-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SVvT83dMRV/7vL3yGIuBB2XdOz2XURQ2eCdGvVKaU40XD+2yQrMFrcta3+FiK21U LiolqaSkzg40SheEs8AfsA== 0000318380-97-000031.txt : 19970520 0000318380-97-000031.hdr.sgml : 19970520 ACCESSION NUMBER: 0000318380-97-000031 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970515 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PUBLIC STORAGE INC /CA CENTRAL INDEX KEY: 0000318380 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 953551121 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08389 FILM NUMBER: 97606327 BUSINESS ADDRESS: STREET 1: 701 WESTERN AVE STREET 2: STE 200 CITY: GLENDALE STATE: CA ZIP: 91201-2397 BUSINESS PHONE: 8182448080 MAIL ADDRESS: STREET 1: 701 WESTERN AVE STREET 2: SUITE 200 CITY: GLENDALE STATE: CA ZIP: 91201 FORMER COMPANY: FORMER CONFORMED NAME: STORAGE EQUITIES INC DATE OF NAME CHANGE: 19920703 10-Q 1 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 1997 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to ----------------- ----------------- Commission File Number: 1-8389 ------ PUBLIC STORAGE, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) California 95-3551121 - ------------------------------------------- ------------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 701 Western Avenue, Glendale, California 91201-2394 - ------------------------------------------- ------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (818) 244-8080. -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [ X ] Yes [ ] No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of April 24, 1997: Common Stock, $.10 par value, 95,277,290 shares outstanding - ----------------------------------------------------------- Class B Common Stock, $.10 Par Value - 7,000,000 shares - ------------------------------------------------------- PUBLIC STORAGE, INC. INDEX Pages ----- PART I. FINANCIAL INFORMATION - ----------------------------- Item 1. Condensed Consolidated Balance Sheets at March 31, 1997 and December 31, 1996 1 Condensed Consolidated Statements of Income for the Three Months Ended March 31, 1997 and 1996 2 Condensed Consolidated Statement of Shareholders' Equity 3 Condensed Consolidated Statements of Cash Flows for Three Months Ended March 31, 1997 and 1996 4 - 5 Notes to Condensed Consolidated Financial Statements 6 - 14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 - 27 PART II. OTHER INFORMATION (Items 1, 2, 3, and 4 are not applicable) - -------------------------- Item 5. Other Information 28 Item 6. Exhibits and Reports on Form 8-K 28 PUBLIC STORAGE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except share data)
March 31, December 31, 1997 1996 --------------- --------------- ASSETS ------ Cash and cash equivalents................................. $ 125,436 $ 26,856 Real estate facilities, at cost: Land................................................... 596,459 596,141 Buildings.............................................. 1,650,885 1,625,172 --------------- --------------- 2,247,344 2,221,313 Accumulated depreciation............................... (315,153) (297,655) --------------- --------------- 1,932,191 1,923,658 Investment in real estate entities........................ 352,258 350,190 Intangible assets, net.................................... 219,926 222,253 Mortgage notes receivable from affiliates................. 24,745 25,016 Other assets.............................................. 26,751 24,179 --------------- --------------- Total assets................................ $ 2,681,307 $ 2,572,152 =============== =============== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Notes payable............................................. $ 107,909 $ 108,443 Accrued and other liabilities............................. 39,993 41,467 --------------- --------------- Total liabilities................................ 147,902 149,910 Minority interest......................................... 110,535 116,805 Commitments and contingencies Shareholders' equity: Preferred Stock, $0.01 par value, 50,000,000 shares authorized, - 13,396,764 shares issued and outstanding (13,421,580 issued and outstanding at December 31, 1996), at liquidation preference: Cumulative Preferred Stock, issued in series..... 718,900 718,900 Convertible Preferred Stock...................... 114,309 114,929 Common stock, $0.10 par value, 200,000,000 shares authorized, 93,041,461 shares issued and outstanding (88,362,026 at December 31, 1996).................... 8,837 9,305 Class B Common Stock, $0.10 par value, 7,000,000 shares authorized and issued................................ 700 700 Paid-in capital........................................ 1,581,673 1,454,387 Cumulative net income.................................. 438,738 396,420 Cumulative distributions paid.......................... (440,755) (388,736) --------------- --------------- Total shareholders' equity....................... 2,422,870 2,305,437 --------------- --------------- Total liabilities and shareholders' equity.. $ 2,681,307 $ 2,572,152 =============== ===============
See accompanying notes. 1 PUBLIC STORAGE, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Amounts in thousands, except per share data) (Unaudited)
For the Three Months Ended March 31, ----------------------------------- 1997 1996 ------------ ------------ Revenues: Rental income: Self-storage facilities............................ $ 82,377 $ 58,744 Commercial properties.............................. 7,597 4,965 Equity earnings of real estate entities................. 5,221 4,611 Facility management fee................................. 3,052 3,760 Ancillary business income............................... 1,322 497 Interest and other income............................... 1,690 2,390 ------------ ------------ 101,259 74,967 ------------ ------------ Expenses: Cost of operations: Self-storage facilities............................ 26,491 18,491 Commercial properties.............................. 3,184 2,194 Cost of facility management............................. 476 628 Cost of operations - ancillary business................. 3,340 440 Depreciation and amortization........................... 19,787 14,592 General and administrative.............................. 1,619 1,361 Interest expense........................................ 1,597 2,581 ------------ ------------ 56,494 40,287 ------------ ------------ Income before minority interest........................... 44,765 34,680 Minority interest in income............................... (2,447) (2,339) ------------ ------------ Net income................................................ $ 42,318 $ 32,341 ============ ============ Net income allocation: ---------------------- Allocable to preferred shareholders.................... $ 19,150 $ 15,166 Allocable to common shareholders....................... 23,168 17,175 ------------ ------------ $ 42,318 $ 32,341 ============ ============ Per common share: ----------------- Net income............................................ $ 0.26 $ 0.24 ============ ============ Weighted average common shares outstanding............ 89,476 71,666 ============ ============
See accompanying notes. 2 PUBLIC STORAGE, INC. CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY For the Three Months Ended March 31, 1997 (Amounts in thousands except share amounts) (Unaudited)
Preferred Stock ------------------------- Class B Cumulative Common Common Paid-in Senior Convertible Stock Stock Capital ----------- ----------- --------- --------- ---------- Balances at December 31, 1996........................... $ 718,900 $ 114,929 $ 8,837 $ 700 $1,454,387 Issuance of common stock: Public issuance (4,600,000 shares)................. - - 460 - 126,239 Other (37,686 shares).............................. - - 4 - 431 Conversion of 8.25% Convertible Preferred Stock into common stock (41,749 shares).................... - (620) 4 - 616 Net income.............................................. - - - - - Cash distributions: Cumulative Senior Preferred Stock.................... - - - - - Mandatory Convertible Preferred Stock, Series CC..... - - - - - 8.25% Convertible Preferred Stock.................... - - - - - Common Stock......................................... - - - - - ----------- ----------- --------- --------- ---------- Balances at March 31, 1997.............................. $718,900 $114,309 $9,305 $700 $1,581,673 =========== =========== ========= ========= ==========
PUBLIC STORAGE, INC. CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY For the Three Months Ended March 31, 1997 (Amounts in thousands except share amounts) (Unaudited)
Total Cumulative Cumulative Shareholders' Net Income Distributions Equity ---------- ------------- -------------- Balances at December 31, 1996........................... $ 396,420 $ (388,736) $ 2,305,437 Issuance of common stock: Public issuance (4,600,000 shares)................. - - 126,699 Other (37,686 shares).............................. - - 435 Conversion of 8.25% Convertible Preferred Stock into common stock (41,749 shares).................... - - - Net income.............................................. 42,318 - 42,318 Cash distributions: Cumulative Senior Preferred Stock.................... - (16,091) (16,091) Mandatory Convertible Preferred Stock, Series CC..... - (15,328) (15,328) 8.25% Convertible Preferred Stock.................... - (1,143) (1,143) Common Stock......................................... - (19,457) (19,457) ---------- ------------- -------------- Balances at March 31, 1997.............................. $438,738 $(440,755) $2,422,870 ========== ============= ==============
See accompanying notes. 3 PUBLIC STORAGE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) (Unaudited)
For the Three Months Ended March 31, --------------------------------- 1997 1996 --------------- --------------- Cash flows from operating activities: Net income................................................ $42,318 $ 32,341 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization (including amortization of mortgage notes receivable discounts)............... 19,770 14,568 Depreciation included in equity in earnings of real estate entities....................................... 3,629 4,494 Minority interest in income............................. 2,447 2,339 --------------- --------------- Total adjustments................................... 25,846 21,401 --------------- --------------- Net cash provided by operating activities....... 68,164 53,742 --------------- --------------- Cash flows from investing activities: Principal payments received on mortgage notes receivable from affiliates............................ 288 385 Capital improvements to real estate facilities.......... (6,292) (2,817) Construction in process................................. (14,289) (4,396) Capital expenditures of portable self-storage operations (included in other assets)................. (4,208) - Acquisition of minority interests in consolidated real estate partnerships................................... (9,837) (655) Acquisition of interests in real estate entities........ (5,697) (16,025) Acquisition of real estate facilities................... - (72,954) Acquisition cost of business combinations............... - (53,706) Acquisition of mortgage notes receivable................ - (3,709) --------------- --------------- Net cash used in investing activities........... (40,035) (153,877) --------------- --------------- Cash flows from financing activities: Net proceeds from the issuance of common stock.......... 127,134 625 Net proceeds from the issuance of preferred stock....... - 163,133 Principal payments on mortgage notes payable............ (534) (38,914) Distributions paid to shareholders...................... (52,019) (30,914) Distributions from operations to minority interests in real estate partnerships.............................. (4,792) (5,240) Net reinvestment by minority interests in consolidated real estate partnerships.............................. 809 747 Other................................................... (147) (1,213) --------------- --------------- Net cash provided by financing activities....... 70,451 88,224 --------------- --------------- Net increase (decrease) in cash and cash equivalents......... 98,580 (11,911) Cash and cash equivalents at the beginning of the period..... 26,856 80,436 --------------- --------------- Cash and cash equivalents at the end of the period........... $125,436 $ 68,525 =============== ===============
See accompanying notes. 4 PUBLIC STORAGE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) (Unaudited) (Continued)
For the Three Months Ended March 31, --------------------------------- 1997 1996 --------------- --------------- Supplemental schedule of noncash investing and financing activities: Acquisition of real estate facilities in exchange for the cancellation of mortgage notes receivable, the assumption of mortgage notes payable, and issuance of common and preferred stock....................................... $ - $ (2,401) Business combinations: Real estate facilities................................ - (148,663) Other assets.......................................... - (484) Accrued and other liabilities......................... - 3,826 Minority interest..................................... - 17,510 Reduction to investment in real estate entities in connection with business combinations................. - 44,137 Assumption of mortgage notes payable in connection with the acquisition of real estate facilities............. - 1,701 Cancellation of mortgage notes receivable in connection with the acquisition of real estate facilities........ - 700 Issuance of common stock: - in connection with mergers.......................... - 29,968 - in connection with the conversion of Preferred Stock 620 365 Conversion of 8.25% Convertible Preferred Stock.......... (620) (365)
See accompanying notes. 5 PUBLIC STORAGE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 31, 1997 1. Description of the business --------------------------- Public Storage, Inc. (the "Company") is a California corporation which was organized in 1980. The Company is a fully integrated, self-administered and self-managed real estate investment trust ("REIT") that acquires, develops, owns and operates self-storage facilities which offer self-storage spaces for lease, usually on a month-to-month basis, for personal and business use. The Company, to a lesser extent, also owns and operates commercial properties containing commercial and industrial rental space. The Company invests in real estate facilities primarily through the acquisition of wholly-owned facilities combined with the acquisition of equity interests in real estate entities owning real estate facilities. At March 31, 1997, the Company had direct and indirect equity interests in 1,111 properties located in 38 states, including 1,066 self-storage facilities and 45 commercial properties. All of the self-storage facilities are operated by the Company. 2. Summary of significant accounting policies ------------------------------------------ Basis of presentation --------------------- The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with instructions to Form 10-Q and Article 10 of regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from estimates. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation have been included. Operating results for the three months ended March 31, 1997 are not necessarily indicative of the results that may be expected for the year ended December 31, 1997. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1996. The consolidated financial statements include the accounts of (i) the Company, (ii) majority owned subsidiaries which are involved in the sale of locks and boxes, rental of trucks and portable self-storage, and the management and operation of commercial properties, and (iii) twenty-one limited partnerships in which the Company has significant economic interest (generally in excess of 50%) and is able to exercise significant control (the "Consolidated Partnerships"). Collectively, the Company, the majority owned subsidiaries, and the Consolidated Partnerships own a total of 758 real estate facilities, consisting of 723 self-storage facilities and 35 commercial properties. The Company also has equity investments in 41 other affiliated limited partnerships and eight REITs owning in aggregate 353 real estate facilities (343 self-storage facilities and 10 commercial properties) which are managed by the Company. The Company's ownership interest in such real estate entities is less than 50% of the total equity interest and, accordingly, the Company's investments in these real estate entities are accounted for using the equity method. 6 Income taxes ------------ For all taxable years subsequent to 1980, the Company qualified and intends to continue to qualify as a REIT, as defined in Section 856 of the Internal Revenue Code. As a REIT, the Company is not taxed on that portion of its taxable income which is distributed to its shareholders provided that the Company meets certain tests. The Company believes it will meet these tests during 1997, accordingly, no provision for income taxes has been made in the accompanying financial statements. Cash and cash equivalents ------------------------- For purposes of financial statement presentation, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Real estate investments ----------------------- Real estate facilities are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the buildings and improvements, which are generally between 5 and 25 years. The Company has no allowance for possible losses relating to any of its real estate investments, including mortgage notes receivable. The need for such an allowance is evaluated by management by means of periodic reviews of its investment portfolio. Intangible assets ----------------- Intangible assets consist of property management contracts ($165,000,000) and the cost over the fair value of net tangible and identifiable intangible assets ($67,726,000) acquired in a 1995 merger with an affiliate. Intangible assets are amortized by the straight-line method over 25 years. At March 31, 1997, intangible assets are net of accumulated amortization of $12,800,000 ($10,473,000 at December 31, 1996). Included in depreciation and amortization expense for the three months ended March 31, 1997 and 1996 is $2,327,000 related to the amortization of intangible assets. Revenue/expense recognition --------------------------- Property rents are recognized as earned. Equity in earnings of real estate entities are recognized based on the Company's ownership interest in the earnings of each of the unconsolidated real estate entities. Leasing commissions relating to the commercial property operations are expensed as incurred. Net income per common share --------------------------- Net income per common share is computed using the weighted average common shares outstanding (adjusted for stock options). The inclusion of the Class B Common Stock in the determination of earnings per common share has been determined to be anti-dilutive (after giving effect to the pro forma additional income required to satisfy certain contingencies (Note 8) required for the Class B common stock to convert into common stock) in 1996 and to be immaterial in 1997 and accordingly the Class B common stock has not been included in the computation in either period. The Company's preferred stocks were not determined to be common stock equivalents. In computing earnings per common share, preferred stock dividends reduced income available to common stockholders. Fully diluted earnings per common share are not presented, as the assumed conversion of the Company's convertible preferred stocks would be anti-dilutive. The following table summarizes the computations of earnings per common share: 7
For the Three Months Ended March 31, 1997 1996 ------------- ------------- (amounts in 000's, except per share data) Primary Earnings Per Common Share: ---------------------------------- Net income...................................................... $ 42,318 $ 32,341 Less: Preferred Stock dividends: Cumulative Senior Preferred Stock............................ (16,091) (13,154) Mandatory Convertible Preferred Stock, Series CC (1)......... (1,916) - 8.25% Convertible Preferred Stock............................ (1,143) (1,186) Mandatory Convertible Participating Preferred Stock.......... - (826) ------------- ------------- Net income allocable to common shareholders..................... $ 23,168 $ 17,175 ============= ============= Weighted Average common and common equivalent shares outstanding: Weighted average common shares outstanding.................. 89,086 71,574 Net effect of dilutive stock options - based on treasury stock method using average market price.................. 390 92 ------------- ------------- Total.................................................. 89,476 71,666 ============= ============= Primary earnings per common and common equivalent share......... $ 0.26 $ 0.24 ============= ============= Fully-diluted Earnings per Common Share: ---------------------------------------- Net income allocable to common shareholders per primary calculation above............................................ $ 23,168 $ 17,175 Add dividends paid to holders of Convertible Preferred Stocks: Series CC Preferred Stock................................... 1,916 - 8.25% Convertible Preferred Stock........................... 1,143 1,186 Mandatory Convertible Participating Preferred Stock......... - 826 ------------- ------------- Net income allocable to common shareholders for purposes of determining Fully-diluted Earnings per Common and Common Equivalent Share............................................. $ 26,227 $ 19,187 ============= ============= Weighted average common and common equivalent shares outstanding 89,476 71,666 Pro forma weighted average common shares assuming conversion of Convertible Preferred Stock: Series CC Preferred Stock.............................. 2,064 - 8.25% Convertible Preferred Stock...................... 3,769 3,872 Mandatory Convertible Participating Preferred Stock.... - 1,524 ------------- ------------- Weighted average common and common equivalent shares for purposes of computation of fully-diluted Earnings per Common and Common Equivalent Share.................................. 95,309 77,062 ============= ============= Fully-diluted Earnings per Common and Common Share (2).......... $ 0.28 $ 0.25 ============= =============
(1) On March 31, 1997, the Company prepaid dividends totaling $13,412,000 with respect to the Mandatory Convertible Participating Preferred Stock. The amount of prepayment has not been included in the determination of income allocable to common shareholders for the three months ended March 31, 1997. (2) Such amounts are anti-dilutive and are not presented in the Company's consolidated financial statements. In addition, the Company has 7,000,000 shares of Class B Common Stock which are convertible into shares of the Company's Common Stock subject to certain contingencies such as the passage of time and the attainment of certain earnings milestone by the Company. The assumption of such earnings and the pro forma conversion of the Class B Common Stock into Common Stock in the above computations would have resulted in an increase in the fully-diluted earnings per common share, and accordingly, is anti-dilutive. In February 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share, which is required to be adopted on December 31, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating primary earnings per share, the dilutive effects of stock options will be excluded. The impact of the new standard will not have a material impact on either primary or fully-diluted earnings per common share for the quarter ended March 31, 1997 and March 31, 1996. 8 3. Real estate facilities: ----------------------- Activity in real estate facilities during 1997 is as follows:
Number of real Net rentable Net carrying estate facilities square feet cost ----------------- ------------ ------------- (Amounts in thousands, except number of facilities) Operating Facilities Balance at December 31, 1996................ 756 46,462 $2,185,498 Developed facilities........................ 2 120 7,380 Acquisition of minority interest............ - - 5,103 Capital improvements........................ - - 6,292 Other....................................... - - 347 ----------------- ------------ ------------- Ending balance.............................. 758 46,582 2,204,620 ----------------- ------------ ------------- Construction in progress: Balance at December 31, 1996................ 11 707 35,815 Current development......................... 2 44 14,289 Newly opened development facilities......... (2) (120) (7,380) ----------------- ------------ ------------- Ending balance.............................. 11 631 42,724 ----------------- ------------ ------------- Accumulated depreciation: Beginning balance........................... - - (297,655) Additions during the year................... - - (17,498) Ending balance.............................. - - (315,153) ----------------- ------------ ------------- Total real estate facilities.................. 769 47,213 $ 1,932,191 ================= ============ =============
During the first quarter of fiscal 1997, the Company expended approximately $14.3 million in the development of 13 self-storage facilities. Two of these facilities were put into operation during the period. The Company's policy is to capitalize interest incurred on debt during the course of construction of its self-storage facilities. Interest capitalized during the three months ended March 31, 1997 was $735,000 compared to $194,000 for the same period in 1996. On April 10, 1997, the Company entered into an agreement with a joint venture partner to develop approximately $220 million of self-storage facilities. The joint venture partner will contribute 70% of the capital needs of the venture with the balance to be provided by the Company. Initially, the Company contributed eight facilities with an aggregate cost of approximately $30.4 million and as a result, the Company received cash of approximately $21.3 million from the venture representing the venture partner's proportionate share of the development cost. 4. Investment in real estate entities ---------------------------------- The Company's investment in real estate entities at March 31, 1997, generally consists of limited and general partnership interests in approximately 41 affiliated partnerships and common stock in 8 affiliated REITs. Such interests consist of ownership interests ranging from 15% to 45% and are accounted for using the equity method of accounting. Provisions of the agreements of the partnerships and REITs provide for the payment of preferred cash distributions to certain investors in the entity (until certain specified amounts have been paid) without regard to the pro rata interest of investors in current earnings. The Company's ownership interests in such entities generally represents interests which are not entitled to these preferred cash distributions. During the three months ended March 31, 1997, the Company recognized earnings from its investments totaling $5,221,000. Included in equity in earnings of real estate entities for the three months 9 ended March 31, 1997 is the Company's share of depreciation expense totaling $3,629,000 (including amortization totaling $1,622,000 representing the amortization of the Company's cost basis over the underlying book value of the Company's equity interest in each of the entities). Summarized combined financial data (based on historical cost) with respect to those real estate entities in which the Company had an ownership interest at March 31, 1997 are as follows:
