UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
þ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2004
or
o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File Number
1-10709
PS BUSINESS PARKS, INC.
California
95-4300881
(State or Other Jurisdiction
of Incorporation)
(I.R.S. Employer
Identification Number)
701 Western Avenue, Glendale, California 91201-2397
(Address of principal executive offices) (Zip Code)
Registrants telephone number, including area code: (818) 244-8080
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes X No
Number of shares outstanding of each of the issuers classes of common stock, as of September 30, 2004:
Common Stock, $0.01 par value, 21,818,529 shares outstanding
PS BUSINESS PARKS, INC.
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Exhibit 10.1 | ||||||||
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Exhibit 10.2 | ||||||||
Exhibit 12 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
EXHIBIT 99.1 | ||||||||
EXHIBIT 99.2 | ||||||||
EXHIBIT 99.3 |
1
PS BUSINESS PARKS, INC.
See accompanying notes.
2
PS Business Parks, Inc,
See accompanying notes.
3
PS BUSINESS PARKS, INC.
See accompanying notes.
4
PS BUSINESS PARKS, INC.
See accompanying notes.
5
PS BUSINESS PARKS, INC.
See accompanying notes.
6
PS BUSINESS PARKS, INC.
PS Business Parks, Inc. (PSB) was incorporated in the state of California
in 1990. As of September 30, 2004, PSB owned approximately 74.9% of the
common partnership units of PS Business Parks, L.P. (the Operating
Partnership or OP). The remaining common partnership units were owned by
Public Storage, Inc. (PSI) and its affiliates. PSB, as the sole general
partner of the Operating Partnership, has full, exclusive and complete
responsibility and discretion in managing and controlling the Operating
Partnership. PSB and the Operating Partnership are collectively referred to
as the Company.
The Company is a fully-integrated, self-advised and self-managed real estate
investment trust (REIT) that acquires, develops, owns and operates
commercial properties containing commercial and industrial rental space. As
of September 30, 2004, the Company owned and operated approximately 18.4
million net rentable square feet of commercial space located in eight
states. The Company also managed approximately 1.2 million net rentable
square feet on behalf of PSI and its affiliated entities.
Basis of presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements. The preparation of the 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 estimates. 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 and nine months ended September 30, 2004 are not necessarily
indicative of the results that may be expected for the year ended December
31, 2004. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Companys Annual Report on
Form 10-K for the year ended December 31, 2003.
The accompanying consolidated financial statements include the accounts of
PSB and the Operating Partnership. All significant intercompany balances
and transactions have been eliminated in the consolidated financial
statements.
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 estimates.
Allowance for doubtful accounts
We monitor the collectibility of our receivable balances, including the
deferred rent receivable, on an on-going basis. Based on these reviews, we
establish a provision, and maintain an allowance for doubtful accounts for
estimated losses resulting from the possible inability of our tenants to
make required rent payments to us. A provision for doubtful accounts is
recorded during each period. The allowance for doubtful accounts, which
represents the cumulative allowances less write-offs of uncollectible rent,
is netted against tenant and other receivables on our consolidated balance
sheets. Tenant receivables are net of an allowance for uncollectible
accounts totaling $400,000 at September 30, 2004.
7
Financial instruments
The methods and assumptions used to estimate the fair value of financial
instruments is described below. The Company has estimated the fair value of
financial instruments using available market information and appropriate
valuation methodologies. Considerable judgement is required in interpreting
market data to develop estimates of market value. Accordingly, estimated
fair values are not necessarily indicative of the amounts that could be
realized in current market exchanges.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133 Accounting for Derivative
Instruments and Hedging Activities, (SFAS 133, as amended by SFAS 138).
The Statement requires the Company to recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges must be
adjusted to fair value and reflected as income or expense. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value
of derivatives are either offset against the change in fair value of the
hedged assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized
in earnings. The ineffective portion of a derivatives change in fair value
is immediately recognized in earnings.
In July 2002, the Operating Partnership entered into an interest rate swap
agreement, which was accounted for as a cash flow hedge, in order to reduce
the impact of changes in interest rates on a portion of its floating rate
debt. The $50 million agreement, which expired in July 2004, effectively
changed the interest rate exposure from floating rate to a fixed rate of
4.46%. Market gains and losses on the value of the swap are deferred and
included in income over the life of the swap or related debt. The Operating
Partnership recorded the differences paid or received on the interest rate
swap in interest expense as interest expense was incurred.
Net interest differentials to be paid or received related to these contracts
were accrued as incurred or earned. There was no unrealized loss related to
the interest rate swap included in other comprehensive income as of
September 30, 2004 and the swap agreement was eliminated.
The Company considers all highly liquid investments with an original
maturity of three months or less at the date of purchase to be cash
equivalents. Due to the short period to maturity of the Companys cash and
cash equivalents, accounts receivable, other assets and accrued and other
liabilities, the carrying values as presented on the condensed consolidated
balance sheets are reasonable estimates of fair value. Based on borrowing
rates currently available to the Company, the carrying amount of debt
approximates fair value.
Financial assets that are exposed to credit risk consist primarily of cash
and cash equivalents and receivables. Cash and cash equivalents, which
consist primarily of short-term investments, including commercial paper, are
only invested in entities with an investment grade rating. Receivables are
comprised of balances due from a large number of tenants. Balances that the
Company expects to become uncollectable are reserved for or written off.
Marketable securities
Marketable securities are classified as available-for-sale in accordance
with SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities. Investments are reflected on the balance sheet at fair market
value based upon the quoted market price. Dividend income is recognized
when earned.
Real estate facilities
Real estate facilities are recorded at cost. Costs related to the
renovation or improvement of the properties are capitalized. Expenditures
for repairs and maintenance are expensed as incurred unless the expenditure
is expected to benefit a period greater than 30 months and exceeds $5,000.
Buildings and equipment are depreciated on the straight-line method over the
estimated useful lives, which are generally 30 and 5 years, respectively.
Leasing costs in excess of $1,000 for leases with terms greater than two
years are capitalized and depreciated/amortized over their estimated useful
lives. Leasing costs for leases of less than two years or less than $1,000
are expensed as incurred.
Property Held for Disposition
The Company accounts for properties held for disposition in accordance with
SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
An asset is classified as an asset held for disposition when it meets the
requirements of SFAS 144, which include, among other criteria, the approval
of the sale of the asset, the asset has been marketed for sale and the
Company expects that the sale will likely occur within the next twelve
months. Upon classification of an asset as held for disposition, the net
book value of the asset, net of any impairment provision, is included on the
balance sheet as assets held for distribution and the operating results of
the asset are included in discontinued operations.
8
Investment in joint venture
In October 2001, the Company formed a joint venture with an unaffiliated
investor to own and operate an industrial park consisting of 14 buildings in
the City of Industry submarket of Los Angles County. The park, consisting
of 294,000 square feet of industrial space, was acquired by the Company in
December 2000 at a cost of approximately $14.4 million. The property was
contributed to the joint venture at its original cost. The partnership was
capitalized with equity capital consisting of 25% from the Company and 75%
from the unaffiliated investor in addition to a mortgage note payable.
During 2002, the joint venture sold eight of the buildings totaling
approximately 170,000 square feet. The Company recognized gains of
approximately $861,000 on the disposition of these eight buildings. In
addition, the Companys interest in cash distributions from the joint
venture increased from 25% to 50% as a result of the joint venture meeting
its performance measures. Therefore, the Company recognized additional
income of $1,008,000 in 2002. As of December 31, 2002, the joint venture
held six buildings totaling 124,000 square feet. During January, 2003, five
of the remaining six buildings were sold and the Company recognized gains of
approximately $1.1 million as a result of these sales and additional income
of approximately $700,000 for the three months ended March 31, 2003. In
April, 2003, the remaining one building with approximately 29,000 square
feet was sold. The Company recognized a gain of approximately
$300,000 and additional income of approximately $200,000 during the second
quarter of 2003.
The Companys investment was accounted for under the equity method in
accordance with APB 18, Equity Method of Accounting for Investments. In
accordance with APB 18, the Companys share of the debt was netted against
its share of the assets in determining the investment in the joint venture
and was not included in the Companys total liabilities. The accounting
policies of the joint venture were consistent with the Companys accounting
policies.
As of December 31, 2003, the joint venture had sold all of its properties,
repaid all of its debt, and distributed any remaining cash to the joint
venture partners.
Intangible assets
Intangible assets consist of property management contracts for properties
managed, but not owned, by the Company. The intangible assets were being
amortized over seven years. At September 30, 2004 intangible assets were
fully amortized.
Evaluation of asset impairment
The Company evaluates its assets used in operations, by identifying
indicators of impairment and by comparing the sum of the estimated
undiscounted future cash flows for each asset to the assets carrying
amount. When indicators of impairment are present and the sum of the
undiscounted future cash flows is less than the carrying value of such
asset, an impairment loss is recorded equal to the difference between the
assets current carrying value and its value based on discounting its
estimated future cash flows. In addition, the Company evaluates its assets
held for disposition. Assets held for disposition are reported at the lower
of their carrying amount or fair value, less cost of disposition. At March
31, 2003, the Company identified impairments on certain assets classified as
properties held for disposition. As a result, the Company recognized an
impairment loss of $5.9 million in the first quarter of 2003. In the first
quarter of 2004, these assets were reclassified as continuing operations
(See Note 3). At September 30, 2004, the Company did not consider any
assets to be impaired.
Borrowings from affiliate
As of December 31, 2003, the Company had $100 million in short-term
borrowings from PSI. The note bore interest at 1.4% and was due on March 9,
2004. The Company repaid the note in full, along with related interest,
during the first quarter of 2004.
Stock-based compensation
Through December 31, 2001, the Company elected to adopt the disclosure
requirements of FAS 123 but continued to account for stock-based
compensation under APB 25. Effective January 1, 2002, the Company adopted
the Fair Value Method of accounting for stock options. As required by the
transition requirements of FAS 123, amended by FAS 148, the Company will
recognize compensation expense in the income statement using the Fair Value
Method only with respect to stock options issued after January 1, 2002, but
continue to disclose the pro-forma impact of utilizing the Fair Value Method
on stock options issued prior to January 1, 2002. See Note 11.
The Company also recognizes compensation expense with regards to restricted
stock units it grants. See Note 11.
9
Revenue and expense recognition
All leases are classified as operating leases. Rental income is recognized
on a straight-line basis over the terms of the leases. Straight-line rent
is recognized for all tenants with contractual increases in rent that are
not included on the Companys credit watch list. Reimbursements from
tenants for real estate taxes and other recoverable operating expenses are
recognized as revenues in the period the applicable costs are incurred.
Property management fees are recognized in the period earned.
Gains/Losses from sales of real estate
The Company recognizes gains from sales of real estate at the time of sale
using the full accrual method, provided that various criteria related to the
terms of the transactions and any subsequent involvement by the Company with
the properties sold are met. If the criteria are not met, the Company
defers the gains and recognizes them when the criteria are met or using the
installment or cost recovery methods as appropriate under the circumstances.
General and administrative expense
General and administrative expense includes executive and other
compensation, office expense, professional fees, state income taxes, cost of
acquisition personnel, and other administrative items.
Related party transactions
Pursuant to a cost sharing and administrative services agreement, the
Company shares costs with PSI and affiliated entities for certain
administrative services, which are allocated among PSI and its affiliates in
accordance with a methodology intended to fairly allocate those costs.
These costs totaled approximately $ 250,000 for the nine months ended
September 30, 2004 and 2003. In addition, the Company provides property
management services for properties owned by PSI and its affiliates for a fee
of 5% of the gross revenues of such properties in addition to reimbursement
of direct costs. These management fee revenues recognized under management
contracts with affiliated parties totaled approximately $ 423,000 and
$424,000 for the nine months ended September 30, 2004 and 2003,
respectively. In addition, prior to April, 2004, the Company combined its
insurance purchasing power with PSI through a captive insurance company
controlled by PSI, STOR-Re Mutual Insurance Corporation. The Company paid
STOR-Re premiums of $ 1,528,000 in 2003 and $ 447,000 through the
termination of this agreement in April 2004.
Income taxes
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, the Company
is not subject to federal income tax to the extent that it distributes its
taxable income to its shareholders. A REIT must distribute at least 90% of
its taxable income each year. In addition, REITs are subject to a number of
organizational and operating requirements. If the Company fails to qualify
as a REIT in any taxable year, the Company will be subject to federal income
tax (including any applicable alternative minimum tax) based on its taxable
income using corporate income tax rates. Even if the Company qualifies for
taxation as a REIT, the Company may be subject to certain state and local
taxes on its income and property and to federal income and excise taxes on
its undistributed taxable income. The Company believes it met all
organizational and operating requirements to maintain its REIT status during
2003 and intends to continue to meet such requirements for 2004.
Accordingly, no provision for income taxes has been made in the accompanying
consolidated financial statements.
10
Net income per common share
Per share amounts are computed using the number of weighted average common shares outstanding. Diluted weighted average common shares outstanding
includes the dilutive effect of stock options and restricted stock under the
treasury stock method. Basic weighted average common shares outstanding
excludes such effect. Earnings per share have been calculated as follows
(in thousands, except per share amounts):
Reclassifications
Certain reclassifications have been made to the consolidated financial
statements for 2003 in order to conform to the 2004 presentation.
11
The activity in real estate facilities for the nine months ended September
30, 2004 is as follows (in thousands):
Amortization, reported during the period, of intangible assets representing
the value of above market rents determined in accordance with SFAS 141,
Business Combinations is included as a component of rental income.
During the three months ended September 30, 2004, the Company closed on a
sale of a 10,000 square foot unit in Miami, Florida with gross proceeds of
$1.2 million. In addition, on September 1, 2004, the Company sold a 30,500
square foot building in Beaverton, Oregon for gross proceeds of $3.1
million. The combined gain on sale was $313,000. In April 2004 the Company
sold a flex facility in Austin, Texas, for net proceeds of approximately
$1.1 million. In connection with the sale, the Company recorded a loss of
approximately $168,000. On May 27, 2004, the Company acquired an office
park in Fairfax, Virginia totaling approximately 165,000 square feet for
approximately $24.1 million.
In the first quarter of 2004 the Company reevaluated its plans to sell five
office and flex buildings and 4.5 acres of land in Beaverton, Oregon. The
Company has determined these properties will not likely be sold during 2004
and has reclassified such as continuing operations. These properties were
included in properties held for disposition during 2003.
During the third quarter of 2004, the Company concluded that it would likely
sell as many as 11 separate units, aggregating 90,000 square feet as well as
a 56,000 square foot retail center of its Miami International Commerce
Center in Miami, Florida. In addition the Company concluded that two assets
in Prince Georges County, Maryland consisting of approximately a combined
400,000 square feet with an average occupancy of 86% would be sold.
Accordingly, these assets are classified as assets held for disposition. As
of September 30, 2004 the operations of such are included in discontinued
operations.
12
The following summarizes the condensed results of operations of the
properties sold during 2004 and 2003 or held for disposition as of September
30, 2004, which are included in the consolidated statements of income as
discontinued operations (in thousands):
The Company leases space in its real estate facilities to tenants under
non-cancelable leases generally ranging from one to ten years. Future
minimum rental revenues excluding recovery of expenses as of September 30,
2004 under these leases are as follows (in thousands):
In addition to minimum rental payments, tenants pay reimbursements for their
pro rata share of specified operating expenses, which amounted to
approximately $6.4 million and $6.3 million for the three months ended
September 30, 2004 and September 30, 2003 respectively.
These revenues were
$20.2 million and $20.0 million for the nine months ended September 30, 2004
and 2003, respectively. These amounts are included as rental income and
cost of operations in the accompanying consolidated statements of income.
Leases accounting for approximately 6% of leased square footage are subject
to termination options which includes leases accounting for approximately 2%
of leased square footage subject to termination options that are exercisable
as of September 30, 2004. In general, these leases provide for termination
payments should the termination options be exercised. The above table is
prepared assuming such options are not exercised.
The Company has a line of credit (the Credit Facility) with Wells Fargo
Bank with a borrowing limit of $100 million and an expiration date of August
1, 2005. Interest on outstanding borrowings is payable monthly. At the
option of the Company, the rate of interest charged is equal to (i) the
prime rate or (ii) a rate ranging from the London Interbank Offered Rate
(LIBOR) plus 0.60% to LIBOR plus 1.20% depending on the Companys credit
ratings and coverage ratios, as defined (currently LIBOR plus 0.70%, 2.575%
as of September 30, 2004). In addition, the Company is required to pay an
annual commitment fee ranging from 0.20% to 0.35% of the borrowing limit
(currently 0.25%). The Company had $95 million outstanding on the Credit
Facility at December 31, 2003. As of September 30, 2004 the Company had $30
million outstanding under the Credit Facility. The balance outstanding was
repaid in full subsequent to September 30, 2004.
The Credit Facility requires the Company to meet certain covenants including
(i) maintain a balance sheet leverage ratio (as defined) of less than 0.45
to 1.00, (ii) maintain interest and fixed charge coverage ratios (as
defined) of not less than 2.25 to 1.00 and 1.75 to 1.00, respectively, (iii)
maintain a minimum tangible net worth (as defined) and (iv) limit
distributions to 95% of funds from operations (as defined) for any four
consecutive quarters. In addition, the Company is limited in its ability to
incur additional borrowings (the Company is required to maintain
unencumbered assets with an aggregate book value equal to or greater than
two times the Companys unsecured recourse debt) or sell assets. The
Company was in compliance with the covenants of the Credit Facility at
September 30, 2004.
13
In February 2002, the Company entered into a seven year $50 million
unsecured term note agreement with Fleet National Bank. The note bears
interest at LIBOR plus 1.45% per annum and is due on February 20, 2009. The
Company used the proceeds from the loan to reduce the amount drawn on the
Credit Facility. During July 2002, the Company entered into an interest
rate swap transaction which resulted in a fixed LIBOR rate through July 16,
2004 at 4.46% per annum. In February 2004, the Company repaid in full the
$50 million outstanding on the term loan.
At September 30, 2004, approximate principal maturities of mortgage notes
payable are as follows (in thousands):
The Company intends to repay in full the $7.8 million outstanding on the
7.05% mortgage in November of 2004 in connection with the anticipated sale
of the asset securing the mortgage.
Common partnership units
The Company presents the accounts of PSB and the Operating Partnership on a
consolidated basis. Ownership interests in the Operating Partnership, other
than PSBs interest, are classified as minority interest in the consolidated
financial statements. Minority interest in income consists of the minority
interests share of the consolidated operating results.
Beginning one year from the date of admission as a limited partner (common
units) and subject to certain limitations described below, each limited
partner other than PSB has the right to require the redemption of its
partnership interest.
A limited partner (common units) that exercises its redemption right will
receive cash from the Operating Partnership in an amount equal to the market
value (as defined in the Operating Partnership Agreement) of the partnership
interests redeemed. In lieu of the Operating Partnership redeeming the
partner for cash, PSB, as general partner, has the right to elect to acquire
the partnership interest directly from a limited partner exercising its
redemption right, in exchange for cash in the amount specified above or by
issuance of one share of PSB common stock for each unit of limited
partnership interest redeemed.
A limited partner cannot exercise its redemption right if delivery of shares
of PSB common stock would be prohibited under the applicable articles of
incorporation, if the general partner believes that there is a risk that
delivery of shares of common stock would cause the general partner to no
longer qualify as a REIT, would cause a violation of the applicable
securities laws, or would result in the Operating Partnership no longer
being treated as a partnership for federal income tax purposes.
14
At September 30, 2004, there were 7,305,355 common units owned by PSI and
affiliated entities, which are accounted for as minority interests. On a
fully converted basis, assuming all 7,305,355 minority interest common units
were converted into shares of common stock of PSB at September 30, 2004, the
minority interest units would convert into approximately 25% of the common shares outstanding. Combined with PSIs common stock ownership of 19% on a
fully converted basis, PSI has a combined ownership of 44% of the Companys
common equity. At the end of each reporting period, the Company determines
the amount of equity (book value of net assets) which is allocable to the
minority interest based upon the ownership interest and an adjustment is
made to the minority interest, with a corresponding adjustment to paid-in
capital, to reflect the minority interests equity in the Company.
Preferred partnership units
Through the Operating Partnership, the Company has issued the following
preferred units in separate private placement transactions (in thousands):
On September 3, 2004, the Operating Partnership redeemed 3,200,000 units of
its 8.75% Series C Cumulative Redeemable Preferred Units for $80 million. Further, on
September 7, 2004, the Operating Partnership redeemed 1,600,000 units of its
8.875% Series X Cumulative Redeemable Preferred units for $40 million. In
addition, on April 23, 2004 the Operating Partnership redeemed 510,000 units of its 8-7/8%
Series B Cumulative Redeemable Preferred Units for approximately $12.8
million. In accordance with EITF D-42, the redemptions resulted in a
reduction of net income allocable to common shareholders of approximately
$2.9 million and $3.1 million for the three and nine months ended September
30, 2004, respectively, and a corresponding increase in the allocation of
income to minority interest equal to the excess of the redemption amount
over the carrying amount of the redeemed securities.
During the second quarter of 2004, the Company completed private placements
totaling approximately $42,750 million of preferred units through its
operating partnership. The 7.5% Series J Cumulative Redeemable Preferred
Units are non-callable for five years and have no mandatory redemption. The
net proceeds from the placements were approximately $41.5 million and were
used to fund a property acquisition in Virginia and to reduce the amount
outstanding on the Companys Credit Facility.
The Operating Partnership has the right to redeem preferred units on or
after the fifth anniversary of the applicable issuance date at the original
capital contribution plus the cumulative priority return, as defined, to the
redemption date to the extent not previously distributed. The preferred
units are exchangeable for Cumulative Redeemable Preferred Stock of the
respective series of PSB on or after the tenth anniversary of the date of
issuance at the option of the Operating Partnership or a majority of the
holders of the respective preferred units. The Cumulative Redeemable
Preferred Stock will have the same distribution rate and par value as the
corresponding preferred units and will otherwise have equivalent terms to
the other series of preferred stock described in Note 9. As of September
30, 2004 the Company had approximately $ 6.3 million of deferred costs in
connection with the issuance of preferred units, which the Company will
report as additional distributions upon notice of redemption.
The Operating Partnership manages industrial, office and retail facilities
for PSI and affiliated entities. These facilities, all located in the
United States, operate under the Public Storage or PS Business Parks
names.
The property management contracts provide for compensation of a percentage
of the gross revenues of the facilities managed. Under the supervision of
the property owners, the Operating Partnership coordinates rental policies,
rent
15
collections, marketing activities, the purchase of equipment and supplies,
maintenance activities, and the selection and engagement of vendors,
suppliers and independent contractors. In addition, the Operating
Partnership assists and advises the property owners in establishing policies
for the hire, discharge and supervision of employees for the operation of
these facilities, including property managers and leasing, billing and
maintenance personnel.
The property management contract with PSI is for a seven year term with the
term being automatically extended one year on each anniversary. At any
time, either party may notify the other that the contract is not to be
extended, in which case the contract will expire on the first anniversary of
its then scheduled expiration date. For PSI affiliate owned properties, PSI
can cancel the property management contract upon 60 days notice while the
Operating Partnership can cancel upon seven years notice.
Fees earned under these contracts were $200,000 and $178,000 for the three
months ended September 30, 2004 and 2003, respectively, and $515,000 and
$553,000 for the nine months ended September 30, 2004 and 2003,
respectively.
16
Preferred stock
As of September 30, 2004 and December 31, 2003, the Company had the
following series of preferred stock outstanding (in thousands, except shares
outstanding amounts):
Holders of the Companys preferred stock are not entitled to vote on most
matters, except under certain conditions. In the event of a cumulative
arrearage equal to six quarterly dividends, the holders of the preferred
stock will have the right to elect two additional members to serve on the
Companys Board of Directors until all events of default have been cured.
At September 30, 2004, there was one month of accrued distributions for
Series L to be paid on December 31, 2004.
Except under certain conditions relating to the Companys qualification as a
REIT, the preferred stock is not redeemable prior to the previously noted
redemption dates. On or after the respective redemption dates, the
respective series of preferred stock will be redeemable, at the option of
the Company, in whole or in part, at $25 per depositary share, plus any
accrued and unpaid dividends. As of September 30, 2004 the Company had
approximately $15.1 million of deferred costs in connection with the
issuance of preferred stock, which the Company will report as additional
non-cash distributions upon notice of its intent to redeem such shares.
Subsequent to September 30, 2004, the Company issued an additional 1,300,000
depositary shares each representing 1/1000 of a share of the 7.000%
Cumulative Preferred Stock, Series H, at a discounted price of $24.0638 per
share. Net proceeds from the offering, totaling $ 30.8 million, were used
to repay in full the balance outstanding on the Companys Credit Facility.
The discount associated with the offering was recorded to issuance costs and
will be recognized as additional distributions upon redemption. On August
31, 2004, the Company issued 2,300,000 depositary shares each representing
1/1000 of a share of the Companys 7.60% Cumulative Preferred Stock, Series
L, at $25.00 per share. The Company received net proceeds from the offering
of approximately $ 55.7 million.
On June 30, 2004, the Company issued 2,300,000 depositary shares each
representing 1/1,000 of a share of the Companys 7.950% Cumulative Preferred
Stock, Series K, at $25.00 per share. The Company received net proceeds of
approximately $55.7 million.
On April 30, 2004 the Company redeemed 2,112,900 depositary shares of its
9-1/4% Cumulative Preferred Stock, Series A for approximately $52.8 million.
In accordance with EITF Topic D-42, the redemption resulted in a reduction
of net income allocable to common shareholders of approximately $1,866,000
for the nine months ended September 30, 2004 equal to the excess of the
redemption amount over the carrying amount of the redeemed securities.
On April 21, 2004, the Company issued 3,000,000 depositary shares, each
representing 1/1,000 of a share of the Companys 6.875% Cumulative Preferred
Stock, Series I, at $25.00 per share. The Company received net proceeds of
approximately $72.6 million, which were used to redeem the Companys
outstanding 9.25% Preferred Stock,
17
Series A and 8.875% Series B Preferred
Operating Partnership Units, and reduce the outstanding balance on the
Companys line of credit.
On January 30, 2004, the Company issued 6,900,000 depositary shares, each representing 1/1,000 of a share of the Companys 7.000%
Cumulative Preferred Stock, Series H, at $25.00 per share. The Company
received net proceeds of approximately $167 million, which were used to
repay outstanding short-term debt, consisting of borrowings under the
Companys line of credit with Wells Fargo Bank and a portion of a short-term
loan from Public Storage, Inc.
