-----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, BknToT2oQSg+8/VBxJlHqseexQ9kCDGtFpHphsRNisFTjQrSVCW5Qsnyk4gM7NPC ZrSxjrKReyjf0J3u4Z6OPg== 0000318380-03-000023.txt : 20030814 0000318380-03-000023.hdr.sgml : 20030814 20030813215013 ACCESSION NUMBER: 0000318380-03-000023 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030814 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: 03843218 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 q203psi.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 June 30, 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 July 30, 2003: Common Stock, $.10 Par Value - 125,979,570 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 June 30, 2003 and December 31, 2002 1 Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2003 and 2002 2 Condensed Consolidated Statement of Shareholders' Equity for the Six Months Ended June 30, 2003 3 Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2003 and 2002 4-5 Notes to Condensed Consolidated Financial Statements 6-36 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 37-62 Item 2A. Risk Factors 62-66 Item 3. Quantitative and Qualitative Disclosures about Market Risk 66-67 Item 4. Controls and Procedures 67 PART II. OTHER INFORMATION (Items 2 and 3 are not applicable) ----------------- Item 1. Legal Proceedings 68-69 Item 4. Submission of Matters to a Vote of Security Holders 69 Item 5. Other Items 69 Item 6. Exhibits and Reports on Form 8-K 69-76 PUBLIC STORAGE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except share data)
June 30, December 31, 2003 2002 ---------------- ---------------- (Unaudited) ASSETS ------ Cash and cash equivalents.................................................... $ 41,363 $ 103,124 Real estate facilities, at cost: Land...................................................................... 1,312,504 1,304,881 Buildings................................................................. 3,718,502 3,683,645 ---------------- ---------------- 5,031,006 4,988,526 Accumulated depreciation.................................................. (1,066,390) (987,546) ---------------- ---------------- 3,964,616 4,000,980 Construction in process................................................... 90,335 87,516 Land held for development................................................. 14,036 17,807 Real estate facilities held for sale, net of accumulated depreciation (Note 4)...................................... 14,671 - ---------------- ---------------- 4,083,658 4,106,303 Investment in real estate entities........................................... 334,323 329,679 Goodwill..................................................................... 78,204 78,204 Intangible assets, net....................................................... 114,591 117,893 Notes receivable, including amounts due from related parties................. 923 24,324 Other assets................................................................. 87,023 84,135 ---------------- ---------------- Total assets................................................... $ 4,740,085 $ 4,843,662 ================ ================ LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Line of credit borrowings.................................................... $ 24,000 $ - Notes payable................................................................ 82,940 115,867 Accrued and other liabilities................................................ 137,386 129,327 ---------------- ---------------- Total liabilities................................................... 244,326 245,194 Minority interest: Preferred partnership interests........................................... 285,000 285,000 Other partnership interests............................................... 145,254 154,499 Commitments and contingencies Shareholders' equity: Cumulative Preferred Stock, $0.01 par value, 50,000,000 shares authorized, 5,758,486 shares issued (in series) and outstanding, (9,258,486 at December 31, 2002) at liquidation preference............................ 1,729,525 1,817,025 Common Stock, $0.10 par value, 200,000,000 shares authorized, 125,114,813 shares issued and outstanding (116,991,455 at December 31, 2002)........ 12,511 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........................................................... 2,399,791 2,371,194 Cumulative net income..................................................... 2,190,943 2,030,007 Cumulative distributions paid............................................. (2,267,265) (2,071,656) ---------------- ---------------- Total shareholders' equity.......................................... 4,065,505 4,158,969 ---------------- ---------------- Total liabilities and shareholders' equity..................... $ 4,740,085 $ 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 For the Six Months Ended June 30, June 30, -------------------------------- -------------------------------- 2003 2002 2003 2002 --------------- --------------- --------------- --------------- Revenues: Rental income: Self-storage facilities.............................. $ 197,075 $ 188,307 $ 386,646 $ 376,832 Commercial properties................................ 2,943 3,067 5,789 6,023 Containerized storage facilities..................... 10,402 8,661 19,638 16,567 Tenant reinsurance premiums.............................. 5,581 5,156 10,796 9,731 Interest and other income................................ 2,879 2,759 4,578 4,467 --------------- --------------- --------------- --------------- 218,880 207,950 427,447 413,620 --------------- --------------- --------------- --------------- Expenses: Cost of operations: Self-storage facilities.............................. 70,437 59,778 135,752 118,217 Commercial properties................................ 1,045 1,106 2,238 2,198 Containerized storage facilities..................... 6,861 6,152 12,997 11,807 Tenant reinsurance................................... 3,015 2,523 5,714 4,816 Depreciation and amortization............................ 46,314 45,463 92,194 88,837 General and administrative............................... 4,429 4,305 8,679 8,305 Interest expense......................................... 372 1,213 825 2,315 --------------- --------------- --------------- --------------- 132,473 120,540 258,399 236,495 --------------- --------------- --------------- --------------- Income before equity in earnings of real estate entities, minority interest in income, discontinued operations and gain (loss) on disposition of real estate investments........... 86,407 87,410 169,048 177,125 Equity in earnings of real estate entities (Note 6)........... 8,999 7,000 13,686 16,256 Minority interest in income: Preferred partnership interests.......................... (6,727) (6,727) (13,453) (13,453) Other partnership interests.............................. (4,043) (3,886) (7,985) (8,502) --------------- --------------- --------------- --------------- Income before discontinued operations and gain (loss) on disposition of real estate investments..................... 84,636 83,797 161,296 171,426 Discontinued operations (Note 4).............................. (1,085) (1,240) (1,120) (1,414) Gain (loss) on disposition of real estate investments......... 746 (1,839) 760 (1,839) --------------- --------------- --------------- --------------- Net income.................................................... $ 84,297 $ 80,718 $ 160,936 $ 168,173 =============== =============== =============== =============== Net income allocation: - ---------------------- Allocable to preferred shareholders...................... $ 35,699 $ 37,936 $ 72,721 $ 73,776 Allocable to Equity Stock, Series A...................... 5,376 5,376 10,751 10,751 Allocable to common shareholders......................... 43,222 37,406 77,464 83,646 --------------- --------------- --------------- --------------- $ 84,297 $ 80,718 $ 160,936 $ 168,173 =============== =============== =============== =============== Per common share: - ----------------- Net income per share - Basic (Note 14)................... $ 0.35 $ 0.30 $ 0.62 $ 0.68 =============== =============== =============== =============== Net income per share - Diluted (Note 14)................ $ 0.34 $ 0.30 $ 0.62 $ 0.67 =============== =============== =============== =============== Net income per depositary share of Equity Stock, Series A - Basic and Diluted...................................... $ 0.61 $ 0.61 $ 1.23 $ 1.23 =============== =============== =============== =============== Weighted average common shares - Basic................... 124,599 122,821 124,340 122,386 =============== =============== =============== =============== Weighted average common shares - Diluted................. 125,854 124,824 125,536 124,417 =============== =============== =============== =============== Weighted average depositary shares of Equity Stock, Series A - Basic and Diluted.................................... 8,776 8,776 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) Series C (1,200,000 shares)............................ (30,000) - - (18) Issuance of common stock: Exercise of Employee Stock Options (871,499 shares).... - 87 - 21,148 Conversion of Class B shares into Common Stock (7,000,000 shares)................................... - 700 (700) - To acquire minority interests (426,859 shares)......... - 43 - 13,467 Repurchase of common stock (175,000 shares)............... - (18) - (5,983) Net income................................................ - - - - Cash distributions: Cumulative preferred stock (Note 10)................... - - - - Equity Stock, Series A ($1.23 per share)............... - - - - Common Stock ($0.90 per share)......................... - - - - ---------------- ---------------- ---------------- ---------------- Balances at June 30, 2003................................. $ 1,729,525 $ 12,511 $ - $ 2,399,791 ================ ================ ================ ================
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) Series C (1,200,000 shares)............................ - - (30,018) Issuance of common stock: Exercise of Employee Stock Options (871,499 shares).... - - 21,235 Conversion of Class B shares into Common Stock (7,000,000 shares)................................... - - - To acquire minority interests (426,859 shares)......... - - 13,510 Repurchase of common stock (175,000 shares)............... - - (6,001) Net income................................................ 160,936 - 160,936 Cash distributions: Cumulative preferred stock (Note 10)................... - (72,721) (72,721) Equity Stock, Series A ($1.23 per share)............... - (10,751) (10,751) Common Stock ($0.90 per share)......................... - (112,137) (112,137) ---------------- ---------------- ---------------- Balances at June 30, 2003................................. $ 2,190,943 $ (2,267,265) $ 4,065,505 ================ ================ ================
See accompanying notes. 3 PUBLIC STORAGE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) (Unaudited)
For the Six Months Ended June 30, ------------------------------------- 2003 2002 ---------------- ---------------- Cash flows from operating activities: Net income.............................................................. $ 160,936 $ 168,173 Adjustments to reconcile net income to net cash provided by operating activities: (Gain) loss on asset sales included in equity in earnings of real estate investments (Note 6)............................................... (453) (2,241) (Gain) loss on sale of real estate investments....................... (760) 1,839 Depreciation and amortization........................................ 92,194 88,837 Depreciation included in equity in earnings of real estate entities.. 13,138 12,896 Minority interest in income.......................................... 21,438 21,955 Depreciation associated with discontinued operations (Note 4)...... 282 1,212 Impairment charge included in discontinued operations (Note 4) ...... 750 - Other................................................................ 6,354 2,696 ---------------- ---------------- Total adjustments........................................... 132,943 127,194 ---------------- ---------------- Net cash provided by operating activities............... 293,879 295,367 ---------------- ---------------- Cash flows from investing activities: Principal payments received on mortgage notes receivable............. 23,401 35,193 Capital improvements to real estate facilities....................... (9,814) (12,526) Construction in process and acquisition of land held for development. (47,591) (49,112) Acquisition of minority interests.................................... (9,867) (13,055) Proceeds from the disposition of land and real estate facilities..... 11,860 5,322 Proceeds from the disposition of investments in real estate entities. 851 - Investment in real estate entities................................... (17,864) (14,914) Business combinations (Note 3)....................................... - (152,327) Acquisition of real estate facilities................................ - (7,936) Other investments.................................................... (5,786) (1,054) ---------------- ---------------- Net cash used in investing activities................... (54,810) (210,409) ---------------- ---------------- Cash flows from financing activities: Borrowings (paydowns) on revolving line of credit.................... 24,000 (25,000) Principal payments on notes payable.................................. (32,927) (21,153) Net proceeds from the issuance of common stock....................... 21,235 15,418 Net proceeds from the issuance of preferred stock.................... - 290,150 Repurchase of common stock........................................... (6,001) (381) Redemption of preferred stock........................................ (87,535) - Distributions paid to shareholders................................... (195,609) (194,650) Distributions paid to holders of preferred partnership units......... (13,453) (13,453) Distributions paid to minority interests............................. (11,218) (13,040) Investment (divestment) of minority interests........................ 678 (32) ---------------- ---------------- Net cash (used in) provided by financing activities..... (300,830) 37,859 ---------------- ---------------- Net (decrease) increase in cash and cash equivalents...................... (61,761) 122,817 Cash and cash equivalents at the beginning of the period.................. 103,124 49,347 ---------------- ---------------- Cash and cash equivalents at the end of the period........................ $ 41,363 $ 172,164 ================ ================
See accompanying notes. 4 PUBLIC STORAGE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) (Continued) (Unaudited)
For the Six Months Ended June 30, ------------------------------------- 2003 2002 ---------------- ---------------- Supplemental schedule of non-cash investing and financing activities: Acquisition of minority interest for consideration including common stock: Real estate facilities............................................. $ (16,687) $ (20,640) Minority Interest.................................................. (6,690) (12,469) Issuance of common stock to acquire minority interest................ 13,510 20,054 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 Disposition of minority interests in exchange for other assets at a loss of $1,839 (Note 9): Other assets...................................................... - (1,450) Minority interest................................................. - 3,289 Note received in exchange for sale of real estate...................... - (210) Real estate sold in exchange for note.................................. - 210
See accompanying notes. 5 PUBLIC STORAGE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 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 June 30, 2003, we had direct and indirect equity interests in 1,407 storage facilities located in 37 states and operating under the "Public Storage" name. We also have direct and indirect equity interests in approximately 16.5 million net rentable square feet of commercial space located in 12 states. 2. Summary of Significant Account Policies Basis of Presentation --------------------- The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been included. Operating results for the three months ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ended December 31, 2003. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2002. 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 1,380 real estate facilities, consisting of 1,371 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 June 30, 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, at June 30, 2003, we own approximately 44% of the common equity of PS Business Parks, Inc. ("PSB"), which owns and operates approximately 14.9 million net rentable square feet of commercial space at June 30, 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 June 30, 2003 presentation, including Discontinued Operations (See note 4). 6 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. 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. 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. 7 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. 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. 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. Our evaluations identified one such impairment in our discontinued operations at June 30, 2003, for which we recorded a $750,000 impairment charge in the quarter ended June 30, 2003 (see Note 4). 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 and six months ended June 30, 2003, a total of $100,000 and $199,000, respectively, in compensation expense ($58,000 for the three and six months ended June 30, 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. 8 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 $16,467,000 and $20,275,000 at June 30, 2003 and December 31, 2002, respectively. Included in depreciation and amortization expense for the three ended June 30, 2003 and 2002 is $2,397,000 and $1,241,000, respectively, and $4,563,000 and $2,449,000, for the six months ended June 30, 2003 and 2002, respectively, related to depreciation of other assets. Included in discontinued operations - containerized storage is depreciation expense of $373,000 and $778,000 for the three and six months ended June 30, 2002, ($40,000 for the six months ended June 30, 2003, none for the three months ended June 30, 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 the continuing containerized storage assets increased $450,000 and $833,000 for the three and six months ended June 30, 2003 as compared to the same periods in 2002. Other assets at June 30, 2003 also include $15,619,000 ($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 June 30, 2003 totaled $23,591,000 ($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 June 30, 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. 9 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 June 30, 2003 and December 31, 2002. At June 30, 2003, property management contracts are net of accumulated amortization of $50,409,000 ($47,107,000 at December 31, 2002). Included in depreciation and amortization expense for each of the three and six months ended June 30, 2003 and 2002 is $1,651,000 and $3,302,000, respectively, with respect to the amortization of property management contracts. 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 $35,699,000 and $37,936,000 for the three months ended June 30, 2003 and 2002, respectively, have been deducted from net income to arrive at net income allocable to our common shareholders. Dividends paid to our preferred shareholders totaling $72,721,000 and $73,776,000 for the six months ended June 30, 2003 and 2002, respectively, have been deducted from net income to arrive at net income allocable to our common shareholders. See Note 14 below regarding clarification of Emerging Issues Task Force Topic D-42. 10 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 $5,376,000 for each of the three months ended June 30, 2003 and 2002 and $10,751,000 for each of the six months ended June 30, 2003 and 2002. The remaining $43,222,000 and $37,406,000 for the three months ended June 30, 2003 and 2002, respectively, was allocated to the regular common shares. For the six months ended June 30, 2003 and 2002, $77,464,000 and $83,646,000, 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 and six months ended June 30, 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 shareholders. 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. 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 self-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 our financial statements. 11 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 six months ended June 30, 2002 as though the business combinations above had been effective as of January 1, 2002 are as follows (amounts in thousands): For the six months ended June 30, 2002 ------------------- Revenues................................. $ 414,810 Net income............................... $ 167,950 Net income per common share (Basic)...... $ 0.68 Net income per common share (Diluted).... $ 0.67 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. 12 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. The Knoxville Facilities were disposed of on July 25, 2003 for aggregate gross proceeds of $11.0 million. The Company financed a substantial part of the buyer's consideration in exchange for a note receivable from the buyer, and in accordance with generally accepted accounting principles, the Company will defer the sale and the corresponding gain of approximately $4.5 million. While there can be no assurance, the Company expects that the note receivable will be collected in full, and the estimated gain on sale will be recorded for financial reporting purposes, by the end of 2003. 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 ($14,671,000, which is net of $5,161,000 in accumulated depreciation at June 30, 2003 and a $750,000 impairment charge recorded in the second quarter of 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 June 30, 2003 balance sheet. The following table summarizes the historical operations of the Knoxville Facilities, the Closed Facilities and the commercial property sold: 13