Three Months Ended March 31, --------------------------------- 1997 1996 --------------- --------------- (in thousands) Rental income..................................... $46,672 $43,138 Total revenues.................................... 47,159 43,512 Cost of operations................................ 17,494 16,195 Depreciation...................................... 6,918 6,785 Net income........................................ 19,494 17,262 Total assets, net of accumulated depreciation..... $840,552 $839,866 Total debt........................................ 89,821 95,305 Total equity...................................... 713,275 709,846
5. Mortgage notes receivable from affiliates ----------------------------------------- At March 31, 1997, mortgage notes receivable balance of $24,745,000 is net of related discounts totaling $294,000. The mortgage notes bear interest at stated rates ranging from 7.48% to 14% and are secured by 13 self-storage facilities owned by affiliated partnerships. All of the notes are current as to the payment of principal and interest. 6. Revolving line of credit ------------------------ As of March 31, 1997, the Company had no borrowings on its unsecured credit agreement with a group of commercial banks. The credit agreement (the "Credit Facility") has a borrowing limit of $150.0 million and an expiration date of July 31, 2001. The expiration date may be extended by one year on each anniversary of the credit agreement. Interest on outstanding borrowings is payable monthly. At the option of the Company, the rate of interest charged is equal to (i) the prime rate or (ii) a rate ranging from the London Interbank Offered Rate ("LIBOR") plus 0.40% to LIBOR plus 1.10% depending on the Company's credit ratings and coverage ratios, as defined. In addition, the Company is required to pay a quarterly commitment fee of 0.250% (per annum) of the unused portion of the Credit Facility. The Credit Facility allows the Company, at its option, to request the group of banks to propose the interest rate they would charge on specific borrowings not to exceed $50 million. However, in no case may the interest rate proposal be greater than the amount provided by the Credit Facility. Under covenants of the Credit Facility, the Company is required to (i) maintain a balance sheet leverage ratio of less than 0.40 to 1.00, (ii) maintain net income of not less than $1.00 for each fiscal quarter, (iii) maintain certain cash flow and interest coverage ratios (as defined) of not less than 1.0 to 1.0 and 5.0 to 1.0, respectively and (iv) maintain a minimum total shareholders' equity (as defined). In addition, the Company is limited in its ability to incur additional borrowings (the Company is required to maintain unencumbered assets with an aggregate book value equal to or greater than three times the Company's unsecured recourse debt) or to sell assets. The Company was in compliance with the covenants of the Credit Facility at March 31, 1997. 10 7. Minority interest ----------------- The Company classifies ownership interests other than its own in the net assets of each of the Consolidated Partnerships as minority interest on the Company's consolidated financial statements. Minority interest in income consists of such interests' share of the operating results of the Company relating to the consolidated operations of the Consolidated Partnerships. 8. Shareholders' equity -------------------- Preferred stock At March 31, 1997 and December 31, 1996, the Company had the following series of Preferred Stock outstanding:
At March 31, 1997 At December 31, 1996 ------------------------------ ------------------------------ Dividend Shares Carrying Shares Carrying Series Rate Outstanding Amount Outstanding Amount -------------------------------------- ----------- ------------- -------------- ------------- -------------- Series A .......................... 10.000% 1,825,000 $ 45,625,000 1,825,000 $ 45,625,000 Series B .......................... 9.200% 2,386,000 59,650,000 2,386,000 59,650,000 Series C........................... Adjustable 1,200,000 30,000,000 1,200,000 30,000,000 Series D........................... 9.500% 1,200,000 30,000,000 1,200,000 30,000,000 Series E........................... 10.000% 2,195,000 54,875,000 2,195,000 54,875,000 Series F........................... 9.750% 2,300,000 57,500,000 2,300,000 57,500,000 Series G .......................... 8.875% 6,900 172,500,000 6,900 172,500,000 Series H .......................... 8.45% 6,750 168,750,000 6,750 168,750,000 Series I .......................... 8.625% 4,000 100,000,000 4,000 100,000,000 -------------------------------------- ----------- ------------- -------------- ------------- -------------- Total Senior Preferred Stock..... 11,123,650 718,900,000 11,123,650 718,900,000 ------------- -------------- ------------- -------------- Convertible........................ 8.25% 2,214,159 55,354,000 2,238,975 55,974,000 Mandatory Convertible - Series CC. 13.00% 58,955 58,955,000 58,955 58,955,000 ------------- -------------- ------------- -------------- Total Convertible Preferred Stock 2,273,114 114,309,000 2,297,930 114,929,000 ------------- -------------- ------------- -------------- 13,396,764 $833,209,000 13,421,580 $833,829,000 ============= ============== ============= ==============
The Series A through Series I (collectively the "Cumulative Senior Preferred Stock") have general preference rights with respect to liquidation and quarterly distributions. With respect to the payment of dividends and amounts upon liquidation, all of the Company's Convertible Preferred Stock ranks junior to the Cumulative Senior Preferred Stock and any other shares of preferred stock of the Company ranking on a parity with or senior to the Cumulative Senior Preferred Stock. The Convertible Preferred Stock ranks senior to the common stock, any additional class of common stock and any series of preferred stock expressly made junior to the Convertible Preferred Stock. Holders of the Company's preferred stock, except under certain conditions and as noted above, will not be entitled to vote on most matters. In the event of a cumulative arrearage equal to six quarterly dividends or failure to maintain a Debt Ratio (as defined) of 50% or less, holders of all outstanding series of preferred stock (voting as a single class without regard to series) will have the right to elect two additional members to serve on the Company's Board of Directors until events of default have been cured. At March 31, 1997, there were no dividends in arrears and the Debt Ratio was 4.0%. Except under certain conditions relating to the Company's qualification as a REIT, the Senior Preferred Stock are not redeemable prior to the following dates: Series A - September 30, 2002, Series B - March 31, 2003, Series C - June 30, 1999, Series D - September 30, 2004, Series E - January 31, 2005, Series F - April 30, 2005, Series G - December 31, 2000, Series H - January 31, 2001, Series I - October 31, 2001. On or after the respective dates, each of the series of Senior Preferred Stock will be redeemable at the option of the Company, in whole or in part, at $25 per share (or depository share in the case of the Series G, Series H and Series I), plus accrued and unpaid dividends. 11 The Convertible Preferred Stock is convertible at any time at the option of the holders of such stock into shares of the Company's common stock at a conversion rate of 1.6835 shares of common stock for each share of Convertible Preferred Stock, subject to adjustment in certain circumstances. On or after July 1, 1998, the Convertible Stock will be redeemable for shares of the Company's common stock at the option of the Company, in whole or in part, at a redemption price of 1.6835 shares of common stock for each share of Convertible Stock (subject to adjustment in certain circumstances), if for 20 trading days within any period of 30 consecutive trading days (including the last trading day of such period), the closing price of the common stock on its principal trading market exceeds $14.85 per share (subject to adjustment in certain circumstances). The Convertible Preferred Stock is not redeemable for cash. The Series CC Preferred Stock ranks junior to the Company's Cumulative Senior Preferred Stock with respect to general preference rights and has a liquidation value of $1,000 per share. Other significant terms of the Series CC Preferred Stock include: (i) quarterly distributions equal to $32.50 per share, (ii) conversion, at anytime at the option of the holder, into common stock of the Company at a conversion price of $28.56, i.e, 35.014 shares of common stock for each share of Series CC Preferred Stock, and (iii) automatic conversion into common stock of the Company on March 31, 2000 at the conversion price described above. Common stock ------------ On March 18, 1997, the Company issued 4,600,000 shares of common stock, raising net proceeds of approximately $126.7 million. The Company intends to use the net proceeds from this offering to make investments in real estate. Class B Common Stock -------------------- The Class B Common Stock will (i) not participate in distributions until the later to occur of funds from operations ("FFO") per Common Share as defined below, aggregating $1.80 during any period of four consecutive calendar quarters, or January 1, 2000; thereafter, the Class B Common Stock will participate in distributions (other than liquidating distributions), at the rate of 97% of the per share distributions on the Common Stock, provided that cumulative distributions of at least $0.22 per quarter per share have been paid on the Common Stock, (ii) not participate in liquidating distributions, (iii) not be entitled to vote (except as expressly required by California law) and (iv) automatically convert into Common Stock, on a share for share basis, upon the later to occur of FFO per Common Share aggregating $3.00 during any period of four consecutive calendar quarters or January 1, 2003. For these purposes, FFO means net income (loss) (computed in accordance with generally accepted accounting principles) before (i) gain (loss) on early extinguishment of debt, (ii) minority interest in income and (iii) gain (loss) on disposition of real estate, adjusted as follows: (i) plus depreciation and amortization (including the Company's pro-rata share of depreciation and amortization of unconsolidated equity interests and amortization of assets acquired in the Merger, including property management agreements and goodwill), and (ii) less FFO attributable to minority interest. For these purposes, FFO per Common Share means FFO less preferred stock dividends (other than dividends on convertible preferred stock) divided by the outstanding weighted average shares of Common Stock assuming conversion of all outstanding convertible securities and the Class B Common Stock. For these purposes, FFO per share of Common Stock (as defined) was $1.89 for the four consecutive calendar quarters ended March 31, 1997. 12 Dividends --------- The following summarizes dividends paid during the first three months of 1997:
Distributions Per Share or Total Depository Share Distributions ---------------- --------------- Series A.............................. $ 0.625 $ 1,140,000 Series B.............................. $ 0.575 1,372,000 Series C.............................. $ 0.454 545,000 Series D.............................. $ 0.594 713,000 Series E.............................. $ 0.625 1,372,000 Series F.............................. $ 0.609 1,401,000 Series G.............................. $ 0.555 3,828,000 Series H.............................. $ 0.528 3,565,000 Series I.............................. $ 0.539 2,156,000 Convertible........................... $ 0.515 1,142,000 Series CC............................. $260.000 15,328,000 --------------- 32,562,000 Common................................ $ 0.220 19,457,000 --------------- $52,019,000 ===============
On March 31, 1997, the Company prepaid a portion of the dividends relating to the Mandatory Convertible Series CC Preferred Stock which would have been payable quarterly through December 31, 1998. The total amount prepaid was approximately $13,412,000. The dividend rate on the Series C Preferred Stock for the first quarter of 1997 was equal to 7.26%, per annum. The dividend rate per annum will be adjusted quarterly and will be equal to the highest of one of three U.S. Treasury indices (Treasury Bill Rate, Ten Year Constant Maturity Rate, and Thirty Year Constant Maturity Rate) multiplied by 110%. However, the dividend rate for any dividend period will not be less than 6.75% per annum nor greater than 10.75%. The dividend rate for the quarter ending June 30, 1997 will be equal to 7.623% per annum. 9. Events subsequent to March 31, 1997 ----------------------------------- On April 11, 1997, the shareholders of each of Public Storage Properties XIV, Inc. ("PSP-14") and Public Storage Properties XV, Inc. ("PSP-15") approved the mergers of the respective corporations into the Company. In connection with the mergers, the Company issued an aggregate of 2.3 million shares of Common Stock and paid an additional $18.7 million in cash for the interest of PSP-14 and PSP-15 the Company did not own. In April 1997, Public Storage Properties XVI, Inc. ("PSP-16"), Public Storage Properties XVII, Inc. ("PSP-17"), Public Storage Properties XVIII, Inc. ("PSP-18") and Public Storage Properties XIX, Inc. ("PSP-19") each agreed, subject to certain conditions, to merge with and into the Company. PSP-16, PSP-17, PSP-18 and PSP-19 are affiliated publicly traded equity real estate investment trusts. Each of the mergers is conditioned on approval by the respective shareholders of PSP-16, PSP-17, PSP-18 and PSP-19, however, the mergers are not conditioned on approval of each other. The Company expects that if approved by the shareholders, the mergers would be completed in June or July 1997. The estimated value of PSP -16's properties is approximately $76.5 million. PSP-16 owns 22 properties (1,430,000 square feet). PSP-16 has 2,962,348 outstanding shares of common stock series A, 259,991 outstanding shares of common stock series B and 920,802 outstanding shares of common stock series C. The Company owns 632,050 shares of common stock series A, 210,510 shares of common stock series B and 607,194 shares of common stock series C. Upon completion of the merger, each outstanding share of common stock series A of PSP-16 (other than shares held by the Company) would be converted, at the election of the shareholders of PSP-16, into either shares of the Company's common stock with a market value of $20.76 or, with respect to up to 20% of the PSP-16 common stock series A, $20.76 in cash. The $20.76 conversion value will be reduced by any required final REIT distributions, such that the total consideration received, inclusive of any final required REIT distributions, is $20.76. In addition, each share of PSP-16 common stock series B and series C (other than shares 13 held by the Company) will be converted into the right to receive $11.82 in the Company's common stock, plus the Series B shares will receive any required REIT distribution attributable to the PSP-16 common stock series B. The shares of PSP-16 common stock series A, B and C held by the Company will be canceled in the merger. The estimated value of PSP-17's properties is approximately $72.8 million. PSP-17 owns 19 properties (1,425,000 square feet). One of these 19 properties, with 95,000 square feet, is jointly held with PSP-18. PSP-17 has 2,776,023 outstanding shares of common stock series A, 324,989 outstanding shares of common stock series B and 920,802 outstanding shares of common stock series C. The Company owns 505,400 shares of common stock series A, 295,487 shares of common stock series B and 851,142 shares of common stock series C. Upon completion of the merger, each outstanding share of common stock series A of PSP-17 (other than shares held by the Company) would be converted, at election of the shareholders of PSP-17, into either shares of the Company's common stock with a market value of $19.63 or, with respect to up to 20% of the PSP-17 common stock series A, $19.63 in cash. The $19.63 conversion value will be reduced by any required final REIT distributions, such that the total consideration received, inclusive of any final required REIT distributions, is $19.63. In addition, each share of PSP-17 common stock series B and series C (other than shares held by the Company) will be converted into the right to receive $10.26 in the Company's common stock, plus the Series B shares will receive any required REIT distribution attributable to the PSP-17 common stock series B. The shares of PSP-17 common stock series A, B and C held by the Company will be canceled in the merger. The estimated value of PSP-18's properties is approximately $73.3 million. PSP-18 owns 18 properties (1,240,000 square feet). One of these 18 properties, with 95,000 square feet, is jointly held with PSP-17. PSP-18 has 2,775,900 outstanding shares of common stock series A, 324,989 outstanding shares of common stock series B and 920,802 outstanding shares of common stock series C. The Company owns 168,000 shares of common stock series A, 324,989 shares of common stock series B and 920,802 shares of common stock series C. Upon completion of the merger, each outstanding share of common stock series A of PSP-18 (other than shares held by the Company) would be converted, at election of the shareholders of PSP-18, into either shares of the Company's common stock with a market value of $20.38 or, with respect to up to 20% of the PSP-18 common stock series A, $20.38 in cash. The $20.38 conversion value will be reduced by any required final REIT distributions, such that the total consideration received, inclusive of any final required REIT distributions, is $20.38. In addition, each share of PSP-18 Series B and C, (other than shares held by the Company) will be converted into the right to receive $9.36 in the Company's Common Stock, plus the Series B shares will receive any required REIT distribution attributable to the PSP-18 Common Stock Series B. The shares of PSP-18 common stock series A, B and C held by the Company will be canceled in the merger. The estimated value of PSP-19's properties is approximately $52.3 million. PSP-19 owns 14 properties (990,000 square feet). PSP-19 has 3,023,371 outstanding shares of common stock series A, 283,224 outstanding shares of common stock series B and 802,466 outstanding shares of common stock series C. The Company owns 646,145 shares of common stock series A, 283,224 shares of common stock series B and 802,466 shares of common stock series C. Upon completion of the merger, each outstanding share of common stock series A of PSP-19 (other than shares held by the Company) would be converted, at election of the shareholders of PSP-19, into either shares of the Company's common stock with a market value of $16.72 or, with respect to up to 20% of the PSP-19 common stock series A, $16.72 in cash. The $16.72 conversion value will be reduced by any required final REIT distributions, such that the total consideration received, inclusive of any final required REIT distributions, is $16.72. In addition, each share of PSP-19 Series B and C (other than shares held by the Company) will be converted into the right to receive $1.41 in the Company's common stock, plus the Series B shares will receive any required REIT distribution attributable to the PSP-19 common stock Series B. The shares of PSP-19 common stock series A, B and C held by the Company will be canceled in the merger. 14 Management's Discussion and Analysis of Financial Condition - ---------------------------------------------------------------- and Results of Operations - ------------------------- Historical Overview: During 1996 and the first three months of Fiscal 1997, the Company completed several business initiatives which have had a significant impact to the Company's comparative operating results for the three months ended March 31, 1997 and 1996: * MERGERS WITH AFFILIATED REITS: During 1996, the Company completed eight mergers with affiliated REITs whereby the Company acquired 103 additional wholly-owned real estate facilities. The aggregate cost of these mergers was approximately $356.8 million which includes the Company's pre-existing investment in the affiliated REITs totaling $79.5 million. * THIRD PARTY ACQUISITIONS: During 1996, the Company acquired 58 real estate facilities from various unaffiliated parties for an aggregate acquisition cost of approximately $202.7 million. * DEVELOPMENT OF SELF-STORAGE FACILITIES: In 1995, the Company commenced development of self-storage facilities, opening one in 1995, four in 1996, and two in 1997. Eleven facilities (631,000 net rentable square feet) are under construction at March 31, 1997, with an aggregate cost incurred to date of $39.4 million and total additional estimated costs to complete of $21.4 million. * PORTABLE SELF-STORAGE BUSINESS: In August 1996, the Company commenced operations in the portable self-storage business facilitated by the acquisition of an existing operator. As of March 31, 1997, the Company has opened 13 facilities. At March 31, 1997, the Company's investment portfolio consists of (i) wholly-owned properties owned by the Company, (ii) properties owned by real estate partnerships in which the Company has significant ownership interests (the "Consolidated Partnerships"), and (iii) properties owned by real estate entities (partnerships and REITs) in which the Company's ownership interest and control are not sufficient to warrant the consolidation of such entities (the "Unconsolidated Entities"). The following table summarizes the Company's investment in real estate facilities as of March 31, 1997:
Number of Facilities in which the Net Rentable Square Footage Company has an ownership interest (in thousands) --------------------------------- ---------------------------------- Self-Storage Commercial Self-Storage Commercial Facilities Properties Total Facilities Properties Total ----------- ---------- -------- ----------- ----------- --------- Wholly-owned facilities (a) 431 - 431 26,368 - 26,368 Facilities owned by Consolidated Partnerships 292 35 327 17,169 3,045 20,214 ----------- ---------- -------- ----------- ----------- --------- Total consolidated facilities 723 35 758 45,357 3,045 46,582 Facilities owned by Unconsolidated Entities 343 10 353 20,600 673 21,273 ----------- ---------- -------- ----------- ----------- --------- Total facilities in which the Company has an ownership interest 1,066 45 1,111 64,137 3,718 67,855 =========== ========== ======== =========== =========== =========
15 (a) 35 commercial properties which were previously "wholly owned" at December 31, 1996 are now classified as "Facilities Owned by Consolidated Partnerships." Pursuant to the restructuring of the commercial properties operations, the Company and its consolidated partnerships contributed substantially all of their commercial properties to a newly created operating partnership, which is owned by American Office Park Properties, Inc., the Company's majority owned subsidiary and by the Company and its consolidated Partnerships. Results of Operations --------------------- Net income for the three months ended March 31, 1997 was $42,318,000 compared to $32,341,000 for the same period in 1996, representing an increase of $9,977,000. Net income allocable to common shareholders increased to $23,168,000 for the three months ended March 31, 1997 compared to $17,175,000 for the same period in 1996. Net income per common share was $0.26 per share (based on weighted average shares outstanding of 89,476,000) for the three months ended March 31, 1997 compared to $0.24 per share (based on weighted average shares outstanding of 71,666,000) for the same period in 1996, representing an increase of 8.33%. The increases in net income, net income allocable to common shareholders, and net income per share were primarily the result of improved property operations, the acquisition of additional real estate facilities during 1996, and the acquisition of additional partnership interests during 1997 and 1996. However, net income per common share for 1997 included the negative impact of (i) development activities ($0.01 per common share), (ii) the portable self-storage operations ($0.03 per common share), and (iv) the temporary uninvested proceeds from the issuance of preferred stock during the fourth quarter of 1996 and common stock issued in the first quarter of 1997 ($0.01 per common share). Net income per common share for the three months ended March 31, 1996 was also negatively impacted by temporary uninvested proceeds from the issuance of preferred stock ($0.01 per common share). Operating results of the Company's property operations have increased significantly for the three months ended March 31, 1997 as compared to the same period in 1996, due to an improvement in the facilities owned throughout both periods, and an increase in the number of facilities through property acquisitions. SELF-STORAGE OPERATIONS: The Company's self-storage operations account for over 90% of the total property operations and represent the largest source of comparison of variances from period to period. As a result, the following table is presented to further illustrate variances from period to period by (i) comparing the operating results of self-storage facilities which were owned by the Company throughout 1996 and 1997 and (ii) outlining operating results for those self-storage facilities which were acquired by the Company in 1996 and 1997 whereby the operations represent partial results from the date the facility was acquired through the end of the period. 16 SUMMARY OF SELF-STORAGE FACILITY OPERATIONS
