UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ended September 30, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
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Commission File Number 0-8908
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PUBLIC STORAGE PROPERTIES IV, LTD.
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(Exact name of registrant as specified in its charter)
California 95-3192402
- -------------------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
701 Western Avenue
Glendale, California 91201
- -------------------------------------------- -----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 244-8080
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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INDEX
Page
PART I. FINANCIAL INFORMATION
Condensed balance sheets at September 30, 1998
and December 31, 1997 2
Condensed statements of income for the three and
nine months ended September 30, 1998 and 1997 3
Condensed statement of partners' deficit for the
nine months ended September 30, 1998 4
Condensed statements of cash flows for the
nine months ended September 30, 1998 and 1997 5
Notes to condensed financial statements 6-7
Management's discussion and analysis of
financial condition and results of operations 8-11
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K. 12
PUBLIC STORAGE PROPERTIES IV, LTD.
CONDENSED BALANCE SHEETS
September 30, December 31,
1998 1997
------------------ ------------------
(Unaudited)
ASSETS
------
Cash and cash equivalents $ 640,000 $ 1,911,000
Marketable securities of affiliate (cost of $6,091,000) 10,242,000 11,220,000
Rent and other receivables 150,000 166,000
Real estate facilities, at cost:
Buildings and equipment 16,278,000 16,031,000
Land 5,244,000 5,244,000
------------------ ------------------
21,522,000 21,275,000
Less accumulated depreciation (11,589,000) (10,898,000)
------------------ ------------------
9,933,000 10,377,000
------------------ ------------------
Other assets 129,000 144,000
------------------ ------------------
Total assets $ 21,094,000 $ 23,818,000
================== ==================
LIABILITIES AND PARTNERS' DEFICIT
---------------------------------
Accounts payable $ 285,000 $ 65,000
Deferred revenue 236,000 230,000
Mortgage note payable - 25,405,000
Note payable to commercial bank 21,000,000 -
Partners' deficit:
Limited partners' deficit, $500 per unit, 40,000 units
authorized, issued and outstanding (3,396,000) (5,200,000)
General partners' deficit (1,182,000) (1,811,000)
Unrealized gain on marketable securities 4,151,000 5,129,000
------------------ ------------------
Total partners' deficit (427,000) (1,882,000)
------------------ ------------------
Total liabilities and partners' deficit $ 21,094,000 $ 23,818,000
================== ==================
See accompanying notes.
2
PUBLIC STORAGE PROPERTIES IV, LTD.
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
1998 1997 1998 1997
-------------- -------------- -------------- --------------
REVENUES:
Rental income $ 2,255,000 $ 2,142,000 $ 6,559,000 $ 6,013,000
Dividends from marketable securities of affiliate 84,000 76,000 252,000 217,000
Other income 11,000 31,000 82,000 99,000
-------------- -------------- -------------- --------------
2,350,000 2,249,000 6,893,000 6,329,000
-------------- -------------- -------------- --------------
COSTS AND EXPENSES:
Cost of operations 508,000 473,000 1,545,000 1,426,000
Management fees paid to affiliate 134,000 129,000 394,000 361,000
Depreciation 231,000 222,000 691,000 654,000
Administrative 15,000 18,000 56,000 49,000
Interest expense 405,000 698,000 1,774,000 2,113,000
-------------- -------------- -------------- --------------
1,293,000 1,540,000 4,460,000 4,603,000
-------------- -------------- -------------- --------------
NET INCOME $ 1,057,000 $ 709,000 $ 2,433,000 $ 1,726,000
============== ============== ============== ==============
Limited partners' share of net income ($60.15 per
unit in 1998 and $42.68 per unit in 1997) $ 2,406,000 $ 1,707,000
General partners' share of net income 27,000 19,000
-------------- --------------
$ 2,433,000 $ 1,726,000
============== ==============
See accompanying notes.
3
PUBLIC STORAGE PROPERTIES IV, LTD.
CONDENSED STATEMENT OF PARTNERS' DEFICIT
(UNAUDITED)
Unrealized Gain
Limited General on Marketable Total Partners'
Partners Partners Securities Deficit
------------------ ------------------ ------------------ ------------------
Balance at December 31, 1997 $ (5,200,000) $ (1,811,000) $ 5,129,000 $ (1,882,000)
Unrealized loss on marketable securities - - (978,000) (978,000)
Net income 2,406,000 27,000 - 2,433,000
Equity transfer (602,000) 602,000 - -
------------------ ------------------ ------------------ ------------------
Balance at September 30, 1998 $ (3,396,000) $ (1,182,000) $ 4,151,000 $ (427,000)
================== ================== ================== ==================
See accompanying notes.
