ITEM 1. Business.
Forward Looking Statements - --------------------------
When used within this document, the words "expects," "believes," "anticipates," "should," "estimates," and similar expressions are intended to identify "forward-looking statements" within the meaning of that term in Section 27A of the Securities Exchange Act of 1933, as amended, and in Section 21F of the Securities Exchange Act of 1934, as amended. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors, which may cause the actual results and performance of the Partnership to be materially different from those expressed or implied in the forward looking statements. Such factors are described in Item 1A, "Risk Factors" and include changes in general economic conditions and in the markets in which the Partnership operates and the impact of competition from new and existing storage and commercial facilities and other storage alternatives, which could impact rents and occupancy levels at the Partnership's facilities; the impact of the regulatory environment as well as national, state, and local laws and regulations, which could increase the Partnership's expense and reduce the Partnership's cash available for distribution; and economic uncertainty due to the impact of war or terrorism could adversely affect our business plan. We disclaim any obligation to publicly release the results of any revisions to these forward-looking statements reflecting new estimates, events or circumstances after the date of this report.
General - -------
PS Partners IV, Ltd. (the "Partnership") is a publicly held limited partnership formed under the California Uniform Limited Partnership Act. Commencing in December 1984, 128,000 units of limited partnership interest (the "Units") were offered to the public in an interstate offering. The offering was completed in July 1985.
The Partnership has reported annually to the Securities and Exchange Commission on Form 10-K which includes financial statements certified by independent public accountants. The Partnership has also reported quarterly to the Securities and Exchange Commission on Form 10-Q and includes unaudited financial statements with such filings. The Partnership expects to continue such reporting.
The Partnership was formed to invest in and operate existing self-service facilities offering storage space for personal and business use (the "mini-warehouses") and to invest up to 40% of the net proceeds of the offering in and operate existing office and industrial properties. The Partnership's real estate investments consist of wholly-owned facilities and an investment in a general partnership (SEI/PSP IV Joint Ventures, the "Joint Venture") with Public Storage, Inc. ("PSI"), a real estate investment trust ("REIT") organized as a corporation under the laws of California.
The Partnership's general partners (the "General Partners") are PSI and B. Wayne Hughes ("Hughes"). Hughes is the chairman of the board, was chief executive officer of PSI through November 7, 2002, and Hughes and members of his family (the "Hughes Family") are the major shareholders of PSI. The Partnership is managed, and its investment decisions are made by Hughes and the executive officers and directors of PSI. The limited partners of the Partnership have no right to participate in the management or conduct of its business affairs. PSI believes that it is the largest operator of mini-warehouse facilities in the United States.
Through 1996, the business parks of the Joint Venture were managed by Public Storage Commercial Properties Group, Inc. ("PSCPG") pursuant to a Management Agreement. In January 1997, the Joint Venture and PSI and other related partnerships transferred a total of 35 business parks to PS Business Parks, L.P. ("PSBPLP"), formerly known as American Office Park Properties, L.P., an operating partnership formed to own and operate business parks in which PSI has a significant interest. Included among the properties transferred were the business parks of the Joint Venture in exchange for a partnership interest in PSBPLP. Until March 17, 1998, the general partner of PSBPLP was American Office Park Properties, Inc., an affiliate of PSI. On March 17, 1998, American Office Park Properties, Inc. was merged into Public Storage Properties XI, Inc., which changed its name to PS Business Parks, Inc. ("PSBP"). PSBP is a REIT affiliated with PSI, and is publicly traded on the American Stock Exchange. As a result of the merger, PSBP became the general partner of PSBPLP (which changed its name from American Office Park Properties, L.P. to PS Business Parks, L.P.). See Item 13.
PSI's current relationship with the Partnership includes (i) the joint ownership of the Joint Venture which owns 32 of the Partnership's 33 properties and 599,340 operating partnership units in PSBPLP, (ii) PSI is a co-general partner along with Hughes, who is chairman of the board, and was chief executive officer of PSI through November 7, 2002, (iii) as of December 31, 2002, PSI owned approximately 58.7% of the Partnership's limited partnership units, and (iv) PSI is the operator of the 33 properties in which the Partnership has an interest (these 33 properties are referred to collectively hereinafter as the "Mini-Warehouse Properties").
Partnership Reorganization - --------------------------
On December 18, 2002, the Partnership entered into an Agreement and Plan of Reorganization with Public Storage, Inc. (NYSE:PSA). Under the Agreement and Plan of Reorganization, each of the Partnership units held by the public will be converted into the right to receive a value of $442 in PSA common stock or, at the limited partner's election, in cash. The transaction is expected to close in the second quarter of 2003.
Investment Objectives and Policies - ----------------------------------
The Partnership's objectives are to (i) preserve and protect invested capital, (ii) maximize the potential for appreciation in value of its investments, (iii) provide Federal income tax deductions so that during the early years of property operations a portion of cash distributions may be treated as a return of capital for tax purposes, and therefore, may not represent taxable income to the limited partners, and (iv) provide for cash distributions from operations.
The Partnership will terminate on December 31, 2038, unless dissolved earlier. Under the terms of the general partnership agreement with PSI, PSI has the right to require the Partnership to sell all of the properties owned by the Joint Venture (see Item 12(c)).
Following are the Partnership's investment practices and policies. The Partnership does not anticipate making any additional investments other than maintenance capital expenditures and does not anticipate liquidating the investments it now holds. While a vote of the limited partners is generally required to change the Partnership's investment policies, PSI holds a majority of the limited partnership units, and as a result, the General Partners could change these policies through PSI's vote.
* Our investments consists of (i) a wholly-owned self-storage facility and (ii) an interest in the Joint Venture which owns 32 self storage facilities and 599,340 operating partnership units in PSBPLP. All of these investments are in real estate or real estate entities holding real estate located in the United States. See "mini-warehouses" and Item 2 "Properties" for further information. These investments were acquired both for income and capital gains.
* There is no limitation on the amount or percentage of assets which can be invested in any specific person.
* The Partnership does not anticipate borrowing money, issuing senior securities, making loans to other persons, investing in the securities of other issuers for the purpose of exercising control, underwriting the securities of other issuers, engaging in the purchase and sale of investments, offering securities in exchange for property, or repurchasing or otherwise reacquiring its outstanding securities.
Competition - -----------
Competition in the market areas in which the Partnership operates is significant and affects the occupancy levels, rental rates and operating expenses of certain of the Partnerships facilities. Recent increases in development of mini-warehouse facilities have intensified the competition among mini-warehouse operators in many market areas in which the Partnership operates. In recent years consolidation has occurred in the fragmented mini-warehouse industry.
The Partnership believes that the significant operating and financial experience of PSI's officers and directors, combined with the Partnership's geographic diversity, economies of scale and the "Public Storage" name, should enable the Partnership to continue to compete effectively with other entities.
Business Attributes - -------------------
Under PSI operation, the Partnership's facilities are part of a comprehensive distribution system encompassing standardized procedures, integrated reporting and information networks and centralized marketing. This distribution system is designed to maximize revenue through pricing and occupancy. The distribution system was significantly enhanced during 1996 with the introduction and implementation of the national telephone reservation center and new facility management software.
National telephone reservation system: Commencing in early 1996, PSI began to implement a national telephone reservation system designed to provide added customer service and maximize utilization of available mini-warehouse space. Customers calling either the PSI's toll-free telephone referral system, (800) 44-STORE, or a mini-warehouse facility are directed to the national reservation system where a representative discusses with the customer space requirements, price and location.
PSI believes that the national telephone reservation system has enhanced the Partnership's ability to effectively market mini-warehouses and is primarily responsible for the Partnership's increasing occupancy levels and realized rental rates experienced at the mini-warehouse facilities during the past three years.
Economies of scale: PSI is the largest provider of mini-warehouse space in the industry. As of December 31, 2002, PSI operated 1,433 mini-warehouse facilities (including 30 managed for third parties) in 37 states and had over 661,000 spaces rented. The size and scope of PSI's operations have enabled it to achieve a consistently high level of profit margins and low level of administrative costs relative to revenues.
Brand name recognition: The Partnership's operations are conducted under the "Public Storage" brand name, which the Partnership believes is the most recognized and established name in the mini-warehouse industry. PSI manages mini-warehouse operations conducted in 37 states, giving it national recognition and prominence. PSI focuses its operations within those states in the major metropolitan markets. This concentration establishes PSI as one of the dominant providers of storage space in each market that it operates in and enables it to use a variety of promotional activities, such as television and radio advertising as well as targeted discounting and referrals, which are generally not economically viable to its competitors.
Mini-warehouses - ---------------
Mini-warehouses, which comprise the majority of the Partnership's investments, are designed to offer accessible storage space for personal and business use at a relatively low cost. A user rents a fully enclosed space which is for the user's exclusive use and to which only the user has access on an unrestricted basis during business hours. On-site operation is the responsibility of resident managers who are supervised by area managers. Some mini-warehouses also include rentable uncovered parking areas for vehicle storage. Leases for mini-warehouse space may be on a long-term or short-term basis, although typically spaces are rented on a month-to-month basis. Rental rates vary according to the location of the property and the size of the storage space.
Users of space in mini-warehouses include both individuals and large and small businesses. Individuals usually employ this space for storage of, among other things, furniture, household appliances, personal belongings, motor vehicles, boats, campers, motorcycles and other household goods. Businesses normally employ this space for storage of excess inventory, business records, seasonal goods, equipment and fixtures.
The Mini-Warehouse Properties generally consist of three to seven buildings containing an aggregate of between 294 to 847 storage spaces, most of which have between 25 and 400 square feet and an interior height of approximately 8 to 12 feet.
The Mini-Warehouse Properties experience minor seasonal fluctuations in the occupancy levels of mini-warehouses with occupancies higher in the summer months than in the winter months. The Partnership believes that these fluctuations result in part from increased moving activity during the summer.