Three Months Ended March 31, ----------------------------------------- 1997 1996 Change ------------ ------------ ----------- (dollar amounts in thousands, except rents per square foot) Rental income: Pre-1996 acquisitions $61,320 $ 57,865 6.0% 1996 and 1997 acquisitions 21,057 879 2,295.7% ------------ ------------ ----------- 82,377 58,744 40.2% ------------ ------------ ----------- Cost of operations: Pre-1996 acquisitions 19,342 18,298 5.7% 1996 and 1997 acquisitions 7,149 193 3,604.1% ------------ ------------ ----------- 26,491 18,491 43.3% ------------ ------------ ----------- Net operating income: Pre-1996 acquisitions 41,978 39,567 6.1% 1996 and 1997 acquisitions 13,908 686 1,927.4% ------------ ------------ ----------- $ 55,886 $40,253 38.8% ============ ============ =========== Net rentable square feet, (in thousands at the end of the period): Pre-1996 acquisitions 32,139 32,139 - 1996 and 1997 acquisitions 11,398 1,854 514.8% Number of facilities (at the end of the period): Pre-1996 acquisitions 547 547 - 1996 and 1997 acquisitions 176 29 506.9% Pre-1996 acquisitions: Annualized realized rent per occupied square foot (a) $8.52 $8.16 4.4% Annualized scheduled rent per occupied square foot (b) $9.12 $7.92 15.2% Weighted average occupancy for the period 89.3% 88.5% 0.9%
--------------------------------------------------------- (a) Realized rent per square foot represents the actual revenue earned per occupied square foot after giving effect to discounts through the use of promotions. (b) Scheduled rent per square foot represents the posted revenue per occupied square foot prior to giving effect to discounts through the use of promotions. The comparative increases in the Company's self-storage operations are principally due to the acquisition of additional facilities. For the consistent group of facilities which were owned by the Company throughout each of the periods, improved operations are principally the result of improved weighted average occupancies combined with increased realized rent per square foot. Commencing in early 1996, the Company began to experiment with a telephone reservation system designed to provide added customer service. Customers calling either the Company's toll-free telephone referral system, (800) 44-STORE, or a self-storage facility are directed to the Company's reservation system where a representative discusses with the customer space requirements, price and location preferences and also informs the customer of other products and services provided by the Company. The national reservation center was not fully operational for most of the Company's facilities until the fourth quarter of 1996. In the second half of 1996, the Company began to increase its scheduled rents charged to new customers (prior to promotional discounts) and to existing tenants where warranted. As a result, both realized and scheduled rents per square foot increased during the three months ended March 31, 1997 as compared to the same period in 1996. 17 DEVELOPMENT OF SELF-STORAGE FACILITIES: Commencing in 1995, the Company began to construct self-storage facilities. Through March 31, 1997, the Company constructed and opened for operation seven facilities, one of which began operations in 1995, four in 1996 and two in 1997. At March 31, 1997, the Company had eleven self-storage facilities (approximately 631,000 square feet) under construction with an aggregate cost incurred to date of approximately $39.4 million and total estimated costs to complete of $21.4 million. Generally the construction period takes 9 to 12 months followed by a 18 to 24 month fill-up process until the newly constructed facility reaches a stabilized occupancy level of approximately 90%. Due to the timing of the employment of the capital to construct the facilities and the relatively long "fill-up" period until the facilities reach a stabilized occupancy level, the Company believes that its development plans may create earnings dilution in the short-term. However, in April 1997, the Company entered into an agreement with a joint venture partner to develop approximately $220 million of self-storage facilities (see "Liquidity and Capital Resources - Development activities") and expects that the joint development of self-storage facilities will mitigate this earnings dilution to the extent of the joint venturer's interest. COMMERCIAL PROPERTY OPERATIONS: Commercial property rental income and cost of operations presented on the consolidated statements of income reflect the operations of the 35 facilities owned by the Company. The following table summarizes the operating results (before depreciation) of these facilities for the three months ended March 31, 1997 and 1996. 18 Summary of Commercial Property Operations
Three Months Ended March 31, ---------------------------------------- 1997 1996 Change ---------- ------------ ---------- (dollar amounts in thousands, except rents per square foot) Rental income: Pre-1996 acquisitions $4,991 $4,965 0.5% 1996 and 1997 acquisitions 2,606 - - ---------- ------------ ---------- 7,597 4,965 53.0% ---------- ------------ ---------- Cost of operations: Pre-1996 acquisitions 2,216 2,194 1.0% 1996 and 1997 acquisitions 968 - - ---------- ------------ ---------- 3,184 2,194 45.1% ---------- ------------ ---------- Net operating income: Pre-1996 acquisitions 2,775 2,771 0.1% 1996 and 1997 acquisitions 1,638 - - ---------- ------------ ---------- $4,413 $2,771 59.3% ========== ============ ========== Net rentable square feet, in thousands (at the end of the period): Pre-1996 acquisitions 2,004 2,004 - 1996 and 1997 acquisitions 1,041 291 257.7% Number of facilities (at the end of the period): Pre-1996 acquisitions 20 20 - 1996 and 1997 acquisitions 15 2 650.0% Pre-1996 acquisitions: ---------------------- Annualized realized rent per occupied square foot (a) $9.00 $8.76 2.7% Weighted average occupancy for the period 95.7% 96.3% (0.6%)
--------------------------------------------------------- (a) Realized rent per square foot represents the actual revenue earned per occupied square foot after giving effect to discounts through the use of promotions. As indicated in the above table, the Company's commercial property operations have grown principally as a result of the addition of new properties. The operations of the consistent group of properties have been relatively stable, with changes in operations principally the result of changing occupancy levels and realized rental rates. Due to the size of the Company's investment in commercial properties relative to its self-storage facilities, the Company has not emphasized its growth in this segment of its portfolio. Effective January 2, 1997, the Company restructured its commercial property operations to concentrate its investing efforts in real estate facilities containing commercial and industrial rental space through a separate entity. The Company believes that the restructuring will create a vehicle which should facilitate future growth in this segment of the real estate industry. The Company will participate in this growth through its ownership interest in the new entity. The Company currently owns approximately 85% of the economic interest in the new entity. Accordingly, due to the Company's significant ownership interest the Company will continue to consolidate the entity until such time that the Company's ownership and control is reduced to a level not warranting consolidation. 19 EQUITY IN EARNINGS OF REAL ESTATE ENTITIES: The Company currently has ownership interests in 41 limited partnerships and 8 REITs (collectively the "Unconsolidated Entities"). The Company's ownership interest in these entities ranges from 15% to 45%, but generally averages approximately 30%. Due to the Company's limited ownership interest and control of these entities, the Company does not consolidate the accounts of these entities for financial reporting purposes and accounts for such investments using the equity method. Equity in earnings of real estate entities was $5,221,000 and $4,611,000 for the three months ended March 31, 1997 and 1996, respectively. The increase in 1997 as compared to 1996 reflects the effect of improved property operations (these improvements were similar to those experienced by the consolidated facilities in "property operations" above) and additional equity interests purchased in numerous other unconsolidated affiliates in 1996 for $83.9 million in cash. These factors were offset by the Company's purchase of eight affiliated REIT's and the acquisition of additional partnership interests in 1996, which resulted in the elimination of $124.7 million in equity investment (and, after the acquisition, the associated equity earnings) as these entities were consolidated or merged into the Company's operations. Equity in earnings of real estate entities for the three months ended March 31, 1997 consists of the Company's pro rata share of earnings (including the Company's share of depreciation expense of $3,629,000) of the Unconsolidated Entities based upon the Company's ownership interest in each for the period. In addition, equity in earnings of real estate entities for the three months ended March 31, 1997 includes amortization totaling $1,622,000, representing the amortization of the Company's cost basis over the underlying book value of the Company's equity interest in each of the entities. The following table summarizes the components of the Company's equity in earnings of real estate entities:
Three Months Ended March 31, --------------------------------------------------- 1997 1996 Dollar Change ---------------- ------------- ---------------- (Amounts in thousands) Self-storage operations $ 8,635 $ 8,828 $ (193) Commercial property operations 629 754 (125) Depreciation: Self-storage facilities (3,401) (4,213) 812 Commercial properties (228) (281) 53 Other (414) (477) 63 ---------------- ------------- ---------------- Total equity in earnings of real estate entities $ 5,221 $ 4,611 $ 610 ================ ============= ================
20 Similar to the Company, the Unconsolidated Entities generate substantially all of their income from their ownership of self-storage facilities. In the aggregate, the Unconsolidated Entities own a total of 353 facilities at March 31, 1997, including 343 self-storage facilities. The following summarizes combined operating data with respect to the Unconsolidated Entities at March 31, 1997: Selected Financial Data of Unconsolidated Entities (in thousands) --------------------------------------------------------- For the three months ended March 31, 1997: Rental income $46,672 Total revenues 47,159 Cost of operations 17,494 Depreciation 6,918 Net income 19,494 At March 31, 1997: Total assets $840,552 Total debt 89,821 Total equity 713,275 The Company expects that its equity in earnings from Unconsolidated Entities will generally decrease as a result of the acquisition of additional interests in the Unconsolidated Entities by the Company. The Company has in the past, and may continue to seek to acquire in the future, real estate facilities owned by or additional interests in the Unconsolidated Entities. PROPERTY MANAGEMENT OPERATIONS: The property management contracts generally provide for compensation equal to 6%, in the case of the self-storage facilities, and 5%, in the case of the commercial properties, of gross revenues of the facilities managed. Under the supervision of the property owners, the Company coordinates rental policies, rent collections, marketing activities, the purchase of equipment and supplies, maintenance activity, and the selection and engagement of vendors, suppliers and independent contractors. In addition, the Company assists and advises the property owners in establishing policies for the hire, discharge and supervision of employees for the operation of these facilities, including resident managers, assistant managers, relief managers and billing and maintenance personnel. Property management operations reflects the activities with respect to the management of facilities owned by affiliated unconsolidated entities. As a result, the revenues generated from its property management operations are generally predictable and dependent upon the future growth of rental income for these affiliated properties. The Company has in the past, and may continue to seek to acquire in the future, real estate facilities owned by affiliated entities which are not consolidated with the Company. Although the acquisition of such facilities will reduce management fee income to the Company, however, offsetting the reduction in management fee income will be a corresponding reduction in the cost of property operations as the facilities acquired by the Company will no longer incur property management fees. 21 During the three months ended March 31, 1997, the Company's property management operations generated net operating income of $2,576,000, as compared to $3,132,000 in the same period in 1996. This decrease is due to the business combinations which occurred during fiscal 1996, which resulted in fewer unconsolidated properties being managed by the Company in 1997 as compared to 1996, and by the acquisition of 25 properties during the fourth quarter of 1996 that were owned by unaffiliated parties and managed by the Company. ANCILLARY BUSINESS: In an effort to attract a wider variety of customers, to further differentiate the Company from its competition and to generate new sources of revenues, additional business are being developed to complement the Company's self-storage business. These products include the sale of locks, boxes and packing supplies and the rental of trucks and other moving equipment through the implementation of (i) a retail expansion program, (ii) a truck rental program and more importantly (iii) a portable self-storage business. Although not material to the Company's overall operations, its ancillary business is expected to play a more important role in the future of the Company. The following table summarizes the Company's ancillary business operations:
Three Months Ended March 31, ---------------------------------------------------------- 1997 1996 Dollar Change ---------------- ---------------- --------------- (Amounts in thousands) Ancillary revenues: ------------------- Packaging material and truck rental $ 850 $ 497 $ 353 Portable self-storage rents 472 - 472 ---------------- ---------------- --------------- 1,322 497 825 ---------------- ---------------- --------------- Cost of operations - ancillary business --------------------------------------- Packaging material and truck rental 519 440 79 Portable self-storage 2,821 - 2,821 ---------------- ---------------- --------------- 3,340 440 2,900 ---------------- ---------------- --------------- Net operating income (loss) - ancillary business ------------------------------------------------ Packaging material and truck rental 331 57 274 Portable self-storage (2,349) - (2,349) ---------------- ---------------- --------------- $(2,018) $ 57 $(2,075) ================ ================ ===============
22 In 1996, the Company organized Public Storage Pickup and Delivery, Inc. ("PSPUD") as a separate corporation to operate a portable self-storage business that rents storage containers to customers for storage in central warehouses and provides related transportation services. The Company believes PSPUD's business complements the Company's existing operations and PSPUD is using the national telephone reservation system and various marketing initiatives, including radio and television, to promote its rental activity. At March 31, 1997, PSPUD has opened a total of 13 facilities, with an additional 8 facilities being opened through April 30, 1997. PSPUD presently anticipates expanding its operations to additional areas during 1997, subject to continuing evaluation of this business and the satisfaction of regulatory requirements. There can be no assurance on the level of PSPUD's expansion or profitability. PSPUD's operations generated a loss of approximately $2.4 million in the first quarter of 1997, due to the start-up concerns mentioned above. PSPUD's operating experience is limited and its operations may be affected by such factors as the level of competition in the business, the demand for storage containers, general economic conditions, either nationally or in the market areas in which PSPUD operates, the rate of facility move-ins and move-outs, the availability of acceptable locations, the level of PSPUD's operating expenses and the cost of capital equipment. Until the facilities are operating profitably, PSPUD's operations are expected to adversely impact the Company's earnings growth rate. The extent of the impact will depend in significant part on the number, timing and performance of new facilities. INTEREST AND OTHER INCOME: Interest and other income decreased $700,000 to $1,690,000 for the three months ended March 31, 1997 from $2,390,000 for the same period in 1996. Interest and other income principally consists of interest earned on cash balances and interest related to mortgage notes receivable. The decrease in interest income for the three months ended March 31, 1997 compared to the same period in 1996 is primarily due to a decrease in invested cash balances. From mid December 1995 through late January 1996, the Company, through two equity offerings of preferred stock, raised net proceeds of approximately $330 million. On March 18, 1997, the Company publicly issued 4.6 million shares of common stock raising net proceeds of approximately $126.7 million. Due to the timing to invest these proceeds into real estate assets, cash balances in interest bearing accounts during the three months ended March 31, 1997 were lower than during the same period in 1996. DEPRECIATION AND AMORTIZATION: Depreciation and amortization expense has increased from $14,592,000 for the three months ended March 31, 1996 to $19,787,000 for the same period in 1997. This increase is principally due to the acquisition of additional real estate facilities during 1996. Amortization expense with respect to intangible assets totaled $2,327,000 for the three months ended March 31, 1997 and 1996. GENERAL AND ADMINISTRATIVE EXPENSE: General and administrative expense was $1,619,000 for the three months ended March 31, 1997 and $1,361,000 the same period in 1996, an increase of $258,000. The Company has experienced and expects to continue to experience increased general and administrative costs due to the following: (i) the growth in the size of the Company has resulted in increased expenses, and (ii) the Company's property acquisition activities have continued to expand, resulting in certain additional costs incurred in connection with the acquisition of additional real estate facilities. General and administrative costs principally consist of state income taxes (for states in which the Company is a non-resident), investor relation expenses, and certain costs incurred in the acquisition and development of real estate facilities. 23 MINORITY INTEREST IN INCOME: Minority interest in income represents the income allocable to equity interests owned by others in the partnerships which are consolidated with the Company. Minority interest in income for the three months ended March 31, 1997 was $2,447,000 compared to $2,339,000 for the same period in 1996, representing an increase of $108,000. This increase is principally due the consolidation of two additional partnerships commencing on April 1, 1996 and the resulting increase in minority interest. Accordingly, unlike the first quarter of 1997, the first quarter of 1996 does not reflect the minority interest from these two partnerships. In determining income allocable to the minority interest for the three months ended March 31, 1997 and 1996, consolidated depreciation and amortization expense of approximately $2,357,000 and $2,901,000, respectively, was allocated to the minority interest. SUPPLEMENTAL PROPERTY DATA AND TRENDS There are approximately 72 ownership entities owning in aggregate 1,066 self-storage facilities, including the facilities which the Company owns and/or operates. At March 31, 1997, 343 of these facilities were owned by affiliated entities, entities in which the Company has an ownership interest and uses the equity method for financial statement presentation. The remaining 723 facilities are owned by the Company and Consolidated Partnerships many of which were acquired through business combinations with affiliates during 1996, 1995, and 1994. In order to evaluate how the Company's overall portfolio has performed, management analyzes the operating performance of a consistent group of self-storage facilities representing 951 (55.8 million net rentable square feet) of the 1,066 self-storage facilities (herein referred to as "Same Store" self-storage facilities) which have been operated under the "Public Storage" name for at least the past three years. The Same Store group of properties includes 613 consolidated facilities and 338 facilities owned by Unconsolidated Entities. The following table summarizes the pre-depreciation historical operating results of the Same Store self-storage facilities:
Three months ended March 31, ----------------------------------------------- 1997 1996 Change -------------- -------------- ---------- (dollar amounts in thousands, except per square foot amounts) Rental income...................... $113,935 $107,006 6.5% Cost of operations (1)............. 42,043 39,296 7.0% -------------- -------------- ---------- Net operating income............... $71,892 $67,710 6.2% ============== ============== ========== Gross profit margin (2)............ 63.1% 63.2% (0.1)% ..................................... .................. ................. ................ Weighted Average: ----------------- Occupancy.................... 89.7% 89.3% 0.4% Annualized realized rent per sq. ft. for period (3)..... $9.12 $8.64 5.6% Annualized scheduled rent per sq. ft. for period......... $9.84 $8.40 17.1% Annualized scheduled rent per sq. ft at end of period.. $9.96 $8.40 18.6%
- ------------------------ 24 1. Assumes payment of property management fees on all facilities, including those facilities owned by the Company for which effective November 16, 1995 no fee is paid. 2. Gross profit margin is computed by dividing property net operating income (before depreciation expense) by rental revenues. Cost of operations include a 6% management fee. The gross profit margin excluding the facility management fee was 69.1% and 69.2% in 1997 and 1996, respectively. On November 16, 1995, the Company acquired its facility manager and no longer incurs such fees on the properties it owns. 3. Realized rent per square foot represents the actual revenue earned per occupied square foot. Management believes this is a more relevant measure then the scheduled rental rates, since scheduled rates can be discounted through the use of promotions. As indicated above, in early 1996, the Company implemented a national telephone reservation system designed to provide added customer service for all the self-storage facilities under management by the Company. The Company believes that the improved operating results, as indicated in the above table, in large part are due to the success of the national telephone reservation system. However, the national telephone reservation system was not fully operational for most of the self-storage facilities until the later part of the fourth quarter of 1996. Rental income for the Same Store facilities included promotional discounts totaling $3,500,000 for the first three months in 1997 compared to $288,000 for the same period in 1996. LIQUIDITY AND CAPITAL RESOURCES ------------------------------- The Company has operated and intends to continue to operate in a self-sufficient manner without reliance on external sources of financing to fund its ongoing operating needs. The Company believes that funds internally generated from ongoing operations will continue to be sufficient to enable it to meet its operating expenses, capital improvements, debt service requirements and distributions to shareholders for the foreseeable future. Over the past several years, funds internally generated from ongoing operations have been in excess of the Company's operating needs, allowing the Company to retain cash flow, which it used to acquire additional real estate investments or make optional principal repayments on debt. Despite the Company's ability to retain a portion of its internally generated cash flow, the Company's growth strategies have required the Company to seek external financing. The Company has an unsecured $150.0 million revolving credit facility with a group of banks which it uses as a temporary source of acquisition financing. The Company, however, seeks to ultimately finance all acquisitions with permanent sources of capital. As a result, the Company has raised capital through the public issuance of both common and preferred stock which was used to repay borrowings and make additional investments in real estate assets. 25 INTERNALLY GENERATED CASH FLOWS: The Company believes that important measures of its performance as well as its liquidity are cash provided by operations and funds from operations ("FFO") and the ability of these measures to find the Company's operating requirements (i.e., capital improvements, principal payments on debt and distribution requirements). Net cash provided by operations (as determined in accordance with generally accepted accounting principles) reflects the cash generated from the Company's business before distributions to various equity holders, including the preferred shareholders, capital expenditures or mandatory principal payments on debt. Net cash provided by operations has increased to $68,164,000 from $53,742,000 for the three months ended March 31, 1997 and 1996, respectively. The following table summarizes the Company's ability to pay the minority interests' distributions, its dividends to the preferred shareholders and capital improvements to maintain the facilities through the use of cash provided by operating activities. The remaining cash flow is available to the Company to make both scheduled and optional principal payments on debt, pay distributions to common shareholders and for reinvestment.