4
PUBLIC STORAGE PROPERTIES IV, LTD.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
--------------------------------
1998 1997
--------------- ----------------
Cash flows from operating activities:
Net income $ 2,433,000 $ 1,726,000
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation 691,000 654,000
Decrease (increase) in rent and other receivables 16,000 (19,000)
Amortization of prepaid loan fees 69,000 69,000
(Increase) decrease in other assets (54,000) 26,000
Increase in accounts payable 220,000 158,000
Increase in deferred revenue 6,000 19,000
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Total adjustments 948,000 907,000
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Net cash provided by operating activities 3,381,000 2,633,000
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Cash flows from investing activities:
Purchase of marketable securities of affiliate - (1,289,000)
Additions to real estate facilities (247,000) (411,000)
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Net cash used in investing activities (247,000) (1,700,000)
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Cash flows from financing activities:
Principal payments on mortgage note payable (25,405,000) (691,000)
Proceeds from note payable to general partner 22,000,000 -
Principal payments on note payable to general partner (22,000,000) -
Proceeds from note payable to commercial bank 21,000,000 -
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Net cash used in financing activities (4,405,000) (691,000)
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Net (decrease) increase in cash and cash equivalents (1,271,000) 242,000
Cash and cash equivalents at beginning of period 1,911,000 2,440,000
--------------- ----------------
Cash and cash equivalents at end of period $ 640,000 $ 2,682,000
=============== ================
Supplemental schedule of non-cash investing and financing activities:
Decrease in fair market value of marketable securities 978,000 295,000
=============== ================
Unrealized loss on marketable securities $ (978,000) $ (295,000)
=============== ================
See accompanying notes.
5
PUBLIC STORAGE PROPERTIES IV, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying unaudited condensed financial statements have been
prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
such rules and regulations, although management believes that the
disclosures contained herein are adequate to make the information presented
not misleading. These unaudited condensed financial statements should be
read in conjunction with the financial statements and related notes
appearing in the Partnership's Form 10-K for the year ended December 31,
1997.
2. In the opinion of management, the accompanying unaudited condensed
financial statements reflect all adjustments, consisting of only normal
accruals, necessary to present fairly the Partnership's financial position
at September 30, 1998, the results of its operations for the three and nine
months ended September 30, 1998 and 1997 and its cash flows for the nine
months then ended.
3. The results of operations for the three and nine months ended September 30,
1998 are not necessarily indicative of the results expected for the full
year.
4. Marketable securities at September 30, 1998 consist of 381,980 shares of
common stock of Public Storage, Inc., a publicly traded real estate
investment trust and a general partner of the Partnership. The Partnership
has designated its portfolio of marketable securities as available for
sale. Accordingly, at September 30, 1998, the Partnership has recorded the
marketable securities at fair value, based upon the closing quoted prices
of the securities at September 30, 1998. Changes in market value of
marketable securities are reflected as unrealized gains or losses directly
in Partners' Equity and accordingly have no effect on net income.
5. The Partnership's mortgage note payable matures on October 1, 1998. On July
1, 1998, the Partnership paid off the mortgage note payable with cash
reserves and with the proceeds of a $22,000,000 loan from Public Storage,
Inc., a general partner of the Partnership. The loan from Public Storage,
Inc. bears interest at the fixed rate of 7.2% and matures June 30, 1999.
The loan calls for monthly payments of interest only. Principal may be paid
at any time without penalty. Public Storage, Inc. also provided the
Partnership with options to extend the loan term through June 2003. This
loan was paid off and canceled in September 1998 (see Note 6). Interest
paid during the third quarter of 1998 to Public Storage, Inc. was $341,000.
6. During September 1998, the Partnership borrowed $21,000,000 from a
commercial bank. The loan is unsecured and bears interest at the London
Interbank Offering Rate ("LIBOR") plus 0.60% to 1.20% depending on the
Partnership's interest coverage ratio (6.017% at September 30, 1998). The
loan requires monthly payments of interest and mature September 2002.
Principal may be paid, in whole or in part, at any time without penalty or
premium.
6
6. (continued)
The loan proceeds were used to pay off the Partnership's note payable to
Public Storage, Inc.
The Partnership has entered into an interest rate swap agreement to reduce
the impact of changes in interest rates on a portion of its floating rate
debt. The agreement, which covers $11,500,000 of debt through March 2000
and $4,000,000 from March 2000 through September 2000, effectively changes
the interest rate exposure from floating rate to a fixed rate of 5.22% plus
0.60% to 1.20% based on the Partnership's interest coverage ratio (5.82% as
of September 30, 1998). Market gains and losses on the value of the swap
are deferred and included in income over the life of the contract. The
Partnership records the differences paid or received on the interest rate
swap in interest expense as payments are made or received. As of September
30, 1998, the unrealized loss on the interest rate swap, if required to be
liquidated, was approximately $90,000.
