243 90,768 (8,525) ----------- ----------- ----------- Commercial properties ---------- ---------- Commercial properties..................... 1,653 1,864 (211) Depreciation and amortization - commercial properties............................. (625) (699) 74 Equity in earnings - commercial property operations............................. 14,700 15,423 (723) Equity in earnings - depreciation (commercial properties) ............... (6,029) (6,101) 72 Discontinued operations (Note 4) ......... - 64 (64) ----------- ----------- ----------- Total commercial property segment net income............................... 9,699 10,551 (852) ----------- ----------- ----------- Containerized storage --------------------- Containerized storage net operating income 3,104 2,241 863 Containerized storage depreciation........ (2,021) (1,451) (570) Discontinued operations (Note 4) ......... (97) (310) 213 ----------- ----------- ----------- Total containerized storage segment net income............................... 986 480 506 ----------- ----------- ----------- Tenant Reinsurance ------------------ Tenant reinsurance net income............ 2,516 2,282 234 ----------- ----------- ----------- Other items not allocated to segments ------------------------------------- Equity in earnings - general and administrative and other.............. (5,147) (1,890) (3,257) Interest and other income................. 1,699 1,708 (9) General and administrative ............... (4,250) (4,000) (250) Interest expense.......................... (453) (1,102) 649 Minority interest in income .............. (10,668) (11,342) 674 Gain on disposition of real estate........ 14 - 14 ----------- ----------- ----------- Total other items not allocated to segments (18,805) (16,626) (2,179) ----------- ----------- ----------- Total consolidated net income ....... $ 76,639 $ 87,455 $(10,816) =========== ==========- ===========
26 12. Stock Options The Company has a 1990 Stock Option Plan (the "1990 Plan") which provides for the grant of non-qualified stock options. The Company has a 1994 Stock Option Plan (the "1994 Plan"), a 1996 Stock Option and Incentive Plan (the "1996 Plan") and a 2000 Non-Executive/Non-Director Stock Option and Incentive Plan (the "2000 Plan"), each of which provides for the grant of non-qualified options and incentive stock options. (the 1990 Plan, the 1994 Plan, the 1996 Plan and the 2000 Plan are collectively referred to as the "PSI Plans"). Under the PSI Plans, the Company has granted non-qualified options to certain directors, officers and key employees to purchase shares of the Company's common stock at a price equal to the fair market value of the common stock at the date of grant. Generally, options under the PSI Plans vest over a three-year period from the date of grant at the rate of one-third per year and expire (i) under the 1990 Plan, five years after the date they became exercisable and (ii) under the 1994 Plan, the 1996 Plan and the 2000 Plan, ten years after the date of grant. The 1996 Plan and the 2000 Plan also provide for the grant of restricted stock to officers, key employees and service providers on terms determined by an authorized committee of the Board of Directors; no shares of restricted stock have been granted. Accounting principles generally accepted in the United States permit, but do not require, companies to recognize compensation expense for stock-based awards based on their fair value at date of grant, which is then amortized as compensation expense over the vesting period (the "Fair Value Method"). Companies can also elect to disclose, but not recognize as an expense, stock option expense when stock options are granted to employees at an exercise price equal to the market price at the date of grant (the "APB 25 Method"). Companies can change their accounting method from the APB 25 Method to the Fair Value Method, and in doing so can elect between three different methods of transition. The first is the prospective method, whereby the Company applies the recognition provisions of the Fair Value Method to all stock options granted after the beginning of the fiscal year in which the company adopts the Fair Value Method. The second is the retroactive restatement method, whereby the company restates all periods presented to reflect compensation cost utilizing the fair value method for all periods. The third is the modified prospective method, where the company applies the Fair Value Method from the beginning of the current fiscal year with respect to all options which vest during the year regardless of when they were granted. For periods prior to December 31, 2001, we utilized the APB 25 Method of accounting for employee stock options. As of January 1, 2002, we adopted the Fair Value Method, and have elected to use the prospective method of transition described above. Accordingly, we recognize compensation expense in our income statement using the Fair Value Method only with respect to stock options issued after January 1, 2002. For the three months ended March 31, 2003, we recorded $99,000 in stock option compensation expense (none in the same period in 2002) related to options granted after January 1, 2002. The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option pricing model. The estimated average value of stock options granted in the first quarter of 2003 was based upon an estimated life of 5 years, a risk-free rate of 4.3%, an expected dividend yield of 7%, and expected volatility of 0.176. If we had recorded stock option expense applying the Fair Value Method to all awards, we would have recognized an additional $701,000 and $969,000 in stock option compensation expense for the three months ended March 31, 2003 and 2002, respectively. Diluted earnings per share would have been $0.27 and $0.36 for the three months ended March 31, 2003 and 2002, respectively. Basic earnings per share would have been $0.27 and $0.37 for the three months ended March 31, 2003 and 2002, respectively. 27 13. Related Party Transactions Relationships and transactions with the Hughes Family ----------------------------------------------------- B. Wayne Hughes, Chairman of the Board, and his family (the "Hughes Family") have ownership interests in, and operate, approximately 38 self-storage facilities in Canada under the name "Public Storage." We currently do not own any interests in these facilities nor do we own any facilities in Canada. The Hughes Family owns approximately 37% of our common stock outstanding at March 31, 2003. We have a right of first refusal to acquire the stock or assets of the corporation engaged in the operation of the 38 self-storage facilities in Canada if the Hughes family or the corporation agrees to sell them. However, we have no interest in the operations of this corporation, have no right to acquire this stock or assets unless the Hughes family decides to sell, and receive no benefit from the profits and increases in value of the Canadian self-storage facilities. Our personnel are engaged in the supervision and the operation of these 38 self-storage facilities and in providing certain administrative services for the Canadian owners, and certain other services, primarily tax services, with respect to certain other Hughes Family interests. The Hughes Family and the Canadian owners reimburse us at cost for these services. There may be conflicts of interest in allocating the time of our personnel between our properties, the Canadian properties, and certain other Hughes Family interests. The Company is in the process of eliminating the sharing of Company personnel with the Canadian entities. PS Business Parks, Inc. ----------------------- Ronald L. Havner Jr., our vice-chairman and chief executive officer, is also chairman and chief executive officer of PSB. Mr. Havner's compensation is allocated between the Company and PSB. This allocation was approved by the audit committee of the Company's Board of Directors. Pursuant to a cost-sharing and administrative services agreement, PSB reimburses the Company for certain administrative services. PSB's share of these costs totaled approximately $85,000 for each of the three months ended March 31, 2003 and 2002, and were computed in accordance with a methodology intended to fairly allocate these costs. PSB manages certain of the commercial facilities owned by the Company pursuant to management agreements for a management fee equal to 5% of revenues. The Company paid a total of $140,000 and $141,000, for the three months ended March 31, 2003 and 2002, respectively, in management fees with respect to PSB's property management services. STOR-Re, an entity that is consolidated with the Company and is partially owned by PSB, provides limited property and liability insurance to PSB at commercial competitive rates. PSB utilizes unaffiliated insurance carriers to provide property and liability insurance in excess of STOR-Re's limitations. In June 2002, we sold an undeveloped parcel of land at cost to PSB for an aggregate of $1,100,000 cash. 28 Consolidated Development Joint Venture with a partner including Mr. Hughes -------------------------------------------------------------------------- In November 1999, we formed the Consolidated Development Joint Venture with a joint venture partner whose partners include an institutional investor and Mr. Hughes. This transaction is discussed more fully in Note 9. 14. Recent Accounting Pronouncements In June 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("FAS 146"), which is effective for disposal activities entered into after December 31, 2002, with early adoption encouraged. FAS 146 requires that a liability for costs associated with exit or disposal activities be recognized when the liability is incurred. Current accounting principles generally accepted in the United States result in the recognition of such liabilities at the time management has committed to an exit plan. The impact of this statement on the Company's future operating results cannot be determined at this time, because such impact is dependent upon the Company's future level of exit and disposal activities, which is unknown. 15. Commitments and Contingencies LEGAL MATTERS Serrao v. Public Storage, Inc. (Filed April 2003) ------------------------------------------------- (Superior Court - Orange County) -------------------------------- The plaintiff in this case filed a suit against the Company on behalf of a putative class of renters who rented self-storage units from the Company. Plaintiff alleges that the Company misrepresented the size of its storage units, has brought claims under California statutory and common law relating to consumer protection, fraud, unfair competition, and negligent misrepresentation, and is seeking monetary damages, restitution, and declaratory and injunctive relief. The claim in this case is substantially similar to those in Henriquez v. Public Storage, Inc., which was disclosed in prior reports. In January 2003, the plaintiff caused the Henriquez action to be dismissed. Based upon the uncertainty inherent in any putative class action, the Company cannot presently determine the potential damages, if any, or the ultimate outcome of this litigation. The Company is vigorously contesting the claims upon which this lawsuit is based. Salaam, et. Al V. Public Storage, Inc. (filed February 2000) ------------------------------------------------------------ (Superior Court - Los Angeles County) ------------------------------------- The plaintiffs in this case are suing the Company on behalf of a purported class of California resident property managers who claim that they were not compensated for all the hours they worked. The named plaintiffs have indicated that their claims total less than $20,000 in aggregate. This maximum potential liability cannot be estimated, but can only be increased if a class is certified or if claims are permitted to be brought on behalf of the others under the California Unfair Business Practices Act. The plaintiffs' motion for class certification was denied in August 2002; the plaintiffs have appealed this denial. This denial does not deal with the claim under the California Unfair Business Practices Act. 29 The Company is continuing to vigorously contest the claims in this case and intends to resist any expansion beyond the named plaintiffs on the grounds of lack of commonality of claims. The Company's resistance will include opposing the plaintiffs' appeal of the court's denial of class certification and opposing the claim on behalf of others under the California Unfair Business Practices Act. The Company cannot presently determine the potential damages, if any, or the ultimate outcome of this litigation. PS Insurance Company, Ltd. -------------------------- In November 2002, a shareholder of the Company made a demand on the Board of Directors that challenged the fairness of the Company's acquisition of PS Insurance Company, Ltd. ("PSIC") and demanded that the Board recover the profits earned by PSIC from November 1995 through December 2001 and that the entire purchase price paid by the Company for PSIC in excess of PSIC's net assets be returned to the Company. The shareholder estimates these profits at $40 million and this excess at $27.5 million. The contract to acquire PSIC was approved by the independent directors of the Company in March 2001 and the transaction closed in December 2001. PSIC was formerly owned by B. Wayne Hughes, currently the Chairman of the Board (and in 2001 also the Chief Executive Officer) of the Company, B. Wayne Hughes, Jr., currently a director (and in 2001 also an officer) of the Company and Tamara Hughes Gustavson, who in 2001 was an officer of the Company. The shareholder has threatened litigation against the Hughes family and the directors of the Company arising out of this transaction and an alleged pattern of deceptive disclosures with respect to PSIC since 1995. In December 2002, the Board held a special meeting to authorize an inquiry by its independent directors to review the fairness to the Company's shareholders of its acquisition of PSIC and the ability of the Company to have started its own tenant reinsurance business in 1995. The Company believes that, prior to the effectiveness in 2001 of the federal REIT Modernization Act and corresponding California legislation that authorized the creation and ownership of "taxable REIT subsidiaries," the ownership by the Company of a reinsurance business relating to its tenants would have jeopardized the Company's status as a REIT and that other REITs faced similar concerns about tenant insurance programs. The inquiry relating to the shareholder's demand is currently ongoing. The Company cannot presently determine the potential damages, if any, or the ultimate outcome of this matter. Sale of Partnership Units ------------------------- In February 2000, the Company entered into a settlement of litigation arising out of a 1997 tender offer for limited partnership units in two affiliated partnerships. Under the settlement agreement, the Company agreed to sell to the plaintiff units representing a 4% interest in each of the partnerships for a total payment of approximately $1,523,000. The plaintiff failed to tender the full purchase price at the scheduled closing and the settlement collapsed. In September 2000, the plaintiff amended its complaint to add a claim for breach of the settlement agreement seeking specific enforcement and a claim seeking damages for unfair and deceptive trade practices in connection with the alleged breach. By amending the complaint the Company believes the plaintiff elected to abandon its underlying claims in the litigation. The Company asserted affirmative defenses including the material breach by the plaintiff. Cross motions for summary judgment were filed by the parties. In July 2002, the court granted plaintiff's motion for summary judgment as to its claim for breach of the settlement agreement and granted the Company's motion for summary judgment to dismiss plaintiff's claim for unfair and deceptive trade practices. 30 In March 2003, the court granted plaintiff's motion to compel the sale of the units to the plaintiff. The Company is considering whether to appeal. If the Company is compelled to sell the units to plaintiff, the Company would incur a loss of approximately $1,839,000, which has been accrued as a loss on sale of real estate investments in the Company's income statement during 2002. The Company is a party to various claims, complaints, and other legal actions that have arisen in the normal course of business from time to time, that are not described above. We believe that it is unlikely that the outcome of these other pending legal proceedings, in the aggregate, will have a material adverse effect upon the operations or financial position of the Company. INSURANCE AND LOSS EXPOSURE Our facilities have historically carried comprehensive insurance, including fire, earthquake, liability and extended coverage through STOR-Re, one of the Consolidated Entities, and insures portions of these risks through nationally recognized insurance carriers. STOR-Re also insures affiliates of the Company. The Company, STOR-Re, and its affiliates' maximum aggregate annual exposure for losses that are below the deductibles set forth in the third-party insurance contracts, assuming multiple significant events occur, is approximately $30,000,000. In addition, if losses exhaust the third-party insurers' limit of coverage of $125,000,000 for property coverage and $101,000,000 for general liability, our exposure could be greater. These limits are higher than estimates of maximum probable losses that could occur from individual catastrophic events (i.e., earthquake and wind damage) determined in recent engineering and actuarial studies. PSIC reinsures policies against claims for losses to goods stored by tenants at our self-storage facilities. PSIC reinsures its risks with third-party insures from any individual event that exceeds a loss of $500,000 up to the policy limit of $10,000,000. Losses that are not covered by the third-party insurers are accrued as cost of operations of the tenant reinsurance operations. DEVELOPMENT OF REAL ESTATE FACILITIES We currently have 40 projects in our development pipeline, including 15 newly developed self-storage facilities and expansions to 25 existing self-storage facilities, with total estimated development costs of $169,227,000, of which $75,781,000 has been spent at March 31, 2003. 16. Subsequent Events On April 28, 2003 we acquired through a merger all of the remaining limited partnership interest not currently owned by the Company in PS Partners IV, Ltd., a partnership which is consolidated with the Company. The acquisition cost consisted of the issuance of approximately 427,000 shares of our common stock and cash of approximately $10 million. 31 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with our consolidated financial statements and notes thereto. FORWARD LOOKING STATEMENTS: When used within this document, the words "expects," "believes," "anticipates," "should," "estimates," and similar expressions are intended to identify "forward-looking statements" within the meaning of that term in Section 27A of the Securities Exchange Act of 1933, as amended, and in Section 21F of the Securities Exchange Act of 1934, as amended. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors, which may cause the actual results and performance of the Company to be materially different from those expressed or implied in the forward looking statements. Such factors are described in Item 1A, "Risk Factors" and include changes in general economic conditions and in the markets in which the Company operates and the impact of competition from new and existing storage and commercial facilities and other storage alternatives, which could impact rents and occupancy levels at the Company's facilities; difficulties in the Company's ability to evaluate, finance and integrate acquired and developed properties into the Company's existing operations and to fill up those properties, which could adversely affect the Company's profitability; the impact of the regulatory environment as well as national, state, and local laws and regulations including, without limitation, those governing Real Estate Investment Trusts, which could increase the Company's expense and reduce the Company's cash available for distribution; consumers' failure to accept the containerized storage concept which would reduce the Company's profitability; difficulties in raising capital at reasonable rates, which would impede the Company's ability to grow; delays in the development process, which could adversely affect the Company's profitability; and economic uncertainty due to the impact of war or terrorism could adversely affect our business plan. We disclaim any obligation to publicly release the results of any revisions to these forward-looking statements reflecting new estimates, events or circumstances after the date of this report. CRITICAL ACCOUNTING POLICIES QUALIFICATION AS A REIT - INCOME TAX EXPENSE: We believe that we have been organized and operated, and we intend to continue to operate, as a qualifying REIT under the Internal Revenue Code and applicable state laws. A qualifying REIT generally does not pay corporate level income taxes on its taxable income that is distributed to its shareholders, and accordingly, we do not pay or record as an expense income tax on the share of our taxable income that is distributed to shareholders. Given the complex nature of the REIT qualification requirements, the ongoing importance of factual determinations and the possibility of future changes in our circumstances, we cannot provide any assurance that we actually have satisfied or will satisfy the requirements for taxation as a REIT for any particular taxable year. For any taxable year that we fail or have failed to qualify as a REIT and applicable relief provisions did not apply, we would be taxed at the regular corporate rates on all of our taxable income, whether or not we made or make any distributions to our shareholders. Any resulting requirement to pay corporate income tax, including any applicable penalties or interest, could have a material adverse impact on our financial condition or results of operations. Unless entitled to relief under specific statutory provisions, we also would be disqualified from taxation as a REIT for the four taxable years following the year during which qualification was lost. There can be no assurance that we would be entitled to any statutory relief. 32 IMPAIRMENT OF LONG LIVED ASSETS: Substantially all of our assets consist of long-lived assets, including real estate, assets associated with the containerized storage business, goodwill, and other intangible assets. We evaluate our goodwill for impairment on an annual basis, and on a quarterly basis evaluate our other long-lived assets for impairment. As described in Note 2 to the consolidated financial statements, the evaluation of goodwill for impairment entails valuation of the reporting unit to which goodwill is allocated, which involves significant judgment in the area of projecting earnings, determining appropriate price-earnings multiples, and discount rates. In addition, the evaluation of other long-lived assets for impairment requires determining whether indicators of impairment exist, which is a subjective process. When any indicators of impairment are found, the evaluation of such long-lived assets then entails projections of future operating cashflows, which also involves significant judgment. We have identified no such impairments at March 31, 2003. However, future events, or facts and circumstances that currently exist that we have not yet identified, could cause us to conclude in the future that our long lived assets are impaired. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations. ESTIMATED USEFUL LIVES OF LONG-LIVED ASSETS: Substantially all of our assets consist of depreciable, long-lived assets. We record depreciation expense with respect to these assets based upon their estimated useful lives. Any change in the estimated useful lives of those assets, caused by functional or economic obsolescence or other factors, could have a material adverse impact on our financial condition or results of operations. ESTIMATED LEVEL OF RETAINED RISK LIABILITIES: As described in Note 15 to the consolidated financial statements, we retain certain risks with respect to property perils, legal liability, and other such risks. In connection with our retention of these risks, we accrue losses based upon our estimated level of losses incurred using certain actuarial assumptions followed in the insurance industry and based upon our experience. While we believe that the amounts of the accrued losses are adequate, the ultimate liability may be in excess of or less than the amounts provided. ACCRUALS FOR CONTINGENCIES: We are exposed to business and legal liability risks with respect to events that have occurred, but in accordance with accounting principles generally accepted in the United States, we have not accrued for such potential liabilities because the loss is either not probable or not estimable or because we are not aware of the event. Future events and the result of pending litigation could result in such potential losses becoming probable and estimable, which could have a material adverse impact on our financial condition or results of operations. Some of these potential losses, which we are aware of, are described in Note 15 to the consolidated financial statements. ACCRUALS FOR OPERATING EXPENSES: We accrue for property tax expense and other operating expenses based upon estimates and historical trends and current and anticipated local and state government rules and regulations. If these estimates and assumptions are incorrect, our expenses could be misstated. Cost of operations, interest expense, general and administrative expense, as well as television, yellow page, and other advertising expenditures are expensed as incurred. Accordingly, the amounts incurred in an interim period may not be indicative of the amounts to be incurred in a full year. 33 Results of Operations - -------------------------------------------------------------------------------- Net income for the three months ended March 31, 2003 was $76,639,000 compared to $87,455,000 for the same period in 2002, representing a decrease of $10,816,000 or 12.4%. This decrease in net income is primarily a result of a reduction in the results of our consistent group of self-storage facilities (as discussed below), increased depreciation expense resulting primarily from new property additions, and a decrease in equity in earnings of real estate entities. The decrease in equity in earnings of real estate entities is primarily due to the reduction in earnings of PS Business Parks, Inc. ("PSB"), an unconsolidated affiliate in which we own approximately a 45% interest at March 31, 2003. PSB's earnings for the quarter ended March 31, 2003 were negatively impacted due to asset impairment charges relating to the impending sale of real estate offset partially by a gain on sale of real estate assets. Our net pro rata share of such items in the quarter ended March 31, 2003 was a reduction in equity in earnings approximating $2,130,000. In addition, during the prior year's quarter ended March 31, 2002, PSB recognized a gain on the sale of real estate of which our pro rata share was approximately $2,241,000. As a result of these items, our equity in earnings for the first quarter of 2003 was negatively impacted a total of $4,371,000 as compared to the first quarter of 2002. Net income allocable to our regular common shareholders was $34,242,000 or $0.27 per common share on a diluted basis (based on 125,232,000 weighted average diluted common equivalent shares) for the three months ended March 31, 2003 compared to $46,240,000 or $0.37 per common share on a diluted basis (based on 124,065,000 weighted average diluted common equivalent shares) for the same period in 2002, representing a decrease of 25.9% in the aggregate or 27.0% on a per share basis. Weighted average diluted shares increased from 124,065,000 for the three months ended March 31, 2002 to 125,232,000 for the three months ended March 31, 2003. This increase was due primarily to the net issuance of 1,091,608 shares during 2002 in connection with the acquisition of the remaining partnership interests in two entities in which the Company held a partial equity interest, as well as the issuance of an aggregate of 1,091,767 shares during 2002 and 2003 in connection with the exercise of employee stock options. This increase was offset partially by the impact of a 965,000 share reduction in the dilutive impact of stock options outstanding due to the exercise of employee stock options as well as an overall decrease in our average stock price, which impacts the weighted average calculation using the treasury stock method. During the three months ended March 31, 2003 and 2002, we allocated $37,022,000 and $35,840,000 of our net income (based on distributions paid), respectively, to our preferred shareholders, representing an increase of 3.3%. This increase is due to the issuance of additional preferred securities throughout 2002, offset partially by the redemption of several series of our higher coupon preferred stock in 2002. In addition, during each of the three months ended March 31, 2003 and 2002, we allocated $5,375,000 of our net income to our Equity Stock, Series A shareholders. Real Estate Operations - -------------------------------------------------------------------------------- SELF-STORAGE OPERATIONS: Our self-storage operations are by far the largest component of our operations, representing approximately 91% of our total revenues generated for the three months ended March 31, 2003. As a result of acquisitions and development of self-storage facilities, year over year comparisons as presented on the consolidated statements of income with respect to our self-storage operations are not meaningful. To enhance year over year comparisons, the following table summarizes, and the ensuing discussion describes, the operating results of (i) 1,166 self-storage facilities that are reflected in the financial statements on a stabilized basis since January 1, 2001 (the "Consistent Group"), (ii) 95 facilities that were acquired since January 1, 2000 ( the "Acquired Facilities"), (iii) 34 facilities that were owned prior to January 1, 2001 but were not stabilized due primarily to expansions in their net rentable square footage (the "Expansion Facilities") and (iv) 71 development facilities that were opened after January 1, 1999 (the "Developed Facilities"): 34
Self-Storage Operations Summary (excluding discontinued operations) Three Months Ended March 31, - ------------------------ ---------------------------------------- Percentage 2003 2002 Change ------------ ------------ ------------ (Dollar amounts in thousands) Rental Income (a): Consistent Group (b).................. $ 161,285 $ 165,524 (2.6)% Acquired Facilities (c)............... 15,502 12,815 21.0% Expansion Facilities (d).............. 5,006 4,998 0.2% Developed Facilities (e).............. 7,778 5,188 49.9% ------------ ------------ ------------ Total rental income............... 189,571 188,525 0.6% ------------ ------------ ------------ Cost of Operations: Consistent Group...................... 54,299 50,113 8.4% Acquired Facilities................... 4,795 3,594 33.4% Expansion Facilities.................. 1,982 1,837 7.9% Developed Facilities.................. 4,239 2,895 46.4% ------------ ------------ ------------ Total cost of operations.......... 65,315 58,439 11.8% ------------ ------------ ------------ Net Operating Income (before depreciation): Consistent Group...................... 106,986 115,411 (7.3)% Acquired Facilities................... 10,707 9,221 16.1% Expansion Facilities.................. 3,024 3,161 (4.3)% Developed Facilities.................. 3,539 2,293 54.3% ------------ ------------ ------------ Total net operating income........ 124,256 130,086 (4.5)% ------------ ------------ ------------ Depreciation............................. (43,274) (41,249) 4.9% ------------ ------------ ------------ Operating income...................... $ 80,982 $ 88,837 (8.8)% ============ ============ ============ Number of self-storage facilities (at end of period)............................... 1,366 1,344 1.6% Net rentable square feet (at end of period - in thousands)......................... 82,427 80,998 1.8%
(a) Rental income includes late charges and administrative fees and is net of promotional discounts given. Rental income does not include retail sales or truck rental income generated at the facilities. (b) The Consistent Group includes 1,166 facilities containing 67,776,000 net rentable square feet that have been owned prior to December 31, 2000, and operated at a mature, stabilized occupancy level since December 31, 2000. (c) The Acquired Facilities includes 95 facilities containing 5,642,000 net rentable square feet that were acquired after January 1, 2000, that were substantially all mature, stabilized facilities at the time of their acquisition. (d) The Expansion Facilities includes 34 facilities containing 3,758,000 net rentable square feet (of which 817,000 square feet is industrial space developed for containerized storage activities). These facilities were owned for the entire three year period ending December 31, 2002, however, operating results are not comparable throughout the periods presented due primarily to expansions in their net rentable square feet or their conversion into Combination Facilities. Such construction activities can cause a drop in revenue levels, as existing capacity is made unavailable in order to accommodate construction activities. During the three years ended December 31, 2002 and the three months ended March 31, 2003, we completed construction on expansion projects to these facilities with a total cost of $121.5 million. (e) The Developed Facilities includes 71 facilities containing 5,251,000 net rentable square feet (of which 878,000 square feet is industrial space initially developed for use in containerized storage activities, see "Containerized Storage" and "Discontinued Operations"). These facilities were developed and opened since January 1, 1999 at a total cost of $456.3 million. 35 For the three months ended March 31, 2003, we have increased the number of facilities included in the Consistent Group pool of facilities from 1,152 at December 31, 2002 to 1,166 facilities. The increase in the Consistent Group's pool of facilities is comprised of the inclusion of 18 facilities that were in the Acquired Facilities pool at December 31, 2002, offset by the reduction of the four Knoxville facilities that are in discontinued operations (see Note 4 to the financial statements for more information on discontinued operations). As a result of the change in the Consistent Group pool, the relative weighting of markets has changed. Accordingly, comparisons should not be made between information presented in 2002 for the Consistent Group pool of 1,152 facilities and this current pool of 1,166 facilities in order to identify trends in occupancies, realized rents per square foot, or operating results. At March 31, 2003, we owned 1,166 self-storage facilities that have operated at a stabilized level of operations since January 1, 2001. The Consistent Group of facilities contains approximately 67,776,000 net rentable square feet, representing approximately 82% of the aggregate net rentable square feet of our self-storage portfolio. Revenues and operating expenses with respect to this group of properties are set forth in the above Self-Storage Operations table under the caption, "Consistent Group." The following table sets forth additional operating data with respect to the Consistent Group of facilities:
CONSISTENT GROUP Three Months Ended March 31, - ---------------- -------------------------------------- Percentage 2003 2002 Change ------------ ------------ ------------ (Dollar amounts in thousands, except rents per square foot) Base rental income.................................. $ 164,855 $ 161,404 2.1% Promotional discounts............................... (9,976) (1,026) 872.3% ------------ ------------ ------------ Adjusted base rental income...................... 154,879 160,378 (3.4)% Late charges and administrative fees collected...... 6,406 5,146 24.5% ------------ ------------ ------------ Total rental income.............................. 161,285 165,524 (2.6)% Cost of operations: Property taxes................................. 16,536 15,781 4.8% Direct property payroll........................ 13,885 12,430 11.7% Cost of managing facilities.................... 5,051 5,052 0.0% Utilities...................................... 3,824 3,796 0.7% Repairs and maintenance........................ 3,722 3,190 16.7% Advertising and promotion...................... 3,504 2,664 31.5% Telephone reservation center................... 2,221 2,094 6.1% Property insurance............................. 1,401 1,305 7.4% Other.......................................... 4,155 3,801 9.3% ------------ ------------ ------------ Total cost of operations......................... 54,299 50,113 8.4% ------------ ------------ ------------ Net operating income before depreciation............ 106,986 115,411 (7.3)% Depreciation........................................ (35,717) (35,034) 1.9% ------------ ------------ ------------ Operating income.................................... $ 71,269 $ 80,377 (11.3)% ============ ============ ============ Gross margin (before depreciation).................. 66.3% 69.7% (4.9)% Weighted average for the period: Square foot occupancy (a)........................ 84.8% 83.5% 1.6% Realized annual rent per occupied square foot (b). $ 10.78 $ 11.34 (4.9)% REVPAR (c)....................................... $ 9.14 $ 9.46 (3.4)% Weighted average at March 31: Square foot occupancy............................ 85.3% 83.4% 2.3% In place annual rent per occupied square foot (d) $ 11.77 $ 11.55 1.9% Posted annual rent per square foot (e)........... $ 11.89 $ 11.26 5.6% Total net rentable square feet (in thousands)....... 67,776 67,776 0.0%