The Company paid approximately $21.5 million and $12.0 million in
distributions to its preferred shareholders for the nine months ended
September 30, 2004 and 2003, respectively. The distributions for the nine
months ended September 30, 2004 includes approximately $1.9 million related
to EITF Topic D-42.
Common Stock
The Companys Board of Directors has authorized the repurchase from time to
time of up to 4,500,000 shares of the Companys common stock on the open
market or in privately negotiated transactions. Since the inception of the
program (March 2000), the Company has repurchased an aggregate total of
2,621,711 shares of common stock and 30,484 units in its Operating
Partnership at an aggregate cost of approximately $70.7 million (average
cost of $26.66 per share/unit).
The Company paid approximately $18.9 million ($0.87 per common share) and $
18.6 million ($0.87 per common share) in distributions to its common
shareholders for the nine months ended September 30, 2004 and 2003,
respectively. Pursuant to restrictions imposed by the Credit Facility,
distributions may not exceed 95% of funds from operations, as defined.
Equity stock
In addition to common and preferred stock, the Company is authorized to
issue 100,000,000 shares of Equity Stock. The Articles of Incorporation
provide that the Equity Stock may be issued from time to time in one or more
series and give the Board of Directors broad authority to fix the dividend
and distribution rights, conversion and voting rights, redemption provisions
and liquidation rights of each series of Equity Stock.
The Company currently is neither subject to any material litigation
nor, to managements knowledge, is any material litigation currently
threatened against the Company other than routine litigation and
administrative proceedings arising in the ordinary course of business.
Management believes that these items will not have a material adverse impact
on the Companys condensed consolidated financial position or results of
operations.
PSB has a 1997 Stock Option and Incentive Plan (the 1997 Plan) and a 2003
Stock Option and Incentive Plan (the 2003 Plan), each covering 1,500,000
shares of PSBs common stock. Under the 1997 Plan and 2003 Plan, PSB has
granted non-qualified options to certain directors, officers and key
employees to purchase shares of PSBs common stock at a price no less than
the fair market value of the common stock at the date of grant.
Through December 31, 2001, the Company elected to adopt the disclosure
requirements of FAS 123 but continue to account for stock-based compensation
under APB 25. Effective January 1, 2002, the Company adopted the Fair Value
Method of accounting for stock options. As required by the transition
requirements of FAS 123, as amended by FAS 148, the Company will recognize
compensation expense in the income statement using the Fair Value Method
only with respect to stock options issued after January 1, 2002, but
continue to disclose the pro-forma impact of utilizing the Fair Value Method
on stock options issued prior to January 1, 2002. As a result, included in
the Companys income statement for the nine months ended September 30, 2004
and 2003 is approximately $ 270,000 and $ 242,000, respectively, in stock
option compensation expense related to options granted after January 1,
2002.
The weighted average grant date fair value of the options for the nine
months ended September 30, 2004 and 2003 was $ 4.99 and $ 4.50
per share,
respectively. Had compensation cost for the 1997 Plan for options granted
prior to December 31, 2001 been determined based on the fair value at the
grant date for awards under the Plan consistent with the method prescribed
by SFAS No. 123, the Companys pro forma net income available to common
shareholders would have been as follows (in thousands, except per share
amounts):
18
For these disclosure purposes, the fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions used for grants during the
nine months ended September 30, 2004 and 2003: dividend yield of 3.7% and
3.5%, respectively; expected volatility of 17.0% and 15.8%, respectively;
expected lives of five years; and risk-free interest rates of 3.0% and 4.0%,
respectively. The pro forma effect on net income allocable to common
shareholders during the nine months ended September 30, 2004, and 2003, may
not be representative of the pro forma effect on net income allocable to
common shareholders in future years.
During the nine months ended September 30, 2004, the Company received
approximately $ 6.5 million due to the exercise of 253,001 stock options.
The Company has granted 190,000 restricted stock units under the 1997 Plan
and 2003 Plan since inception. As of September 30, 2004, 127,900 restricted stock units were
outstanding. The restricted stock units were granted
at a zero exercise price. The fair market value of the restricted stock
units at the date of grant ranged from $24.02 to $44.20 per restricted stock
unit. The restricted stock units issued prior to August, 2002 (88,000
units) are subject to a five-year vesting schedule, with 30% of the units
vesting in year three, 30% in year four and 40% in year five. Restricted
stock units issued subsequent to August, 2002 (102,000 units) are subject to
a six year vesting schedule, with none of the units vesting in year one and
20% of the units vesting in each of the next five years. Compensation
expense of $697,000 and $481,000 related to these units was recognized
during the nine months ended September 30, 2004 and 2003, respectively.
During the nine months ended September 30, 2004, 11,150 restricted stock
units vested, of this amount 4,500 shares were redeemed by the Company for
approximately $192,000, and 4,429 shares were issued, net of shares applied
to payroll taxes.
19
Forward-Looking Statements:
Forward-looking statements are made
throughout this Quarterly Report on Form 10-Q. For this purpose, any
statements contained herein that are not statements of historical fact may
be deemed to be forward-looking statements. Without limiting the foregoing,
the words may, believes, anticipates, plans, expects, seeks,
estimates, intends, and similar expressions are intended to identify
forward-looking statements. There are a number of important factors that
could cause the results of the Company to differ materially from those
indicated by such forward-looking statements, including those detailed under
the heading Item 2A. Risk Factors. In light of the significant
uncertainties inherent in the forward-looking statements included herein,
the inclusion of such information should not be regarded as a representation
by us or any other person that our objectives and plans will be achieved.
Moreover, we assume no obligation to update these forward-looking statements
to reflect actual results, changes in assumptions or changes in other
factors affecting such forward-looking statements.
Overview
The Company owns and operates approximately 18.4 million rentable
square feet of flex, industrial and office properties located in eight
states.
The Company focuses on increasing profitability and cash flow aimed at
maximizing shareholder value. The Company strives to maintain high occupancy
levels while increasing rental rates when market conditions allow. The
Company also acquires properties which it believes will create long-term
value, and disposes of properties which no longer fit within the Companys
strategic objectives or in situations where it can optimize cash proceeds.
Operating results are driven by income from rental operations and are
therefore substantially influenced by rental demand for space within our
properties.
In 2003 and continuing into 2004, the Company continued to experience
the effects of a generally slow economy and a particularly difficult real
estate market heavily favoring tenants. These market conditions impacted
many aspects of the Companys business including occupancy levels and rental
rates. Market conditions, characterized by weak demand and over supply
resulted in downward pressure on rental rates coupled with increased
necessity to give rental concessions in the form of free rent. In addition,
the Company continued to experience increasing tenant improvement costs over
the first nine months of 2004. Operating income from the Companys Same
Park facilities for the three and nine months ended September 30, 2004 was
impacted by declines in operating income in our challenged markets such as
Portland, Austin and Dallas. See further discussion of operating results
below.
The Company believes that the remaining months in 2004 will continue to
see some downward pressure on rents in certain markets coupled with upward
pressure on transaction costs.
Critical Accounting Policies and Estimates:
Our significant accounting policies are described in Note 2 to the
consolidated financial statements included in this Form 10-Q. We believe
our most critical accounting policies relate to revenue recognition,
allowance for doubtful accounts, impairment of long-lived assets,
capitalization of real estate facilities, depreciation, accruals of
operating expenses, accruals for contingencies, clarification of EITF Topic
D-42 and qualification as a REIT, each of which we discuss below.
Revenue Recognition:
We recognize revenue in accordance with Staff
Accounting Bulletin No. 101 of the Securities and Exchange Commission,
Revenue Recognition in Financial Statements (SAB 101), as amended. SAB 101
requires that the following four basic criteria must be met before revenue
can be recognized: persuasive evidence of an arrangement exists; the
delivery has occurred or services rendered; the fee is fixed and
determinable; and collectibility is reasonably assured. All leases are
classified as operating leases. Rental income is recognized on a
straight-line basis over the terms of the leases. Straight-line rent is
recognized for all tenants with contractual increases in rent that are not
included on the Companys credit watch list. Deferred rent receivables
represents rental revenue accrued on a straight-line basis in excess of
rental revenue currently billed. Reimbursements from tenants for real
estate taxes and other recoverable operating expenses are recognized as
revenues in the period the applicable costs are incurred.
Allowance for Doubtful Accounts:
Rental revenue from our tenants is
our principal source of revenue. We monitor the collectibility of our
receivable balances including the deferred rent receivable on an on-going
basis. Based on these reviews, we maintain an allowance for doubtful
accounts for estimated losses resulting from the possible inability of our
tenants to make required rent payments to us. Tenant receivables and
unbilled deferred rent
20
receivables are carried net of the allowances for
uncollectible tenant receivables and unbilled deferred rent. Managements
determination of the adequacy of these allowances requires significant
judgments and estimates.
Current tenant receivables consist primarily of amounts due for
contractual lease payments, reimbursements of common area maintenance
expenses, property taxes and other expenses recoverable from tenants.
Managements determination of the adequacy of the allowance for
uncollectible current tenant receivables is performed using a methodology
that incorporates both a specific identification and aging analysis and an
overall evaluation of the Companys historical loss trends and the current
economic and business environment. The specific identification methodology
relies on factors such as the age and nature of the receivables, the payment
history and financial condition of the tenant, the Companys assessment of
the tenants ability to meet its lease obligations, and the status of
negotiations of any disputes with the tenant. The Companys allowance also
includes a reserve based on historical loss trends not associated with any
specific tenant. This reserve as well as the Companys specific
identification reserve is reevaluated quarterly based on economic conditions
and the current business environment. During the second quarter, management
concluded that an increase in the allowance was necessary as a result of
certain bankruptcy proceedings and other factors. Accordingly, the Company
increased the allowance for uncollectible tenant receivables by $250,000
during the three months ended June 30, 2004.
Unbilled deferred rents receivable represents the amount that the
cumulative straight-line rental income recorded to date exceeds cash rents
billed to date under the lease agreement. Given the longer-term nature of
these types of receivables, managements determination of the adequacy of
the allowance for unbilled deferred rents receivables is based primarily on
historical loss experience. Management evaluates the allowance for unbilled
deferred rents receivable using a specific identification methodology for
the Companys significant tenants designed to assess the tenants financial
condition and their ability to meet their lease obligations.
Impairment of Long-Lived Assets:
The Company evaluates a property for
potential impairment whenever events or changes in circumstances indicate
that its carrying amount may not be recoverable. On a quarterly basis, the
Company evaluates the whole portfolio for impairment based on current
operating information. In the event that these periodic assessments reflect
that the carrying amount of a property exceeds the sum of the undiscounted
cash flows (excluding interest) that are expected to result from the use and
eventual disposition of the property, the Company would recognize an
impairment loss to the extent the carrying amount exceeded the estimated
fair value of the property. The estimation of expected future net cash flows
is inherently uncertain and relies on subjective assumptions dependent upon
future and current market conditions and events that affect the ultimate
value of the property. It requires management to make assumptions related to
the property such as future rental rates, tenant allowances, operating
expenditures, property taxes, capital improvements, occupancy levels, and
the estimated proceeds generated from the future sale of the property.
Capitalization of Real Estate Facilities:
Real estate facilities are
recorded at cost. Costs related to the renovation or improvement of the
properties are capitalized. Expenditures for repairs and maintenance are
expensed as incurred. Expenditures that are expected to benefit a period
greater than 30 months and exceed $5,000 are capitalized and depreciated
over the estimated useful life. Buildings and equipment are depreciated on
the straight-line method over the estimated useful lives, which are
generally 30 and 5 years, respectively. Leasing costs in excess of $1,000
for leases with terms greater than two years are capitalized and
depreciated/amortized over their estimated useful lives. Leasing costs for
leases of less than two years or less than $1,000 are expensed as incurred.
Interest cost and property taxes incurred during the period of construction
of real estate facilities are capitalized. If these costs are not
capitalized correctly, the timing of expenses and the recording of real
estate assets could be over or understated.
Depreciation:
We compute depreciation on our buildings and equipment
using the straight-line method based on estimated useful lives of generally
30 and 5 years. A significant portion of the acquisition cost of each
property is allocated to building and building components (usually 75-85%).
The allocation of the acquisition cost to building and its components and
the determination of the useful life are based on managements estimates.
If we do not allocate appropriately to building or related components or
incorrectly estimate the useful life of our properties, the timing and/or
the amount of depreciation expense will be affected. In addition, the net
book value of real estate assets could be over or understated. The
statement of cash flows, however, would not be affected.
Accruals of Operating Expenses:
The Company accrues for property tax
expenses, performance bonuses and other operating expenses each quarter
based on historical trends and anticipated disbursements. If these
estimates are incorrect, the timing of expense recognition will be affected.
Accruals for Contingencies:
The Company is exposed to business and
legal liability risks with respect to events that may have occurred, but in
accordance with generally accepted accounting principles has not accrued for
such potential liabilities because the loss is either not probable or not
estimable. Future events and the result of
21
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.
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.
At the July 31, 2003 meeting of the EITF, the Securities and Exchange
Commissions 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 upon redemption, regardless of where
in the stockholders equity section those costs were initially classified on
issuance. The Company records its issuance costs as a reduction to Paid-in
Capital on its balance sheet at the time the preferred securities are issued
and reflects the carrying value of the preferred stock at the stated value.
The Company reduces the carrying value of preferred stock by the issuance
costs at the time it notifies the holders of preferred stock or units of its
intent to redeem such shares or units to comply with EITF Topic D-42.
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
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 qualifications was lost. There can be no assurance
that we would be entitled to any statutory relief.
Effect of Economic Conditions on the Companys Operations:
Through September 30, 2004, the Company continues to experience conditions
in certain of its markets that significantly favor the tenants. As a result
of the challenging economic conditions the Company continues to experience
declines in occupancy rates compared to prior years. While the Company
works to change this trend in occupancy rates, it has experienced decreases
in rental rates. Rental rate decreases on executed transactions have
averaged 10%, 12% and 12% for each of the last three calendar quarters ended
September 30, 2004, June 30, 2004 and March 31, 2004,
respectively (determined by comparing the rental rate in effect
immediately prior to the renewal of a lease or the reletting of a
property with the rental rate in effect after the lease is renewed
or the property is relet). In
addition, the capital costs necessary to execute lease transactions have
increased sharply over the past year. Recurring capital expenditures, which
the Company defines as those costs necessary to operate its real estate
assets at their current economic value, for 2003 were approximately $1.60
per square foot of owned real estate. Through September 30, 2004 such costs
equal $1.61 per owned square footage. The Company anticipates that the
higher level of recurring capital expenditures incurred in the third quarter
of 2004 will continue in the fourth quarter and into 2005.
The reduction in occupancies and market rental rates has been the
result of several factors related to general economic conditions. There are
more businesses contracting than expanding, more businesses failing than
starting-up and general uncertainty for businesses, resulting in slower
decision-making and requests for shorter-term leases. There is also more
competing vacant space including substantial amounts of sub-lease space in
many of the Companys markets. Many of the Companys properties have lower
vacancy rates than the average rates for the markets in which they are
located; consequently, the Company may have difficulty in maintaining its
occupancy rates as leases expire. An extended economic slowdown will put
additional downward pressure on occupancies and market rental rates. The
economic slowdown and the abundance of space alternatives available to
customers has led to pressure for greater rent concessions, more generous
tenant improvement allowances and higher broker commissions.
These economic conditions have also placed increased pressure on the
credit quality of certain tenants throughout the portfolio. As a result,
more tenants are contacting us regarding their economic viability, including
those that could be material to our revenue base. These economic conditions
have affected two tenants previously included in
22
our list of top ten tenants
based on annual revenue. Footstar and its affiliates, which was previously
one of our top ten tenants, filed for protection under Chapter 11 of the
U.S. Bankruptcy Laws during the first quarter of 2004. In connection with
such filing, they rejected one of two leases with the Company. The lease
which has been rejected was for approximately 59,000 square feet in Dallas,
Texas. They continue to occupy 57,000 square feet with a term to expire in
November, 2008. No action has been taken with respect to the second lease
and we are uncertain of their intentions for the occupied space. They
currently have until November 13, 2004, subject to a court approved
extension,
to notify us of their intention. Annual base rental income on the
remaining lease subject to rejection through bankruptcy is approximately
$770,000. Another large tenant representing approximately 1.1% of revenues
as of June 30, 2004, had been in and out of default several times over the
past two years. Effective September 1, 2004, the Company amended the
tenants lease by resetting the term to 10 years and reducing initial
monthly rents by approximately $120,000 per month, with annual
increases thereafter. Given the historical
uncertainty of the tenants ability to meet its lease obligations, we will
continue to reserve any income that would have been realized on a straight
line basis. Certain other tenants have contacted us, requesting early
termination of their lease, reduction in space under lease, rent deferment
or abatement. At this time, the Company cannot anticipate what impact, if
any, the ultimate outcome of these discussions will have on our operating
results.
Effect of Economic Conditions on the Companys Primary Markets:
The Company has concentrated its operations in nine major markets. Each of
these markets has been affected by the slowdown in economic activity in some
way. The Companys overall view of these markets is summarized below as of
September 30, 2004. The Company has compiled the market occupancy
information set forth below using broker reports for these respective
markets. These sources are deemed to be reliable by the Company, but there
can be no assurance that these reports are accurate.
The Company owns approximately 3.7 million square feet in Southern
California. This is one of the more stable markets in the country but
continues to experience relatively flat rental rates. Vacancy rates have
decreased slightly throughout Southern California for flex, industrial and
office space, and range from 11.5% to 16% for office and less than 5% for
industrial, depending on sub-markets and product type. The rental rates for
the Companys properties continue to improve. The Companys vacancy rate at
September 30, 2004 was approximately 5.9%.
The Company owns approximately 2.8 million square feet in Northern
Virginia, where the overall market vacancy rate is 15% as of September 30,
2004. Vacancy rates have stabilized at less than 18% and are improving in
the sub-markets in the western technology corridor, such as Herndon,
Chantilly and Sterling. Other suburban Washington D.C. sub-markets have
continued to be positively impacted by increased federal government spending
on defense and national security. The Companys vacancy rate at September
30, 2004 was approximately 3.8%.
The Company owns approximately 1.6 million square feet in Maryland.
This region is split between two very different markets. The Montgomery
County submarket accounts for approximately 55% of the Companys Maryland
properties and remains stable, with increases in rental income driven by
anticipated lease-up and some increase in rental rates. Prince Georges
County remains relatively weak with fewer demand drivers in the market. The
Company expects the business of the federal government, defense contractors
and the biotech industry to remain strong for the rest of 2004. The
Companys vacancy rate at September 30, 2004 was approximately 7.3%.
The Company owns approximately 1.5 million square feet in Northern
California with a concentration in South San Francisco, Sacramento and the Santa Clara and North San Jose submarket. The vacancy rates in these submarkets stand at 21%,
26% and 24%, respectively, or more throughout most of the Bay Area. Market
rental rates dropped dramatically in 2003 and continue to decrease in 2004.
The Companys vacancy rate at September 30, 2004 was approximately 5.6%.
The Company owns approximately 1.8 million square feet in the Beaverton
sub-market of Portland, Oregon. Leasing activity slowed dramatically during
2003 and continues to be slow in 2004. The vacancy rate in this market is
over 17%. On the supply side, the Company does not believe significant new
construction starts will occur during the remainder of 2004. Leasing
activity in the market is occurring generally at rates 25% to 40% below
in-place rents. The Companys vacancy rate at September 30, 2004 was
approximately 21.1%.
The Company owns approximately 1.7 million square feet in the Dallas
Metroplex market. The vacancy rate in Las Colinas, where most of the
Companys properties are concentrated, has stabilized at levels less than
25% for office and 20% for industrial flex. During the nine months ended
September 30, 2004, the number of new properties coming on-line has
decreased, little new construction has commenced and very little pre-leasing
of space has occurred. The Company believes that any such new construction
will cause vacancy rates to rise. Leasing activity has slowed overall and
sub-leasing is continuing to increase in the Telecom Corridor in North
Dallas County. The Companys vacancy rate at September 30, 2004 was
approximately 15.4%.
23
The Company owns approximately 1.2 million square feet in the Austin
and Greater Houston market. Austin has been hit hard by downturns in the
technology industry. Softness in this market has increased competition for
tenants, creating an incentive laden real estate market. Current rental
rates in Austin are 25% to 30% less than average in-place rental rates. The
Companys vacancy rate at September 30, 2004 was approximately 22.1%.
In December, 2003, the Company acquired a 3.4 million square foot
property located in the Airport West sub-market of Miami-Dade County in
Florida. The propertys vacancy rate upon acquisition was approximately
16.6%, compared to a vacancy rate of approximately 12.7% for the entire
sub-market. The property is located less than one
mile from the cargo entrance of the Miami International Airport, which
is recognized as one of the nations busiest cargo and passenger airports.
The Companys vacancy rate at September 30, 2004 was approximately 15.0%.
The Company owns approximately 0.7 million square feet in the Phoenix
market. Overall, the Phoenix market has been characterized by steady
growth. However, average market rental rates have declined over the past
several years as demand for space subsided. The vacancy rate in this market
is over 16%. The Companys vacancy rate at September 30, 2004 was
approximately 9.0%.
Growth of the Companys Operations:
During 2003 and continuing into 2004, the Company has focused on maximizing
cash flow from its existing core portfolio of properties and acquisitions
and dispositions of properties, seeking to expand its presence in existing
and new markets through strategic acquisitions and strengthening its balance
sheet, primarily through the issuance of preferred stock/units. The Company
has historically maintained low debt and overall leverage levels, including
preferred stock/units; this approach is intended to provide the Company with
the flexibility for future growth without the issuance of additional common
stock.
During the third quarter of 2004 the Company concluded that it would
likely proceed with the sale of certain additional assets. Accordingly,
such assets have been classified as assets held for disposition and the
operations of such assets have been reflected as discontinued operations.
Included in assets held for sale are 11 units, aggregating 90,000 square
feet, at Miami International Commerce Center (MICC). In addition the
Company has also included a 56,000 square foot retail center within MICC
that it intends to proceed with selling. Finally, the Company has included
two assets in Prince Georges County, Maryland. The two buildings comprise
approximately 400,000 square feet with a combined weighted average occupancy
rate of 86% for the third quarter of 2004.
On July 28, 2004 the Company closed on a sale of a 10,000 square foot
unit in Miami with gross proceeds of $1.2 million. In addition, on
September 1, 2004 the Company sold a 30,500 square foot building in
Beaverton, Oregon for gross proceeds of $3.1 million. The Company reported
a combined gain of $313,000 on the sale of those two assets.
In the first quarter of 2004, the Company reevaluated its plans to sell
five office and flex buildings and 4.5 acres of land in Beaverton, Oregon.
The Company has determined these properties will not likely be sold during
2004. These properties were included in properties held for disposition
during 2003.
During 2003, the Company added approximately 4.1 million square feet to
its portfolio at an aggregate cost of approximately $283 million. The
Company acquired 544,000 square feet in Southern California for $60 million,
113,000 square feet in Northern Texas for $8 million, 3,352,000 square feet
in Florida for $205 million, and 110,000 square feet in Phoenix, Arizona for
$10 million. During 2002, the Company did not complete any acquisitions.
The Company plans to continue to seek to build its presence in existing
markets by acquiring high quality facilities in selected markets. The
Company targets properties in markets with below market rents which may
offer it growth in rental rates above market averages, and which offer the
Company the ability to achieve economies of scale resulting in more
efficient operations.
During the first half of 2003, the Company identified a property in
Lakewood, California with 57,000 square feet, two buildings in Nashville,
Tennessee totaling 138,000 square feet, and five office and flex buildings
totaling 342,000 square feet and a 3.5 acre parcel of vacant land in
Beaverton, Oregon as assets the Company intended to sell. The sale of
Lakewood, California was completed early in the second quarter of 2003 with
net proceeds of approximately $6.3 million. The sale of the Nashville
properties was completed in June, 2003 with net proceeds of $5.1 million. A
gain on the Lakewood and Nashville properties of $3.5 million was recognized
in the second quarter of 2003. During the third quarter of 2003, the
Company sold a one-acre parcel of land located in Beaverton, Oregon with net
proceeds of approximately $733,000. The transaction was completed in July,
2003 at a gain of approximately $14,000. During the fourth quarter of 2003,
the Company sold a 31,000 square foot flex facility in Beaverton, Oregon
with net proceeds of approximately $2.4 million. The transaction was
completed in December, 2003 at a loss of approximately $601,000.
24
Through a joint venture with an institutional investor, the Company
held a 25% equity interest in an industrial park in the City of Industry,
submarket of Los Angeles County. Initially the joint venture consisted of
14 buildings totaling 294,000 square feet. During 2002, the joint venture
sold eight of the buildings totaling approximately 170,000 square feet. The
Company recognized gains of approximately $861,000 on the disposition of
these eight buildings. In addition, the Companys interest in cash
distributions from the joint venture increased from 25% to 50% as a result
of meeting its performance measures. Therefore, the Company recognized
additional income of $1,008,000 in 2002. As of December 31, 2002, the joint
venture held six buildings totaling 124,000 square feet. During January,
2003, five of the remaining six buildings were sold and the Company
recognized gains of
approximately $1,076,000 as a result of these sales and additional
income of approximately $700,000 in the first quarter of 2003. During
April, 2003 the joint venture sold the remaining building with approximately
29,000 square feet. During the second quarter of 2003, the Company
recognized a gain of $300,000 and additional income of $200,000.
Impact of Inflation:
Although inflation has slowed in recent years, it is still a factor in
our economy and the Company continues to seek ways to mitigate its impact.
A substantial portion of the Companys leases require tenants to pay
operating expenses, including real estate taxes, utilities, and insurance,
as well as increases in common area expenses. Management believes these
provisions reduce the Companys exposure to the impact of inflation.
Results of Operations
Net income allocable to common shareholders for the three months ended
September 30, 2004 was $2.8 million or $0.13 per diluted share compared to
$7.8 million or $0.36 per diluted share for the same period in 2003. The
change resulted primarily from an increase of $4.4 million in paid preferred
equity distributions related to a net increase in preferred equity of $219.7
million. The Company used the proceeds from the preferred equity
offerings to fund asset acquisitions in 2004 and 2003. In addition,
the Company reported non-cash distributions of $2.9 million during the third
quarter of 2004 related to the redemption of $120 million of preferred
equity and the application of EITF Topic D-42. These increases in
distributions were partially offset by a decrease in interest expense of $0.5
million, as the Company repaid debt with proceeds from its preferred equity
offerings, and an increase in revenues net of cost of operations and
depreciation from assets acquired in 2004 and 2003.