For the Three Months Ended March 31, ------------------------------------------- 1997 1996 ---------------------- ------------------- Net Income $ 42,318,000 $ 32,341,000 Depreciation and amortization 19,787,000 14,592,000 Depreciation from unconsolidated real estate investments 3,629,000 4,494,000 Minority interest in income 2,447,000 2,339,000 Amortization of discounts on mortgage notes receivable (17,000) (24,000) ---------------------- ------------------- Net cash provided by operating activities 68,164,000 53,742,000 Distributions from operations to minority interests (funds from operations allocable to minority interests) (4,792,000) (5,240,000) ---------------------- ------------------- Cash from operations/FFO available to the Company's shareholders 63,372,000 48,502,000 Less: preferred stock dividends (19,150,000) (15,166,000) ---------------------- ------------------- Cash from operations/FFO available to common shareholders 44,222,000 33,336,000 Capital improvements to maintain facilities: Mini-warehouses (5,861,000) (2,322,000) Business parks (431,000) (495,000) Add back: minority interest share of capital improvements 398,000 496,000 ---------------------- ------------------- Funds available for principal payments on debt, common dividends and reinvestment 38,328,000 31,015,000 Cash distributions to common shareholders (19,457,000) (15,748,000) ---------------------- ------------------- Funds available for principal payments on debt and investment $ 18,871,000 $ 15,267,000 ====================== ===================
26 See the consolidated statements of cash flows for the three months ended March 31, 1997 and 1996 for additional information regarding the Company's investing and financing activities. Total FFO increased to $63,372,000 for the three months ended March 31, 1997 compared to $48,502,000 for the same period in 1996. FFO available to common shareholders (after deducting preferred stock dividends) increased to $44,222,000 for the three months ended March 31, 1997 compared to $33,336,000 for the same period in 1996. FFO means net income (loss) (computed in accordance with generally accepted accounting principles) before (i) gain (loss) on early extinguishment of debt, (ii) minority interest in income and (iii) gain (loss) on disposition of real estate, adjusted as follows: (i) plus depreciation and amortization (including the Company's pro-rata share of depreciation and amortization of unconsolidated equity interests and amortization of assets acquired in the PSMI Merger, including property management agreements and goodwill), and (ii) less FFO attributable to minority interest. FFO is a supplemental performance measure for equity REITs as defined by the National Association of Real Estate Investment Trusts, Inc. ("NAREIT"). The NAREIT definition does not specifically address the treatment of minority interest in the determination of FFO or the treatment of the amortization of property management agreements and goodwill. In the case of the Company, FFO represents amounts attributable to its shareholders after deducting amounts attributable to the minority interests and before deductions for the amortization of property management agreements and goodwill. FFO is presented because many industry analysts consider FFO to be one measure of the performance of the Company and it is used in establishing the terms of the Class B Common Stock. FFO does not take into consideration capital improvements, scheduled principal payments on debt, distributions and other obligations of the Company. Accordingly, FFO is not a substitute for the Company's cash flow or net income (as discussed above) as a measure of the Company's liquidity or operating performance. The Company accounts for its investments in the unconsolidated affiliated entities using the equity method of accounting, and accordingly, earnings are recognized based upon the Company's interest in each of the partnerships and REITs. This interest is based on the Company's share of the increase or decrease in the net assets of the 27 entities from their operations. Provisions of the partnerships' and REITs' governing documents provide for the payment of preferred cash distributions to other investors (until certain specified amounts have been paid) without regard to the pro rata interest of all investors in current earnings. As a result, actual cash distributions paid to the Company for a period of time will be less than the Company's interest in the entities' FFO. During the three months ended March 31, 1997, FFO distributed to the Company was approximately $5.4 million less than the Company's share of FFO. Preferred cash distributions paid to other investors during each period have the effect of increasing the Company's economic interest in each of the respective entities and reducing the amount of future preference payments which must be paid to other investors before cash distributions will be shared on a pro rata basis with respect to each investor's actual interest. At March 31, 1997, the aggregate future preference payments to other investors is approximately $77.5 million and is expected to be paid over approximately 9 years, with approximately 40% of the amount being paid over the next 3 years. RETENTION OF OPERATING CASH FLOWS: Operating as a REIT, the Company's ability to retain cash flow for reinvestment is restricted. In order for the Company to maintain its REIT status, a substantial portion of its operating cash flows must be used to make distributions to its shareholders. Remaining cash flows must then be sufficient to fund necessary capital improvements and scheduled debt service requirements. Accordingly, the Company's ability to be self-sufficient is predicated on its ability to generate sufficient operating cash flows to satisfy its REIT distribution requirements, capital improvement requirements, scheduled debt service requirements, and provide funds for additional investments. Over the past five years, the Company's distribution policy has enabled it to retain significant funds (after capital improvements) to make additional investments and debt reductions. During first three months of 1997 and 1996, the Company distributed to common shareholders approximately 43.9% and 47.2% of its FFO available to common shareholders, respectively, allowing it to retain approximately $18.9 million and $15.3 million (an increase of approximately 23.5%), respectively, after satisfying its capital improvements and preferred stock dividend requirements (see table above). DISTRIBUTION REQUIREMENTS: During the first three months of 1997, the Company paid dividends totaling $16,091,000 to the holders of the Company's Senior Preferred Stock, $16,471,000 to the holders of the Convertible Preferred Stock (of which $13,412,000 represents a prepayment of dividends due through December 31, 1998), and $19,457,000 to the holders of Common Stock. CAPITAL IMPROVEMENT REQUIREMENTS: During 1997, the Company has budgeted approximately $26.6 million for capital improvements ($22.4 million for its self-storage facilities and $4.2 million for its business park facilities). The minority interests' share of the budgeted capital improvements is approximately $3.3 million. During the first three months of 1997, the Company incurred capital improvements of approximately $6.3 million. During 1995, the Company commenced a program to enhance its visual icon and modernize the appearance of its self-storage facilities, including modernization of signs, paint color schemes, and rental offices. Included in the 1997 capital improvement budget is approximately $4.8 million with respect to these expenditures. 28 DEBT SERVICE REQUIREMENTS: The Company does not believe it has any significant refinancing risks with respect to its mortgage debt, all of which is at a fixed rate. The Company uses its $150.0 million of bank credit facility (all of which was unused as of May 13, 1997) primarily to fund acquisitions and provide financial flexibility and liquidity. The credit facility currently bears interest at LIBOR plus 0.47%. At March 31, 1997, the Company had total outstanding borrowings of approximately $107.9 million. Approximate principal maturities of notes payable at March 31, 1997 are as follows:
7.08% Unsecured Fixed Rate Senior Notes Mortgage Debt Total ---------------- --------------- ----------------- 1997 (remainder of ) $ 6,500 $ 4,175 $ 10,675 1998 7,250 7,929 15,179 1999 8,000 6,467 14,467 2000 8,750 2,707 11,457 2001 9,500 2,997 12,497 Thereafter 19,750 23,884 43,634 ---------------- --------------- ----------------- $ 59,750 $ 48,159 $ 107,909 ================ =============== =================
EXTERNAL FINANCING ABILITY: The Company believes that its size and financial flexibility enables it to access capital for growth when appropriate. The Company's financial profile is characterized by a low level of debt to total capitalization, increasing net income, increasing cash flow from operations, and a conservative dividend payout ratio with respect to the common stock. The Company's credit ratings on its Senior Preferred Stock by each of the three major credit agencies are Baa2 by Moody's and BBB+ by Standard and Poors and Duff & Phelps. The Company's portfolio of real estate facilities remains substantially unencumbered. At March 31, 1997, the Company had mortgage debt outstanding of $48.2 million and had consolidated real estate facilities with a book value of $1.9 billion. However, the Company has been reluctant to finance its acquisitions with debt and generally will only increase its mortgage borrowing through the assumption of pre-existing debt on acquired real estate facilities. Over the past three years the Company has funded substantially all of its acquisitions with permanent capital (both common and preferred stock). Unlike many other real estate companies, the Company has elected to use preferred stock despite the fact that the coupon rates of its preferred stock exceeds current rates on conventional debt. The Company has chosen this method of financing for the following reasons: (i) the Company's perpetual preferred stock has no sinking fund requirements, or maturity date and does not require redemption, all of which eliminate any future refinancing risks, (ii) preferred stock allows the Company to leverage the common stock without the attendant interest rate or refinancing risks of debt, and (iii) dividends on the preferred stock can be applied to the Company's REIT distributions requirements, which have helped the Company to maintain a low common stock dividend payout ratio and retain cash flow. On March 18, 1997, the Company publicly issued 4.6 million shares of common stock, raising net proceeds of approximately $126.7 million. The Company intends to use the net proceeds from this offering to make investments in real estate, primarily self-storage, including mortgage loans and interest in real estate partnerships, to satisfy cash elections in connection with mergers with affiliated REITs and to fund expenditures of PSPUD. 29 MERGERS: On April 11, 1997, the shareholders of each of Public Storage Properties XIV, Inc. and Public Storage Properties XV, Inc. approved the mergers of the respective corporations into the Company. In connection with the mergers, the Company issued an aggregate of 2.3 million shares of common stock and paid $18.7 million in cash. In April 1997, Public Storage Properties XVI, Inc. ("PSP-16"), Public Storage Properties XVII, Inc. ("PSP-17"), Public Storage Properties XVIII, Inc. ("PSP-18") and Public Storage Properties XIX, Inc. ("PSP-19") each agreed, subject to certain conditions, to merge with and into the Company. PSP-16, PSP-17, PSP-18 and PSP-19 are affiliated publicly traded equity real estate investment trusts. Each of the mergers is conditioned on approval by the respective shareholders of PSP-16, PSP-17, PSP-18 and PSP-19, however, the mergers are not conditioned on approval of each other. The Company expects that if approved by the shareholders, the mergers would be completed in June or July 1997. The aggregate estimated cost of these pending mergers for the interest not owned by the Company is approximately $200 million. The Company currently owns, on average, approximately 33% of the equity interest in each of these affiliated REITs. The Company will acquire the remaining interest in each of these affiliated REITs for a combination of cash and common stock of the Company. See Note 9 to the Company's consolidated financial statements. DEVELOPMENT ACTIVITIES: At March 31, 1997, the Company had eleven self-storage facilities (approximately 631,000 square feet) under construction with an aggregate cost incurred to date of approximately $39.4 million and total additional estimated cost to complete of $21.4 million. The Company currently has plans to develop an additional 15 self-storage facilities (approximately 927,000 square feet) in various locations at an estimated cost of approximately $60.4 million (aggregate costs incurred to date of approximately $3.3 million). The Company is evaluating the feasibility of developing additional self-storage facilities in selected markets in which there are few, if any, facilities to acquire at attractive prices and where the scarcity of other undeveloped parcels of land or other impediments to development make it difficult to construct additional competing facilities. Generally the construction period takes 9 to 12 months followed by a 18 to 24 month fill-up process until the newly constructed facility reaches a stabilized occupancy level of approximately 90%. Due to the timing of the employment of the capital to construct the facilities and the relatively long "fill-up" period until the facilities reach a stabilized occupancy level, the Company believes that its development plans may create earnings dilution in the short-term. 30 In April 1997, the Company formed a joint venture partnership with an unaffiliated partner to participate in the development of approximately $220 million of self-storage facilities (including selected facilities currently under development by the Company). The venture will be funded solely with equity capital consisting of 30% from the Company and 70% from the institutional investor. Initially, the Company contributed 8 facilities which were under development at March 31, 1997 to the joint venture partnership, and received a refund from the venture for 70% of the costs incurred to date in developing these properties. REIT STATUS: The Company believes that it has operated, and intends to continue to operate, in such a manner as to qualify as a REIT under the Internal Revenue Code of 1986, but no assurance can be given that it will at all times so qualify. To the extent that the Company continues to qualify as a REIT, it will not be taxed, with certain limited exceptions, on the taxable income that is distributed to its shareholders. As a REIT, the Company is not taxed on that portion of its taxable income which is distributed to its shareholders provided that at least 95% of its taxable income is so distributed prior to filing of the Company's tax return. The Company has satisfied the REIT distribution requirement since 1980. 31 PART II. OTHER INFORMATION Item 5 Other Information ----------------- On April 10, 1997, PSAF Development, Inc., a subsidiary of the Company, and an institutional investor entered into a limited partnership agreement relating to the development of mini-warehouses. See Note 3 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q. The limited partnership agreement is attached hereto as Exhibit 10 and is incorporated herein by this reference. Item 6 Exhibits and Reports on Form 8-K -------------------------------- (a) The following Exhibits are included herein: (10) Limited Partnership Agreement of PSAF Development Partners, L.P. between PSAF Development, Inc. and the Limited Partner dated as of April 10, 1997 (11) Statement re: Computation of Earnings per Share (12) Statement re: Computation of Ratio of Earnings to Fixed Charges (27) Financial Data Schedule (b) Reports on Form 8-K The Company filed a Current Report on Form 8-K dated March 12, 1997, pursuant to Item 5, which filed certain exhibits relating to the Company's public offering of Common Stock. 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: May 14, 1997 PUBLIC STORAGE, INC. BY: /s/ John Reyes -------------- John Reyes Senior Vice President and Chief Financial Officer (Principal financial officer) 32 EX-10 2 LIMITED PARTNERSHIP AGREEMENT EXHIBIT 10 LIMITED PARTNERSHIP AGREEMENT OF PSAF DEVELOPMENT PARTNERS, L.P. BETWEEN PSAF DEVELOPMENT, INC. AND [LIMITED PARTNER] DATED AS OF APRIL 10, 1997 Exhibits to this Agreement will be furnished to the Securities and Exchange Commission upon request. TABLE OF CONTENTS Page ---- 1. FORMATION; PURPOSES; TERM 1 1.1 Formation 1 1.2 Name 1 1.3 Purposes and Powers 1 1.4 Principal Executive Office 2 1.5 Term 2 1.6 Filings; Agent for Service of Process 2 1.7 Other Activities 2 1.8 Definitions 3 2. PARTNERS; CAPITAL CONTRIBUTIONS 14 2.1 Partners 14 2.2 Capital Contributions 14 2.3 Extent of Liability 18 2.4 Other Matters 18 3. ALLOCATIONS 18 3.1 Profits 18 3.2 Losses 19 3.3 Special Allocations to the General Partner 19 3.4 Gain from Sale 20 3.5 Regulatory Special Allocations 21 3.6 Other Allocations Rules 23 3.7 Tax Allocations: Code Section 704(c) 23 4. DISTRIBUTIONS 24 4.1 Operating Cash 24 4.2 Capital Proceeds 24 4.3 Amounts Withheld 26 5. MANAGEMENT 26 5.1 Managing Partner 26 5.2 Authority of Managing Partner 26 5.3 Limitations on Rights and Powers 27 5.4 Project Development 27 5.5 Compensation and Reimbursement 29 5.6 Hazardous Materials 30 6. ACTION BY PARTNERS; INVESTMENT COMMITTEE 31 6.1 Action by Partners 31 6.2 Investment Committee 31 6.3 Investment Programs 33 7. BOOKS AND RECORDS; FISCAL MATTERS 33 7.1 Books and Records 33 7.2 Reports 34 7.3 Tax Information 34 7.4 Fiscal Year 35 7.5 Tax Matters Partner 35 7.6 Tax Elections Made by Managing Partner 35 7.7 Taxation as a Partnership 35 7.8 Avoidance of Unrelated Business Taxable Income 35 i 8. TRANSFER OF INTERESTS 36 8.1 Transfer of Interest of General Partner 36 8.2 Transfer of Interest of Limited Partners 36 8.3 Prohibited Transfers 37 8.4 Representations; Legend 37 8.5 Distributions and Allocations in Respect to Transferred Interests 38 8.6 Right to Transfer 39 9. OPTIONS TO PURCHASE 39 9.1 General Partner's Option to Purchase 39 9.2 Consideration 39 9.3 Determination of Net Equity 40 9.4 Determination of Fair Market Value 40 9.5 Closing 42 9.6 Limited Partner's Option to Purchase 42 10. DISSOLUTION AND WINDING UP 43 10.1 Liquidating Events 43 10.2 Winding Up 43 10.3 Special Rights to Acquire PSA Common Shares 44 10.4 Compliance with Timing Requirements of Regulations 44 10.5 Rights of Partners 45 11. INDEMNIFICATION 45 11.1 Indemnification 45 11.2 Expenses 46 11.3 Indemnification Rights Nonexclusive 46 11.4 Errors and Omissions Insurance 46 11.5 Assets of the Partnership 46 12. DEFAULTING EVENT REMEDIES 46 12.1 Election to Purchase Defaulting Partner's Interest 46 12.2 Purchase Price of Defaulting Partner's Interest 47 12.3 Remedies Nonexclusive 47 13. REPRESENTATIONS AND WARRANTIES 48 13.1 Representations and Warranties of the General Partner 48 13.2 Representations and Warranties of the Limited Partner 51 13.3 Agreements of the General Partner 52 14. MISCELLANEOUS 53 14.1 Notices 53 14.2 Binding Effect 53 14.3 Construction 54 14.4 Time 54 14.5 Headings 54 14.6 Severability 54 14.7 Incorporation by Reference 54 14.8 Further Action 54 14.9 Variation of Pronoun 54 14.10 Governing Law 54 14.11 Waiver of Action for Partition 54 14.12 Counterparts 54 14.13 Sole and Absolute Discretion 55 14.14 Entire Agreement 55 14.15 Attorneys' Fees 55 14.16 Third Parties 55 14.17 Waiver 55 14.18 Amendment and Modification 55 14.19 Dispute Resolution 55 14.20 Confidentiality 56 ii EXHIBIT A - DESCRIPTION OF PROJECT EXHIBIT B - SPECIFIED ACTIONS EXHIBIT C - ACQUISITION CHECKLIST EXHIBIT D - MANAGEMENT AGREEMENT EXHIBIT E - MASTER LEASE AGREEMENT EXHIBIT F - FINANCIAL PROJECTIONS AND DEVELOPMENT COSTS EXHIBIT G - INITIAL BUSINESS PLAN EXHIBIT H - ANNUAL BUSINESS PLAN EXHIBIT I - CALCULATION OF "STOCK SHORTFALL" EXHIBIT J - COST ALLOCATIONS EXHIBIT K - FORM OF FUNDING REQUEST EXHIBIT L - SUMMARY OF INSURANCE COVERAGE EXHIBIT M - EXAMPLES OF REPORTS iii LIMITED PARTNERSHIP AGREEMENT OF PSAF DEVELOPMENT PARTNERS, L.P. This LIMITED PARTNERSHIP AGREEMENT OF PSAF DEVELOPMENT PARTNERS, L.P. is entered into and shall be effective as of April 10, 1997 (the "Effective Date"), by and among PSAF DEVELOPMENT, INC., a California corporation, as the General Partner, and the [LIMITED PARTNER], as the Limited Partner, pursuant to the provisions of the Act. WHEREAS, the General Partner and the Limited Partner propose to form a limited partnership to pursue the development and ownership of a number of state-of-the-art, geographically diversified self-storage facilities for income and capital appreciation; NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, the Partners hereby covenant and agree among themselves as follows: 1. FORMATION; PURPOSES; TERM 1.1 Formation. The Partners hereby form the Partnership as a limited partnership pursuant to the provisions of the Act and upon the terms and conditions set forth in this Agreement. 1.2 Name. The name of the Partnership shall be PSAF Development Partners, L.P. and all business of the Partnership shall be conducted in such name or in the name "Public Storage." 1.3 Purposes and Powers. (a) The Partnership is formed for the object and purpose of, and the nature of the business to be conducted and promoted by the Partnership is, acquiring, owning, developing, leasing and otherwise operating and dealing with the Projects as self-storage facilities, and conducting any and all activities as may be necessary or incidental to the foregoing. (b) The Partnership is empowered to do any and all things necessary, appropriate or convenient for the furtherance and accomplishment of its purposes, and for the protection and benefit of the Partnership and its Property, including but not limited to the following: (i) Entering into and performing contracts of any kind; (ii) Acquiring, constructing, operating, maintaining, owning, transferring, renting, or leasing any property, real, personal or mixed; (iii) Applying for and obtaining governmental authorizations and approvals; and (iv) Bringing and defending actions at law or in equity. (c) Except as otherwise provided in this Agreement, the Partnership shall not engage in any other activity or business and no Partner shall have any authority to hold itself out as a general agent of another Partner in any other business or activity. 1.4 Principal Executive Office. The principal executive office of the Partnership shall be at 701 Western Avenue, Glendale, California 91201-2397. The principal executive office may be changed from time to time by the General Partner. 1.5 Term. The term of the existence of the Partnership shall commence on the Effective Date and shall continue until the winding up and liquidation of the Partnership and its business is completed following a Liquidating Event, as provided in Section 10. 1.6 Filings; Agent for Service of Process. (a) The General Partner has caused a Certificate of Limited Partnership on Form LP-1 to be filed with the California Secretary of State in accordance with the Act. The Partnership shall take any and all actions reasonably necessary to perfect and maintain the status of the Partnership as a limited partnership under the laws of the State of California and under the laws of any other states or jurisdictions in which the Partnership engages in business. (b) To the extent required pursuant to the Act or the laws of any other state or jurisdiction, the name and address of the agent for service of process shall be Hugh W. Horne, 701 Western Avenue, Glendale, California 91201-2397, or any successor as appointed by the General Partner. (c) Upon the dissolution of the Partnership, the Partnership shall promptly execute and cause to be filed any necessary certificates of dissolution and cancellation in accordance with the Act and the laws of any other state or jurisdiction in which the Partnership has engaged in business. 1.7 Other Activities. (a) The Limited Partner acknowledges that the PSA Affiliates are engaged in the business, directly and indirectly, of acquiring, owning, developing, leasing, managing and operating self-storage facilities. The Limited Partner understands that the PSA Affiliates may be involved, directly or indirectly, in various other projects and businesses not included in the Partnership. The Partners hereby agree that the creation of the Partnership and involvement herein by each of the Partners shall not prejudice their rights (or the rights of their Affiliates) to have such other interests and activities and to enjoy profits or other benefits therefrom, and each Partner waives any rights it might otherwise have to share or participate in such other interests or activities of the other Partners or their Affiliates. Except as otherwise provided in this Agreement, the Partners and their Affiliates may engage in or possess any interest in any other business venture of any nature or description, independently or with others, including without limitation, the acquisition, ownership, development, leasing, managing and operation of self-storage facilities or other real property, and neither the Partnership nor any Partner shall have any right by virtue of this Agreement in and to such venture or the income or profits derived therefrom. (b) Notwithstanding the provisions of Section 1.7(a) above, so long as the General Partner is required to afford the Partnership the first right to develop and own a Qualifying Project pursuant to Section 6.2, no PSA Affiliates shall develop a Qualifying Project without complying with the provisions of Section 6.2. 