Discontinued Operations: - ------------------------ For the three months ended June 30, For the six months ended June 30, --------------------------------------- --------------------------------------- 2003 2002 Change 2003 2002 Change ----------- ----------- ----------- ----------- ----------- ----------- (Amounts in thousands) Rental income (a): Knoxville Facilities............ $ 399 $ 380 $ 19 $ 787 $ 762 $ 25 Closed Facilities............... 523 4,097 (3,574) 2,301 7,890 (5,589) Sold commercial facility........ - 114 (114) - 229 (229) ----------- ----------- ----------- ----------- ----------- ----------- Total rental income........ 922 4,591 (3,669) 3,088 8,881 (5,793) ----------- ----------- ----------- ----------- ----------- ----------- Cost of operations (a): Knoxville Facilities............ 146 127 19 316 283 33 Closed Facilities............... 989 5,091 (4,102) 2,860 8,754 (5,894) Sold commercial facility........ - 24 (24) - 46 (46) ----------- ----------- ----------- ----------- ----------- ----------- Total cost of operations... 1,135 5,242 (4,107) 3,176 9,083 (5,907) ----------- ----------- ----------- ----------- ----------- ----------- Depreciation expense (a): Knoxville Facilities............ 122 123 (1) 242 242 - Closed Facilities............... - 435 (435) 40 910 (870) Sold commercial facility........ - 31 (31) - 60 (60) ----------- ----------- ----------- ----------- ----------- ----------- Total depreciation ........ 122 589 (467) 282 1,212 (930) ----------- ----------- ----------- ----------- ----------- ----------- Asset impairment charges (b): Closed Facilities............... 750 - 750 750 - 750 ----------- ----------- ----------- ----------- ----------- ----------- Net discontinued operations (c)... $ (1,085) $ (1,240) $ 155 $ (1,120) $ (1,414) $ 294 =========== =========== =========== =========== =========== ===========
(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. (b) An impairment charge of $750,000 was recorded in the second quarter of 2003 with respect to a real estate facility held for sale at June 30, 2003, which was previously used by the discontinued containerized storage operations. (c) The net discontinued operations resulted in a reduction in our diluted and basic earnings per share of approximately $0.01 per share for each of the three months ended June 30, 2003 and 2002, as well for each of the six months ended June 30, 2003 and 2002. 14 5. Real Estate Facilities Activity in real estate facilities during the six months ended June 30, 2003 is as follows: In thousands ----------------- Operating facilities, at cost: Balance at December 31, 2002........................ $ 4,988,526 Transfer from construction in process............... 44,772 Disposition of real estate facilities............... (8,211) Transfer to real estate held for sale (Note 4)...... (20,582) Acquisition of minority interest.................... 16,687 Capital improvements................................ 9,814 ----------------- Balance at June 30, 2003............................ 5,031,006 ----------------- Accumulated depreciation: Balance at December 31, 2002........................ (987,546) Additions during the year........................... (84,571) Transfer to real estate held for sale (Note 4)...... 5,161 Disposition of real estate facilities............... 566 ----------------- Balance at June 30, 2003............................ (1,066,390) ----------------- Construction in process: Balance at December 31, 2002........................ 87,516 Current development................................. 47,591 Transfer to operating facilities.................... (44,772) ----------------- Balance at June 30, 2003............................ 90,335 ----------------- Land held for development: Balance at December 31, 2002........................ 17,807 Disposition of land................................. (3,771) ----------------- Balance at June 30, 2003............................ 14,036 ----------------- Real estate facilities held for sale (Note 4): Balance at December 31, 2002........................ - Transfer from land and buildings.................... 20,582 Impairment charge................................... (750) Transfer from accumulated depreciation.............. (5,161) ----------------- Balance at June 30, 2003............................ 14,671 ----------------- Total real estate facilities........................... $ 4,083,658 ================= During the six months ended June 30, 2003, we opened six newly developed facilities (420,000 net rentable square feet) with an aggregate cost of $42,059,000, and incurred additional development costs amounting to $1,304,000 with respect to existing real estate facilities. In addition, we completed a conversion of industrial space, previously used by the discontinued containerized storage operations, into 55,000 net rentable square feet of self-storage space at an existing self-storage facility for a total of $1,409,000. During the six months ended June 30, 2003, we sold two self-storage facilities for $7,330,000, two parcels of land for $528,000 and two parcels of land held for development for $4,002,000. 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 $444,000 was recorded from these sales. 15 Construction in process at June 30, 2003 consists primarily of 16 self-storage facilities (1,129,000 net rentable square feet) and 24 expansion projects to existing self-storage facilities. In addition, we have seven parcels of land held for development or sale with total costs of approximately $14,036,000. Our policy is to capitalize interest incurred on debt during the course of construction of our self-storage facilities. Interest capitalized during the three and six months ended June 30, 2003 was $1,450,000 and $2,975,000, respectively compared to $1,426,000 and $3,272,000, respectively for the same periods in 2002. 6. Investment in Real Estate Entities At June 30, 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 and six months ended June 30, 2003, we recognized earnings from our investments of $8,999,000 and $13,686,000, respectively, as compared to $7,000,000 and $16,256,000, respectively for the same periods in 2002. For the six months ended June 30, 2003, we received cash distributions totaling $8,649,000, as compared to $12,239,000 for the same periods in 2002. Equity in earnings of real estate entities includes our pro-rata share of the net impact of gains on sale of real estate assets and impairment charges relating to the impending sale of real estate assets recorded by PSB. Our net pro-rata impact of these items totaled $2,583,000 and $453,000 for the three and six months ended June 30, 2003, respectively, as compared to $2,241,000 for the six months ended June 30, 2002 (none for the three months ended June 30, 2002). See the condensed financial information with respect to PSB below for further information regarding these items recorded by PSB. For the six months ended June 30, 2003, we acquired investments in the real estate entities totaling $142,000 as compared to $242,000 for the six months ended June 30, 2002. The following table sets forth our investments in real estate entities at June 30, 2003 and December 31, 2002, and our equity in earnings of real estate entities for the three months ended June 30, 2003 and 2002 (amounts in thousands):
Equity in Earnings of Real Equity in Earnings of Real Investments in Real Estate Estate Entities for the Estate Entities for the Six Entities at Three Months Ended June 30, Months Ended June 30, --------------------------------- ---------------------------- ---------------------------- December 31, June 30, 2003 2002 2003 2002 2003 2002 ---------------- ---------------- -------------- ------------- -------------- ------------- PSB (a).................. $ 277,563 $ 273,790 $ 7,731 $ 5,215 $ 11,150 $ 12,329 Disposed Investments (b). - 525 - 9 10 239 Other investments........ 56,760 55,364 1,268 1,776 2,526 3,688 ---------------- ---------------- -------------- ------------- -------------- ------------- Total.................. $ 334,323 $ 329,679 $ 8,999 $ 7,000 $ 13,686 $ 16,256 ================ ================ ============== ============= ============== =============
(a) Equity in earnings for the three and six months ended June 30, 2003 includes our pro rata share of PSB's gain on sale of real estate assets totaling $2,583,000. In addition, equity in earnings for the six months ended June 30, 2003, is reduced by $2,130,000, representing our pro rata share of PSB's impairment charge related to the impending sale of real estate. Equity in earnings for the six months ended June 30, 2002 includes $2,241,000, representing our pro-rata share of PSB's gain on disposition of real estate investments. 16 (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. In addition, in the second quarter of 2003, we disposed of an investment for cash of $851,000, recognizing a gain on sale of approximately $316,000. 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 44% common equity interest in PSB as of June 30, 2003. This 44% 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 June 30, 2003 ($35.30), the shares and units had a market value of approximately $449.1 million as compared to a book value of $277.6 million. At June 30, 2003, PSB owned and operated approximately 14.9 million net rentable square feet of commercial space. In addition, PSB manages approximately 1,222,000 net rentable square feet of commercial space owned by the Company, the Consolidated Entities, and the Unconsolidated Entities pursuant to property management agreements. The following table sets forth the condensed statements of operations for the six months ended June 30, 2003 and for the same period in 2002, and the condensed balance sheets of PSB at June 30, 2003 and December 31, 2002. These amounts below represent 100% of PSB's balances and not our pro-rata share.
For the six months ended June 30, ------------------------------------ 2003 2002 ----------------- ----------------- (Amounts in thousands) Total revenue prior to gains on sale................. $ 97,063 $ 96,905 Gain on sale of marketable securities................ 2,043 25 Cost of operations and other expenses................ (30,586) (31,063) Depreciation and amortization........................ (27,804) (26,972) Discontinued operations (a).......................... 1,962 7,767 Minority interest.................................... (16,031) (16,488) ----------------- ----------------- Net income......................................... $ 26,647 $ 30,174 ================= ================= December 31, June 30, 2003 2002 ----------------- ----------------- (Amounts in thousands) Total assets (primarily real estate)................. $ 1,157,830 $ 1,156,802 Total debt........................................... 69,992 70,279 Other liabilities.................................... 36,849 36,902 Minority interest.................................... 386,942 385,219 Shareholders' equity................................. $ 664,047 $ 664,402
(a) Includes gains on disposition of real estate totaling $3,484,000 and $5,366,000 for the six months ended June 30, 2003 and 2002, respectively, an impairment charge on properties held for sale totaling $5,907,000 for the six months ended June 30, 2003, and equity in income of discontinued joint venture totaling $2,296,000 and $249,000 for the six months ended June 30, 2003 and 2002, respectively. 17 Other Investments ----------------- The Other Investments consist primarily of an average 41% common equity ownership, which we owned during each of the three and six months ended June 30, 2003 and 2002, in seven limited partnerships (collectively, the "Other Investments") owning an aggregate of 36 storage facilities. For the six months ended June 30, 2003, we acquired additional equity interests in these entities from third parties for a total of $142,000, as compared to $242,000 for the same period in 2002. In the second quarter of 2003, we disposed of an investment for net proceeds of $851,000, and recognized a gain of $316,000, representing the difference between the gross proceeds and the book value of this investment. 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 six months ended June 30, ------------------------------------ 2003 2002 ----------------- ----------------- (Amounts in thousands) Total revenue........................................ $ 13,042 $ 13,428 Cost of operations and other expenses................ (4,568) (4,893) Depreciation and amortization........................ (1,258) (1,267) ----------------- ----------------- Net income......................................... $ 7,216 $ 7,268 ================= ================= December 31, June 30, 2003 2002 ----------------- ----------------- (Amounts in thousands) Total assets (primarily storage facilities).......... $ 55,691 $ 56,731 Total debt........................................... 3,175 5,450 Other liabilities.................................... 8,994 1,121 Partners' equity..................................... $ 43,522 $ 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 June 30, 2003, we had borrowings on our line of credit totaling $24,000,000. As of July 15, 2003, there were no outstanding borrowings. 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 June 30, 2003. 18 8. Notes Payable Notes payable at June 30, 2003 and December 31, 2002 consist of the following:
Carrying Amount --------------------------------- December 31, June 30, 2003 2002 --------------- --------------- (Amounts in thousands) Unsecured senior notes: 7.08% note due November 2003............................ $ 5,000 $ 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 16,558 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 1,982 2,400 --------------- --------------- Total notes payable.............................. $ 82,940 $ 115,867 =============== ===============
All of our notes payable are fixed rate. The unsecured senior notes require interest and principal payments to be paid semi-annually and have various restrictive covenants, all of which have been met at June 30, 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 $57.3 million at June 30, 2003 and $56.4 million at December 31, 2002. At June 30, 2003, approximate principal maturities of notes payable are as follows:
Unsecured Senior Notes Mortgage Notes Total -------------- -------------- -------------- (in thousands) 2003 (remainder of).......... $ 5,000 $ 1,857 $ 6,857 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 -------------- -------------- -------------- $ 64,400 $ 18,540 $ 82,940 ============== ============== ============== Weighted average rate........ 7.6% 10.3% 8.2% ============== ============== ==============
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. 19 Preferred Partnership Interests ------------------------------- During 2000, one of our consolidated operating partnerships issued preferred partnership units: March 17, 2000 - $240.0 million of 9.5% Series N Cumulative Redeemable Perpetual Preferred Units and March 29, 2000 - $75.0 million of 9.125% Series O Cumulative Redeemable Perpetual Preferred. A portion of the 9.125% Series O Cumulative Redeemable Perpetual Preferred ($30 million) were repurchased by the Company in 2001. For each of the three and six months ended June 30, 2003 and 2002, the holders of the preferred units were paid distributions aggregating approximately $6,727,000 and $13,453,000, respectively, and received an equivalent allocation of minority interest in earnings. The following table summarizes the preferred partnership units outstanding at June 30, 2003 and December 31, 2002:
Earliest Distribution Units Carrying Series Redemption Date (a) Rate Outstanding Amount - --------------------- ------------------- ------------ --------------- --------------- (Amounts in thousands) Series N............ March 17, 2005 9.500% 9,600 $240,000 Series O............ March 29, 2005 9.125% 1,800 45,000 --------------- --------------- Total............... 11,400 $285,000 =============== ===============
(a) 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 conditions, 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 --------------------------- The following table sets forth the minority interest at June 30, 2003 and December 31, 2002 as well as the distributions paid to minority interest for the six months ended June 30, 2003 and 2002 with respect to the other partnership interests (amounts in thousands):
Distributions to minority interests for the six months Minority interest at ended June 30, ---------------------------------- ----------------------------- June 30, December 31, Description 2003 2002 2003 2002 - -------------------------------------------- --------------- --------------- ------------ ------------- Consolidated Development Joint Venture...... $ 72,121 $ 75,432 $ 4,924 $ 4,923 Convertible Partnership Units............... 6,314 6,274 107 213 Other consolidated partnerships............. 66,819 72,793 5,509 7,936 --------------- --------------- ------------ ------------- Total other partnership interests........... $ 145,254 $ 154,499 $ 10,540 $ 13,072 =============== =============== ============ =============
20 Income is allocated to the minority interests based upon their pro-rata interest in the operating results of the Consolidated Entities. The following table sets forth the income allocated to minority interest in income with respect to the Other Partnership interests for the three and six months ended June 30, 2003 and 2002 (amounts in thousands):
Minority interest in income for Minority interest in income for the three months ended June 30, the six months ended June 30, ---------------------------------- ----------------------------- Description 2003 2002 2003 2002 - -------------------------------------------- --------------- --------------- ------------ ------------- Consolidated Development Joint Venture...... $ 870 $ 329 $ 1,613 $ 636 Convertible Partnership Units............... 82 73 147 162 Other consolidated partnerships............. 3,091 3,484 6,225 7,704 --------------- --------------- ------------ ------------- Total other partnership interests........... $ 4,043 $ 3,886 $ 7,985 $ 8,502 =============== =============== ============ =============
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 June 30, 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. 21 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 June 30, 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 June 30, 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. Other Consolidated Partnerships ------------------------------- At June 30, 2003, the Other Consolidated Partnerships reflect common equity interests that the Company does not own in 25 entities owning an aggregate of 172 self-storage facilities. 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 was approximately $23,377,000, consisting of the issuance of 426,859 shares of our common stock ($13,510,000) and cash of approximately $9,867,000; this acquisition had the effect of reducing minority interest by $6,690,000, with the excess of cost over underlying book value ($16,687,000) allocated to real estate. 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. 22 10. Shareholders' Equity Cumulative Preferred Stock -------------------------- At June 30, 2003 and December 31, 2002, we had the following series of Cumulative Preferred Stock outstanding:
At June 30, 2003 At December 31, 2002 --------------------------- ----------------------------- Earliest Redemption Dividend Shares Carrying Shares Carrying Series Date (a) 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 Series D September 30, 2004 9.500% 1,200,000 30,000 1,200,000 30,000 Series E January 31, 2005 10.000% 2,195,000 54,875 2,195,000 54,875 Series F April 30, 2005 9.750% 2,300,000 57,500 2,300,000 57,500 Series K January 19, 2004 8.250% 4,600 115,000 4,600 115,000 Series L March 10, 2004 8.250% 4,600 115,000 4,600 115,000 Series M August 17, 2004 8.750% 2,250 56,250 2,250 56,250 Series Q January 19, 2006 8.600% 6,900 172,500 6,900 172,500 Series R September 28, 2006 8.000% 20,400 510,000 20,400 510,000 Series S October 31, 2006 7.875% 5,750 143,750 5,750 143,750 Series T January 18, 2007 7.625% 6,086 152,150 6,086 152,150 Series U February 19, 2007 7.625% 6,000 150,000 6,000 150,000 Series V September 30, 2007 7.500% 6,900 172,500 6,900 172,500 -------------- ------------- -------------- -------------- Total Cumulative Preferred Stock 5,758,486 $ 1,729,525 9,258,486 $ 1,817,025 ============== ============= ============== ==============
(a) Except under certain conditions relating to the Company's qualification as a REIT, the Senior Preferred Stock outstanding at June 30, 2003 is not redeemable prior to the dates indicated. On or after the dates indicated, 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. 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 costs). On June 30, 2003, we redeemed all outstanding shares of our Cumulative Preferred Stock, Series C at a redemption price of $25 per share for a total of $30,018,000 (including related redemption costs). 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. 23 The Series D 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 June 30, 2003, there were no dividends in arrears and the Debt Ratio was 1.8%. 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 June 30, 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. 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. 24 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. Common Stock ------------ At June 30, 2003, entities consolidated with the Company owned 723,732 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 June 30, 2003, December 31, 2002, and December 31, 2001:
Reconciliation of Common Shares - ------------------------------- Outstanding At June 30, At December At December 31, - ----------- 2003 31, 2002 2001 ---------------- ---------------- ---------------- Legally issued and outstanding shares 125,838,545 117,540,187 115,499,647 Less - Shares owned by the Consolidated Entities that are eliminated in consolidation..... (723,732) (548,732) (537,732) ---------------- ---------------- ---------------- Reported issued and outstanding shares 125,114,813 116,991,455 114,961,915 ================ ================ ================
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. During the second quarter of 2003, we repurchased, through one of the Consolidated Entities, 175,000 shares for a total of $6,001,000. From the initial authorization through June 30, 2003, we have repurchased a total of 21,672,020 shares of common stock at an aggregate cost of approximately $541.9 million. 25 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 six months ended June 30, 2003: Distributions Per Share or Depositary Total Share Distributions ------------------- --------------- Preferred Stock: - ---------------- Series B.............................. $0.554 $ 1,323,000 Series C.............................. $0.844 1,012,000 Series D.............................. $1.188 1,426,000 Series E.............................. $1.250 2,744,000 Series F.............................. $1.219 2,802,000 Series K.............................. $1.031 4,744,000 Series L ............................. $1.031 4,744,000 Series M.............................. $1.094 2,460,000 Series Q.............................. $1.075 7,418,000 Series R.............................. $1.000 20,400,000 Series S.............................. $0.984 5,660,000 Series T.............................. $0.953 5,800,000 Series U.............................. $0.953 5,720,000 Series V.............................. $0.938 6,468,000 --------------- 72,721,000 Common Stock: - ------------- Equity Stock, Series A................ $1.225 10,751,000 Common ............................... $0.900 112,137,000 --------------- Total dividends.................... $ 195,609,000 =============== The dividend rate on the Series C Preferred Stock for the first six months of 2003 was equal to 6.75% per annum. The Series B and Series C were redeemed entirely by the Company on March 31, 2003 and June 30, 2003, respectively. 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. 26 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. 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. 27
Three months ended Six months ended June 30, June 30, ----------------------- ----------------------- 2003 2002 Change 2003 2002 Change ----------- ----------- ----------- ----------- ----------- ----------- (Dollar amounts in thousands) Reconciliation of Revenues by Segment: - -------------------------------------- Self-storage property rentals................ $ 197,075 $ 188,307 $ 8,768 $ 386,646 $ 376,832 $ 9,814 Commercial properties rentals................ 2,943 3,067 (124) 5,789 6,023 (234) Containerized storage........................ 10,402 8,661 1,741 19,638 16,567 3,071 Tenant re-insurance.......................... 5,581 5,156 425 10,796 9,731 1,065 Other items not allocated to segments: Interest and other income.................. 2,879 2,759 120 4,578 4,467 111 ----------- ----------- ----------- ----------- ----------- ----------- Total revenues......................... $ 218,880 $ 207,950 $ 10,930 $ 427,447 $ 413,620 $ 13,827 =========== =========== =========== =========== =========== ===========
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." 28
Three months ended Six months ended June 30, June 30, ----------------------- ----------------------- 2003 2002 Change 2003 2002 Change ----------- ----------- ----------- ----------- ----------- ----------- (Amounts in thousands) Reconciliation of Net Income by Segment: ---------------------------------------- Self-storage ------------ Self-storage net operating income......... $ 126,638 $ 128,529 $ (1,891) $250,894 $ 258,615 $ (7,721) Self-storage depreciation................. (43,485) (43,177) (308) (86,759) (84,426) (2,333) Equity in earnings - storage property operations............................. 1,447 1,806 (359) 2,875 3,900 (1,025) Equity in earnings - depreciation (self-storage) ........................ (564) (279) (285) (829) (549) (280) Discontinued operations (Note 4) ......... 131 130 1 229 237 (8) ----------- ----------- ----------- ----------- ----------- ----------- Total self-storage segment net income. 84,167 87,009 (2,842) 166,410 177,777 (11,367) ----------- ----------- ----------- ----------- ----------- ----------- Commercial properties ---------- ---------- Commercial properties..................... 1,898 1,961 (63) 3,551 3,825 (274) Depreciation and amortization - commercial properties............................. (674) (670) (4) (1,299) (1,369) 70 Equity in earnings - commercial property operations............................. 15,331 16,135 (804) 30,031 31,558 (1,527) Equity in earnings - depreciation (commercial properties) ............... (6,280) (6,246) (34) (12,309) (12,347) 38 Discontinued operations (Note 4) ......... - 59 (59) - 123 (123) ----------- ----------- ----------- ----------- ----------- ----------- Total commercial property segment net income............................... 10,275 11,239 (964) 19,974 21,790 (1,816) ----------- ----------- ----------- ----------- ----------- ----------- Containerized storage --------------------- Containerized storage net operating income 3,541 2,509 1,032 6,641 4,760 1,881 Containerized storage depreciation........ (2,155) (1,616) (539) (4,136) (3,042) (1,094) Discontinued operations (Note 4) ......... (1,216) (1,429) 213 (1,349) (1,774) 425 ----------- ----------- ----------- ----------- ----------- ----------- Total containerized storage segment net income (loss)........................ 170 (536) 706 1,156 (56) 1,212 ----------- ----------- ----------- ----------- ----------- ----------- Tenant Reinsurance ------------------ Tenant reinsurance net income............ 2,566 2,633 (67) 5,082 4,915 167 ----------- ----------- ----------- ----------- ----------- ----------- Other items not allocated to segments ------------------------------------- Equity in earnings - general and administrative and other............... (935) (4,416) 3,481 (6,082) (6,306) 224 Interest and other income................. 2,879 2,759 120 4,578 4,467 111 General and administrative ............... (4,429) (4,305) (124) (8,679) (8,305) (374) Interest expense.......................... (372) (1,213) 841 (825) (2,315) 1,490 Minority interest in income .............. (10,770) (10,613) (157) (21,438) (21,955) 517 Gain (loss) on disposition of real estate. 746 (1,839) 2,585 760 (1,839) 2,599 ----------- ----------- ----------- ----------- ----------- ----------- Total other items not allocated to segments (12,881) (19,627) 6,746 (31,686) (36,253) 4,567 ----------- ----------- ----------- ----------- ----------- ----------- Total consolidated net income ....... $ 84,297 $ 80,718 $ 3,579 $160,936 $ 168,173 $ (7,237) =========== =========== =========== =========== =========== -----------
29 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"). In any fiscal year beginning before December 15, 2003, 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 that 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 and six months ended June 30, 2003, we recorded $100,000 and $199,000, respectively, in stock option compensation expense ($58,000 for the three and six months ended June 30, 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 six months of 2003 was based upon an estimated life of 5 years, a risk-free rate of 4.0%, 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 $1,409,000 and $2,039,000 in stock option compensation expense for the six months ended June 30, 2003 and 2002, respectively. Diluted earnings per share would have been $0.61 and $0.66 for the six months ended June 30, 2003 and 2002, respectively. Basic earnings per share would have been $0.61 and $0.67 for the six months ended June 30, 2003 and 2002, respectively. 30 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 June 30, 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 have been engaged in the supervision and the operation of these 38 self-storage facilities and currently provide 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 of PSB and was CEO until August 12, 2003. 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 month periods ended June 30, 2003 and 2002 and $170,000 for each of the six months ended June 30, 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 $103,000 and $243,000, for the three and six months ended June 30, 2003, respectively, as compared to $219,000 and $360,000, respectively, for the same periods in 2002, 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 commercially competitive rates. PSB and the Company utilize 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. 31 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 Clarification of Emerging Issues Task Force Topic D-42 and impact on -------------------------------------------------------------------- reported earnings per common share ---------------------------------- Emerging Issues Task Force ("EITF") Topic D-42, "The Effect on the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock" provides, among other things, that any excess of (1) the fair value of the consideration transferred to the holders of preferred stock redeemed over (2) the carrying amount of the preferred stock should be subtracted from net earnings to determine net earnings available to common stockholders in the calculation of earnings per share. During 2001, 2002 and for the six months ended June 30, 2003, we redeemed various series of our perpetual preferred stock. Our interpretation of EITF Topic D-42 was that the carrying amount of our preferred stock was equivalent to the liquidation preference as recorded on our balance sheet. Each of the series of preferred stock that were redeemed, were redeemed at the liquidation preference. Accordingly, based upon our interpretation, the fair value of the consideration given at redemption was equivalent to the carrying amount on our balance resulting in no impact to net earnings available to common stockholders in the calculation of earnings per share. At the July 31, 2003 meeting of the EITF, the Securities and Exchange Commission Observer clarified that for the purposes of applying EITF Topic D-42, the carrying amount of the preferred stock should be reduced by the issuance costs of the preferred stock, regardless of where in the stockholders' equity section those costs were initially classified on issuance. In our case, issuance costs were recorded as a reduction to Paid-in Capital on our balance sheet at the time the related securities were issued and were not considered as a reduction to the carrying value of the preferred stock at the time of redemption. The clarification and resulting implementation will result in the following estimated reductions to our reported basic and diluted earnings per share:
For the three months ended ----------------------------------------------------------------- March 31, June 30, September 30, December 31, Total --------------- --------------- --------------- --------------- --------------- 2003............... $0.02 $0.01 - - $0.03 2002............... - - $0.01 $0.04 $0.05 2001............... - - $0.05 $0.07 $0.12
The reported diluted earnings per common share for the three and six months ended June 30, 2003 have not been adjusted to reflect the implementation of this clarification. The Company will implement this clarification commencing in the quarter ending September 30, 2003 and such implementation will be reflected retroactively in the financial statements of prior periods. 32 Accounting for Certain Financial Instruments with Characteristics of both ------------------------------------------------------------------------- Liabilities and Equity ---------------------- In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 - "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This statement prescribes reporting standards for financial instruments that have characteristics of both liabilities and equity. This standard generally indicates that certain financial instruments that give the issuer a choice of settling an obligation with a variable number of securities or settling an obligation with a transfer of assets, any mandatorily redeemable security, and certain put options and forward purchase contracts, should be classified as a liability on the balance sheet. This statement is applicable at the beginning of the Company's quarter ended September 30, 2003. We are in the process of evaluating the impact of this Statement. FASB Interpretation No. 46 - Consolidation of Variable Interest Entities ------------------------------------------------------------------------ In January 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46 - "Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51." This interpretation explains how to identify variable interest entities and how an enterprise assesses its interests in a variable interest entity to decide whether to consolidate that entity. In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights, or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. This statement is applicable at the beginning of the Company's quarter ended September 30, 2003. We are in the process of evaluating the impact of the adoption of this Interpretation but do not believe it will have a significant impact on our financial statements. 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. 33 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. 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. Gustavson et al. v. Public Storage, Inc. (Filed June 2003) ---------------------------------------------------------- (Superior Court-Los Angeles County) ---------------------------------- 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 contract to acquire PSIC was approved by the independent directors of the Company in March 2001, and the transaction was 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 H. Gustavson, who in 2001 was an officer of the Company. In exchange for the Hughes family's shares in PSIC, the Company issued to them 1,439,765 shares of common stock (or a net of 1,138,733 shares, after taking into account 301,032 shares held by PSIC). The shareholder has threatened litigation against the Hughes family and the directors of the Company arising out of this transaction and alleged a 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. 34 In June 2003, the Hughes family filed a complaint for declaratory relief relating to the Company's acquisition of PSIC naming the Company as defendant. The Hughes family is seeking that the court make (i) a binding declaration that the Company either is not entitled to recover profits or other moneys earned by PSIC from November 1995 through December 2001; or alternatively the amounts that the Hughes family should be ordered to surrender to the Company if the court determines that the Company is entitled to recover any such profits or moneys; and (ii) a binding declaration either that the Company cannot establish that the acquisition agreement was not just and reasonable as to the Company at the time it was authorized, approved or ratified; or alternatively the amounts that the Hughes family should surrender to the Company, if the court determines that the agreement was not just and reasonable to the Company at that time. The Hughes family is not seeking any payments from the Company. In the event of a determination that the Hughes family is obligated to pay certain amounts to the Company, the complaint states that they have agreed to be bound by that determination to pay such amounts to the Company. In July 2003 the Company filed an answer to the Hughes family's complaint requesting a final judicial determination of the Company's rights of recovery against the Hughes family in respect of PSIC. The Company believes that the lawsuit by the Hughes family will ultimately resolve matters relating to PSIC and will not have any financially adverse effect on the Company (other than the costs and other expenses relating to the lawsuit). 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. In March 2003, the court granted plaintiff's motion to compel the sale of the units to the plaintiff. The Company is appealing the court's decision. 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 for the three and six months ended June 30, 2002. Other Items ----------- 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. 35 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. We believe that 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 16 newly developed self-storage facilities and expansions to 24 existing self-storage facilities, with total estimated development costs of $187,419,000, of which $90,335,000 has been spent at June 30, 2003. Development of these facilities is subject to contingencies. 16. Subsequent Events The Knoxville Facilities were disposed of on July 25, 2003 for aggregate gross proceeds of $11.0 million. The Company financed a substantial part of the buyer's consideration in exchange for a note receivable from the buyer, and in accordance with generally accepted accounting principles, the Company will defer the sale and the corresponding gain of approximately $4.5 million. While there can be no assurance, the Company expects that the note receivable will be collected in full, and the estimated gain on sale will be recorded for financial reporting purposes, by the end of 2003. 36 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 2A, "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. 37 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 one such impairment as of June 30, 2003, see Note 4 to the consolidated financial statements. Future events, or facts and circumstances that currently exist, that we have not yet identified, could cause us to conclude in the future that other 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 Notes 2 and 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. 