Revenues increased $6.3 million for the three months ended September 30,
2004 over the same period in the prior year as a result of properties
acquired during the latter part of 2003, partially offset by a decrease in
Same Park revenues of $1.1 million.
Net income allocable to
common shareholders for the nine months ended September 30, 2004 was
$12.2 million or $0.56 per diluted share compared to $26.6 million or
$1.24 per diluted share for the same period in 2003. The change
resulted primarily from an increase of $9.3 million in paid preferred
equity distributions related to the net increase in preferred equity.
In addition, the Company reported non-cash distributions of $50
million during the first nine months of 2004 related to the
redemption of $185.6 million of preferred equity and the application
of EITF Topic D-42. In addition, during the nine months ended
September 30, 2003 the Company reported an impairment provision of
$5.9 million related to the previously anticipated sale of assets in
Oregon. These increases resulting from distributions and the
impairment provision were partially offset by an increase in revenues
net of cost of operations and depreciation from assets acquired in
2004 and 2003.
Revenues increased $18.3 million for the nine months ended September
30, 2004 over the same period in the prior year as a result of
properties acquired during the latter part of 2003, partially offset
by a decrease in Same Park revenues of $3.5 million.
25
The Companys property operations account for almost all of the net
operating income earned by the Company. The following table presents the
operating results of the properties for the three and nine months ended
September 30, 2004 and 2003 in addition to other income and expense items
affecting income from continuing operations. The Company breaks out Same
Park operations to provide information regarding trends for properties the
Company has held for the periods being compared (in thousands, except per
square foot amounts):
26
27
Concentration of Portfolio by Region:
Rental income, cost of operations
and rental income less cost of operations, excluding depreciation and
amortization or net
operating income prior to depreciation and amortization (defined as NOI for purposes of the
following tables) from continuing operations are summarized for the three
and nine months ended September 30, 2004 by major geographic region below.
The Company uses NOI and its components as a measurement of the performance
of its commercial real estate. Management believes that these
financial measures provide them
as well as the investor the most consistent measurement on a comparative
basis of the performance of the commercial real estate and its contribution
to the value of the Company. Depreciation and amortization have been
excluded from these financial measures as they are generally not used in determining the value of
commercial real estate by management or the investment community.
Depreciation and amortization are generally not used in determining
value as they consider the historical costs of as asset compared to
its current value; therefore, to understand the effect of the assets
historical cost on the Companys results, investors should look at
GAAP financial measures, such as total operating costs including
depreciation and amortization. The Companys
calculation of NOI may not be comparable to those of other companies and
should not be used as an alternative to measures of performance in
accordance with generally accepted accounting principles. The table below
reflects rental income, operating expenses and NOI from continuing
operations for the three and nine months ended September 30, 2004 based on
geographical concentration. The total of all regions is equal to the amount
of rental income and cost of operations recorded by the Company in
accordance with Generally Accepted Accounting Principals (GAAP). We have
also included the most comparable GAAP measure which includes total
depreciation and amortization. The percent of totals by region reflects the
actual contribution to rental income, cost of operations and NOI during the
three and nine month periods from properties included in continuing
operations (in thousands):
Three Months Ended September 30, 2004:
28
Nine Months Ended September 30, 2004:
29
Concentration of Credit Risk by Industry:
The information below depicts
the industry concentration of our tenant base as of September 30, 2004. The
Company analyzes this concentration to minimize significant industry exposure
risk.
The information below depicts the Companys top ten customers by annual
rents as of September 30, 2004 (in thousands):
Of the leases included in the above list, approximately 33% of the
total square footage is currently scheduled to expire in 2005.
Supplemental Property Data and Trends:
In order to evaluate the
performance of the Companys overall portfolio, management analyzes the
operating performance of a consistent group of properties constituting 13.7
million net rentable square feet (Same Park facilities). These properties
include all assets included in continuing operations that have been owned
since January 1, 2003. The Company currently has owned and operated them
since January 1, 2003. The Same Park facilities represent approximately 77%
of the weighted average square footage of the Companys portfolio for 2004.
Rental income, cost of operations
and rental income less cost of operations, excluding depreciation and
amortization or net
operating income prior to depreciation and amortization (defined as NOI for purposes of the
following tables) from continuing operations are summarized for the three
and nine months ended September 30, 2004 by major geographic region below.
The Company uses NOI and its components as a measurement of the performance
of its commercial real estate. Management believes that these
financial measures provide them
as well as the investor the most consistent measurement on a comparative
basis of the performance of the commercial real estate and its contribution
to the value of the Company. Depreciation and amortization have been
excluded from these financial measures as they are generally not used in determining the value of
commercial real estate by management or the investment community.
Depreciation and amortization are generally not used in determining
value as they consider the historical costs of as asset compared to
its current value; therefore, to understand the effect of the assets
historical cost on the Companys results, investors should look at
GAAP financial measures, such as total operating costs including
depreciation and amortization. The Companys
calculation of NOI may not be comparable to those of other companies and
should not be used as an alternative to measures of performance in
accordance with generally accepted accounting principles.
30
The following tables summarize the Same Park operating results by major
geographic region for the three months ended September 30, 2004 and 2003 (in
thousands). In addition, the table reflects the comparative impact on the
overall rental income, operating expenses and NOI from properties that have
been acquired since January 1, 2003. The impact of these properties is
included in Other Facilities in the charts below:
31
The following tables summarize the Same Park operating results by major
geographic region for the nine months ended September 30, 2004 and 2003 (in
thousands). In addition, the table reflects the comparative impact on the
overall rental income, operating expenses and NOI from properties that have
been acquired since January 1, 2003. The impact of these properties is
included in Other Facilities in the charts below:
32
Southern California (Same Park)
This region includes San Diego, Orange and Los Angeles Counties. The
increase in revenues is the result of a stable market with a diverse
economy. Weighted average occupancies have decreased from 97.3% for the
first nine months in 2003 to 95.8% for the first nine months in 2004.
Realized rent per foot increased 1.6% from $14.06 per foot for the first
nine months in 2003 to $14.29 per foot for the first nine months in 2004.
Northern California (Same Park)
This region includes San Jose, San Francisco and Sacramento,
including 1,025,000 square feet in the Silicon Valley, a market that has
been devastated by the technology slump. The Company benefited from the
early renewal of large leases in its Silicon Valley portfolio and relative
strength in the Sacramento market. Weighted average occupancies have
outperformed the market, yet they have decreased from 95.8% for the first
nine months in 2003 to 94.4% for the first nine months in 2004. Realized
rent per foot decreased 1.0% from $14.30 per foot for the first nine months
in 2003 to $14.16 per foot for the first nine months in 2004.
Southern Texas (Same Park)
This region includes Austin and Houston. Austin was among the
hardest hit due to the technology slump and the Companys operating results
reflect the effects of sharply reduced market rental rates, higher vacancies
and business failures. The Houston market remains relatively stable.
Weighted average occupancies have decreased from 92.9% for the first nine
months in 2003 to 85.1% for the first nine months in 2004. Realized rent
per foot decreased 15.1% from $11.62 per foot for the first nine months in
2003 to $9.87 per foot for the first nine months in 2004.
In our 2003 annual report and in prior annual and quarterly reports, we
included our Houston properties in the Northern Texas region for purposes of
analyzing Same Park operating results. We intend to include our Houston
properties in the Southern Texas region for this purpose in future annual
and quarterly reports. In the tables above, we have also grouped the
Houston properties in the Southern Texas region for purposes of reporting
operating results for the three and nine months ended September 30, 2003.
Northern Texas (Same Park)
This region consists of the Companys Dallas portfolio, which
continues to be negatively impacted by the lingering effects of the slowdown
in the telecommunications industry, coupled with the unanticipated
bankruptcy filing by Footaction. Weighted average occupancies have
decreased from 93.3% for the first nine months in 2003 to 82.8% for the
first nine months in 2004. Realized rent per foot decreased 9.5% from
$11.08 per foot for the first nine months in 2003 to $10.03 per foot for the
first nine months in 2004, reflective of the weakening in real estate market
fundamentals.
Virginia (Same Park)
This region includes all major Northern Virginia submarkets
surrounding the Washington D.C. metropolitan area. Virginia has been
negatively impacted in the Chantilly and Herndon submarkets as a result of
the technology and telecommunications industry slowdown. Other submarkets
have been positively impacted by increased federal government spending on
defense. Weighted average occupancies have increased from 94.5% for the
first nine months in 2003 to 96.1% for the first nine months in 2004.
Realized rent per foot increased 1.8% from $17.26 per foot for the first
nine months in 2003 to $17.57 per foot for the first nine months in 2004.
Maryland (Same Park)
This region consists primarily of facilities in Prince Georges
County and Montgomery County. These markets have been relatively stable.
Weighted average occupancies are 90.7% for the first nine months in 2003 and
17.76% for the first nine months in 2004. Realized rent per foot increased
6.1% from $20.18 per foot for the first nine months in 2003 to $21.41 per
foot for the first nine months in 2004.
Oregon (Same Park)
This region consists primarily of three business parks in the
Beaverton submarket of Portland. Oregon has been one of the markets hardest
hit by the technology slowdown. The full effect of this slowdown began to
take effect in 2003 and continued into 2004, with lease terminations and
expirations resulting in significant declines in rental revenue. Weighted
average occupancies have decreased from 81.9% for the first nine months in
2003 to 78.9% for the first nine months in 2004. Realized rent per foot
decreased 0.2% from $16.40 per foot for the first nine months in 2003 to
$16.36 per foot for the first nine months in 2004.
33
Arizona (Same Park)
This region consists primarily of Phoenix and Tempe. Weighted
average occupancies have increased from 94.3% for the first nine months in
2003 to 94.7% for the first nine months in 2004. Realized rent per foot
decreased 2.9% from $10.36 per foot for the first nine months in 2003 to
$10.06 for the first nine months in 2004.
Other Facilities
During the nine months ended September 30, 2004 the Company
acquired one asset consisting of 165,000 square feet for $22.4 million
compared to five assets comprising of 4.2 million square feet for a total of
approximately $296 million in the twelve months ended December 31, 2003. Of
the 2003 acquisitions only two assets comprising of approximately 550,000
square feet were acquired in the nine months ended September 30, 2003.
During the three and nine months ended September 30, 2004 these
recently acquired assets (referred to as Other Facilities) contributed $5.3 million and $14.9 million in revenues less cost of
operations, respectively. This compares to contributions in the three and
nine months ended September 30, 2003 from Other Facilities of $0.7 million and $1.3 million in
revenue less cost of operations, respectively.
Facility Management Operations:
The Companys facility management
operations account for a small portion of the Companys net income. During
the three months ended September 30, 2004, $200,000 in revenue was
recognized from facility management operations compared to $178,000 for the
same period in 2003. During the nine months ended September 30, 2004,
$515,000 in revenue was recognized from facility management operations
compared to $553,000 for the same period in 2003.
Cost of Operations:
Cost of operations for the three months ended
September 30, 2004 was $16.3 million compared to $13.4 million for the same
period in 2003. The increase is due primarily to the growth in square
footage of the Companys portfolio of properties. Cost of operations for
the nine months ended September 30, 2004 was $48.3 million compared to $39.0
million for the same period in 2003. Cost of operations as a percentage of
rental income for the nine months ended September 30, 2004 and 2003 was
29.7% and 27.1%, respectively. This increase is primarily due to decreased
rental revenues, including increased rental concessions, related to the
Companys Same Park operations in the Southern and Northern Texas regions.
Depreciation and Amortization Expense:
Depreciation and amortization
expense for the three months ended September 30, 2004 was $18.3 million
compared to $15.0 for the same period in 2003. Depreciation and amortization
expense for the nine months ended September 30, 2004 was $53.6 million
compared to $42.0 million for the same period in 2003. This increase is
primarily due to depreciation expense on real estate facilities acquired
during the latter part of 2003.
34
General and Administrative Expense:
General and administrative expense
consisted of the following expenses (in thousands):
The increase in general and administrative expenses during the quarter were
primarily related to the increase in professional fees. This increase
relates to the Companys compliance with Section 404 of the Sarbanes-Oxley
Act, related to the Companys internal controls. The Company anticipates
that it will continue to incur higher levels of professional fees as a
result of the ongoing efforts with completing its required compliance work
as well as the efforts required by its third party auditors to complete
their certifications required under the act.
The nine months ended September 30, 2004, general and administrative costs
have decreased $260,000 or 7.4%. The primary cause of the decrease relates
to payroll expenses as a result of the departure in March 2004 of the
Companys Director of Acquisitions and Development.
Interest and Other Income:
Interest and other income reflects earnings
on cash balances and dividends on marketable securities in addition to
miscellaneous income items. Interest income was $109,000 for the three
months ended September 30, 2004 compared to $90,000 for the same period in
2003. The increase is attributable to higher cash balances as the Company
prefunded some of its September 2004 preferred equity redemptions. Average
cash balances and effective interest rates for the three months ended
September 30, 2004 were approximately $37 million and 1.4%, respectively,
compared to $34 million and 0.93% respectively, for the same period in 2003.
Interest income was $143,000 for the nine months ended September 30, 2004
compared to $414,000 for the same period in 2003. Average cash balances and
effective interest rates for the nine months ended September 30, 2004 were
approximately $20 million and .9%, respectively, compared to $40 million
and 1.1% respectively, for the same period in 2003.
Interest Expense:
Interest expense was $513,000 for the three months
ended September 30, 2004 compared to $1.0 million for the same period in
2003. Interest expense was $2.6 million for the nine months ended September
30, 2004 compared to $3.0 million for the same period in 2003. The decrease
is primarily attributable to lower average debt balances in 2004 due to
lower average balances on the line of credit and declining mortgage
balances.
Impairment Charge on Properties Held for Disposition:
An impairment
charge on properties held for disposition of $5.9 million was reported in
the nine months ended September 30, 2003. The impairment loss is specific
to five office and flex buildings, and a 3.5 acre parcel of land in
Beaverton, Oregon that were held for disposition in 2003. In the first
quarter of 2004 the Company reevaluated its plans to sell these properties.
The Company determined that these properties were not likely to be sold
during 2004.
35
Equity in Income of Liquidated Joint Venture
:
Equity in income of
liquidated joint venture reflects the Companys share of net income from its
joint venture. Equity in income of liquidated joint venture was none for
the nine months ended September 30, 2004 compared to $2.3 million for the
same period in 2003. The decrease is due to the gain on sale of the
remaining six buildings in the joint venture of $1,376,000 and additional
income for meeting performance measures of $920,000 recognized during the
nine months ended September 30, 2003. As of December 31, 2003, the joint
venture had sold all of its properties, repaid all of its debts, and
distributed all remaining cash to the joint venture partners.
Minority Interest in Income:
Minority interest in income reflects the
income allocable to equity interests in the Operating Partnership that are
not owned by the Company. Minority interest in income was $8,620,000
($7,666,000 allocated to preferred unit holders and $714,000 allocated to
common unit holders and $240,000 allocated to common units from discontinued
operations) for the three months ended September 30, 2004 compared to
$7,463,000 ($4,810,000 allocated to preferred unit holders, $2,462,000
allocated to common unit holders and $191,000 allocated to common units from
discontinued operations) for the same period in 2003. Minority interest in
income was $21,650,000 ($17,548,000 allocated to preferred unit holders,
$3,643,000 allocated to common unit holders and $459,000 allocated to
common units from discontinued operations) for the nine months ended
September 30, 2004 compared to $23,494,000 ($14,430,000 allocated to
preferred unit holders, $9,183,000 allocated to common unit holders and a
$119,000 loss allocated to common units from discontinued operations) for
the same period in 2003. The changes in minority interest in income
are a result of the charges outlined within Results of Operations.
Liquidity and Capital Resources
Net cash provided by operating activities for the nine months
ended September 30, 2004 and 2003 was $117.5 million and $102.6 million,
respectively. Management believes that the Companys internally generated
net cash provided by operating activities will continue to be sufficient to
enable it to meet its operating expenses, capital improvements and debt
service requirements and to maintain the current level of distributions to
shareholders in addition to providing additional returned cash for future
growth, debt repayment, and stock repurchases.
Net cash used in investing activity was $56.2 million and $57.5 million
for the nine months ended September 30, 2004 and 2003, respectively. While
the net change between periods was $1,300,000 or 2.3%, the composition of
the activity is very different from 2003 to 2004. Acquisitions through
September 30, 2004 were $24.1 million compared to $53.0 million in the prior
year. Capital improvements to real estate facilities in 2004 were $38.1
million compared to $25.6 million in 2003. The primary reason for the
increase in improvements is the higher level of transaction costs the
Company is incurring in connection with its leasing activity. This includes
both tenant improvements and leasing commissions. In addition the first
nine months of 2003 included proceeds of approximately $23.0 million related
to various asset and security sales, while 2004 proceeds from asset sales
are $5.1 million.
Net cash used in financing activity was $64.0 million for the nine
months ended September 30, 2004 compared to $55.8 million for the same
period of 2003. The increase of approximately $8.2 million is primarily a
result from the use of approximately $7.9 million of operating cash to repay
debt and preferred stock redemptions as the Company repaid or refinanced
$537.8 million of debt and preferred equity during the period while it
received $529.9 million from preferred equity offerings and short term
borrowings during the same period.
The Companys capital structure is characterized by a low level of
leverage. As of September 30, 2004, the Company had three fixed rate
mortgages totaling $19.2 million, which represented approximately 1.4% of
its total capitalization (based on book value, including minority interest
and debt). The weighted average interest rate for the mortgages is
approximately 7.46% per annum. The Company had approximately 2.6% of its
properties, in terms of net book value, encumbered at September 30, 2004.
The Company has an unsecured line of credit (the Credit Facility)
with Wells Fargo Bank, with a borrowing limit of $100 million and an
expiration date of August 1, 2005. Interest on outstanding borrowings is
payable monthly. At the option of the Company, the rate of interest charged
is equal to (i) the prime rate or (ii) a rate ranging from the London
Interbank Offered Rate (LIBOR) plus 0.60% to LIBOR plus 1.20% depending on
the Companys credit ratings and coverage ratios, as defined (currently
LIBOR plus 0.70%, 2.575% as of September 30, 2004). In addition, the
Company is required to pay an annual commitment fee ranging from 0.20% to
0.35% of the borrowing limit (currently 0.25%). The Company had an
outstanding balance of $30 million on its Credit Facility at September 30,
2004 which was repaid in full subsequent to September 30, 2004.
The Company received approximately $6.5 million due to the exercise of
stock options during the nine months ended September 30, 2004.
36
On August 31, 2004, the Company issued 2,300,000 depositary shares each
representing 1/1,000 of a share of the Companys 7.60% Cumulative Preferred
Stock, Series L at $25.00 per share. The Company received net proceeds of
approximately $55.7 million.
Subsequent to September 30, 2004, the Company issued an additional
1,300,000 depositary shares, each representing 1/1,000 of a share of the
7.000% Cumulative Preferred Stock, Series H at $24.0638 per share. Net
proceeds from the offering were used to repay in full the balance
outstanding on the Companys Credit Facility.
In September 2004, the Company redeemed $120 million Cumulative
Redeemable Preferred Units consisting of $80 million of 8.75% Series C
Cumulative Redeemable Preferred Units redeemed as of September 3, 2004 and $40 million
of 8.875% Series X Cumulative Redeemable Preferred Units redeemed as of September 7,
2004. In connection with the redemption of Series C and Series X Preferred
Units, the Company recognized additional non-cash distributions of $2.0
million and $900,000, respectively. As a result of these redemptions as
well as those completed in April 2004, based on the difference in the
weighted average yield on the preferred equity redeemed compared to the
weighted average yield on preferred equity issued, the Company has reduced
its annual distributions going forward by approximately
$3.1 million.
On June 30, 2004, the Company issued 2,300,000 depositary shares each
representing 1/1,000 of a share of the Companys 7.950% Cumulative Preferred
Stock, Series K, at $25.00 per share. The Company received net proceeds of
approximately $55.7 million.
In May 2004, the Company acquired an office park in Fairfax, Virginia
totaling approximately 165,000 square feet for approximately $24.1 million.
The Company also completed private placements of the 7 1/2% Series J
Cumulative Redeemable Preferred Units totaling approximately $42.8 million
through its operating partnership. The Preferred Units are non-callable for
five years and have no mandatory redemption. The net proceeds from the
placements were approximately $41.5 million and were used to fund the
acquisition of the office park in Fairfax, Virginia and to reduce the amount
outstanding on the Companys line of credit.
On April 30, 2004 the Company redeemed 2,112,900 depositary shares of
its 9-1/4% Cumulative Preferred Stock, Series A for approximately $52.8
million and on April 23, 2004 the Company redeemed 510,000 units of its
8-7/8% Series B Cumulative Preferred Operating Partnership Units for
approximately $12.8 million. In accordance with EITF Topic D-42, the
redemptions resulted in a reduction of net income allocable to common
shareholders of approximately $2,133,000 for the nine months ended September
30, 2004 equal to the excess of the redemption amounts over the carrying
amounts of the redeemed securities.
On April 21, 2004, the Company issued 3,000,000 depositary shares, each
representing 1/1,000 of a share of the Companys 6.875% Cumulative Preferred
Stock, Series I, at $25.00 per share. The Company received net proceeds of
approximately $72.6 million, which were used to redeem the Companys
outstanding 9.25% Cumulative Preferred Stock, Series A and the Operating
Partnerships 8.875% Series B Cumulative Redeemable Preferred Units, and
reduce the outstanding balance on the Companys line of credit.
In April 2004, the Company sold a 43,000 square foot flex facility in
Austin, Texas with net proceeds of approximately $1.1 million. In
connection with the sale, the Company recorded a loss of approximately
$168,000.
On January 30, 2004, the Company issued 6,900,000 depositary shares,
each representing 1/1,000 of a share of the Companys 7.000% Cumulative
Preferred Stock, Series H, at $25.00 per share. The Company received net
proceeds of approximately $167 million, which was used to repay outstanding
short-term debt, consisting of borrowings under the Companys line of credit
with Wells Fargo Bank and a portion of a short-term loan from Public
Storage, Inc.
The Company used its short-term borrowing capacity to complete acquisitions
totaling approximately $283 million in 2003. The Company borrowed $95
million from its Credit Facility and $100 million from PSI. The remaining
balance was funded with retained cash from operations. All amounts owed to
PSI and or the Credit Facility have been repaid in full.
The Companys funding strategy has been to use permanent capital,
including common and preferred stock, and internally generated retained cash
flows. In addition, the Company may sell properties that no longer meet its
investment criteria. The Company may finance acquisitions on a temporary
basis with borrowings from its Credit Facility. The Company targets a ratio
of Funds from Operations (FFO) to combined fixed charges and preferred
37
distributions of 3.0 to 1.0. Fixed charges include interest expense and
capitalized interest. Preferred distributions include amounts paid to
preferred shareholders and preferred Operating Partnership unit holders.
For the three and nine months ended September 30, 2004, the FFO to fixed
charges and preferred distributions coverage ratio, excluding the effect of
EITF Topic D-42, was 2.8 to 1.0 and 3.0 to 1.0, respectively, which is below
the Companys
historical trend as a result of the prefunding efforts for the
September 2004 redemptions as well as the ongoing lease up efforts at our
acquired assets.
Non-GAAP Supplemental Disclosure Measure: Funds from Operations:
Management believes that Funds From Operations (FFO) is a useful
supplemental measure of the Companys operating performance. The Company
computes FFO in accordance with the White Paper on FFO approved by the Board
of Governors of the National Association of Real Estate Investment Trusts
(NAREIT). The White Paper defines FFO as net income, computed in
accordance with generally accepted accounting principles (GAAP), before
depreciation, amortization, minority interest in income, and extraordinary
items. Management believes that FFO provides a useful measure of the
Companys operating performance and when compared year over year, reflects the impact
to operations from trends in occupancy rates, rental rates, operating costs,
development activities, general and administrative expenses and interest
costs, providing a perspective not immediately apparent from net income.
FFO should be analyzed in conjunction with net income. However, FFO
should not be viewed as a substitute for net income as a measure of
operating performance as it does not reflect depreciation and amortization
costs or the level of capital expenditure and leasing costs necessary to
maintain the operating performance of the Companys properties, which are
significant economic costs and could materially impact the Companys results
from operations.
Management believes FFO provides useful information to the investment
community about the Companys operating performance when compared to the
performance of other real estate companies as FFO is generally recognized as
the industry standard for reporting operations of real estate investment
trusts (REIT). Other REITs may use different methods for calculating FFO
and, accordingly, our FFO may not be comparable to other real estate
companies.
FFO for the Company is computed as follows (in thousands):
FFO allocated to common shareholders for the nine months ended September 30,
2004, decreased 0.7% from the same period in 2003. FFO for the nine months
ended September 30, 2004 included non-cash distributions of $5 million
related to the application of EITF Topic D-42 and the redemption of $185.6
million of preferred equity completed in 2004. FFO for the same period of
2003 included a non-cash impairment provision related to the previously
anticipated sale of assets in Beaverton, Oregon. Excluding these non-cash
adjustments, the changes in FFO relate to a reduction in the Same Park
operating results of approximately $4.6 million, partially offset by
contributions from Other Facilities in 2003 as well as a reduction in fixed
charges related to the refinancing of preferred equity.
Capital Expenditures:
During the nine months ended September 30, 2004,
the Company incurred approximately $29.4 million in recurring capital
expenditures or $1.61 per weighted average square foot owned. The Company
defines recurring capital expenditures as those necessary to maintain and
operate its commercial real estate of its current economic value. During
the nine months ended September 30, 2003, the Company incurred approximately
$15.6 million in recurring capital expenditures or $1.05 per weighted
average square foot
.
The Company expects recurring capital expenditures to
continue to be at the higher levels incurred in the third quarter of 2004
over the remainder of 2004 and into 2005 as a result of competition in
difficult markets. The following table shows total capital expenditures for
the stated periods (in thousands):
38
Stock Repurchase:
The Companys Board of Directors has authorized the
repurchase from time to time of up to 4,500,000 shares of the Companys
common stock on the open market or in privately negotiated transactions.
Since the inception of the program (March 2000), the Company has repurchased
an aggregate total of 2,621,711 shares of common stock and 30,484 common
units in its operating partnership at an aggregate cost of approximately
$70.7 million (average cost of $ 26.66 per share/unit). No shares were
repurchased during the nine months ended September 30, 2004.