1.8 Definitions.1.8 Definitions. Capitalized words and phrases used in this Agreement have the meanings set forth in this Section 1.8 or elsewhere in this Agreement: 2 (a) "Act" means the California Revised Limited Partnership Act as set forth in Title 2 (commencing with Section 15611) of the Corporations Code of the State of California, as amended from time to time (or any corresponding provisions of succeeding law), provided that the substantive rights of the Partners under this Agreement shall not be adversely affected by any such amendment. (b) "Actual Costs" means costs of development incurred to date, including Land Acquisition Costs, Basic Development Costs and PSA Affiliates Operating Costs. (c) "Adjusted Capital Account Deficit" means, with respect to any Partner, the deficit balance, if any, in such Partner's Capital Account as of the end of the relevant Fiscal Year, after giving effect to the following adjustments: (i) Credit to such Capital Account any amounts which such Partner is obligated to restore pursuant to any provision of this Agreement or is deemed to be obligated to restore pursuant to the penultimate sentences of Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5); and (ii) Debit to such Capital Account the items described in Sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6) of the Regulations. The foregoing definition of Adjusted Capital Account Deficit is intended to comply with the provisions of Section 1.704-1(b)(2)(ii)(d) of the Regulations and shall be interpreted consistently therewith. (d) "Adjusted Capital Contributions" means, as of any day with respect to a Partner, such Person's Capital Contributions, adjusted as follows: (i) Increased by the amount of any Partnership liabilities which, in connection with distributions to such Person pursuant to Sections 4.1, 4.2, and 10.2(c), are assumed by such Person or are secured by any Property distributed to such Person; and (ii) Reduced by the amount of cash and the Gross Asset Value of any Property distributed to such Person pursuant to Sections 2.2(d), 4.2(b), 4.2(d) and 10.2(c) and the amount of any liabilities of such Person assumed by the Partnership or which are secured by any Property contributed by such Person to the Partnership. In the event such Person Transfers all or any portion of its Interest in accordance with the terms of this Agreement, its transferee shall succeed to its Adjusted Capital Contribution to the extent it relates to the transferred Interest. (e) "Affiliate" means, with respect to any Person, (i) any Person directly or indirectly controlling, controlled by or under common control with such Person, (ii) any Person owning or controlling 10% or more of the outstanding voting interests of such Person, (iii) any officer, director or general partner of such Person, or (iv) any Person who is an officer, director, general partner, trustee or holder of 10% or more of the voting interests of any Person described in clauses (i) through (iii) of this sentence. 3 (f) "Agreement" means this Limited Partnership Agreement of PSAF Development Partners, L.P. and the exhibits hereto, as amended from time to time. Words such as "herein," "hereinafter," "hereof," "hereto" and "hereunder" refer to this Agreement as a whole, unless the context otherwise requires. (g) "Appraiser" means a disinterested entity that is experienced in valuing real estate portfolios and (a) is a M.A.I. appraiser that is a member of the American Institute of Real Estate Appraisers, any organization successor thereto, or other nationally recognized organization of real estate appraisers, with at least five years' experience in the case of the First and Second Appraisers and ten years' experience in the case of the Third Appraiser in conducting appraisals in the commercial real estate industry, and is qualified and experienced in appraising self-storage facilities similar to the Property, or (b) that works in conjunction with another disinterested entity with the qualifications described in (a) and both such entities sign the report. "First Appraiser," "Second Appraiser" and "Third Appraiser" shall have the meanings set forth in Section 9.4. (h) "Appraised Value" means the amount that a third party buyer would reasonably be expected to pay for all of the Property, on a portfolio basis, in a cash purchase, taking into account the current condition, use and zoning of the Property, net of a provision for all normal costs of sale, including a real estate commission at prevailing rates. (i) "Average Price" means the average of the PSA Common Shares daily closing prices on the Exchange for each of the first 20 of the 25 trading days on which PSA Common Shares are traded immediately preceding the date of a distribution of Capital Proceeds pursuant to Section 4.2 or a distribution pursuant to Section 10.2 or Section 10.3 or the date of any closing pursuant to Section 9.5, as the case may be, provided that the Average Price shall be no greater than 105% or less than 95% of the closing price of the PSA Common Shares on the Exchange on the sixth trading day immediately preceding such date. (j) "Basic Development Costs" means the costs actually incurred by the Partnership or any PSA Affiliate in conducting the activity referred to in Section 5.4, exclusive, however, of (i) Land Acquisition Costs, and (ii) PSA Affiliates Operating Costs, but including costs of initial operations and leaseup until a Project has achieved three consecutive months of Net Operating Income. (k) "Business Day" means Monday through Friday of each week, except that a legal holiday recognized as such by the United States Government shall not be regarded as a Business Day. (l) "Business Plans" means the "Initial Business Plan" attached hereto as Exhibit G and "Annual Business Plans" in the form attached hereto as Exhibit H. (m) "Capital Account" means, with respect to any Partner, the Capital Account maintained for such Person in accordance with the following provisions: 4 (i) To each Person's Capital Account there shall be credited such Person's Capital Contributions, such Person's distributive share of Profits and any items in the nature of income or gain which are specially allocated pursuant to Sections 3.4 or 3.5, and the amount of any Partnership liabilities assumed by such Person or which are secured by any Property distributed to such Person. (ii) To each Person's Capital Account there shall be debited the amount of cash and the Gross Asset Value of any Property distributed to such Person pursuant to Sections 2.2(d), 4.1, 4.2, 4.3 and 10.2, such Person's distributive share of Losses and any items in the nature of expenses or losses which are specially allocated pursuant to Sections 3.3 or 3.5, and the amount of any liabilities of such Person assumed by the Partnership or which are secured by any property contributed by such Person to the Partnership. (iii) In the event any Interest is transferred in accordance with the terms of this Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent it relates to the transferred Interest. (iv) In determining the amount of any liabilities for purposes of Sections 1.8(d)(i), 1.8(d)(ii), 1.8(m)(i) and 1.8(m)(ii), there shall be taken into account Code Section 752(c) and any other applicable provisions of the Code and Regulations. The foregoing provisions and the other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Regulations Section 1.704-1(b), and shall be interpreted and applied in a manner consistent with such Regulations. In the event the General Partner shall determine that it is prudent to modify the manner in which the Capital Accounts, or any debits or credits thereto (including, without limitation, debits or credits relating to liabilities which are secured by contributed or distributed property or which are assumed by the Partnership or the Partners), are computed in order to comply with such Regulations, the General Partner may make such modification, provided that it is not likely to have a material effect on the amounts distributable to any Partner pursuant to Section 10 upon the dissolution of the Partnership. The General Partner also shall (i) make any adjustments that are necessary or appropriate to maintain equality between the Capital Accounts of the Partners and the amount of Partnership capital reflected on the Partnership's balance sheet, as computed for book purposes, in accordance with Regulations Section 1.704-1(b)(2)(iv)(g), and (ii) make any appropriate modifications in the event unanticipated events might otherwise cause this Agreement not to comply with Regulations Section 1.704-1(b). (n) "Capital Contributions" means, with respect to any Partner, the amount of money and the initial Gross Asset Value of any property (other than money) contributed to the Partnership with respect to the interest in the Partnership held by such Partner. (o) "Capital Proceeds" means the gross cash proceeds of sales and financings of the Partnership's Properties, less the portion thereof used to pay or establish reserves for all Partnership expenses, any debt payments, capital improvements and other costs of development, replacements and contingencies, all as determined in accordance with the terms hereof. (p) "Capital Reserve" means a reserve for capital expenditures of 2.3% of annual gross revenue. (q) "Code" means the Internal Revenue Code of 1986, as amended from time to time (or any corresponding provisions of succeeding law). (r) "Completed Project" means a Project as to which a final certificate of occupancy (or its equivalent) has been received and which has had three consecutive months of positive monthly Net Operating Income. (s) "Contingency Reserve" means the aggregate amount by which the Actual Cost for all Completed Projects is less than 103% of the aggregate Project Budgeted Costs for Completed Projects. (t) "Defaulting Event" means (i) a Partner's withdrawal as a Partner from the Partnership in breach of Section 2.4(a), (ii) the Transfer by a Partner of all or any part of its Interest in the Partnership 5 (or such Partner's right to receive distributions) in breach of Article 8, (iii) a Partner's failure to make one or more capital contributions pursuant to Section 2.2 which in the aggregate exceed $100,000, which failure continues ten Business Days after written demand by the General Partner or any Partner; (iv) the General Partner taking any unilateral action which requires the unanimous consent of the Partners without first securing such consent in accordance with the terms hereof and (v) a violation of Section 1.7(b) or 13.3 (to the extent the circumstances giving rise to such violation are within the control of the General Partner or a PSA Affiliate), provided, however, that in the case of (iv) or (v) the action taken would prejudice the Limited Partner in a materially adverse manner and such default or prejudice is not cured or eliminated or in the process of being cured or eliminated in good faith within ten days after giving of notice by the Limited Partner to the General Partner specifying the nature of such default. (u) "Defaulting Partner" means a Partner with respect to which a Defaulting Event occurs. (v) "Depreciation" means, for each Fiscal Year or other period, an amount equal to the depreciation, amortization or other cost recovery deduction allowable with respect to an asset for such year or other period, except that if the Gross Asset Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of such year or other period, Depreciation shall be an amount which bears the same ratio to such beginning Gross Asset Value as the federal income tax depreciation, amortization or other cost recovery deduction for such year or other period bears to such beginning adjusted tax basis; provided, however, that if the federal income tax depreciation, amortization, or other cost recovery deduction for such year is zero, Depreciation shall be determined with reference to such beginning Gross Asset Value using any reasonable method selected by the General Partner. (w) "Exchange" means the New York Stock Exchange, Inc. or the national securities exchange (as defined in Section 12(b) of the Securities Exchange Act of 1934, as amended) or automated quotation system upon which the PSA Common Shares are then listed for trading. (x) "Fair Market Value" shall have the meaning set forth in Section 9.4. (y) "Fiscal Year" shall have the meaning set forth in Section 7.4. (z) "Gain from Sale" shall mean any gain recognized for federal income tax purposes from the sale or other disposition of the Partnership's assets computed by reference to the Gross Asset Value of the Property disposed of, notwithstanding that the adjusted tax basis of such Property differs from its Gross Asset Value. (aa) "Gross Asset Value" means, with respect to any asset, the asset's adjusted basis for federal income tax purposes, except as follows: (i) The initial Gross Asset Value of any asset contributed by a Partner to the Partnership shall be the gross fair market value of such asset, as determined by the Partners (as described below the Partners have agreed that the gross fair market value of Projects contributed by the General Partner to the Partnership at the time of contribution will be based on the cost of those Projects as set forth in Section 2.2); (ii) The Gross Asset Values of all Partnership assets shall be adjusted to equal their respective gross fair market values, as determined by the Partners, as of the following times: (A) the acquisition of an additional Interest by any new or existing Partner in exchange for more than a de minimis Capital Contribution; (B) the distribution by the Partnership to a Partner of more than a de minimis amount of Property as consideration for an Interest; and (C) the liquidation of the Partnership within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g); provided, however that the adjustments pursuant to clauses (A) and (B) above shall be made only if the Partners reasonably determine that such adjustments are necessary or appropriate to reflect the relative economic interests of the Partners in the Partnership; (iii) The Gross Asset Value of any Partnership asset distributed to any Partner shall be the gross fair market value of such asset on the date of distribution; and 6 (iv) The Gross Asset Values of Partnership assets shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such assets pursuant to Code Section 734(b) or Code Section 743(b), but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Regulation Section 1.704-1(b)(2)(iv)(m) and Sections 1.8(xx) and 3.5(g); provided, however, that Gross Asset Values shall not be adjusted pursuant to this Section 1.8(aa)(iv) to the extent the Partners determine that an adjustment pursuant to Section 1.8(aa)(ii) is necessary or appropriate in connection with a transaction that would otherwise result in an adjustment pursuant to this Section 1.8(aa)(iv). If the Gross Asset Value of an asset has been determined or adjusted pursuant to Section 1.8(aa)(i), 1.8(aa)(ii) or 1.8(aa)(iv), such Gross Asset Value shall thereafter be adjusted by Depreciation taken into account with respect to such asset for purposes of computing Profits and Losses. (bb) "Hazardous Materials" means any toxic, reactive, corrosive, ignitable or flammable chemical compound or hazardous substance, material or waste, whether solid, liquid or gas, that is regulated by any federal or state law or regulation. (cc) "Hazardous Materials Claims" shall have the meaning set forth in Section 5.6. (dd) "Hazardous Materials Laws" means all federal, state or local laws or regulations which regulate or relate to the use, treatment, storage, transportation, generation, handling or disposal of, or emission, discharge or other release or threatened release of, any Hazardous Materials. (ee) "Indemnitee" shall have the meaning set forth in Section 11.1. (ff) "Interest" means an interest, whether as a general partner or limited partner, in the Partnership representing the rights and obligations under the Agreement of the Partner who holds such Interest. (gg) "Investment Committee" shall have the meaning set forth in Section 6.2(a). (hh) "Land Acquisition Costs" means the amount paid by the Partnership or any PSA Affiliate to acquire land for development as a Project and all costs of closing such acquisition (e.g., transfer tax, title insurance and escrow charges and recording fees). Legal fees and other charges of independent firms incurred in connection with the evaluation, negotiation and closing of each acquisition of property which becomes a Project shall constitute Basic Development Costs and not Land Acquisition Costs. If the property acquired for a Project includes improvements which may be incorporated into the completed Project, that portion of the purchase price and closing costs which is fairly allocable to the value of the improvements to be so incorporated shall constitute Basic Development Costs and not Land Acquisition Costs. (ii) "Liquidating Event" shall have the meaning set forth in Section 10.1. (jj) "Minimum Gain" has the meaning set forth in Regulations Sections 1.704-2(b)(2) and 1.704-2(d). (kk) "Net Equity" of a Partner's Interest as of the Purchase Notice Date means the amount that would be distributed to such Partner in liquidation of the Partnership pursuant to Sections 10.2 and 10.3 if (1) all of the Partnership's Property were sold for its Fair Market Value, (2) the Partnership paid its accrued, but unpaid, liabilities, and established reserves pursuant to this Agreement for the payment of reasonably anticipated contingent or unknown liabilities, and (3) the Partnership distributed the remaining proceeds to the Partners in liquidation. (ll) "Net Operating Income" means all income from Projects less the costs of operations, including property management fees and a Capital Reserve. Net Operating Income shall be computed on an accrual basis consistent with PSA Affiliates' prior practice. Net Operating Income will not be reduced by depreciation, amortization, cost recovery deductions or similar non-cash allowances. (mm) "Nonrecourse Deductions" shall have the meaning set forth in Section 1.704-2(b)(1) of the Regulations. 7 (nn) "Nonrecourse Liability" shall have the meaning set forth in Section 1.704-2(b)(3) of the Regulations. (oo) "Operating Cash" means the gross cash proceeds of the Partnership from all operating sources (not including amounts taken into account in determining Capital Proceeds) less the portion thereof used to pay or establish reserves for all Partnership expenses, any debt payments, capital improvements and other costs of development, replacements and contingencies, all as determined by the Partners. "Operating Cash" shall not be reduced by depreciation, amortization, cost recovery deductions or similar allowances, but shall be increased by any reductions of reserves previously established. (pp) "Partner Nonrecourse Debt" shall have the meaning set forth in Section 1.704-2(b)(4) of the Regulations. (qq) "Partner Nonrecourse Debt Minimum Gain" means an amount, with respect to each Partner Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if such Partner Nonrecourse Debt were treated as a Nonrecourse Liability, determined in accordance with Section 1.704-2(i)(3) of the Regulations. (rr) "Partner Nonrecourse Deductions" has the meaning set forth in Sections 1.704-2(i)(1) and 1.704-2(i)(2) of the Regulations. (ss) "Partners" means the General Partner and the Limited Partner, collectively, and reference to a "Partner" shall be to any one of the Partners. The "General Partner" and "Limited Partner" are as set forth in Section 2.1. (tt) "Partnership" means the limited partnership formed pursuant to this Agreement. (uu) "Person" means any individual, partnership, corporation, trust or other entity. (vv) "Percentage Interest" means, with respect to the Limited Partner, 70%, and with respect to the General Partner, 30%. In the event any Interest is transferred in accordance with the provisions of this Agreement, the transferee of such Interest shall succeed to the Percentage Interest of its transferor to the extent it relates to the transferred Interest. (ww) "Priority Return" means, as to each Partner, a cumulative return on that Partner's Adjusted Capital Contributions including accrued and unpaid Priority Returns computed using monthly compounding at a monthly rate of one twelfth of 9 1/2%, provided that, in the case of the General Partner, any Capital Contribution made pursuant to Sections 2.2(a)(vi), 2.2(a)(vii) and 10.3 shall not be taken into account in computing the General Partner's Priority Return. (xx) "Profits" and "Losses" means, for each Fiscal Year or other period, an amount equal to the Partnership's taxable income or loss for such year or period, determined in accordance with Code Section 703(a) (for this purpose, all items of income, gain, loss or deduction required to be stated separately pursuant to Code Section 703(a)(1) shall be included in taxable income or loss), with the following adjustments: (i) Any income of the Partnership that is exempt from federal income tax and not otherwise taken into account in computing Profits or Losses pursuant to this Section 1.8(xx) shall be added to such taxable income or loss; (ii) Any expenditures of the Partnership described in Code Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to Regulations Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing Profits or Losses pursuant to this Section 1.8(xx) shall be subtracted from such taxable income or loss; (iii) In the event the Gross Asset Value of any Partnership asset is adjusted pursuant to Section 1.8(aa)(ii) or Section 1.8(aa)(iii), the amount of such adjustment shall be taken into account as gain or loss from the disposition of such asset for purposes of computing Profits or Losses; 8 (iv) Gain or loss resulting from any disposition of Property with respect to which gain or loss is recognized for federal income tax purposes shall be computed by reference to the Gross Asset Value of the Property disposed of, notwithstanding that the adjusted tax basis of such Property differs from its Gross Asset Value; (v) In lieu of the depreciation, amortization and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such Fiscal Year or other period, computed in accordance with Section 1.8(v); (vi) To the extent an adjustment to the adjusted tax basis of any Partnership asset pursuant to Code Section 734(b) or Code Section 743(b) is required pursuant to Regulations Section 1.704-1(b)(2)(iv)(m)(4) to be taken into account in determining Capital Accounts as a result of a distribution other than in liquidation of a Partner's interest in the Partnership, the amount of such adjustment shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases the basis of the asset) from the disposition of the asset and shall be taken into account for purposes of computing Profits or Losses; and (vii) Notwithstanding any other provision of this Section 1.8(xx), any items which are specially allocated pursuant to Sections 3.3, 3.4 or 3.5 (including Depreciation, deductions attributable to "guaranteed payments" and Gain from Sale) shall not be taken into account in computing Profits or Losses. The amounts of the items of Partnership income, gain, loss or deduction available to be specifically allocated pursuant to Sections 3.3, 3.4 and 3.5 shall be determined by applying rules analogous to those set forth in Sections 1.8(xx)(i) through 1.8(xx)(vi) above. (yy) "Project Budgeted Costs" has the meaning set forth in Section 6.2(b). (zz) "Projects" means the real properties described in Exhibit A-1 hereto and, unless the context indicates otherwise, such other real properties as are acquired by the Partnership pursuant to Section 5.4. (aaa) "Property" means all real, personal and other property or assets acquired by the Partnership, and shall include the Projects and both tangible and intangible property. (bbb) "PSA" means Public Storage, Inc., a California corporation. (ccc) "PSA Affiliate" means PSA and/or any Affiliate of PSA (other than the Partnership) that is under the control of PSA. The General Partner shall be responsible for all activities performed hereunder by PSA Affiliates. (ddd) "PSA Affiliates Operating Costs" means that portion of (i) compensation and other personnel costs incurred by PSA Affiliates in the employment of their employees and (ii) all other overhead and general and administrative costs of all PSA Affiliates, which is allocable to the performance of services referred to in Section 5.4 with respect to Qualifying Projects, including costs attributable to properties considered for development by the Partnership but not acquired by it. (eee) "PSA Common Shares" means the voting class shares of the Common Stock, $0.10 par value, of PSA. (fff) "Purchase Notice" shall have the meaning set forth in Section 9.1 with respect to the "General Partner Purchase Notice" and Section 9.6 with respect to the "Limited Partner Purchase Notice." (ggg) "Purchase Notice Date" shall have the meaning set forth in Section 9.1. (hhh) "Qualifying Project" means any PSA Affiliate's real estate development project of which 50% or more of the net rentable square footage will consist of self-storage facilities and no part of the project would generate for the Limited Partner more than a de minimus amount of unrelated business taxable income under Section 511 of the Code. A Qualifying Project shall not include the renovation, expansion or replacement of a self-storage facility currently owned by a PSA Affiliate. 