7
PUBLIC STORAGE PROPERTIES IV, LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
- --------------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains "forward looking" statements that involve risks and
uncertainties and are based upon a number of assumptions. Actual results and
trends may differ materially depending upon a number of factors. Information
regarding these factors is contained in the Partnership's Annual Report on Form
10-K for the fiscal year ended December 31, 1997 and in the reports for the
quarterly periods on Form 10-Q for the quarters ended March 31, 1998 and June
30, 1998.
RESULTS OF OPERATIONS
- ---------------------
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1997:
The Partnership's net income for the nine months ended September 30, 1998
was $2,433,000 compared to $1,726,000 for the nine months ended September 30,
1997, representing an increase of $707,000 or 41%. The Partnership's net income
for the three months ended September 30, 1998 was $1,057,000 compared to
$709,000 for the three months ended September 30, 1997, representing an increase
of $348,000 or 49%. These increases are primarily a result of increased
operating results at the Partnership's mini-warehouse facilities combined with
decreased interest expense.
Rental income for the nine months ended September 30, 1998 was $6,559,000
compared to $6,013,000 for the nine months ended September 30, 1997,
representing an increase of $546,000 or 9%. Rental income for the nine months
September 30, 1998 was $2,255,000 compared to $2,142,000 for the three months
ended September 30, 1997, representing an increase of $113,000 or 5%. These
increases are primarily attributable to higher rental rates and occupancy levels
at the Partnership's mini-warehouse facilities. The weighted average occupancy
levels at the mini-warehouse facilities were 94% and 92% for the nine months
ended September 30, 1998 and 1997, respectively. Realized rent for the nine
months ended September 30, 1998 increased to $.88 per occupied square foot from
$.83 per occupied square foot for the nine months ended September 30, 1997.
Interest and other income decreased $17,000 for the nine months ended
September 30, 1998 compared to the same period in 1997. This decrease is
primarily a result of the pay off of the mortgage note payable with cash
reserves, which resulted in lower cash balances and consequently less interest
earned.
8
Dividend income from marketable securities of affiliate increased $35,000
for the nine months ended September 30, 1998 compared to the same period in 1997
due to an increase in the number of shares owned in 1998 compared to the same
period in 1997.
Cost of operations (including management fees paid to affiliate) for the
nine months ended September 30, 1998 was $1,939,000 compared to $1,787,000 for
the nine months ended September 30, 1997, representing an increase of $152,000
or 9%. Cost of operations (including management fees paid to affiliate) for the
three months ended September 30, 1998 was $642,000 compared to $602,000 for the
three months ended September 30, 1997, representing an increase of $40,000 or
7%. This increase is mainly attributable to increases in management fees,
property taxes, repairs and maintenance and payroll expenses. Property taxes
increased due to an increase in property tax rates at some of the Partnership's
mini-warehouse facilities.
Interest expense decreased $339,000 to $1,774,000 in the nine months ended
September 30, 1998 from $2,113,000 in the same period in 1997. This decrease is
mainly attributable to a lower outstanding principal balances and reduced
interest rates on the Partnership's indebtedness. See Liquidity and Capital
Resources for a discussion of the refinancing of the Partnership's indebtedness
in the third quarter of 1998.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash flows from operating activities ($3,381,000 for the nine months ended
September 30, 1998) have been sufficient to meet all current obligations of the
Partnership.
At September 30, 1998, the Partnership held 381,980 shares of common stock
(marketable securities) with a fair value totaling $10,242,000 (cost basis of
$6,091,000 at September 30, 1998) in Public Storage, Inc. The Partnership
recognized $252,000 in dividends for the nine months ended September 30, 1998.
The Partnership's mortgage note payable matures on October 1, 1998. On July
1, 1998, the Partnership paid off the mortgage note payable with cash reserves
and with the proceeds of a $22,000,000 loan from Public Storage, Inc., a general
partner of the Partnership. The loan from Public Storage, Inc. bears interest at
the fixed rate of 7.2% and matures June 30, 1999. The loan calls for monthly
payments of interest only. Principal may be paid at any time without penalty.
Public Storage, Inc. also provided the Partnership with options to extend the
loan term through June 2003.
During September 1998, the Partnership borrowed $21,000,000 from a
commercial bank. The loan is unsecured and bears interest at the London
Interbank Offering Rate ("LIBOR") plus 0.60% to 1.20% depending on the
Partnership's interest coverage ratio (6.017% at September 30, 1998). The loan
requires monthly payments of interest and mature September 2002. Principal may
be paid, in whole or in part, at any time without penalty or premium. The loan
proceeds were used to pay off the Partnership's note to Public Storage, Inc.