38 Results of Operations - -------------------------------------------------------------------------------- FOR THE THREE MONTHS ENDED JUNE 30, 2003 Net income for the three months ended June 30, 2003 was $84,297,000 compared to $80,718,000 for the same period in 2002, representing an increase of $3,579,000 or 4.4%. This increase in net income is primarily due to improved results from our containerized storage operations, an increase in equity in earnings of real estate entities (as discussed below), and the absence of a loss on sale of real estate assets in the amount of $1,839,000 recorded in the three months ended June 30, 2002. These effects were partially offset by a reduction in the operating results of our Consistent Group of self-storage facilities (as discussed below) and increased depreciation expense resulting primarily from new property additions. The increase in equity in earnings of real estate entities is primarily due to a net gain on sale of real estate assets recorded by PS Business Parks, Inc., ("PSB"), an unconsolidated affiliate in which we own approximately a 44% interest at June 30, 2003. Our net pro rata share of this gain for the quarter ended June 30, 2003 totaled approximately $2,583,000; there was no such gain recorded in the same period in 2002. Net income allocable to our regular common shareholders (after allocating net income to our preferred and equity shareholders) was $43,222,000 or $0.34 per common share on a diluted basis (based on 125,854,000 weighted average diluted common equivalent shares) for the three months ended June 30, 2003 compared to $37,406,000 or $0.30 per common share on a diluted basis (based on 124,824,000 weighted average diluted common equivalent shares) for the same period in 2002, representing an increase of 15.5% in the aggregate or 13.3% on a per share basis. The increase in net income allocable to common shareholders and earnings per common diluted share is due to the impact of the factors described above with respect to net income, combined with a reduction in income allocated to preferred shareholders, as described below. Please see "Clarification of Emerging Issues Task Force Topic D-42 and impact on reported earnings per common share" in Note 14 to the consolidated financial statements for more information. Weighted average diluted shares increased from 124,824,000 for the three months ended June 30, 2002 to 125,854,000 for the three months ended June 30, 2003. This increase was due primarily to the net issuance of 1,518,467 shares during 2002 and 2003 in connection with the acquisition of the remaining partnership interests in three entities in which the Company held a partial equity interest, as well as the issuance of an aggregate of 1,820,431 shares during 2002 and 2003 in connection with the exercise of employee stock options. This increase was offset partially by the impact of a 748,000 share reduction in the dilutive impact of stock options outstanding due to the exercise of employee stock options as well as a decrease in our average stock price, which impacts the weighted average calculation using the treasury stock method. During the three months ended June 30, 2003 and 2002, we allocated $35,699,000 and $37,936,000 of our net income (based on distributions paid), respectively, to our preferred shareholders, representing a decrease of 5.9%. This decrease is due to the redemption of several series of our higher coupon preferred stock in 2002 and 2003, offset partially by the issuance of additional preferred securities throughout 2002. In addition, during each of the three months ended June 30, 2003 and 2002, we allocated $5,376,000 of our net income to our Equity Stock, Series A shareholders. 39 FOR THE SIX MONTHS ENDED JUNE 30, 2003 Net income for the six months ended June 30, 2003 was $160,936,000 compared to $168,173,000 for the same period in 2002, representing a decrease of $7,237,000 or 4.3%. This decrease in net income is primarily a result of a reduction in the operating 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 a reduction in earnings for PSB, caused primarily by the net impact of a gain on sale offset by an asset impairment charge with respect to impending real estate sales recorded by PSB in the six months ended June 30, 2003, as compared to a gain on sale recorded by PSB in the six months ended June 30, 2002. Our net pro rata share of such items recorded by PSB for the six months ended June 30, 2003 was $453,000 as compared to $2,241,000 in the same period in 2002, representing a decrease of $1,788,000. These decreases were offset partially by improved results of our containerized storage operations and the impact of a loss on sale of real estate assets recorded in the six months ended June 30, 2002. Net income allocable to our regular common shareholders (after allocating net income to our preferred and equity shareholders) was $77,464,000 or $0.62 per common share on a diluted basis (based on 125,536,000 weighted average diluted common equivalent shares) for the six months ended June 30, 2003 compared to $83,646,000 or $0.67 per common share on a diluted basis (based on 124,417,000 weighted average diluted common equivalent shares) for the same period in 2002, representing a decrease of 7.4% in the aggregate or 7.5% on a per share basis. The decrease in net income allocable to common shareholders and diluted earnings per share is primarily attributable to the same factors denoted above with respect to net income, offset partially by the impact of a reduction in income allocated to our preferred shareholders, as described below. Please see "Clarification of Emerging Issues Task Force Topic D-42 and impact on reported earnings per common" in Note 14 to the consolidated financial statements for more information. Weighted average diluted shares increased from 124,417,000 for the six months ended June 30, 2002 to 125,536,000 for the six months ended June 30, 2003. This increase was due primarily to the net issuance of 1,518,467 shares during 2002 and 2003 in connection with the acquisition of the remaining partnership interests in three entities in which the Company held a partial equity interest, as well as the issuance of an aggregate of 1,820,431 shares during 2002 and 2003 in connection with the exercise of employee stock options. This increase was offset partially by the impact of a 835,000 share reduction in the dilutive impact of stock options outstanding due to the exercise of employee stock options as well as a decrease in our average stock price, which impacts the weighted average calculation using the treasury stock method. During the six months ended June 30, 2003 and 2002, we allocated $72,721,000 and $73,776,000 of our net income (based on distributions paid), respectively, to our preferred shareholders, representing a decrease of 1.4%. This decrease is due to the redemption of several series of our higher coupon preferred stock in 2002 and 2003, offset partially by the issuance of additional preferred securities throughout 2002. In addition, during each of the six months ended June 30, 2003 and 2002, we allocated $10,751,000 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 90% of our total revenues generated for the six months ended June 30, 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) 1,165 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) 35 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) 72 newly-developed facilities that were opened after January 1, 1999 (the "Developed Facilities"): 40
Self - storage operations summary: Three months ended June 30, Six months ended June 30, - ---------------------------------- --------------------------------------- --------------------------------------- Percentage Percentage 2003 2002 Change 2003 2002 Change ------------ ------------ ------------ ------------ ------------ ------------ (Dollar amounts in thousands) Rental income (a): - ------------------ Consistent Group (b)................ $ 166,665 $ 163,358 2.0% $ 327,874 $ 328,802 (0.3)% Acquired Facilities (c)............. 16,104 14,514 11.0% 31,606 27,329 15.7% Expansion Facilities (d)............ 5,182 4,742 9.3% 10,264 9,820 4.5% Developed Facilities (e)............ 9,124 5,693 60.3% 16,902 10,881 55.3% ------------ ------------ ------------ ------------ ------------ ------------ Total rental income............... 197,075 188,307 4.7% 386,646 376,832 2.6% ------------ ------------ ------------ ------------ ------------ ------------ Cost of operations: - ------------------- Consistent Group.................... 58,055 50,447 15.1% 112,329 100,531 11.7% Acquired Facilities................. 5,409 4,330 24.9% 10,204 7,924 28.8% Expansion Facilities................ 2,318 1,701 36.3% 4,325 3,567 21.3% Developed Facilities................ 4,655 3,300 41.1% 8,894 6,195 43.6% ------------ ------------ ------------ ------------ ------------ ------------ Total cost of operations............ 70,437 59,778 17.8% 135,752 118,217 14.8% ------------ ------------ ------------ ------------ ------------ ------------ Net operating income (before depreciation): - ------------------------------------------- Consistent Group.................... 108,610 112,911 (3.8)% 215,545 228,271 (5.6)% Acquired Facilities................. 10,695 10,184 5.0% 21,402 19,405 10.3% Expansion Facilities................ 2,864 3,041 (5.8)% 5,939 6,253 (5.0)% Developed Facilities................ 4,469 2,393 86.8% 8,008 4,686 70.9% ------------ ------------ ------------ ------------ ------------ ------------ Total net operating income.......... 126,638 128,529 (1.5)% 250,894 258,615 (3.0)% Depreciation.......................... (43,485) (43,177) 0.7% (86,759) (84,426) 2.8% ------------ ------------ ------------ ------------ ------------ ------------ Operating Income.................... $ 83,153 $ 85,352 (2.6%) $ 164,135 $ 174,189 (5.8%) ============ ============ ============ ============ ============ ============ Number of self-storage facilities (at end of period):............................ 1,367 1,351 1.2% 1,367 1,351 1.2% Net rentable square feet (at end of period - - in thousands):....................... 82,516 81,344 1.4% 82,516 81,344 1.4%
(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 1,165 facilities containing 67,729,000 net rentable square feet that have been owned prior to January 1, 2001, 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 35 facilities containing 3,805,000 net rentable square feet (of which 817,000 square feet is industrial space developed for containerized storage activities). These facilities were owned since January 1, 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 six months ended June 30, 2003, we completed construction on expansion projects to these facilities with a total cost of $121.5 million. (e) The Developed Facilities includes 72 facilities containing 5,340,000 net rentable square feet (of which 840,000 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 $466.0 million. 41 For the six months ended June 30, 2003, we have increased the number of facilities included in the Consistent Group pool of facilities from 1,152 at December 31, 2002 to 1,165 facilities. The increase in the Consistent Group's pool of facilities is due to (i) the inclusion of 18 facilities that were in the Acquired Facilities pool at December 31, 2002, offset by (ii) the reduction of the four Knoxville facilities that are in discontinued operations (see Note 4 to the consolidated financial statements for more information on discontinued operations) and (iii) one facility that was removed from the Consistent Group because its operations were being expanded. 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 1,165 facilities in order to identify trends in occupancies, realized rents per square foot, or operating results. The Consistent Group consists of facilities that have operated at a stabilized level of operations since January 1, 2001. This group of facilities contains approximately 67,729,000 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 June 30, Six Months Ended June 30, - ---------------- --------------------------------------- --------------------------------------- Percentage Percentage 2003 2002 Change 2003 2002 Change ------------ ------------ ------------ ------------ ------------ ------------ (Dollar amounts in thousands, except rents per square foot) Base rental income......................... $ 172,911 $ 163,497 5.8% $ 337,691 $ 324,821 4.0% Promotional discounts...................... (12,974) (5,380) 141.2% (22,949) (6,404) 258.4% ------------ ------------ ------------ ------------ ------------ ------------ Adjusted base rental income............. 159,937 158,117 1.2% 314,742 318,417 (1.2)% Late charges and administrative fees collected.................................. 6,728 5,241 28.4% 13,132 10,385 26.5% ------------ ------------ ------------ ------------ ------------ ------------ Total rental income..................... 166,665 163,358 2.0% 327,874 328,802 (0.3)% Cost of operations: Property taxes........................ 14,947 14,189 5.3% 31,478 29,965 5.0% Direct property payroll............... 14,823 12,486 18.7% 28,699 24,906 15.2% Cost of managing facilities........... 4,977 4,600 8.2% 10,024 9,648 3.9% Advertising and promotion............. 5,830 4,160 40.1% 9,333 6,823 36.8% Utilities............................. 3,895 3,621 7.6% 7,717 7,416 4.1% Repairs and maintenance............... 4,488 3,792 18.4% 8,209 6,981 17.6% Telephone reservation center.......... 2,424 2,373 2.1% 4,644 4,466 4.0% Property insurance.................... 2,452 1,652 48.4% 3,852 2,952 30.5% Other................................. 4,219 3,574 18.0% 8,373 7,374 13.5% ------------ ------------ ------------ ------------ ------------ ------------ Total cost of operations................ 58,055 50,447 15.1% 112,329 100,531 11.7% ------------ ------------ ------------ ------------ ------------ ------------ Net operating income before depreciation... 108,610 112,911 (3.8)% 215,545 228,271 (5.6)% Depreciation............................... (36,218) (36,811) (1.6)% (71,961) (71,875) 0.1% ------------ ------------ ------------ ------------ ------------ ------------ Operating income........................... $ 72,392 $ 76,100 (4.9)% $ 143,584 $ 156,396 (8.2)% ============ ============ ============ ============ ============ ============ Gross margin (before depreciation)......... 65.2% 69.1% (5.6)% 65.7% 69.4% (5.3)% Weighted average for the period: Square foot occupancy (a)............... 89.1% 86.3% 3.2% 86.9% 84.9% 2.4% Realized annual rent per occupied square foot (b)....................... $ 10.60 $ 10.82 (2.0)% $ 10.70 $ 11.08 (3.4)% REVPAR (c).............................. $ 9.45 $ 9.34 1.2% $ 9.29 $ 9.40 (1.2)% Weighted average at June 30: Square foot occupancy................... 91.2% 86.5% 5.4% In place annual rent per occupied $ 11.64 $ 11.71 (0.6%) square foot (d)...................... Posted annual rent per square foot (e).. $ 11.28 $ 11.73 (3.8)% Total net rentable square feet (in thousands)................................. 67,729 67,729 0.0%
42 (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 three and six months ended June 30, 2003, net operating income (prior to depreciation) for the Consistent Group facilities decreased 3.8% and 5.6%, respectively, as compared to the same periods in 2002. These decreases are primarily attributable to increased promotional discounts combined with increased cost of operations. During fiscal 2002, we struggled to regain occupancy levels that were below the levels that were experienced in the prior year. The reduction in our occupancy levels resulted in a reduction in our rental income that negatively impacted property net operating income and 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 on 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%. Although our average occupancy level was now higher than 2002, the level at March 31, 2003 was still well below levels we had experienced in years prior to 2002. In order to maintain the positive occupancy spread over 2002 and to regain to higher levels experienced in years prior to 2002, we continued to enhance move-in activity by advertising on television and offering promotional discounts to new incoming tenants throughout the second quarter of 2003. At the end of June 2003, the average occupancy level for the Consistent Group of facilities was 91.2% as compared to 86.5% at the end of June 2002, representing an increase of 5.4%. The increase in occupancy levels has come at a significant cost. Television advertising expense for the second quarter of 2003 was $2,719,000 as compared to $1,403,000 in the second quarter of 2002. In addition, promotional discounts totaled $12,974,000 for the second quarter of 2003 as compared to $5,380,000 for the second 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 second 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. 43 Total operating expenses increased 15.1% for the three months ended June 30, 2003 as compared to the same period in 2002. This increase was due primarily to increases in payroll, advertising and promotion, property tax, and repairs and maintenance costs. Direct property payroll increased 18.7% in the three months ended June 30, 2003 as compared to the same period in 2002 due primarily to increased incentives paid to and hours worked by property operating personnel. Advertising and promotion increased 40.1% in the three months ended June 30, 2003 as compared to the same period in 2002 primarily due to an increase in television advertising expense from $1,403,000 in the three months ended June 30, 2002 to $2,719,000 for the same period in 2003. Repairs and maintenance cost have increased 18.4% for the three months ended June 30, 2003, as compared to the same period in 2002, as a result of costs to remedy mold issues at several facilities in Southern states combined with a general increase in cost that we expect will continue at least over the next 12 months to address deferred maintenance at our facilities. Total operating expenses increased 11.7% for the six months ended June 30, 2003 as compared to the same period in 2002. This increase was due to increases in payroll, advertising and promotion, property tax, and repairs and maintenance costs. Direct property payroll increased 15.2% due primarily to increased incentives paid to and hours worked by property operating personnel. Advertising and promotion increased 36.8% primarily due to an increase in television advertising from $1,943,000 in the six months ended June 30, 2002 to $4,222,000 for the same period in 2003. Repairs and maintenance have increased 17.6% in the six months ended June 30, 2003 as compared to the same period in 2002 due to costs to remedy mold issues in several facilities in Southern states, increased snow removal expenses, as well as a general increase in costs that we expect will continue at least over the next 12 months to address deferred maintenance at our facilities. 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............ $ 161,209 $ 166,665 2002............ $ 165,444 $ 163,358 $ 168,257 $ 161,388 $ 658,447 Promotional discounts given: 2003............ $ 9,975 $ 12,974 2002............ $ 1,024 $ 5,380 $ 4,721 $ 7,301 $ 18,426 Total cost of operations: 2003............ $ 54,274 $ 58,055 2002............ $ 50,084 $ 50,447 $ 52,375 $ 57,759 $ 210,665 Television advertising expense: 2003............ $ 1,503 $ 2,719 2002............ $ 540 $ 1,403 $ 1,934 $ 3,913 $ 7,790 REVPAR: 2003............ $ 9.14 $ 9.45 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 $ 10.60 2002............ $ 11.33 $ 10.82 $ 11.20 $ 10.81 $ 11.04 Weighted average occupancy levels for the period: 2003............ 84.8% 89.1% 2002............ 83.5% 86.3% 85.7% 85.0% 85.1% Weighted average occupancy at July 31, 2003............ 91.7% 2002............ 85.7%
44 We are pleased with the occupancy gains that we have achieved thus far this year, however, our experience has been that on average approximately 25% to 30% of our new customers will move out within the first 60 to 90 days. Our current occupancy levels have been achieved in large part on the move-in activity over the past four months. Accordingly, we expect that our move-out activity will continue at a higher level putting pressure on our occupancy levels. Compounding the pressure on our occupancies will be the normal seasonal increase in move-out activity that we have historically experienced in the third and fourth quarters. In order to achieve a sustainable high level of occupancy, we expect to continue promotional discounting and television advertising during at least 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. As indicated on the above table, the weighted average occupancy of the Consistent Group facilities was 91.7% at July 31, 2003 as compared to 85.7% at July 31, 2002, representing an increase of 7.0%. This increase, however, has come at a significant cost, as promotional discounts and television advertising costs are expected to be higher in the quarter ended September 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. 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 June 30, Six months ended June 30, -------------------------------------- ---------------------------------------- Percentage Percentage 2003 2002 Change 2003 2002 Change ------------ ------------ ------------ ------------ ------------ ------------ (Dollar amounts in thousands) Rental income: Southern California (120 facilities) $ 28,161 $ 26,106 7.9% $ 55,291 $ 52,448 5.4% Northern California (108 facilities) 19,540 19,055 2.5% 38,601 38,507 0.2% Texas (140 facilities).......... 15,473 15,542 (0.4)% 30,518 31,373 (2.7)% Florida (108 facilities)........ 13,910 13,500 3.0% 27,542 27,437 0.4% Illinois (82 facilities)........ 12,504 13,113 (4.6)% 24,800 26,417 (6.1)% Georgia (56 facilities)......... 5,866 5,805 1.1% 11,567 11,708 (1.2)% All other states (551 facilities) 71,211 70,237 1.4% 139,555 140,912 (1.0)% ------------ ------------ ------------ ------------ ------------ ------------ Total rental income................. 166,665 163,358 2.0% 327,874 328,802 (0.3)% ------------ ------------ ------------ ------------ ------------ ------------ Cost of operations: Southern California.............. 6,846 5,825 17.5% 13,439 11,586 16.0% Northern California.............. 5,213 4,646 12.2% 10,284 8,994 14.3% Texas............................ 7,153 6,102 17.2% 13,462 12,094 11.3% Florida.......................... 5,734 4,855 18.1% 10,796 9,234 16.9% Illinois......................... 5,483 5,133 6.8% 11,014 10,357 6.3% Georgia.......................... 2,299 1,906 20.6% 4,275 3,660 16.8% All other states................. 25,327 21,980 15.2% 49,059 44,606 10.0% ------------ ------------ ------------ ------------ ------------ ------------ Total cost of operations............ 58,055 50,447 15.1% 112,329 100,531 11.7% ------------ ------------ ------------ ------------ ------------ ------------