36 (a) Square foot occupancies represent weighted average occupancy levels over the entire period. (b) Realized annual rent per occupied square foot is computed by annualizing the result of dividing adjusted base rental income by the weighted average occupied square footage for the period. Realized rents per square foot take into consideration promotional discounts, bad debt costs, credit card fees and other costs which reduce rental income from the contractual amounts due. (c) Annualized revenue per available square foot ("REVPAR") represents annualized adjusted base rental income divided by total available net rentable square feet. (d) In place annual rent per occupied square foot represents contractual rents per occupied square foot without reductions for promotional discounts. (e) Posted annual rent per square foot represents the rents charged to new tenants prior to any promotional discounts. During the first quarter of 2003, net operating income (prior to depreciation) for the Consistent Group facilities decreased 7.3% as compared to the same period in 2002. During the first quarter of 2003, operating income (after depreciation) for the Consistent Group facilities decreased 11.3% as compared to the same period in 2002. These decreases are primarily attributable to lower adjusted base rental income due primarily to increased promotional discounts combined with increased cost of operations. During fiscal 2002, we struggled with our occupancy levels that were below the levels that were experienced in the prior year. The reduction in occupancy level had a negative impact on our property net operating income as well as the overall net income of the company. At the end of July 2002, the average occupancy level for the Consistent Group of facilities was 85.7% as compared to 91.2% at the end of July 2001, representing a reduction of 6.0%. Beginning in mid-August 2002 and through the remainder of 2002, we reinstated a promotional discount program and advertised on television in selected markets in an effort to enhance move-in activity and improve occupancy levels. This program had a positive impact upon move-in activity throughout the third and fourth quarters of 2002 and stabilized our occupancy levels. By the end of December 2002, the average occupancy level for the Consistent Group of facilities was 84.3% as compared to 85.3% at the end of December 2001, representing a reduction of 1.2% and improvement in the negative spread from July 2002. During the first quarter of 2003, we continued advertising on television and offering promotional discounts to new incoming tenants. These activities continued to have a positive impact on our occupancies. At the end of March 2003, the average occupancy level for the Consistent Group of facilities was 85.3% as compared to 83.4% at the end of March 2002, representing an increase of 2.3%. The increase in occupancy levels has come at a significant cost. Television advertising expense for the first quarter of 2003 was $1,503,000 as compared to $540,000 in the first quarter of 2002. In addition, promotional discounts totaled $9,976,000 for the first quarter of 2003 as compared to $1,026,000 for the first quarter of 2002. Therefore, despite the increase in physical occupancy, net operating income (before depreciation) for our Consistent Group of facilities was lower in the first quarter of 2003 as compared to the same period of 2002. This reduction was due primarily to higher levels of advertising expense and reduced rental income caused by increased promotional discounting. Total operating expenses increased 8.4%, due primarily to increases in payroll, advertising and promotion, property tax, and repairs and maintenance costs. Direct property payroll increased 11.7% due primarily to increased incentives to property operating personnel. Advertising and promotion increased 31.5% primarily due to increased television advertising expense. Repairs and maintenance cost have increased 16.7% for the three months ended March 31, 2003, as compared to 2002, as a result of heavy snow in the Northeastern states and costs to remedy mold issues at several facilities in Southern states. 37 OUTLOOK We expect to continue promotional discounting and television advertising during the remainder of 2003, though the level of such activities cannot be estimated at this time. The up front costs of these marketing activities, and the increases in discounts, are expected to continue to adversely impact our operating income during 2003. We believe, however, that these activities have and will continue to have a positive impact on our occupancy levels. Ultimately, we believe higher occupancy levels will result in higher rental income and allow us to begin to reduce the level of promotional discounting and television advertising expenditures. The following table summarizes additional selected financial data with respect to the Consistent Group of Facilities:
For the three months ended ---------------------------------------------------------------------- March 31, June 30, September 30, December 31, Full Year ------------- ------------- ------------- ------------- ------------- (Amounts in thousands, except for per square foot amounts) Total rental income: 2003............ $ 161,285 2002............ $ 165,524 $ 163,441 $ 168,340 $ 161,470 $ 658,775 Promotional discounts given: 2003............ $ 9,976 2002............ $ 1,026 $ 5,384 $ 4,725 $ 7,306 $ 18,441 Total cost of operations: 2003............ $ 54,299 2002............ $ 50,113 $ 50,470 $ 52,404 $ 57,793 $ 210,780 Television advertising expense: 2003............ $ 1,503 2002............ $ 540 $ 1,405 $ 1,934 $ 3,915 $ 7,794 REVPAR: 2003............ $ 9.14 2002............ $ 9.46 $ 9.34 $ 9.60 $ 9.18 $ 9.40 Weighted average realized annual rent per occupied square foot for the period: 2003............ $ 10.78 2002............ $ 11.34 $ 10.82 $ 11.20 $ 10.81 $ 11.04 Weighted average occupancy levels for the period: 2003............ 84.8% 2002............ 83.5% 86.3% 85.7% 85.0% 85.1% Weighted average occupancy at April 30, 2003............ 86.6% 2002............ 85.4%
As indicated on the above table, the weighted average occupancy of the Consistent Group facilities was 86.6% at April 30, 2003 as compared to 85.4% at April 30, 2002, representing an increase of 1.4%. This increase, however, has come at a significant cost, as promotional discounts and television advertising costs are expected to be higher in quarter ended June 30, 2003 than in the same period in 2002. We are continuously evaluating our call volume, reservation activity, and move-in/move-out rates for each of our markets relative to our marketing activities and rental rates. In addition, we are evaluating market supply and demand factors and based upon these analyses we are continuing to adjust our marketing activities in an effort to increase our occupancy levels and ultimately our rental income. 38 ANALYSIS OF REGIONAL TRENDS The following table sets forth regional trends in our consistent group of facilities:
Consistent Group Operating Trends by Region: Three months ended March 31, -------------------------------------- Percentage 2003 2002 Change ------------ ------------ ------------ (Dollar amounts in thousands, except rents per square foot) Rental income: Southern California (120 facilities)...................... $ 27,130 $ 26,342 3.0% Northern California (108 facilities)...................... 19,061 19,452 (2.0)% Texas (140 facilities).......... 15,045 15,831 (5.0)% Florida (108 facilities)........ 13,632 13,937 (2.2)% Illinois (82 facilities)........ 12,296 13,304 (7.6)% Georgia (56 facilities)......... 5,701 5,903 (3.4)% All other states (552 facilities) 68,420 70,755 (3.3)% ------------ ------------ ------------ Total rental income................. 161,285 165,524 (2.6)% Cost of operations: Southern California.............. 6,593 5,761 14.4% Northern California.............. 5,071 4,348 16.6% Texas............................ 6,309 5,992 5.3% Florida.......................... 5,062 4,379 15.6% Illinois......................... 5,531 5,224 5.9% Georgia.......................... 1,976 1,754 12.7% All other states................. 23,757 22,655 4.9% ------------ ------------ ------------ Total cost of operations............ 54,299 50,113 8.4% Net operating income (before depreciation): Southern California.............. 20,537 20,581 (0.2)% Northern California.............. 13,990 15,104 (7.4)% Texas............................ 8,736 9,839 (11.2)% Florida.......................... 8,570 9,558 (10.3)% Illinois......................... 6,765 8,080 (16.3)% Georgia.......................... 3,725 4,149 (10.2)% All other states................. 44,663 48,100 (7.1)% ------------ ------------ ------------ Total net operating income.......... $ 106,986 $ 115,411 (7.3)% Weighted average occupancy: Southern California.............. 88.5% 86.1% 2.8% Northern California.............. 85.5% 84.2% 1.5% Texas............................ 84.5% 83.6% 1.1% Florida.......................... 86.4% 84.4% 2.4% Illinois......................... 82.7% 82.1% 0.7% Georgia.......................... 85.0% 82.3% 3.3% All other states................. 83.7% 83.0% 0.8% ------------ ------------ ------------ Total weighted average occupancy.... 84.8% 83.5% 1.6% Realized annual rent per occupied square foot: Southern California.............. $ 15.73 $ 15.83 (0.6)% Northern California.............. 14.70 15.34 (4.2)% Texas............................ 7.89 8.47 (6.8)% Florida.......................... 9.65 10.23 (5.7)% Illinois......................... 11.63 12.74 (8.7)% Georgia.......................... 7.87 8.67 (9.2)% All other states................. 9.99 10.51 (4.9)% ------------ ------------ ------------ Total realized annual rent per occupied square foot:............. $ 10.78 $ 11.34 (4.9)%
39 Self-Storage Operations - Acquired Facilities The results of 18 facilities acquired from related parties during 2000 at a stabilized level of operations that were presented in the "Acquired Facilities" at December 31, 2002 are now included in the Consistent Group for the March 31, 2003 presentation. As a result, the number of facilities included in the "Acquired Facilities" decreased from 113 at December 31, 2002 to 95 at March 31, 2003. The "Acquired Facilities" at March 31, 2003 are comprised of 95 self-storage facilities containing 5,642,000 net rentable square feet that were acquired in 2000, 2001, and 2002. These facilities were substantially all mature, stabilized facilities at the time of their acquisition. The following table summarizes operating data with respect to these 95 facilities:
ACQUIRED FACILITIES: Three months ended March 31, -------------------------------------- 2003 2002 Change ------------ ------------ ------------ (Dollar amounts in thousands) Rental income (a): Self-storage facilities acquired in 2002 (a) $ 14,317 $ 11,710 $ 2,607 Self-storage facility acquired in 2001 (b).. 131 96 35 Self-storage facilities acquired in 2000 (c) 1,054 1,009 45 ------------ ------------ ------------ Total rental income....................... 15,502 12,815 2,687 ------------ ------------ ------------ Cost of operations: Self-storage facilities acquired in 2002 (a) 4,277 3,131 1,146 Self-storage facility acquired in 2001 (b).. 39 38 1 Self-storage facilities acquired in 2000 (c) 479 425 54 ------------ ------------ ------------ Total cost of operations.................. 4,795 3,594 1,201 ------------ ------------ ------------ Net operating income before depreciation: - ---------------------------------------- Self-storage facilities acquired in 2002 (a) 10,040 8,579 1,461 Self-storage facility acquired in 2001 (b).. 92 58 34 Self-storage facilities acquired in 2000 (c) 575 584 (9) ------------ ------------ ------------ Net operating income...................... 10,707 9,221 1,486 Depreciation.................................. (2,891) (2,404) (487) ------------ ------------ ------------ Operating Income............................ $ 7,816 $ 6,817 $ 999 ============ ============ ============ Weighted average square foot occupancy during the - ------------------------------------------------- period: - ------- Self-storage facilities acquired in 2002 (a) 85.7% 82.7% 3.6% Self-storage facility acquired in 2001 (b).. 84.5% 50.8% 66.3% Self-storage facilities acquired in 2000 (c) 73.5% 63.6% 15.6% ------------ ------------ ------------ 84.6% 80.5% 5.1% ============ ============ ============ Number of self-storage facilities (at end of 95 88 7 period)........................................ Net rentable square feet (in thousands, at end of period)..................................... 5,642 5,243 399 Cumulative acquisition cost (at end of period). $ 405,684 $ 380,719 $ 24,965
(a) The 2002 acquisitions includes 47 properties acquired on January 16, 2002 from an affiliated development joint venture at a total cost of $269,898,000, 31 properties acquired on January 1, 2002 in connection with business combinations with two affiliated partnerships at a total cost of $60,528,000, and 9 facilities acquired from third parties at a total cost of $30,117,000. (b) The 2001 acquisition was acquired from a third party at a cost of $3,503,300. (c) The 2000 acquisitions are comprised of seven facilities acquired from third parties at a total cost of $41,638,000. 40 Rental income and cost of operations for the Acquired Facilities have increased significantly in the three months ended March 31, 2003 as compared to 2002, due primarily to the acquisition of new facilities in 2002. Similar to our Consistent Group of facilities, the Acquired Facilities have experienced operating difficulties over the past year. Marketing and promotional strategies, as described above with respect to our Consistent Group, will continue to be employed in 2003 to enhance the occupancy levels and rental income of the Acquired Facilities. Self-Storage Operations - Expansion Facilities Since January 1, 2000, we expanded 34 self-storage facilities or converted them to Combination Facilities (defined below). These activities caused a drop in revenue levels, as existing capacity was made unavailable in order to accommodate construction activities and, as a result, the operating results are not comparable. At March 31, 2003, the weighted average occupancy level was approximately 73% as compared to 66% one year earlier. The operating results for these facilities are presented in the Self-Storage Operations table above under the caption, "Expansion Facilities." Depreciation expense with respect to the expansion facilities was $1,517,000 and $1,649,000 for the three months ended March 31, 2003 and 2002, respectively. These 34 facilities contain approximately 3,758,000 net rentable square feet at March 31, 2003 (which includes the expanded space, and 817,000 square feet of industrial space developed for containerized storage activities - see "Containerized Storage" and "Discontinued Operations"). The aggregate construction costs to complete these expansions totaled approximately $121,510,000. A portion of the 817,000 net rentable square feet of industrial space included in these facilities was previously used by the discontinued containerized storage operations. As described under "Liquidity and Capital Resources," we are converting a portion of this industrial space into traditional self-storage units. Self-Storage Operations -Developed Facilities Since January 1, 1999, we have opened 54 newly developed self-storage facilities and 17 facilities that contain both self-storage and portable self-storage at the same location ("Combination Facilities"). These newly developed facilities have an aggregate of 5,251,000 net rentable square feet (of which 878,000 net square feet is industrial space developed for containerized storage activities - see "Containerized Storage" and "Discontinued Operations"). Aggregate development cost for these 71 facilities was approximately $456.3 million. The operating results of the self-storage facilities and Combination Facilities are reflected in the Self-Storage Operations table under the caption, "Developed Facilities." 41 The following table sets forth the operating results and selected operating data with respect to the Developed Facilities: Three months ended March 31, ------------------------------------- 2003 2002 Change ----------- ----------- ----------- (Amounts in thousands, except No. of facilities) Rental income: - -------------- Self-storage facilities............ $ 5,636 $ 3,819 $ 1,817 Combination Facilities............. 2,142 1,369 773 ----------- ----------- ----------- Total rental income.............. 7,778 5,188 2,590 ----------- ----------- ----------- Cost of operations: Self-storage facilities............ 3,057 1,897 1,160 Combination Facilities............. 1,182 998 184 ----------- ----------- ----------- Total cost of operations......... 4,239 2,895 1,344 ----------- ----------- ----------- Net operating income before depreciation: - ----------------------------------------- Self-storage facilities............ 2,579 1,922 657 Combination Facilities............. 960 371 589 ----------- ----------- ----------- Net operating income............. 3,539 2,293 1,246 Depreciation......................... (3,149) (2,162) (987) ----------- ----------- ----------- Operating income................... $ 390 $ 131 $ 259 =========== =========== =========== Weighted average square foot occupancies - ---------------------------------------- for the period: - --------------- Self-storage facilities............ 57.2% 50.3% 13.7% Combination Facilities............. 65.3% 39.4% 65.7% ----------- ----------- ----------- Total............................ 59.0% 47.4% 24.5% =========== =========== =========== SELF-STORAGE FACILITIES, AT END OF PERIOD: Number of facilities............... 54 40 14 Net rentable square feet........... 3,407 2,491 916 Total development cost............. $ 302,118 $ 206,603 $ 95,515 COMBINATION FACILITIES, AT END OF PERIOD: Number of facilities............... 17 16 1 Net rentable square feet........... 1,844 1,730 114 Total development cost............. $ 154,177 $ 147,363 $ 6,814 42 The following table summarizes operating data for the 54 newly developed self-storage facilities that opened since January 1, 1999:
DEVELOPED SELF-STORAGE FACILITIES: Three Months Ended March 31, -------------------------------------- 2003 2002 Change ------------ ------------ ------------ (Dollar amounts in thousands) Rental income: Self-storage facilities developed in 2003... $ 4 $ - $ 4 Self-storage facilities developed in 2002... 1,127 7 1,120 Self-storage facilities developed in 2001... 1,296 936 360 Self-storage facilities developed in 2000... 2,427 2,144 283 Self-storage facilities developed in 1999... 782 732 50 ------------ ------------ ------------ Total rental income....................... 5,636 3,819 1,817 ------------ ------------ ------------ Cost of operations: Self-storage facilities developed in 2003... 75 - 75 Self-storage facilities developed in 2002... 815 36 779 Self-storage facilities developed in 2001... 821 673 148 Self-storage facilities developed in 2000... 1,047 937 110 Self-storage facilities developed in 1999... 299 251 48 ------------ ------------ ------------ Total cost of operations.................. 3,057 1,897 1,160 ------------ ------------ ------------ Net operating income before depreciation: Self-storage facilities developed in 2003... (71) - (71) Self-storage facilities developed in 2002... 312 (29) 341 Self-storage facilities developed in 2001... 475 263 212 Self-storage facilities developed in 2000... 1,380 1,207 173 Self-storage facilities developed in 1999... 483 481 2 ------------ ------------ ------------ Net operating income........................ 2,579 1,922 657 Depreciation................................... (2,053) (1,268) (785) ------------ ------------ ------------ Operating income............................ $ 526 $ 654 $ (128) ============ ============ ============ Weighted average square foot occupancy during the period: Self-storage facilities opened in 2003...... 6.5% - - Self-storage facilities opened in 2002...... 39.6% 1.9% 1984.2% Self-storage facilities opened in 2001...... 54.3% 35.6% 52.5% Self-storage facilities opened in 2000...... 81.9% 67.9% 20.6% Self-storage facilities opened in 1999...... 90.0% 83.2% 8.2% ------------ ------------ ------------ 57.2% 50.3% 13.7% ============ ============ ============ Number of facilities: Self-storage facilities developed in 2003... 5 - 5 Self-storage facilities developed in 2002... 14 5 9 Self-storage facilities developed in 2001... 12 12 - Self-storage facilities developed in 2000... 18 18 - Self-storage facilities developed in 1999... 5 5 - ------------ ------------ ------------ 54 40 14 ============ ============ ============ Cumulative Development Cost: Self-storage facilities developed in 2003... $ 33,744 $ - $ 33,744 Self-storage facilities developed in 2002... 93,479 31,708 61,771 Self-storage facilities developed in 2001... 66,905 66,905 - Self-storage facilities developed in 2000... 82,819 82,819 - Self-storage facilities developed in 1999... 25,171 25,171 - ------------ ------------ ------------ $ 302,118 $ 206,603 $ 95,515 ============ ============ ============