The Mini-Warehouse Properties are geographically diversified and are generally located in heavily populated areas and close to concentrations of apartment complexes, single family residences and commercial developments. However, there may be circumstances in which it may be appropriate to own a property in a less populated area, for example, in an area that is highly visible from a major thoroughfare and close to, although not in, a heavily populated area. Moreover, in certain population centers, land costs and zoning restrictions may create a demand for space in nearby less populated areas.
As with most other types of real estate, the conversion of mini-warehouses to alternative uses in connection with a sale or otherwise would generally require substantial capital expenditures. However, the Partnership and the Joint Venture do not intend to convert the Mini-Warehouse Properties to other uses.
Mini-warehouse Property Operator - --------------------------------
The Mini-Warehouse Properties are managed by PSI pursuant to a Management Agreement.
Under the supervision of the Partnership and the Joint Venture, PSI coordinates the operation of the facilities, establishes rental policies and rates, directs marketing activity and directs the purchase of equipment and supplies, maintenance activity, and the selection and engagement of all vendors, supplies and independent contractors.
PSI engages, at the expense of the property owner, employees for the operation of the owner's facilities, including resident managers, assistant managers, relief managers, and billing and maintenance personnel. Some or all of these employees may be employed on a part-time basis and may also be employed by other persons, partnerships, REITs or other entities owning facilities operated by PSI.
In the purchasing of services such as advertising (including broadcast media advertising) and insurance, PSI attempts to achieve economies by combining the resources of the various facilities that it operates. Facilities operated by PSI have historically carried comprehensive insurance, including fire, earthquake, liability and extended coverage.
PSI has developed systems for space inventory, accounting and handling delinquent accounts, including a computerized network linking PSI operated facilities. Each project manager is furnished with detailed operating procedures and typically receives facilities management training from PSI. Form letters covering a variety of circumstances are also supplied to the project managers. A record of actions taken by the project managers when delinquencies occur is maintained.
The Mini-warehouse Properties are typically advertised via signage, yellow pages, flyers and broadcast media advertising (television and radio) in geographic areas in which many of the facilities are located. Broadcast media and other advertising costs are charged to the facilities located in geographic areas affected by the advertising. From time to time, PSI adopts promotional programs, such as temporary rent reductions, in selected areas or for individual facilities.
For as long as the Management Agreement is in effect, PSI has granted the Partnership and the Joint Venture a non-exclusive license to use two PSI service marks and related designs, including the "Public Storage" name, in conjunction with rental and operation of facilities managed pursuant to the Management Agreement. Upon termination of the Management Agreement, the Partnership and the Joint Venture would no longer have the right to use the service marks and related designs. The General Partners believe that the loss of the right to use the service marks and related designs could have a material adverse effect on the Partnership's business.
The Management Agreement with PSI provides that the Management Agreement may be terminated without cause upon 60 days written notice by the Partnership or six months notice by PSI.
Other Business Activities - -------------------------
A Corporation that reinsures policies against losses to goods stored by tenants in PSI's storage facilities was purchased by PSI from Mr. Hughes and members of his family (the "Hughes Family") on December 31, 2001. We believe that the availability of insurance reduces our potential liability to tenants for losses to their goods from theft or destruction. This Corporation receives the premiums and bears the risks associated with the re-insurance.
A subsidiary of PSI sells locks and boxes and rents trucks to the general public and tenants to be used in securing their spaces and moving their goods. We believe that the availability of locks and boxes for sale and the rental of trucks promote the rental of spaces.
Federal Income Tax - ------------------
PS Partners IV, Ltd. is treated as a partnership for federal income tax purposes with the taxable income of the entity allocated to each partners in accordance with the partnership agreement.
Employees - ---------
There are approximately 120 persons who render services on behalf of the Partnership and the Joint Venture. These persons include resident managers, assistant managers, relief managers, district managers, and administrative personnel. Some of these employees may be employed on a part-time basis and may also be employed by other persons, partnerships, REITs or other entities owning facilities operated by PSI or PSBPLP.
ITEM 1A.
ITEM 1A. Risk Factors.
In addition to the other information in our Form 10-K, you should consider the following factors in evaluating the Partnership:
PUBLIC STORAGE CONTROLS US.
Public Storage owns approximately 58.7% of our outstanding limited partnership units and is our general partner. Consequently, Public Storage controls matters submitted to a vote of our unitholders, including amending our organizational documents, dissolving the Partnership and approving other extraordinary transactions.
SINCE OUR BUSINESS CONSISTS PRIMARILY OF ACQUIRING AND OPERATING REAL ESTATE, WE ARE SUBJECT TO REAL ESTATE OPERATING RISKS.
The value of our investments may be reduced by general risks of real estate ownership. Since we derive substantially all of our income from real estate operations, we are subject to the general risks of owning real estate-related assets, including:
* lack of demand for rental spaces or units in a locale;
* changes in general economic or local conditions;
* changes in supply of or demand for similar or competing facilities in an area;
* potential terrorists attacks;
* the impact of environmental protection laws;
* changes in interest rates and availability of permanent mortgage funds which may render the sale or financing of a property difficult or unattractive; and
* changes in tax, real estate and zoning laws.
There is significant competition among self-storage facilities and from other storage alternatives. Most of our properties are self-storage facilities, which generated 94% of our rental revenue during 2002. Local market conditions will play a significant part in how competition will affect us. Competition in the market areas in which many of our properties are located from other self-storage facilities and other storage alternatives is significant and has affected the occupancy levels, rental rates and operating expenses of some of our properties. Any increase in availability of funds for investment in real estate may accelerate competition. Further development of self-storage facilities may intensify competition among operators of self-storage facilities in the market areas in which we operate.
We may incur significant environmental costs and liabilities. As an owner of real properties, under various federal, state and local environmental laws, we are required to clean up spills or other releases of hazardous or toxic substances on or from our properties. Certain environmental laws impose liability whether or not the owner knew of, or was responsible for, the presence of the hazardous or toxic substances. In some cases, liability may not be limited to the value of the property. The presence of these substances, or the failure to properly remediate any resulting contamination, also may adversely affect the owner's or operator's ability to sell, lease or operate its property or to borrow using its property as collateral.
We have conducted preliminary environmental assessments on the properties the Partnership has an interest in to evaluate the environmental condition of, and potential environmental liabilities associated with, our properties. These assessments generally consist of an investigation of environmental conditions at the property (not including soil or groundwater sampling or analysis), as well as a review of available information regarding the site and publicly available data regarding conditions at other sites in the vicinity. In connection with these property assessments, we have become aware that prior operations or activities at some facilities or from nearby locations have or may have resulted in contamination to the soil or groundwater at these facilities. In this regard, some of our facilities are or may be the subject of federal or state environment investigations or remedial actions. Although we cannot provide any assurance, based on the preliminary environmental assessments, we believe we have funds available to cover any liability from environmental contamination or potential contamination and we are not aware of any environmental contamination of our facilities material to our overall business, financial condition or results of operation.
Property taxes can increase and cause a decline in yields on investments. Each of our properties is subject to real property taxes. These real property taxes may increase in the future as property tax rates change and as our properties are assessed or reassessed by tax authorities. Such increases could adversely impact the Partnership's profitability.
We must comply with the Americans with Disabilities Act and fire and safety regulations, which can require significant expenditures: All our properties must comply with the Americans with Disabilities Act and with related regulations (the "ADA"). The ADA has separate compliance requirements for "public accommodations" and "commercial facilities," but generally requires that buildings be made accessible to persons with disabilities. Various state laws impose similar requirements. A failure to comply with the ADA or similar state laws could result in government imposed fines on us and the award of damages to individuals affected by the failure. In addition, we must operate our properties in compliance with numerous local fire and safety regulations, building codes, and other land use regulations. Compliance with these requirements can require us to spend substantial amounts of money, which would reduce cash otherwise available for distribution to Partners. Failure to comply with these requirements could also affect the marketability of our real estate facilities.
TERRORIST ATTACKS AND THE POSSIBILITY OF WIDER ARMED CONFLICT MAY HAVE AN ADVERSE IMPACT ON OUR BUSINESS AND OPERATING RESULTS AND COULD DECREASE THE VALUE OF OUR ASSETS.
Terrorist attacks and other acts of violence or war, such as those that took place on September 11, 2001, could have a material adverse impact on our business and operating results. There can be no assurance that there will not be further terrorist attacks against the United States or its businesses or interests. Attacks or armed conflicts that directly impact one or more of our properties could significantly affect our ability to operate those properties and thereby impair our operating results. Further, we may not have insurance coverage for losses caused by a terrorist attack. Such insurance may not be available, or if it is available and we decide to obtain such terrorist coverage, the cost for the insurance may be significant in relationship to the risk overall. In addition, the adverse effects that such violent acts and threats of future attacks could have on the U.S. economy could similarly have a material adverse effect on our business and results of operations. Finally, further terrorist acts could cause the United States to enter into a wider armed conflict, which could further impact our business and operating results.
ITEM 2.
ITEM 2. Properties.
The following table sets forth information as of December 31, 2002, about the properties that the Partnership has an interest in:
The weighted average occupancy level for the Mini-Warehouse Properties was 84% in 2002 and 86% in 2001. The annual average realized rent per square foot for the Mini-Warehouse Properties was $8.85 in 2002 compared to $8.88 in 2001.
There are no mortgages or other encumbrances of any of the Properties.
The Partnership does not have any agreements to buy or sell any real estate nor does it expect to further develop any of its facilities except for capital improvements.
ITEM 3.
ITEM 3. Legal Proceedings.