On September 3, 2004, the Operating Partnership redeemed 3,200,000 units of
its 8.75% Series C Cumulative Redeemable Preferred units for $80 million. Further, on
September 7, 2004, the Operating Partnership redeemed 1,600,000 units of its
8.875% Series X Cumulative Redeemable Preferred units for $40 million. In
addition, on April 23, 2004 the Operating Partnership redeemed 510,000 units of its 8-7/8%
Series B Cumulative Redeemable Preferred Units for approximately $12.8
million. In accordance with EITF D-42, the redemptions resulted in a
reduction of net income allocable to common shareholders of approximately
$2.9 million and $3.1 million for the three and nine months ended September
30, 2004, respectively, and a corresponding increase in the allocation of
income to minority interest equal to the excess of the redemption amount
over the carrying amount of the redeemed securities.
Distributions:
The Company has elected and intends to qualify as a
REIT for federal income tax purposes. In order to maintain its status as a
REIT, the Company must meet, among other tests, sources of income, share
ownership and certain asset tests. As a REIT, the Company is not taxed on
that portion of its taxable income that is distributed to its shareholders
provided that at least 90% of its taxable income is distributed to its
shareholders prior to filing of its tax return.
Related Party Transactions:
At September 30, 2004, PSI owned 25% of the
outstanding shares of the Companys common stock (44% upon conversion of its
interest in the Operating Partnership) and 25% of the outstanding common
units of the Operating Partnership (100% of the common units not owned by
the Company). Ronald L. Havner, Jr., the Companys chairman (and until
August 2003 also the Chief Executive Officer), is also the vice-chairman,
chief executive officer and a director of PSI. Mr. Havners 2003
compensation from the Company was approved by the Companys Compensation
Committee.
Pursuant to a cost sharing and administrative services agreement, the
Company shares costs with PSI and affiliated entities for certain
administrative services. These costs totaled approximately $ 250,000 or
each of the nine months ended September 30, 2004 and 2003, and are allocated
among PSI and its affiliates in accordance with a methodology intended to
fairly allocate those costs. In addition, the Company provides property
management services for properties owned by PSI and its affiliates for a fee
of 5% of the gross revenues of such properties in addition to reimbursement
of direct costs. These management fee revenues recognized under management
contracts with affiliated parties totaled approximately $423,000 and
$424,000 for the nine months ended September 30, 2004, and 2003,
respectively. In addition, through March 31, 2004, the Company combined its
insurance purchasing power with PSI through a captive insurance company
controlled by PSI, STOR-Re Mutual Insurance Corporation (Stor-Re).
Stor-Re provides limited property and liability insurance to the Company at
commercially competitive rates. The Company and PSI also utilize
unaffiliated insurance carriers to provide property and liability insurance
in excess of Stor-Res limitations. Subsequent to March 31, 2004 the
Company has obtained insurance coverage independent of PSI and Stor-Re.
As of December 31, 2003, the Company had $100 million in short-term
borrowings from PSI. The note bore interest at 1.4% and was due on March 9,
2004. The Company repaid the note in full, along with related interest,
during the first quarter of 2004.
Off-Balance Sheet Arrangements:
The Company does not have any
off-balance sheet arrangements.
39
ITEM 2A. RISK FACTORS
In addition to the other information in this Form 10-Q, the following
factors should be considered in evaluating our company and our business.
Public Storage has significant influence over us.
At September 30, 2004, Public Storage and its affiliates owned 25% of
the outstanding shares of our common stock (44% upon conversion of its
interest in our operating partnership) and 25% of the outstanding common
units of our operating partnership (100% of the common units not owned by
us). Also, Ronald L. Havner, Jr., our Chairman of the Board, is also
Vice-Chairman, Chief Executive Officer and a Director of Public Storage and
Harvey Lenkin, one of our Directors, is President, Chief Operating Officer,
and a Director of Public Storage. Consequently, Public Storage has the
ability to significantly influence all matters submitted to a vote of our
shareholders, including electing directors, changing our articles of
incorporation, dissolving and approving other extraordinary transactions
such as mergers, and all matters requiring the consent of the limited
partners of the operating partnership. In addition, Public Storages
ownership may make it more difficult for another party to take over our
company without Public Storages approval.
Provisions in our organizational documents may prevent changes in
control.
Our articles generally prohibit owning more than 7% of our shares.
Our articles of incorporation restrict the number of shares that may be
owned by any other person, and the partnership agreement of our operating
partnership contains an anti-takeover provision. No shareholder (other than
Public Storage and certain other specified shareholders) may own more than
7% of the outstanding shares of our common stock, unless our board of
directors waives this limitation. We imposed this limitation to avoid, to
the extent possible, a concentration of ownership that might jeopardize our
ability to qualify as a REIT. This limitation, however, also makes a change
of control much more difficult (if not impossible) even if it may be
favorable to our public shareholders. These provisions will prevent future
takeover attempts not approved by Public Storage even if a majority of our
public shareholders consider it to be in their best interests because they
would receive a premium for their shares over the shares then market value
or for other reasons.
Our board can set the terms of certain securities without shareholder
approval.
Our board of directors is authorized, without shareholder
approval, to issue up to 50,000,000 shares of preferred stock and up to
100,000,000 shares of equity stock, in each case in one or more series. Our
board has the right to set the terms of each of these series of stock.
Consequently, the board could set the terms of a series of stock that could
make it difficult (if not impossible) for another party to take over our
company even if it might be favorable to our public shareholders. Our
articles of incorporation also contain other provisions that could have the
same effect. We can also cause our operating partnership to issue additional
interests for cash or in exchange for property.
The partnership agreement of our operating partnership restricts
mergers:
The partnership agreement of our operating partnership generally
provides that we may not merge or engage in a similar transaction unless the
limited partners of our operating partnership are entitled to receive the
same proportionate payments as our shareholders. In addition, we have agreed
not to merge unless the merger would have been approved had the limited
partners been able to vote together with our shareholders, which has the
effect of increasing Public Storages influence over us due to Public
Storages ownership of operating partnership units. These provisions may
make it more difficult for us to merge with another entity.
Our operating partnership poses additional risks to us.
Limited partners of our operating partnership, including Public
Storage, have the right to vote on certain changes to the partnership
agreement. They may vote in a way that is against the interests of our
shareholders. Also, as general partner of our operating partnership, we are
required to protect the interests of the limited partners of the operating
partnership. The interests of the limited partners and of our shareholders
may differ.
We cannot sell certain properties without Public Storages approval.
Prior to 2007, we are prohibited from selling 11 specified properties
without Public Storages approval. Since Public Storage would be taxed on a
sale of these properties, the interests of Public Storage and our
shareholders may differ as to the best time to sell.
40
We would incur adverse tax consequences if we fail to qualify as a REIT.
Our cash flow would be reduced if we fail to qualify as a REIT:
While we believe that we have qualified since 1990 to be taxed as a REIT,
and will continue to be so qualified, we cannot be certain. To continue to
qualify as a REIT, we need to satisfy certain requirements under the federal
income tax laws relating to our income, assets, distributions to
shareholders and shareholder base. In this regard, the share ownership
limits in our articles of incorporation do not necessarily ensure that our
shareholder base is sufficiently diverse for us to qualify as a REIT. For
any year we fail to qualify as a REIT, we would be taxed at regular
corporate tax rates on our taxable income unless certain relief provisions
apply. Taxes would reduce our cash available for distributions to
shareholders or for reinvestment, which could adversely affect us and our
shareholders. Also we would not be allowed to elect REIT status for five
years after we fail to qualify unless certain relief provisions apply.
Our cash flow would be reduced if our predecessor failed to qualify as
a REIT:
For us to qualify to be taxed as a REIT, our predecessor, American
Office Park Properties, also needed to qualify to be taxed as a REIT. We
believe American Office Park Properties qualified as a REIT beginning in
1997 until its March 1998 merger with us. If it is determined that it did
not qualify as a REIT, we could also lose our REIT qualification. Before
1997, our predecessor was a taxable corporation and, to qualify as a REIT,
was required to distribute all of its profits before the end of 1996. While
we believe American Office Park Properties qualified as a REIT since 1997,
we did not obtain an opinion of an outside expert at the time of its merger
with us.
We may need to borrow funds to meet our REIT distribution requirements:
To qualify as a REIT, we must generally distribute to our shareholders 90%
of our taxable income. Our income consists primarily of our share of our
operating partnerships income. We intend to make sufficient distributions
to qualify as a REIT and otherwise avoid corporate tax. However, differences
in timing between income and expenses and the need to make nondeductible
expenditures such as capital improvements and principal payments on debt
could force us to borrow funds to make necessary shareholder distributions.
Since we buy and operate real estate, we are subject to general real
estate investment and operating risks.
Summary of real estate risks:
We own and operate commercial
properties and are subject to the risks of owning real estate generally and
commercial properties in particular. These risks include:
41
Certain significant costs, such as mortgage payments, real estate
taxes, insurance and maintenance, generally are not reduced even when a
propertys rental income is reduced. In addition, environmental and tax
laws, interest rate
levels, the availability of financing and other factors may affect real
estate values and property income. Furthermore, the supply of commercial
space fluctuates with market conditions.
If our properties do not generate sufficient income to meet operating
expenses, including any debt service, tenant improvements, leasing
commissions and other capital expenditures, we may have to borrow additional
amounts to cover fixed costs, and we may have to reduce our distributions to
shareholders.
We recently acquired a large property in a new market:
In December
2003, we acquired an industrial park in Miami, Florida. This is our only
property in this market and represents approximately 18.2% of our
properties aggregate net rentable square footage at September 30, 2004. As
a result of our lack of experience with the Miami market and other factors,
the operating performance of this property may be less than we anticipate,
and we may have difficulty in integrating this property into our existing
portfolio.
We may encounter significant delays and expense in reletting vacant
space, or we may not be able to relet space at existing rates, in each case
resulting in losses of income:
When leases expire, we will incur expenses in
retrofitting space and we may not be able to release the space on the same
terms. Certain leases provide tenants with the right to terminate early if
they pay a fee. Our properties as of September 30, 2004 generally have lower
vacancy rates than the average for the markets in which they are located,
and leases accounting for 5.0% of our annual rental income expire in 2004
and 24.0% in 2005. While we have estimated our cost of renewing leases that expire in 2004 and 2005, our
estimates could be wrong. If we are unable to release space promptly, if the
terms are significantly less favorable than anticipated or if the costs are
higher, we may have to reduce our distributions to shareholders.
Tenant defaults and bankruptcies may reduce our cash flow and
distributions:
We may have difficulty in collecting from tenants in default,
particularly if they declare bankruptcy. This could affect our cash flow and
distributions to shareholders. Since many of our tenants are non-rated
private companies, this risk may be enhanced.
Footstar and its affiliates have filed protection under Chapter 11 of
the U.S. Bankruptcy Laws. In connection with such filing, they have
rejected one of two leases with the Company. The lease which has been
rejected was for approximately 60,000 square feet in Dallas, Texas.
Footstar Corporation continues to lease a 57,000 square foot space in
Dallas, Texas with a term scheduled to expire in November 2008. At this
point we are uncertain of their intentions for this space. Several other
tenants have contacted us, requesting early termination of their lease,
reduction in space under lease, rent deferment or abatement. At this time,
the Company cannot anticipate what impact, if any, the ultimate outcome of
these discussions will have on our operating results.
We may be adversely affected by significant competition among
commercial properties:
Many other commercial properties compete with our
properties for tenants. Some of the competing properties may be newer and
better located than our properties. We also expect that new properties will
be built in our markets. Also, we compete with other buyers, many of whom
are larger than us, for attractive commercial properties. Therefore, we may
not be able to grow as rapidly as we would like.
We may be adversely affected if casualties to our properties are not
covered by insurance:
We carry insurance on our properties that we believe
is comparable to the insurance carried by other operators for similar
properties. However, we could suffer uninsured losses or losses in excess of
policy limits for such occurrences such as earthquakes that adversely affect
us or even result in loss of the property. We might still remain liable on
any mortgage debt or other unsatisfied obligations related to that property.
The illiquidity of our real estate investments may prevent us from
adjusting our portfolio to respond to market changes:
There may be delays
and difficulties in selling real estate. Therefore, we cannot easily change
our portfolio when economic conditions change. Also, tax laws limit a REITs
ability to sell properties held for less than four years.
We may be adversely affected by changes in laws:
Increases in income
and service taxes may reduce our cash flow and ability to make expected
distributions to our shareholders. Our properties are also subject to
various federal, state and local regulatory requirements, such as state and
local fire and safety codes. If we fail to comply with these requirements,
governmental authorities could fine us or courts could award damages against
us. We believe our properties comply with all significant legal
requirements. However, these requirements could change in a way that would
reduce our cash flow and ability to make distributions to shareholders.
We may incur significant environmental remediation costs:
Under various
federal, state and local environmental laws, an owner or operator of real
estate may have to clean spills or other releases of hazardous or toxic
substances on or from a property. Certain environmental laws impose
liability whether or not the owner knew
42
of, or was responsible for, the
presence of the hazardous or toxic substances. In some cases, liability may
exceed the value of the property. The presence of toxic substances, or the
failure to properly remedy any resulting contamination,
may make it more difficult for the owner or operator to sell, lease or
operate its property or to borrow money using its property as collateral.
Future environmental laws may impose additional material liabilities on us.
We may be affected by the Americans with Disabilities Act
.
The Americans with Disabilities Act of 1990 requires that access and
use by disabled persons of all public accommodations and commercial
properties be facilitated. Existing commercial properties must be made
accessible to disabled persons. While we have not estimated the cost of
complying with this act, we do not believe the cost will be material. We
have an ongoing program to bring our properties into what we believe is
compliance with the American with Disabilities Act.
We depend on external sources of capital to grow our company.
We are generally required under the Internal Revenue Code to distribute
at least 90% of our taxable income. Because of this distribution
requirement, we may not be able to fund future capital needs, including any
necessary building and tenant improvements, from operating cash flow.
Consequently, we may need to rely on third-party sources of capital to fund
our capital needs. We may not be able to obtain the financing on favorable
terms or at all. Access to third-party sources of capital depends, in part,
on general market conditions, the markets perception of our growth
potential, our current and expected future earnings, our cash flow, and the
market price per share of our common stock. If we cannot obtain capital from
third-party sources, we may not be able to acquire properties when strategic
opportunities exist, satisfy any debt service obligations, or make cash
distributions to shareholders.
Our ability to control our properties may be adversely affected by
ownership through partnerships and joint ventures.
We own most of our properties through our operating partnership. Our
organizational documents do not prevent us from acquiring properties with
others through partnerships or joint ventures. This type of investment may
present additional risks. For example, our partners may have interests that
differ from ours or that conflict with ours, or our partners may become
bankrupt. During 2001, we entered into a joint venture arrangement that held
property subject to debt. This joint venture has been liquidated and all
debts paid; however, we may enter into similar arrangements with the same
partner or other partners.
We can change our business policies and increase our level of debt
without shareholder approval.
Our board of directors establishes our investment, financing,
distribution and our other business policies and may change these policies
without shareholder approval. Our organizational documents do not limit our
level of debt. A change in our policies or an increase in our level of debt
could adversely affect our operations or the price of our common stock.
We can issue additional securities without shareholder approval.
We can issue preferred, equity and common stock without shareholder
approval. Holders of preferred stock have priority over holders of common
stock, and the issuance of additional shares of stock reduces the interest
of existing holders in our company.
Increases in interest rates may adversely affect the market price of our
common stock.
One of the factors that influences the market price of our common stock
is the annual rate of distributions that we pay on our common stock, as
compared with interest rates. An increase in interest rates may lead
purchasers of REIT shares to demand higher annual distribution rates, which
could adversely affect the market price of our common stock.
Shares that become available for future sale may adversely affect the
market price of our common stock.
Substantial sales of our common stock, or the perception that
substantial sales may occur, could adversely affect the market price of our
common stock. As of September 30, 2004, Public Storage and its affiliates
owned 25% of the outstanding shares of our common stock (44% upon conversion
of its interest in our operating partnership). These shares, as well as
shares of common stock held by certain other significant stockholders, are
eligible to be sold in the public market, subject to compliance with
applicable securities laws.
43
We depend on key personnel.
We depend on our key personnel, including Ronald L. Havner, Jr., our
Chairman of the Board, and Joseph D. Russell, Jr., our President and Chief
Executive Officer. The loss of Mr. Havner, Mr. Russell, or other key
personnel could adversely affect our operations. We maintain no key person
insurance on our key personnel.
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 all 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.
We may be affected by Californias budget shortfall.
The California budget could affect our company in many ways, including
the possible repeal of Proposition 13, which could result in higher property
taxes. Reduced state and local government spending and the resulting effects
on the state and local economies could have an adverse impact on demand for
our space. The budget shortfall could impact our company in other ways that
cannot be predicted. Approximately 34.5% of our properties net operating
income was generated in California for the nine months ended September 30,
2004.
Recent change in taxation of corporate dividends may adversely affect
the value of our shares.
The Jobs and Growth Tax Relief Reconciliation Act of 2003, enacted
on May 28, 2003, generally reduces to 15% the maximum marginal rate of
federal tax payable by individuals on dividends received from a regular C
corporation. This reduced tax rate, however, will not apply to dividends
paid to individuals by a REIT on its shares except for certain limited
amounts. The earnings of a REIT that are distributed to its shareholders
still will generally be subject to less federal income taxation on an
aggregate basis than earnings of a non-REIT C corporation that are
distributed to its shareholders net of corporate-level income tax. The Jobs
and Growth Tax Act, however, could cause individual investors to view stocks
of regular C corporations as more attractive relative to shares of REITs
than was the case prior to the enactment of the legislation because the
dividends from regular C corporations, which previously were taxed at the
same rate as REIT dividends, now will be taxed at a maximum marginal rate of
15% while REIT dividends will be taxed at a maximum marginal rate of 35%. We
cannot predict what effect, if any, the enactment of this legislation may
have on the value of our common stock, either in terms of price or relative
to other investments.
We
may fail to timely complete our assessment of our internal
controls.
Pursuant
to Section 404 of the Sarbanes-Oxley Act of 2002, we will be
required, beginning with the fiscal year ending December 31 2004, to
include in our annual report our assessment of the effectiveness of our
internal controls over financial reporting and our audited financial
statements as of December 31, 2004. Furthermore, our independent
registered public accounting firm, Ernst & Young LLP will be
required to attest to whether our assessment of the effectiveness of
our internal controls overs financial reporting is fairly stated in
all material respects and separately report on
whether it believes we maintained, in all material respects,
effective internal controls over financial reporting as of December
31, 2004. We have not yet completed our assessment of the
effectiveness of our internal controls. If we fail to timely complete
this assessment, or if our independent registered public accounting
firm cannot timely attest to our assessment, we could be subject to
regulatory sanctions and a loss of public confidence in our internal
control. In addition, any failure to implement required new or
improved controls, or difficulties encountered in their
implementation, could harm our operating results or cause us to fail
to timely meet our regulatory reporting obligations. The Company is
currently behind schedule in completing its assessment of the
effectiveness of its internal controls over financial reporting.
While management currently believes that the Company will be able to
timely complete its assessment, there can be no assurance that the
Company will do so. The Company may be required to commit substantial
resources to complete the assessment, which could divert the
attention of our management or finance personnel and cause our
operating results to suffer.
ITEM
3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
44
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
To limit the Companys exposure to market risk, the Company principally
finances its operations and growth with permanent equity capital consisting
of either common or preferred stock. At September 30, 2004, the Companys
debt as a percentage of shareholders equity and minority interest (based on
book values) was 6.4%.
The Companys market risk sensitive instruments include mortgage notes
payable and line of credit which total $19.2 million and $30 million at
September 30, 2004. All of the Companys mortgage notes payable bear
interest at fixed rates. See Notes 5 and 6 of the Notes to Consolidated
Financial Statements for terms, valuations and approximate principal
maturities of the mortgage notes payable and line of credit as of September
30, 2004. Based on borrowing rates currently available to the Company,
combined with the amount of fixed rate debt financing, the difference
between the carrying amount of debt and its fair value is insignificant.
ITEM 4. CONTROLS AND PROCEDURES
(a)
Evaluation of disclosure controls and procedures.
The Company
maintains disclosure controls and procedures that are designed to ensure
that information required to be disclosed by the Company in reports the
Company files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SECs rules
and forms and that such information is accumulated and communicated to the
Companys management, including its Chief Executive Officer and Chief
Financial Officer, to allow timely decisions regarding required disclosure
based on the definition of disclosure controls and procedures in Rule
13a-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. As of the end of the fiscal quarter
ended September 30, 2004, the Companys management carried out an
evaluation, with the participation of the Companys Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the Companys
disclosure controls and procedures. Based upon this evaluation, the
Companys Chief Executive Officer and Chief Financial Officer concluded
that, as of the end of the fiscal quarter ended September 30, 2004, the
Companys disclosure controls and procedures were effective.
(b)
Changes in internal control over financial reporting.
There has
not been any change in the Companys internal control over financial
reporting that occurred during the fiscal quarter ended September 30, 2004
that has materially affected, or is reasonably likely to materially affect,
the Companys internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In March 2000, the Company publicly announced that the Board of
Directors had authorized the repurchase of up to 4,500,000 shares of the
Companys Common Stock (the Program). The Company has repurchased an
aggregate of 2,621,711 shares of Common Stock under the Program since March
2000. The Company did not repurchase any shares of Common Stock under the
Program during the three months ended September 30, 2004. Unless terminated
earlier by resolution of the Board of Directors, the Program will expire
when the Company has repurchased all shares of Common Stock authorized for
repurchase thereunder.
45
ITEM 6. EXHIBITS
Exhibits
46
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
47
EXHIBIT INDEX
48
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands except per share amounts)
September 30,
December 31,
2004
2003
(Unaudited)
ASSETS
$
3,103
$
5,809
385,077
379,268
1,170,370
1,116,750
1,555,447
1,496,018
(278,843
)
(223,786
)
1,276,604
1,272,232
47,038
51,957
11,633
11,399
1,335,275
1,335,588
1,821
1,885
15,171
13,626
76
3,276
1,877
1,358,646
1,358,861
LIABILITIES AND SHAREHOLDERS EQUITY
$
41,672
$
35,701
30,000
95,000
11,468
11,756
7,757
7,938
100,000
50,000
90,897
300,395
127,374
217,750
165,945
169,888
478,350
168,673
218
216
420,896
420,778
317,005
281,386
(535
)
(242,039
)
(199,690
)
974,430
670,828
$
1,358,646
$
1,358,861
Table of Contents
Consolidated Statements of Income
Consolidated Statements of Income
(unaudited in thousands, except per share amounts)
For The Three Months Ended
For The Nine Months Ended
September 30,
September 30,
2004
2003
2004
2003
$
54,979
$
48,719
$
162,405
$
144,124
200
178
515
553
55,179
48,897
162,920
144,677
16,342
13,403
48,270
39,038
18,310
15,015
53,559
41,972
1,155
1,055
3,249
3,509
35,807
29,473
105,078
84,519
2,043
136
145
212
970
(513
)
(1,013
)
(2,612
)
(3,013
)
(377
)
(868
)
(2,400
)
18,995
18,556
55,442
60,158
2,296
(4,794
)
(4,810
)
(14,409
)
(14,430
)
(2,872
)
(3,139
)
(714
)
(2,462
)
(3,643
)
(9,183
)
(8,380
)
(7,272
)
(21,191
)
(23,613
)
10,615
11,284
34,251
38,841
655
737
1,682
1,939
(5,907
)
313
14
145
3,498
(240
)
(191
)
(459
)
119
728
560
1,368
(351
)
11,343
11,844
35,619
38,490
8,497
4,052
21,542
11,904
1,866
8,497
4,052
23,408
11,904
$
2,846
$
7,792
$
12,211
$
26,586
$
0.10
$
0.33
$
0.50
$
1.26
0.03
0.03
0.06
(0.02
)
$
0.13
$
0.36
$
0.56
$
1.24
$
0.10
$
0.33
$
0.50
$
1.25
0.03
0.03
0.06
(0.01
)
$
0.13
$
0.36
$
0.56
$
1.24
21,813
21,417
21,744
21,368
21,977
21,617
21,919
21,514
Table of Contents
CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
(Unaudited, in thousands)
Other
Total
Preferred Stock
Common Stock
Paid-in
Cumulative
Comprehensive
Cumulative
Shareholders
Shares
Amount
Shares
Amount
Capital
Net Income
Income/(Loss)
Distributions
Equity
6,747
$
168,673
21,565,528
$
216
$
420,778
$
281,386
$
(535
)
$
(199,690
)
$
670,828
14,500
362,500
(12,129
)
350,371
(2,113
)
(52,823
)
5,004
(47,819
)
253,001
2
6,475
6,477
967
967
(101
)
(101
)
535
535
35,619
35,619
(23,408
)
(23,408
)
(18,941
)
(18,941
)
(98
)
(98
)
19,134
$
478,350
21,818,529
$
218
$
420,896
$
317,005
$
$
(242,039
)
$
974,430
Table of Contents
CONSOLIDATED STATEMENTS OF CASH FLOWS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
For the Nine Months
Ended September 30,
2004
2003
$
35,619
$
38,490
55,016
43,238
117
21,650
23,494
(2,043
)
(145
)
(3,498
)
(2,296
)
5,907
967
242
(2,882
)
(701
)
7,121
(267
)
81,844
64,076
117,463
102,566
(38,851
)
(25,637
)
7,600
(1,396
)
(22,375
)
(52,976
)
5,067
12,108
(492
)
3,253
(56,159
)
(57,540
)
138,000
(203,000
)
(100,000
)
(469
)
(435
)
(50,000
)
41,533
350,371
6,477
6,120
(101
)
(21,542
)
(11,778
)
(14,409
)
(14,430
)
(18,941
)
(18,624
)
(6,356
)
(6,357
)
(8,119
)
(132,750
)
(52,823
)
(2,198
)
(64,010
)
(55,821
)
(2,706
)
(10,795
)
5,809
44,812
$
3,103
$
34,017
Table of Contents
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
For the Nine Months
Ended September 30,
2004
2003
$
(535
)
$
312
$
535
$
(312
)
$
98
$
(450
)
$
(98
)
$
450
$
(5,004
)
$
$
5,004
$
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
1.
2.
Table of Contents
Table of Contents
Table of Contents
Table of Contents
For the Three Months
For the Nine Months
Ended September 30,
Ended September 30,
2004
2003
2004
2003
$
2,846
$
7,792
$
12,211
$
26,586
21,813
21,417
21,744
21,368
164
200
175
146
21,977
21,617
21,919
21,514
0.13
0.36
0.56
1.24
0.13
0.36
0.56
1.24
Table of Contents
3.