9 (iii) "Regulations" means the Income Tax Regulations, including Temporary Regulations, promulgated under the Code, as such Regulations may be amended from time to time (or any corresponding provisions of succeeding regulations). (jjj) "Regulatory Allocations" shall have the meaning set forth in Section 3.5(h). (kkk) "Securities Act" means the Securities Act of 1933, as amended (or any corresponding provisions of succeeding law). (lll) "Stock Shortfall" shall be determined upon the liquidation of the Partnership or upon an election by the General Partner to exercise its option pursuant to Section 9.1, by first calculating the monthly rate of return, using monthly compounding, earned with respect to the Limited Partner's contributions to the Partnership, taking into account all distributions previously received, or to be received in the liquidation or sale pursuant to the option, including amounts received as guaranteed payments, without regard to whether a Stock Shortfall exists (that rate of return shall be the "Realized Rate of Return"). If the Realized Rate of Return is equal to or in excess of one twelfth of 10%, the Stock Shortfall shall be zero. If the Realized Rate of Return is less than one twelfth of 10%, but more than or equal to one twelfth of 7.5%, the Stock Shortfall shall be the amount that, when added to the distribution of Capital Proceeds or to the Net Equity, would increase the Realized Rate of Return to equal one twelfth of 10%. If the Realized Rate of Return is less than one twelfth of 7.5%, the Stock Shortfall shall be the amount that, when added to the distribution of Capital Proceeds or to the Net Equity, would increase the calculated Realized Rate of Return by one twelfth of 2.5%. The calculations set forth in Exhibit I illustrate how the Stock Shortfall is to be calculated. (mmm) "Transfer" means, as a noun, any voluntary or involuntary transfer, sale, pledge, hypothecation or other disposition and, as a verb, voluntarily or involuntarily to transfer, sell, pledge, hypothecate or otherwise dispose of. (nnn) "Working Capital" means the sum of the initial contributions made under Sections 2.2(a)(i) and 2.2(b)(i), as may be replenished from time to time, the outstanding balance of which shall at all times be invested in instruments backed by the United States Government. (ooo) "Yield" means the projected stabilized annual Net Operating Income of a Project or Projects divided by its or their total cost (including land cost), as determined in accordance with the financial projections and development costs in the form attached as Exhibit F-1 employing the same underwriting criteria and methodology used in generating the yields in the Initial Business Plan. 10 2. PARTNERS; CAPITAL CONTRIBUTIONS 2.1 Partners. The names and addresses of the Partners are as follows: General Partner: PSAF Development, Inc. c/o Public Storage, Inc. 701 Western Avenue Glendale, CA 91201 Limited Partner: [Name and address of Limited Partner] 2.2 Capital Contributions.2.2 Capital Contributions. The Capital Contributions of the Partners shall be as follows: (a) The Capital Contributions of the General Partner shall be as follows: (i) On the Effective Date, the General Partner shall make an initial cash Capital Contribution of $3,000,000 for initial working capital. (ii) On the Effective Date, the General Partner shall contribute or cause to be contributed to the Partnership those Projects described in Exhibit A-1 hereto. The parties agree that with respect to such Projects, the General Partner's Capital Account shall be credited with the amount of $30,406,462, consisting of the amount of the expenditures made with respect to such Projects, prior to their contribution, for (A) Land Acquisition Costs, (B) Basic Development Costs and (C) PSA Affiliates Operating Costs (but only to the extent such PSA Affiliates Operating Costs do not exceed 4% of the Basic Development Costs). The parties agree that this Capital Account credit represents the agreed fair market value of those contributed assets. (iii) From time to time as the General Partner shall contribute or cause to be contributed to the Partnership additional Qualifying Projects, the General Partner's Capital Account shall be credited with the amount of the expenditures made with respect to such Projects by PSA Affiliates (to the extent not previously reimbursed from Working Capital) for (A) Land Acquisition Costs, (B) Basic Development Costs and (C) PSA Affiliates Operating Costs (but only to the extent that such credit for PSA Affiliates Operating Costs does not cause cumulative credits to the General Partner pursuant to this Agreement for PSA Affiliates Operating Costs to exceed 4% of the cumulative sum of Basic Development Costs). The parties agree that any such Capital Account credits represent the agreed fair market value of those contributed assets. 11 (iv) The General Partner shall make additional Capital Contributions in cash up to 103% of 30% of all amounts required to pay Land Acquisition Costs and Basic Development Costs (including costs of initial operations and leaseup until a Project has achieved three consecutive months of positive Net Operating Income), in excess of the sum of the amounts credited to the General Partner for those costs pursuant to (ii) and (iii) above and the amounts paid for those costs from reserves. The General Partner also shall be deemed to have contributed, and the General Partner's Capital Account will be credited, with the amount of that portion of any PSA Affiliates Operating Costs not previously credited pursuant to (ii) and (iii) above (but only to the extent that such credit of PSA Affiliates Operating Costs does not cause cumulative credits to the General Partner pursuant to this Agreement for PSA Affiliates Operating Costs to exceed 4% of the cumulative sum of Basic Development Costs). In addition to the Capital Contributions required by the first sentence of this Section 2.2(a)(iv), the General Partner shall make additional Capital Contributions in cash up to 30% of amounts required as needed on a Project-by-Project basis not to exceed the amount available in the Contingency Reserve. (v) The General Partner may, but shall not be obligated to, make Capital Contributions from time to time in order to pay any accrued but unpaid Priority Returns to the Limited Partner hereunder, which amounts will be distributed to the Limited Partner pursuant to Section 2.2(e) below. (vi) In addition, once the Limited Partner has funded: (A) its portion of Capital Contributions for a Project up to 103% of 70% of the Project Budgeted Costs required pursuant to Section 2.2(b) below, and (B) its portion of Capital Contributions required under Section 2.2(b)(iv)(A) with reference to the last sentence of Section 2.2(a)(iv), the General Partner shall make additional cash Capital Contributions equal to any additional amounts required in connection with the development, ownership and operation of the Projects. The General Partner shall not use Operating Cash to pay such additional amounts. (vii) In the circumstances described in Section 10.3 below, the General Partner shall make a contribution as set forth in Section 10.3. (b) The Capital Contributions of the Limited Partner shall be as follows: (i) On the Effective Date, the Limited Partner shall make an initial cash Capital Contribution of $7,000,000 for initial working capital. (ii) On the Effective Date, the Limited Partner shall make an additional Capital Contribution in cash equal to 70% of the amount of the General Partner's Capital Contributions pursuant to Section 2.2(a)(ii) above, which amount will be distributed to the General Partner pursuant to Section 2.2(d) below. (iii) The Limited Partner shall make additional Capital Contributions in cash equal to 70% of the amount of the General Partner's Capital Contributions from time to time pursuant to Section 2.2(a)(iii) above, which amounts will be distributed to the General Partner pursuant to Section 2.2(d) below. 12 (iv) The Limited Partner shall make additional Capital Contributions in cash equal to: (A) two and one third (2 1/3) times the amount of the Capital Contributions made by the General Partner from time to time pursuant to the first and last sentences of Section 2.2(a)(iv) above, and (B) 70% of the amount of the Capital Contributions credited to the General Partner from time to time pursuant to the second sentence of Section 2.2(a)(iv) above. (c) Any Capital Contributions required of Partners pursuant to Sections 2.2(a)(iv), 2.2(b)(iii) and 2.2(b)(iv) above shall be set forth in written notices from the General Partner to the Partners in the form attached as Exhibit K hereto. Such notices shall contain a breakdown and supporting evidence of Land Acquisition Costs and Basic Development Costs, and a breakdown by Project and total showing Project Budgeted Costs, Actual Costs (with such supporting evidence as requested by the Limited Partner) and balance of cost to complete, together with any replenishment of Working Capital. Such notices shall be given on or about the 25th day of each month and shall estimate the Capital Contributions required for that month based on the Project Budgeted Costs. Notwithstanding anything herein to the contrary, the Limited Partner's obligation to make such Capital Contributions shall be limited to 103% of 70% of Project Budgeted Costs on a cumulative basis. Unused Working Capital reserves shall be applied to pay the final Project Budgeted Costs of the Partnership, which would otherwise be provided for by Capital Contributions. Such Capital Contributions shall be paid within ten Business Days of delivery of the applicable notice from the General Partner. (d) Promptly following the Capital Contributions by the Limited Partner pursuant to Sections 2.2(b)(ii) and 2.2(b)(iii) above, an amount equal to such Capital Contributions shall be distributed by the General Partner to the General Partner as a reduction in its Capital Contributions. Promptly following the Capital Contributions by the Limited Partner pursuant to Section 2.2(b)(iv)(B), an amount equal to such Capital Contributions shall be distributed by the General Partner to the General Partner as a reduction in its Capital Contributions. The Partners acknowledge that these amounts will be treated as contributed to the Partnership and then distributed by the Partnership for purposes of this Agreement, notwithstanding that for federal income tax purposes the amounts perhaps could be recharacterized as if paid by the Limited Partner to the General Partner for an interest in the Properties which the Limited Partner then would be treated as contributing to the Partnership. Such a recharacterization, in the Partnership's circumstances, is not expected to produce materially differing consequences. (e) Promptly following any Capital Contributions by the General Partner pursuant to Sections 2.2(a)(v) and (vii) above, an amount equal to such Capital Contributions shall be distributed by the General Partner to the Limited Partner and shall be treated as deductible "guaranteed payments" for the use of capital for income tax purposes. 12 (f) All Capital Contributions required by the first sentence of Section 2.2(a)(iv) shall be made pursuant to Project Budgeted Costs. 2.3 Extent of Liability. Except as otherwise provided by this Agreement or applicable law: (a) A Partner shall not be liable for the debts, liabilities, contracts or any other obligations of the Partnership; and (b) A Partner shall be liable only to make the Capital Contributions provided in Section 2.2 for Qualifying Projects approved under Section 6.2(b) and shall not be required to lend any funds to the Partnership. Performance of any one or more of the acts specifically authorized for performance by the Limited Partner under this Agreement shall not in any way constitute the Limited Partner a general partner or impose any personal liability on the Limited Partner. The General Partner shall have no personal liability for the repayment of any Capital Contributions of the Limited Partner. 2.4 Other Matters. (a) Except as otherwise provided in this Agreement, no Partner shall demand or receive a return of its Capital Contributions or withdraw as a Partner from the Partnership without the consent of the General Partner and the Partners. Under circumstances requiring a return of any Capital Contributions, no Partner shall have the right to receive property other than cash except as may be specifically provided herein. (b) No Partner shall receive any interest, salary or draw with respect to its Capital Contributions or its Capital Account or for services rendered on behalf of the Partnership or otherwise in its capacity as a Partner, except as otherwise provided in this Agreement. 3. ALLOCATIONS 3.1 Profits. After giving effect to the special allocations set forth in Sections 3.3, 3.4 and 3.5, Profits for any Fiscal Year or other period shall be allocated to the Partners in the following order and priority: (a) First, to the Limited Partner until the cumulative Profits allocated pursuant to this Section 3.1(a) and Gain from Sale allocated pursuant to Section 3.4(a) for the current and all prior Fiscal Years or other periods are equal to the cumulative Priority Return accrued for the Limited Partner from the Effective Date to the end of such Fiscal Year or other period less the amount of any guaranteed payments made pursuant to Section 2.2(e); 13 (b) Second, to the Limited Partner until the cumulative Profits allocated pursuant to this Section 3.1(b) and Gain from Sale allocated pursuant to Section 3.4(b) for the current and all prior Fiscal Years or other periods are equal to the cumulative Losses allocated to the Limited Partner pursuant to Section 3.2 for all prior Fiscal Years or other periods; (c) Third, to the General Partner until the cumulative Profits allocated pursuant to this Section 3.1(c) and Gain from Sale allocated pursuant to Section 3.4(c) for the current and all prior Fiscal Years or other periods are equal to the cumulative Losses allocated to the General Partner pursuant to Section 3.2 for all prior Fiscal Years or other periods; (d) Fourth, to the General Partner until the cumulative Profits allocated pursuant to this Section 3.1(d) for the current and all prior Fiscal Years or other periods are equal to the cumulative distributions received by the General Partner pursuant to Section 4.1(b) from the Effective Date to the end of such Fiscal Year or other period; and (e) Fifth, the remaining balance, if any, shall be allocated among the Partners in proportion to their Percentage Interests. 3.2 Losses. After giving effect to the special allocations set forth in Sections 3.3, 3.4 and 3.5, Losses for any Fiscal Year or other period shall be allocated in the following order and priority: (a) First, to the General Partner until any additional allocation would cause the General Partner to have an Adjusted Capital Account Deficit at the end of any Fiscal Year; (b) Second, to the Limited Partner until any additional allocation would cause the Limited Partner to have an Adjusted Capital Account Deficit at the end of any Fiscal Year; and (c) Third, any remaining Losses to the General Partner. 3.3 Special Allocations to the General Partner. The following special allocations shall be made: 14 (a) Items of gross loss or expense shall be allocated to the General Partner until the cumulative allocations pursuant to this Section 3.3(a) equal the aggregate Capital Contributions made by the General Partner pursuant to Section 2.2(a)(vi). (b) All Depreciation shall be specially allocated to the General Partner. (c) All deductions for any guaranteed payments made to the Limited Partner pursuant to Section 2.2(e) shall be specially allocated to the General Partner. 3.4 Gain from Sale. All Gain from Sale shall be allocated in the following order: (a) First, to the Limited Partner until the cumulative Gain from Sale allocated pursuant to this Section 3.4(a) and Profits allocated pursuant to Section 3.1(a) for the current and all prior Fiscal Years or other periods are equal to the cumulative Priority Return accrued for the Limited Partner from the Effective Date to the end of such Fiscal Year or other period less the amount of any guaranteed payments made pursuant to Section 2.2(e); (b) Second, to the Limited Partner until the cumulative Gain from Sale allocated pursuant to this Section 3.4(b) and Profits allocated pursuant to Section 3.1(b) for the current and all prior Fiscal Years or other periods are equal to the cumulative Losses allocated to the Limited Partner pursuant to Section 3.2 for all prior Fiscal Years or other periods (c) Third, to the General Partner until the cumulative Gain from Sale allocated pursuant to this Section 3.4(c) and Profits allocated pursuant to Section 3.1(c) for the current and all prior Fiscal Years or other periods are equal to the cumulative Losses allocated to the General Partner pursuant to Section 3.2 for all prior Fiscal Years or other periods; (d) Fourth, to the General Partner until the cumulative Gain from Sale allocated pursuant to this Section 3.4(d) is equal to the cumulative allocations of Depreciation and deductions for guaranteed payments made pursuant to Section 3.3(b) and (c), excluding any guaranteed payments deductions attributable to Capital Contributions made pursuant to Section 2.2(a)(vii). (e) Fifth, to the General Partner until the cumulative Gain from Sale allocated pursuant to this Section 3.4(e) and Profits allocated pursuant to Section 3.1(e) for the current and all prior Fiscal Years or other periods are equal to the cumulative Priority Return accrued for the General Partner from the Effective Date to the end of such Fiscal Year or other period; (f) Sixth, 70% to the Limited Partner and 30% to the General Partner until the cumulative Gain from Sale allocated to the Limited Partner pursuant to this Section 3.4(f) for the current and all prior Fiscal Years or other periods is equal to the cumulative distributions made (or expected by the Partners to be made) to the Limited Partner pursuant to Section 4.2(e); 15 (g) Seventh, 50% to the Limited Partner and 50% to the General Partner until the cumulative Gain from Sale allocated to the Limited Partner pursuant to this Section 3.4(g) for the current and all prior Fiscal Years or other periods is equal to the cumulative distributions made (or expected by the Partners to be made) to the Limited Partner pursuant to Section 4.2(f); (h) Eighth, 10% to the Limited Partner and 90% to the General Partner until the cumulative Gain from Sale allocated to the Limited Partner pursuant to this Section 3.4(h) for the current and all prior Fiscal Years or other periods is equal to the cumulative distributions made (or expected by the Partners to be made) to the Limited Partner pursuant to Section 4.2(g); and (i) Finally, 100% to the General Partner. Sections 3.4(f) - (h) shall be applied based on the assumption that all Capital Proceeds will be distributed pursuant to Section 4.2, rather than Section 10.2(c). 3.5 Regulatory Special Allocations. The following special allocations shall be made in the following order: (a) Minimum Gain Chargeback. Except as provided in Section 1.704-2(f) of the Regulations, notwithstanding any other provision of this Section 3, if there is a net decrease in Minimum Gain during any Fiscal Year, each Partner shall be specially allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to the portion of such Partner's share of the net decrease in Minimum Gain, determined in accordance with Regulations Section 1.704-2(g). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant thereto. The items to be so allocated shall be determined in accordance with Sections 1.704-2(f)(6) and 1.704-2(j)(2) of the Regulations. This Section 3.5(a) is intended to comply with the minimum gain chargeback requirement in Section 1.704-2(f) of the Regulations and shall be interpreted consistently therewith. (b) Partner Nonrecourse Debt Minimum Gain Chargeback. Except as otherwise provided in Section 1.704-2(i)(4) of the Regulations, notwithstanding any other provision of this Section 3 except Section 3.5(a), if there is a net decrease in Partner Nonrecourse Debt Minimum Gain attributable to a Partner Nonrecourse Debt during any Fiscal Year, each Partner who has a share of the Partner Nonrecourse Debt Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Regulations Section 1.704-2(i)(5), shall be specially allocated items of Partnership income and gain for such year (and, if necessary, subsequent years) in an amount equal to such Partner's share of the net decrease in Partner Nonrecourse Debt Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Regulations Section 1.704-2(i)(4). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant thereto. The items to be so allocated shall be determined in accordance with Sections 1.704-2(i)(4) and 1.704-2(j)(2) of the Regulations. This Section 3.5(b) is intended to comply with the minimum gain chargeback requirement in Section 1.704-2(i)(4) of the Regulations and shall be interpreted consistently therewith. 16 (c) Qualified Income Offset. In the event any Partner unexpectedly receives any adjustments, allocations or distributions described in Section 1.704-1(b)(2)(ii)(d)(4), (5) or (6) of the Regulations, items of Partnership income and gain shall be specially allocated to each such Partner in an amount and manner sufficient to eliminate, to the extent required by the Regulations, the Adjusted Capital Account Deficit of such Partner as quickly as possible, provided that an allocation pursuant to this Section 3.5(c) shall be made only if and to the extent that such Partner would have an Adjusted Capital Account Deficit after all other allocations provided for in this Section 3 have been tentatively made as if this Section 3.5(c) were not in this Agreement. (d) Gross Income Allocation. In the event any Partner has a deficit Capital Account at the end of any Partnership Fiscal Year which is in excess of the sum of (i) the amount such Partner is obligated to restore pursuant to any provision of this Agreement, and (ii) the amount such Partner is deemed to be obligated to restore pursuant to the penultimate sentences of Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5), each such Partner shall be specially allocated items of Partnership income and gain in the amount of such excess as quickly as possible, provided that an allocation pursuant to this Section 3.5(d) shall be made if and only to the extent that such Partner would have a deficit Capital Account in excess of such sum after all other allocations provided for in this Section 3 have been tentatively made as if Section 3.5(c) and this Section 3.5(d) were not in the Agreement. (e) Nonrecourse Deductions. Nonrecourse Deductions for any Fiscal Year or other period shall be specially allocated to the General Partner. (f) Partner Nonrecourse Deductions. Any Partner Nonrecourse Deductions for any Fiscal Year or other period shall be specially allocated to the Partner who bears the economic risk of loss with respect to the Partner Nonrecourse Debt to which such Partner Nonrecourse Deductions are attributable in accordance with Regulations Section 1.704-2(i)(1). (g) Section 754 Adjustment. To the extent an adjustment to the adjusted tax basis of any Partnership asset pursuant to Code Section 734(b) or Code Section 743(b) is required, pursuant to Regulations Section 1.704-1(b)(2)(iv)(m)(2) or Regulations Section 1.704-1(b)(2)(iv)(m)(4), to be taken into account in determining Capital Accounts as the result of a distribution to a Partner in complete liquidation of its interest in the Partnership, the amount of such adjustment to the Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis) and such gain or loss shall be specially allocated to the Partners in accordance with their interests in the Partnership in the event that Regulations Section 1.704-1(b)(2)(iv)(m)(2) applies, or to the Partners to whom such distribution was made in the event that Regulations Section 1.704-1(b)(2)(iv)(m)(4) applies. 17 (h) Curative Allocations. The allocations set forth in Sections 3.5(a) through (g) (the "Regulatory Allocations") are intended to comply with certain requirements of the Regulations. It is the intent of the Partners that, to the extent possible, all Regulatory Allocations shall be offset either with other Regulatory Allocations or with special allocations of other items of Partnership income, gain, loss or deduction pursuant to this Section 3.5(h). Therefore, notwithstanding any other provision of this Section 3 (other than the Regulatory Allocations), the General Partner shall make such offsetting special allocations of Partnership income, gain, loss or deduction in whatever manner the Partners determine appropriate so that, after such offsetting allocations are made, each Partner's Capital Account balance is, to the extent possible, equal to the Capital Account balance such Partner would have had if the Regulatory Allocations were not part of the Agreement. In exercising its discretion under this Section 3.5(h), the Partners shall take into account future Regulatory Allocations under Sections 3.5(a) and 3.5(b) that, although not yet made, are likely to offset other Regulatory Allocations previously made under Sections 3.5(e) and 3.5(f). 3.6 Other Allocations Rules. (a) Except as otherwise provided, all Profits and Losses allocated to the Partners shall be allocated among them in proportion to their Percentage Interests. (b) For purposes of determining the Profits, Losses or any other items allocable to any period, Profits, Losses and any such other items shall be determined on a daily, monthly, or other basis, as determined by the General Partner using any permissible method under Code Section 706 and the Regulations thereunder. (c) Except as otherwise provided in this Agreement, all items of Partnership income, gain, loss, deduction, credit and any other allocations not otherwise provided for shall be divided among the Partners in the same proportions as they share Profits or Losses, as the case may be, for the year. (d) Solely for purposes of determining a Partner's proportionate share of the "excess nonrecourse liabilities" of the Partnership within the meaning of Regulations Section 1.752-3(a)(3), any such liabilities shall be allocated solely to the General Partner, consistent with the General Partner's share of profits pursuant to Section 3.4(i). (e) To the extent permitted by Section 1.704-2(h)(3) of the Regulations, the General Partner shall endeavor to treat distributions of Operating Cash as having been made from the proceeds of a Nonrecourse Liability or a Partner Nonrecourse Debt only to the extent that such distributions would cause or increase an Adjusted Capital Account Deficit for any Partner. 18 3.7 Tax Allocations: Code Section 704(c).3.7 Tax Allocations: Code Section 704(c). In accordance with Code Section 704(c) and the Regulations thereunder, income, gain, loss and deduction with respect to any property contributed to the capital of the Partnership shall, solely for tax purposes, be allocated among the Partners so as to take account of any variation between the adjusted basis of such property to the Partnership for federal income tax purposes and its initial Gross Asset Value (computed in accordance with Section 1.8(aa)(i)). In the event the Gross Asset Value of any Partnership asset is adjusted pursuant to Section 1.8(aa)(ii), subsequent allocations of income, gain, loss and deduction with respect to such asset shall take account of any variation between the adjusted basis of such asset for federal income tax purposes and its Gross Asset Value in the same manner as under Code Section 704(c) and the Regulations thereunder. Any elections or other decisions relating to such allocations shall be made by the General Partner in any manner that reasonably reflects the purpose and intention of this Agreement. Allocations pursuant to this Section 3.7 are solely for purposes of federal, state and local taxes and shall not affect, or in any way be taken into account in computing, any Partner's Capital Account or share of Profits, Losses other items or distributions pursuant to any provision of this Agreement. 