Salaam, et. Al V. Public Storage, Inc. (filed February 2000) ------------------------------------------------------------
The plaintiffs in this case are suing the Company on behalf of a purported class of California resident property managers who claim that they were not compensated for all the hours they worked. The named plaintiffs have indicated that their claims total less than $20,000 in aggregate. This maximum potential liability can only be increased if a class is certified or if claims are permitted to be brought on behalf of the others under the California Unfair Business Practices Act. The plaintiffs' motion for class certification was denied in August 2002; the plaintiffs have appealed this denial. This denial does not deal with the claim under the California Unfair Business Practices Act.
The Company is continuing to vigorously contest the claims in this case and intends to resist any expansion beyond the named plaintiffs on the grounds of lack of commonality of claims. The Company's resistance will include opposing the plaintiffs' appeal of the court's denial of class certification and opposing the claim on behalf of others under the California Unfair Business Practices Act.
Henriquez v. Public Storage, Inc. (Filed June 2002; Dismissed January, ----------------------------------------------------------------------- 2003) ----- The plaintiff in this case filed a suit against the Company on behalf of a purported class of renters who rented self-storage units from the Company. Plaintiff alleged that the Company misrepresents the size of its units and sought damages and injunctive and declaratory relief under California statutory and common law relating to consumer protection, unfair competition, fraud and deceit and negligent misrepresentation. In January 2003, the plaintiff caused this suit to be dismissed. The plaintiff's attorney has advised that he anticipates filing a similar suit against the Company on behalf of a new plaintiff. However, the Company cannot presently determine the potential total damages, if any, or the ultimate outcome of any such litigation. If a new suit is filed, the Company intends to vigorously contest any claims on which it is based.
Public Storage and the Partnership are parties to various claims, complaints, and other legal actions that have arisen in the normal course of business from time to time. We believe that the outcome of these other pending legal proceedings, in the aggregate, will not have a material adverse effect upon the operations or financial position of the Partnership.
ITEM 4.
ITEM 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the fourth quarter of 2002.
PART II
ITEM 5.
ITEM 5. Market for the Partnership's Common Equity and Related Stockholder Matters.
The Partnership has no common stock.
The Units are not listed on any national securities exchange or quoted on the NASDAQ System, and there is no established public trading market for the Units. Secondary sales activity for the Units has been limited and sporadic. The General Partners monitor transfers of the Units (a) because the admission of the transferee as a substitute limited partner requires the consent of the General Partners under the Partnership's Amended and Restated Agreement of Limited Partnership, (b) in order to ensure compliance with safe harbor provisions to avoid treatment as a "publicly traded partnership" for tax purposes and (c) because PSI has purchased Units. However, the General Partners do not have information regarding the prices at which all secondary sale transactions in the Units have been effectuated. Various organizations offer to purchase and sell limited partnership interests (including securities of the type such as the Units) in secondary sales transactions. Various publications such as The Stanger Report summarize and report information (on a monthly, bimonthly or less frequent basis) regarding secondary sales transactions in limited partnership interests (including the Units), including the prices at which such secondary sales transactions are effectuated.
Exclusive of the General Partners' interest in the Partnership, as of December 31, 2002, there were approximately 2,361 record holders of Units.
In February 1997, PSI completed a cash tender offer, which had commenced in December 1996, pursuant to which PSI acquired a total of 14,787 limited partnership units at $300 per Unit.
The Partnership makes quarterly distributions of all "Cash Available for Distribution" and will make distributions of "Cash from Sales or Refinancing". Cash Available for Distribution is cash flow from all sources less cash necessary for any obligations or capital improvements, or reserves.
Reference is made to Items 6 and 7 hereof for information on the amount of such distributions.
On December 18, 2002, the Partnership entered into an Agreement and Plan of Reorganization with Public Storage, Inc. (NYSE:PSA). Under the Agreement and Plan of Reorganization, each of the Partnership units held by the public will be converted into the right to receive a value of $442 in PSA common stock or, at the limited partner's election, in cash. The transaction is expected to close in the second quarter of 2003.
ITEM 6.
ITEM 6. Selected Financial Data.
(a) Limited partners' per unit data is based on the weighted average number of units outstanding (128,000) during the year.
(b) The General Partners distributed, concurrent with the distributions for the first quarter of 1999, a portion of the Partnership's operating reserve estimated to be $21.92 per Unit. The General Partners distributed, concurrent with the distribution for the second quarter of 2001, a portion of the operating reserve estimated to be $18.45 per Unit. The General Partner distributed, concurrent with the distribution for the third quarter of 2002, a portion of the operating reserve estimated to be $6.96 per Unit.
ITEM 7.
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements - --------------------------
When used within this document, the words "expects," "believes," "anticipates," "should," "estimates," and similar expressions are intended to identify "forward-looking statements" within the meaning of that term in Section 27A of the Securities Exchange Act of 1933, as amended, and in Section 21F of the Securities Exchange Act of 1934, as amended. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors, which may cause the actual results and performance of the Partnership to be materially different from those expressed or implied in the forward looking statements. Such factors are described in Item 1A, "Risk Factors" and include changes in general economic conditions and in the markets in which the Partnership operates and the impact of competition from new and existing storage and commercial facilities and other storage alternatives, which could impact rents and occupancy levels at the Partnership's facilities; the impact of the regulatory environment as well as national, state, and local laws and regulations, which could increase the Partnership's expense and reduce the Partnership's cash available for distribution; and economic uncertainty due to the impact of war or terrorism could adversely affect our business plan. We disclaim any obligation to publicly release the results of any revisions to these forward-looking statements reflecting new estimates, events or circumstances after the date of this report.
Critical Accounting Policies - ----------------------------
IMPAIRMENT OF REAL ESTATE
Substantially all of our assets consist of real estate. We quarterly evaluate our real estate for impairment. The evaluation of real estate for impairment requires determining whether indicators of impairment exist, which is a subjective process. When any indicators of impairment are found, the evaluation then entails projections of future operating cashflows, which also involves significant judgment. We have identified no such impairments at December 31, 2002. However, future events, or facts and circumstances that currently exist that we have not yet identified, could cause us to conclude in the future that our real estate is impaired. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations.
ESTIMATED USEFUL LIVES OF LONG-LIVED ASSETS
Substantially all of our assets consist of depreciable, long-lived assets. We record depreciation expense with respect to these assets based upon their estimated useful lives. Any change in the estimated useful lives of those assets, caused by functional or economic obsolescence or other factors, could have a material adverse impact on our financial condition or results of operations.
ACCRUALS FOR CONTINGENCIES
We are exposed to business and legal liability risks with respect to events that have occurred, but in accordance with generally accepted accounting principles we have not accrued for such potential liabilities because the loss is either not probable or not estimable or because we are not aware of the event. Future events and the result of pending litigation could result in such potential losses becoming probable and estimable, which could have a material adverse impact on our financial condition or results of operations. Some of these potential losses, which we are aware of, are described in Note 9 to the partnership's financial statements.
ACCRUALS FOR OPERATING EXPENSES
We accrue for property tax expense and other operating expenses based upon estimates and historical trends and current and anticipated local and state government rules and regulations. If these estimates and assumptions are incorrect, our expenses could be misstated.
Results of Operations - ---------------------
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001:
The Partnership's net income was $3,876,000 in 2002 compared to $3,902,000 in 2001, representing a decrease of $26,000, or 0.7%. The decrease is due primarily to the Partnership's share of decreased results in operations of the mini-warehouses in which the Partnership has an interest (the "Mini-Warehouse Properties").
Property Operations: Rental income for the Partnership's wholly-owned mini-warehouse property was $320,000 in 2002 compared to $327,000 in 2001, representing a decrease of $7,000, or 2.1%. Cost of operations (including management fees) was $143,000 for 2002 as compared to $137,000 for 2001, representing a decrease of $6,000 or 4.4%. Accordingly, for the Partnership's wholly-owned mini-warehouse property, property net operating income decreased by $13,000, or 6.8%, from $190,000 in 2001 to $177,000 in 2002.
Equity in earnings of real estate entities: Equity in earnings of real estate entities was $3,774,000 in 2002 as compared to $3,765,000 during 2001, representing an increase of $9,000, or 0.2%.
Depreciation and amortization: Depreciation and amortization decreased $1,000, or 1.3%, from $76,000 in 2001 to $75,000 during 2002.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000:
The Partnership's net income was $3,902,000 in 2001 compared to $3,418,000 in 2000, representing an increase of $484,000, or 12.4%. The increase is due primarily to the Partnership's share of an improvement in operations of the mini-warehouses in which the Partnership has an interest (the "Mini-Warehouse Properties") and a decrease in depreciation allocated to the Partnership with respect to the joint venture.
Property Operations: Rental income for the Partnership's wholly-owned mini-warehouse property was $327,000 in 2001 compared to $319,000 in 2000, representing an increase of $8,000, or 2.5%. Cost of operations (including management fees) remained stable at $137,000 for 2001 and 2000. Accordingly, for the Partnership's wholly-owned mini-warehouse property, property net operating income increased by $8,000, or 4.4%, from $182,000 in 2000 to $190,000 in 2001.
Equity in earnings of real estate entities: Equity in earnings of real estate entities was $3,765,000 in 2001 as compared to $3,262,000 during 2000, representing an increase of $503,000, or 15.4%. The increase is due primarily to the Partnership's share of an improvement in operations of the Mini-Warehouse Properties and a decrease in depreciation allocated to the Partnership with respect to the joint venture.
Depreciation and amortization: Depreciation and amortization increased $6,000, or 8.6%, from $70,000 in 2000 to $76,000 during 2001.
Supplemental Property Data - --------------------------
During 2002 and 2001, a majority of the Partnership's net income was from the Partnership's share of the operating results of the Mini-Warehouse Properties. Therefore, in order to evaluate the Partnership's operating results, the General Partners analyze the operating performance of the Mini-Warehouse Properties.