Accumulated
Land
Buildings
Depreciation
Total
$
379,268
$
1,116,750
$
(223,786
)
$
1,272,232
4,647
19,493
24,140
1,162
34,127
35,289
(117
)
(117
)
(54,940
)
(54,940
)
$
385,077
$
1,170,370
$
(278,843
)
$
1,276,604
Table of Contents
For the Three Months
For the Nine Months
Ended September 30,
Ended September 30,
2004
2003
2004
2003
$
1,624
$
1,576
$
4,780
$
4,829
(477
)
(472
)
(1,641
)
(1,625
)
(492
)
(367
)
(1,457
)
(1,265
)
$
655
$
737
$
1,682
$
1,939
4.
$
49,113
181,834
130,317
93,535
67,975
137,245
$
660,019
5.
Table of Contents
6.
Mortgage notes consist of the following (in thousands):
September 30,
December 31,
2004
2003
$
7,757
$
7,938
5,644
5,832
5,824
5,924
$
19,225
$
19,694
$
162
680
7,890
5,169
179
5,145
$
19,225
7.
Table of Contents
Preferred
Number of
Distribution
Date of Issuance
Call Date
Series
Units
Face Value
Rate
July 2005
Series Y
480
$
12,000
8.875
%
September 2006
Series E
2,120
53,000
9.250
%
October, 2007
Series G
800
20,000
7.950
%
May, 2009
Series J
1,710
42,750
7.500
%
5,110
$
127,750
8.
Table of Contents
Table of Contents
9.
September 30, 2004
December 31, 2003
Redemption
Dividend
Shares
Carrying
Shares
Carrying
Series
Date
Rate
Outstanding
Amount
Outstanding
Amount
April, 2004
9.250
%
$
2,113
$
52,823
May, 2006
9.500
%
2,634
65,850
2,634
65,850
January, 2007
8.750
%
2,000
50,000
2,000
50,000
January, 2009
7.000
%
6,900
172,500
April, 2009
6.875
%
3,000
75,000
June, 2009
7.950
%
2,300
57,500
August, 2009
7.600
%
2,300
57,500
19,134
$
478,350
6,747
$
168,673
Table of Contents
10.
11.
Table of Contents
For the Nine Months Ended
September 30,
2004
2003
$
12,211
$
26,586
215
538
$
11,996
$
26,048
$
.56
$
1.24
$
.55
$
1.22
$
.56
$
1.24
$
.55
$
1.21
Table of Contents
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Table of Contents
Table of Contents
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Three Months Ended
September 30,
2004
2003
Change
$
46,225
$
47,294
(2.3
%)
8,754
1,425
514.3
%
54,979
48,719
12.8
%
12,898
12,668
1.8
%
3,444
735
368.6
%
16,342
13,403
21.9
%
33,327
34,626
(3.8
%)
5,310
690
669.6
%
38,637
35,316
9.4
%
200
178
12.4
%
136
145
(6.2
%)
(513
)
(1,013
)
(49.4
%)
(18,310
)
(15,015
)
21.9
%
(1,155
)
(1,055
)
9.5
%
$
18,995
$
18,556
2.4
%
72.1
%
73.2
%
(1.5
%)
90.5
%
92.9
%
(2.6
%)
$
14.91
$
14.86
0.3
%
(1)
(2)
(3)
(4)
(5)
Table of Contents
Nine Months Ended
September 30,
2004
2003
Change
$
138,292
$
141,838
(2.5
%)
24,113
2,286
954.8
%
162,405
144,124
12.7
%
39,045
38,014
2.7
%
9,225
1,024
800.9
%
48,270
39,038
23.6
%
99,247
103,824
(4.4
%)
14,888
1,262
1,079.7
%
114,135
105,086
8.6
%
515
553
(6.9
%)
212
970
(78.1
%)
(2,612
)
(3,013
)
(13.3
%)
2,043
(100.0
%)
(53,559
)
(41,972
)
27.6
%
(3,249
)
(3,509
)
(7.4
%)
$
55,442
$
60,158
(7.8
%)
71.8
%
73.2
%
(1.9
%)
90.4
%
92.9
%
(2.7
%)
$
14.89
$
14.86
0.2
%
(1)
(2)
(3)
(4)
(5)
Table of Contents
Weighted
Square
Percent
Rental
Percent
Cost of
Percent
Percent
Region
Footage
of Total
Income
of Total
Operations
of Total
NOI
of Total
3,663
20.5
%
$
13,050
23.7
%
$
3,658
22.4
%
$
9,392
24.3
%
1,497
8.4
%
4,869
8.9
%
1,087
6.7
%
3,782
9.8
%
1,163
6.5
%
2,387
4.3
%
1,125
6.9
%
1,262
3.3
%
1,690
9.5
%
3,753
6.8
%
1,296
7.9
%
2,457
6.4
%
3,191
17.9
%
5,194
9.5
%
1,729
10.6
%
3,465
9.0
%
2,786
15.6
%
11,614
21.1
%
3,267
20.0
%
8,347
21.6
%
1,242
7.0
%
6,367
11.6
%
1,585
9.7
%
4,782
12.4
%
1,939
10.9
%
6,128
11.1
%
1,915
11.7
%
4,213
10.9
%
678
3.7
%
1,617
3.0
%
680
4.1
%
937
2.3
%
17,849
100
%
54,979
100
%
$
16,342
100
%
38,637
100
%
18,310
(18,310
)
$
54,979
$
34,652
$
20,327
Table of Contents
Weighted
Square
Percent
Rental
Percent
Cost of
Percent
Percent
Region
Footage
of Total
Income
of Total
Operations
of Total
NOI
of Total
3,663
20.6
%
$
38,587
23.8
%
$
10,614
22.0
%
$
27,973
24.5
%
1,497
8.4
%
14,888
9.2
%
3,271
6.8
%
11,617
10.2
%
1,163
6.5
%
7,312
4.5
%
3,360
7.0
%
3,952
3.5
%
1,690
9.5
%
10,415
6.4
%
4,041
8.4
%
6,374
5.6
%
3,191
18.0
%
15,357
9.5
%
5,405
11.2
%
9,952
8.7
%
2,720
15.3
%
34,216
21.1
%
9,435
19.5
%
24,781
21.7
%
1,242
7.0
%
18,096
11.1
%
4,642
9.6
%
13,454
11.8
%
1,939
10.9
%
18,575
11.4
%
5,448
11.3
%
13,127
11.5
%
678
3.8
%
4,959
3.0
%
2,054
4.2
%
2,905
2.5
%
17,783
100
%
$
162,405
100
%
$
48,270
100
%
$
114,135
100
%
53,559
(53,559
)
$
162,405
$
101,829
$
60,576
Table of Contents
11.5
%
11.7
%
10.9
%
8.6
%
9.3
%
8.1
%
5.6
%
4.5
%
4.5
%
3.9
%
78.6
%
Tenants
Square Footage
Annual Rents
% of Total Annual Rents
536
$
12,459
5.7
%
262
4,255
1.9
%
214
3,647
1.7
%
180
2,961
1.3
%
97
2,935
1.3
%
106
2,669
1.2
%
89
1,609
0.7
%
81
1,576
0.7
%
95
1,511
0.7
%
88
1,414
0.6
%
1,748
$
35,036
15.8
%
*
Table of Contents
Cost of
Cost of
Revenues
Revenues
Operations
Operations
NOI
NOI
September 30,
September 30,
Increase
September 30,
September 30,
Increase
September 30,
September 30,
Increase
Region
2004
2003
(Decrease)
2004
2003
(Decrease)
2004
2003
(Decrease)
$
10,803
$
10,944
(1.3
%)
$
2,517
$
2,486
1.2
%
$
8,286
$
8,458
(2.0
%)
4,870
5,110
(4.7
%)
1,086
1,051
3.3
%
3,784
4,059
(6.8
%)
2,380
3,066
(22.4
%)
1,123
1,107
1.4
%
1,257
1,959
(35.8
%)
3,410
4,017
(15.1
%)
1,182
1,206
(2.0
%)
2,228
2,811
(20.7
%)
10,914
10,672
2.3
%
2,919
2,737
6.6
%
7,995
7,935
0.8
%
6,369
5,870
8.5
%
1,584
1,561
1.5
%
4,785
4,309
11.0
%
6,155
6,199
(0.7
%)
1,913
1,904
.5
%
4,242
4,295
(1.2
%)
1,324
1,416
(6.5
%)
574
616
(6.8
%)
750
800
(6.3
%)
46,225
47,294
(2.3
%)
12,898
12,668
1.8
%
33,327
34,626
(3.8
%)
8,754
1,425
514.3
%
3,444
735
368.6
%
5,310
690
669.6
%
54,979
48,719
12.8
%
16,342
13,403
21.9
%
38,637
35,316
9.4
%
18,310
15,015
21.9
%
(18,310
)
(15,015
)
21.9
%
$
54,979
$
48,719
12.8
%
$
34,652
$
28,418
21.9
%
$
20,327
$
20,301
0.1
%
Table of Contents
Cost of
Cost of
Revenues
Revenues
Operations
Operations
NOI
NOI
September 30,
September 30,
Increase
September 30,
September 30,
Increase
September 30,
September 30,
Increase
Region
2004
2003
(Decrease)
2004
2003
(Decrease)
2004
2003
(Decrease)
$
32,021
$
32,016
0.0
%
$
7,766
$
7,522
3.2
%
$
24,255
$
24,494
(1.0
%)
15,001
15,379
(2.5
%)
3,268
3,357
(2.7
%)
11,733
12,022
(2.4
%)
7,322
9,414
(22.2
%)
3,357
3,297
1.8
%
3,965
6,117
(35.2
%)
9,810
12,218
(19.7
%)
3,740
3,521
6.2
%
6,070
8,697
(30.2
%)
33,208
32,060
3.6
%
9,069
8,984
.9
%
24,139
23,076
4.6
%
18,082
17,048
6.1
%
4,639
4,383
5.8
%
13,443
12,665
6.1
%
18,785
19,532
(3.8
%)
5,444
5,243
3.8
%
13,341
14,289
(6.6
%)
4,063
4,171
(2.6
%)
1,762
1,707
3.2
%
2,301
2,464
(6.6
%)
138,292
141,838
(2.5
%)
39,045
38,014
2.7
%
99,247
103,824
(4.4
%)
24,113
2,286
954.8
%
9,225
1,024
800.9
%
14,888
1,262
1079.7
%
162,405
144,124
12.7
%
48,270
39,038
23.6
%
114,135
105,086
8.6
%
53,559
41,972
27.6
%
(53,559
)
(41,972
)
27.6
%
$
162,405
$
144,124
12.7
%
$
101,829
$
81,010
25.7
%
$
60,576
$
63,114
(4.0
%)
Table of Contents
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Table of Contents
For the Three Months Ended
September 30,
Increase
2004
2003
(Decrease)
$
497
$
507
$
(10
)
17
68
(51
)
252
121
131
125
121
4
264
238
26
$
1,155
$
1,055
$
100
For the Nine Months Ended
September 30,
Increase
2004
2003
(Decrease)
$
1,690
$
1,844
$
(154
)
97
145
(48
)
368
340
28
330
369
(39
)
764
811
(47
)
$
3,249
$
3,509
$
(260
)
Table of Contents
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Nine Months Ended September 30,
2004
2003
$
12,211
$
26,586
(2,043
)
(145
)
(3,498
)
(1,376
)
55,016
43,237
4,103
9,064
71,185
71,970
(17,867
)
(18,280
)
$
53,318
$
53,690
Table of Contents
Nine Months Ended
September 30,
2004
2003
$
29,382
$
15,611
492
9,469
9,534
$
38,851
$
25,637
Table of Contents
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Certificate of Determination of Preferences of 7.60% Cumulative Preferred Stock,
Series L of PS Business Parks, Inc. filed with Registrants Current Report on
Form 8-K, dated August 23, 2004 and incorporated herein by reference.
Certificate of Correction of Certificate of Determination of Preferences for the
7.000% Cumulative Preferred Stock, Series H of PS Business Parks, Inc. filed
with the Registrants Current Report on Form 8-K, dated October 18, 2004 and
incorporated herein by reference.
Amendment to Certificate of Determination for the 7.000% Cumulative Preferred
Stock, Series H of PS Business Parks, Inc. filed with the Registrants Current
Report on Form 8-K, dated October 18, 2004 and incorporated herein by reference.
Amendment to Agreement of Limited Partnership of PS Business Parks L.P. relating
to 7.60% Series L Cumulative Redeemable Preferred Units, dated as of August 31,
2004. Filed herewith.
Amendment No. 1 to Amendment to Agreement of Limited Partnership of PS Business
Parks L.P. relating to 7.000% Series H Cumulative Redeemable Preferred Units,
dated as of October 25, 2004. Filed herewith.
Amendment to Agreement of Limited Partnership of PS Business Parks L.P. relating
to 6.875% Series I Cumulative Redeemable Preferred Units, dated as of April 21,
2004. Filed herewith.
Statement re: Computation of Ratio of Earnings to Fixed Charges. Filed herewith.
Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. Filed herewith.
Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. Filed herewith.
Certifications of Chief Executive Officer and Chief Financial Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith.
Form of PS Business Parks, Inc. Restricted Stock Unit Agreement
Form of PS Business Parks, Inc. 2003 Stock Option and Incentive Plan Non-Qualified Stock Option Agreement
Form of PS Business Parks, Inc. 2003 Stock Option and Incentive Plan Stock Option Agreement
Table of Contents
Dated: 11/9/04
PS BUSINESS PARKS, INC.
BY:
/s/ Edward A. Stokx
Edward A. Stokx
Executive Vice President and Chief
Financial Officer
(Principal Financial and Accounting Officer)
Table of Contents
Certificate of Determination of Preferences of 7.60% Cumulative Preferred Stock,
Series L of PS Business Parks, Inc. filed with Registrants Current Report on
Form 8-K, dated August 23, 2004 and incorporated herein by reference.
Certificate of Correction of Certificate of Determination of Preferences for the
7.000% Cumulative Preferred Stock, Series H of PS Business Parks, Inc. filed
with the Registrants Current Report on Form 8-K, dated October 18, 2004 and
incorporated herein by reference.
Amendment to Certificate of Determination for the 7.000% Cumulative Preferred
Stock, Series H of PS Business Parks, Inc. filed with the Registrants Current
Report on Form 8-K, dated October 18, 2004 and incorporated herein by reference.
Amendment to Agreement of Limited Partnership of PS Business Parks L.P. relating
to 7.60% Series L Cumulative Redeemable Preferred Units, dated as of August 31,
2004. Filed herewith.
Amendment No. 1 to Amendment to Agreement of Limited Partnership of PS Business
Parks L.P. relating to 7.000% Series H Cumulative Redeemable Preferred Units,
dated as of October 25, 2004. Filed herewith.
Amendment to Agreement of Limited Partnership of PS Business Parks L.P. relating
to 6.875% Series I Cumulative Redeemable Preferred Units, dated as of April 21,
2004. Filed herewith.
Statement re: Computation of Ratio of Earnings to Fixed Charges. Filed herewith.
Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. Filed herewith.
Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. Filed herewith.
Certifications of Chief Executive Officer and Chief Financial Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith.
Form of PS Business Parks, Inc. Restricted Stock Unit Agreement
Form of PS Business Parks, Inc. 2003 Stock Option and Incentive Plan Non-Qualified Stock Option Agreement
Form of PS Business Parks, Inc. 2003 Stock Option and Incentive Plan Stock Option Agreement
EXHIBIT 10.1
PS BUSINESS PARKS, L.P.
AMENDMENT TO AGREEMENT OF LIMITED
PARTNERSHIP RELATING TO
7.60% SERIES L CUMULATIVE REDEEMABLE
PREFERRED UNITS
This Amendment to the Agreement of Limited Partnership of PS Business Parks, L.P., a California limited partnership (the Partnership" ), dated as of August 31, 2004 (this Amendment" ), amends the Agreement of Limited Partnership of the Partnership, dated as of March 17, 1998, as amended, by and among PS Business Parks, Inc. (the General Partner" ) and each of the limited partners described on Exhibit A to that partnership agreement (the Partnership Agreement" ). Section references are (unless otherwise specified) references to sections in this Amendment.
WHEREAS, the General Partner agreed to issue 2,300,000 Depositary Shares each representing 1/1000th of a share of the General Partners preferred stock designated as the 7.60% Cumulative Preferred Stock, Series L (the Depositary Shares" ) for a price of $25.00 per Depositary Share;
WHEREAS, Section 4.1(b)(2) of the Partnership Agreement requires the General Partner to contribute to the Partnership the funds raised through the issuance of additional shares of the General Partner in return for additional Partnership Units, and provides that the General Partners capital contribution shall be deemed to equal the amount of the gross proceeds of that share issuance (i.e., the net proceeds actually contributed, plus any underwriters discount or other expenses incurred, with any such discount or expense deemed to have been incurred on behalf of the Partnership);
WHEREAS, Section 4.2(a) of the Partnership Agreement provides generally for the creation and issuance of Partnership Units with such designations, preferences and relative, participating, optional or other special rights, powers and duties, including rights, powers and duties senior to other Partnership Interests, all as shall be determined by the General Partner, without the consent of the Limited Partners, and Section 4.2(b) of the Partnership Agreement specifically contemplates the issuance of Units to the General Partner having designations, preferences and other rights, all such that the economic interests are substantially similar to the designations, preferences and other rights of shares issued by the General Partner, such as the Depositary Shares;
WHEREAS, the General Partner desires to cause the Partnership to issue additional Units of a new class and series, with the designations, preferences and relative, participating, optional or other special rights, powers and duties set forth herein; and
WHEREAS, the General Partner desires by this Amendment to so amend the Partnership Agreement as of the date first set forth above to provide for the designation and issuance of such new class and series of Units.
NOW, THEREFORE, the Partnership Agreement is hereby amended by establishing and fixing the rights, limitations and preferences of a new class and series of Units as follows:
Section 1. Definitions . Capitalized terms not otherwise defined herein shall have their respective meanings set forth in the Partnership Agreement. Capitalized terms that are used in this Amendment shall have the meanings set forth below:
(a) Liquidation Preference means, with respect to the Series L Preferred Units (as defined below), $25.00 per Series L Preferred Unit, plus the amount of any accumulated and unpaid Priority Return (as defined below) with respect to such Series L Preferred Unit, whether or not declared, minus any distributions in excess of the Priority Return that has accrued with respect to such Series L Preferred Units, to the date of payment.
(b) Parity Preferred Units means any class or series of Partnership Interests (as such term is defined in the Partnership Agreement) of the Partnership now or hereafter authorized, issued or outstanding and expressly designated by the Partnership to rank on a parity with the Series L Preferred Units with respect to distributions and rights upon voluntary or involuntary liquidation, winding-up or dissolution of the Partnership, including the 83/4% Series C Cumulative Redeemable Preferred Units (the Series C Preferred Units" ), the 91/2% Series D Cumulative Redeemable Preferred Units (the Series D Preferred Units" ), the 91/4% Series E Cumulative Redeemable Preferred Units (the Series E Preferred Units" ), the 83/4% Series F Cumulative Redeemable Preferred Units (the Series F Preferred Units" ), the 7.95% Series G Cumulative Redeemable Preferred Units (the Series G Preferred Units" ), the 7.000% Series H Cumulative Redeemable Preferred Units (the Series H Preferred Units" ), the 6.875% Series I Cumulative Redeemable Preferred Units (the Series I Preferred Units" ), the 7.50% Series J Cumulative Redeemable Preferred Units (the Series J Preferred Units" ), the 7.950% Series K Cumulative Redeemable Preferred Units (the Series K Preferred Units" ), the 87/8% Series X Cumulative Redeemable Preferred Units (the Series X Preferred Units" ) and the 87/8% Series Y Cumulative Redeemable Preferred Units (the " Series Y Preferred Units" ). Notwithstanding the differing allocation rights set forth in Section 4 below that apply to the Series C, D, F, H, I, K and L Preferred Units (as compared to the Series E, G, J, X and Y Preferred Units), for purposes of this Amendment those Series C, D, F, H, I, K and L Preferred Units and any future series of preferred units that rank in parity with those series also shall be considered Parity Preferred Units to the Series E, G, J, X and Y Preferred Units.
(c) Priority Return means an amount equal to 7.60% per annum, of the Liquidation Preference per Series L Preferred Unit, commencing on the date of issuance of such Series L Preferred Unit, determined on the basis of a 360-day year (and twelve 30-day months), cumulative to the extent not distributed on any Series L Preferred Unit Distribution Payment Date (as defined below).
Section 2. Creation of Series L Preferred Units . (a) Designation and Number. Pursuant to Section 4.2(a) of the Partnership Agreement, a series of Partnership Units (as such term is defined in the Partnership Agreement) in the Partnership designated as the 7.60% Series L Cumulative Redeemable Preferred Units (the Series L Preferred Units" ) is hereby established effective as of August 31, 2004. The number of Series L Preferred Units shall
be 2,300,000. The Holders of Series L Preferred Units shall not have any Percentage Interest (as such term is defined in the Partnership Agreement) in the Partnership.
(b) Capital Contribution . In return for the issuance to the General Partner of the Series L Preferred Units set forth on Exhibit C to this Amendment, the General Partner has contributed to the Partnership the funds raised through the General Partners issuance of the Depositary Shares (the General Partners capital contribution shall be deemed to equal the amount of the gross proceeds of that share issuance, i.e. , the net proceeds actually contributed, plus any underwriters discount or other expenses incurred, with any such discount or expense deemed to have been incurred by the General Partner on behalf of the Partnership).
(c) Construction . The Series L Preferred Units have been created and are being issued in conjunction with the General Partners issuance of the Depositary Shares relating to the General Partners 7.60% Cumulative Preferred Stock, Series L, and as such, the Series L Preferred Units are intended to have designations, preferences and other rights, all such that the economic interests are substantially similar to the designations, preferences and other rights of the Depositary Shares, and the terms of this Amendment shall be interpreted in a fashion consistent with this intent.
Section 3. Distributions . (a) Payment of Distributions . Subject to the rights of holders of Parity Preferred Units as to the payment of distributions, pursuant to Section 5.1 of the Partnership Agreement, holders of Series L Preferred Units shall be entitled to receive, when, as and if declared by the Partnership acting through the General Partner, the Priority Return. Such distributions shall be cumulative, shall accrue from the original date of issuance of the Series L Preferred Units and, notwithstanding Section 5.1 of the Partnership Agreement, will be payable (i) quarterly in arrears on March 31, June 30, September 30 and December 31 of each year commencing on September 30, 2004 and (ii) in the event of a redemption of Series L Preferred Units (each a Series L Preferred Unit Distribution Payment Date" ). If any date on which distributions are to be made on the Series L Preferred Units is not a Business Day (as defined below), then payment of the distribution to be made on such date will be made on the Business Day immediately preceding such date with the same force and effect as if made on such date. Distributions on the Series L Preferred Units will be made to the holders of record of the Series L Preferred Units on the relevant record dates to be fixed by the Partnership acting through the General Partner, which record dates shall in no event exceed fifteen (15) Business Days prior to the relevant Series L Preferred Unit Distribution Payment Date. Business Day shall be any day other than a Saturday, Sunday or day on which banking institutions in the State of New York or the State of California are authorized or obligated by law to close, or a day which is or is declared a national or a New York or California state holiday.
(b) Prohibition on Distribution . No distributions on Series L Preferred Units shall be authorized by the General Partner or paid or set apart for payment by the Partnership at any such time as the terms and provisions of any agreement of the Partnership or the General Partner, including any agreement relating to their indebtedness, prohibits such authorization, payment or setting apart for payment or provides that such authorization, payment or setting apart for payment would constitute a breach thereof or a default thereunder, or to the extent that such authorization or payment shall be restricted or prohibited by law.
(c) Distributions Cumulative . Distributions on the Series L Preferred Units will accrue whether or not the terms and provisions of any agreement of the Partnership, including any agreement relating to its indebtedness, at any time prohibit the current payment of distributions, whether or not the Partnership has earnings, whether or not there are funds legally available for the payment of such distributions and whether or not such distributions are authorized. Accrued but unpaid distributions on the Series L Preferred Units will accumulate as of the Series L Preferred Unit Distribution Payment Date on which they first become payable. Distributions on account of arrears for any past distribution periods may be declared and paid at any time, without reference to a regular Series L Preferred Unit Distribution Payment Date, to holders of record of the Series L Preferred Units on the record date fixed by the Partnership acting through the General Partner which date shall not exceed fifteen (15) Business Days prior to the payment date. Accumulated and unpaid distributions will not bear interest.
(d) Priority as to Distributions . Subject to the provisions of Article 13 of the Partnership Agreement:
(i) So long as any Series L Preferred Units are outstanding, no distribution of cash or other property shall be authorized, declared, paid or set apart for payment on or with respect to any class or series of Partnership Interests ranking junior as to the payment of distributions or rights upon a voluntary or involuntary liquidation, dissolution or winding-up of the Partnership to the Series L Preferred Units (collectively, Junior Units" ), nor shall any cash or other property be set aside for or applied to the purchase, redemption or other acquisition for consideration of any Series L Preferred Units, any Parity Preferred Units or any Junior Units, unless, in each case, all distributions accumulated on all Series L Preferred Units and all classes and series of outstanding Parity Preferred Units have been paid in full. The foregoing sentence shall not prohibit (x) distributions payable solely in Junior Units, or (y) the conversion of Junior Units or Parity Preferred Units into Partnership Interests ranking junior to the Series L Preferred Units.
(ii) So long as distributions have not been paid in full (or a sum sufficient for such full payment is not irrevocably deposited in trust for payment) upon the Series L Preferred Units, all distributions authorized and declared on the Series L Preferred Units and all classes or series of outstanding Parity Preferred Units shall be authorized and declared so that the amount of distributions authorized and declared per Series L Preferred Unit and such other classes or series of Parity Preferred Units shall in all cases bear to each other the same ratio that accrued distributions per Series L Preferred Unit and such other classes or series of Parity Preferred Units (which shall not include any accumulation in respect of unpaid distributions for prior distribution periods if such class or series of Parity Preferred Units do not have cumulative distribution rights) bear to each other.
(e) No Further Rights . Holders of Series L Preferred Units shall not be entitled to any distributions, whether payable in cash, other property or otherwise, in excess of the full cumulative distributions described herein.