43 Unlike many other forms of real estate, we are unable to pre-lease our newly developed facilities due to the nature of our tenants. Accordingly, at the time a newly developed facility first opens for operations, the facility is entirely vacant, generating no rental income. Historically, we estimated that on average it took approximately 24 months for a newly developed facility to fill up and reach a targeted occupancy level of approximately 90%. We believe that the current economic environment has extended the fill-up period beyond 24 months notwithstanding our marketing efforts to enhance the fill-up process. Similar to our Consistent Group of facilities, the newly developed self-storage facilities participated in promotional discounting and advertising activities to enhance occupancy levels. During the three months ended March 31, 2003, the newly developed self-storage facilities had a weighted average occupancy level of approximately 57.2%. Property operating expenses are substantially fixed, consisting primarily of payroll, property taxes, utilities, and marketing costs. The rental revenue of a newly developed facility will generally not cover its property operating expenses (excluding depreciation) until the facility has reach an occupancy level of approximately 30% to 34%. However, at that occupancy level, the rental revenues from the facility are still not sufficient to cover related depreciation expense and cost of capital with respect to the facility's development cost. During construction of the self-storage facility, we capitalize interest costs and include such cost as part of the overall development cost of the facility. Once the facility is opened for operations, interest is no longer capitalized. Due to the relationship between the generation of rental income and immediate recognition of expenses upon opening of a facility, our development activities have had a negative impact on our net income. We estimate that our net income has been negatively impacted by approximately $7,982,000 and $5,940,000, in the three months ended March 31, 2003 and 2002, respectively, as a result of the difference between the revenues generated by the Developed Facilities and the related operating costs denoted above. These amounts include approximately $3,149,000 and $2,162,000, in the three months ended March 31, 2003 and 2002, respectively, in depreciation expense. We continue to develop facilities, despite the short-term earnings dilution experienced during the fill-up period, because we believe that the ultimate returns on developed facilities are favorable. In addition, we believe that it is advantageous for us to continue to expand our asset base and benefit from the resultant increased critical mass, with facilities that will improve our portfolio's overall average construction and location quality. We expect that over at least the next 24 months, the Developed Facilities will continue to have a negative impact to our earnings, however, to a much lesser degree than experienced in 2002. Furthermore, the 40 expansion and newly developed facilities in our development pipeline described in "Liquidity and Capital Resources - Acquisition and Development of Facilities" that will be opened for operation over the next 12 - 24 months will also negatively impact our earnings until they reach a stabilized occupancy level. COMMERCIAL PROPERTY OPERATIONS: Commercial property operations included in our consolidated financial statements include commercial space owned by the Company and entities consolidated by the Company. We have a much larger interest in commercial properties through our ownership interest in PSB. Our investment in PSB is accounted for on the equity method of accounting, and accordingly our share of PSB's earnings is reflected as "Equity in earnings of real estate entities", see below. Our commercial operations are comprised of 992,000 net rentable square feet of commercial space operated at certain of the self-storage facilities, and three stand-alone commercial facilities having a total of 195,000 net rentable square feet. In addition, we own an industrial building with 67,000 net rentable square feet that was opened in 2001. This facility was previously used by the containerized storage operations, and is now classified as "real estate facilities held for sale" on our March 31, 2003 balance sheet. 44 The following table sets forth the historical commercial property amounts included in the financial statements: Commercial Property Operations (excluding discontinued operations): ------------------------------------ For the three months ended March 31, ----------------------- 2003 2002 Change ---------- ---------- ---------- (Amounts in thousands) Rental income ............... $2,846 $2,956 $(110) Cost of operations............ 1,193 1,092 101 ---------- ---------- ---------- Net operating income....... 1,653 1,864 (211) Depreciation expense.......... 625 699 (74) ---------- ---------- ---------- Operating income........... $1,028 $1,165 $(137) ========== ========== ========== The decrease in rental income for March 31, 2003 as compared to the same period in 2002 is due primarily to a vacancy in one of the three stand-alone commercial facilities, which caused a reduction in rental income of approximately $138,000. During 2002, we sold one of our commercial facilities to a third party for an aggregate $3.9 million in cash. The historical operations with respect to this facility are classified as "Discontinued Operations" in our income statement and are not included in the above table. CONTAINERIZED STORAGE OPERATIONS: In August 1996, Public Storage Pickup & Delivery ("PSPUD"), a subsidiary of the Company, made its initial entry into the containerized storage business through its acquisition of a single facility operator located in Irvine, California. At March 31, 2003, PSPUD operated 33 facilities in 12 states, which are located in major markets in which we have significant market presence with respect to our traditional self-storage facilities. During 2002, we reevaluated our operational strategy and closed, or are in the process of closing, 22 of the 55 containerized storage facilities that were open at January 1, 2002 (22 facilities herein referred to as the "Closed Facilities"). The operations with respect to the Closed Facilities, including historical operating results for previous periods, are not included in the table below and instead are included in Discontinued Operations. PSPUD's operations, which exclude the Closed Facilities, are reflected on the table below: Containerized storage (excluding discontinued operations): - ------------------------------------ For the three months ended March 31, ----------------------- 2003 2002 Change ---------- ---------- ---------- (Dollar amounts in thousand) Rental and other income ............ $9,481 $8,198 $1,283 ---------- ---------- ---------- Cost of operations: Direct operating costs.......... 5,757 5,291 466 Facility lease expense.......... 620 666 (46) ---------- ---------- ---------- Total cost of operations..... 6,377 5,957 420 ---------- ---------- ---------- Operating income prior to depreciation.................. 3,104 2,241 863 Depreciation expense (a)............ (2,021) (1,451) (570) ---------- ---------- ---------- Operating income.................... $1,083 $790 $293 ========== ========== ========== (a) Depreciation expense principally relates to the depreciation related to the containers, however, depreciation expense for the three months ended March 31, 2003 and 2002 includes $390,000 and $224,000, respectively, with respect to real estate facilities. 45 Rental and other income includes monthly rental charges to customers for storage of the containers, service fees charged for pickup and delivery of containers to customers' homes. Rental income increased to $9,481,000 for the three months ended March 31, 2003, as compared to $8,198,000 for the same period in 2002 primarily as a result of higher per container rents and an increase in the number of occupied containers. At March 31, 2003, there were approximately 48,128 occupied containers in the 33 facilities that are reflected in these "ongoing" operations. We continue to evaluate the business operations, and additional facilities may be closed. Direct operating costs principally includes payroll, equipment lease expense, utilities and vehicle expenses (fuel and insurance). Depreciation expense with respect to the containers and other non-real estate assets of the containerized storage operations increased $404,000 due primarily to reduced estimated useful lives of the containers and other assets of the containerized storage operations. We reevaluated the historical results with respect to wear and functional obsolescence of these assets. Based upon the results of this review, we decreased the estimated useful lives with respect to these assets effective January 1, 2003. We expect that the ongoing depreciation with respect to the containerized storage operations will remain at the level experienced in the first quarter of 2003. At March 31, 2003, nine of the 33 containerized storage facilities are leased from third parties. The remaining 24 facilities were operated in facilities owned by the Company, comprised of 19 Combination Facilities with an aggregate of 994,000 square feet of industrial space (this square footage is a component of the total net rentable square footage of the Expansion Facilities and the Developed Facilities in the table above) and five industrial facilities having an aggregate of 420,000 net rentable square feet. The containerized storage operations may continue to adversely impact our future earnings and cash flows. There can be no assurance as to the level of the containerized storage business's expansion, level of gross rentals, level of move-outs or profitability. See "Discontinued Operations" below for a discussion of operating results of the Closed Facilities. TENANT REINSURANCE OPERATIONS: On December 31, 2001, we acquired PS Insurance Company, Ltd. ("PS Insurance") from a related party. PS Insurance reinsures policies against losses to goods stored by tenants in our self-storage facilities. The operations of PS Insurance are included in the income statement under "Revenues - tenant reinsurance premiums" and "Cost of operations - tenant reinsurance." For the three months ended March 31, 2003 and 2002, the tenant reinsurance business earned $5,215,000 and $4,575,000, respectively, in revenues and incurred $2,699,000 and $2,293,000, respectively, in operating expenses, generating a net operating profit of $2,516,000 and $2,282,000, respectively. The level of tenant reinsurance revenues is largely dependent upon our occupancy level and move-in activity. As of March 31, 2003, approximately 38% of our self-storage tenant base have such policies. New insurance business comes from tenants who sign up for insurance as they move into our self-storage facilities. We have outside third-party insurance coverage for losses from any individual event that exceeds a loss of $500,000, to a limit of $10,000,000. Losses below these amounts are recorded as cost of operations for the tenant reinsurance operations. Equity in earnings of real estate entities: In addition to our ownership of equity interests in PSB, we had general and limited partnership interests in seven limited partnerships at March 31, 2003 (PSB and the limited partnerships are collectively referred to as the "Unconsolidated Entities"). Due to our limited ownership interest and limited control of these entities, we do not consolidate the accounts of these entities for financial reporting purposes, and account for such investments using the equity method. Equity in earnings of real estate entities for the three months ended March 31, 2003 and 2002 consists of our pro rata share of the Unconsolidated Entities based upon our ownership interest for the period. The following table sets forth the significant components of equity in earnings of real estate entities: 46 Historical summary: Three Months Ended March 31, ------------------------ Dollar 2003 2002 Change ----------- ---------- -------- (Amounts in thousands) Property operations: PSB $14,700 $15,423 $(723) Disposed investments (1)............... - 288 (288) Other investments (2).................. 1,428 1,806 (378) ----------- ---------- -------- 16,128 17,517 (1,389) ----------- ---------- -------- Depreciation: PSB.................................... (6,029) (6,101) 72 Disposed investments (1)............... - (65) 65 Other investments (2).................. (265) (205) (60) ----------- ---------- -------- (6,294) (6,371) 77 ----------- ---------- -------- Other: (3) PSB (4)................................ (5,252) (2,208) (3,044) Disposed investments (1)............... - - - Other investments (2).................. 105 318 (213) ----------- ---------- -------- (5,147) (1,890) (3,257) ----------- ---------- -------- Total equity in earnings of real estate entities................................. $4,687 $9,256 $(4,569) =========== ========== ======== (1) Amounts include our pro rata share of the earnings for the Development Joint Venture. On January 16, 2002, we acquired a controlling interest in this partnership and began to consolidate the operations of this partnership, and no longer account for our interest in this partnership using the equity method (see Note 3 to the consolidated financial statements). (2) Amounts include equity in earnings recorded for investments that have been held consistently throughout each of the three months ended March 31, 2003 and 2002. (3) "Other" reflects our share of general and administrative expense, interest expense, interest income, and other non-property, non-depreciation related operating results of these entities. (4) "Other" with respect to PSB for the three months ended March 31, 2003 includes a $2,130,000 reduction to equity in earnings, representing our net pro-rata share of PSB's impairment charges related to the impending sale of real estate partially offset by a gain on the sale of real estate assets. Amounts for the three months ended March 31, 2002 include our $2,241,000 pro-rata share of PSB's gain on disposition of real estate investments. The decrease in equity in earnings of real estate entities is primarily due to the reduction in earnings of PSB. PSB's earnings for the quarter ended March 31, 2003 were negatively impacted due to asset impairment charges relating to the impending sale of real estate offset partially by a gain on sale of real estate assets. Our net pro rata share of such items in the quarter ended March 31, 2003 was a reduction in equity in earnings approximating $2,130,000. In addition, during the prior year's quarter ended March 31, 2002, PSB recognized a gain on the sale of real estate of which our pro rata share was approximately $2,241,000. As a result of these items, our equity in earnings for the first quarter of 2003 was negatively impacted a total of $4,371,000 as compared to the first quarter of 2002. Equity in earnings of PSB represents our pro rata share (an average of approximately 44% for the quarter ended March 31, 2003 and 2002) of the earnings of PSB. As of March 31, 2003, we owned 5,418,273 common shares and 7,305,355 operating partnership units (units which are convertible into common shares on a one-for-one basis) in PSB. At March 31, 2003, PSB owned and operated 14.5 million net rentable square feet of commercial space located in nine states. PSB also manages approximately 1,196,000 net rentable square feet of commercial space owned by the Company and affiliated entities at March 31, 2003 pursuant to property management agreements. 47 Accordingly, our future equity income from PSB will be dependent entirely upon PSB's operating results. PSB's filings and selected financial information can be accessed through the Securities and Exchange Commission, and on its website, www.psbusinessparks.com. On January 16, 2002, we acquired the remaining 70% ownership interest in the Development Joint Venture for cash totaling approximately $153,078,000. As a result, we began consolidating the operating results of the Development Joint Venture and no further equity in earnings will be recorded with respect to this entity for periods after January 16, 2002. Our earnings with respect to this entity is included in the table above in the line-item "Disposed Investments." The "Other Investments" includes our equity in earnings with respect to our pro-rata share of earnings with respect to seven limited partnerships, for which we held an approximately consistent level of equity interest during each of the three months ended March 31, 2003 and 2002. These limited partnerships were formed by the Company during the 1980's. The Company is the general partner in each limited partnership, and manages each of these facilities for a management fee that is included in "interest and other income." The limited partners consist of numerous individual investors, including the Company, which throughout the 1990's acquired units of limited partnership interests in these limited partnerships in various transactions. Our future earnings with respect to the "Other investments" will be dependent upon the operating results of the 36 self-storage facilities (2,186,000 net rentable square feet) that these entities own. The operating characteristics of these facilities are similar to those of the Company's self-storage facilities, and are subject to the same operational issues as the Consistent Group of self-storage facilities as discussed above. See Note 6 to the consolidated financial statements for the operating results of these entities for the months ended March 31, 2003 and 2002. Other Income and Expense Items - -------------------------------------------------------------------------------- INTEREST AND OTHER INCOME: Interest in other income includes (i) the net operating results from our property management operations, (ii) merchandise sales and consumer truck rentals and (iii) interest income. Interest and other income has decreased from $1,708,000 in the three months ended March 31, 2002 to $1,699,000 for the three months ended March 31, 2003. This represents a decrease in interest on outstanding cash balances due to reductions in the interest rates on outstanding balances and a reduction in property management operations due to the consolidation of the Development Joint Venture as described in Note 3 to the financial statements, offset partially by improved operating results on our merchandise and truck rental operations. DEPRECIATION AND AMORTIZATION: Depreciation and amortization expense has increased $2,521,000 to $45,920,000 for the three months ended March 31, 2003 as compared to $43,399,000 for the same period in 2002. Included in depreciation expense with respect to our real estate facilities was $42,183,000 and $40,521,000 for the three months ended March 31, 2003 and 2002, respectively. The increase in such depreciation is principally the result of property acquisitions and newly developed facilities opened for operations. Included in depreciation and amortization expense for the three months ended March 31, 2003 and 2002 is $2,086,000 and $1,227,000, respectively, with respect to other assets, principally depreciation of equipment and containers associated with the containerized storage operations, which have increased as discussed in Containerized Storage Operations above. Included in depreciation and amortization expense for each of the three months ended March 31, 2003 and 2002 is $1,651,000 with respect to the amortization of property management contracts. GENERAL AND ADMINISTRATIVE: General and administrative expense for the three months ended March 31, 2003 increased 6.3% to $4,250,000 as compared to $4,000,000 for the same period in 2002. General and administrative expense principally consists of state income taxes, investor relation expenses, certain overhead associated with the acquisition and development of real estate facilities, corporate payroll, and overhead associated with the containerized storage business. 48 Beginning January 1, 2002, we began to expense the fair value of stock options in accordance with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"). As indicated by FAS 123, the estimated fair value of stock options issued after January 1, 2002 will be expensed over their vesting period. The total of such expense included in general and administrative expense was approximately $99,000 for the three months ended March 31, 2003 (none in the same period of 2002). Based upon stock options granted between January 1, 2002 and March 31, 2003, the total expected annual expense for 2003 is approximately $395,000. In addition, pro-forma disclosures of the impact of stock options issued prior to January 1, 2002 (which are not expensed per the transition provisions of FAS 123) are presented in Note 12 to the financial statements. The impact of stock option expense will continue to increase in the future to the extent that additional stock options are granted. INTEREST EXPENSE: Interest expense was $453,000 and $1,102,000 for the three months ended March 31, 2003 and 2002, respectively. Capitalized interest expense totaled $1,525,000 and $1,846,000 for the three months ended March 31, 2003 and 2002, respectively. The decrease in interest expense in 2003 compared to 2002 is principally the result of lower interest expense on notes payable due to scheduled principal repayments and a $295,000 reduction in interest on line of credit borrowings, offset by a reduction in capitalized interest from $1,846,000 in the three months ended March 31, 2002 to $1,525,000 for the three months ended March 31, 2003. MINORITY INTEREST IN INCOME: Minority interest in income represents the income allocable to equity interests in the Consolidated Entities, which are not owned by the Company. The following table summarizes minority interest in income for the three months ended March 31, 2003 and 2002 (amounts in thousands): Minority Interest in Income for the Three Months Ended March 31, ----------------------------------- Description 2003 2002 - -------------------------------------------- ------------------- --------------- Preferred partnership interests............ $ 6,726 $ 6,726 Consolidated Development Joint Venture (a). 743 307 Convertible Partnership Units (b).......... 65 89 Acquired minority interests (c) ........... - 901 Other minority interests (d)............... 3,134 3,319 ------------------- --------------- Total minority interests in income......... $ 10,668 $ 11,342 =================== =============== (a) These amounts reflect income allocated to the minority interests in the Consolidated Development Joint Venture. Included in minority interest in income is $851,000 and $746,000 in depreciation expense for the three months ended March 31, 2003 and 2002, respectively. (b) These amounts reflect the minority interests represented by the Convertible Partnership Units (see Note 9 to the consolidated financial statements). Included in minority interest is $97,000 and $85,000 in depreciation expense for the three months ended March 31, 2003 and 2002, respectively. (c) These amounts reflect income allocated to minority interests that the Company acquired since December 31, 2001 and are no longer outstanding at March 31, 2003. Included in minority interests is $606,000 in depreciation expense for the three months ended March 31, 2002. (d) These amounts reflect income allocated to minority interests that were outstanding consistently throughout the three months ended March 31, 2003 and 2002. Included in minority interest in income is $698,000 and $818,000 in depreciation expense for the three months ended March 31, 2003 and 2002, respectively. 49 Minority interest in income - preferred partnership interests represents the income allocable to holders of our preferred partnership units. Throughout the periods ending March 31, 2003 and 2002, we had outstanding $240,000,000 of our 9.5% Series N Cumulative Redeemable Perpetual Preferred Units which were issued on March 17, 2000, and $45,000,000 of our 9.125% Series O Cumulative Redeemable Perpetual Preferred Units which were issued on March 29, 2000. For each of the three months ended March 31, 2003 and 2002, the holders of these preferred units were paid aggregate distributions of approximately $6,726,000 and received a corresponding allocation of minority interest in earnings. We estimate that during the year ended March 31, 2003 the preferred units will be allocated $26,904,000 in income. These preferred units are not redeemable during the first 5 years; thereafter, at our option, we can call the units for redemption at the issuance amount plus any unpaid distributions. The increase in minority interest in income with respect to the Consolidated Development Joint Venture is due to an increase in income with respect to the properties owned by this entity. Included in minority interest in income for the Consolidated Development Joint Venture is depreciation expense of $851,000 and $746,000 for the three months ended March 31, 2003 and 2002, respectively. We expect that minority interest in income with respect to the Consolidated Development Joint Venture will continue to increase as the properties owned by this entity, substantially all of which are newly developed facilities in the fill-up stage, continue to increase their occupancy to a stabilized occupancy level and increase the earnings of this entity. The acquired minority interests reflects interests in the consolidated entities that the Company acquired since January 1, 2002 and are therefore no longer outstanding. There will be no further income allocated to these interests. Other minority interests reflect income allocated to minority interests that have maintained a consistent level of interest throughout the three months ended March 31, 2003 and 2002, comprised of investments in the Consolidated Entities and the Convertible Partnership Units described in Note 9 to the Company's financial statements. The level of income allocated to these interests in the future is dependent upon the operating results of the storage facilities that these entities own, as well as any minority interests that the Company acquires in the future. On April 28, 2003, we acquired all of the remaining limited partnership interest not currently owned by the Company in PS Partners IV, Ltd., a partnership which is consolidated with the Company, for an aggregate of $23,351,000. Included in minority interest in income for the three months ended March 31, 2003 and 2002, with respect to these interests was approximately $359,000 and $393,000, respectively, including $143,000 and $174,000, respectively, in depreciation expense. Upon acquisition of these interests, no further income will be allocated to these interests. DISCONTINUED OPERATIONS: During the first quarter of 2003, we entered into a business plan to exit the Knoxville, Tennessee market, and listed our four self-storage facilities (the "Knoxville Facilities") in this market for sale. Accordingly, the operations of these four facilities for current and prior periods has been reclassified into the line-item "Discontinued Operations" on our income statement. During 2002, we adopted a business plan that included the closure of several non-strategic containerized storage facilities (the "Closed Facilities"), representing components of our containerized storage business. The related assets of the Closed Facilities (consisting primarily of storage containers) were deemed not recoverable from future operations, and as a result an asset impairment charge for the excess of these assets' net book value over their fair value was recorded in the latter half of 2002 totaling $6,187,000. In addition, lease termination costs, representing the expected remaining lease liability following closure of the facilities, were recorded in the amount of $2,447,000 during the latter half of 2002. Also, during 2002, we sold one of our commercial facilities to a third party. 50 The following table summarizes the historical operations of the Knoxville Facilities, the Closed Facilities, and the sold commercial facility: Discontinued Operations: Three months ended March 31, - ------------------------- --------------------------------------- 2003 2002 Change ----------- ----------- ----------- (Amounts in thousands) Rental income (a): Knoxville Facilities............ $ 388 $ 382 $ 6 Closed Facilities............... 1,533 3,501 (1,968) Sold commercial facility........ - 115 (115) ----------- ----------- ----------- Total rental income........ 1,921 3,998 (2,077) ----------- ----------- ----------- Cost of operations (a): Knoxville Facilities............ 170 156 14 Closed Facilities............... 1,630 3,361 (1,731) Sold commercial facility........ - 22 (22) ----------- ----------- ----------- Total cost of operations... 1,800 3,539 (1,739) ----------- ----------- ----------- Depreciation (a): Knoxville Facilities............ 120 119 1 Closed Facilities............... - 450 (450) Sold commercial facility........ - 29 (29) ----------- ----------- ----------- Total depreciation ........ 120 598 (478) ----------- ----------- ----------- Net discontinued operations....... $ 1 $ (139) $ 140 =========== =========== =========== (a) These amounts represent the historical operations of the Knoxville Facilities, the Closed Containerized Operations and the sold commercial facility, and include amounts previously classified as rental income, cost of operations, and depreciation expense in the financial statements in prior periods. Many of the Closed Facilities are in the process of closing which may take up to several months to complete. We expect that these facilities will continue to generate operating losses until final closure. GAIN (LOSS) IN DISPOSITION OF REAL ESTATE: In the three months ended March 31, 2003, we sold two real estate facilities and a parcel of land for an aggregate of $7,713,000 in cash, and recorded a gain on disposition of real estate of $14,000. Liquidity and Capital Resources - -------------------------------------------------------------------------------- We believe that our internally generated net cash provided by operating activities will continue to be sufficient to enable us to meet our operating expenses, capital improvements, debt service requirements and distributions to shareholders for the foreseeable future. Operating as a real estate investment trust ("REIT"), our ability to retain cash flow for reinvestment is restricted. In order for us to maintain our REIT status, a substantial portion of our operating cash flow must be distributed to our shareholders (see "REQUIREMENT TO PAY DISTRIBUTIONS" below). However, despite the significant distribution requirements, we have been able to retain a significant amount of our operating cash flow. The following table summarizes our ability to fund distributions to the minority interest, capital improvements to maintain our facilities, and distributions to our shareholders through the use of cash provided by operating activities. The remaining cash flow generated is available to fund principal payments on debt and reinvestment opportunities. 51
For the three months ended March 31, --------------------------------- 2003 2002 -------------- -------------- (amounts in thousands) Net cash provided by operating activities.................. $ 146,915 $ 152,149 Allocable to minority interest (Preferred Units)........... (6,726) (6,726) Allocable to minority interest (common equity)............. (5,588) (6,871) -------------- -------------- Cash from operations allocable to our shareholders......... 134,601 138,552 Capital improvements to maintain our facilities............ (2,333) (3,968) Add back: minority interest share of capital improvements to maintain facilities................................. 57 179 -------------- -------------- Remaining operating cash flow available for distributions to our shareholders....................................... 132,325 134,763 Distributions paid: Preferred stock dividends................................ (37,022) (35,840) Equity Stock, Series A dividends......................... (5,375) (5,375) Distributions to Common and Class B shareholders (a)..... (55,995) (55,045) -------------- -------------- Cash available for principal payments on debt and reinvestment $ 33,933 $ 38,503 ============== ==============
(a) The 7,000,000 shares of Class B common stock converted into 7,000,000 regular common shares on January 1, 2003. Our financial profile is characterized by a low level of debt to total capitalization and a conservative dividend payout ratio with respect to the common stock. We expect to fund our growth strategies with cash on hand at March 31, 2003, internally generated retained cash flows, and proceeds from issuing equity securities. In general, our current strategy is to continue to finance our growth with permanent capital; either common or preferred equity. We have in the past used our $200 million line of credit as temporary "bridge" financing, and repaid borrowings with internally generated cash flows and proceeds from the placement of permanent capital. At March 31, 2003, we had borrowings on our line of credit totaling $25,000,000. As of May 13, 2003, outstanding borrowings had been reduced to $5,000,000. Over the past three years, we have funded substantially all of our acquisitions with permanent capital (both common and preferred securities). We have elected to use preferred securities as a form of leverage despite the fact that the dividend rates of our preferred securities exceed the prevailing market interest rates on conventional debt. We have chosen this method of financing for the following reasons: (i) under the REIT structure, a significant amount of operating cash flow needs to be distributed to our shareholders, making it difficult to repay debt with operating cash flow alone, (ii) our perpetual preferred stock has no sinking fund requirement, or maturity date and does not require redemption, all of which eliminate any future refinancing risks, (iii) after the end of a non-call period, we have the option to redeem the preferred stock at any time, which in 2002 and 2001 enabled us to effectively refinance higher coupon preferred stock with new preferred stock at lower rates, (iv) preferred stock does not contain onerous covenants, thus allowing us to maintain significant financial flexibility, and (v) dividends on the preferred stock can be applied to our REIT distribution requirements. Our credit ratings on each of our series of Cumulative Preferred Stock by each of the three major credit agencies are "Baa2" by Moody's and BBB+ by both Standard & Poor's and Fitch IBCA. Our portfolio of real estate facilities remains substantially unencumbered. At March 31, 2003, we had mortgage debt outstanding of $19.7 million and unsecured long-term debt in the amount of $69.4 million, and had unencumbered real estate facilities with a book value of approximately $3.9 billion. We believe that our size and financial flexibility enables us to access capital when appropriate. 52 REQUIREMENT TO PAY DISTRIBUTIONS: We have operated, and intend to continue to operate, in such a manner as to qualify as a REIT under the Internal Revenue Code of 1986, but no assurance can be given that we will at all time so qualify. To the extent that the Company continues to qualify as a REIT, we will not be taxed, with certain limited exceptions, on the taxable income that is distributed to our shareholders, provided that at least 90% of our taxable income is so distributed prior to filing of the Company's tax return. We have satisfied the REIT distribution requirement since 1980. During the three months ended March 31, 2003 and 2002, we paid cash dividends totaling $37,022,000 and $35,840,000, respectively, to the holders of our Senior Preferred Stock. We estimate the regular annual distribution requirements with respect to our Preferred Stock outstanding at March 31, 2003 to be approximately $142.8 million, which excludes $1.3 million for our Senior Preferred Stock, Series B, which we redeemed in March 2003. During each of the three months ended March 31, 2003 and 2002, we paid cash dividends totaling $6,726,000 to the holders of our preferred partnership units. The annual distribution requirement with respect to the preferred partnership units outstanding at March 31, 2003, is estimated at $26.9 million. During each of the three months ended March 31, 2003 and 2002, we paid cash dividends totaling $5,375,000, to the holders of our Equity Stock, Series A. With respect to the depositary shares of Equity Stock, Series A, we have no obligation to pay distributions if no distributions are paid to the common shareholders. To the extent that we do pay common distributions in any year, the holders of the depositary shares receive annual distributions equal to the lesser of (i) five times the per share dividend on the common stock or (ii) $2.45. The depositary shares are noncumulative, and have no preference over our Common Stock either as to dividends or in liquidation. With respect to the Equity Stock, Series A outstanding at March 31, 2003, we estimate the total annual regular distribution to be approximately $21.5 million assuming that dividends of at least $0.49 per share per year are paid to the common shareholders. During the three months ended March 31, 2003, we paid dividends totaling $55,995,000 ($0.45 per common share) to the holders of our common stock. Based upon shares outstanding at March 31, 2003 and a quarterly distribution of $0.45 per share, which was declared by the Board of Directors on May 8, 2003 and payable on June 30, 2003, we estimate dividend payments with respect to our common stock of approximately $55.9 million for the second quarter of 2003. We anticipate that quarterly distributions per common share will remain at $0.45 per common share during 2003. We have, in the past, paid special distributions which were necessary to meet our distribution requirements in order to maintain our REIT tax status. It is unlikely that any special distribution will be required to enable the Company to meet its distribution requirements in 2003. CAPITAL IMPROVEMENT REQUIREMENTS: For 2003, we have budgeted approximately $30 million for capital improvements. During the three months ended March 31, 2003, we incurred capital improvements of approximately $2.3 million. DEBT SERVICE REQUIREMENTS: We do not believe we have any significant refinancing risks with respect to our notes payable, all of which are fixed rate. At March 31, 2003, we had total outstanding notes payable of approximately $89.1 million. See Note 8 to the consolidated financial statements for approximate principal maturities of such borrowings. We anticipate that our retained operating cash flow will continue to be sufficient to enable us to make schedule principal payments. It is our current intention to fully amortize our debt as opposed to refinance debt maturities with additional debt. ACQUISITION OF INTERESTS IN SELF-STORAGE FACILITIES: On January 16, 2002, we acquired the remaining 70% interest in the Development Joint Venture for approximately $153,078,000 in cash. The Development Joint Venture was formed in April 1997 with equity capital consisting of 30% from the Company and 70% from an institutional investor, which owns 47 storage facilities opened since 1997. This transaction was principally financed with the capital raised through the issuance of our 7.625% Cumulative Preferred Stock, Series T. 53 On April 28, 2003 we acquired through a merger all of the remaining limited partnership interest not currently owned by the Company in PS Partners IV, Ltd., a partnership which is consolidated with the Company. The acquisition cost consisted of the issuance of approximately 427,000 shares of our common stock and cash of approximately $10 million. DEVELOPMENT OF SELF-STORAGE FACILITIES: We anticipate that the cost of development of self-storage facilities for the year ended December 31, 2003 and beyond will be approximately $75 million per year. We have utilized two development joint ventures in the past 5 years; we acquired our partner's interest in January 2002 for one of the development joint ventures, and the other joint venture is fully committed. However, we believe that it is unlikely that we will form a development joint venture to fund our current pipeline described below. We currently have a development "pipeline" of 40 self-storage facilities, combination facilities, and expansions to existing self-storage facilities with an aggregate estimated cost of approximately $169.2 million. Approximately $75.8 million of development cost has been incurred as of March 31, 2003. We have acquired the land for 39 of these projects, which have an aggregate estimated cost of approximately $165.0 million, and costs incurred as of March 31, 2003 of approximately $75.8 million. The remaining facility represents an identified site where we have an agreement in place to acquire the land, generally within one year. We anticipate that the development of these projects will be funded solely by the Company. The development and fill-up of these storage facilities is subject to significant contingencies such as obtaining appropriate governmental approvals. We estimate that the amount remaining to be spent of approximately $93.4 million will be incurred over the next 18 - 24 months. The following table sets forth certain information with respect to our development pipeline.