Year ended December 31, 2002 compared to the year ended December 31, 2001: Rental income for the Mini-Warehouse Properties was $13,457,000 in 2002 compared to $13,921,000 during 2001, representing a decrease of $464,000, or 3.3%. The decrease in rental income was primarily attributable to decreased occupancy at the Partnership's Mini-Warehouse Properties. The annual average realized rent per square foot was $8.85 in 2002 compared to $8.88 in 2001. The weighted average occupancy level was 86% in 2001 and 84% in 2002. Cost of operations (including management fees) decreased $5,000, or 0.1%, to $5,435,000 during 2002 from $5,440,000 in 2001. This decrease was primarily attributable to a decrease in advertising expense. Accordingly, for the Mini-Warehouse Properties, property net operating income decreased by $459,000, or 5.4%, from $8,481,000 in 2001 to $8,022,000 during 2002.
Year ended December 31, 2001 compared to the year ended December 31, 2000: Rental income for the Mini-Warehouse Properties was $13,921,000 in 2001 compared to $13,183,000 during 2000, representing an increase of $738,000, or 5.6%. The increase in rental income was primarily attributable to increased rental rates. The annual average realized rent per square foot was $8.88 in 2001 compared to $8.27 in 2000. The weighted average occupancy level was 88% in 2000 and 86% in 2001. Cost of operations (including management fees) increased $124,000, or 2.3%, to $5,440,000 during 2001 from $5,316,000 in 2000. This increase was primarily attributable to increases in advertising and property tax expense. Accordingly, for the Mini-Warehouse Properties, property net operating income increased by $614,000, or 7.8%, from $7,867,000 in 2000 to $8,481,000 during 2001.
Liquidity and Capital Resources - -------------------------------
The Partnership has adequate sources of cash to finance its operations, both on a short-term and a long-term basis, primarily by internally generated cash from property operations and distributions from Real Estate Entities, combined with cash on-hand at December 31, 2002 totaling $1,446,000.
Cash flows from operating activities and distributions from Real Estate Entities (totaling $4,320,000 for the year ended December 31, 2002) have been sufficient to meet all current obligations of the Partnership. Total capital improvements for the Partnership's wholly-owned property were $17,000, $5,000 and $35,000 in 2002, 2001 and 2000, respectively.
Total distributions paid to the General Partners and the limited partners (including per Unit amounts) for 2002 and prior years were as follows:
Total Per Unit -------------- ------------ 2002 $4,598,000 $32.00 2001 6,149,000 42.80 2000 2,600,000 18.10 1999 5,150,000 35.84 1998 2,000,000 13.92 1997 2,000,000 13.92 1996 2,999,000 20.88 1995 4,899,000 34.10 1994 2,816,000 19.60 1993 2,442,000 17.00 1992 2,968,000 20.66 1991 3,607,000 25.11 1990 3,144,000 21.89 1989 3,097,000 21.56 1988 3,769,000 26.23 1987 3,770,000 26.23 1986 3,593,000 25.00
The Partnership, in prior years, made regular distributions based on estimated cash available for distribution (cash flow from all sources, less cash necessary for capital improvement needs and to establish reserves). The General Partners would periodically make special distributions if cash available for distribution exceeded its original estimates or if it adjusted the Partnership's cash reserve levels. The General Partners distributed, concurrent with the regular distribution for the third quarter of 2002, a special distribution of $6.96 per Unit. Future distribution levels will be based on the General Partners' estimate of on-going cash flow available for distributions (cash flows from operations and distributions from Real Estate Entities less capital improvements and necessary cash reserves). The Partnership does not anticipate any material changes in its reserve requirements for capital improvements or other items.
ITEM 7A.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk.
None.
ITEM 8.
ITEM 8. Financial Statements and Supplementary Data.
The Partnership's financial statements are included elsewhere herein. Reference is made to the Index to Financial Statements and Financial Statement Schedules in Item 15(a).
ITEM 9.
ITEM 9. Disagreements on Accounting and Financial Disclosure.
None.
PART III
ITEM 10.
ITEM 10. Directors and Executive Officers of the Partnership.
The Partnership has no directors or executive officers.
The Partnership's General Partners are PSI and B. Wayne Hughes. PSI, acting through its directors and executive officers, and Mr. Hughes manage and make investment decisions for the Partnership. The Mini-Warehouse Properties are managed by PSI pursuant to a Management Agreement. Through 1996, the business parks owned by the Joint Venture were managed by a predecessor of PSBPLP, pursuant to a Management Agreement. In January 1997, the Joint Venture transferred its business parks to PSBPLP in exchange for a partnership interest in PSBPLP.
The names of all directors and executive officers of PSI, the offices held by each of them with PSI, and their ages and business experience during the past five years are as follows:
Name Positions with PSI - ---------------------- -------------------------------------------------- B. Wayne Hughes Chief Executive Officer (through November 7, 2002) and Chairman of the Board Ronald L. Havner, Jr. Chief Executive Officer (after November 7, 2002) and Vice Chairman of the Board Harvey Lenkin President and Director Marvin M. Lotz Senior Vice President and Director B. Wayne Hughes, Jr. Director John Reyes Senior Vice President and Chief Financial Officer Robert J. Abernethy Director Dann V. Angeloff Director William C. Baker Director Thomas J. Barrack Jr. Director Uri P. Harkham Director Daniel C. Staton Director
B. Wayne Hughes, age 69, a general partner of the Partnership, has been a director of PSI since its organization in 1980 and was President and Co-Chief Executive Officer from 1980 until November 1991 when he became Chairman of the Board and sole Chief Executive Officer. On November 7, 2002, Mr. Hughes resigned as Chief Executive Officer of PSI. He remains as chairman of the board of directors, and intends to focus on strategic and marketing initiatives. Mr. Hughes has been active in the real estate investment field for over 30 years. He is the father of B. Wayne Hughes, Jr.
Ronald L. Havner, Jr., age 45, was appointed Vice Chairman and Chief Executive Officer of PSI on November 7, 2002. Mr. Havner has been employed by PSI in various accounting and operational capacities since 1986 and served as Senior Vice President and Chief Financial Officer from November 1991 until December 1996 when be became Chairman, President and Chief Executive Officer of PS Business Parks, Inc. (AMEX: symbol PSB) an affiliate of the Company. He is a member of the National Association of Real Estate Investment Trusts (NAREIT) and the Urban Land Institute (ULI) and a Director of Business Machine Security, Inc. and Mobile Storage Group, Inc. Mr. Havner earned a Bachelor of Arts degree in Economics from the University of California, Los Angeles.
Harvey Lenkin, age 66, has been employed by PSI for 25 years and became President and a director of PSI in November 1991. Mr. Lenkin has been a director of PS Business Parks, Inc. ("PSBP"), an affiliated REIT, since March 16, 1998 and was President of PSBP (formerly Public Storage Properties XI, Inc.) from 1990 until March 16, 1998. He is a member of the Board of Governors of the National Association of Real Estate Investment Trusts (NAREIT).
Marvin M. Lotz, age 60, became a director of PSI in May 1999. Mr. Lotz has been a Senior Vice President of the Company since November 1995 and President of the Property Management Division since 1988 with overall responsibility for Public Storage's mini-warehouse operations. He had overall responsibility for the Company's property acquisitions from 1983 until 1988.
B. Wayne Hughes, Jr., age 43 became director of PSI in January 1998. He has been employed by PSI from 1989 to 2002 serving as Vice President - Acquisitions of PSI from 1992 to 2002. Mr. Hughes, Jr. is the president of a firm that manufactures and distributes sweets. He is the son of B. Wayne Hughes.
John Reyes, age 42, a certified public accountant, joined PSI in 1990 and was Controller of PSI from 1992 until December 1996 when he became Chief Financial Officer. He became a Vice President of PSI in November 1995 and a Senior Vice President of PSI in December 1996. From 1983 to 1990, Mr. Reyes was employed by Ernst & Young.
Robert J. Abernethy, age 63, has been President of American Standard Development Company and of Self-Storage Management Company, which develop and operate mini-warehouses, since 1976 and 1977, respectively. Mr. Abernethy has been a director of PSI since its organization in 1980. He is a member of the board of trustees of Johns Hopkins University, a director of Marathon National Bank and a California Transportation Commissioner. Mr. Abernethy is a former member of the board of directors of the Los Angeles County Metropolitan Transportation Authority and the Metropolitan Water District of Southern California and a former Planning Commissioner and Telecommunications Commissioner and former Vice-Chairman of the Economic Development Commission of the City of Los Angeles.
Dann V. Angeloff, age 67, has been President of the Angeloff Company, a corporate financial advisory firm, since 1976. Mr. Angeloff is the general partner of a limited partnership that owns a mini-warehouse operated by PSI and which secures a note owned by PSI. Mr. Angeloff has been a director of PSI since its organization in 1980. He is a director of AremisSoft Corporation, Balboa Capital Corporation, Nicholas/Applegate Growth Equity Fund, ReadyPac Produce, Inc., Royce Medical Company and xDimentional Technologies, Inc. He was a director of SPI from 1989 until June 1996.
William C. Baker, age 69, became a director of PSI in November 1991. Since 1970, Mr. Baker has been a partner in Baker & Simpson, a private investment entity. From August 1998 through April 2000, he was President and Treasurer of Meditrust Operating Company, a real estate investment trust. From April 1996 to December 1998, Mr. Baker was Chief Executive Officer of Santa Anita Companies which then operated the Santa Anita Racetrack. From April 1993 through May 1995, Mr. Baker was President of Red Robin International, Inc., an operator and franchiser of casual dining restaurants in the United States and Canada. From January 1992 through December 1995 he was Chairman and Chief Executive Officer of Carolina Restaurant Enterprises, Inc., a franchisee of Red Robin International, Inc. From 1991 to 1999, he was Chairman of the Board of Coast Newport Properties, a real estate brokerage company. From 1976 to 1988, he was a principal shareholder and Chairman and Chief Executive Officer of Del Taco, Inc., an operator and franchiser of fast food restaurants in California. Mr. Baker is a director of Callaway Golf Company, Meditrust Operating Company and Meditrust Corporation.