45
Consistent Group Operating Trends by Region: (Continued) - -------------------------------------------------------- Three months ended June 30, Six months ended June 30, -------------------------------------- ---------------------------------------- Percentage Percentage 2003 2002 Change 2003 2002 Change ------------ ------------ ------------ ------------ ------------ ------------ (Dollar amounts in thousands) Net operating income (before depreciation): Southern California.............. 21,315 20,281 5.1% 41,852 40,862 2.4% Northern California.............. 14,327 14,409 (0.6)% 28,317 29,513 (4.1)% Texas............................ 8,320 9,440 (11.9)% 17,056 19,279 (11.5)% Florida.......................... 8,176 8,645 (5.4)% 16,746 18,203 (8.0)% Illinois......................... 7,021 7,980 (12.0)% 13,786 16,060 (14.2)% Georgia.......................... 3,567 3,899 (8.5)% 7,292 8,048 (9.4)% All other states................. 45,884 48,257 (4.9)% 90,496 96,306 (6.0)% ------------ ------------ ------------ ------------ ------------ ------------ Total net operating income.......... $ 108,610 $ 112,911 (3.8)% $ 215,545 $ 228,271 (5.6)% ------------ ------------ ------------ ------------ ------------ ------------ Weighted average occupancy: Southern California.............. 90.5% 87.3% 3.7% 89.5% 86.7% 3.2% Northern California.............. 89.9% 86.3% 4.2% 87.7% 85.3% 2.8% Texas............................ 89.7% 85.8% 4.5% 87.1% 84.7% 2.8% Florida.......................... 90.9% 86.0% 5.7% 88.7% 85.2% 4.1% Illinois......................... 86.6% 83.8% 3.3% 84.0% 82.3% 2.1% Georgia.......................... 91.2% 85.1% 7.2% 88.2% 83.7% 5.4% All other states................. 88.1% 86.6% 1.7% 85.8% 84.8% 1.3% ------------ ------------ ------------ ------------ ------------ ------------ Total weighted average occupancy.... 89.1% 86.3% 3.2% 86.9% 84.9% 2.4% ------------ ------------ ------------ ------------ ------------ ------------ REVPAR: Southern California.............. $14.47 $13.50 7.2% $14.20 $13.57 4.6% Northern California.............. 12.89 12.65 1.9% 12.73 12.79 (0.5)% Texas............................ 6.87 6.94 (1.0)% 6.77 7.01 (3.4)% Florida.......................... 8.08 8.01 0.9% 8.21 8.32 (1.3)% Illinois......................... 9.43 10.02 (5.9)% 9.53 10.24 (6.9)% Georgia.......................... 6.90 7.00 (1.4)% 6.79 7.07 (4.0)% All other states................. 8.83 8.77 0.7% 8.60 8.75 (1.7)% ------------ ------------ ------------ ------------ ------------ ------------ Total REVPAR:....................... $9.45 $9.34 1.2% $9.29 $9.40 (1.2)% ------------ ------------ ------------ ------------ ------------ ------------ Realized annual rent per occupied square foot: Southern California.............. $15.99 $15.47 3.4% $15.86 $15.65 1.3% Northern California.............. 14.34 14.66 (2.2)% 14.52 14.99 (3.1)% Texas............................ 7.66 8.09 (5.3)% 7.77 8.28 (6.2)% Florida.......................... 8.89 9.31 (4.5)% 9.25 9.77 (5.3)% Illinois......................... 10.89 11.95 (8.9)% 11.34 12.44 (8.8)% Georgia.......................... 7.56 8.22 (8.0)% 7.70 8.44 (8.8)% All other states................. 10.02 10.13 (1.1)% 10.01 10.32 (3.0)% ------------ ------------ ------------ ------------ ------------ ------------ Total realized annual rent per occupied square foot:...................... $10.60 $10.82 (2.0)% $10.70 $11.08 (3.4)% ------------ ------------ ------------ ------------ ------------ ------------
Self-Storage Operations - Acquired Facilities The "Acquired Facilities," at June 30, 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: 46
ACQUIRED FACILITIES - ------------------- Three Months Ended June 30, Six Months Ended June 30, -------------------------------------- ------------------------------------ 2003 2002 Change 2003 2002 Change ------------ ------------ ------------ ---------- ---------- ------------ (Dollar amounts in thousands) Rental income (a): Self-storage facilities acquired in 2002 (a) $ 14,844 $ 13,400 $ 1,444 $ 29,161 $ 25,110 $ 4,051 Self-storage facility acquired in 2001 (b).. 138 105 33 269 201 68 Self-storage facilities acquired in 2000 (c) 1,122 1,009 113 2,176 2,018 158 ------------ ------------ ------------ ---------- ---------- ------------ Total rental income....................... 16,104 14,514 1,590 31,606 27,329 4,277 ------------ ------------ ------------ ---------- ---------- ------------ Cost of operations: Self-storage facilities acquired in 2002 (a) 4,795 3,836 959 9,072 6,967 2,105 Self-storage facility acquired in 2001 (b).. 44 41 3 83 79 4 Self-storage facilities acquired in 2000 (c) 570 453 117 1,049 878 171 ------------ ------------ ------------ ---------- ---------- ------------ Total cost of operations.................. 5,409 4,330 1,079 10,204 7,924 2,280 ------------ ------------ ------------ ---------- ---------- ------------ Net operating income before depreciation: - ---------------------------------------- Self-storage facilities acquired in 2002 (a) 10,049 9,564 485 20,089 18,143 1,946 Self-storage facility acquired in 2001 (b).. 94 64 30 186 122 64 Self-storage facilities acquired in 2000 (c) 552 556 (4) 1,127 1,140 (13) ------------ ------------ ------------ ---------- ---------- ------------ Net operating income...................... 10,695 10,184 511 21,402 19,405 1,997 Depreciation.................................. (2,564) (2,745) 181 (5,455) (5,149) (306) ------------ ------------ ------------ ---------- ---------- ------------ Operating Income............................ $ 8,131 $ 7,439 $ 692 $ 15,947 $ 14,256 $ 1,691 ============ ============ ============ ========== ========== ============ Weighted average square foot occupancy during the period: Self-storage facilities acquired in 2002 (a) 89.9% 80.0% 12.4% 87.8% 78.5% 11.8% Self-storage facility acquired in 2001 (b).. 93.0% 61.3% 51.7% 88.8% 56.2% 58.0% Self-storage facilities acquired in 2000 (c) 83.0% 68.6% 21.0% 78.2% 66.1% 18.3% ------------ ------------ ------------ ---------- ---------- ------------ 89.3% 78.7% 13.5% 87.0% 77.1% 12.8% ============ ============ ============ ========== ========== ============ Number of self-storage facilities (at end of 95 89 6 95 89 6 period)........................................ Net rentable square feet (in thousands, at end of period)..................................... 5,642 5,295 347 5,642 5,295 347 Cumulative acquisition cost (at end of period). $ 405,684 $ 383,599 $ 22,085 $ 405,684 $ 383,599 $ 22,085
(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 $3,503,000. (c) The 2000 acquisitions are comprised of seven facilities acquired from third parties at a total cost of $41,638,000. Rental income and cost of operations for the Acquired Facilities have increased significantly in the three months ended June 30, 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. 47 Self-Storage Operations - Expansion Facilities Since January 1, 2000, we expanded 35 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 June 30, 2003, the weighted average occupancy level was approximately 86% as compared to 70% 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 $1,550,000 and $3,041,000 for the three and six months ended June 30, 2003, respectively, as compared to $1,431,000 and $3,050,000, respectively, for the same periods in 2002. These 35 facilities contain approximately 3,805,000 net rentable square feet at June 30, 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 55 newly developed self-storage facilities and 17 facilities that were developed to contain both self-storage and portable self-storage at the same location ("Combination Facilities"). These newly developed facilities have an aggregate of 5,324,000 net rentable square feet (of which 840,000 net rentable square feet is industrial space initially developed for containerized storage activities - see "Containerized Storage" and "Discontinued Operations"). Aggregate development cost for these 72 facilities was approximately $465,953,000. The operating results of the self-storage facilities and Combination Facilities are reflected in the Self-Storage Operations table under the caption, "Developed Facilities." 48 The following table sets forth the operating results and selected operating data with respect to the Developed Facilities:
DEVELOPED FACILITIES - -------------------- Three Months Ended June 30, Six Months Ended June 30, -------------------------------------- ------------------------------------- 2003 2002 Change 2003 2002 Change ----------- ----------- ----------- ----------- ----------- ----------- (Dollar amounts in thousands) Rental income: Self-storage facilities............ $ 6,635 $ 4,200 $ 2,435 $ 12,271 $ 8,019 $ 4,252 Combination Facilities............. 2,489 1,493 996 4,631 2,862 1,769 ----------- ----------- ----------- ----------- ----------- ----------- Total rental income.............. 9,124 5,693 3,431 16,902 10,881 6,021 ----------- ----------- ----------- ----------- ----------- ----------- Cost of operations: Self-storage facilities............ 3,265 2,165 1,100 6,322 4,062 2,260 Combination Facilities............. 1,390 1,135 255 2,572 2,133 439 ----------- ----------- ----------- ----------- ----------- ----------- Total cost of operations......... 4,655 3,300 1,355 8,894 6,195 2,699 ----------- ----------- ----------- ----------- ----------- ----------- Net operating income before depreciation: Self-storage facilities............ 3,370 2,035 1,335 5,949 3,957 1,992 Combination Facilities............. 1,099 358 741 2,059 729 1,330 ----------- ----------- ----------- ----------- ----------- ----------- Net operating income............. 4,469 2,393 2,076 8,008 4,686 3,322 Depreciation......................... (3,153) (2,190) (963) (6,302) (4,352) (1,950) ----------- ----------- ----------- ----------- ----------- ----------- Operating income................... $ 1,316 $ 203 $ 1,113 $ 1,706 $ 334 $ 1,372 =========== =========== =========== =========== =========== =========== Weighted average square foot occupancies for the period: Self-storage facilities............ 66.8% 55.5% 20.4% 61.8% 52.4% 17.9% Combination Facilities............. 73.0% 42.4% 72.2% 67.1% 38.2% 75.7% ----------- ----------- ----------- ----------- ----------- ----------- Total............................ 68.2% 51.7% 31.9% 63.0% 48.3% 30.4% =========== =========== =========== =========== =========== =========== Self-storage facilities, at end of period: Number of facilities............... 55 42 13 Net rentable square feet........... 3,479 2,623 856 Total development cost............. $310,367 $ 218,610 $91,757 Combination Facilities, at end of period: Number of facilities............... 17 17 - Net rentable square feet (a)....... 1,861 1,844 17 Total development cost (a)......... $155,586 $ 154,177 $ 1,409
(a) During the three months ended June 30, 2003, we completed the conversion of a PUD container facility to a self-storage facility, at an aggregate cost of $1,409,000. As a result of this conversion, the Company converted a total of 38,000 net rentable square feet of industrial space into 55,000 net rentable square feet of traditional miniwarehouse space. The following table summarizes operating data for the 55 newly developed self-storage facilities that opened since January 1, 1999: 49
DEVELOPED SELF-STORAGE FACILITIES - --------------------------------- Three Months Ended June 30, Six Months Ended June 30, ------------------------------------- ----------------------------------- 2003 2002 Change 2003 2002 Change ----------- ----------- ---------- ----------- ----------- ---------- (Dollar Amounts in thousands) Rental income: Self-storage facilities opened in 2003...... $ 189 $ - $ 189 $ 193 $ - $ 193 Self-storage facilities opened in 2002...... 1,524 138 1,386 2,651 145 2,506 Self-storage facilities opened in 2001...... 1,500 1,060 440 2,796 1,996 800 Self-storage facilities opened in 2000...... 2,593 2,251 342 5,020 4,395 625 Self-storage facilities opened in 1999...... 829 751 78 1,611 1,483 128 ----------- ----------- ---------- ----------- ----------- ---------- Total rental income....................... 6,635 4,200 2,435 12,271 8,019 4,252 ----------- ----------- ---------- ----------- ----------- ---------- Cost of operations: Self-storage facilities opened in 2003...... 235 - 235 310 - 310 Self-storage facilities opened in 2002...... 861 247 614 1,676 283 1,393 Self-storage facilities opened in 2001...... 893 707 186 1,714 1,380 334 Self-storage facilities opened in 2000...... 1,009 949 60 2,056 1,886 170 Self-storage facilities opened in 1999...... 267 262 5 566 513 53 ----------- ----------- ---------- ----------- ----------- ---------- Total cost of operations.................. 3,265 2,165 1,100 6,322 4,062 2,260 ----------- ----------- ---------- ----------- ----------- ---------- Net operating income before depreciation: Self-storage facilities opened in 2003...... (46) - (46) (117) - (117) Self-storage facilities opened in 2002...... 663 (109) 772 975 (138) 1,113 Self-storage facilities opened in 2001...... 607 353 254 1,082 616 466 Self-storage facilities opened in 2000...... 1,584 1,302 282 2,964 2,509 455 Self-storage facilities opened in 1999...... 562 489 73 1,045 970 75 ----------- ----------- ---------- ----------- ----------- ---------- Net operating income........................ 3,370 2,035 1,335 5,949 3,957 1,992 Depreciation.................................. (2,049) (1,287) (762) (4,102) (2,555) (1,547) ----------- ----------- ---------- ----------- ----------- ---------- Operating income............................ $ 1,321 $ 748 $ 573 $ 1,847 $ 1,402 $ 445 =========== =========== ========== =========== =========== ========== Weighted average square foot occupancy during the period: Self-storage facilities opened in 2003...... 23.2% - - 17.4% - - Self-storage facilities opened in 2002...... 54.8% 14.4% 280.6% 47.3% 11.8% 300.8% Self-storage facilities opened in 2001...... 66.7% 42.6% 56.6% 60.5% 39.1% 57.7% Self-storage facilities opened in 2000...... 87.3% 74.8% 16.7% 84.6% 71.4% 18.5% Self-storage facilities opened in 1999...... 91.3% 87.6% 4.2% 90.6% 85.4% 6.1% ----------- ----------- ---------- ----------- ----------- ---------- 66.8% 55.5% 20.4% 61.8% 52.4% 17.9% =========== =========== ========== =========== =========== ========== Number of facilities: Self-storage facilities opened in 2003...... 6 - 6 Self-storage facilities opened in 2002...... 14 7 7 Self-storage facilities opened in 2001...... 12 12 - Self-storage facilities opened in 2000...... 18 18 - Self-storage facilities opened in 1999...... 5 5 - ----------- ----------- ---------- 55 42 13 =========== =========== ========== Cumulative Development Cost: Self-storage facilities opened in 2003...... $ 42,059 $ - $ 42,059 Self-storage facilities opened in 2002...... 93,413 43,715 49,698 Self-storage facilities opened in 2001...... 66,905 66,905 - Self-storage facilities opened in 2000...... 82,819 82,819 - Self-storage facilities opened in 1999...... 25,171 25,171 - ----------- ----------- ---------- $ 310,367 $ 218,610 $ 91,757 =========== =========== ==========
50 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 June 30, 2003, the newly developed self-storage facilities had a weighted average occupancy level of approximately 66.8%. 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 the 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 $15,757,000 and $13,383,000, in the six months ended June 30, 2003 and 2002, respectively, as a result of the difference between the revenues generated by the Developed Facilities and the operating expenses, depreciation, and cost of capital with respect to these facilities as described above. These amounts include approximately $6,302,000 and $4,352,000, in the six months ended June 30, 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 we expect to be opened for operation over approximately the next 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 June 30, 2003 balance sheet. 51 The following table sets forth the historical commercial property amounts included in the financial statements:
COMMERCIAL PROPERTY OPERATIONS (EXCLUDING DISCONTINUED OPERATIONS): Three Months Ended June 30, Six Months Ended June 30, ------------------------------------- ----------------------------------- 2003 2002 Change 2003 2002 Change ---------- ---------- ---------- ---------- ---------- ---------- Rental income $ 2,943 $ 3,067 $ (124) $ 5,789 $ 6,023 $ (234) Cost of operations................... (1,045) (1,106) 61 (2,238) (2,198) (40) ---------- ---------- ---------- ---------- ---------- ---------- Net operating income............... 1,898 1,961 (63) 3,551 3,825 (274) Depreciation......................... (674) (670) (4) (1,299) (1,369) 70 ---------- ---------- ---------- ---------- ---------- ---------- Operating income................... $ 1,224 $ 1,291 $ (67) $ 2,252 $ 2,456 $ (204) ========== ========== ========== ========== ========== ==========
The decrease in rental income for June 30, 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 $198,000. 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 June 30, 2003, PSPUD operated 32 facilities in 11 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 decided to closed 22 of the 55 containerized storage facilities that were open at January 1, 2002. As of June 30, 2003, 21 of the 22 facilities have been closed and the remaining facility is expected to be closed by December 31, 2003. In addition, during the second quarter of 2003, we closed one additional facility that was not included in the original 22 facilities targeted for closure. These 23 facilities are 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 June 30, For the six months ended June 30, ----------------------------------- ---------------------------------- 2003 2002 Change 2003 2002 Change ---------- ---------- -------- ---------- --------- ---------- (Amounts in thousands) Rental and other income ............ $10,402 $8,661 $1,741 $19,638 $16,567 $3,071 ---------- ---------- -------- ---------- --------- ---------- Cost of operations: Direct operating costs.......... 6,306 5,586 720 11,883 10,634 1,249 Facility lease expense.......... 555 566 (11) 1,114 1,173 (59) ---------- ---------- -------- ---------- --------- ---------- Total cost of operations..... 6,861 6,152 709 12,997 11,807 1,190 ---------- ---------- -------- ---------- --------- ---------- Operating income prior to depreciation.................. 3,541 2,509 1,032 6,641 4,760 1,881 Depreciation expense (a)............ (2,155) (1,616) (539) (4,136) (3,042) (1,094) ---------- ---------- -------- ---------- --------- ---------- Operating income.................... $1,386 $893 $493 $2,505 $1,718 $787 ========== ========== ======== ========== ========= ==========
(a) Depreciation expense principally relates to the depreciation related to the containers; however, depreciation expense for the three and six months ended June 30, 2003 includes $464,000 and $854,000, respectively, with respect to real estate facilities. Depreciation expense for the three months ended June 30, 2002 includes $375,000 and $593,000, respectively, with respect to real estate facilities 52 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 $10,402,000 and $19,638,000 for the three and six months ended June 30, 2003, respectively, from $8,661,000 and $16,567,000, respectively, for the same periods in 2002 primarily as a result of higher per container rents and an increase in the number of occupied containers. At June 30, 2003, there were approximately 50,000 occupied containers in the 32 facilities that are reflected in these "ongoing" operations. 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 $833,000 for the six months ended June 30, 2003 as compared to the same period in 2002 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. At June 30, 2003, eight of the 32 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. We continue to evaluate the business operations, and additional facilities may be closed. 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."