DEVELOPMENT PIPELINE SUMMARY Total Number Net estimated Costs incurred of rentable development through Costs to projects sq. ft. costs 3/31/03 complete --------- -------- ------------- --------------- ------------ (Amounts in thousands) Facilities currently under construction: Self-storage facilities 13 768 $ 109,230 $ 62,741 $ 46,489 Expansions to existing self-storage facilities 7 288 22,547 6,229 16,318 --------- -------- ------------- --------------- ------------ 20 1,056 131,777 68,970 62,807 Facilities awaiting construction, where land is acquired: Self-storage facilities 1 44 5,562 1,306 4,256 Expansions of existing self-storage facilities 18 500 27,612 5,319 22,293 --------- -------- ------------- --------------- ------------ 19 544 33,174 6,625 26,549 Facility awaiting construction, where land has not yet been acquired 1 41 4,276 186 4,090 --------- -------- ------------- --------------- ------------ Total Development Pipeline 40 1,641 $ 169,227 $ 75,781 $ 93,446 ========= ======== ============= =============== ============
Included in "expansions of existing self-storage facilities" are 16 projects associated with the conversion of industrial space, previously used by the discontinued containerized facility operations, into self-storage space. In addition to the above projects, we have 9 parcels of land held for development with total costs of approximately $17,807,000 at March 31, 2003. These parcels will either be developed or sold. 54 REPURCHASES OF THE COMPANY'S COMMON STOCK: The Company's Board of Directors authorized the repurchase from time to time of up to 25,000,000 shares of our common stock on the open market or in privately negotiated transactions. From the initial authorization through March 31, 2003, we have repurchased a total of 21,497,020 shares of common stock at an aggregate cost of approximately $535.9 million. There have been no substantial repurchases of our common stock since May 2002. Item 2A. Risk Factors In addition to the other information in our Form 10-Q and our Form 10-K for the year ended December 31, 2002, you should consider the following factors in evaluating the Company: THE HUGHES FAMILY COULD CONTROL US. At March 31, 2003, the Hughes family owned approximately 37% of our outstanding shares of common stock. Consequently, the Hughes family could control matters submitted to a vote of our shareholders, including electing directors, amending our organizational documents, dissolving and approving other extraordinary transactions, such as a takeover attempt, even though such actions may be favorable to the other common shareholders. PROVISIONS IN OUR ORGANIZATIONAL DOCUMENTS MAY PREVENT CHANGES IN CONTROL. Restrictions in our organizational documents may further limit changes in control. Unless our board of directors waives these limitations, no shareholder may own more than (1) 2.0% of our outstanding shares of our common stock or (2) 9.9% of the outstanding shares of each class or series of our preferred or equity stock. Our organizational documents in effect provide, however, that the Hughes family may continue to own the shares of our common stock held by them at the time of the 1995 reorganization. These limitations are designed, to the extent possible, to avoid a concentration of ownership that might jeopardize our ability to qualify as a real estate investment trust or REIT. These limitations, however, also may make a change of control significantly more difficult (if not impossible) even if it would be favorable to the interests of our public shareholders. These provisions will prevent future takeover attempts not approved by our board of directors even if a majority of our public shareholders deem 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. WE WOULD INCUR ADVERSE TAX CONSEQUENCES IF WE FAIL TO QUALIFY AS A REIT. You will be subject to the risk that we may not qualify as a REIT. As a REIT, we must distribute at least 90% of our REIT taxable income to our shareholders, which include not only holders of our common stock and equity stock but also holders of our preferred stock. Failure to pay full dividends on the preferred stock would prevent us from paying dividends on our common stock and could jeopardize our qualification as a REIT. For any taxable year that we fail to qualify as a REIT and the relief provisions do not apply, we would be taxed at the regular corporate rates on all of our taxable income, whether or not we make any distributions to our shareholders. Those taxes would reduce the amount of cash available for distribution to our shareholders or for reinvestment. As a result, our failure to qualify as a REIT during any taxable year could have a material adverse effect upon us and our shareholders. Furthermore, unless certain relief provisions apply, we would not be eligible to elect REIT status again until the fifth taxable year that begins after the first year for which we fail to qualify. 55 WE MAY PAY SOME TAXES. Even if we qualify as a REIT for Federal income tax purposes, we are required to pay some federal, state and local taxes on our income and property. Several corporate subsidiaries of the Company have elected to be treated as "taxable REIT subsidiaries" of the Company for federal income tax purposes since January 1, 2001. A taxable REIT subsidiary is a fully taxable corporation and is limited in its ability to deduct interest payments made to us. In addition, we will be subject to a 100% penalty tax on some payments that we receive if the economic arrangements among our tenants, our taxable REIT subsidiaries and us are not comparable to similar arrangements among unrelated parties. To the extent that the Company or any taxable REIT subsidiary is required to pay federal, state or local taxes, we will have less cash available for distribution to shareholders. WE WOULD INCUR A CORPORATE LEVEL TAX IF WE SELL CERTAIN ASSETS. We will generally be subject to a corporate level tax on any net built-in gain if before November 2005 we sell any of the assets we acquired in the November 1995 reorganization. WE AND OUR SHAREHOLDERS ARE SUBJECT TO FINANCING RISKS. Debt increases the risk of loss. In making real estate investments, we may borrow money, which increases the risk of loss. At March 31, 2003, our debt of $114.1 million was approximately 2.4% of our total assets. Certain securities have a liquidation preference over our common stock and Equity Stock, Series A. If we liquidated, holders of our preferred securities would be entitled to receive liquidating distributions, plus any accrued and unpaid distributions, before any distribution of assets to the holders of our common stock and Equity Stock, Series A. Holders of preferred securities are entitled to receive, when declared by our board of directors, cash distributions in preference to holders of our common stock and Equity Stock, Series A. SINCE OUR BUSINESS CONSISTS PRIMARILY OF ACQUIRING AND OPERATING REAL ESTATE, WE ARE SUBJECT TO REAL ESTATE OPERATING RISKS. The value of our investments may be reduced by general risks of real estate ownership. Since we derive substantially all of our income from real estate operations, we are subject to the general risks of owning real estate-related assets, including: o lack of demand for rental spaces or units in a locale; o changes in general economic or local conditions; o potential terrorist attacks; o changes in supply of or demand for similar or competing facilities in an area; o the impact of environmental protection laws; o changes in interest rates and availability of permanent mortgage funds which may render the sale or financing of a property difficult or unattractive; and o changes in tax, real estate and zoning laws. 56 There is significant competition among self-storage facilities and from other storage alternatives. Most of our properties are self-storage facilities, which generated 91% of our revenue for the three months ended March 31, 2003. Local market conditions will play a significant part in how competition will affect us. Competition in the market areas in which many of our properties are located from other self-storage facilities and other storage alternatives is significant and has affected the occupancy levels, rental rates and operating expenses of some of our properties. Any increase in availability of funds for investment in real estate may accelerate competition. Further development of self-storage facilities may intensify competition among operators of self-storage facilities in the market areas in which we operate. As discussed in Management's Discussion and Analysis of Financial Condition and Results of Operations - Self-Storage Operations, the revenues of the Consistent Group of facilities declined 2.6% in the three months ended March 31, 2003 as compared to 2002. Such competition could have been a factor in this decline. We may incur significant environmental costs and liabilities. As an owner and operator of real properties, under various federal, state and local environmental laws, we are required to clean up spills or other releases of hazardous or toxic substances on or from our properties. Certain environmental laws impose liability whether or not the owner knew of, or was responsible for, the presence of the hazardous or toxic substances. In some cases, liability may not be limited to the value of the property. The presence of these substances, or the failure to properly remediate any resulting contamination, also may adversely affect the owner's or operator's ability to sell, lease or operate its property or to borrow using its property as collateral. We have conducted preliminary environmental assessments of most of our properties (and intend to conduct these assessments in connection with property acquisitions) to evaluate the environmental condition of, and potential environmental liabilities associated with, our properties. These assessments generally consist of an investigation of environmental conditions at the property (not including soil or groundwater sampling or analysis), as well as a review of available information regarding the site and publicly available data regarding conditions at other sites in the vicinity. In connection with these property assessments, our operations and recent property acquisitions, we have become aware that prior operations or activities at some facilities or from nearby locations have or may have resulted in contamination to the soil or groundwater at these facilities. In this regard, some of our facilities are or may be the subject of federal or state environment investigations or remedial actions. We have obtained, with respect to recent acquisitions, and intend to obtain with respect to pending or future acquisitions, appropriate purchase price adjustments or indemnifications that we believe are sufficient to cover any related potential liability. Although we cannot provide any assurance, based on the preliminary environmental assessments, we believe we have funds available to cover any liability from environmental contamination or potential contamination and we are not aware of any environmental contamination of our facilities material to our overall business, financial condition or results of operation. Delays in development and fill-up of our properties would reduce our profitability: During 2002 and 2003, the Company opened a total of five newly developed self-storage facilities at a total cost of approximately $33,744,000, and at March 31, 2003 the Company had 40 projects in development that are expected to begin construction generally by September 30, 2003. These 40 projects have total estimated costs of $169,227,000. Construction delays due to weather, unforeseen site conditions, personnel problems, and other factors, as well as cost overruns, would adversely affect the Company's profitability. Delays in the rent-up of newly developed facilities as a result of competition or other factors would also adversely impact the Company's profitability. Property taxes can increase and cause a decline in yields on investments. Each of our properties is subject to real property taxes. These real property taxes may increase in the future as property tax rates change and as our properties are assessed or reassessed by tax authorities. Such increases could adversely impact the Company's profitability. 57 We must comply with the Americans with Disabilities Act and fire and safety regulations, which can require significant expenditures: All our properties must comply with the Americans with Disabilities Act and with related regulations (the "ADA"). The ADA has separate compliance requirements for "public accomodations" and "commercial facilities," but generally requires that buildings be made accessible to persons with disabilities. Various state laws impose similar requirements. A failure to comply with the ADA or similar state laws could result in government imposed fines on us and the award of damages to individuals affected by the failure. In addition, we must operate our properties in compliance with numerous local fire and safety regulations, building codes, and other land use regulations. Compliance with these requirements can require us to spend substantial amounts of money, which would reduce cash otherwise available for distribution to shareholders. Failure to comply with these requirements could also affect the marketability of our real estate facilities. WE HAVE NO INTEREST IN CANADIAN SELF-STORAGE FACILITIES OWNED BY THE HUGHES FAMILY AND HAVE POTENTIAL CONFLICTS OF INTEREST WITH RESPECT TO SERVICES PROVIDED TO THE HUGHES FAMILY B. Wayne Hughes, Chairman of the Board, and his family (the "Hughes Family") have ownership interests in, and operate, approximately 38 self-storage facilities in Canada under the name "Public Storage." We currently do not own any interests in these facilities nor do we own any facilities in Canada. The Hughes Family owns approximately 37% of our common stock outstanding at March 31, 2003. We have a right of first refusal to acquire the stock or assets of the corporation engaged in the operation of the 38 self-storage facilities in Canada if the Hughes family or the corporation agrees to sell them. However, we have no interest in the operations of this corporation, have no right to acquire this stock or assets unless the Hughes family decides to sell, and receive no benefit from the profits and increases in value of the Canadian self-storage facilities. Our personnel are engaged in the supervision and the operation of these 38 self-storage facilities and in providing certain administrative services for the Canadian owners, and certain other services, primarily tax services, with respect to certain other Hughes Family interests. The Hughes Family and the Canadian owners reimburse us at cost for these services. There may be conflicts of interest in allocating the time of our personnel between our properties, the Canadian properties, and certain other Hughes Family interests. The Company is in the process of eliminating the sharing of Company personnel with the Canadian entities. OUR PORTABLE SELF-STORAGE BUSINESS HAS INCURRED OPERATING LOSSES. Public Storage Pickup & Delivery ("PSPUD") was organized in 1996 to operate a portable self-storage business. We own all of the economic interest of PSPUD. Since PSPUD will operate profitably only if it can succeed in the relatively new field of portable self-storage, we cannot provide any assurance as to its profitability. PSPUD incurred operating losses of $10,058,000 in 2002 and generated a profit of $986,000 for the three months ended March 31, 2003. PSPUD closed 22 facilities that were deemed not strategic to the Company's business plan during 2002. The operating loss for 2002 includes a write-down for impaired assets totaling $6,937,000 ($750,000 of which relates to continuing operations) and lease termination charges of $2,447,000. TERRORIST ATTACKS AND THE POSSIBILITY OF WIDER ARMED CONFLICT MAY HAVE AN ADVERSE IMPACT ON OUR BUSINESS AND OPERATING RESULTS AND COULD DECREASE THE VALUE OF OUR ASSETS. Terrorist attacks and other acts of violence or war, such as those that took place on September 11, 2001, could have a material adverse impact on our business and operating results. There can be no assurance that there will not be further terrorist attacks against the United States or its businesses or interests. Attacks or armed conflicts that directly impact one or more of our properties could significantly affect our ability to operate those properties and thereby impair our operating results. Further, we may not have insurance coverage for losses caused by a terrorist attack. Such insurance may not be available, or if it is available and we decide to obtain such terrorist coverage, the cost for the insurance may be significant in relationship to the risk overall. In addition, the adverse effects that such violent acts and threats of future attacks could have on the U.S. economy could similarly have a material adverse effect on our business and results of operations. Finally, further terrorist acts could cause the United States to enter into a wider armed conflict which could further impact our business and operating results. 58 PRESIDENT BUSH'S PROPOSED TAX CUT COULD ADVERSELY AFFECT THE PRICE OF OUR STOCK. President Bush has proposed a tax reduction package that would, among other things, substantially reduce or eliminate the taxation of dividends paid by corporations other than REITs. If the double taxation of corporate dividends were to be eliminated or reduced, certain of the relative tax advantage of being a REIT would be eliminated or reduced, which may have an adverse effect on the price of our stock. This adverse effect may take place prior to the adoption of any tax cut based upon the market's perception of the likelihood of implementation of such a provision. ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK To limit our exposure to market risk, we principally finance our operations and growth with permanent equity capital, consisting of either common or preferred stock. At March 31, 2003, our debt as a percentage of total shareholders' equity (based on book values) was 2.8%. Our preferred stock is not redeemable by the holders. Except under certain conditions relating to our qualification as a REIT, we may not redeem the Senior Preferred Stock prior to the following dates: Series C - June 30, 1999, Series D - March 31, 2004, Series E - January 31, 2005, Series F - April 30, 2005, Series K - January 19, 2004, Series L - March 10, 2004, Series M - August 17, 2004, Series Q - January 19, 2006, Series R - September 28, 2006, Series S - October 31, 2006, Series T - January 18, 2007, Series U - February 19, 2007 and Series V - March 31, 2007. On or after the respective dates, each of the series of Senior Preferred Stock will be redeemable (The Series C is presently redeemable) at our option, in whole or in part, at $25 per share (or depositary share in the case of the Series K through Series V), plus accrued and unpaid dividends. Our market risk sensitive instruments include notes payable, which totaled $114.1 million at March 31, 2003. Substantially all of the Company's notes payable bear interest at fixed rates. See Note 8 to the consolidated financial statements at March 31, 2003 for approximate principal maturities of the notes payable at March 31, 2003. 59 ITEM 4. CONTROLS AND PROCEDURES The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports the Company files and submits under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in accordance with SEC guidelines and that such information is communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure based on the definition of "disclosure controls and procedures" in Rule 13a-14(c) of the Exchange Act. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Also, the Company has investments in certain unconsolidated entities. As the Company does not control or manage these entities, its disclosure controls and procedures with respect to such entities are substantially more limited than those it maintains with respect to its consolidated subsidiaries. Within 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and the Company's Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based upon this evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect the internal controls subsequent to the date of the Company's evaluation. 