Thomas J. Barrack, Jr., age 55, became a director of PSI in February 1998. Mr. Barrack has been the Chairman and Chief Executive Officer of Colony Capital, Inc. since September, 1991. Colony Capital, Inc. is one of the largest real estate investors in America, having acquired properties in the U.S., Europe and Asia. Prior to founding Colony Capital, Inc., from 1987 to 1991, Mr. Barrack was a principal with the Robert M. Bass Group, Inc., the principal investment vehicle for Robert M. Bass of Fort Worth, Texas. From 1985 to 1987, Mr. Barrack was President of Oxford Ventures, Inc., a Canadian-based real estate development company. From 1984 to 1985 he was a Senior Vice President at E. F. Hutton Corporate Finance in New York. Mr. Barrack was appointed by President Ronald Reagan as Deputy Under Secretary at the U.S. Department of the Interior from 1982 to 1983. Mr. Barrack currently is a director of Continental Airlines, Inc. and Kennedy-Wilson, Inc.
Uri P. Harkham, age 54, became a director of PSI in March 1993. Mr. Harkham has been the President and Chief Executive Officer of the Jonathan Martin Fashion Group, which specializes in designing, manufacturing and marketing women's clothing, since its organization in 1976. Since 1978, Mr. Harkham has been the Chairman of the Board of Harkham Properties, a real estate firm specializing in buying and managing fashion warehouses in Los Angeles.
Daniel C. Staton, age 50, became a director of PSI on March 12, 1999 in connection with the merger of Storage Trust Realty, a real estate investment trust, with PSI. Mr. Staton was Chairman of the Board of Trustees of Storage Trust Realty from February 1998 until March 12, 1999 and a Trustee of Storage Trust Realty from November 1994 until March 12, 1999. He is President of Walnut Capital Partners, an investment and venture capital company. Mr. Staton was the Chief Operating Officer and Executive Vice President of Duke Realty Investments, Inc. from 1993 to 1997 and a director of Duke Realty Investments, Inc. from 1993 until August 1999. From 1981 to 1983, Mr. Staton was a principal owner of Duke Associates, the predecessor of Duke Realty Investments, Inc. Prior to joining Duke Associates in 1981, he was a partner and general manager of his own moving company, Gateway Van & Storage, Inc. in St. Louis, Missouri. Form 1986 to 1988, Mr. Staton served as president of the Greater Cincinnati Chapter of the National Association of Industrial and Office Parks.
Pursuant to Articles 16 and 17 of the Partnership's Amended Certificate and Agreement of Limited Partnership (the "Partnership Agreement"), a copy of which is included in the Partnership's prospectus included in the Partnership's Registration Statement, File No. 2-92009, each of the General Partners continues to serve until (i) death, insanity, insolvency, bankruptcy or dissolution, (ii) withdrawal with the consent of the other general partner and a majority vote of the limited partners, or (iii) removal by a majority vote of the limited partners.
Each director of PSI serves until he resigns or is removed from office by PSI, and may resign or be removed from office at any time with or without cause. Each officer of PSI serves until he resigns or is removed by the board of directors of PSI. Any such officer may resign or be removed from office at any time with or without cause.
There have been no events under any bankruptcy act, no criminal proceedings, and no judgments or injunctions material to the evaluation of the ability of any director or executive officer of PSI during the past five years.
ITEM 11.
ITEM 11. Executive Compensation.
The Partnership has no subsidiaries, directors or officers. See Item 13 for a description of certain transactions between the Partnership and the General Partners and their affiliates.
ITEM 12.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
(a) At March 10, 2003, PSI beneficially owned more than 5% or more of the Units of the Partnership:
- ------------ (1) These Units are held of record by SEI Arlington Acquisition Corporation, a wholly-owned subsidiary of PSI.
The Partnership is not aware of any other beneficial owners of more than 5% of the Units.
(b) The Partnership has no officers and directors. The General Partners of the Partnership are PSI and B. Wayne Hughes, the Chairman of PSI. These general partners have the powers and duties of a general partner, such as management, conduct and operation of the Partnership as denoted in the Partnership agreement. In addition, they have the liabilities associated with being a general partner of the Partnership.
The General Partners have contributed $646,000 to the capital of the Partnership representing 1% of the aggregate capital contributions and as a result participate in the distributions to the limited partners and in the Partnership's profits and losses in the same proportion that the general partners' capital contribution bears to the total capital contribution (approximately $517,000 was contributed by PSI and approximately $129,000 was contributed by Mr. Hughes). In addition, the General Partners' interest includes additional distribution rights as outlined in Item 13.
ITEM 13. Certain Relationships and Related Transactions.
The Partnership Agreement provides that the General Partners and their affiliates are entitled to the following compensation:
1. Incentive distributions equal to 10% of Cash Flow from Operations.
2. Provided the limited partners have received distributions equal to 100% of their investment plus a cumulative 8% per year (not compounded) on their investment (reduced by distributions other than from Cash Flow from Operations), subordinated incentive distributions equal to 15% of remaining Cash from Sales or Refinancings.
3. Provided the limited partners have received distributions equal to 100% of their capital contributions plus a cumulative 6% per year (not compounded) on their investment (reduced by distributions other than distributions from Cash Flow from Operations), brokerage commissions at the lesser of 3% of the sales price of a property or 50% of a competitive commission.
During 2002, approximately $460,000 was paid to PSI with respect to items 1, 2, and 3 above. Mr. Hughes was paid no amounts with respect to items 1, 2, and 3 and receives no compensation as general partner because PSI has acquired Mr. Hughes' ownership and distribution rights in the Partnership. The Partnership owns interests in 33 properties (which exclude the properties transferred to PSBPLP in January 1997); 32 of such properties are held in a general partnership comprised of the Partnership and PSI.
The Partnership and the Joint Venture have a Management Agreement with PSI pursuant to which the Partnership and the Joint Venture pay PSI a fee of 6% of the gross revenues of the mini-warehouse spaces operated for the Partnership and the Joint Venture. For as long as the Management Agreement is in effect, PSI has granted the Partnership and the Joint Venture a non-exclusive license to use two PSI service marks and related designs, including the "Public Storage" name, in conjunction with rental and operation of facilities managed pursuant to the Management Agreement. Upon termination of the Management Agreement, the Partnership and Joint Venture would no longer have the right to use the service marks ad related designs. The General Partners believe that the loss of the right to use the service marks and related designs could have a material adverse effect on the Partnership's business. The Management Agreement with PSI provides that the Management Agreement may be terminated without cause upon 60 days written notice by the Partnership or 6 months notice by PSI. During 2002, the Partnership and the Joint Venture paid fees of $805,000 to PSI pursuant to the Management Agreement.
The Partnership and PSI have joint ownership in SEI/PSP IV Joint Ventures, which owns 32 of the 33 properties that the Partnership has an interest in, as well as 599,340 operating partnership units in PSBPLP.
Pursuant to a Participation Agreement among PSI and the Partnership, the Partnership manages SEI/PSP Partners IV Joint Ventures although PSI may compel the sale of a property owned by the Joint Venture and each has a right of first refusal to acquire the other's interest in the event of a proposed sale of a property owned by the Joint Venture.
Through 1996, the Joint Venture business parks were managed by a predecessor of PSBPLP pursuant to a Management Agreement which provides for the payment of a fee by the Joint Venture of 5% of the gross revenues of the commercial space operated for the Joint Venture. In January 1997, the Joint Venture, PSI and other affiliated entities transferred a total of 35 business parks to PSBPLP, an operating partnership formed to own and operate business parks in which PSI has a significant interest. Included among the properties transferred were the Joint Venture's business parks in exchange for a partnership interest in PSBPLP. The general partner of PSBPLP is PS Business Parks, Inc., a REIT traded on the American Stock Exchange. As of December 31, 2002, the Joint Venture owned approximately 2%, PSI and its subsidiaries (excluding the Partnership) owned approximately 42% and Mr. Hughes and his family owned less than 1% of the outstanding common partnership interests of PSBPLP, respectively.
In addition, the Partnership combines its insurance purchasing power with PSI through a captive insurance company controlled by PSI, STOR-Re Mutual Insurance Corporation ("Stor-Re"). Stor-Re provides limited property and liability insurance to the Partnership at commercially competitive rates. The Partnership and PSI also utilize unaffiliated insurance carriers to provide property and liability insurance in excess of Stor-Re's limitations.
ITEM 14.
ITEM 14. Controls and Procedures
The Partnership maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports the Partnership files and submits under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in accordance with SEC guidelines and that such information is communicated to the Partnership's management, to allow timely decisions regarding required disclosure based on the definition of "disclosure controls and procedures" in Rule 13a-14(c) of the Exchange Act. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
Within 90 days prior to the date of this report, the Partnership carried out an evaluation, under the supervision and with the participation of the Partnership's management, of the effectiveness of the design and operation of the Partnership's disclosure controls and procedures. Based upon this evaluation, the Partnership's Chief Executive Officer and Chief Financial Officer concluded that the Partnership's disclosure controls and procedures were effective. There have been no significant changes in the Partnership's internal controls or in other factors that could significantly affect the internal controls subsequent to the date of the Partnership's evaluation.
PART IV
ITEM 15.
ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) List of Documents filed as part of the Report.