TENANT REINSURANCE OPERATIONS Three Months Ended June 30, Six Months Ended June 30, -------------------------------------- ------------------------------------ 2003 2002 Change 2003 2002 Change ----------- ----------- ----------- ----------- ----------- ----------- (Amounts in thousands) Tenant reinsurance revenues........... $ 5,581 $ 5,156 $ 425 $ 10,796 $ 9,731 $ 1,065 Cost of operations................... (3,015) (2,523) (492) (5,714) (4,816) (898) ----------- ----------- ----------- ----------- ----------- ----------- Operating income................... $ 2,566 $ 2,633 $ (67) $ 5,082 $ 4,915 $ 167 =========== =========== =========== =========== =========== ===========
The level of tenant reinsurance revenues is largely dependent upon our occupancy level and move-in activity. As of June 30, 2003, approximately 38% of our self-storage tenant base has 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. 53 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 June 30, 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 and six months ended June 30, 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:
For the three months ended June 30, For the six months ended June 30, ------------------------------------ ------------------------------------- 2003 2002 Change 2003 2002 Change ---------- ---------- ---------- ---------- ---------- ---------- (Amounts in thousands) Property operations: PSB $15,331 $16,135 $(804) $30,031 $31,558 $(1,527) Disposed investments (1)............... - 9 (9) 10 304 (294) Other investments (2).................. 1,447 1,797 (350) 2,865 3,596 (731) ---------- ---------- ---------- ---------- ---------- ---------- 16,778 17,941 (1,163) 32,906 35,458 (2,552) ---------- ---------- ---------- ---------- ---------- ---------- Depreciation: PSB.................................... (6,280) (6,246) (34) (12,309) (12,347) 38 Disposed investments (1)............... - - - - (65) 65 Other investments (2).................. (564) (279) (285) (829) (484) (345) ---------- ---------- ---------- ---------- ---------- ---------- (6,844) (6,525) (319) (13,138) (12,896) (242) ---------- ---------- ---------- ---------- ---------- ---------- Other: (3) PSB (4)................................ (1,320) (4,674) 3,354 (6,572) (6,882) 310 Disposed investments (1)............... - - - - - - Other investments (2).................. 385 258 127 490 576 (86) ---------- ---------- ---------- ---------- ---------- ---------- (935) (4,416) 3,481 (6,082) (6,306) 224 ---------- ---------- ---------- ---------- ---------- ---------- Total equity in earnings of real estate entities.................................. $8,999 $7,000 $1,999 $13,686 $16,256 $(2,570) ========== ========== ========== ========== ========== ==========
(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). Amounts also include income with respect to an investment that was disposed of in the second quarter of 2003. (2) Amounts include equity in earnings recorded for investments that have been held consistently throughout each of the three and six months ended June 30, 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 also includes the net impact of PSB's gains on sales of assets recorded in the first and second quarters of 2003 and in the second quarter of 2002, as well as the impact of an impairment charge recorded by PSB in the first quarter of 2003 with respect to an impending sale of real estate assets. Our net pro rata share of these items for the three months ended June 30, 2003 was $2,583,000 compared to none for the same period in 2002. Our net pro rata share of these items for the six months ended June 30, 2003 and 2002 was $453,000 and $2,241,000, respectively. The increase in equity in earnings of real estate entities for the three months ended June 30, 2003 as compared to 2002 is primarily due to a net gain on sale of real estate assets recorded by PSB. Our net pro rata share of this gain for the quarter ended June 30, 2003 totaled approximately $2,583,000; there was no such gain recorded in the same period in 2002. The decrease in equity in earnings of real estate entities for the six months ended June 30, 2003 as compared to 2002, is primarily due to a reduction in earnings for PSB, caused primarily by the net impact of a gain on sale offset by an asset impairment charge with respect to impending real estate sales recorded by PSB in the six months ended June 30, 2003, as compared to a gain on sale recorded by PSB in the six months ended June 30, 2002. Our net pro rata share of such items recorded by PSB for the six months ended June 30, 2003 was $453,000 as compared to $2,241,000 in the same period in 2002, representing a decrease of $1,788,000. 54 Equity in earnings of PSB represents our pro rata share (an average of approximately 44% for the quarter ended June 30, 2003 and 2002) of the earnings of PSB. As of June 30, 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 June 30, 2003, PSB owned and operated 14.9 million net rentable square feet of commercial space located in nine states. PSB also manages approximately 1,222,000 net rentable square feet of commercial space owned by the Company, the Consolidated Entities, and the Unconsolidated Entities at June 30, 2003 pursuant to property management agreements. 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 six months ended June 30, 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 six months ended June 30, 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 increased to $2,879,000 and $4,578,000 for the three and six months ended June 30, 2003, respectively, from $2,759,000 and $4,467,000, respectively, for the same periods in 2002. This increase reflects improved operating results on our merchandise and truck rental operations, offset partially by reduced interest on notes receivable due to principal payments and a reduction in average interest rates on outstanding cash balances. In addition, interest and other income for the six months ended June 30, 2003 reflects a reduction from the same period in 2002 due to a reduction in property management operations due to the consolidation of the Development Joint Venture, as described in Note 3 to the consolidated financial statements. 55 DEPRECIATION AND AMORTIZATION: Depreciation and amortization expense was $46,314,000 and $92,194,000 for the three and six months ended June 30, 2003, respectively, as compared to $45,463,000 and $88,837,000, respectively for the same periods in 2002. Included in depreciation expense with respect to our real estate facilities was $42,266,000 and $84,329,000 for the three and six months ended June 30, 2003, respectively, as compared to $42,571,000 and $83,086,000 for the same periods in 2002, respectively. The increase in such depreciation is principally the result of property acquisitions and newly developed facilities opened for operation. Included in depreciation and amortization expense for the three and six months ended June 30, 2003 is $2,397,000 and $4,563,000, respectively, as compared to $1,241,000 and $2,449,000 for the same periods in 2002, 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 and six month periods ended June 30, 2003 and 2002 is $1,651,000 and $3,302,000, respectively, with respect to the amortization of property management contracts. GENERAL AND ADMINISTRATIVE: General and administrative expense for the three months ended June 30, 2003 increased 2.9% to $4,429,000 as compared to $4,305,000 for the same period in 2002. General and administrative expense for the six months ended June 30, 2003 increased 4.5% to $8,679,000 as compared to $8,305,000 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. 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 $100,000 and $199,000 for the three and six months ended June 30, 2003 ($58,000 for the three and six months ended June 30, 2002). Based upon stock options granted between January 1, 2002 and June 30, 2003, the total expected annual expense for 2003 is approximately $400,000. 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 $372,000 and $1,213,000 for the three months ended June 30, 2003 and 2002, respectively. Interest expense was $825,000 and $2,315,000 for the six months ended June 30, 2003 and 2002, respectively. Interest capitalized during the three and six months ended June 30, 2003 was $1,450,000 and $2,975,000, respectively, compared to $1,426,000 and $3,272,000, respectively, for the same periods in 2002. 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. 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 and six months ended June 30, 2003 and 2002 (amounts in thousands):
For the three months ended June 30, For the six months ended June 30, ---------------------------------------- ---------------------------------------- Description 2003 2002 Change 2003 2002 Change ------------ ------------ ------------ ------------ ------------ ------------ Preferred partnership interests......... $ 6,727 $ 6,727 $ - $ 13,453 $ 13,453 $ - Consolidated Development Joint Venture (a) 870 329 541 1,613 636 977 Convertible Partnership Units (b)....... 82 73 9 147 162 (15) Acquired minority interests (c) ........ 56 684 (628) 415 1,978 (1,563) Other minority interests (d)............ 3,035 2,800 235 5,810 5,726 84 ------------ ------------ ------------ ------------ ------------ ------------ Total minority interests in income.. $ 10,770 $ 10,613 $ 157 $ 21,438 $ 21,955 $ (517) ============ ============ ============ ============ ============ ============
(a) These amounts reflect income allocated to the minority interests in the Consolidated Development Joint Venture. Included in minority interest in income is $814,000 and $1,665,000 in depreciation expense for the three and six months ended June 30, 2003, respectively, as compared to $804,000 and $1,550,000, respectively, for the same periods in 2002. 56 (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 in income is $90,000 and $187,000 in depreciation expense for the three and six months ended June 30, 2003, respectively, as compared to $94,000 and $179,000, respectively, for the same periods in 2002. (c) These amounts reflect income allocated to minority interests that the Company acquired since December 31, 2001 and are no longer outstanding at June 30, 2003. Included in minority interest in income is $73,000 and $216,000 in depreciation expense for the three and six months ended June 30, 2003, respectively, as compared to $598,000 and $1,378,000, respectively, for the same periods in 2002. (d) These amounts reflect income allocated to minority interests that were outstanding consistently throughout the three months ended June 30, 2003 and 2002. Included in minority interest in income is $610,000 and $1,165,000 in depreciation expense for the three and six months ended June 30, 2003, respectively, as compared to $787,000 and $1,431,000 for the same periods in 2002. Minority interest in income - preferred partnership interests represents the income allocable to holders of our preferred partnership units. Throughout the periods ending June 30, 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 June 30, 2003 and 2002, the holders of these preferred units were paid aggregate distributions of approximately $6,727,000 and received a corresponding allocation of minority interest in earnings. We estimate that during the year ended December 31, 2003 the preferred units will be allocated $26,906,000 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. 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 and six months ended June 30, 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 $23,377,000. Included in minority interest in income for the three months ended June 30, 2003 and 2002, with respect to these interests was approximately $56,000 and $333,000, respectively, including $73,000 and $196,000, respectively, in depreciation expense. Included in minority interest in income for the six months ended June 30, 2003 and 2002, with respect to these interests was approximately $415,000 and $726,000, respectively, including $216,000 and $370,000, respectively, in depreciation expense. Following our 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. These facilities were disposed of on July 25, 2003, see Note 16 to the consolidated financial statements. 57 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. The following table summarizes the historical operations of the Knoxville Facilities, the Closed Facilities, and the sold commercial facility:
DISCONTINUED OPERATIONS: - ------------------------ For the three months ended June 30, For the six months ended June 30, --------------------------------------- ----------------------------------------- 2003 2002 Change 2003 2002 Change ------------ ---------- ------------ ------------ ------------ ------------ (Amounts in thousands) Rental income (a): Knoxville Facilities............ $ 399 $ 380 $ 19 $ 787 $ 762 $ 25 Closed Facilities............... 523 4,097 (3,574) 2,301 7,890 (5,589) Sold commercial facility........ - 114 (114) - 229 (229) ------------ ---------- ------------ ------------ ------------ ------------ Total rental income........ 922 4,591 (3,669) 3,088 8,881 (5,793) ------------ ---------- ------------ ------------ ------------ ------------ Cost of operations (a): Knoxville Facilities............ 146 127 19 316 283 33 Closed Facilities............... 989 5,091 (4,102) 2,860 8,754 (5,894) Sold commercial facility........ - 24 (24) - 46 (46) ------------ ---------- ------------ ------------ ------------ ------------ Total cost of operations... 1,135 5,242 (4,107) 3,176 9,083 (5,907) ------------ ---------- ------------ ------------ ------------ ------------ Depreciation expense (a): Knoxville Facilities............ 122 123 (1) 242 242 - Closed Facilities............... - 435 (435) 40 910 (870) Sold commercial facility........ - 31 (31) - 60 (60) ------------ ---------- ------------ ------------ ------------ ------------ Total depreciation ........ 122 589 (467) 282 1,212 (930) ------------ ---------- ------------ ------------ ------------ ------------ Asset impairment charges (b): Closed Facilities............... 750 - 750 750 - 750 ------------ ---------- ------------ ------------ ------------ ------------ Net discontinued operations....... $ (1,085) $ (1,240) $ 155 $ (1,120) $ (1,414) $ 294 ============ ========== ============ ============ ============ ============
(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. (b) An impairment charge of $750,000 was recorded in the second quarter of 2003 with respect to a real estate facility held for sale at June 30, 2003, which was previously used by the discontinued containerized storage operations. As of June 30, 2003, 22 of the 23 Closed Facilities were closed. We expect that the remaining facility will be closed by the December 31, 2003 and will continue to generate operating losses until final closure. GAIN (LOSS) IN DISPOSITION OF REAL ESTATE: During the first quarter of 2003, we disposed of two self-storage facilities and a parcel of land for an aggregate of $7,713,000 in cash, and recognized a gain on disposition of $14,000. During the quarter ended June 30, 2003, we disposed of two additional parcels of land for an aggregate of $4,147,000, recognizing a gain on disposition of $430,000, and disposed of an investment in real estate entities for an aggregate of $851,000, for a gain of approximately $316,000. During the second quarter ended June 30, 2002, we recorded a loss of $1,839,000 on the pending sale of minority interests. 58 The Knoxville Facilities were disposed of on July 25, 2003 for aggregate gross proceeds of $11.0 million. The Company financed a substantial part of the buyer's consideration in exchange for a note receivable from the buyer, and in accordance with generally accepted accounting principles, the Company will defer the sale and the corresponding gain of approximately $4.5 million. While there can be no assurance, the Company expects that the note receivable will be collected in full, and the estimated gain on sale will be recorded for financial reporting purposes, by the end of 2003. 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.