60 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Serrao v. Public Storage, Inc. (Filed April 2003) ------------------------------------------------- (Superior Court - Orange County) -------------------------------- The plaintiff in this case filed a suit against the Company on behalf of a putative class of renters who rented self-storage units from the Company. Plaintiff alleges that the Company misrepresents the size of its storage units, has brought claims under California statutory and common law relating to consumer protection, fraud, unfair competition, and negligent misrepresentation, and is seeking monetary damages, restitution, and declaratory and injunctive relief. The claim in this case is substantially similar to those in Henriquez v. Public Storage, Inc., which was disclosed in prior reports. In January 2003, the plaintiff caused the Henriquez action to be dismissed. Based upon the uncertainty inherent in any putative class action, the Company cannot presently determine the potential damages, if any, or the ultimate outcome of this litigation. The Company is vigorously contesting the claims upon which this lawsuit is based. PS Insurance Company, Ltd. -------------------------- In November 2002, a shareholder of the Company made a demand on the Board of Directors that challenged the fairness of the Company's acquisition of PS Insurance Company, Ltd. ("PSIC") and demanded that the Board recover the profits earned by PSIC from November 1995 through December 2001 and that the entire purchase price paid by the Company for PSIC in excess of PSIC's net assets be returned to the Company. The shareholder estimates these profits at $40 million and this excess at $27.5 million. The contract to acquire PSIC was approved by the independent directors of the Company in March 2001 and the transaction closed in December 2001. PSIC was formerly owned by B. Wayne Hughes, currently the Chairman of the Board (and in 2001 also the Chief Executive Officer) of the Company, B. Wayne Hughes, Jr., currently a director (and in 2001 also an officer) of the Company and Tamara Hughes Gustavson, who in 2001 was an officer of the Company. The shareholder has threatened litigation against the Hughes family and the directors of the Company arising out of this transaction and an alleged pattern of deceptive disclosures with respect to PSIC since 1995. In December 2002, the Board held a special meeting to authorize an inquiry by its independent directors to review the fairness to the Company's shareholders of its acquisition of PSIC and the ability of the Company to have started its own tenant reinsurance business in 1995. The Company believes that, prior to the effectiveness in 2001 of the federal REIT Modernization Act and corresponding California legislation that authorized the creation and ownership of "taxable REIT subsidiaries," the ownership by the Company of a reinsurance business relating to its tenants would have jeopardized the Company's status as a REIT and that other REITs faced similar concerns about tenant insurance programs. The inquiry relating to the shareholder's demand is currently ongoing. The Company cannot presently determine the potential damages, if any, or the ultimate outcome of this matter. The Company is also a party to the actions described under "Item 3. Legal Proceedings" in the Company's 2002 annual report on Form 10-K. Except as described above, there have been no material developments in the actions described in the Company's 2002 annual report on Form 10-K. The Company is a party to various claims, complaints, and other legal actions that have arisen in the normal course of business from time to time. The Company believes that the outcome of these other pending legal proceedings, in the aggregate, will not have a material adverse effect upon the operations or financial portion of the Company. 61 ITEM 5. OTHER ITEMS On May 8, 2003, the board of directors of the Company amended the Company's Bylaws (i) to decrease the authorized number of directors from 11 to 10 and (ii) to eliminate a provision requiring that a majority of the directors not be affiliated with the "Advisor." This provision is no longer applicable because the Advisor was merged through one or more intermediaries into the Company in 1995. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 3.1 Restated Articles of Incorporation. Filed with Registrant's Registration Statement No. 33-54557 and incorporated herein by reference. 3.2 Certificate of Determination for the 10% Cumulative Preferred Stock, Series A. Filed with Registrant's Registration Statement No. 33-54557 and incorporated herein by reference. 3.3 Certificate of Determination for the 9.20% Cumulative Preferred Stock, Series B. Filed with Registrant's Registration Statement No. 33-54557 and incorporated herein by reference. 3.4 Amendment to Certificate of Determination for the 9.20% Cumulative Preferred Stock, Series B. Filed with Registrant's Registration Statement No. 33-56925 and incorporated herein by reference. 3.5 Certificate of Determination for the 8.25% Convertible Preferred Stock. Filed with Registrant's Registration Statement No. 33-54557 and incorporated herein by reference. 3.6 Certificate of Determination for the Adjustable Rate Cumulative Preferred Stock, Series C. Filed with Registrant's Registration Statement No. 33-54557 and incorporated herein by reference. 3.7 Certificate of Determination for the 9.50% Cumulative Preferred Stock, Series D. Filed with Registrant's Form 8-A/A Registration Statement relating to the 9.50% Cumulative Preferred Stock, Series D and incorporated herein by reference. 3.8 Certificate of Determination for the 10% Cumulative Preferred Stock, Series E. Filed with Registrant's Form 8-A/A Registration Statement relating to the 10% Cumulative Preferred Stock, Series E and incorporated herein by reference. 3.9 Certificate of Determination for the 9.75% Cumulative Preferred Stock, Series F. Filed with Registrant's Form 8-A/A Registration Statement relating to the 9.75% Cumulative Preferred Stock, Series F and incorporated herein by reference. 3.10 Certificate of Determination for the Convertible Participating Preferred Stock. Filed with Registrant's Registration Statement No. 33-63947 and incorporated herein by reference. 3.11 Certificate of Amendment of Articles of Incorporation. Filed with Registrant's Registration Statement No. 33-63947 and incorporated herein by reference. 3.12 Certificate of Determination for the 8-7/8% Cumulative Preferred Stock, Series G. Filed with Registrant's Form 8-A/A Registration Statement relating to the Depositary Shares Each Representing 1/1,000 of a Share of 8-7/8% Cumulative Preferred Stock, Series G and incorporated herein by reference. 3.13 Certificate of Determination for the 8.45% Cumulative Preferred Stock, Series H. Filed with Registrant's Form 8-A/A Registration Statement relating to the Depositary Shares Each Representing 1/1,000 of a Share of 8.45% Cumulative Preferred Stock, Series H and incorporated herein by reference. 62 3.14 Certificate of Determination for the Convertible Preferred Stock, Series CC. Filed with Registrant's Registration Statement No. 333-03749 and incorporated herein by reference. 3.15 Certificate of Correction of Certificate of Determination for the Convertible Participating Preferred Stock. Filed with Registrant's Registration Statement No. 333-08791 and incorporated herein by reference. 3.16 Certificate of Determination for 8-5/8% Cumulative Preferred Stock, Series I. Filed with Registrant's Form 8-A/A Registration Statement relating to the Depositary Shares Each Representing 1/1,000 of a Share of 8-5/8% Cumulative Preferred Stock, Series I and incorporated herein by reference. 3.17 Certificate of Amendment of Articles of Incorporation. Filed with Registrant's Registration Statement No. 333-18395 and incorporated herein by reference. 3.18 Certificate of Determination for Equity Stock, Series A. Filed with Registrant's Form 10-Q for the quarterly period ended June 30, 1997 and incorporated herein by reference. 3.19 Certificate of Determination for Equity Stock, Series AA. Filed with Registrant's Form 10-Q for the quarterly period ended September 30, 1999 and incorporated herein by reference. 3.20 Certificate Decreasing Shares Constituting Equity Stock, Series A. Filed with Registrant's Form 10-Q for the quarterly period ended September 30, 1999 and incorporated herein by reference. 3.21 Certificate of Determination for Equity Stock, Series A. Filed with Registrant's Form 10-Q for the quarterly period ended September 30, 1999 and incorporated herein by reference. 3.22 Certificate of Determination for 8% Cumulative Preferred Stock, Series J. Filed with Registrant's Form 8-A/A Registration Statement relating to the Depositary Shares Each Representing 1/1,000 of a Share of 8% Cumulative Preferred Stock, Series J and incorporated herein by reference. 3.23 Certificate of Correction of Certificate of Determination for the 8.25% Convertible Preferred Stock. Filed with Registrant's Registration Statement No. 333-61045 and incorporated herein by reference. 3.24 Certificate of Determination for 8-1/4% Cumulative Preferred Stock, Series K. Filed with Registrant's Form 8-A/A Registration Statement relating to the Depositary Shares Each Representing 1/1,000 of a Share of 8-1/4% Cumulative Preferred Stock, Series K and incorporated herein by reference. 3.25 Certificate of Determination for 8-1/4% Cumulative Preferred Stock, Series L. Filed with Registrant's Form 8-A/A Registration Statement relating to the Depositary Shares Each Representing 1/1,000 of a Share of 8-1/4% Cumulative Preferred Stock, Series L and incorporated herein by reference. 3.26 Certificate of Determination for 8.75% Cumulative Preferred Stock, Series M. Filed with Registrant's Form 8-A/A Registration Statement relating to the Depositary Shares Each Representing 1/1,000 of a Share of 8.75% Cumulative Preferred Stock, Series M and incorporated herein by reference. 3.27 Certificate of Determination for Equity Stock, Series AAA. Filed with Registrant's Current Report on Form 8-K dated November 15, 1999 and incorporated herein by reference. 3.28 Certificate of Determination for 9.5% Cumulative Preferred Stock, Series N. Filed with Registrant's Annual Report on Form 10-K for the year ended December 31, 1999 and incorporated herein by reference. 3.29 Certificate of Determination for 9.125% Cumulative Preferred Stock, Series O. Filed with Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2000 and incorporated herein by reference. 63 3.30 Certificate of Determination for 8.75% Cumulative Preferred Stock, Series P. Filed with Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000 and incorporated herein by reference. 3.31 Certificate of Determination for 8.600% Cumulative Preferred Stock, Series, Q. Filed with Registrant's Form 8-A/A Registration Statement relating to the Depositary Shares Each Representing 1/1,000 of a Share of 8.600% Cumulative Preferred Stock, Series Q and incorporated herein by reference. 3.32 Amendment to Certificate of Determination for Equity Stock, Series A. Filed with Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001 and incorporated herein by reference. 3.33 Certificate of Determination for 8.000% Cumulative Preferred Stock, Series R. Filed with Registrant's Form 8-A Registration Statement relating to the Depositary Shares Each Representing 1/1,000 of a Share of 8.000% Cumulative Preferred Stock, Series R and incorporated herein by reference. 3.34 Certificate of Determination for 7.875% Cumulative Preferred Stock, Series S. Filed with Registrant's Form 8-A Registration Statement relating to the Depositary Shares Each Representing 1/1,000 of a Share of 7.875% Cumulative Preferred Stock, Series S and incorporated herein by reference. 3.35 Certificate of Determination for 7.625% Cumulative Preferred Stock, Series T. Filed with Registrant's Form 8-A Registration Statement relating to the Depositary Shares Each Representing 1/1,000 of a Share of 7.625% Cumulative Preferred Stock, Series T and incorporated herein by reference. 3.36 Certificate of Determination for 7.625% Cumulative Preferred Stock, Series U. Filed with Registrant's Form 8-A Registration Statement relating to the Depositary Shares Each Representing 1/1,000 of a Share of 7.625% Cumulative Preferred Stock, Series U and incorporated herein by reference. 3.37 Amendment to Certificate of Determination for 7.625% Cumulative Preferred Stock, Series T. Filed with Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2002 and incorporated herein by reference. 3.38 Certificate of Determination for 7.500% Cumulative Preferred Stock, Series V. Filed with Registrant's Form 8-A Registration Statement relating to the Depositary Shares Each Representing 1/1,000 of a Share of 7.500% Cumulative Preferred Stock, Series V and incorporated herein by reference. 3.39 Bylaws, as amended. Filed with Registrant's Registration Statement No. 33-64971 and incorporated herein by reference. 3.40 Amendment to Bylaws adopted on May 9, 1996. Filed with Registrant's Registration Statement No. 333-03749 and incorporated herein by reference. 3.41 Amendment to Bylaws adopted on June 26, 1997. Filed with Registrant's Registration Statement No. 333-41123 and incorporated herein by reference. 3.42 Amendment to Bylaws adopted on January 6, 1998. Filed with Registrant's Registration Statement No. 333-41123 and incorporated herein by reference. 3.43 Amendment to Bylaws adopted on February 10, 1998. Filed with Registrant's Current Report on Form 8-K dated February 10, 1998 and incorporated herein by reference. 3.44 Amendment to Bylaws adopted on March 4, 1999. Filed with Registrant's Current Report on Form 8-K dated March 4, 1999 and incorporated herein by reference. 64 3.45 Amendment to Bylaws adopted on May 6, 1999. Filed with Registrants' Form 10-Q for the quarterly period ended March 31, 1999 and incorporated herein by reference. 3.46 Amendment to Bylaws adopted on November 7, 2002. Filed with Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2002 and incorporated herein by reference. 3.47 Amendment to Bylaws adopted on May 8, 2003. Filed herewith. 10.1 Second Amended and Restated Management Agreement by and among Registrant and the entities listed therein dated as of November 16, 1995. Filed with PS Partners, Ltd.'s Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference. 10.2 Amended Management Agreement between Registrant and Public Storage Commercial Properties Group, Inc. dated as of February 21, 1995. Filed with Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference. 10.3 Loan Agreement between Registrant and Aetna Life Insurance Company dated as of July 11, 1988. Filed with Registrant's Current Report on Form 8-K dated July 14, 1988 and incorporated herein by reference. 10.4 Amendment to Loan Agreement between Registrant and Aetna Life Insurance Company dated as of September 1, 1993. Filed with Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference. 10.5 Second Amended and Restated Credit Agreement by and among Registrant, Wells Fargo Bank, National Association, as agent, and the financial institutions party thereto dated as of February 25, 1997. Filed with Registrant's Registration Statement No. 333-22665 and incorporated herein by reference. 10.6 Note Assumption and Exchange Agreement by and among Public Storage Management, Inc., Public Storage, Inc., Registrant and the holders of the notes dated as of November 13, 1995. Filed with Registrant's Registration Statement No. 33-64971 and incorporated herein by reference. 10.7 Registrant's 1990 Stock Option Plan. Filed with Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference. 10.8* Registrant's 1994 Stock Option Plan. Filed with Registrant's Annual Report on Form 10-K for the year ended December 31, 1997 and incorporated herein by reference. 10.9* Registrant's 1996 Stock Option and Incentive Plan. Filed with Registrant's Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated herein by reference. 10.10 Deposit Agreement dated as of December 13, 1995, among Registrant, The First National Bank of Boston, and the holders of the depositary receipts evidencing the Depositary Shares Each Representing 1/1,000 of a Share of 8-7/8% Cumulative Preferred Stock, Series G. Filed with Registrant's Form 8-A/A Registration Statement relating to the Depositary Shares Each Representing 1/1,000 of a Share of 8-7/8% Cumulative Preferred Stock, Series G and incorporated herein by reference. 10.11 Deposit Agreement dated as of January 25, 1996, among Registrant, The First national Bank of Boston, and the holders of the depositary receipts evidencing the Depositary Shares Each Representing 1/1,000 of a Share of 8.45% Cumulative Preferred Stock, Series H. Filed with Registrant's Form 8-A/A Registration Statement relating to the Depositary Shares Each Representing 1/1,000 of a Share of 8.45% Cumulative Preferred Stock, Series H and incorporated herein by reference. 65 10.12** Employment Agreement between Registrant and B. Wayne Hughes dated as of November 16, 1995. Filed with Registrant's Annual Report on Form 10-K for the year ended December 31,1995 and incorporated herein by reference. 10.13 Deposit Agreement dated as of November 1, 1996, among Registrant, The First National Bank of Boston, and the holders of the depositary receipts evidencing the Depositary Shares Each Representing 1/1,000 of a Share of 8-5/8% Cumulative Preferred Stock, Series I. Filed with Registrant's Form 8-A/A Registration Statement relating to the Depositary Shares Each Representing 1/1,000 of a Share of 8-5/8% Cumulative Preferred Stock, Series I and incorporated herein by reference. 10.14 Limited Partnership Agreement of PSAF Development Partners, L.P. between PSAF Development, Inc. and the Limited Partner dated as of April 10, 1997. Filed with Registrant's Form 10-Q for the quarterly period ended March 31, 1997 and incorporated herein by reference. 10.15 Deposit Agreement dated as of August 28, 1997 among Registrant, The First National Bank of Boston, and the holders of the depositary receipts evidencing the Depositary Shares Each Representing 1/1,000 of a Share of 8% Cumulative Preferred Stock, Series J. Filed with Registrant's Form 8-A/A Registration Statement relating to the Depositary Shares Each Representing 1/1,000 of a Share of 8% Cumulative Preferred Stock, Series J and incorporated herein by reference. 10.16 Agreement of Limited Partnership of PS Business Parks, L.P. dated as of March 17, 1998. Filed with PS Business Parks, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1998 and incorporated herein by reference. 10.17 Deposit Agreement dated as of January 19, 1999 among Registrant, BankBoston, N.A. and the holders of the depositary receipts evidencing the Depositary Shares Each Representing 1/1,000 of a Share of 8-1/4% Cumulative Preferred Stock, Series K. Filed with Registrant's Form 8-A/A Registration Statement relating to the Depositary Shares Each Representing 1/1,000 of a Share of 8-1/4% Cumulative Preferred Stock, Series K and incorporated herein by reference. 10.18 Agreement and Plan of Merger among Storage Trust Realty, Registrant and Newco Merger Subsidiary, Inc. dated as of November 12, 1998. Filed with Registrant's Registration Statement No. 333-68543 and incorporated herein by reference. 10.19 Amendment No. 1 to Agreement and Plan of Merger among Storage Trust Realty, Registrant, Newco Merger Subsidiary, Inc. and STR Merger Subsidiary, Inc. dated as of January 19, 1999. Filed with registrant's Registration Statement No. 333-68543 and incorporated herein by reference. 10.20 Amended and Restated Agreement of Limited Partnership of Storage Trust Properties, L.P., dated as of March 12, 1999. Filed with Registrant's Form 10-Q for the quarterly period ended June 30, 1999 and incorporated herein by reference. 10.21* Storage Trust Realty 1994 Share Incentive Plan. Filed with Storage Trust Realty's Annual Report on Form 10-K for the year ended December 31, 1997 and incorporated herein by reference. 10.22 Amended and Restated Storage Trust Realty Retention Bonus Plan effective as of November 12, 1998. Filed with Registrant's Registration Statement No. 333-68543 and incorporated herein by reference. 10.23 Deposit Agreement dated as of March 10, 1999 among Registrant, BankBoston, N.A. and the holders of the depositary receipts evidencing the Depositary Shares Each Representing 1/1,000 of a Share of 8-1/4% Cumulative Preferred Stock, Series L. Filed with Registrant's Form 8-A/A Registration Statement relating to the Depositary Shares Each Representing 1/1,000 of a Share of 8-1/4% Cumulative Preferred Stock, Series L and incorporated herein by reference. 66 10.24 Note Purchase Agreement and Guaranty Agreement with respect to $100,000,000 of Senior Notes of Storage Trust Properties, L.P. Filed with Storage Trust Realty's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference. 