1. Financial Statements: See Index to Financial Statements and Financial Statement Schedules.
2. Financial Statement Schedules: See Index to Financial Statements and Financial Statement Schedules.
3. Exhibits: See Exhibit Index contained herein.
4. Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
The Partnership filed a Current Report on from 8-K dated December 18, 2002 (filed December 20, 2002), pursuant to Item 5, in connection with an Agreement and Plan of Reorganization by and among Public Storage, Inc. ("PSI"), PS Partners IV Merger Co., Inc, and the Partnership.
(c) Exhibits: See Exhibit Index contained herein.
PS PARTNERS IV, LTD. INDEX TO EXHIBITS (Item 15(c))
3.1 Amended Certificate and Agreement of Limited Partnership. Previously filed with the Securities and Exchange Commission as Exhibit A to the Partnership's Prospectus included in Registration Statement No. 2-92009 and incorporated herein by reference.
10.1 Second Amended and Restated Management Agreement dated November 16, 1995, between the Partnership and Public Storage Management, Inc. Previously filed with the Securities and Exchange Commission as an exhibit to PS Partners, Ltd.'s Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference.
10.2 Amended Management Agreement dated February 21, 1995 between Storage Equities, Inc. and Public Storage Commercial Properties Group, Inc. Previously filed with the Securities and Exchange Commission as an exhibit to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference.
10.3 Participation Agreement dated as of December 26, 1984, among Storage Equities, Inc., the Partnership, Public Storage, Inc., B. Wayne Hughes and Kenneth Q. Volk, Jr. Previously filed with the Securities and Exchange Commission as an exhibit to Storage Equities, Inc. Annual Report on Form 10-K for the year ended December 31, 1984 and incorporated herein by reference.
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith.
99.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
99.3 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
99.4 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Partnership has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PS PARTNERS IV, LTD. Dated: March 28, 2003 By: Public Storage, Inc., General Partner
By: /s/ B. Wayne Hughes -------------------- B. Wayne Hughes, Chairman of the Board
By: /s/ B. Wayne Hughes ------------------- B. Wayne Hughes, General Partner
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Partnership in the capacities and on the dates indicated.
PS PARTNERS IV, LTD.
AND FINANCIAL STATEMENT SCHEDULES
(Item 15 (a))
All other schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements or the notes thereto.
Report of Independent Auditors
The Partners PS Partners IV, Ltd.
We have audited the balance sheets of PS Partners IV, Ltd. (the "Partnership") as of December 31, 2002 and 2001 and the related statements of income, partners' equity, and cash flows for each of the three years in the period ended December 31, 2002. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of PS Partners IV, Ltd. at December 31, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
March 19, 2003 Los Angeles, CA
PS PARTNERS IV, LTD. BALANCE SHEETS December 31, 2002 and 2001
See accompanying footnotes.
PS PARTNERS IV, LTD. STATEMENTS OF INCOME For the years ended December 31, 2002, 2001 and 2000
See accompanying footnotes.
PS PARTNERS IV, LTD. STATEMENTS OF PARTNERS' EQUITY For the years ended December 31, 2002, 2001 and 2000
See accompanying footnotes.
PS PARTNERS IV, LTD. STATEMENTS OF CASH FLOWS For the years ended December 31, 2002, 2001 and 2000
See accompanying footnotes.
PS PARTNERS IV, LTD. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2002
1. Description of Partnership
PS Partners IV, Ltd. (the "Partnership") was formed with the proceeds of an interstate public offering. PSI Associates II, Inc. ("PSA"), an affiliate of Public Storage Management, Inc., organized the Partnership along with B. Wayne Hughes ("Hughes"). In September 1993, Storage Equities, Inc., now known as Public Storage Inc. ("PSI") acquired the interest of PSA relating to its general partner capital contribution in the Partnership and was substituted as a co-general partner in place of PSA.
In 1995, there was a series of mergers among Public Storage Management, Inc. (which was the Partnership's mini-warehouse operator), Public Storage, Inc. and their affiliates (collectively, "PSMI"), culminating in the November 16, 1995 merger (the "PSMI Merger") of PSMI into Storage Equities, Inc. In the PSMI Merger, Storage Equities, Inc. was renamed Public Storage, Inc. and it acquired substantially all of PSMI's United States real estate operations and became the operator of the mini-warehouse properties in which the Partnership has an interest.
The Partnership has invested in existing mini-warehouse storage facilities which offer self-service storage spaces for lease, usually on a month-to-month basis, to the general public and, to a lesser extent, in existing business park facilities which offer industrial and office space for lease.
The Partnership has ownership interests in 33 properties in 15 states (collectively referred to as the "Mini-Warehouse Properties"), which exclude three properties transferred to PS Business Parks, L.P. ("PSBPLP") in January 1997. Thirty-two of the properties are owned by SEI/PSP IV Joint Ventures (the "Joint Venture"), a general partnership between the Partnership and PSI. The Partnership is the managing general partner of the Joint Venture, with ownership interests in the individual properties of the Joint Venture ranging from 49.8% to 50.9%.
As used hereinafter, the Joint Venture and PSBPLP are referred to as the "Real Estate Entities."
2. Summary of Significant Accounting Policies and Partnership Matters
Basis of Presentation ---------------------
The financial statements include the accounts of the Partnership. The accounts of the Joint Venture, which the Partnership does not control, are not consolidated with the Partnership and the Partnership's interest in the Joint Venture is accounted for on the equity method.
The Partnership does not control the Joint Venture because PSI has significant control rights with respect to the management of the properties, including the right to compel the sale of each property in the Joint Venture and the right to require the Partnership to submit operating budgets.
Under the terms of the general partnership agreement of the Joint Venture all depreciation and amortization with respect to each property is allocated solely to the Partnership until the limited partners recover their initial capital contribution. Thereafter, all depreciation and amortization is allocated solely to PSI until it recovers its initial capital contribution. All remaining depreciation and amortization is allocated to the Partnership and PSI in proportion to their ownership percentages.
Under the terms of the partnership agreements, PSI has the right to compel the sale of each property in the general partnerships at any time after seven years from the date of acquisition at not less than its independently determined fair market value provided the Partnership receives its share of the net proceeds solely in cash. PSI's right to require the Partnership to sell all of the properties owned jointly with the Partnership has been exercisable in all periods presented.
Under the terms of the general partnership agreement of the Joint Venture, for property acquisitions in which PSI issued convertible securities to the sellers for its interest, PSI's rights to receive cash flow distributions from the partnership for any year after the first year of operation are subordinated to cash distributions to the Partnership equal to a cumulative annual 7% of its cash investment (not compounded). These agreements also specify that upon sale or refinancing of a property for more than its original purchase price, distribution of proceeds to PSI is subordinated to the return to the Partnership of the amount of its cash investment and the 7% distribution described above.
Mini-Warehouse Facilities -------------------------
Cost of land includes appraisal fees and legal fees related to acquisition and closing costs. Buildings, land improvements and equipment reflect costs incurred through December 31, 2002 and 2001 to develop mini-warehouse facilities which provide self-service storage spaces for lease, usually on a month-to-month basis, to the general public. The buildings and equipment are generally depreciated on a straight-line basis over estimated useful lives of 25 and 5 years, respectively.
Revenue and Expense Recognition -------------------------------
Property rents are recognized as earned. Advertising costs of $13,000, $14,000 and $3,000 in 2002, 2001 and 2000, respectively, are expensed as incurred.
Allocation of Net Income or Loss --------------------------------
The General Partners' share of net income or loss consists of an amount attributable to their 1% capital contribution and an additional percentage of cash flow (as defined, see Note 5) which relates to the General Partners' share of cash distributions as set forth in the Partnership Agreement. All remaining net income or loss is allocated to the limited partners.
Per Unit Data -------------
Per unit data is based on the number of limited partnership units (128,000) outstanding during the year.
Cash Distributions ------------------
The Partnership Agreement provides for quarterly distributions of cash flow from operations (as defined). Cash distributions per unit were $32.00, $42.80 and $18.10 for 2002, 2001 and 2000, respectively.
Cash and Cash Equivalents -------------------------
For financial statement purposes, the Partnership considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents.
Environmental Cost ------------------
Substantially all of the real estate facilities in which the Partnership has an interest were acquired prior to the time that it was customary to conduct extensive environmental investigations in connection with the property acquisitions. Although there can be no assurance, the Partnership is not aware of any environmental contamination of the Mini-Warehouse Properties which individually or in the aggregate would be material to the Partnership's overall business, financial condition, or results of operations.
Segment Reporting -----------------
Effective January 1, 1998, the Partnership adopted SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." SFAS No. 131 established standards for the way public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. SFAS No. 131 also establishes standards for related disclosures about products and services, geographic areas and major customers. The Partnership only has one reportable segment as defined within SFAS No. 131, therefore the adoption of SFAS No. 131 had no effect on the Partnership's disclosures.
Use of Estimates ----------------
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Impairment of long-lived assets -------------------------------
We evaluate our real estate for impairment on a quarterly basis. We first evaluate these assets for indicators of impairment such as a) a significant decrease in the market price of real estate, b) a significant adverse change in the extent or manner in which real estate is being used or in its physical condition, c) a significant adverse change in legal factors or the business climate that could affect the value of the real estate, d) an accumulation of costs significantly in excess of the amount originally projected for the acquisition of construction of the real estate, or e) a current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of the real estate. When any such indicators of impairment are noted, we compare the carrying value of the real estate to the future estimated undiscounted cash flows attributable to the real estate. If the real estate's recoverable amount is less than the carrying value of the asset, then an impairment charge is booked for the excess of carrying value over the real estate's fair value. Our evaluations have indicated no impairment.
Any real estate which we expect to sell or dispose of prior to their previously estimated useful life are stated at the lower of their estimated net realizable value or their carrying value, less cost to sell, and are evaluated throughout the sale process for impairment.