For the six months ended June 30, ----------------------------------- 2003 2002 ---------------- ---------------- (amounts in thousands) Net cash provided by operating activities.................. $ 293,879 $ 295,367 Allocable to minority interest (Preferred Units)........... (13,453) (13,453) Allocable to minority interest (common equity)............. (11,218) (13,040) ---------------- ---------------- Cash from operations allocable to our shareholders......... 269,208 268,874 Capital improvements to maintain our facilities............ (9,814) (12,526) Add back: minority interest share of capital improvements to maintain facilities................................. 244 478 ---------------- ---------------- Remaining operating cash flow available for distributions to our shareholders....................................... 259,638 256,826 Distributions paid: Preferred stock dividends................................ (72,721) (73,776) Equity Stock, Series A dividends......................... (10,751) (10,751) Distributions to Common and Class B shareholders (a)..... (112,137) (110,123) ---------------- ---------------- Cash available for principal payments on debt and reinvestment $ 64,029 $ 62,176 ================ ================
(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 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 June 30, 2003, we had borrowings on our line of credit totaling $24,000,000. As of July 15, 2003, outstanding borrowings had been repaid. 59 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 June 30, 2003, we had mortgage debt outstanding of $18.5 million and unsecured long-term debt in the amount of $64.4 million, and had unencumbered real estate facilities with a book value of approximately $4.0 billion. We believe that our size and financial flexibility enables us to access capital when appropriate. 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 six months ended June 30, 2003 and 2002, we paid cash dividends totaling $72,721,000 and $73,776,000, respectively, to the holders of our Cumulative Preferred Stock. We estimate that the distribution requirements with respect to our Preferred Stock outstanding at June 30, 2003 for the remainder of 2003 (after redemption of the Series C Senior Preferred Stock on that date) to be approximately $70.4 million. During each of the six months ended June 30, 2003 and 2002, we paid cash dividends totaling $13,453,000 to the holders of our preferred partnership units. We estimate that the remaining distribution requirement for 2003 with respect to the preferred partnership units outstanding at June 30, 2003 to be approximately $13.5 million. During each of the six months ended June 30, 2003 and 2002, we paid cash dividends totaling $10,751,000, 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 June 30, 2003, we estimate the total regular distribution for the remainder of 2003 to be approximately $10.8 million assuming that dividends of at least $0.49 per share per year are paid to the common shareholders. During the six months ended June 30, 2003, we paid dividends totaling $112,137,000 ($0.90 per common share) to the holders of our common stock. Based upon shares outstanding at June 30, 2003 and a quarterly distribution of $0.45 per share, which was declared by the Board of Directors on August 5, 2003 and payable on September 30, 2003, we estimate dividend payments with respect to our common stock of approximately $56.3 million for the third quarter of 2003. 60 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 six months ended June 30, 2003, we incurred capital improvements of approximately $9.8 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 June 30, 2003, we had total outstanding notes payable of approximately $82.9 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. 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 was approximately $23,377,000, consisting of the issuance of 426,859 shares of our common stock ($13,510,000) and cash of approximately $9,867,000 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 $187.4 million. Approximately $90.3 million of development cost has been incurred as of June 30, 2003. We have acquired the land for 37 of these projects, which have an aggregate estimated cost of approximately $168.3 million, and costs incurred as of June 30, 2003 of approximately $89.7 million. The remaining three facilities represent identified sites 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 $97.1 million will be incurred over the next 24 months. The following table sets forth certain information with respect to our development pipeline. 61
DEVELOPMENT PIPELINE SUMMARY Total Number Net estimated Costs incurred of rentable development through Costs to projects sq. ft. costs 6/30/03 complete -------- --------- ------------- --------------- -------------- (Amounts in thousands) FACILITIES CURRENTLY UNDER CONSTRUCTION: Self-storage facilities 13 943 $ 104,782 $ 74,457 $ 30,325 Expansions to existing self-storage facilities 9 539 35,183 13,960 21,223 -------- --------- ------------- --------------- -------------- 22 1,482 139,965 88,417 51,458 Expansions of existing self-storage facilities awaiting construction 15 827 28,302 1,302 27,000 Self storage facilities awaiting construction and land has not yet been acquired 3 186 19,152 616 18,536 -------- --------- ------------- --------------- -------------- Total Development Pipeline 40 2,495 $ 187,419 $ 90,335 $ 97,084 ======== ========= ============= =============== ==============
Included in the 24 "expansions of existing self-storage facilities" are 15 projects associated with the conversion of industrial space, previously used by the discontinued containerized facility operations, into self-storage space. The total amount of self-storage space to come on line from these 15 conversions is approximately 873,000 net rentable square feet of traditional self-storage space. In addition to the above projects, we have seven parcels of land held for development with total costs of approximately $14,036,000 at June 30, 2003. These parcels will either be developed or sold. 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 June 30, 2003, we have repurchased a total of 21,672,020 shares of common stock at an aggregate cost of approximately $541.9 million. 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 AND TAKE ACTIONS ADVERSE TO OTHER SHAREHOLDERS. At June 30, 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. 62 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, including 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. WE MAY PAY SOME TAXES, REDUCING CASH AVAILABLE FOR SHAREHOLDERS. 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 June 30, 2003, our debt of $106.9 million was approximately 2.3% 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. 63 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. There is significant competition among self-storage facilities and from other storage alternatives. Most of our properties are self-storage facilities, which generated 90% of our revenue for the six months ended June 30, 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 0.3% in the six months ended June 30, 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 64 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: Since January 1, 1999, we have opened 55 newly developed self storage facilities and 17 facilities that combine self-storage and containerized storage space at the same location, with aggregate development costs of $466.0. In addition, at June 30, 2003 the Company had 40 projects in development that are expected to begin construction generally by December 31, 2003. These 40 projects have total estimated costs of $187,419,000. 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. 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 June 30, 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. 65 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 $1,097,000 for the six months ended June 30, 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. The operating profit for the six months ended June 30, 2003, includes a write-down for impaired real estate assets totaling $750,000. 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. RECENTLY ENACTED TAX LEGISLATION COULD ADVERSELY AFFECT THE PRICE OF OUR STOCK. Recently enacted tax legislation generally reduces the maximum tax rate for dividends payable to individuals to 15% through 2008. Dividends payable by REITs, however, generally continue to be taxed at the normal rate applicable to the individual recipient, rather than the preferential rates applicable to other dividends. Although this legislation does not adversely affect the taxation of REITs or dividends paid by REITs, the more favorable rates applicable to regular corporate dividends could cause investors who are individuals to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the stock of REITs, including our common stock . 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 June 30, 2003, our debt as a percentage of total shareholders' equity (based on book values) was 2.6%. 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 D - June 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 - June 30, 2007. On or after the respective dates, each of the series of Senior Preferred Stock will be 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. 66 Our market risk sensitive instruments include notes payable, which totaled $106.9 million at June 30, 2003. Substantially all of the Company's notes payable bear interest at fixed rates. See Note 8 to the consolidated financial statements at June 30, 2003 for approximate principal maturities of the notes payable at June 30, 2003. 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 Rules 13a-15(e) 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 and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures in reaching that level of reasonable assurance. 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. As of the end of the fiscal quarter covered by 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 not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that has materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 67 PART II. OTHER INFORMATION Item 1. Legal Proceedings ----------------- Gustavson et al. v. Public Storage, Inc. (Filed June 2003) ---------------------------------------------------------- (Superior Court-Los Angeles County) ----------------------------------- 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 H. Gustavson, who in 2001 was an officer of the Company. In exchange for the Hughes family's shares in PSIC, the Company issued to them 1,439,765 shares of common stock (or a net of 1,138,733 shares, after taking into account 301,032 shares held by PSIC). 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. In June 2003, the Hughes family filed a complaint for declaratory relief relating to the Company's acquisition of PSIC naming the Company as defendant. The Hughes family is seeking that the court make (i) a binding declaration that the Company either is not entitled to recover profits or other moneys earned by PSIC from November 1995 through December 2001; or alternatively the amounts that the Hughes family should be ordered to surrender to the Company if the court determines that the Company is entitled to recover any such profits or moneys; and (ii) a binding declaration either that the Company cannot establish that the acquisition agreement was not just and reasonable as to the Company at the time it was authorized, approved or ratified; or alternatively the amounts that the Hughes family should surrender to the Company, if the court determines that the agreement was not just and reasonable to the Company at that time. The Hughes family is not seeking any payments from the Company. In the event of a determination that the Hughes family is obligated to pay certain amounts to the Company, the complaint states that they have agreed to be bound by that determination to pay such amounts to the Company. In July 2003 the Company filed an answer to the Hughes family's complaint requesting a final judicial determination of the Company's rights of recovery against the Hughes family in respect of PSIC. The Company believes that the lawsuit by the Hughes family will ultimately resolve matters relating to PSIC and will not have any financially adverse effect on the Company (other than the costs and other expenses relating to the lawsuit). 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 and Part II - - Item 1 to the Form 10-Q for the quarter ended March 31, 2003. 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 and Part II - Item 1 to the Form 10-Q for the quarter ended March 31, 2003. 68 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. Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------ The Company held an annual meeting of shareholders on May 8, 2003. Proxies for the annual meeting were solicited pursuant to Regulation 14 under the Securities Exchange Act of 1934. The annual meeting involved the following two matters: A. Election of Directors:
Total Common Stock Total Equity Stock, Series A ------------------------------------------ --------------------------------------------- Name Total Votes For Total Votes Withheld Total Votes For Total Votes Withheld - ----------------------- ------------------ --------------------- ------------------- ---------------------- B. Wayne Hughes 104,518,958 6,016,753 728,583 10,539 Ronald L. Havner, Jr. 106,454,152 4,081,560 735,685 3,437 Harvey Lenkin 105,804,028 4,731,683 734,847 4,275 Marvin M. Lotz 105,811,579 4,724,133 735,067 4,055 Robert J. Abernethy 95,080,206 15,455,505 735,282 3,841 Dann V. Angeloff 105,884,672 4,651,039 735,028 4,094 William C. Baker 95,108,276 15,427,435 735,053 4,070 Uri P. Harkham 106,267,426 4,268,286 735,663 3,459 B. Wayne Hughes, Jr. 84,041,452 26,494,259 712,389 26,734 Daniel C. Staton 97,897,720 12,637,991 735,678 3,445
There was no solicitation in opposition to the management's nominees to the Board of Directors listed in the proxy statement. B. Ratification of selection of Ernst & Young LLP as the Company's independent auditors for the fiscal year ended December 31, 2003:
For Against Abstain No Vote --------------- ---------------- -------------- --------- Common Stock 96,947,061 13,360,760 228,071 0 Equity Stock, Series A 734,239 3,465 1,419 0 --------------- ---------------- -------------- --------- Total Common Stock and Equity Stock, Series A 97,681,300 13,364,225 229,490 0 =============== ================ ============== =========
Item 5. Other Items - ---------------------- On August 5, 2003, the board of directors of the Company (1) amended the Company's Bylaws to increase the authorized number of directors from 10 to 11 and (2) elected John T. Evans as a director of the Company. Mr. Evans is a senior partner of Osler, Hoskin & Harcourt, one of the largest law firms in Canada, and specializes in business law matters. 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. 69 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. 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. 70 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 June 30, 2000 and incorporated herein by reference. 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. 71 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. 3.45 Amendment to Bylaws adopted on May 6, 1999. Filed with Registrants' Form 10-Q for the quarterly period ended June 30, 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 with Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2003 and incorporated herein by reference. 3.48 Amendment to Bylaws adopted on August 5, 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. 72 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. 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 June 30, 1997 and incorporated herein by reference. 73 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. 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. 74 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. 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. 75 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. 10.41 Employment agreement between Registrant and Harvey Lenkin dated as of August 5, 2003. Filed herewith. 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. 31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. 31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. 31.3 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. 32 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith. ------------ * Compensatory benefit plan. ** Management contract. (b) Reports on Form 8-K The Company furnished a Current Report on from 8-K dated May 8, 2003 (filed May 9, 2003), pursuant to Item 7 with its press release announcing its results for the quarter ended March 31, 2003. The Company filed a Current Report on from 8-K dated June 16, 2003 (filed June 19, 2003), pursuant to Item 5. The Company furnished a Current Report on from 8-K dated and filed June 30, 2003, pursuant to Item 7. 76 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: August 14, 2003 PUBLIC STORAGE, INC. By: /s/ John Reyes -------------- John Reyes Senior Vice President and Chief Financial Officer (Principal financial officer and duly authorized officer) 77 EX-3 3 q203psi_ex348.txt AMENDMENTS TO BYLAWS OF PUBLIC STORAGE, INC. Exhibit 3.48 Amendments to Bylaws of Public Storage, Inc. Adopted by the Board of Directors on August 5, 2003 WHEREAS: The Board of Directors of this corporation considers it to be in the best interests of the corporation to increase the authorized number of directors of the corporation from ten (10) to eleven (11); 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). 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 eleven (11) 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." EX-10 4 q203psi_ex1041.txt PRESIDENT'S EMPLOYMENT AGREEMENT Exhibit 10.41 August 5, 2003 Mr. Harvey Lenkin Dear Harvey: We appreciate your contributions and commitment to Public Storage, Inc. (the "Company") for the past 25 years and your agreement to continue to be employed by the Company through the term of this agreement, June 30, 2005. Positions: - ---------- You will continue to serve as president and chief operating officer of the Company until you retire on June 30, 2005. In this position, you will report to the Company's chief executive officer or to such other person as may be designated by the Company's chief executive officer or its board of directors. Your responsibilities, to which you will devote your full-time efforts, will include involvement with the Company's capital raising activities, investor services, property operations, ancillary businesses, corporate administration, and you will use your best efforts to execute these responsibilities in a timely manner that enhances shareholder value. During the term of this agreement, the Company may, consistent with your qualifications and experience, change these responsibilities at any time by creating new responsibilities and/or removing certain responsibilities and change your position and title. During the term of this agreement, you agree to continue to serve as a director of the Company and as a director of the Company's affiliate, PS Business Parks, Inc., subject to the request of the respective company's board of directors. You will not be compensated or receive any other benefit (other than reimbursement of expenses) for serving as a director of either company. Compensation and Benefits: - -------------------------- You will be paid twice monthly on the 15th and last day of the month, at a rate of $550,000 per year effective July 1, 2003. You will be entitled to four weeks annual paid vacation, earned and accrued on a pay period basis and prorated over the course of your employment during the year. Restrictions on the accrual of vacation benefits are more fully set forth in the Employee Handbook. Through December 31, 2003, the Company will continue to pay for and lease for your use the same car currently leased for your use. After December 31, 2003, you will be responsible for making lease and maintenance payments on the car currently leased for you and you will be reimbursed for your business mileage at $0.365 per mile (the current IRS guidelines). You will be required to track your mileage and provide records for reimbursement monthly. During the term of this agreement, you will continue to participate in the Company's group insurance plans and section 401(k) plan. During the term of this agreement, the Company will continue to reimburse you for those properly documented travel or similar expenditures incurred by you consistent with prior practice that are reasonably necessary for the proper discharge of your duties under this agreement. 