10.25 Deposit Agreement dated as of August 17, 1999 among Registrant, BankBoston, N.A. and the holders of the depositary receipts evidencing the Depositary Shares Each Representing 1/1,000 of a Share of 8.75% Cumulative Preferred Stock, Series M. Filed with Registrant's Form 8-A/A Registration Statement relating to the Depositary Shares Each Representing 1/1,000 of a Share of 8.75% Cumulative Preferred Stock, Series M and incorporated herein by reference. 10.26 Limited Partnership Agreement of PSAC Development Partners, L.P. among PS Texas Holdings, Ltd., PS Pennsylvania Trust and PSAC Storage Investors, L.L.C. dated as November 15, 1999. Filed with Registrant's Current Report on Form 8-K dated November 15, 1999 and incorporated herein by reference. 10.27 Agreement of Limited Liability Company of PSAC Storage Investors, L.L.C. dated as of November 15, 1999. Filed with Registrant's Current Report on Form 8-K dated November 15, 1999 and incorporated herein by reference. 10.28 Deposit Agreement dated as of January 14, 2000 among Registrant, BankBoston, N.A. and the holders of the depositary receipts evidencing the Depositary Shares Each Representing 1/1,000 of a Share of Equity Stock, Series A. Filed with Registrant's Form 8-A/A Registration Statement relating to the Depositary Shares Each Representing 1/1,000 of a Share of Equity Stock, Series A and incorporated herein by reference. 10.29 Amended and Restated Agreement of Limited Partnership of PSA Institutional Partners, L.P. among PS Texas Holdings, Ltd. and the Limited Partners dated as of March 29, 2000. Filed with Registrant's Annual Report on Form 10-K for the year ended December 31, 1999 and incorporated herein by reference. 10.30 Amended and Restated Agreement of Limited Partnership of PSA Institutional Partners, L.P. among PS Texas Holdings, Ltd. and the Limited Partners dated as of August 11, 2000. Filed with Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000 and incorporated herein by reference. 10.31* Registrant's 2000 Non-Executive/Non-Director Stock Option and Incentive Plan. Filed with Registrant's Registration Statement No, 333-52400 and incorporated herein by reference. 10.32 Deposit Agreement dated as of January 19, 2001 among Registrant, Fleet National Bank and the holders of the depositary receipts evidencing the Depositary Shares Each Representing 1/1,000 of a Share of 8.600% Cumulative Preferred Stock, Series Q. Filed with Registrant's Form 8-A/A Registration Statement relating to the Depositary Shares Each Representing 1/1,000 of a Share of 8.600% Cumulative Preferred Stock, Series Q and incorporated herein by reference. 10.33* Registrant's 2001 Non-Executive/Non-Director Stock Option and Incentive Plan. Filed with Registrant's Registration Statement No. 333-59218 and incorporated herein by reference. 10.34* Registrant's 2001 Stock Option and Incentive Plan. Filed with Registrant's Registration Statement No. 333-59218 and incorporated herein by reference. 10.35 Deposit Agreement dated as of September 28, 2001 among Registrant, Fleet National Bank and the holders of the depositary receipts evidencing the Depositary Shares Each Representing 1/1,000 of a Share of 8.000% Cumulative Preferred Stock, Series R. Filed with Registrant's Form 8-A Registration Statement relating to the Depositary Shares Each Representing 1/1,000 of a Share of 8.000% Cumulative Preferred Stock, Series R and incorporated herein by reference. 67 10.36 Deposit Agreement dated as of October 31, 2001 among Registrant, Fleet National Bank and the holder of the depositary receipts evidencing the Depositary Shares Each Representing 1/1,000 of a Share of 7.875% Cumulative Preferred Stock, Series S. Filed with Registrant's Form 8-A Registration Statement relating to the Depositary Shares Each Representing 1/1,000 of a Share of 7.875% Cumulative Preferred Stock, Series S and incorporated herein by reference. 10.37 Credit Agreement by and among Registrant, Wells Fargo Bank, National Association, as agent, and the financial institutions party thereto dated as of November 1, 2001. Filed with Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2001 and incorporated herein by reference. 10.38 Deposit Agreement dated as of January 18, 2002 among Registrant, Fleet National Bank and the holders of the depositary receipts evidencing the Depositary Shares Each Representing 1/1,000 of a Share of 7.625% Cumulative Preferred Stock, Series T. Filed with Registrant's Form 8-A Registration Statement relating to the Depositary Shares Each Representing 1/1,000 of a Share of 7.625% Cumulative Preferred Stock, Series T and incorporated herein by reference. 10.39 Deposit Agreement dated as of February 19, 2002 among Registrant, Fleet National Bank and the holders of the depositary receipts evidencing the Depositary Shares Each Representing 1/1,000 of a Share of 7.625% Cumulative Preferred Stock, Series U. Filed with Registrant's Form 8-A Registration Statement relating to the Depositary Shares Each Representing 1/1,000 of a Share of 7.625% Cumulative Preferred Stock, Series U and incorporated herein by reference. 10.40 Deposit Agreement dated as of September 30, 2002 among Registrant, Fleet National Bank and the holders of the depositary receipts evidencing the Depositary Shares Each Representing 1/1,000 of a Share of 7.500% Cumulative Preferred Stock, Series V. Filed with Registrant's Form 8-A Registration Statement relating to the Depositary Shares Each Representing 1/1,000 of a Share of 7.500% Cumulative Preferred Stock, Series V and incorporated herein by reference. 11 Statement Re: Computation of Ratio of Earnings Per Share. Filed herewith. 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. 99.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. 99.3 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. 99.4 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. - --------------- * Compensatory benefit plan. ** Management contract. (b) Reports on Form 8-K The Company filed a Current Report on from 8-K dated May 8, 2003 (filed May 9, 2003), pursuant to Item 7, furnishing its press release announcing its results for the quarter ended March 31, 2003. 68 SIGNATURES Pursuant to the requirement of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DATED: May 15, 2003 PUBLIC STORAGE, INC. By: /s/ John Reyes -------------- John Reyes Senior Vice President and Chief Financial Officer (Principal financial officer and duly authorized officer) 69 EX-3 3 q103psi_ex347.txt AMENDMENTS TO BYLAAWS OF PSI Exhibit 3.47 Amendments to Bylaws of Public Storage, Inc. Adopted by the Board of Directors on May 8, 2003 WHEREAS: The Board of Directors of this corporation considers it to be in the best interests of the corporation to decrease the authorized number of directors of the corporation from eleven (11) to ten (10); WHEREAS: The corporation's Bylaws permit the Board of Directors to designate the number of directors of the corporation provided that such number is within the range of not less than eight (8) or more than fifteen (15); and WHEREAS: The "Adviser" (as defined in the corporation's Bylaws) was, through a series of mergers, merged into the corporation in November 1995 and no longer exists as a separate entity. NOW, THEREFORE, BE IT RESOLVED: That the second sentence of Section 3 of Article IV of the corporation's Bylaws is hereby amended to read as follows: "The exact number of directors shall be ten (10) until changed within the limits specified above, by a bylaw amending this section 3, duly adopted by the board of directors or by the shareholders." RESOLVED FURTHER: That Section 6 of Article IV of the bylaws of this corporation is hereby deleted in its entirety. 1 EX-11 4 q103psi_ex11.txt COMPUTATION OF EARNINGS PER SHARE PUBLIC STORAGE, INC. EXHIBIT 11 - STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
For the Three Months Ended March 31, -------------------------------- Earnings per Share 2003 2002 - -------------------------------------------------- ------------- ------------- (amounts in thousands, except per share data) Net income..................................... $ 76,639 $ 87,455 Less Preferred Stock dividends: 10.00% Cumulative Preferred Stock, Series A. - (1,140) 9.20% Cumulative Preferred Stock, Series B.. (1,323) (1,372) Adjustable Rate Preferred Stock, Series C... (506) (506) 9.50% Cumulative Preferred Stock, Series D.. (713) (713) 10.00% Cumulative Preferred Stock, Series E. (1,372) (1,372) 9.75% Cumulative Preferred Stock, Series F.. (1,401) (1,401) 8.00% Cumulative Preferred Stock, Series J.. - (3,000) 8.25% Cumulative Preferred Stock, Series K.. (2,372) (2,372) 8.25% Cumulative Preferred Stock, Series L.. (2,372) (2,372) 8.75% Cumulative Preferred Stock, Series M.. (1,230) (1,230) 8.60% Cumulative Preferred Stock, Series Q.. (3,709) (3,709) 8.00% Cumulative Preferred Stock, Series R.. (10,200) (10,200) 7.875% Cumulative Preferred Stock, Series S. (2,830) (2,830) 7.625% Cumulative Preferred Stock, Series T. (2,900) (2,352) 7.625% Cumulative Preferred Stock, Series U. (2,860) (1,271) 7.500% Cumulative Preferred Stock, Series V. (3,234) - ------------- ------------- Total Preferred dividends................ (37,022) (35,840) ------------- ------------- $ 39,617 $ 51,615 ============= ============= Allocation of net income allocable to common shareholder to classes: Net income allocable to shareholders of the Equity Stock, Series A................. $ 5,375 $ 5,375 Net income allocable to shareholders of common stock........................... 34,242 46,240 ------------- ------------- $ 39,617 $ 51,615 ============= ============= Weighted average common shares outstanding: Basic - weighted average common shares outstanding............................ 124,078 121,946 Effect of dilutive stock options - based on treasury stock method using average market price........................... 1,154 2,119 ------------- ------------- Diluted weighted average common shares outstanding............................ 125,232 124,065 ============= ============= Basic earnings per common share................ $ 0.28 $ 0.38 ============= ============= Diluted earnings per common share.............. $ 0.27 $ 0.37 ============= =============
Note: There are no securities outstanding which would have an anti-dilutive effect upon earnings per common share in each of the three months ending March 31, 2003 and 2002. Exhibit 11 EX-12 5 q103psi_ex12.txt COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES PUBLIC STORAGE, INC. EXHIBIT 12 - STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Three Months Ended March 31, -------------------------- 2003 2002 ----------- ----------- Net income........................................... $ 76,639 $ 87,455 Add: Minority interest in income............... 10,668 11,342 Less: Minority interests in income which do not have fixed charges........................... (3,195) (3,025) ----------- ----------- Income from continuing operations.................... 84,112 95,772 Interest expense................................ 453 1,102 ----------- ----------- Total earnings available to cover fixed charges...... $ 84,565 $ 96,874 =========== =========== Total fixed charges - interest expense (including capitalized interest)............................. $ 1,978 $ 2,948 =========== =========== Cumulative Preferred Stock dividends................. $ 37,022 $ 35,840 Preferred partnership unit distributions............. 6,726 6,726 ----------- ----------- Total preferred distributions........................ $ 43,748 $ 42,566 =========== =========== Total combined fixed charges and preferred distributions $ 45,726 $ 45,514 =========== =========== Ratio of earnings to fixed charges.................. 42.75x 32.86x =========== =========== Ratio of earnings to combined fixed charges and preferred distributions........................... 1.85x 2.13x =========== ===========
For the Year Ended December 31, --------------------------------------------------------------------------- 2002 2001 2000 1999 1998 ----------- ----------- ----------- ----------- ----------- (amounts in thousands, except ratios) Net income........................................... $ 318,738 $ 324,208 $ 297,088 $ 287,885 $ 227,019 Add: Minority interest in income............... 44,087 46,015 38,356 16,006 20,290 Less: Minority interests in income which do not have fixed charges........................... (14,307) (11,243) (10,549) (13,362) (15,853) ----------- ----------- ----------- ----------- ----------- Income from continuing operations.................... 348,518 358,980 324,895 290,529 231,456 Interest expense................................ 3,809 3,227 3,293 7,971 4,507 ----------- ----------- ----------- ----------- ----------- Total earnings available to cover fixed charges...... $ 352,327 $ 362,207 $ 328,188 $ 298,500 $ 235,963 =========== =========== =========== =========== =========== Total fixed charges - interest expense (including capitalized interest)............................. $ 10,322 $ 12,219 $ 13,071 $ 12,480 $ 7,988 =========== =========== =========== =========== =========== Cumulative Preferred Stock dividends................. $ 148,926 $ 117,979 $ 100,138 $ 94,793 $ 78,375 Preferred partnership unit distributions............. 26,906 31,737 24,859 - - ----------- ----------- ----------- ----------- ----------- Total preferred distributions........................ $ 175,832 $ 149,716 $ 124,997 $ 94,793 $ 78,375 =========== =========== =========== =========== =========== Total combined fixed charges and preferred distributions $ 186,154 $ 161,935 $ 138,068 $ 107,273 $ 86,363 =========== =========== =========== =========== =========== Ratio of earnings to fixed charges.................. 34.13x 29.64x 25.11x 23.92x 29.54x =========== =========== =========== =========== =========== Ratio of earnings to combined fixed charges and preferred distributions........................... 1.89x 2.24x 2.38x 2.78x 2.73x =========== =========== =========== =========== ===========
Exhibit 12 PUBLIC STORAGE, INC. EXHIBIT 12 - STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Three Months Ended March 31, -------------------------- 2003 2002 ----------- ----------- Supplemental Disclosure of Ratio of Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") to Fixed Charges (a): Net income........................................... $ 76,639 $ 87,455 Less: (Gain)/Loss on sale of real estate and real estate investments........................... 2,116 (2,241) Add: Depreciation and amortization............. 45,920 43,399 Less: Depreciation allocable to minority interests (1,646) (2,255) Add: Depreciation included in equity in earnings of real estate entities...................... 6,294 6,371 Add: Depreciation and amortization included in discontinued operations...................... 120 598 Add: Minority interest - preferred............. 6,726 6,726 Add: Interest expense.......................... 453 1,102 ----------- ----------- EBITDA available to cover fixed charges.............. $ 136,622 $ 141,155 =========== =========== Total fixed charges - interest expense (including capitalized interest)............................. $ 1,978 $ 2,948 =========== =========== Cumulative Preferred Stock dividends................. $ 37,022 $ 35,840 Preferred partnership unit distributions............. 6,726 6,726 ----------- ----------- Total preferred distributions........................ $ 43,748 $ 42,566 =========== =========== Total combined fixed charges and preferred distributions $ 45,726 $ 45,514 =========== =========== Ratio of EBITDA to fixed charges.................... 69.07x 47.88x =========== =========== Ratio of EBITDA to combined fixed charges and preferred distributions..................................... 2.99x 3.10x =========== ===========
For the Year Ended December 31, ----------------------------------------------------------------------- 2002 2001 2000 1999 1998 ----------- ----------- ----------- ----------- ----------- (amounts in thousands, except ratios) Supplemental Disclosure of Ratio of Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") to Fixed Charges (a): Net income........................................... $ 318,738 $ 324,208 $ 297,088 $ 287,885 $ 227,019 Less: (Gain)/Loss on sale of real estate and real estate investments........................... 2,541 (4,091) (3,786) (2,154) - Add: Depreciation and amortization............. 179,144 165,636 147,778 136,969 111,444 Less: Depreciation allocable to minority interests (8,087) (7,847) (7,138) (9,294) (12,022) Add: Depreciation included in equity in earnings of real estate entities...................... 27,078 25,096 21,825 19,721 13,884 Add: Depreciation and amortization included in discontinued operations...................... 2,504 2,425 1,189 750 355 Add: Minority interest - preferred............. 26,906 31,737 24,859 - - Add: Interest expense.......................... 3,809 3,227 3,293 7,971 4,507 ----------- ----------- ----------- ----------- ----------- EBITDA available to cover fixed charges.............. $ 552,633 $ 540,391 $ 485,108 $ 441,848 $ 345,187 =========== =========== =========== =========== =========== Total fixed charges - interest expense (including capitalized interest)............................. $ 10,322 $ 12,219 $ 13,071 $ 12,480 $ 7,988 =========== =========== =========== =========== =========== Cumulative Preferred Stock dividends................. $ 148,926 $ 117,979 $ 100,138 $ 94,793 $ 78,375 Preferred partnership unit distributions............. 26,906 31,737 24,859 - - ----------- ----------- ----------- ----------- ----------- Total preferred distributions........................ $ 175,832 $ 149,716 $ 124,997 $ 94,793 $ 78,375 =========== =========== =========== =========== =========== Total combined fixed charges and preferred distributions $ 186,154 $ 161,935 $ 138,068 $ 107,273 $ 86,363 =========== =========== =========== =========== =========== Ratio of EBITDA to fixed charges.................... 53.54x 44.23x 37.11x 35.40x 43.21x =========== =========== =========== =========== =========== Ratio of EBITDA to combined fixed charges and preferred distributions..................................... 2.97x 3.34x 3.51x 4.12x 4.00x =========== =========== =========== =========== ===========
(a) EBITDA represents earnings prior to interest, taxes, depreciation, amortization and gains on sale of real estate assets. This supplemental disclosure of EBITDA is included because financial analysts and other members of the investment community consider coverage ratios for real estate companies on a pre-depreciation basis. Exhibit 12 EX-99 6 q103psi_ex991.txt CERTIFICATION CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of Public Storage, Inc. (the "Company") for the quarterly period ended March 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Ronald L. Havner, Jr., as Chief Executive Officer of the Company, Harvey Lenkin, as President of the Company, and John Reyes, as Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Ronald L. Havner, Jr. - ------------------------- Name: Ronald L. Havner, Jr. Title: Chief Executive Officer Date: May 15, 2003 /s/ Harvey Lenkin - ----------------- Name: Harvey Lenkin Title: President Date: May 15, 2003 /s/ John Reyes - -------------- Name: John Reyes Title: Chief Financial Officer Date: May 15, 2003 This certification accompanies the Report pursuant to ss.906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of ss.18 of the Securities Exchange Act of 1934, as amended. A signed original of this written statement required by Section 906 has been provided to the Company, and will be retained and furnished to the SEC or its staff upon request. Exhibit 99.1 EX-99 7 q103psi_ex992.txt CEO CERTIFICATION CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Ronald L. Havner, Jr., certify that: 1. I have reviewed this quarterly report on Form 10-Q of Public Storage, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Ronald L. Havner, Jr. - ------------------------- Name: Ronald L. Havner, Jr. Title: Chief Executive Officer Date: May 15, 2003 Exhibit 99.2 EX-99 8 q103psi_ex993.txt PRESIDENT CERTIFICATION CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Harvey Lenkin, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Public Storage, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Harvey Lenkin - ----------------- Name: Harvey Lenkin Title: President Date: May 15, 2003 Exhibit 99.3 EX-99 9 q103psi_ex994.txt CFO CERTIFICATION CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, John Reyes, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Public Storage, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ John Reyes - -------------- Name: John Reyes Title: Chief Financial Officer Date: May 15, 2003 Exhibit 99.4 -----END PRIVACY-ENHANCED MESSAGE-----