4. DISTRIBUTIONS 4.1 Operating Cash. Except as otherwise provided in Section 10, Operating Cash, if any, shall be distributed to the Partners monthly, on the 15th day of each month or next Business Day if the 15th day is not a Business Day, for the preceding month, or at such other times as the Partners may determine in the following order and priority: (a) First, to the Limited Partner in an amount equal to the excess of (i) the aggregate Priority Return of the Limited Partner accrued from the Effective Date to the end of the calendar month immediately preceding the date of distribution pursuant to this Section 4.1(a), over (ii) the sum of all prior distributions to the Limited Partner pursuant to this Section 4.1(a), Section 4.2(a) and Section 2.2(e); (b) Second, to the General Partner in an amount equal to the Priority Return of the General Partner accrued for the calendar month immediately preceding the date of distribution pursuant to this Section 4.1(b); and (c) Third, the balance, if any, to the Partners in proportion to their Percentage Interests. 4.2 Capital Proceeds. Capital Proceeds, if any, shall be distributed to the Partners on the third Business Day after a sale or financing or at such other times as the Partners may determine in the following order and priority: 19 (a) First, to the Limited Partner in an amount equal to the excess of (i) the aggregate Priority Return of the Limited Partner accrued from the Effective Date to the end of the calendar month immediately preceding the date of distribution pursuant to this Section 4.2(a), over (ii) the sum of all prior distributions to the Limited Partner pursuant to Sections 4.1(a), 4.1(c), 4.2(a) and 2.2(e) (including analogous distributions made pursuant to Sections 10.2 and 10.3); (b) Second, to the Limited Partner in an amount equal to the excess of (i) the Limited Partner's Capital Contribution over (ii) the sum of all prior distributions to the Limited Partner pursuant to this Section 4.2(b) (including analogous distributions made pursuant to Sections 10.2 and 10.3); (c) Third, to the General Partner in an amount equal to the excess of (i) the aggregate Priority Return of the General Partner accrued from the Effective Date to the end of the calendar month immediately preceding the date of distribution pursuant to this Section 4.2(c), over (ii) the sum of all prior distributions to the General Partner pursuant to Sections 4.1(b), 4.1(c) and 4.2(c) (including analogous distributions made pursuant to Section 10.2); (d) Fourth, to the General Partner in an amount equal to the excess of (i) the General Partner's Capital Contributions, other than pursuant to Sections 2.2(a)(vi) and (vii), over (ii) the sum of all prior distributions to the General Partner pursuant to Sections 4.2(d) and 2.2(d) (including analogous distributions made pursuant to Section 10.2); (e) Fifth, 70% to the Limited Partner and 30% to the General Partner until all amounts distributed to the Limited Partner pursuant to this Agreement (including any guaranteed payments made pursuant to Section 2.2(e)) equal the sum of the Limited Partner's Capital Contributions and the aggregate Priority Return of the Limited Partner accrued from the Effective Date to the end of the calendar month immediately preceding the date of distribution pursuant to this Section 4.2(c), with the Priority Return for purposes of this Section 4.2(e) computed using monthly compounding at the monthly rate of one twelfth of 10 1/2%; (f) Sixth, 50% to the Limited Partner and 50% to the General Partner until all amounts distributed to the Limited Partner pursuant to this Agreement (including any guaranteed payments made pursuant to Section 2.2(e)) equal the sum of the Limited Partner's Capital Contributions and the aggregate Priority Return of the Limited Partner accrued from the Effective Date to the end of the calendar month immediately preceding the date of distribution pursuant to this Section 4.2(f), with the Priority Return for purposes of this Section 4.2(f) computed using monthly compounding at the monthly rate of one twelfth of 11%; (g) Seventh, 10% to the Limited Partner and 90% to the General Partner until all amounts distributed to the Limited Partner pursuant to this Agreement (including any guaranteed payments made pursuant to 20 Section 2.2(e)) equal the sum of the Limited Partner's Capital Contributions and the aggregate Priority Return of the Limited Partner accrued from the Effective Date to the end of the calendar month immediately preceding the date of distribution pursuant to this Section 4.2(g), with the Priority Return for purposes of this Section 4.2(g) computed using monthly compounding at the monthly rate of one twelfth of 11 1/2%; and (h) Finally, 100% to the General Partner. 4.3 Amounts Withheld. If required by applicable law, the General Partner shall cause the Partnership to withhold such amounts as may be required from any payment or distribution from the Partnership to a Partner, and the General Partner shall remit such amounts on a timely basis to the tax authority or other entity entitled to them. Any (a) amounts so withheld or (b) estimated or other payments to tax authorities with respect to any Profits or other items allocable to the Partners, shall be treated as amounts distributed to the Partners pursuant to this Section 4 for all purposes. The General Partner shall allocate any such amounts among the Partners in accordance with applicable law. 5. MANAGEMENT 5.1 Managing Partner.5.1 Managing Partner. The Partnership shall be managed by the General Partner. The Limited Partner shall not participate in the management of the Partnership's business, and shall have no power to bind or act on behalf of the Partnership. 5.2 Authority of Managing Partner5.2 Authority of Managing Partner. The General Partner shall have, subject to the control of the Partners to the extent (and only the extent) provided herein, supervision, direction and control of the business of the Partnership. Subject to the limitations and restrictions set forth in this Agreement, the General Partner shall act on behalf of the Partnership in all matters affecting the management and supervision of the Partnership and its business affairs, and shall have all rights and powers generally conferred by law or otherwise necessary, advisable or consistent therewith. Without limiting the scope of the foregoing, the Partners agree and acknowledge that it is their intention and desire to confer upon the General Partner, to the fullest extent permissible under the Act and other provisions of applicable law, and subject only to the express limitations set forth in Section 5.3, full power and authority relative to any and all matters relating to or affecting the Partnership and its affairs. Notwithstanding any provision of this Agreement, including without limitation Section 5.3, any Person dealing with the Partnership may rely (without duty of further inquiry) upon a certificate signed by the General Partner as to: 21 (a) The identity of the General Partner or any Partner; (b) The existence or nonexistence of any fact or facts which constitute a condition precedent to acts by the General Partner or which are in any other manner germane to the affairs of the Partnership; (c) The Persons who are authorized to execute and deliver any instrument or document of the Partnership; or (d) Any act or failure to act by the Partnership or any other matter whatsoever involving the Partnership or any Partner. 5.3 Limitations on Rights and Powers5.3Limitations on Rights and Powers. Except by the unanimous consent of the Partners, the General Partner shall not have authority to: (a) Require additional Capital Contributions to be made to the Partnership in addition to the Capital Contributions required to be made pursuant to Section 2.2; (b) Enter into or commit to any agreement, contract, commitment or obligation on behalf of the Partnership obligating the Limited Partner to contribute additional capital, to make or guarantee a loan or to increase the Partner's liability either to the Partnership or to third parties; (c) Receive or permit any Partner or Affiliate of a Partner to receive any fee or rebate except as set forth in Section 5.5, or to participate in any reciprocal business arrangements that would have the effect of circumventing any of the provisions of this Agreement; (d) Materially alter the business of the Partnership; (e) Do any act in contravention of this Agreement; (f) Possess Property, or assign rights in specific Property, for other than a Partnership purpose; or (g) Admit any Person as a Partner. Except as otherwise contemplated by this Agreement or provided for in the Initial Business Plans, no action specified on the attached Exhibit B shall be taken by the General Partner without approval of the Partners. 22 5.4 Project Development. All phases of site selection, development and construction of Projects shall be carried out by employees of PSA Affiliates and independent contractors engaged by the General Partner for and on behalf of the Partnership. In order for any Qualifying Project to be contributed to or acquired by the Partnership, and before the Limited Partner shall have to make any Capital Contribution for such a Qualifying Project under Section 2.2(b), the General Partner shall complete all the items listed on the acquisition checklist attached as Exhibit C to the satisfaction of the Investment Committee. For any Project other than those listed on Exhibits A-1 and A-2, plans and specifications shall be reviewed by a third-party consultant acceptable to the Limited Partner and shall be paid for by the Partnership not to exceed $1,500 per Project, with any excess being paid for by the Limited Partner. Copies of the final title policy in the amount of the Project Budgeted Costs, deed into the Partnership and closing statement for the acquisition shall be furnished to the Limited Partner's advisor and attorneys within 30 days after payment of the initial Capital Contribution for a Project. A copy of an as built survey shall be furnished to such advisor and attorneys on or before the date a Project becomes a Completed Project. The General Partner and the Limited Partner shall attempt, to the extent feasible, to develop an approved list of architects and environmental consultants for the Projects. PSA Affiliates shall be responsible for arranging, supervising and coordinating all activities, purchases and services associated with the development of each Qualifying Project which is or is to become a Project including, without limitation, the following: (a) Review and analysis of the suitability for the Partnership of each Qualifying Project; (b) Negotiation and documentation of the terms of each acquisition of property for development; (c) Conduct of such "due diligence" and obtaining of such studies, reports and approvals as are required in connection with the prospective acquisition of each property, including a review and studies, reports and approvals, as required, as to soils, environmental issues, title and survey matters, zoning and other land use issues and economic feasibility; (d) Obtaining of necessary building permits and other approvals required for development; (e) Negotiation and closing of the acquisition of each Qualifying Project; (f) Coordination with planners and engineers on matters relating to the design of each Qualifying Project and any modifications thereof; (g) Coordination with contractors regarding costs and performance of construction and other development activity; 23 (h) Negotiation and preparation for execution by the Partnership, or for the account of the Partnership, by PSA Affiliates of construction contracts and other contracts for the supply of services and/or material necessary to perform and complete the development of each Project; (i) Negotiation, preparation and execution of all change orders; (j) Review and approval of applications for payment submitted by contractors in connection with the development of each Project and maintenance of accurate and complete books of account and other records relating thereto; (k) Negotiation with suppliers of major building components, if any, where such items are not covered by a general construction contract, and purchase of such components; (l) Performance of normal business functions of an owner of property in administering all aspects of the development of each Project (including property acquisition); (m) If necessary, and not performed under a general contract, submission of applications to utility companies and municipal and governmental authorities for, and obtaining of, agreements relating to utility and sewer easements and the provision of adequate utility and sewer service to each Project; and (n) The engagement of such independent contractors and professional firms including, but not limited to, construction firms, architects, environmental consultants, engineers, architects and attorneys, as may be required or appropriate in connection with the foregoing, it being understood and agreed that virtually all of the activity described above in this Section 5.4 will be undertaken by independent contractors and firms whose charges will be borne by PSA Affiliates or by the Partnership as herein provided. 5.5 Compensation and Reimbursement. Subject to the limitations provided herein, PSA Affiliates shall be entitled to receive the following compensation and reimbursement from the Partnership: (a) The Partnership shall enter into the Management Agreement in the form attached as Exhibit D (provided that in the event of any conflict between the Management Agreement and this Agreement, this Agreement shall prevail) relative to the operation and management of each Project, pursuant to which PSA Affiliates shall be entitled to receive a management fee equal to 6% of gross operating revenues from each Project (not including revenue earned pursuant to the Master Lease Agreement referred to in Section 5.5(e) below or any revenue earned with respect to truck rental operations undertaken at the Projects); (b) In connection with the development of each Project, PSA Affiliates shall be entitled to reimbursement for Land Acquisition Costs, Basic Development Costs and PSA Affiliates Operating Costs as and to the extent provided in Section 2.2; 24 (c) PSA Affiliates shall be entitled to reimbursement, on submission of an itemized account, of all sums paid to unaffiliated Persons for goods and materials for the direct benefit of the Partnership; (d) PSA Affiliates shall be entitled to reimbursement for the direct personnel cost (without overhead) for tax preparation and other services provided for the conduct of the Partnership's affairs, including preparation of reports to the Limited Partner, as distinguished from acquisition, development, operation and management of the Projects, provided such cost does not exceed the amount the Partnership would be required to pay other Persons not affiliated with the General Partner for comparable services; and (e) The Partnership shall enter into the Master Lease Agreement in the form attached as Exhibit E relative to the lease of space to the General Partner or its Affiliate in the Projects for retail storage related uses involving the general public and self-storage tenants. Except as expressly provided for in this Section 5.5 or otherwise approved by the Partners, no payment shall be made by the Partnership to a PSA Affiliate for services of such PSA Affiliate or any officer or employee thereof. 5.6 Hazardous Materials. (a) The General Partner shall use its best efforts to keep and maintain the Property in compliance with, and to not cause, and shall use its reasonable efforts to not permit, the Property to be in violation of, any Hazardous Materials Laws. The General Partner shall not use, generate, manufacture, store or dispose of on, under or about the Property or transport to or from the Property (and shall use its reasonable efforts not to permit anyone else to do any of the foregoing) in violation of any Hazardous Material Laws. (b) The General Partner shall immediately advise the Partners in writing of (i) any and all enforcement, cleanup, removal, or other governmental or regulatory actions instituted, completed or threatened pursuant to any Hazardous Materials Laws of which actions the General Partner has actual knowledge; (ii) all claims made or threatened by any third party against the Partnership or any Partner or the Property relating to damage, loss or injury resulting from, or contribution, cost recovery or compensation for, any 25 Hazardous Materials, of which claims the General Partner has actual knowledge (the matters set forth in clauses (i) and (ii) above are collectively referred to in this Agreement as "Hazardous Materials Claims"); and (iii) the General Partner's actual knowledge of any occurrence or condition on any real property adjoining or in the vicinity of the Property that the General Partner knows could cause the Property or any part thereof to be subject to any restrictions on the ownership, occupancy, transferability or use of the Property under any Hazardous Materials Laws. (c) Without the prior written approval of all Partners, the General Partner shall not take any remedial action in response to the presence of any Hazardous Materials on, under or about the Property, nor enter into any settlement agreement, consent decree other compromise in respect to any Hazardous Materials Claims; provided, however, that the prior approval of all Partners shall not be necessary in the event that the presence of Hazardous Materials on, under or about the Property, in the reasonable belief of the General Partner, either poses an immediate threat to the health, safety or welfare of any individual or is of such a nature that an immediate remedial response is necessary and it is not possible to obtain such Partners' approval before taking such action, provided that in such event the General Partner shall notify all Partners as soon as practicable of any action so taken. All Partners agree not to withhold their approval, where approval is required under this Agreement, if either (i) a particular remedial action is ordered by a court of competent jurisdiction, or (ii) the General Partner establishes to the satisfaction of the Partners that there is no reasonable alternative to such remedial action which would result in less impairment of the value of the Property. 6. ACTION BY PARTNERS; INVESTMENT COMMITTEE 6.1 Action by Partners. No annual or regular meetings of the Partners are required to be held. However, meetings of the Partners may be held if called by the General Partner or any Partner upon at least four Business Days' prior written notice. Any consents required of the Partners hereunder shall be in writing and shall be filed by the General Partner with the books and records of the Partnership. 6.2 Investment Committee.6.2 Investment Committee. (a) The Partnership shall have an investment committee (the "Investment Committee") which shall consist of three members, two of whom shall be appointed by the Limited Partner as its representatives and one of whom shall be appointed by the General Partner as its representative. Initially, the Limited Partner appoints [two representives of Limited Partner] and the General Partner appoints Hugh W. Horne, as the members of the Investment Committee. In the event of the death or resignation of any member of the Investment Committee or the removal of any member of the Investment Committee by the Partner who appointed the same, the Partner originally appointing such member of the Investment Committee shall have the right to appoint his or her successor as its representative. Meetings of the members of the Investment Committee shall be held by conference telephone or at the principal executive office of the Partnership or another appropriate and convenient location designated by the General Partner. Meetings may be called at any time by the General Partner or by any member of the Investment Committee upon at least seven Business Days' prior written notice. Alternatively, any action requiring approval or consent of the Investment Committee may be taken in writing, executed by any two of the three members of the Investment Committee, provided one of the two members is the General Partner's representative. Any action requiring approval or consent of the Investment Committee will be deemed to mean approval or consent by a majority of the Investment Committee members. (b) Subject to Section 6.2(c), in the event that any PSA Affiliate desires to develop a Qualifying Project before the earlier of (i) the third anniversary of the Effective Date or (ii) the date the Partnership has undertaken Projects that require or would require total Capital Contributions at completion from Partners in excess of $220,000,000 (plus 3% of such amount, to the extent expended in funding cost overruns), then the General Partner shall afford the Partnership the first right and opportunity to develop and own the proposed Qualifying Project on the terms and conditions set forth in this Agreement. 26 (i) In such case, the General Partner shall provide to the members of the Investment Committee a detailed description of the Qualifying Project, including any costs for which the General Partner's Capital Account is to be credited under Section 2.2(a)(iii), preliminary financial projections and development costs in the form attached as Exhibit F-1 and such other pertinent information as the Investment Committee shall reasonably request. Upon receipt thereof, the Investment Committee shall have the option, to be exercised within 30 days, to give approval for the Qualifying Project to be undertaken by the Partnership as a Project. The Qualifying Projects described on Exhibit A-2 hereto shall be deemed to have been approved by the Investment Committee, subject to Section 6.2(b)(iii). (ii) In the event the Investment Committee shall not timely elect to, or elects not to, have the Qualifying Project included as a Project subject to the terms of this Agreement, PSA Affiliates shall be free to develop such Qualifying Project outside of the Partnership, in which event the Partnership and the Limited Partner shall have no further rights or interests therein. In the event there shall be a 10% or greater change in the aggregate costs or in the net rentable square footage of such Qualifying Project (as compared to the information submitted under Section 6.2(b)(i)), then the Qualifying Project shall be resubmitted to the Investment Committee pursuant to this Section 6.2(b). (iii) If a Qualifying Project is approved based on the information submitted under Section 6.2(b)(i), the General Partner shall thereafter provide to the members of the Investment Committee finalized estimates of development costs and costs of funding any deficiency in Net Operating Income until the Project experiences three consecutive months of positive monthly Net Operating Income (such final estimates for a Project being referred to as "Project Budgeted Costs") and stabilized yield-on-cost projections in the form attached as Exhibit F-2. In the event those finalized estimates reflect a 10% or greater change in the Project Budgeted Costs or net rentable square footage, or a reduction of over 25 basis points in Yield, of any Project as compared to the information submitted under Section 6.2(b)(i) (or a 10% or greater change in the Project Budgeted Costs or reduction of over 12 1/2 basis points in Yield for those Projects described on Exhibit A-2), then such change must be approved by the Investment Committee for such Qualifying Project to be included as one of the Projects subject to the terms of this Agreement. (c) The Partnership's first right to develop Projects under Sections 1.7(b) and 6.2(b) shall terminate if the General Partner shall have presented eight consecutive Qualifying Projects to the Investment Committee that each have a Yield of 11% per year or more, and the Investment Committee shall not have caused any of such Qualifying Projects to be included as a Project pursuant to this Agreement. (d) The General Partner shall prepare and submit a Business Plan to the Investment Committee on or before November 15 of each Fiscal Year that shall apply to the twelve-month period beginning on January 1 of the subsequent Fiscal Year. The Annual Business Plan shall include an estimated budget for each Completed Project for the subsequent Fiscal Year and a report aggregating all such information for all Completed Projects. (e) The General Partner shall provide to the Investment Committee any report that any member might reasonably request, if available without significant cost or effort, including, but not limited to, analyses of the Properties and the market, market rent surveys, tenant traffic reports, tenant turnover statistics, tenant demographic profiles, projected market values, projected income and expense statements, projected cost breakdowns and cash flow analyses, summaries of the overall plan of operations and contemplated transactions, insurance coverages and the like applicable to the Properties. 27 6.3 Investment Programs. In the event that during the first 12 months after the PSA Affiliates are no longer required to afford to the Partnership the first right to develop and own Qualifying Projects, any PSA Affiliate develops a program for institutional investors to develop and own self-storage facilities, such PSA Affiliate will provide the Limited Partner with information concerning such program and will first negotiate in good faith with the Limited Partner concerning its participation in such program before approaching other institutional investors. 7. BOOKS AND RECORDS; FISCAL MATTERS 7.1 Books and Records. The Partnership shall keep adequate financial books and records in accordance with generally accepted accounting principles. The books and records shall be kept at the principal executive office of the Partnership and shall set forth a true and accurate account of all business transactions arising out of and in connection with the conduct of the Partnership. Any Partner or its designated representative shall have the right, at any reasonable time during ordinary business hours, to have access to and inspect and copy the contents of any of the Partnership's books and records (financial or otherwise) and records of any PSA Affiliates relating to the Projects. The Partnership shall not, without the consent of the Partners, which shall not be unreasonably withheld or delayed, vary the Partnership's accounting methods, change its Fiscal Year or make other major decisions with respect to treatment of various transactions for bookkeeping or accounting purposes. 