Section 4. Allocations . Section 6.1(a)(ii) of the Partnership Agreement is amended to read, in its entirety, as follows:
(ii) (A) Notwithstanding anything to the contrary contained in this Agreement, in any taxable year: (1) the holders of series C, D, F, H, I, K and L Preferred Units shall first be allocated an amount of gross income equal to the Priority Return distributed to such holders in such taxable year, and (2) subject to any prior allocation of Profit pursuant to the loss chargeback set forth in Section 6.1(a)(ii)(B) below, the holders of Series E, G, J, X and Y Preferred Units shall then be allocated an amount of Profit equal to the Priority Return distributed to such holders either in such taxable year or in prior taxable years to the extent that such distributions have not previously been matched with an allocation of Profit pursuant to this Section 6.1(a)(ii)(A)(2).
(B) After the Capital Account balances of all Partners other than holders of any series of Preferred Units have been reduced to zero, Losses of the Partnership that otherwise would be allocated so as to cause deficit Capital Account balances for those other Partners shall be allocated to the holders of the Series C, D, E, F, G, H, I, J, K, L, X and Y Preferred Units in proportion to the positive balances of their Capital Accounts until those Capital Account balances have been reduced to zero. If Losses have been allocated to the holders of the Series C, D, E, F, G, H, I, J, K, L, X and Y Preferred Units pursuant to the preceding sentence, the first subsequent Profits shall be allocated to those preferred partners so as to recoup, in reverse order, the effects of the loss allocations.
(C) Upon liquidation of the Partnership or the interest of the holders of Series C, D, E, F, G, H, I, J, K, L, X or Y Preferred Units in the Partnership: (1) items of gross income or deduction shall first be allocated to the holders of Series C, D, F, H, I, K and L Preferred Units in a manner such that, immediately prior to such liquidation, the Capital Account balances of such holders shall equal the amount of their Liquidation Preferences, and (2) an amount of Profit or Loss shall then be allocated to the holders of Series E, G, J, X and Y Preferred Units in a manner such that, immediately prior to such liquidation, the Capital Account balances of such holders shall equal the amount of their Liquidation Preferences.
Section 5. Optional Redemption . The Series L Preferred Units shall be redeemed at the same time, to the same extent, and applying, except as set forth below, similar procedures, as any redemption by the General Partner of the Depositary Shares. The redemption price, payable in cash, shall equal the Liquidation Preference (the Series L Redemption Price" ). The Partnership will deliver into escrow with an escrow agent acceptable to the Partnership and the holders of the Series L Preferred Units being redeemed (the Escrow Agent" ) the Series L Redemption Price and an executed Redemption Agreement, in substantially the form attached as Exhibit A (the Redemption Agreement" ), and an Amendment to the Agreement of Limited Partnership evidencing the Redemption, in substantially the form attached as Exhibit B. The holders of the Series L Preferred Units to be redeemed will also deliver into escrow with the Escrow Agent an executed Redemption Agreement and an executed Amendment to the Agreement of Limited Partnership evidencing the redemption. Upon delivery of all of the above-described items by both parties, on the redemption date the Escrow Agent shall release the Series L Redemption Price to the holders of the Series L Preferred Units and the fully-executed Redemption Agreement and Amendment to
Agreement of Limited Partnership to both parties. On and after the date of redemption, distributions will cease to accumulate on the Series L Preferred Units called for redemption, unless the Partnership defaults in the payment of the Series L Redemption Price. The Redemption Right (as such term is defined in the Partnership Agreement) given to Limited Partners (as such term is defined in the Partnership Agreement) in Section 8.6 of the Partnership Agreement shall not be available to the holders of the Series L Preferred Units and all references to Limited Partners in said Section 8.6 (and related provisions of the Partnership Agreement) shall not include holders of the Series L Preferred Units.
Section 6. Voting Rights . Holders of the Series L Preferred Units will not have any voting rights or right to consent to any matter requiring the consent or approval of the Limited Partners, except as set forth in Section 14.1 of the Partnership Agreement and in this Section 6. Solely for purposes of Section 14.1 of the Partnership Agreement, each Series L Preferred Unit shall be treated as one Partnership Unit.
Section 7. Transfer Restrictions . The holders of Series L Preferred Units shall be subject to all of the provisions of Section 11 of the Partnership Agreement.
Section 8. No Conversion Rights . The holders of the Series L Preferred Units shall not have any rights to convert such units into shares of any other class or series of stock or into any other securities of, or interest in, the Partnership.
Section 9. No Sinking Fund . No sinking fund shall be established for the retirement or redemption of Series L Preferred Units.
Section 10. Exhibit A to Partnership Agreement . In order to duly reflect the issuance of the Series L Preferred Units provided for herein, the Partnership Agreement is hereby further amended pursuant to Section 12.3 of the Partnership Agreement by replacing the current form of Exhibit A to the Partnership Agreement with the form of Exhibit A that is attached to this Amendment as Exhibit C.
Section 11. Inconsistent Provisions . Nothing to the contrary contained in the Partnership Agreement shall limit any of the rights or obligations set forth in this Amendment.
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IN WITNESS WHEREOF, this Amendment has been executed as of the date first above written.
PS BUSINESS PARKS, INC.
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By: | /s/ Edward A. Stokx | |||
Name: | Edward A. Stokx | |||
Title: | Executive Vice President and Chief Financial Officer | |||
EXHIBIT 10.2
PS BUSINESS PARKS, L.P.
AMENDMENT NO. 1 TO
AMENDMENT TO AGREEMENT OF LIMITED
PARTNERSHIP RELATING TO
7.000% SERIES H CUMULATIVE REDEEMABLE
PREFERRED UNITS
This Amendment No. 1, effective as of October 25, 2004 (this Amendment ), to the Amendment to the Agreement of Limited Partnership of PS Business Parks, L.P., a California limited partnership (the Partnership" ), dated as of January 30, 2004 (the Initial Amendment" ), further amends the Agreement of Limited Partnership of the Partnership, dated as of March 17, 1998, as amended, by and among PS Business Parks, Inc. (the General Partner" ) and each of the limited partners described on Exhibit A to that partnership agreement (the Partnership Agreement" ).
WHEREAS, on January 30, 2004, the General Partner issued 6,900,000 Depositary Shares each representing 1/1000th of a share of the General Partners preferred stock designated as the 7.000% Cumulative Preferred Stock, Series H (the Depositary Shares" ) for a price of $25.00 per Depositary Share;
WHEREAS, the General Partner has agreed to issue an additional 1,300,000 Depositary Shares for a price of $24.0638 per Depositary Share; and
WHEREAS, the General Partner desires by this Amendment to so amend (i) the Initial Amendment as of the date first set forth above to increase the number of Series H Preferred Units (as defined in the Initial Amendment) and (ii) the Partnership Agreement as of the date first set forth above to reflect the issuance of the additional 1,300,000 Series H Preferred Units.
NOW, THEREFORE, the Initial Amendment and the Partnership Agreement are hereby amended as follows:
Section 1. Section 1(c) of the Initial Amendment is hereby amended and replaced, in its entirety, by the following:
Priority Return means an amount equal to 7.0% per annum, of the Liquidation Preference per Series H Preferred Unit, commencing on the date of issuance of such Series H Preferred Unit (for purposes of this definition, October 1, 2004 shall be deemed to be the date of issuance for the 1,300,000 Series H Preferred Units issued on October 25, 2004), determined on the basis of a 360-day year (and twelve 30-day months), cumulative to the extent not distributed on any Series H Preferred Unit Distribution Payment Date (as defined below).
Section 2. Section 2(a) of the Initial Amendment is hereby amended and replaced, in its entirety, by the following:
Pursuant to Section 4.2(a) of the Partnership Agreement, a series of Partnership Units (as such term is defined in the Partnership Agreement) in the Partnership designated as the 7.000% Series H Cumulative Redeemable Preferred Units (the Series H Preferred Units" ) is hereby established effective as of January 30, 2004. The initial number of Series H Preferred Units shall be 6,900,000. Effective as of October 25, 2004, the number of Series H Preferred Units shall be increased to 8,200,000. The Holders of Series H Preferred Units shall not have any Percentage Interest (as such term is defined in the Partnership Agreement) in the Partnership.
Section 3. The second sentence of Section 3(a) of the Initial Amendment is hereby amended and replaced, in its entirety, by the following:
Such distributions shall be cumulative, shall accrue from the original date of issuance of the Series H Preferred Units (for purposes of this section, October 1, 2004 shall be deemed to be the original date of issuance for the 1,300,000 Series H Preferred Units issued on October 25, 2004), and, notwithstanding Section 5.1 of the Partnership Agreement, will be payable (i) quarterly in arrears on March 31, June 30, September 30 and December 31 of each year commencing on September 30, 2004 and (ii) in the event of a redemption of Series H Preferred Units (each a Series H Preferred Unit Distribution Payment Date" ).
Section 4. In order to duly reflect the issuance of the additional 1,300,000 Series H Preferred Units provided for herein, the Partnership Agreement is hereby amended pursuant to Section 12.3 of the Partnership Agreement by replacing the current form of Exhibit A to the Partnership Agreement with the form of Exhibit A that is attached to this Amendment as Exhibit A.
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IN WITNESS WHEREOF, this Amendment has been executed as of the date first above written.
PS BUSINESS PARKS, INC.
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By: | /s/ Edward A. Stokx | |||
Name: | Edward A. Stokx | |||
Title: | Executive Vice President | |||
EXHIBIT 10.3
PS BUSINESS PARKS, L.P.
AMENDMENT TO AGREEMENT OF LIMITED
PARTNERSHIP RELATING TO
6.875% SERIES I CUMULATIVE REDEEMABLE
PREFERRED UNITS
This Amendment to the Agreement of Limited Partnership of PS Business Parks, L.P., a California limited partnership (the Partnership ), dated as of April 21, 2004 (this Amendment ), amends the Agreement of Limited Partnership of the Partnership, dated as of March 17, 1998, as amended, by and among PS Business Parks, Inc. (the General Partner ) and each of the limited partners described on Exhibit A to that partnership agreement (the Partnership Agreement ). Section references are (unless otherwise specified) references to sections in this Amendment.
WHEREAS, the General Partner agreed to issue 3,000,000 Depositary Shares each representing 1/1000th of a share of the General Partners preferred stock designated as the 6.875% Cumulative Preferred Stock, Series I (the Depositary Shares ) for a price of $25.00 per Depositary Share;
WHEREAS, Section 4.1(b)(2) of the Partnership Agreement requires the General Partner to contribute to the Partnership the funds raised through the issuance of additional shares of the General Partner in return for additional Partnership Units, and provides that the General Partners capital contribution shall be deemed to equal the amount of the gross proceeds of that share issuance (i.e., the net proceeds actually contributed, plus any underwriters discount or other expenses incurred, with any such discount or expense deemed to have been incurred on behalf of the Partnership);
WHEREAS, Section 4.2(a) of the Partnership Agreement provides generally for the creation and issuance of Partnership Units with such designations, preferences and relative, participating, optional or other special rights, powers and duties, including rights, powers and duties senior to other Partnership Interests, all as shall be determined by the General Partner, without the consent of the Limited Partners, and Section 4.2(b) of the Partnership Agreement specifically contemplates the issuance of Units to the General Partner having designations, preferences and other rights, all such that the economic interests are substantially similar to the designations, preferences and other rights of shares issued by the General Partner, such as the Depositary Shares;
WHEREAS, the General Partner desires to cause the Partnership to issue additional Units of a new class and series, with the designations, preferences and relative, participating, optional or other special rights, powers and duties set forth herein; and
WHEREAS, the General Partner desires by this Amendment to so amend the Partnership Agreement as of the date first set forth above to provide for the designation and issuance of such new class and series of Units.
NOW, THEREFORE, the Partnership Agreement is hereby amended by establishing and fixing the rights, limitations and preferences of a new class and series of Units as follows:
Section 1. Definitions . Capitalized terms not otherwise defined herein shall have their respective meanings set forth in the Partnership Agreement. Capitalized terms that are used in this Amendment shall have the meanings set forth below:
(a) Liquidation Preference means, with respect to the Series I Preferred Units (as defined below), $25.00 per Series I Preferred Unit, plus the amount of any accumulated and unpaid Priority Return (as defined below) with respect to such Series I Preferred Unit, whether or not declared, minus any distributions in excess of the Priority Return that has accrued with respect to such Series I Preferred Units, to the date of payment.
(b) Parity Preferred Units means any class or series of Partnership Interests (as such term is defined in the Partnership Agreement) of the Partnership now or hereafter authorized, issued or outstanding and expressly designated by the Partnership to rank on a parity with the Series I Preferred Units with respect to distributions and rights upon voluntary or involuntary liquidation, winding-up or dissolution of the Partnership, including the 9 1/4% Series A Cumulative Redeemable Preferred Units (the Series A Preferred Units ), the 8 7/8% Series B Cumulative Redeemable Preferred Units (the Series B Preferred Units ), the 8 3/4% Series C Cumulative Redeemable Preferred Units (the Series C Preferred Units ), the 9 1/2% Series D Cumulative Redeemable Preferred Units (the Series D Preferred Units ), the 9 1/4% Series E Cumulative Redeemable Preferred Units (the Series E Preferred Units ), the 8 3/4% Series F Cumulative Redeemable Preferred Units (the Series F Preferred Units ), the 7.95% Series G Cumulative Redeemable Preferred Units (the Series G Preferred Units ), the 7.000% Series H Cumulative Redeemable Preferred Units (the Series H Preferred Units ), the 8 7/8% Series X Cumulative Redeemable Preferred Units (the Series X Preferred Units ) and the 8 7/8% Series Y Cumulative Redeemable Preferred Units (the Series Y Preferred Units ). Notwithstanding the differing allocation rights set forth in Section 4 below that apply to the Series A, B, C, D, F, H and I Preferred Units (as compared to the Series E, G, X and Y Preferred Units), for purposes of this Amendment those Series A, B, C, D, F, H and I Preferred Units and any future series of preferred units that rank in parity with those series also shall be considered Parity Preferred Units to the Series E, G, X and Y Preferred Units.
(c) Priority Return means an amount equal to 6.875% per annum, of the Liquidation Preference per Series I Preferred Unit, commencing on the date of issuance of such Series I Preferred Unit, determined on the basis of a 360-day year (and twelve 30-day months), cumulative to the extent not distributed on any Series I Preferred Unit Distribution Payment Date (as defined below).
Section 2. Creation of Series I Preferred Units . (a) Designation and Number. Pursuant to Section 4.2(a) of the Partnership Agreement, a series of Partnership Units (as such term is defined in the Partnership Agreement) in the Partnership designated as the 6.875% Series I Cumulative Redeemable Preferred Units (the Series I Preferred Units ) is hereby established effective as of April 21, 2004. The number of Series I Preferred Units shall be 3,000,000. The Holders of Series I Preferred Units shall not have any Percentage Interest (as such term is defined in the Partnership Agreement) in the Partnership.
(b) Capital Contribution . In return for the issuance to the General Partner of the Series I Preferred Units set forth on Exhibit C to this Amendment, the General Partner has contributed to the Partnership the funds raised through the General Partners issuance of the Depositary Shares (the General Partners capital contribution shall be deemed to equal the amount of the gross proceeds of that share issuance, i.e. , the net proceeds actually contributed, plus any underwriters discount or other expenses incurred, with any such discount or expense deemed to have been incurred by the General Partner on behalf of the Partnership).
(c) Construction . The Series I Preferred Units have been created and are being issued in conjunction with the General Partners issuance of the Depositary Shares relating to the General Partners 6.875% Cumulative Preferred Stock, Series I, and as such, the Series I Preferred Units are intended to have designations, preferences and other rights, all such that the economic interests are substantially similar to the designations, preferences and other rights of the Depositary Shares, and the terms of this Amendment shall be interpreted in a fashion consistent with this intent.
Section 3. Distributions . (a) Payment of Distributions . Subject to the rights of holders of Parity Preferred Units as to the payment of distributions, pursuant to Section 5.1 of the Partnership Agreement, holders of Series I Preferred Units shall be entitled to receive, when, as and if declared by the Partnership acting through the General Partner, the Priority Return. Such distributions shall be cumulative, shall accrue from the original date of issuance of the Series I Preferred Units and, notwithstanding Section 5.1 of the Partnership Agreement, will be payable (i) quarterly in arrears on March 31, June 30, September 30 and December 31 of each year commencing on June 30, 2004 and (ii) in the event of a redemption of Series I Preferred Units (each a Series I Preferred Unit Distribution Payment Date ). If any date on which distributions are to be made on the Series I Preferred Units is not a Business Day (as defined below), then payment of the distribution to be made on such date will be made on the Business Day immediately preceding such date with the same force and effect as if made on such date. Distributions on the Series I Preferred Units will be made to the holders of record of the Series I Preferred Units on the relevant record dates to be fixed by the Partnership acting through the General Partner, which record dates shall in no event exceed fifteen (15) Business Days prior to the relevant Series I Preferred Unit Distribution Payment Date. Business Day shall be any day other than a Saturday, Sunday or day on which banking institutions in the State of New York or the State of California are authorized or obligated by law to close, or a day which is or is declared a national or a New York or California state holiday.
(b) Prohibition on Distribution . No distributions on Series I Preferred Units shall be authorized by the General Partner or paid or set apart for payment by the Partnership at any such time as the terms and provisions of any agreement of the Partnership or the General Partner, including any agreement relating to their indebtedness, prohibits such authorization, payment or setting apart for payment or provides that such authorization, payment or setting apart for payment would constitute a breach thereof or a default thereunder, or to the extent that such authorization or payment shall be restricted or prohibited by law.
(c) Distributions Cumulative . Distributions on the Series I Preferred Units will accrue whether or not the terms and provisions of any agreement of the Partnership, including any agreement relating to its indebtedness, at any time prohibit the current payment of
distributions, whether or not the Partnership has earnings, whether or not there are funds legally available for the payment of such distributions and whether or not such distributions are authorized. Accrued but unpaid distributions on the Series I Preferred Units will accumulate as of the Series I Preferred Unit Distribution Payment Date on which they first become payable. Distributions on account of arrears for any past distribution periods may be declared and paid at any time, without reference to a regular Series I Preferred Unit Distribution Payment Date, to holders of record of the Series I Preferred Units on the record date fixed by the Partnership acting through the General Partner which date shall not exceed fifteen (15) Business Days prior to the payment date. Accumulated and unpaid distributions will not bear interest.
(d) Priority as to Distributions . Subject to the provisions of Article 13 of the Partnership Agreement:
(i) So long as any Series I Preferred Units are outstanding, no distribution of cash or other property shall be authorized, declared, paid or set apart for payment on or with respect to any class or series of Partnership Interests ranking junior as to the payment of distributions or rights upon a voluntary or involuntary liquidation, dissolution or winding-up of the Partnership to the Series I Preferred Units (collectively, Junior Units ), nor shall any cash or other property be set aside for or applied to the purchase, redemption or other acquisition for consideration of any Series I Preferred Units, any Parity Preferred Units or any Junior Units, unless, in each case, all distributions accumulated on all Series I Preferred Units and all classes and series of outstanding Parity Preferred Units have been paid in full. The foregoing sentence shall not prohibit (x) distributions payable solely in Junior Units, or (y) the conversion of Junior Units or Parity Preferred Units into Partnership Interests ranking junior to the Series I Preferred Units.
(ii) So long as distributions have not been paid in full (or a sum sufficient for such full payment is not irrevocably deposited in trust for payment) upon the Series I Preferred Units, all distributions authorized and declared on the Series I Preferred Units and all classes or series of outstanding Parity Preferred Units shall be authorized and declared so that the amount of distributions authorized and declared per Series I Preferred Unit and such other classes or series of Parity Preferred Units shall in all cases bear to each other the same ratio that accrued distributions per Series I Preferred Unit and such other classes or series of Parity Preferred Units (which shall not include any accumulation in respect of unpaid distributions for prior distribution periods if such class or series of Parity Preferred Units do not have cumulative distribution rights) bear to each other.
(e) No Further Rights . Holders of Series I Preferred Units shall not be entitled to any distributions, whether payable in cash, other property or otherwise, in excess of the full cumulative distributions described herein.
Section 4. Allocations . Section 6.1(a)(ii) of the Partnership Agreement is amended to read, in its entirety, as follows:
(ii) (A) Notwithstanding anything to the contrary contained in this Agreement, in any taxable year: (1) the holders of series A, B, C, D, F, H and I Preferred Units shall first be allocated an amount of gross income equal to the
Priority Return distributed to such holders in such taxable year, and (2) subject to any prior allocation of Profit pursuant to the loss chargeback set forth in Section 6.1(a)(ii)(B) below, the holders of Series E, G, X and Y Preferred Units shall then be allocated an amount of Profit equal to the Priority Return distributed to such holders either in such taxable year or in prior taxable years to the extent that such distributions have not previously been matched with an allocation of Profit pursuant to this Section 6.1(a)(ii)(A)(2).
(B) After the Capital Account balances of all Partners other than holders of any series of Preferred Units have been reduced to zero, Losses of the Partnership that otherwise would be allocated so as to cause deficit Capital Account balances for those other Partners shall be allocated to the holders of the Series A, B, C, D, E, F, G, H, I, X and Y Preferred Units in proportion to the positive balances of their Capital Accounts until those Capital Account balances have been reduced to zero. If Losses have been allocated to the holders of the Series A, B, C, D, E, F, G, H, I, X and Y Preferred Units pursuant to the preceding sentence, the first subsequent Profits shall be allocated to those preferred partners so as to recoup, in reverse order, the effects of the loss allocations.
(C) Upon liquidation of the Partnership or the interest of the holders of Series A, B, C, D, E, F, G, H, I, X or Y Preferred Units in the Partnership: (1) items of gross income or deduction shall first be allocated to the holders of Series A, B, C, D, F, H and I Preferred Units in a manner such that, immediately prior to such liquidation, the Capital Account balances of such holders shall equal the amount of their Liquidation Preferences, and (2) an amount of Profit or Loss shall then be allocated to the holders of Series E, G, X and Y Preferred Units in a manner such that, immediately prior to such liquidation, the Capital Account balances of such holders shall equal the amount of their Liquidation Preferences.
Section 5. Optional Redemption . The Series I Preferred Units shall be redeemed at the same time, to the same extent, and applying, except as set forth below, similar procedures, as any redemption by the General Partner of the Depositary Shares. The redemption price, payable in cash, shall equal the Liquidation Preference (the Series I Redemption Price ). The Partnership will deliver into escrow with an escrow agent acceptable to the Partnership and the holders of the Series I Preferred Units being redeemed (the Escrow Agent ) the Series I Redemption Price and an executed Redemption Agreement, in substantially the form attached as Exhibit A (the Redemption Agreement ), and an Amendment to the Agreement of Limited Partnership evidencing the Redemption, in substantially the form attached as Exhibit B. The holders of the Series I Preferred Units to be redeemed will also deliver into escrow with the Escrow Agent an executed Redemption Agreement and an executed Amendment to the Agreement of Limited Partnership evidencing the redemption. Upon delivery of all of the above-described items by both parties, on the redemption date the Escrow Agent shall release the Series I Redemption Price to the holders of the Series I Preferred Units and the fully-executed Redemption Agreement and Amendment to Agreement of Limited Partnership to both parties. On and after the date of redemption, distributions will cease to accumulate on the Series I Preferred Units called for redemption, unless the Partnership defaults in the payment of the Series I Redemption Price. The Redemption Right (as such term is defined in the Partnership
Agreement) given to Limited Partners (as such term is defined in the Partnership Agreement) in Section 8.6 of the Partnership Agreement shall not be available to the holders of the Series I Preferred Units and all references to Limited Partners in said Section 8.6 (and related provisions of the Partnership Agreement) shall not include holders of the Series I Preferred Units.
Section 6. Voting Rights . Holders of the Series I Preferred Units will not have any voting rights or right to consent to any matter requiring the consent or approval of the Limited Partners, except as set forth in Section 14.1 of the Partnership Agreement and in this Section 6. Solely for purposes of Section 14.1 of the Partnership Agreement, each Series I Preferred Unit shall be treated as one Partnership Unit.
Section 7. Transfer Restrictions . The holders of Series I Preferred Units shall be subject to all of the provisions of Section 11 of the Partnership Agreement.
Section 8. No Conversion Rights . The holders of the Series I Preferred Units shall not have any rights to convert such units into shares of any other class or series of stock or into any other securities of, or interest in, the Partnership.
Section 9. No Sinking Fund . No sinking fund shall be established for the retirement or redemption of Series I Preferred Units.
Section 10. Exhibit A to Partnership Agreement . In order to duly reflect the issuance of the Series I Preferred Units provided for herein, the Partnership Agreement is hereby further amended pursuant to Section 12.3 of the Partnership Agreement by replacing the current form of Exhibit A to the Partnership Agreement with the form of Exhibit A that is attached to this Amendment as Exhibit C.
Section 11. Inconsistent Provisions . Nothing to the contrary contained in the Partnership Agreement shall limit any of the rights or obligations set forth in this Amendment.
IN WITNESS WHEREOF, this Amendment has been executed as of the date first above written.
PS BUSINESS PARKS, INC.
|
||||
By: | /s/ Edward A. Stokx | |||
Name: | Edward A. Stokx | |||
Title: | Executive Vice President and Chief Financial Officer | |||
PS BUSINESS PARKS, INC.
EXHIBIT 12
STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(in thousands, except ratios)
Nine Months Ended
September 30,
2004
2003
$
35,243
$
38,490
22,026
23,494
2,612
3,013
$
59,881
$
64,997
$
2,612
$
3,013
$
23,032
$
11,904
17,924
14,430
$
40,956
$
26,334
$
38,563
$
29,347
5,005
$
43,568
$
29,347
22.93x
21.57x
1.55x
2.21x
1.37x
2.21x
Year Ended December 31,
2003
2002
2001
2000
1999
$
49,096
$
57,430
$
49,870
$
51,181
$
41,255
30,585
32,170
27,489
26,741
16,049
4,015
5,324
1,715
1,481
3,153
$
83,696
$
94,924
$
79,074
$
79,403
$
60,457
$
4,015
$
5,612
$
2,806
$
2,896
$
4,142
$
15,784
$
15,412
$
8,854
$
5,088
$
3,406
19,240
17,927
14,107
12,185
4,156
$
35,024
$
33,339
$
22,961
$
17,273
$
7,562
$
38,912
$
38,951
$
25,767
$
20,169
$
11,704
127
$
39,039
$
38,951
$
25,767
$
20,169
$
11,704
20.85x
16.91x
28.18x
27.42x
14.60x
2.15x
2.44x
3.07x
3.94x
5.17x
2.14x
2.44x
3.07x
3.94x
5.17x
PS BUSINESS PARKS, INC.