Recent Accounting Pronouncements and Guidance ---------------------------------------------
As of March 20, 2003, there have been no recent accounting pronouncements and guidance, which were not effective for implementation prior to December 31, 2002, that would have a material impact upon the operations of the Joint Venture.
3. Real Estate Facilities
In January 1997, the Partnership, the Joint Venture and PSI and other related partnerships transferred a total of 35 business parks to PSBLP, an operating partnership formed to own and operate business parks in which PSI has a significant interest. Included among the properties transferred were the Partnership's and the Joint Venture's business parks in exchange for a partnership interest in PSBLP. The general partner of PSBLP is PS Business Parks, Inc. ("PSBP").
4. Investment in Real Estate Entities
During 2002, 2001 and 2000, the Partnership recognized earnings from the Real Estate Entities of $3,774,000, $3,765,000 and $3,262,000, respectively, and received cash distributions totaling $4,136,000, $3,963,000 and $3,840,000, respectively from the Real Estate Entities. Equity in earnings for 2002 and 2000 includes $112,000 and $108,000, respectively, representing the Partnership's share of a gain on sale of real estate investments recorded by PSBPLP.
The accounting policies of the Real Estate Entities are similar to that of the Partnership. Summarized combined financial data with respect to the Real Estate Entities are as follows:
The increase in the size of the combined financial position and operating results, respectively, of the Real Estate Entities for the year ended December 31, 2002 and at December 31, 2001, respectively, as compared to prior periods, is the result of additional properties acquired by PSBPLP during 2001 and 2002.
Financial statements of the Joint Venture are filed with the Partnership's Form 10-K for 2002, in Item 15. PS Business Parks, Inc. is a registrant with the Securities and Exchange Commission, and its filings can be accessed through the Securities and Exchange Commission.
5. General Partners' Equity
PSI and Hughes are general partners of the Partnership. In 1993, Hughes sold his ownership in and rights to distributions from the Partnership to PSI. As such, Hughes continues to act as a general partner but receives no compensation, distributions or other consideration from the Partnership. Hughes has no other interest in the Partnership.
As such, PSI has a 1% interest in the Partnership with respect to the General Partners' contributed capital and an additional 10% interest in cash distributions attributable to operations, exclusive of distributions attributable to sales and refinancing proceeds.
Proceeds from sales and refinancings will be distributed entirely to the limited partners until the limited partners recover their investment plus a cumulative 8% annual return (not compounded); thereafter, PSI has a 15% interest in remaining proceeds.
6. Related Party Transactions
The Partnership has a management agreement with PSI whereby PSI operates the Mini-Warehouse Properties for a fee equal to 6% of the facilities' monthly gross revenue (as defined). For 2002, 2001 and 2000, the Partnership paid PSI $19,000, $20,000 and $20,000, respectively, pursuant to this management agreement.
The Management Agreement between the Partnership and PSI provides that the Management Agreement may be terminated without cause upon 60 days written notice by the Partnership or six months notice by PSI.
In addition, the Partnership combines its insurance purchasing power with PSI through a captive insurance company controlled by PSI, STOR-Re Mutual Insurance Corporation ("Stor-Re"). Stor-Re provides limited property and liability insurance to the Partnership at commercially competitive rates. The Partnership and PSI also utilize unaffiliated insurance carriers to provide property and liability insurance in excess of Stor-Re's limitations.
In January 1997, the Joint Venture transferred its business park facilities to PSBPLP in exchange for a partnership interest in PSBPLP. PSI has a significant economic interest in PSBPLP.
7. Leases
The Partnership has invested primarily in existing mini-warehouse storage facilities which offer self-service storage spaces for lease to the general public. Leases for such space are usually on a month-to-month basis.
8. Taxes Based on Income
Taxes based on income are the responsibility of the individual partners and, accordingly, the Partnership's financial statements do not reflect a provision for such taxes.
Unaudited taxable net income was $3,273,000, $5,746,000 and $4,568,000 for the years ended December 31, 2002, 2001 and 2000, respectively. The difference between taxable income and book income is primarily related to timing differences in depreciation expense.
9. Partnership Reorganization
On December 18, 2002, the Partnership entered into an Agreement and Plan of Reorganization with Public Storage, Inc. (NYSE:PSA). Under the Agreement and Plan of Reorganization, each of the Partnership units held by the public will be converted into the right to receive a value of $442 in PSA common stock or, at the limited partner's election, in cash. The transaction is expected to close in the second quarter of 2003 (unaudited).
10. Supplementary Quarterly Financial Data (Unaudited)
11. Commitments and Contingencies
Salaam, et. Al V. Public Storage, Inc. (filed February 2000) ------------------------------------------------------------
The plaintiffs in this case are suing the Company on behalf of a purported class of California resident property managers who claim that they were not compensated for all the hours they worked. The named plaintiffs have indicated that their claims total less than $20,000 in aggregate. This maximum potential liability can only be increased if a class is certified or if claims are permitted to be brought on behalf of the others under the California Unfair Business Practices Act. The plaintiffs' motion for class certification was denied in August 2002; the plaintiffs have appealed this denial. This denial does not deal with the claim under the California Unfair Business Practices Act.
The Company is continuing to vigorously contest the claims in this case and intends to resist any expansion beyond the named plaintiffs on the grounds of lack of commonality of claims. The Company's resistance will include opposing the plaintiffs' appeal of the court's denial of class certification and opposing the claim on behalf of others under the California Unfair Business Practices Act.
Henriquez v. Public Storage, Inc. (Filed June 2002; Dismissed -------------------------------------------------------------- January, 2003) --------------
The plaintiff in this case filed a suit against the Company on behalf of a purported class of renters who rented self-storage units from the Company. Plaintiff alleged that the Company misrepresents the size of its units and sought damages and injunctive and declaratory relief under California statutory and common law relating to consumer protection, unfair competition, fraud and deceit and negligent misrepresentation. In January 2003, the plaintiff caused this suit to be dismissed. The plaintiff's attorney has advised that he anticipates filing a similar suit against the Company on behalf of a new plaintiff. However, the Company cannot presently determine the potential total damages, if any, or the ultimate outcome of any such litigation. If a new suit is filed, the Company intends to vigorously contest any claims on which it is based.
Public Storage and the Partnership are parties to various claims, complaints, and other legal actions that have arisen in the normal course of business from time to time. We believe that the outcome of these other pending legal proceedings, in the aggregate, will not have a material adverse effect upon the operations or financial position of the Partnership.
PS PARTNERS IV, LTD. SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
PS PARTNERS IV, LTD. REAL ESTATE RECONCILIATION SCHEDULE III (CONTINUED)
(A) The following is a reconciliation of cost and related accumulated depreciation.
Gross Carrying Cost Reconciliation
Years Ended December 31, ----------------------------------- 2002 2001 -----------------------------------
Balance at beginning of the period $ 1,678,000 $ 1,673,000
Additions during the period: Improvements, etc. 17,000 5,000 -----------------------------------
Balance at the close of the period $ 1,695,000 $ 1,678,000 ===================================
Accumulated Depreciation Reconciliation
Years Ended December 31, ---------------------------------- 2002 2001 ----------------------------------
Balance at beginning of the period $ 862,000 $ 786,000
Additions during the period: Depreciation 75,000 76,000 -----------------------------------
Balance at the close of the period $ 937,000 $ 862,000 ===================================
(B) The aggregate cost of real estate for Federal income tax purposes is $1,249,000 (unaudited).
Report of Independent Auditors
The Partners SEI/PSP IV Joint Ventures
We have audited the balance sheets of the SEI/PSP IV Joint Ventures ("the Joint Venture") as of December 31, 2002 and 2001 and the related statements of income, partners' equity and cash flows for each of the three years in the period ended December 31, 2002. Our audits also included the financial statement schedule listed in the Index at Item 15 (a). These financial statements and schedule are the responsibility of the Joint Ventures' management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the SEI/PSP IV Joint Ventures at December 31, 2002 and 2001, and the results of its operations and cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
March 19, 2003 Los Angeles, CA
SEI/PSP IV JOINT VENTURES BALANCE SHEETS For the years ended December 31, 2002 and 2001
See accompanying notes
SEI/PSP IV JOINT VENTURES STATEMENTS OF INCOME For the years ended December 31, 2002, 2001 and 2000
See accompanying notes
SEI/PSP IV JOINT VENTURES STATEMENTS OF PARTNERS' EQUITY For the years ended December 31, 2002, 2001 and 2000
See accompanying notes
SEI/PSP IV JOINT VENTURES STATEMENTS OF CASH FLOWS For the years ended December 31, 2002, 2001 and 2000
See accompanying notes
SEI/PSP IV JOINT VENTURES NOTES TO FINANCIAL STATEMENTS December 31, 2002
1. Description of Partnership
SEI/PSP IV Joint Ventures (the "Joint Venture") was formed on December 31, 1990 in connection with the consolidation of 23 separate general partnerships between Public Storage Inc. ("PSI") and PS Partners IV, Ltd. ("PSP IV"). The Joint Venture, through its predecessor general partnerships, invested in existing mini-warehouse facilities which offer self-service storage spaces for lease, usually on a month-to-month basis, to the general public and, to a lesser extent, in existing business park facilities which offer industrial and office space for lease.
The Joint Venture owns 32 properties (referred to hereinafter as the "Mini-Warehouses"), which excludes three properties which were transferred to PS Business Parks, L.P. ("PSBPLP") in January 1997. PSP IV is the managing general partner of the Joint Venture, with its ownership interests in the properties of the Joint Venture ranging from 49.8% to 50.9%.
2. Summary of Significant Accounting Policies and Partnership Matters
Basis of Presentation ---------------------
The financial statements include the accounts of the Joint Venture.