9
The Partnership has entered into an interest rate swap agreement to reduce
the impact of changes in interest rates on a portion of its floating rate debt.
The agreement, which covers $11,500,000 of debt through March 2000 and
$4,000,000 from March 2000 through September 2000, effectively changes the
interest rate exposure from floating rate to a fixed rate of 5.22% plus 0.60% to
1.20% based on the Partnership's interest coverage ratio (5.82% as of September
30, 1998). Market gains and losses on the value of the swap are deferred and
included in income over the life of the contract. The Partnership records the
differences paid or received on the interest rate swap in interest expense as
payments are made or received. As of September 30, 1998, the unrealized loss on
the interest rate swap, if required to be liquidated, was approximately $90,000.
IMPACT OF THE YEAR 2000 ISSUE
- -----------------------------
Public Storage, Inc. ("PSI"), the general partner and property manager, has
completed an assessment of all of its hardware and software applications to
identify susceptibility to what is commonly referred to as the "Y2K Issue"
whereby certain computer programs have been written using two digits rather than
four to define the applicable year. Any of PSI's computer programs or hardware
with the Y2K Issue that have date-sensitive applications or embedded chips may
recognize a date using "00" as the year 1900 rather than the year 2000,
resulting in miscalculations or system failure causing disruptions of
operations.
Many of PSI's critical applications, relative to the direct management of
properties, have recently been replaced and PSI believes they are already Year
2000 compliant. PSI has an implementation in process on the remaining critical
applications, including its general ledger and related systems, that are
believed to have Y2K Issues. PSI expects the implementation to be complete by
June 1999. Contingency plans have been developed for use in case PSI's
implementations are not completed on a timely basis. While PSI presently
believes that the impact of the Y2K Issue on its systems can be mitigated, if
the plan for ensuring Year 2000 compliance and the related contingency plans
were to fail, be insufficient, or not be implemented on a timely basis,
operations of the Partnership could be materially impacted.
Certain of PSI's other non-computer related systems that may be impacted by
the Y2K Issue, such as security systems, are currently being evaluated, and PSI
expects the evaluation to be completed by June 1999. PSI expects the
implementation of any required solutions to be complete in advance of December
31, 1999. PSI has not fully evaluated the impact of lack of Year 2000 compliance
on these systems, but has no reason to believe that lack of compliance would
materially impact the operations of the Partnership.
The Partnership exchanges electronic data with certain outside vendors in
the banking and payroll processing areas. PSI has been advised by these vendors
that their systems are or will be Year 2000 compliant, but has requested a Year
2000 compliance certification from these entities. PSI is not aware of any other
vendors, suppliers, or other external agents with a Y2K Issue that would
materially impact the Partnership's results of operations, liquidity, or capital
resources. However, PSI has no means of ensuring that external agents will be
Year 2000 compliant, and there can be no assurance that the Partnership has
10
identified all such external agents. The inability of external agents to
complete their Year 2000 compliance process in a timely fashion could materially
impact the Partnership. The effect of non-compliance by external agents is not
determinable.
The total cost of PSI's Year 2000 compliance activities (which primarily
consists of the costs of new systems) will be allocated to all entities that use
the PSI computer systems. The amount to be allocated to the Partnership is
estimated at approximately $64,000. These costs are capitalized.
The costs of the projects and the date on which PSI believes that it will
be Year 2000 compliant are based upon management's best estimates, and were
derived utilizing numerous assumptions of future events. There can be no
assurance that these estimates will be achieved, and actual results could differ
materially from those anticipated. There can be no assurance that PSI has
identified all potential Y2K Issue either within PSI and the Partnership or at
external agents. In addition, the impact of the Y2K Issue on governmental
entities and utility providers and the resultant impact on the Partnership, as
well as disruptions in the general economy, may be material but cannot be
reasonably determined or quantified.
11
PART II. OTHER INFORMATION
Items 1 through 5 are inapplicable.
Item 6 Exhibits and Reports on Form 8-K.
---------------------------------
(a) The following exhibits are included herein:
10.1 Credit Agreement dated September 1, 1998 by and
between Public Storage Properties IV, Ltd. and Wells
Fargo Bank, National Association
10.2 Interest Rate Swap Agreement dated September 18, 1998
by and between Public Storage Properties IV, Ltd. and
Wells Fargo Bank, National Association
(27) Financial Data Schedule
(b) Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATED: November 13, 1998
PUBLIC STORAGE PROPERTIES IV, LTD.
BY: Public Storage, Inc.
General Partner
BY: /s/ John Reyes
-------------------------
John Reyes
Senior Vice President and
Chief Financial Officer
12