EXHIBIT 12
STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Supplemental Disclosure of Ratio of Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) to Fixed Charges (a):
Nine Months Ended | ||||||||
September 30, | ||||||||
2004 | 2003 | |||||||
(in thousands, except ratios) | ||||||||
Net income
|
$ | 35,243 | $ | 38,490 | ||||
(Gain) loss on sale of real estate
|
(145 | ) | (3,498 | ) | ||||
Depreciation and amortization
|
55,019 | 43,237 | ||||||
Minority interest preferred
|
17,924 | 14,430 | ||||||
Interest expense
|
2,612 | 3,013 | ||||||
|
||||||||
EBITDA available to cover fixed charges
|
$ | 110,653 | $ | 95,672 | ||||
|
||||||||
Fixed charges interest expense
|
$ | 2,612 | $ | 3,013 | ||||
|
||||||||
Cumulative Preferred Stock dividends
|
$ | 23,032 | $ | 11,904 | ||||
Preferred partnership unit distributions
|
17,924 | 14,430 | ||||||
|
||||||||
Total preferred distributions (including impact of EITF Topic D-42)
|
$ | 40,956 | $ | 26,334 | ||||
|
||||||||
Total combined fixed charges and preferred distributions, prior to
the impact of EITF Topic D-42
|
$ | 38,563 | $ | 29,347 | ||||
Impact of EITF Topic D-42
|
5,005 | | ||||||
|
||||||||
Total combined fixed charges and preferred distributions,
including the impact of EITF Topic D-42
|
$ | 43,568 | $ | 29,347 | ||||
|
||||||||
Ratio of EBITDA to fixed charges
|
42.36x | 31.75x | ||||||
|
||||||||
Ratio of EBITDA to combined fixed charges and preferred
distributions, prior to the impact of EITF Topic D-42
|
2.87x | 3.26x | ||||||
|
||||||||
Ratio of EBITDA to combined fixed charges and preferred
distributions, including the impact of EITF Topic D-42
|
2.54x | 3.26x | ||||||
|
Continued on the following page
PS BUSINESS PARKS, INC.
EXHIBIT 12
STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Supplemental Disclosure of Ratio of Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) to Fixed Charges (a):
Continued from previous page
Years Ended December 31, | ||||||||||||||||||||
2003 | 2002 | 2001 | 2000 | 1999 | ||||||||||||||||
Net income
|
$ | 49,096 | $ | 57,430 | $ | 49,870 | $ | 51,181 | $ | 41,255 | ||||||||||
(Gain) loss on sale of real estate
|
(2,897 | ) | (9,023 | ) | | (256 | ) | | ||||||||||||
Depreciation and amortization
|
59,107 | 58,144 | 41,067 | 35,637 | 29,762 | |||||||||||||||
Minority interest preferred
|
19,240 | 17,927 | 14,107 | 12,185 | 4,156 | |||||||||||||||
Interest expense
|
4,015 | 5,324 | 1,715 | 1,481 | 3,153 | |||||||||||||||
|
||||||||||||||||||||
EBITDA available to cover fixed charges
|
$ | 128,561 | $ | 129,802 | $ | 106,759 | $ | 100,228 | $ | 78,326 | ||||||||||
|
||||||||||||||||||||
Fixed charges- (including capitalized interest)
|
$ | 4,015 | $ | 5,612 | $ | 2,806 | $ | 2,896 | $ | 4,142 | ||||||||||
|
||||||||||||||||||||
Cumulative Preferred Stock dividends
|
$ | 15,784 | $ | 15,412 | $ | 8,854 | $ | 5,088 | $ | 3,406 | ||||||||||
Preferred partnership unit distributions
|
19,240 | 17,927 | 14,107 | 12,185 | 4,156 | |||||||||||||||
|
||||||||||||||||||||
Total preferred distributions
|
$ | 35,024 | $ | 33,339 | $ | 22,961 | $ | 17,273 | $ | 7,562 | ||||||||||
|
||||||||||||||||||||
Total combined fixed charges and preferred
distributions, prior to the impact of EITF
Topic D-42
|
$ | 38,912 | $ | 38,951 | $ | 25,767 | $ | 20,169 | $ | 11,704 | ||||||||||
Impact of EITF Topic D-42
|
127 | | | | | |||||||||||||||
|
||||||||||||||||||||
Total combined fixed charges and preferred
distributions, including the impact of EITF
Topic D-42
|
$ | 39,039 | $ | 38,951 | $ | 25,767 | $ | 20,169 | $ | 11,704 | ||||||||||
|
||||||||||||||||||||
Ratio of EBITDA to fixed charges
|
32.02x | 23.13x | 38.05x | 34.61x | 18.91x | |||||||||||||||
|
||||||||||||||||||||
Ratio of EBITDA to combined fixed charges and
preferred distributions, prior to the impact
of EITF Topic D-42
|
3.30x | 3.33x | 4.14x | 4.97x | 6.69x | |||||||||||||||
|
||||||||||||||||||||
Ratio of EBITDA to combined fixed charges and
preferred distributions, including the impact
of EITF Topic D-42
|
3.30x | 3.33x | 4.14x | 4.97x | 6.69x | |||||||||||||||
|
(a) EBITDA represents earnings prior to interest, taxes, depreciation, amortization, gains on sale of real estate and the impact of EITF Topic D-42. 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 this basis.
Exhibit 31.1
CERTIFICATION PURSUANT TO
I, Joseph D. Russell, Jr. certify that:
/s/ Joseph D. Russell, Jr.
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
1.
2.
3.
4.
(a)
(b)
(c)
(d)
5.
(a)
(b)
Name: Joseph D. Russell, Jr.
Title: Chief Executive Officer
Date: 11/9/04
Exhibit 31.2
CERTIFICATION PURSUANT TO
I, Edward A. Stokx certify that:
/s/ Edward A. Stokx
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
1.
2.
3.
4.
(a)
(b)
(c)
(d)
5.
(a)
(b)
Name: Edward A. Stokx
Title: Chief Financial Officer
Date: 11/9/04
Exhibit 32.1
Certification of CEO and CFO Pursuant to
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-Q of PS Business Parks, Inc. (the Company) for the period ending September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the Report), Joseph D. Russell Jr., as Chief Executive Officer of the Company, and Edward A. Stokx, as Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) 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/ Joseph D. Russell, Jr.
|
||
Name: Joseph D. Russell, Jr.
|
||
Title: Chief Executive Officer
|
||
Date:
11/9/04
|
||
|
||
/s/
Edward A. Stokx
|
||
Name: Edward A. Stokx
|
||
Title: Chief Financial Officer
|
||
Date:
11/9/04
|
EXHIBIT 99.1
PS BUSINESS PARKS, INC.
RESTRICTED STOCK UNIT AGREEMENT
THIS RESTRICTED STOCK UNIT AGREEMENT is entered into as of _____________, by and between PS Business Parks, Inc. (the Company), and _____________, an employee of the Company, PS Business Parks, L.P. (the Partnership), a Subsidiary or a Service Provider (the Grantee).
Recitals:
WHEREAS, the assumption and adoption of the PS Business Parks, Inc. 2003 Stock Option and Incentive Plan (the Plan) as a new plan of the Company has been duly approved by the Board of Directors of the Company and the shareholders of the Company;
WHEREAS, under the Plan the Company is authorized to issue, inter alia , Restricted Stock Units relating to shares of common stock of the Company, par value $.01 per share (the Stock); and
WHEREAS, the Company desires to grant Restricted Stock Units to the Grantee under the terms and conditions set forth below.
NOW, THEREFORE, in consideration of the mutual benefits hereinafter provided, and each intending to be legally bound, the Company and the Grantee hereby agree as follows:
1. GRANT OF RESTRICTED STOCK UNITS.
The Company hereby grants to the Grantee _____________Restricted Stock Units, subject to the terms of this Restricted Stock Unit Agreement and the Plan. The Grant Date of the Restricted Stock Units is _____________. All terms and conditions of the Plan are hereby incorporated into this Agreement by reference and shall be deemed to be part of this Agreement, without regard to whether such terms and conditions are not otherwise set forth in this Agreement. To the extent that any capitalized words used in this Agreement are not defined, they shall have the definitions stated for them in the Plan. In the event that there is any inconsistency between the provisions of this Agreement and the provisions of the Plan, the provisions of the Plan shall govern.
2. VESTING OF RESTRICTED STOCK UNITS.
2.1. Service Requirement.
Rights in respect of twenty percent (20%) of the number of Restricted Stock Units specified in Section 1 above shall vest on each of the second, third, fourth, fifth and sixth anniversaries of the Grant Date, provided that the Grantee is in service on the applicable vesting date. As used herein, service shall mean service to the Company, a Subsidiary or the Partnership as an employee, director, consultant, service provider or independent contractor. For purposes of this Agreement, termination of service would not be deemed to occur if the Grantee, after terminating service in one capacity, continues to provide service to the Company, any Subsidiary, the Partnership or any affiliate of the Company in another capacity. Termination of service is sometimes referred to below as termination of employment or other relationship with the Company. As used herein, references to the Company shall be deemed to
include its Subsidiaries and affiliates, including the Partnership. The period during which the Restricted Stock Units have not vested and therefore are subject to a substantial risk of forfeiture is referred to below as the Restricted Period.
2.2. Restrictions on Transfer.
The Grantee may not sell, transfer, assign, pledge or otherwise encumber or dispose of the Restricted Stock Units.
2.3. Payment for Vested Restricted Stock Units.
When a portion of the Restricted Stock Units shall vest pursuant to Section 2.1, the Company shall, upon payment by the Grantee of the aggregate par value of the shares of Stock represented by such Restricted Stock Units, deliver to the Grantee a certificate for the number of shares of Stock represented by the Restricted Stock Units which have vested.
3. TERMINATION OF EMPLOYMENT OR OTHER RELATIONSHIP.
Upon the termination of the Grantees employment or other relationship with the Company other than by reason of death or permanent and total disability, any Restricted Stock Units held by the Grantee that have not vested shall terminate immediately, and the Grantee shall forfeit any rights with respect to such Restricted Stock Units. If the Grantees employment or other relationship with the Company is terminated because of his death, his legal guardian, or the executor or administrator of the estate of the Grantee, or the person or persons to whom rights under the Restricted Stock Unit Agreement have passed by bequest or inheritance, as the case may be, shall immediately be vested in all Restricted Stock Units that have not previously vested. If the Grantees employment or other relationship with the Company is terminated because of the Grantees permanent and total disability, the Grantees Restricted Stock Units shall continue to vest in accordance with the terms of this Agreement for a period of one year thereafter. At the end of such one-year period, any Restricted Stock Units that have not vested shall terminate and shall be forfeited.
4. DIVIDEND AND VOTING RIGHTS.
The Grantee shall have none of the rights of a shareholder with respect to the Restricted Stock Units. The Grantee shall be entitled to receive, upon the Companys payment of a cash dividend on its outstanding Stock, a cash payment for each Restricted Stock Unit held as of the record date for such dividend equal to the per-share dividend paid on the Stock.
5. REQUIREMENTS OF LAW.
The Company shall not be required to deliver any shares of Stock under this Restricted Stock Unit Agreement if the delivery of such Stock would constitute a violation by the Grantee or by the Company of any provision of any law or regulation of any governmental authority, including without limitation any federal or state securities laws or regulations. If at any time the Company shall determine, in its discretion, that the listing, registration or qualification of any Stock upon any securities exchange or under any state or federal law, or the consent or approval of any government regulatory body, is necessary or desirable as a condition of, or in connection with, the delivery of Stock hereunder, the Restricted Stock Units shall not vest in whole or in part unless such listing, registration, qualification,
2
consent or approval shall have been effected or obtained free of any conditions not acceptable to the Company. Specifically in connection with the Securities Act of 1933 (as now in effect or as hereafter amended), unless a registration statement under such Act is in effect with respect to the Stock, the Company shall not be required to deliver such Stock unless the Company has received evidence satisfactory to it that the Grantee may acquire such Stock pursuant to an exemption from registration under such Act. Any determination in this connection by the Company shall be final, binding, and conclusive. The Company may, but shall in no event be obligated to, register any securities covered hereby pursuant to the Securities Act of 1933 (as now in effect or as hereafter amended). The Company shall not be obligated to take any affirmative action in order to cause the delivery of Stock pursuant thereto to comply with any law or regulation of any governmental authority. As to any jurisdiction that expressly imposes the requirement that the Restricted Stock Units shall not vest unless and until the Stock is registered or is subject to an available exemption from registration, the vesting of the Restricted Stock Units (under circumstances in which the laws of such jurisdiction apply) shall be deemed conditioned upon the effectiveness of such registration or the availability of such an exemption.
6. WITHHOLDING OF TAXES.
The Company, the Partnership and any Subsidiary shall have the right to deduct from payments of any kind otherwise due to the Grantee any federal, state, or local taxes of any kind required by law to be withheld with respect to the termination of the Restricted Period with respect to the Restricted Stock Units. At the termination of the Restricted Period, the Grantee shall pay to the Company, the Partnership or the Subsidiary, as applicable, any amount that the Company, the Partnership or the Subsidiary may reasonably determine to be necessary to satisfy such withholding obligation. Subject to the prior approval of the Company, the Partnership or the Subsidiary, as applicable, which may be withheld by the Company, the Partnership or the Subsidiary in its sole discretion, the Grantee may elect to satisfy such obligations, in whole or in part, (i) by causing the Company, the Partnership or the Subsidiary to withhold Stock otherwise deliverable or (ii) by delivering to the Company, the Partnership or the Subsidiary Stock already owned by the Grantee. The Stock so delivered or withheld shall have a fair market value equal to such withholding obligations. The Fair Market Value of the Stock used to satisfy such withholding obligation shall be determined by the Company, the Partnership or the Subsidiary as of the date that the amount of tax to be withheld is to be determined. A Grantee who has made an election pursuant to this Section 6 may satisfy his withholding obligation only with shares of Stock that are not subject to any repurchase, forfeiture, unfulfilled vesting, or other similar requirements.
7. PARACHUTE LIMITATIONS
Notwithstanding any other provision of this Agreement or of any other agreement, contract, or understanding heretofore or hereafter entered into by the Grantee and the Company, the Partnership or any Subsidiary, except an agreement, contract, or understanding hereafter entered into that expressly modifies or excludes application of this Section (the Other Agreements), and notwithstanding any formal or informal plan or other arrangement heretofore or hereafter adopted by the Company (or the Partnership or any Subsidiary) for the direct or indirect compensation of the Grantee (including groups or classes of participants or beneficiaries of which the Grantee is a member), whether or not such compensation is deferred, is in cash, or is in the form of a benefit to or for the Grantee (a Benefit Arrangement), if the Grantee is a disqualified individual, as defined in Section 280G(c) of the Code, the Restricted Stock Units and any right to receive any payment or other benefit under this Agreement shall not become vested (i) to the extent that such right to payment or benefit, taking into account all other rights, payments, or benefits to or for Grantee under the Plan, all Other Agreements, and all Benefit Arrangements, would cause any payment or benefit to the Grantee under this Agreement to be considered
3
a parachute payment within the meaning of Section 280G(b)(2) of the Code as then in effect (a Parachute Payment) and (ii) if, as a result of receiving a Parachute Payment, the aggregate after-tax amounts received by the Grantee from the Company under this Agreement, the Plan, all Other Agreements, and all Benefit Arrangements would be less than the maximum after-tax amount that could be received by Grantee without causing any such payment or benefit to be considered a Parachute Payment. In the event that the receipt of any such right to exercise, payment, or benefit under this Agreement, in conjunction with all other rights, payments, or benefits to or for the Grantee under the Plan, any Other Agreement or any Benefit Arrangement would cause the Grantee to be considered to have received a Parachute Payment under this Agreement that would have the effect of decreasing the after-tax amount received by the Grantee as described in clause (ii) of the preceding sentence, then the Grantee shall have the right, in the Grantees sole discretion, to designate those rights, payments, or benefits under this Agreement, the Plan, any Other Agreements, and any Benefit Arrangements that should be reduced or eliminated so as to avoid having the payment or benefit to the Grantee under this Agreement be deemed to be a Parachute Payment.
8. DISCLAIMER OF RIGHTS.
No provision of this Agreement shall be construed to confer upon the Grantee the right to be employed by the Company, the Partnership, any Subsidiary or any affiliate, or to interfere in any way with the right and authority of the Company, the Partnership, any Subsidiary or any affiliate either to increase or decrease the compensation of the Grantee at any time, or to terminate any employment or other relationship between the Grantee and the Company, the Partnership, any Subsidiary, any Service Provider or any affiliate of any of the foregoing.
9. GOVERNING LAW.
This Agreement shall be governed by the laws of the State of California (but not including the choice of law rules thereof).
IN WITNESS WHEREOF, the parties hereto have caused this Restricted Stock Unit Agreement to be duly executed as of the date first above written.
|
PS BUSINESS PARKS, INC. | |
|
||
|
By: | |
|
|
|
|
David Goldberg
|
|
|
Vice President
|
|
|
||
|
GRANTEE: | |
|
||
|
|
4
EXHIBIT 99.2
PS BUSINESS PARKS, INC.
2003 STOCK OPTION AND INCENTIVE PLAN
NON-QUALIFIED STOCK OPTION AGREEMENT
This Stock Option Agreement (the Option Agreement) is made as of the ___day of_________, 2003 (the Grant Date), by and between PS Business Parks, Inc. (the Corporation) and _________, an employee of the Corporation, PS Business Parks, L.P. (the Partnership), one of the Corporations Subsidiaries or a Service Provider (the Optionee). Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Corporations 2003 Stock Option and Incentive Plan (the Plan).
WHEREAS, the adoption of the Plan has been duly approved by the Board of Directors of the Corporation (the Board) and the shareholders of the Corporation;
WHEREAS, the Plan provides for the grant to employees of the Corporation, the Partnership, the Corporations Subsidiaries and Service Providers of options for the purchase of shares of the Corporations Common Stock, par value $.01 per share (the Common Stock), which may be granted from time to time as the Committee so determines;
WHEREAS, the Corporation has determined that it is desirable and in its best interests to grant to the Optionee, pursuant to the Plan, options to purchase a certain number of shares of Common Stock as compensation for services rendered to the Corporation and/or the Partnership, and/or in order to provide the Optionee with an incentive to advance the interests of the Corporation and the Partnership, all according to the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein, the parties hereto do hereby agree as follows:
1. GRANT OF OPTION.
Subject to the terms of the Plan (the terms of which are incorporated by reference herein), the Corporation hereby grants to the Optionee the right and option (the Option) to purchase, on the terms and subject to the conditions hereinafter set forth, ___shares of Common Stock. This Option shall not constitute an incentive stock option within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended.
2. PRICE.
The purchase price (the Option Price) of the shares of Common Stock subject to the Option evidenced by this Option Agreement is $____per share (the Fair Market Value on the Grant Date).
3. EXERCISE OF OPTION.
Except as otherwise provided herein, the Option granted pursuant to this Option Agreement shall be subject to exercise as follows:
3.1 Time of Exercise of Option.
The Optionee may exercise the Option (subject to the limitations on exercise set forth in the Plan or in this Option Agreement), in installments as follows: (i) prior to the first anniversary of the
Grant Date, the Option shall not be exercisable; (ii) on the first anniversary of the Grant Date, the Option shall become exercisable with respect to one-fifth of the shares of Common Stock subject to the Option; (iii) on the second anniversary of the Grant Date, the Option shall become exercisable with respect to an additional one-fifth of the shares of Common Stock subject to the Option; (iv) on the third anniversary of the Grant Date, the Option shall become exercisable with respect to an additional one-fifth of the shares of Common Stock subject to the Option, (v) on the fourth anniversary of the Grant Date, the Option shall become exercisable with respect to an additional one-fifth of the shares of Common Stock subject to the Option, and (vi) on the fifth anniversary of the Grant Date, the Option shall become exercisable with respect to the remaining shares of Common Stock subject to the Option. The foregoing installments, to the extent not exercised, shall accumulate and be exercisable, in whole or in part, at any time and from time to time, after becoming exercisable and prior to the termination of the Option; provided, that no single exercise of the Option shall be for less than 100 shares, unless the number of shares purchased is the total number at the time available for purchase under this Option.
3.2 Exercise by Optionee.
During the lifetime of the Optionee, only the Optionee (or, in the event of the Optionees legal incapacity or incompetency, the Optionees guardian or legal representative) or a person or entity to whom the Optionee has transferred the Option in accordance with Section 6 hereof may exercise the Option.
3.3 Term of Option.
The Option shall have a term of ten years, subject to earlier termination in accordance with this Option Agreement or the terms of the Plan.
3.4 Limitations on Exercise of Option.
In no event may the Option be exercised, in whole or in part, after ten years following the Grant Date, or after the occurrence of an event referred to in Section 8 below which results in termination of the Option. In no event may the Option be exercised for a fractional Share.
3.5 Termination of Employment or Other Relationship.
Subject to Sections 3.6 and 3.7 hereof, upon the termination of (i) the employment of the Optionee by the Corporation, the Partnership, a Subsidiary or a Service Provider, or (ii) a Service Providers relationship with the Corporation, the Optionee shall have the right at any time within 30 days after such termination and prior to termination of the Option pursuant to Section 3.4 above, to exercise, in whole or in part, any Option held by such Optionee at the date of such termination, to the extent such Option was exercisable immediately prior to such termination.
3.6 Rights in the Event of Death.
If the Optionee dies while employed by the Corporation, the Partnership, a Subsidiary or a Service Provider, or while serving as a Service Provider, the executors or administrators or legatees or distributees of the Optionees estate shall have the right, at any time within one year after the date of the Optionees death and prior to termination of the Option pursuant to Section 3.4 above, to exercise the Option with respect to all shares subject to the Option, whether or not the Option was exercisable immediately prior to the Optionees death.
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3.7 Rights in the Event of Disability.
If the Optionee terminates employment with the Corporation, the Partnership, a Subsidiary, or a Service Provider, or if the Optionee ceases to be a Service Provider, by reason of the permanent and total disability of the Optionee, then the Optionee shall have the right, for a period of one year after such termination and prior to termination of the Option pursuant to Section 3.4 above, to exercise the Option to the extent such Option was exercisable immediately prior to such termination or becomes exercisable within such one year period pursuant to Section 3.1 above. Whether termination of employment or service is to be considered by reason of permanent and total disability for purposes of this Option Agreement shall be determined by the Committee, which determination shall be final and conclusive.
3.8 Reduction in Number of Shares Subject to Option.
The number of shares which may be purchased upon exercise of the Option pursuant to this Section 3 shall be reduced by the number of shares previously purchased upon exercise of the Option pursuant to this Section 3.
4. METHOD OF EXERCISE OF OPTION.
The Option may be exercised to the extent that it has become exercisable hereunder by delivery to the Corporation on any business day, at its principal office addressed to the attention of the Committee, of written notice of exercise, which notice shall specify the number of shares for which the Option is being exercised, and shall be accompanied by payment in full of the Option Price of the shares for which the Option is being exercised. Payment of the Option Price for the shares of Common Stock purchased pursuant to the exercise of the Option shall be made (a) in cash or by check payable to the order of the Partnership or such other person or entity as may be specified by the Corporation (the Payee); (b) through the tender to the Payee of shares of Common Stock, which shares shall be valued, for purposes of determining the extent to which the Option Price has been paid thereby, at their Fair Market Value on the date of exercise; or (c) by a combination of the methods described in (a) and (b). Payment in full of the Option Price need not accompany the written notice of exercise provided the notice directs that the Common Stock certificate or certificates for the shares for which the Option is exercised be delivered to a specified licensed broker acceptable to the Corporation as the agent for the Optionee and, at the time such Common Stock certificate or certificates are delivered, the broker tenders to the Payee cash (or cash equivalents acceptable to the Payee) equal to the Option Price plus the amount, if any, of federal and/or other taxes which the Corporation or the Payee may, in its judgment, be required to withhold with respect to the exercise of the Option. An attempt to exercise the Option granted other than as set forth above shall be invalid and of no force or effect. Promptly after the exercise of the Option and the payment in full of the Option Price of the shares of Common Stock covered thereby, the Optionee shall be entitled to the issuance of a Common Stock certificate or certificates evidencing the Optionees ownership of such shares.
5. PARACHUTE LIMITATIONS.
Notwithstanding any other provision of this Option Agreement or of any other agreement, contract, or understanding heretofore or hereafter entered into by a Optionee with the Corporation or any Subsidiary, except an agreement, contract or understanding hereafter entered into that expressly modifies or excludes application of this paragraph (an Other Agreement), and notwithstanding any formal or informal plan or other arrangement for the direct or indirect provision of compensation to the Optionee (including groups or classes of participants or beneficiaries of which the Optionee is a member), whether or not such compensation is deferred, is in cash, or is in the form of a benefit to or for the Optionee
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(a Benefit Arrangement), if the Optionee is a disqualified individual, as defined in Section 280G(c) of the Code, any Option held by that Optionee and any right to receive any payment or other benefit under this Option Agreement shall not become exercisable or vested (i) to the extent that such right to exercise, vesting, payment, or benefit, taking into account all other rights, payments, or benefits to or for the Optionee under this Option Agreement, all Other Agreements, and all Benefit Arrangements, would cause any payment or benefit to the Optionee under this Option Agreement to be considered a parachute payment within the meaning of Section 280G(b)(2) of the Code as then in effect (a Parachute Payment) and (ii) if, as a result of receiving a Parachute Payment, the aggregate after-tax amounts received by the Optionee from the Corporation under this Option Agreement, all Other Agreements, and all Benefit Arrangements would be less than the maximum after-tax amount that could be received by the Optionee without causing any such payment or benefit to be considered a Parachute Payment. In the event that the receipt of any such right to exercise, vesting, payment, or benefit under this Option Agreement, in conjunction with all other rights, payments, or benefits to or for the Optionee under any Other Agreement or any Benefit Arrangement would cause the Optionee to be considered to have received a Parachute Payment under this Option Agreement that would have the effect of decreasing the after-tax amount received by the Optionee as described in clause (ii) of the preceding sentence, then the Optionee shall have the right, in the Optionees sole discretion, to designate those rights, payments, or benefits under this Option Agreement, any Other Agreements, and any Benefit Arrangements that should be reduced or eliminated so as to avoid having the payment or benefit to the Optionee under this Option Agreement be deemed to be a Parachute Payment.