Under the terms of the general partnership agreement of the Joint Venture, for property acquisitions in which PSI issued convertible securities to the sellers for its interest, PSI's right to receive cash flow distributions for any year after the first year of operation are subordinated to cash distributions to PSP IV equal to a cumulative annual 7% of its cash investment (not compounded). In addition, upon sale or refinancing of a property for more than its original purchase price, distribution of proceeds to PSI is subordinated to the return to PSP IV of the amount of its cash investment and the 7% distribution described above.
Mini-Warehouse Facilities -------------------------
Cost of land includes appraisal fees and legal fees related to acquisition and closing costs. Buildings, land improvements and equipment reflect costs incurred through December 31, 2002 and 2001 to develop mini-warehouse facilities which provide self-service storage spaces for lease, usually on a month-to-month basis, to the general public. The buildings and equipment are generally depreciated on a straight-line basis over estimated useful lives of 25 and 5 years, respectively.
Revenue and Expense Recognition -------------------------------
Property rents are recognized as earned. Advertising costs of $674,000, $751,000 and $589,000 in 2002, 2001 and 2000, respectively, are expensed as incurred.
Allocation of Net Income to PSP IV and PSI ------------------------------------------
Net income prior to depreciation is allocated to PSP IV and PSI based upon their relative ownership interest in each property and the results of each property.
Under the terms of the general partnership agreement of the Joint Venture all depreciation and amortization with respect to each Joint Venture is allocated solely to PSP IV until it recovers its initial capital contribution. Thereafter, all depreciation and amortization is allocated solely to PSI until it recovers its initial capital contribution. All remaining depreciation and amortization is allocated to PSP IV and PSI in proportion to their ownership percentages.
Cash Distributions ------------------
The general partnership agreement of the Joint Venture provides for regular distributions of cash flow from operations (as defined).
Cash and Cash Equivalents -------------------------
For financial statement purposes, the Joint Venture considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents.
Environmental Cost ------------------
Substantially all of the real estate facilities in which the Joint Venture has an interest were acquired prior to the time that it was customary to conduct extensive environmental investigations in connection with the property acquisitions. Although there can be no assurance, the Joint Venture is not aware of any environmental contamination of the Mini-Warehouses which individually or in the aggregate would be material to the Joint Venture's overall business, financial condition, or results of operations.
Segment Reporting -----------------
Effective January 1, 1998, the Joint Venture adopted SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." SFAS No. 131 established standards for the way public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. SFAS No. 131 also establishes standards for related disclosures about products and services, geographic areas and major customers. The Joint Venture only has one reportable segment as defined within SFAS No. 131, therefore the adoption of SFAS No. 131 had no effect on the Joint Venture's disclosures.
Use of Estimates ----------------
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Impairment of long-lived assets -------------------------------
We evaluate our real estate for impairment on a quarterly basis. We first evaluate these assets for indicators of impairment such as a) a significant decrease in the market price of real estate, b) a significant adverse change in the extent or manner in which real estate is being used or in its physical condition, c) a significant adverse change in legal factors or the business climate that could affect the value of the real estate, d) an accumulation of costs significantly in excess of the amount originally projected for the acquisition of construction of the real estate, or e) a current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of the real estate. When any such indicators of impairment are noted, we compare the carrying value of the real estate to the future estimated undiscounted cash flows attributable to the real estate. If the real estate's recoverable amount is less than the carrying value of the asset, then an impairment charge is booked for the excess of carrying value over the real estate's fair value. Our evaluations have indicated no impairment.
Any real estate which we expect to sell or dispose of prior to their previously estimated useful life are stated at the lower of their estimated net realizable value or their carrying value, less cost to sell, and are evaluated throughout the sale process for impairment.
Recent Accounting Pronouncements and Guidance ---------------------------------------------
As of March 20, 2003, there have been no recent accounting pronouncements and guidance, which were not effective for implementation prior to December 31, 2002, that would have a material impact upon the operations of the Joint Venture.
3. Real Estate Facilities
In January 1997, the Joint Venture, PSI and other affiliated partnerships of PSI transferred a total of 35 business parks to PSBPLP, an operating partnership formed to own and operate business parks in which PSI has a significant interest. Included among the properties transferred was the Joint Venture's business parks in exchange for a partnership interest in PSBPLP. The general partner of PSBPLP is PS Business Parks, Inc. ("PSBP").
4. Investment in real estate entity
In 2002, 2001 and 2000, the Joint Venture recognized $1,139,000, $1,103,000 and $1,189,000 respectively, in equity in earnings of real estate entities with respect to the investment in PSBPLP, described in Note 3 above. Included in equity in earnings for 2002 and 2000 is $168,000 and $162,000, respectively, representing the Joint Venture's share of PSBPLP's gains on sale of real estate investments.
The accounting policies of PSBPLP are similar to that of the Joint Venture. Summarized combined financial data with respect to PSBPLP is as follows:
The increase in the size of the combined financial position and operating results, respectively, of the Real Estate Entity for the year ended December 31, 2001 and at December 31, 2002, respectively, as compared to prior periods, is the result of additional properties acquired by PSBLP during 2001 and 2002.
PS Business Parks, Inc., which owns PSBPLP, is a registrant with the Securities and Exchange Commission, and its filings can be accessed through the Securities and Exchange Commission.
5. Related Party Transactions
The Joint Venture has a management agreement with PSI whereby PSI operates the Mini-Warehouses for a fee equal to 6% of the facilities' monthly gross revenue (as defined). For 2002, 2001 and 2000, the Partnership paid PSI $786,000, $818,000 and $773,000, respectively, pursuant to this management agreement.
The Management Agreement between the Partnership and PSI provides that the Management Agreement may be terminated without cause upon 60 days written notice by the Partnership or six months notice by PSI.
In addition, the Partnership combines its insurance purchasing power with PSI through a captive insurance company controlled by PSI, STOR-Re Mutual Insurance Corporation ("Stor-Re"). Stor-Re provides limited property and liability insurance to the Partnership at commercially competitive rates. The Partnership and PSI also utilize unaffiliated insurance carriers to provide property and liability insurance in excess of Stor-Re's limitations.
In January 1997, the Joint Venture transferred its business park facilities to PSBPLP in exchange for a partnership interest in PSBPLP. PSI has a significant economic interest in PSBPLP and PSBP.
6. Leases
The Joint Venture has invested primarily in existing mini-warehouse storage facilities which offer self-service storage spaces for lease to the general public. Leases for such space are usually on a month-to-month basis.
7. Taxes Based on Income
Taxes based on income are the responsibility of PSP IV and PSI and, accordingly, the Joint Venture's financial statements do not reflect a provision for such taxes.
Unaudited taxable net income was $2,322,000, $6,691,000 and $5,072,000 for the years ended December 31, 2002, 2001 and 2000, respectively. The difference between taxable income and book income is primarily related to timing differences in depreciation expense.
8. Commitments and Contingencies
Salaam, et. Al V. Public Storage, Inc. (filed February 2000) ------------------------------------------------------------
The plaintiffs in this case are suing the Company on behalf of a purported class of California resident property managers who claim that they were not compensated for all the hours they worked. The named plaintiffs have indicated that their claims total less than $20,000 in aggregate. This maximum potential liability can only be increased if a class is certified or if claims are permitted to be brought on behalf of the others under the California Unfair Business Practices Act. The plaintiffs' motion for class certification was denied in August 2002; the plaintiffs have appealed this denial. This denial does not deal with the claim under the California Unfair Business Practices Act.
The Company is continuing to vigorously contest the claims in this case and intends to resist any expansion beyond the named plaintiffs on the grounds of lack of commonality of claims. The Company's resistance will include opposing the plaintiffs' appeal of the court's denial of class certification and opposing the claim on behalf of others under the California Unfair Business Practices Act.
Henriquez v. Public Storage, Inc. (Filed June 2002; Dismissed -------------------------------------------------------------- January, 2003) --------------
The plaintiff in this case filed a suit against the Company on behalf of a purported class of renters who rented self-storage units from the Company. Plaintiff alleged that the Company misrepresents the size of its units and sought damages and injunctive and declaratory relief under California statutory and common law relating to consumer protection, unfair competition, fraud and deceit and negligent misrepresentation. In January 2003, the plaintiff caused this suit to be dismissed. The plaintiff's attorney has advised that he anticipates filing a similar suit against the Company on behalf of a new plaintiff. However, the Company cannot presently determine the potential total damages, if any, or the ultimate outcome of any such litigation. If a new suit is filed, the Company intends to vigorously contest any claims on which it is based.
Public Storage and the Partnership are parties to various claims, complaints, and other legal actions that have arisen in the normal course of business from time to time. We believe that the outcome of these other pending legal proceedings, in the aggregate, will not have a material adverse effect upon the operations or financial position of the Partnership.
SEI/PSP IV JOINT VENTURES SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
SEI/PSP IV JOINT VENTURES REAL ESTATE RECONCILIATION SCHEDULE III (CONTINUED)
(A) The following is a reconciliation of cost and related accumulated depreciation.
Gross Carrying Cost Reconciliation
Years Ended December 31, --------------------------------- 2002 2001 ---------------------------------
Balance at beginning of the period $ 62,492,000 $ 61,535,000
Additions during the period: Improvements, etc. 981,000 957,000 ---------------------------------
Balance at the close of the period $ 63,473,000 $ 62,492,000 =================================
Accumulated Depreciation Reconciliation
Years Ended December 31, --------------------------------- 2002 2001 ---------------------------------
Balance at beginning of the period $ 31,724,000 $ 29,146,000
Additions during the period: Depreciation 2,600,000 2,578,000 ---------------------------------
Balance at the close of the period $ 34,324,000 $ 31,724,000 =================================
(B) The aggregate cost of real estate for Federal income tax purposes is $55,326,000 (unaudited).