1 No Prior Obligations: - --------------------- You acknowledge and agree that the Company has no previous obligation to you, including bonuses, options (other than vested and unvested options for 342,000 shares of common stock) or other form of compensation. Trade Secrets And Confidential Information: - ------------------------------------------- Our competitive success depends on the proper safeguarding of the Company's trade secrets and confidential information. Some of the information we receive also touches on the privacy interests of individuals and must be safeguarded for that reason as well. You promise to continue to preserve the confidentiality of our trade secrets and commercially useful confidential information learned through your employment and to use this information only as necessary and appropriate for our legitimate business purposes. You promise to safeguard against disclosure without the consent of affected persons all information touching on the privacy interests of our employees and tenants. Our trade secrets and commercially useful confidential information include without limitation the Company's non-public financial information and the contents of our business plans. Non Solicitation - ---------------- You agree that for a period of one year following the termination or expiration of this agreement, you will not directly or indirectly, or by action in concert with others, induce or influence (or seek to induce or influence), any person who is engaged as an employee, agent, independent contractor or otherwise by the Company to terminate such person's employment or engagement with the Company. Employment Termination: - ----------------------- During the term of this agreement, you may only be terminated for "cause". Termination for "cause" may be based upon any of the following, as determined by the Company in its reasonable discretion: (i) Any act of fraud, dishonesty, embezzlement, or theft. (ii)Conviction of, or a plea of nolo contendre to, any felony or any misdemeanor involving moral turpitude; (iii) Any act of gross negligence in the performance of your responsibilities; (iv)An inexcusable repeated or prolonged absence from work other than as a result of illness or a disability; (v) Your voluntary resignation from employment with the Company. In the event that your employment is terminated for cause, the Company will pay you any unpaid salary and benefits earned under this agreement through the last day of actual employment. Additionally, the Company will reimburse you for reasonable and documented expenses. The Company will have no further obligations to you, and you will have no further rights, including, without limitation, rights to any bonus, unvested stock options, other compensation or benefits whatsoever under this Agreement. 2 The Company's obligation to pay your compensation under this agreement does not terminate as a result of your death or total disability. In the event of your death or total disability during the term of this agreement, you (in the case of your total disability) or your estate (in the case of your death) will continue to be paid your compensation under this agreement until June 30, 2005, provided however that, if you are terminated for "cause" (as defined above), you will only be entitled to the compensation described in the preceding paragraph. Post-termination Obligations - ---------------------------- Your obligations described under "Trade Secrets and Confidential Information" and "Non Solicitation" above survive the termination of this agreement or the expiration of its term. Notices Any notices to be given by either party to the other may be effected either by personal delivery in writing or by registered or certified mail, postage prepaid with return receipt requested, by nationally recognized overnight courier or by confirmed facsimile at the following number: If to Employee: Mr. Harvey Lenkin If to the Company: Public Storage, Inc. 701 Western Avenue Glendale, CA 91201 Attn: Ronald L. Havner, Jr. Notices delivered personally will be deemed communicated upon actual receipt; mailed notices will be deemed communicated upon receipt of the mailing; notices sent by overnight courier will be deemed communicated and received as of one business day after delivery to the overnight courier; and notices sent by facsimile will be deemed communicated and received as of the time the sender receives written confirmation of the sending of the facsimile. Partial Invalidity: - ------------------- If any provision of this agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions will nevertheless continue in full force without being impaired or invalidated. Applicable Law: - --------------- This agreement will be governed by and construed in accordance with the laws of the State of California. Construction of Terms: - ---------------------- The terms and provisions of this agreement, which are freely negotiated as between the parties, will not be construed either in favor of or against either party in the event of any ambiguity or uncertainty. Modifications: - -------------- Any modification of this agreement will be effective only if it is in writing and signed by both parties. Waiver: - ------- A waiver of any of the terms and conditions of this agreement will not be construed as a general waiver of the same or any other term or condition hereof of any subsequent breach thereof. 3 Arbitration: - ------------ You and the Company agree to submit to final and binding arbitration, and not to any other forum, any claim by you or the Company under state, federal or local law which arises out of or relates to your employment with the Company, including without limitation claims for sexual harassment, discrimination, wrongful termination, breach of contract, invasion of privacy and defamation. This agreement excludes employment-related claims that cannot be required to be submitted to arbitration under applicable law, such as claims for workers' compensation or unemployment insurance benefits. Notwithstanding any other provisions of this agreement, you and the Company agree that breaches of either your or the Company's obligations concerning trade secrets and/or confidential information cannot adequately be remedied at law or in arbitration, and we agree that either you or the Company may seek and upon proper proof obtain, from a court with proper jurisdiction, injunctive relief and damages. Any injunctive proceeding will be without prejudice to your or the Company's rights under this agreement to obtain other relief in arbitration with respect to these matters. Arbitration under this agreement, including the selection of a single arbitrator, will be governed by the most recent version of the National Rules for the Resolution of Employment Disputes (the "Rules") of the American Arbitration Association ("AAA"), except to the extent inconsistent with specific provisions of this agreement. State law provisions governing arbitrations in California, such as provisions for temporary restraining orders and preliminary injunctions, will also apply unless inconsistent with the AAA Rules or this agreement. In order to initiate a claim for arbitration, the party seeking arbitration must deliver to the local AAA office, and send to the other party a written request for arbitration within the time period required by the statute of limitation applicable to the party's claim (the time within which the party's claim must be filed according to law). Contact information for the nearest AAA office and a copy of the AAA Rules may be obtained from the Company's Human Resources Department. Arbitration proceedings will be held before a single arbitrator in Los Angeles. Each party will pay his or its own attorneys' fees if the party chooses to be represented by an attorney, except where the arbitrator orders that the prevailing party recover attorneys' fees from the other party under applicable law. In no case, however, you will bear any cost or expense as a result of arbitration that you would not be required to pay if the claim had been brought in court. The parties will be permitted to conduct discovery as is appropriate to the nature of the claim and necessary to its full and fair determination in arbitration, including at a minimum access to essential documents and witnesses. The arbitrator will have the authority to order any appropriate legal and equitable relief consistent with that available to parties in civil actions filed in court. The decision of the arbitrator will be in writing, and shall reflect the arbitrator's essential findings and conclusions upon which the award is based. The decision will be final and binding subject to review only as provided by the law of the state in which the arbitration took place governing review of arbitration awards. If no state law on the subject exists, the award will be subject to the standard of review provided in the Federal Arbitration Act, 9 U.S.C. section 10. The award will be enforceable in any court of competent jurisdiction. You and the Company agree that if a court of competent jurisdiction declares that any part of this agreement is illegal, invalid or unenforceable, this declaration will not affect the legality, validity or enforceability of the remaining parts of the agreement, and the illegal, invalid or unenforceable part will no longer be part of this agreement. You and the Company agree that arbitration under this agreement will be the exclusive means of resolving any claims or disputes arising out of or related to your employment with the Company, which are either (1) not resolved through the Company's internal grievance processes or through proceedings before the United States Equal Employment Opportunity Commission (or the state agency processing charges of discrimination), or (2) excluded from this agreement by the second paragraph under "Arbitration" above. Both parties further agree that no proceedings will be brought by you or the Company in any court or other forum as to any claims covered by this agreement, except to enforce this agreement or review the decision of the arbitrator as provided above. No claim will be arbitrated that otherwise would be barred by the statute of limitations in a judicial proceeding. 4 20 Nothing in this agreement prohibits any party from seeking injunctive relief under applicable law before arbitration or while arbitration is pending. THIS AGREEMENT IS A WAIVER OF ALL RIGHTS TO A CIVIL COURT ACTION FOR A CLAIM ARISING OUT OF OR RELATED TO YOUR EMPLOYMENT WITH THE COMPANY. ONLY THE ARBITRATOR, AND NOT A JUDGE OR JURY, WILL DECIDE THE CLAIM OR DISPUTE. Integrated Complete Agreement: - ------------------------------ This agreement integrates and supersedes all other prior and contemporaneous written and oral agreements and understandings of every character between you and the Company and comprises the entire agreement between you and the Company (other than the agreements relating to vested and unvested options for a total of 342,000 shares of common stock previously granted to you). You understand that this agreement may be amended only by a further express written agreement between us, and cannot be amended by informal discussions or written communications from any party. No waiver of any rights or obligations under this agreement will be deemed to have occurred unless in writing signed by the party against whom such waiver is asserted and no waiver will be deemed a waiver of any other or subsequent rights or obligations. Harvey, we appreciate your continued commitment to the Company. /s/ Ronald L. Havner, Jr. ------------------------- Ronald L. Havner, Jr. Chief Executive Officer 5 ACCEPTANCE AND ACKNOWLEDGMENT - ----------------------------- I accept continued employment with Public Storage, Inc. on the terms and conditions stated above, and I acknowledge that no other promises have been made to me. I acknowledge that I have had an opportunity to ask questions regarding this agreement, to seek legal counsel, and to carefully consider all of the provisions of this agreement. I am waiving my right to a jury trial regarding any claims that arise from or relate to my employment relationship with the Company. Dated: August 5, 2003 /s/ Harvey Lenkin -------------- ------------------ Harvey Lenkin 6 EX-11 5 q203psi_ex11.txt COMPUTATION OF EARNINGS PER SHARE PUBLIC STORAGE, INC. EXHIBIT 11 - STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
For the three months ended For the six months ended June 30, June 30, ----------------------------- ----------------------------- Earnings Per Share: 2003 2002 2003 2002 - ---------------------------------------------------- ------------ ----------- ----------- ----------- (Amounts in thousands, except per share data) Net income........................................... $ 84,297 $ 80,718 $ 160,936 $ 168,173 Less: Preferred Stock dividends: 10% Cumulative Preferred Stock, Series A.......... - (1,140) - (2,280) 9.20% Cumulative Preferred Stock, Series B........ - (1,372) (1,323) (2,744) Adjustable Rate Preferred Stock, Series C......... (506) (506) (1,012) (1,012) 9.50% Cumulative Preferred Stock, Series D........ (713) (713) (1,426) (1,426) 10.0% Cumulative Preferred Stock, Series E........ (1,372) (1,372) (2,744) (2,744) 9.75% Cumulative Preferred Stock, Series F........ (1,401) (1,401) (2,802) (2,802) 8.00% Cumulative Preferred Stock, Series J........ - (3,000) - (6,000) 8.25% Cumulative Preferred Stock, Series K........ (2,372) (2,372) (4,744) (4,744) 8.25% Cumulative Preferred Stock, Series L........ (2,372) (2,372) (4,744) (4,744) 8.75% Cumulative Preferred Stock, Series M........ (1,230) (1,230) (2,460) (2,460) 8.60% Cumulative Preferred Stock, Series Q........ (3,709) (3,709) (7,418) (7,418) 8.00% Cumulative Preferred Stock, Series R........ (10,200) (10,200) (20,400) (20,400) 7.875% Cumulative Preferred Stock, Series S....... (2,830) (2,830) (5,660) (5,660) 7.625% Cumulative Preferred Stock, Series T....... (2,900) (2,859) (5,800) (5,211) 7.625% Cumulative Preferred Stock, Series U....... (2,860) (2,860) (5,720) (4,131) 7.500% Cumulative Preferred Stock, Series V....... (3,234) - (6,468) - ------------ ----------- ----------- ---------- Total preferred dividends (35,699) (37,936) (72,721) (73,776) ------------ ----------- ----------- ---------- $ 48,598 $ 42,782 $ 88,215 $ 94,397 ============ =========== =========== ========== Allocation of net income allocable to common shareholders to classes: Net income allocable to shareholders of the Equity Stock, Series A........................ 5,376 5,376 10,751 10,751 Net income allocable to shareholders of common stock......................................... 43,222 37,406 77,464 83,646 ------------ ----------- ----------- ---------- $ 48,598 $ 42,782 $ 88,215 $ 94,397 ============ =========== =========== ========== Weighted average common shares outstanding: Basic - weighted average common shares outstanding................................... 124,599 122,821 124,340 122,386 Effect of dilutive stock options - based on treasury stock method using average market 1,255 2,003 1,196 2,031 price......................................... ------------ ----------- ----------- ---------- Diluted weighted average common shares outstanding................................... 125,854 124,824 125,536 124,417 ============ =========== =========== ========== Basic earnings per common share...................... $0.35 $0.30 $0.62 $0.68 ============ =========== =========== ========== Diluted earnings per common share.................... $0.34 $0.30 $0.62 $0.67 ============ =========== =========== ==========
Note: There are no securities outstanding which would have an anti-dilutive effect upon earnings per common share in each of the three and six month periods ending June 30, 2003 and 2002. See Note 14 to the Company's financial statements regarding clarification of Emerging Issues Task Force Topic D-42. Exhibit 11 EX-12 6 q203psi_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
Six Months Ended June 30, ------------------------- 2003 2002 ---------- ---------- Net income........................................... $ 160,936 $ 168,173 Add: Minority interest in income............... 21,438 21,955 Less: Minority interests in income which do not have fixed charges........................... (6,444) (5,492) ---------- ---------- Income from continuing operations.................... 175,930 184,636 Interest expense................................ 825 2,315 ---------- ---------- Total earnings available to cover fixed charges...... $176,7455 $ 186,951 ========== ========== Total fixed charges - interest expense (including capitalized interest)............................. $ 3,800 $ 5,587 ========== ========== Cumulative Preferred Stock dividends................. $ 72,721 $ 73,776 Preferred partnership unit distributions............. 13,453 13,453 ---------- ---------- Total preferred distributions........................ $ 86,174 $ 87,229 ========== ========== Total combined fixed charges and preferred distributions $ 89,974 $ 92,816 ========== ========== Ratio of earnings to fixed charges.................. 46.51x 33.46x ========== ========== Ratio of earnings to combined fixed charges and preferred distributions........................... 1.96x 2.01x ========== ==========
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
Six Months Ended June 30, ------------------------- 2003 2002 ---------- ---------- Supplemental Disclosure of Ratio of Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") to Fixed Charges (a): Net income........................................... $ 160,936 $ 168,173 Less: (Gain)/Loss on sale of real estate and real estate investments........................... (463) (402) Add: Depreciation and amortization............. 92,194 88,837 Less: Depreciation allocable to minority interests (3,233) (4,538) Add: Depreciation included in equity in earnings of real estate entities...................... 13,138 12,896 Add: Depreciation and amortization included in discontinued operations...................... 282 1,212 Add: Minority interest - preferred............. 13,453 13,453 Add: Interest expense.......................... 825 2,315 ---------- ---------- EBITDA available to cover fixed charges.............. $ 277,132 $ 281,946 ========== ========== Total fixed charges - interest expense (including capitalized interest)............................. $ 3,800 $ 5,587 Cumulative Preferred Stock dividends................. $ 72,721 $ 73,776 Preferred partnership unit distributions............. 13,453 13,453 ---------- ---------- Total preferred distributions........................ $ 86,174 $ 87,229 ========== ========== Total combined fixed charges and preferred distributions $ 89,974 $ 92,816 ========== ========== Ratio of EBITDA to fixed charges.................... 72.92x 50.46x ========== ========== Ratio of EBITDA to combined fixed charges and preferred distributions..................................... 3.08x 3.04x ========== ==========
For the Year Ended December 31, ----------------------------------------------------------------------- 2002 2001 2000 1999 1998 ---------- ----------- ----------- ---------- ----------- (amounts in thousands, except ratios) Supplemental Disclosure of Ratio of Earnings Before Interest, 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-31 7 q203psi_ex311.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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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, or caused such disclosure controls and procedures to be designed under our supervision 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 report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the Registrant's internal control over financial reporting that occurred the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect the registrant's internal control over financial reports; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or person performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Ronald L. Havner, Jr. - -------------------------------- Name: Ronald L. Havner, Jr. Title: Chief Executive Officer Date: August 13, 2003 Exhibit 31.1 EX-31 8 q203psi_ex312.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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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, or caused such disclosure controls and procedures to be designed under our supervision 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 report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the Registrant's internal control over financial reporting that occurred the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect the registrant's internal control over financial reports; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or person performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and 6. b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Harvey Lenkin - ------------------------ Name: Harvey Lenkin Title: President Date: August 13, 2003 Exhibit 31.2 EX-31 9 q203psi_ex313.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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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, or caused such disclosure controls and procedures to be designed under our supervision 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 report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the Registrant's internal control over financial reporting that occurred the Registrant's most recent fiscal quarter (the Registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect the registrant's internal control over financial reports; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or person performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and 6. b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ John Reyes - -------------------------------- Name: John Reyes Title: Chief Financial Officer Date: August 13, 2003 Exhibit 31.3 EX-32 10 q203psi_ex32.txt CEO, PRESIDENT AND CFO 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 June 30, 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: August 13, 2003 /s/ Harvey Lenkin - -------------------------------- Name: Harvey Lenkin Title: President Date: August 13, 2003 /s/ John Reyes - -------------------------------- Name: John Reyes Title: Chief Financial Officer Date: August 13, 2003 Exhibit 32 -----END PRIVACY-ENHANCED MESSAGE-----