6. LIMITATIONS ON TRANSFER.
The Option is not transferable by the Optionee, other than by will or the laws of descent and distribution in the event of death of the Optionee, and except that the Optionee may transfer the Option in whole or in part to (i) the spouse, children (including step-children and adopted children) or grandchildren of the Optionee (Family Members), (ii) a trust for the exclusive benefit of one or more Family Members, or (iii) a partnership of which the Optionee and/or one or more Family Members are the only partners, provided that the transferee, in connection with the transfer, agrees in writing to be bound by all of the terms of this Option Agreement and the Plan and further agrees not to transfer the Option other than by will or the laws of descent and distribution in the event of the death of the transferee. Following any transfer permitted by this Section 6, the transferee shall have all of the rights of the Optionee hereunder, and the Option shall be exercisable by the transferee only to the extent that the Option would have been exercisable by the Optionee had the Option not been transferred. The Option shall not be pledged or hypothecated (by operation of law or otherwise) or subject to execution, attachment or similar processes.
7. RIGHTS AS SHAREHOLDER.
Neither the Optionee, nor any executor, administrator, distributee or legatee of the Optionees estate, nor any transferee hereof shall be, or have any of the rights or privileges of, a shareholder of the Corporation in respect of any shares issuable hereunder unless and until such shares have been fully paid and certificates representing such shares have been endorsed, transferred and delivered, and the name of the Optionee (or of such personal representative, administrator, distributee or legatee of the Optionees estate, or of such transferee) has been entered as the shareholder of record on the books of the Corporation.
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8. EFFECT OF CHANGES IN CAPITALIZATION.
8.1 Changes in Shares.
If the number of outstanding shares of Common Stock is increased or decreased or changed into or exchanged for a different number or kind of stock or other securities of the Corporation by reason of any recapitalization, reclassification, stock split, reverse split, combination of shares, exchange of shares, stock dividend or other distribution payable in capital stock, or other increase or decrease in such shares effected without receipt of consideration by the Corporation occurring after the date the Option is granted, a proportionate and appropriate adjustment shall be made by the Corporation in the number and kind of shares subject to the Option, so that the proportionate interest of the Optionee immediately following such event shall, to the extent practicable, be the same as immediately prior to such event. Any such adjustment in the Option shall not change the total Option Price with respect to shares subject to the unexercised portion of the Option but shall include a corresponding proportionate adjustment in the Option Price per share.
8.2 Reorganization in Which the Corporation Is the Surviving Entity and in Which No Change of Control Occurs.
Subject to Section 8.3 hereof, if the Corporation shall be the surviving entity in any reorganization, merger or consolidation of the Corporation with one or more other entities, the Option shall pertain to and apply to the securities to which a holder of the number of shares subject to the Option would have been entitled immediately following such reorganization, merger or consolidation, with a corresponding proportionate adjustment of the Option Price per share so that the aggregate Option Price thereafter shall be the same as the aggregate Option Price immediately prior to such reorganization, merger or consolidation.
8.3 Reorganization, Sale of Assets or Sale of Stock Which Involves a Change of Control.
Subject to the exceptions set forth in the last sentence of this Section 8.3, fifteen days prior to the scheduled consummation of a Change of Control, the Option shall become immediately exercisable with respect to all shares subject to the Option and shall remain exercisable for a period of fifteen days. Any exercise of the Option during such fifteen-day period shall be conditioned upon the consummation of the Change of Control and shall be effective only immediately before the consummation of the Change of Control. Upon consummation of any Change of Control, unless exercised the Option shall terminate. The Committee shall send written notice of an event that will result in such a termination to the Optionee not later than the time at which the Corporation gives notice thereof to its shareholders. For purposes of this Section 8.3, a Change of Control shall be deemed to occur upon (i) the dissolution or liquidation of the Corporation or upon a merger, consolidation, or reorganization of the Corporation with one or more other entities in which the Corporation is not the surviving entity, (ii) a sale of substantially all of the assets of the Corporation to another entity, or (iii) any transaction (including without limitation a merger or reorganization in which the Corporation is the surviving corporation) which results in any person or entity owning 50% or more of the combined voting power of all classes of stock of the Corporation. This Section 8.3 shall not apply to any Change of Control to the extent that (A) provision is made in writing in connection with such Change of Control for the assumption of the Option, or for the substitution for the Option of a new option covering the stock of a successor corporation, or a parent, subsidiary or affiliate thereof, with appropriate adjustments as to the number and kind of shares and exercise prices, in which event the Option shall continue in the manner and under the terms so provided or (B) a majority of the full
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Board determines that such Change of Control shall not trigger application of the provisions of this Section 8.3.
8.4 Adjustments.
Adjustments specified in this Section 8 relating to shares of Common Stock or securities of the Corporation shall be made by the Committee, whose determination in that respect shall be final, binding and conclusive. No fractional shares shall be issued pursuant to any such adjustment, and any fractions resulting from any such adjustment shall be eliminated in each case by rounding downward to the nearest whole share.
9. GENERAL RESTRICTIONS.
The Corporation shall not be required to sell or issue any shares of Common Stock under the Option if the sale or issuance of such shares would constitute a violation by the individual exercising the Option or by the Corporation of any provision of any law or regulation of any governmental authority, including without limitation any federal or state securities laws or regulations. If at any time the Corporation shall determine, in its discretion, that the listing, registration or qualification of any shares of Common Stock subject to the Option upon any securities exchange or under any state or federal law, or the consent or approval of any government regulatory body, is necessary or desirable as a condition of, or in connection with, the issuance or purchase of shares hereunder, the Option may not be exercised in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Corporation, and any delay caused thereby shall in no way affect the date of termination of the Option. Specifically, in connection with the Securities Act of 1933, upon notice of exercise of the Option, unless a registration statement under such Act is in effect with respect to the shares covered by the Option, the Corporation shall not be required to sell or issue such shares unless the Committee has received evidence satisfactory to the Committee that the holder of the Option may acquire such shares pursuant to an exemption from registration under such Act. Any determination in this connection by the Committee shall be final, binding, and conclusive. The Corporation shall not be obligated to take any affirmative action in order to cause the exercise of the Option or the issuance of shares of Common Stock pursuant thereto to comply with any law or regulation of any governmental authority. As to any jurisdiction that expressly imposes the requirement that the Option shall not be exercisable unless and until the shares covered by the Option are registered or are subject to an available exemption from registration, the exercise of the Option (under circumstances in which the laws of such jurisdiction apply) shall be deemed conditioned upon the effectiveness of such registration or the availability of such an exemption.
10. DISCLAIMER OF RIGHTS.
No provision in this Option Agreement shall be construed to confer upon the Optionee the right to be employed by the Corporation, the Partnership, a Subsidiary or a Service Provider or to provide services to the Corporation, or to interfere in any way with the right and authority of the Corporation, the Partnership, a Subsidiary or a Service Provider either to increase or decrease the compensation of the Optionee at any time, or to terminate any employment or other relationship between the Optionee and the Corporation, the Partnership, a Subsidiary or a Service Provider.
11. WITHHOLDING TAXES
Upon the request of the Corporation, the Payee, a Subsidiary or a Service Provider, the Optionee shall promptly pay to the Corporation, the Payee, the Subsidiary or the Service Provider, or make
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arrangements satisfactory to the Corporation, the Payee, the Subsidiary or the Service Provider regarding payment of, any federal, state or local taxes of any kind required by law to be withheld as a result of the Optionees exercise of the Option. The Corporation, the Payee, the Subsidiary or the Service Provider shall have the right to deduct from payments of any kind otherwise due to the Optionee any such taxes. The Optionee shall make any such payments in cash or cash equivalents or, subject to the prior approval of the Committee, which may be withheld in the Committees sole discretion, the Optionee may elect to satisfy the withholding obligation, in whole or in part, (i) by causing the Corporation, the Payee, the Subsidiary or the Service Provider to withhold shares of Common Stock otherwise issuable to the Optionee pursuant to the Option or (ii) by delivering to the Corporation, the Payee, the Subsidiary or the Service Provider shares of Common Stock already owned by the Optionee. The shares of Common Stock so delivered or withheld shall have an aggregate Fair Market Value equal to the applicable withholding obligations. The Optionee may deliver or have withheld only shares of Common Stock that are not subject to any repurchase, forfeiture, unfulfilled vesting, or other similar requirements.
12. INTERPRETATION OF THIS OPTION AGREEMENT.
All decisions and interpretations made by the Committee with regard to any question arising under the Plan or this Option Agreement shall be binding and conclusive on the Corporation and the Optionee and any other person entitled to exercise the Option as provided for herein. In the event that there is any inconsistency between the provisions of this Option Agreement and of the Plan, the provisions of the Plan shall govern.
13. GOVERNING LAW.
This Option Agreement is executed pursuant to and shall be governed by the laws of the State of California (but not including the choice of law rules thereof).
14. BINDING EFFECT.
Subject to all restrictions provided for in this Option Agreement and by applicable law relating to assignment and transfer of this Option Agreement and the option provided for herein, this Option Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, executors, administrators, successors, transferees and assigns.
15. NOTICE.
Any notice hereunder by the Optionee to the Corporation shall be in writing and shall be deemed duly given if mailed or delivered to the Corporation at its principal office, addressed to the attention of the Corporate Secretary, or if so mailed or delivered to such other address as the Corporation may hereafter designate by notice to the Optionee. Any notice hereunder by the Corporation to the Optionee shall be in writing and shall be deemed duly given if mailed or delivered to the Optionee at the address specified below by the Optionee for such purpose, or if so mailed or delivered to such other address as the Optionee may hereafter designate by written notice given to the Corporation.
16. ENTIRE AGREEMENT.
This Option Agreement constitutes the entire agreement and supersedes all prior understandings and agreements, written or oral, of the parties hereto with respect to the subject matter hereof. Neither this Option Agreement nor any term hereof may be amended, waived, discharged or terminated except by a written instrument signed by the Corporation and the Optionee; provided, however, that the Corporation
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unilaterally may waive any provision hereof in writing to the extent that such waiver does not adversely affect the interests of the Optionee hereunder, but no such waiver shall operate as or be construed to be a subsequent waiver of the same provision or a waiver of any other provision hereof.
IN WITNESS WHEREOF, the parties hereto have duly executed this Option Agreement, or caused this Option Agreement to be duly executed on their behalf, as of the day and year first above written.
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David Goldberg
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Vice President
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OPTIONEE: | |
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EXHIBIT 99.3
Outside Director
PS BUSINESS PARKS, INC.
2003 STOCK OPTION AND INCENTIVE PLAN
STOCK OPTION AGREEMENT
This Stock Option Agreement (the Option Agreement) is made as of the ___day of_________, 200___(the Grant Date), by and between PS Business Parks, Inc. (the Corporation) and ____________, an Outside Director of the Corporation (the Optionee). Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Corporations 2003 Stock Option and Incentive Plan (the Plan).
WHEREAS, the assumption and adoption of the Plan as a new plan of the Corporation has been duly approved by the Board of Directors of the Corporation (the Board) and the shareholders of the Corporation;
WHEREAS, the Plan provides for the grant to Outside Directors of options for the purchase of a specified number of shares of the Corporations Common Stock, par value $.01 per share (the Common Stock), following the first Annual Meeting of Shareholders of the Corporation held after the Effective Date, upon initial election to the Board thereafter and following each subsequent Annual Meeting of Shareholders of the Corporation;
WHEREAS, the Optionee was [re-]elected to the Board at the 200___Annual Meeting of Shareholders held on _______________, 200___;
NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein, the parties hereto do hereby agree as follows:
1. GRANT OF OPTION.
Subject to the terms of the Plan (the terms of which are incorporated by reference herein), the Corporation hereby grants to the Optionee the right and option (the Option) to purchase, on the terms and subject to the conditions hereinafter set forth, ______shares of Common Stock. This Option shall not constitute an incentive stock option within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended.
2. PRICE.
The purchase price (the Option Price) of the shares of Common Stock subject to the Option evidenced by this Option Agreement is $______per share (the Fair Market Value on the Grant Date).
3. EXERCISE OF OPTION.
Except as otherwise provided herein, the Option granted pursuant to this Option Agreement shall be subject to exercise as follows:
3.1 Time of Exercise of Option.
The Optionee may exercise the Option (subject to the limitations on exercise set forth in the Plan or in this Option Agreement), in installments as follows: (i) prior to the first anniversary of the Grant Date, the Option shall not be exercisable; (ii) on the first anniversary of the Grant Date, the Option shall become exercisable with respect to one-fifth of the shares of Common Stock subject to the Option; (iii) on the second anniversary of the Grant Date, the Option shall become exercisable with respect to an additional one-fifth of the shares of Common Stock subject to the Option; (iii) on the third anniversary of the Grant Date, the Option shall become exercisable with respect to an additional one-fifth of the shares subject to the Option; (iv) on the fourth anniversary of the Grant Date, the Option shall become exercisable with respect to an additional one-fifth of the shares subject to the Option; and (v) on the fifth anniversary of the Grant Date, the Option shall become exercisable with respect to the remaining shares of Common Stock subject to the Option. The foregoing installments, to the extent not exercised, shall accumulate and be exercisable, in whole or in part, at any time and from time to time, after becoming exercisable and prior to the termination of the Option; provided, that no single exercise of the Option shall be for less than 100 shares, unless the number of shares purchased is the total number at the time available for purchase under this Option.
3.2 Exercise by Optionee.
During the lifetime of the Optionee, only the Optionee (or, in the event of the Optionees legal incapacity or incompetency, the Optionees guardian or legal representative) or a person or entity to whom the Optionee has transferred the Option in accordance with Section 5 hereof may exercise the Option.
3.3 Term of Option.
The Option shall have a term of ten years, subject to earlier termination in accordance with this Agreement or the terms of the Plan.
3.4 Limitations on Exercise of Option.
In no event may the Option be exercised, in whole or in part, after ten years following the Grant Date, or after the occurrence of an event referred to in Section 7 below which results in termination of the Option. In no event may the Option be exercised for a fractional Share.
3.5 Termination of Service.
Upon the termination of service (a Service Termination) of the Optionee as a director of the Corporation, other than by reason of the death or permanent and total disability of the Optionee, the Optionee shall have the right at any time within 30 days after such Service Termination and prior to termination of the Option pursuant to Section 3.4 above, to exercise, in whole or in part, any Option held by such Optionee at the date of such Service Termination, to the extent such Option was exercisable immediately prior to such Service Termination.
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3.6 Rights in the Event of Death.
If the Optionee dies while in service as a director of the Corporation, the executors or administrators or legatees or distributees of the Optionees estate shall have the right, at any time within one year after the date of the Optionees death and prior to termination of the Option pursuant to Section 3.4 above, to exercise the Option with respect to all shares subject to the Option, whether or not the Option was exercisable immediately prior to the Optionees death.
3.7 Rights in the Event of Disability.
If there is a Service Termination by reason of the permanent and total disability of the Optionee, then the Optionee shall have the right, for a period of one year after such Service Termination and prior to termination of the Option pursuant to Section 3.4 above, to exercise the Option to the extent such Option was exercisable immediately prior to such Service Termination or becomes exercisable within such one year period pursuant to Section 3.1 above. Whether a Service Termination is to be considered by reason of permanent and total disability for purposes of this Option Agreement shall be determined by the Committee, which determination shall be final and conclusive.
3.8 Reduction in Number of Shares Subject to Option.
The number of shares which may be purchased upon exercise of the Option pursuant to this Section 3 shall be reduced by the number of shares previously purchased upon exercise of the Option pursuant to this Section 3.
4. METHOD OF EXERCISE OF OPTION.
The Option may be exercised to the extent that it has become exercisable hereunder by delivery to the Corporation on any business day, at its principal office addressed to the attention of the Committee, of written notice of exercise, which notice shall specify the number of shares for which the Option is being exercised, and shall be accompanied by payment in full of the Option Price of the shares for which the Option is being exercised. Payment of the Option Price for the shares of Common Stock purchased pursuant to the exercise of the Option shall be made (a) in cash or by check payable to the order of PS Business Parks, L.P. (the Partnership) or such other person or entity as may be specified by the Corporation (the Payee); (b) through the tender to the Payee of shares of Common Stock, which shares shall be valued, for purposes of determining the extent to which the Option Price has been paid thereby, at their Fair Market Value on the date of exercise; or (c) by a combination of the methods described in (a) and (b). Payment in full of the Option Price need not accompany the written notice of exercise provided the notice directs that the Common Stock certificate or certificates for the shares for which the Option is exercised be delivered to a specified licensed broker acceptable to the Corporation as the agent for the Optionee and, at the time such Common Stock certificate or certificates are delivered, the broker tenders to the Payee cash (or cash equivalents acceptable to the Payee) equal to the Option Price plus the amount, if any, of federal and/or other taxes which the Corporation or the Payee may, in its judgment, be required to withhold with respect to the exercise of the Option. An attempt to exercise the Option granted other than as set forth above shall be invalid and of no force or effect. Promptly after the exercise of the Option
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and the payment in full of the Option Price of the shares of Common Stock covered thereby, the Optionee shall be entitled to the issuance of a Common Stock certificate or certificates evidencing the Optionees ownership of such shares.
5. LIMITATIONS ON TRANSFER.
The Option is not transferable by the Optionee, other than by will or the laws of descent and distribution in the event of death of the Optionee, and except that the Optionee may transfer the Option in whole or in part, for no consideration, to (i) the spouse, children (including step-children and adopted children) or grandchildren of the Optionee (Family Members), (ii) a trust for the exclusive benefit of one or more Family Members, or (iii) a partnership of which the Optionee and/or one or more Family Members are the only partners, provided that the transferee, in connection with the transfer, agrees in writing to be bound by all of the terms of this Option Agreement and the Plan and further agrees not to transfer the Option other than by will or the laws of descent and distribution in the event of the death of the transferee. Following any transfer permitted by this Section 5, the transferee shall have all of the rights of the Optionee hereunder, and the Option shall be exercisable by the transferee only to the extent that the Option would have been exercisable by the Optionee had the Option not been transferred. The Option shall not be pledged or hypothecated (by operation of law or otherwise) or subject to execution, attachment or similar processes.
6. RIGHTS AS SHAREHOLDER.
Neither the Optionee nor any executor, administrator, distributee or legatee of the Optionees estate shall be, or have any of the rights or privileges of, a shareholder of the Corporation in respect of any shares issuable hereunder unless and until such shares have been fully paid and certificates representing such shares have been endorsed, transferred and delivered, and the name of the Optionee (or of such personal representative, administrator, distributee or legatee of the Optionees estate) has been entered as the shareholder of record on the books of the Corporation.
7. EFFECT OF CHANGES IN CAPITALIZATION.
7.1 Changes in Shares.
If the number of outstanding shares of Common Stock is increased or decreased or changed into or exchanged for a different number or kind of stock or other securities of the Corporation by reason of any recapitalization, reclassification, stock split, reverse split, combination of shares, exchange of shares, stock dividend or other distribution payable in capital stock, or other increase or decrease in such shares effected without receipt of consideration by the Corporation occurring after the date the Option is granted, a proportionate and appropriate adjustment shall be made by the Corporation in the number and kind of shares subject to the Option, so that the proportionate interest of the Optionee immediately following such event shall, to the extent practicable, be the same as immediately prior to such event. Any such adjustment in the Option shall not change the total Option Price with respect to shares subject to the unexercised portion of the Option but shall include a corresponding proportionate adjustment in the Option Price per share.
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7.2 Reorganization in Which the Corporation Is the Surviving Entity and in Which No Change of Control Occurs.
Subject to Section 7.3 hereof, if the Corporation shall be the surviving entity in any reorganization, merger or consolidation of the Corporation with one or more other entities, the Option shall pertain to and apply to the securities to which a holder of the number of shares subject to the Option would have been entitled immediately following such reorganization, merger or consolidation, with a corresponding proportionate adjustment of the Option Price per share so that the aggregate Option Price thereafter shall be the same as the aggregate Option Price immediately prior to such reorganization, merger or consolidation.
7.3 Reorganization, Sale of Assets or Sale of Stock Which Involves a Change of Control.
Subject to the exceptions set forth in the last sentence of this Section 7.3, fifteen days prior to the scheduled consummation of a Change of Control, the Option shall become immediately exercisable with respect to all shares subject to the Option and shall remain exercisable for a period of fifteen days. Any exercise of the Option during such fifteen-day period shall be conditioned upon the consummation of the Change of Control and shall be effective only immediately before the consummation of the Change of Control. Upon consummation of any Change of Control, unless exercised the Option shall terminate. The Committee shall send written notice of an event that will result in such a termination to the Optionee not later than the time at which the Corporation gives notice thereof to its shareholders. For purposes of this Section 7.3, a Change of Control shall be deemed to occur upon (i) the dissolution or liquidation of the Corporation or upon a merger, consolidation, or reorganization of the Corporation with one or more other entities in which the Corporation is not the surviving entity, (ii) a sale of substantially all of the assets of the Corporation to another entity, or (iii) any transaction (including without limitation a merger or reorganization in which the Corporation is the surviving corporation) which results in any person or entity owning 50% or more of the combined voting power of all classes of stock of the Corporation. This Section 7.3 shall not apply to any Change of Control to the extent that (A) provision is made in writing in connection with such Change of Control for the assumption of the Option, or for the substitution for the Option of a new option covering the stock of a successor corporation, or a parent, subsidiary or affiliate thereof, with appropriate adjustments as to the number and kind of shares and exercise prices, in which event the Option shall continue in the manner and under the terms so provided or (B) a majority of the full Board determines that such Change of Control shall not trigger application of the provisions of this Section 7.3.
7.4 Adjustments.
Adjustments specified in this Section 7 relating to shares of Common Stock or securities of the Corporation shall be made by the Committee, whose determination in that respect shall be final, binding and conclusive. No fractional shares shall be issued pursuant to any such adjustment, and any fractions resulting from any such adjustment shall be eliminated in each case by rounding downward to the nearest whole share.
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8. GENERAL RESTRICTIONS.
The Corporation shall not be required to sell or issue any shares of Common Stock under the Option if the sale or issuance of such shares would constitute a violation by the individual exercising the Option or by the Corporation of any provision of any law or regulation of any governmental authority, including without limitation any federal or state securities laws or regulations. If at any time the Corporation shall determine, in its discretion, that the listing, registration or qualification of any shares of Common Stock subject to the Option upon any securities exchange or under any state or federal law, or the consent or approval of any government regulatory body, is necessary or desirable as a condition of, or in connection with, the issuance or purchase of shares hereunder, the Option may not be exercised in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Corporation, and any delay caused thereby shall in no way affect the date of termination of the Option. Specifically, in connection with the Securities Act of 1933, upon notice of exercise of the Option, unless a registration statement under such Act is in effect with respect to the shares covered by the Option, the Corporation shall not be required to sell or issue such shares unless the Committee has received evidence satisfactory to the Committee that the holder of the Option may acquire such shares pursuant to an exemption from registration under such Act. Any determination in this connection by the Committee shall be final, binding, and conclusive. The Corporation shall not be obligated to take any affirmative action in order to cause the exercise of the Option or the issuance of shares of Common Stock pursuant thereto to comply with any law or regulation of any governmental authority. As to any jurisdiction that expressly imposes the requirement that the Option shall not be exercisable unless and until the shares covered by the Option are registered or are subject to an available exemption from registration, the exercise of the Option (under circumstances in which the laws of such jurisdiction apply) shall be deemed conditioned upon the effectiveness of such registration or the availability of such an exemption.
9. DISCLAIMER OF RIGHTS.
No provision in this Option Agreement shall be construed to confer upon the Optionee the right to continue as a director of the Corporation.
10. WITHHOLDING TAXES
Upon the request of the Corporation or the Payee, the Optionee shall promptly pay to the Corporation or the Payee, or make arrangements satisfactory to the Corporation or the Payee regarding payment of, any federal, state or local taxes of any kind required by law to be withheld as a result of the Optionees exercise of the Option. The Corporation or the Payee shall have the right to deduct from payments of any kind otherwise due to the Optionee any such taxes. The Optionee shall make any such payments in cash or cash equivalents or, subject to the prior approval of the Committee, which may be withheld in the Committees sole discretion, the Optionee may elect to satisfy the withholding obligation, in whole or in part, (i) by causing the Corporation or the Payee to withhold shares of Common Stock otherwise issuable to the Optionee pursuant to the Option or (ii) by delivering to the Corporation or the Payee shares of Common Stock already owned by the Optionee. The shares of Common Stock so delivered or withheld shall have an aggregate Fair Market Value equal to the applicable withholding obligations. The Optionee may
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deliver or have withheld only shares of Common Stock that are not subject to any repurchase, forfeiture, unfulfilled vesting, or other similar requirements.
11. INTERPRETATION OF THIS OPTION AGREEMENT.
All decisions and interpretations made by the Committee with regard to any question arising under the Plan or this Option Agreement shall be binding and conclusive on the Corporation and the Optionee and any other person entitled to exercise the Option as provided for herein. In the event that there is any inconsistency between the provisions of this Option Agreement and of the Plan, the provisions of the Plan shall govern.
12. GOVERNING LAW.
This Option Agreement is executed pursuant to and shall be governed by the laws of the State of California (but not including the choice of law rules thereof).
13. BINDING EFFECT.
Subject to all restrictions provided for in this Option Agreement and by applicable law relating to assignment and transfer of this Option Agreement and the option provided for herein, this Option Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, executors, administrators, successors, and assigns.
14. NOTICE.
Any notice hereunder by the Optionee to the Corporation shall be in writing and shall be deemed duly given if mailed or delivered to the Corporation at its principal office, addressed to the attention of the Corporate Secretary, or if so mailed or delivered to such other address as the Corporation may hereafter designate by notice to the Optionee. Any notice hereunder by the Corporation to the Optionee shall be in writing and shall be deemed duly given if mailed or delivered to the Optionee at the address specified below by the Optionee for such purpose, or if so mailed or delivered to such other address as the Optionee may hereafter designate by written notice given to the Corporation.
15. ENTIRE AGREEMENT.
This Option Agreement constitutes the entire agreement and supersedes all prior understandings and agreements, written or oral, of the parties hereto with respect to the subject matter hereof. Neither this Option Agreement nor any term hereof may be amended, waived, discharged or terminated except by a written instrument signed by the Corporation and the Optionee; provided, however, that the Corporation unilaterally may waive any provision hereof in writing to the extent that such waiver does not adversely affect the interests of the Optionee hereunder, but no such waiver shall operate as or be construed to be a subsequent waiver of the same provision or a waiver of any other provision hereof.
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IN WITNESS WHEREOF, the parties hereto have duly executed this Option Agreement, or caused this Option Agreement to be duly executed on their behalf, as of the day and year first above written.
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PS BUSINESS PARKS, INC. | |
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David Goldberg
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Vice President
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