7.2 Reports. The General Partner shall furnish to each Partner, at the expense of the Partnership, such statements and reports of the Partnership as the Partners may determine or which may be required under the Act, including the following: (a) within 25 days of the end of each month, operating statements for each of the Projects for such month, including occupancy reports, a consolidated operating statement of the Projects for that month and a statement detailing Partnership investment of funds; (b) within 40 days of the end of each of the fiscal quarters of each Fiscal Year, a balance sheet, a profit and loss statement, a statement of cash flows and a statement of changes in partner's capital accounts, which statements need not be audited but shall be prepared in accordance with generally accepted accounting principles (except that quarterly statements need not include footnotes), and shall be certified as fairly presenting the financial results by the chief financial officer of the General Partner; (c) within 40 days of the end of each of the fiscal quarters of each Fiscal Year, a report setting forth the variance between the Project operating budget and actual results on a Project and consolidated basis; and (d) within 90 days of the end of each Fiscal Year, audited financial statements of the Partnership for such Fiscal Year certified by Ernst & Young LLP or such other so-called "Big Six" firm of independent public accountants as may be approved by the Investment Committee. 28 Examples of the reports required by Section 7.2(a), (b) and (c) are attached hereto as Exhibit M. 7.3 Tax Information. The General Partner shall cause the Partnership accountants to prepare and file on a timely basis all income and other tax returns of the Partnership. The General Partner shall have the accounting firm that audits the Partnership's financial statements or another accounting firm approved by the Investment Committee review and sign as preparer the Partnership's Federal and state income tax returns. The General Partner shall submit such Federal income tax returns to the Limited Partner for the Limited Partner's review at least ten Business Days before filing such returns. The General Partner shall furnish to the Limited Partner a copy of such return, together with any schedules or other information which each Partner may reasonably require in connection with such Partner's own tax affairs within 90 days of the end of each Fiscal Year. 7.4 Fiscal Year. The Fiscal Year of the Partnership shall be the calendar year. 7.5 Tax Matters Partner. The General Partner is hereby designated by the Partners as, and shall be specifically authorized to act as, the "Tax Matters Partner" under the Code and in any similar capacity under state or local law, and to expend Partnership funds for professional services and costs associated therewith. 7.6 Tax Elections Made by Managing Partner.2 The General Partner on behalf of the Partnership may make any and all elections for tax purposes with respect to the Partnership, with the consent of the Limited Partner, which consent will not be unreasonably withheld or delayed. At the request of any Partner, the Partnership will make an election under Code Section 754 7.7 Taxation as a Partnership. The Partners will use their best efforts to cause the Partnership to be treated as a partnership for income tax purposes. 7.8 Avoidance of Unrelated Business Taxable Income.The General Partner acknowledges that the Limited Partner generally expects to be exempt from federal income taxes, and wishes to avoid receipt of income that otherwise would be considered unrelated business taxable income. Accordingly, the General Partner shall use its best efforts to conduct the Partnership's operations at all times in a manner that will avoid subjecting the Limited Partner or any Affiliate to regular corporate income tax or to tax on "unrelated business taxable income" under Section 511 of the Code. In furtherance of the foregoing 29 (and not in limitation thereof), notwithstanding any other provision herein to the contrary, absent specific written approval of the Limited Partner, the Partnership shall conduct its operations in accordance with the following provisions at all times: (a) The Partnership's business shall be limited to owning, operating, and disposing of the Projects. The Partnership shall not engage in any other business activities. (b) The Partnership shall not incur or continue any "acquisition indebtedness" as defined in Section 514 of the Code. (c) The Partnership shall be a lessor of personal property only if the rents attributable to such personal property are an incidental amount of the total rents received or accrued under a lease of real property within the meaning of Section 512(b)(3)(A)(ii) of the Code. (d) The Partnership's lease agreements shall not provide for rents that depend in whole or in part on the income or profits derived by any Person from the leased property. (e) The Partnership shall not provide services to lessees of the Property, other than services that are usually or customarily rendered in connection with the rental of space for occupancy only. (f) The Partnership shall not hold property primarily for sale to customers in the ordinary course of business or hold stock in trade or property of a kind which would be included in inventory if on hand at the close of its taxable year. 8. TRANSFER OF INTERESTS 8.1 Transfer of Interest of General Partner8.1 Transfer of Interest of General Partner. The General Partner shall not Transfer all or any portion of its Interest in the Partnership except in connection with the merger or reorganization of the General Partner into another entity or the transfer of all or substantially all the assets of, or ownership in, the General Partner or the assumption of the rights and obligations of the General Partner by another entity in connection with any such transaction. 8.2 Transfer of Interest of Limited Partner 8.2 Transfer of Interest of Limited Partner. The Limited Partner shall not Transfer all or any portion of its Interest unless all of the following conditions are satisfied, in which event the transferee of such Interest shall be admitted as a Limited Partner: (a) Such transfer is approved by the General Partner and each Partner. 30 (b) The transferor and transferee shall execute and deliver to the Partnership such documents and instruments of transfer as may be necessary or appropriate in the opinion of counsel to the Partnership to effect such Transfer and to confirm the agreement of the transferee to be bound by the provisions of this Agreement as a Partner. In all cases, the Partnership shall be reimbursed by the transferor and/or transferee for all costs and expenses that it reasonably incurs in connection with such Transfer. (c) The transferor shall furnish to the Partnership an opinion of counsel, which counsel and opinion shall be satisfactory to the Partnership, that the Transfer will not cause the Partnership to terminate for federal income tax purposes or that such a termination will not have a significant adverse effect on the Partnership or its Partners. (d) The transferor and transferee shall furnish the Partnership with the transferee's taxpayer identification number, sufficient information to determine the transferee's initial tax basis in the Interest transferred, and any other information reasonably necessary to permit the Partnership to file all required federal and state tax returns and other legally required information statements or returns. Without limiting the generality of the foregoing, the Partnership shall not be required to make any distribution otherwise provided for in this Agreement with respect to any transferred Interest until it has received such information. (e) Either (i) such Transfer shall be registered under the Securities Act of 1933, as amended, and any applicable state securities laws, or (ii) the transferor shall provide an opinion of counsel, which opinion and counsel shall be satisfactory to the Partnership, to the effect that such Transfer is exempt from all applicable registration and qualification requirements and that such Transfer will not violate any applicable laws regulating the sale of securities. 8.3 Prohibited Transfers. Any purported Transfer of an Interest not satisfying the requirements of Section 8.2 shall be null and void and of no effect whatever; provided that, if the Partnership is required by proper authority to recognize a Transfer not satisfying the requirements of Section 8.2, the Interest transferred shall be strictly limited to the transferor's rights to allocations and distributions as provided by this Agreement with respect to the transferred Interest, which allocations and distributions may be applied (without limiting any other legal or equitable rights of the Partnership) to satisfy any debts, obligations or liabilities for damages that the transferor or transferee of such Interest may have to the Partnership. Except as otherwise required under the Act, such transferee shall have no right to any information or accounting of the affairs of the Partnership, shall not be entitled to inspect the books or records of the Partnership, and shall not have any of the rights of a Partner under the Act or this Agreement until such time, if at all, that it is admitted as a Partner. In the case of a Transfer or attempted Transfer of an Interest that is not a permitted Transfer, the parties engaging or attempting to engage in such Transfer shall indemnify and hold harmless the Partnership and all Partners from all cost, liability and damage that any of such indemnified Persons may incur (including, without limitation, incremental tax liability and attorneys' fees and expenses) as a result of such Transfer or attempted Transfer and efforts to enforce the indemnity granted hereby. 31 8.4 Representations; Legend. Each Partner hereby represents and warrants to the Partnership and the Partners that such Partner's acquisition of an Interest hereunder is made as principal for such Partner's own account and not for resale or distribution of such Interest. Each Partner further hereby agrees that the following legend may be placed upon any counterpart of this Agreement, or any other document or instrument evidencing ownership of Interests: The Interest represented by this document has not been registered under any securities laws and the transferability of such Interest is restricted. Such Interest may not be sold, assigned or transferred, nor will any assignee, vendee, transferee or endorsee thereof be recognized as having acquired any such Interest by the issuer for any purposes, unless (i) a registration statement under the Securities Act of 1933, as amended, with respect to the transfer of such Interest shall then be in effect and such transfer has been qualified under all applicable state securities laws, or (ii) the availability of an exemption from such registration and qualification shall be established to the satisfaction of counsel to the Partnership. The Interest represented by this document is subject to restriction as to its sale, transfer, hypothecation or assignment as set forth in the Limited Partnership Agreement of PSAF Development Partners, L.P. and agreed to by each Partner. Said provision restricts, among other things, the right of any transferee to become a Partner. Said Agreement further provides for an option to purchase the Interest represented by this document under certain circumstances described therein. 8.5 Distributions and Allocations in Respect to Transferred Interests. If any Interest is sold, assigned or transferred during any accounting period in compliance with the provisions of this Section 8, Profits, Losses, each item thereof and all other items attributable to the transferred Interest for such period shall be divided and allocated between the transferor and the transferee by taking into account their varying interests during the period in accordance with Code Section 706(d), using any conventions permitted by law and selected by the transferring Partners. All distributions on or before the date of such transfer shall be made to the transferor, and all distributions thereafter shall be made to the transferee. Solely for purposes of making such allocations and distributions, the Partnership shall recognize such transfer not later than the end of the calendar month during which it is given notice of such transfer, provided that if the Partnership does not receive a notice stating the date such Interest was transferred and such other information as the General Partner may reasonably require within 30 days after the end of the accounting period during which the transfer occurs, then all of such items shall be allocated, and all distributions shall be made, to the Person who, according to the books and records of the Partnership, on the last day of the accounting period during which the transfer occurs, was the owner of the Interest. Neither the Partnership, the General Partner nor the Partners shall incur any liability for making allocations and distributions in accordance with the provisions of this Section 8.5, whether or not the Partnership, the General Partner or the Partners have knowledge of any transfer of ownership of any Interest. 32 8.6 Right to Transfer. Notwithstanding anything herein to the contrary, both the General Partner and Limited Partner shall have the right to Transfer their Interests to an Affiliate, provided that such Transfer shall not relieve such Partner of its obligations under this Agreement. 9. OPTIONS TO PURCHASE 9.1 General Partner's Option to Purchase. The General Partner shall have the right and option (but not the obligation) to purchase all of the Interest of the Limited Partner on the terms and conditions set forth in this Section 9. The option granted pursuant to this Section may be exercised by the General Partner by delivery of a notice (the "General Partner Purchase Notice") to the Limited Partner at any time within the two year period commencing the later of: (i) three years from the date final certificates of occupancy (or their equivalents) have been received for 90% (calculated on the basis of relative net rentable square footage) of the Projects, or (ii) April 10, 2002 (the date the General Partner Purchase Notice is delivered will be the "Purchase Notice Date"). As a condition to exercise of the option granted pursuant to this Section 9.1, the General Partner agrees that any PSA Common Shares to be issued to the Limited Partner hereunder (i) will be registered under the Securities Act on Form S-3, Form S-4 or otherwise either at the time of issuance or no later than 30 days after such issuance, and (ii) will be approved for listing on the Exchange upon official notice of issuance. If the General Partner exercises its option and the General Partner determines that it does not wish to continue to hold an ownership interest in certain of the Projects, the Partners agree to cooperate to have the Partnership dispose of those Projects. 9.2 Consideration. (a) The purchase consideration payable by the General Partner to the Limited Partner shall be the Net Equity of the Limited Partner's Interest determined as follows. As to the amount of the Net Equity represented by the Interest to be purchased, the Limited Partner may elect to receive cash or PSA Common Shares, in such proportions as the Limited Partner may elect, by written notice to the General Partner within 30 days of the Purchase Notice Date. Failure of the Limited Partner to timely designate its election to receive any portion in PSA Common Shares shall constitute the Limited Partner's irrevocable election to receive cash for all of its Interest. In any case, if the Limited Partner's Net Equity with respect to the Interest purchased, combined with all prior distributions received by the Limited Partner, produces a Stock Shortfall, an amount equal to the Stock Shortfall shall be paid in PSA Common Shares. The Limited Partner shall also have the option to purchase for cash additional PSA Common Shares in an amount equal to the amount of any prior distributions to the Limited Partner pursuant to Sections 4.2 or 10.2 (this option must be exercised at the same time as the Limited Partner makes its election with respect to the Net Equity). The number of PSA Common Shares to be issued shall be determined by combining the amount of the Stock Shortfall, if any, the portion of the Net Equity the Limited Partner elects to receive in PSA Common Shares, and any optional cash purchase relating to prior distributions under Sections 4.2 and 10.2, and dividing that sum by 98.5% of the Average Price. 33 (b) The Limited Partner will not be permitted to elect to receive any portion of the consideration for its Interest in PSA Common Shares if the Limited Partner has sold (to the extent it directly controls such sale) any PSA Common Shares at any time between the Purchase Notice Date and the closing contemplated by Section 9.5. The General Partner agrees that there will be no purchases of PSA Common Shares by PSA Affiliates at any time between notice from the Limited Partner that it elects to receive PSA Common Shares and the closing contemplated by Section 9.5. No Affiliate of the General Partner under the actual control of the General Partner shall purchase PSA Common Shares during the period described above for consideration having an aggregate value of more than $500,000, and the General Partner shall use reasonable efforts to preclude any other Affiliate of the General Partner from affecting purchases of PSA Common Shares during such period for consideration having an aggregate value of more than $500,000. The foregoing shall not preclude or limit purchases at any time by the General Partner or any of its Affiliates of PSA Common Shares as part of an ongoing purchase program in transactions satisfying the conditions contained in paragraph (b) of Rule 10b-18 under the Securities Exchange Act of 1934, as amended. 9.3 Determination of Net Equity. The Net Equity of the Limited Partner's Interest to be purchased shall be determined, without audit or certification, from the books and records of the Partnership by the firm of independent public accountants regularly employed by the Partnership. The Net Equity of the Limited Partner's Interest to be purchased shall be determined within 15 days after such accountants are apprised in writing of the Fair Market Value of the Property, and the amount of such Net Equity shall be disclosed to the Partners by written notice. The Net Equity determination of such accountants shall be final and binding in the absence of manifest error. 9.4 Determination of Fair Market Value. The Fair Market Value of the Property shall be determined as follows: (a) The General Partner shall provide the Limited Partner its estimate of the value of the Property with the General Partner Purchase Notice. If the Limited Partner does not provide the General Partner with an approval of the estimate of value within 45 days of receiving the General Partner's estimate of value of the Property, then such value shall be deemed to be rejected as its Fair Market Value. (b) If the Limited Partner rejects the General Partner's estimate of value, then the General Partner shall engage an Appraiser (the "First Appraiser"). The First Appraiser's engagement shall require the Appraiser to determine the Appraised Value of the Property, and to submit such appraisal and determination to each of the General Partner and the Limited Partner within 60 days of engagement. (c) Within 20 days after receipt of such appraisal and determination, the Limited Partner shall notify the General Partner and the First Appraiser as to whether it accepts or rejects the Appraised Value of the Property. If the Limited Partner rejects the Appraised Value of the First Appraiser, it shall engage another Appraiser (the "Second Appraiser") and include its name in the notice of rejection. In the absence of acceptance of the Appraised Value prepared by the First Appraiser, the Limited Partner shall be deemed to have rejected the Appraised Value as determined by the First Appraiser. If the Limited Partner accepts the Appraised Value of the First Appraiser, then such value shall be deemed the Fair Market Value. 34 (d) The Second Appraiser's engagement shall require the Appraiser to determine the Appraised Value of the Property, and to submit such appraisal and determination to each of the General Partner and the Limited Partner within 60 days of engagement. (e) If the lower of the Appraised Values determined by the First and Second Appraisers is at least 90% of the higher of those two Appraised Values, then the Fair Market Value shall be the average of those two Appraised Values. If the difference between the Appraised Values is greater than 10%, then the First Appraiser and the Second Appraiser shall engage another Appraiser (the "Third Appraiser") to determine the Appraised Value of the Property, and to submit such appraisal and determination to each of the General Partner and the Limited Partner within 60 days of engagement. (f) If a Third Appraiser is so engaged, the average of the highest Appraised Value and the lowest Appraised Value shall be determined. If the remaining Appraised Value (the Appraised Value that is in between the highest and the lowest) is no more than 5% greater than, and no more than 5% less than, the average of the highest and the lowest, the Fair Market Value shall be the average of the highest and lowest Appraised Values. If the middle Appraised Value is outside of that range, the Fair Market Value shall be the average of the two Appraised Values that are closest to each other. (g) All costs of any appraisal process shall be borne 50% by the General Partner and 50% by the Limited Partner. (h) Notwithstanding anything in this Section 9.4 to the contrary, the Fair Market Value of the Property shall be deemed to be the General Partner's estimate of the value of the Property in the General Partner Purchase Notice, provided (i) such estimate of value will result in amounts distributed to the Limited Partner under this Agreement (including any guaranteed payments made under Section 2.2(e)) equal to the sum of the Limited Partner's Capital Contributions and the aggregate Priority Return of the Limited Partner accrued from the Effective Date to a date 20 days after the General Partner Purchase Notice with the Priority Return for purposes of this Section 9.4(h) and Section 12.1 computed using monthly compounding at the monthly rate of one twelfth of 11 1/2% (the "Maximum Return") and (ii) the Limited Partner agrees that the General Partner's estimate of value will result in the Limited Partner receiving the Maximum Return, which agreement will not be unreasonably denied or delayed. If the parties are unable to reach such agreement, the matter will be arbitrated in accordance with Section 14.19. 35 9.5 Closing. The closing of the purchase and sale of the Limited Partner's Interest shall occur at the principal executive office of the Partnership on a date and time mutually agreeable to the General Partner and the Limited Partner, which shall not be later than 20 days following the determination of the Fair Market Value. At the closing, the Limited Partner will deliver or cause to be delivered to the General Partner (i) appropriate assignments or other documents sufficient to transfer good and valid title to the Interest to be purchased, free and clear of all liens and encumbrances; and (ii) such other documents as the General Partner or its counsel may reasonable request. At the closing, the General Partner will deliver or cause to be delivered to the Limited Partner (i) to the extent the Limited Partner elects to receive cash, a wire transfer or bank cashier's check in the amount to which it is entitled hereunder, and (ii) to the extent the Limited Partner elects to receive PSA Common Shares, certificates representing the number of PSA Common Shares to which it is entitled hereunder. 9.6 Limited Partner's Option to Purchase. In the event the General Partner shall fail to timely exercise the option to purchase set forth in Section 9.1 above, the Limited Partner shall have the option to purchase from the Partnership any or all of the Properties on the terms and conditions set forth herein. The option granted pursuant to this Section may be exercised by the Limited Partner by delivery of a notice (the "Limited Partner Purchase Notice") to the General Partner at any time within the 180 day period commencing on the earlier to occur of (i) the day immediately following the expiration of the period during which the General Partner was entitled to exercise the option set forth in Section 9.1 or (ii) the day immediately following delivery of written notice from the General Partner to the Limited Partner waiving the General Partner's option. Such Limited Partner Purchase Notice shall specify those Properties which the Limited Partner elects to purchase. The Limited Partner shall not be entitled to deliver more than one Limited Partner Purchase Notice. In the event the Limited Partner Purchase Notice is delivered, the Properties designated therein shall be purchased by the Limited Partner on the terms and conditions of this Section 9, modified and supplemented as follows: (a) The purchase price of the designated Properties shall be their Fair Market Values; (b) The purchase price for the designated Properties shall be paid in cash, by wire transfer or bank cashier's check, at the closing; and (c) Closing costs and expenses shall be allocated 50% to the Limited Partner and 50% to the General Partner and items of income and expense shall be appropriately prorated as of the date of closing. 10. DISSOLUTION AND WINDING UP 10.1 Liquidating Events. The Partnership shall dissolve and commence winding up and liquidating upon the first to occur of any of the following (a "Liquidating Event"): (a) The sale of all or substantially all of the Property; 36 (b) The vote by the General Partner and 100% in Percentage Interest of the Partners to dissolve, wind up and liquidate the Partnership; (c) The failure of the General Partner to exercise the option to purchase provided in Section 9.1 by the end of the two-year period specified therein and the failure of the Limited Partner to exercise its option provided in Section 9.6 as to all the Properties by the end of the 180-day period specified therein; (d) The occurrence of any of the events specified in Section 15681 of the Act; or (e) 5:00 p.m., Pacific time, December 31, 2012. The Partners hereby agree that, notwithstanding any provision of applicable law, the Partnership shall not dissolve prior to the occurrence of a Liquidating Event. 10.2 Winding Up. Upon the occurrence of a Liquidating Event, the Partnership shall continue solely for the purposes of winding up its affairs in an orderly manner, liquidating its assets and satisfying the claims of its creditors and Partners. In such event, no Partner shall take any action that is inconsistent with, or not necessary to or appropriate for, the winding up of the Partnership's business and affairs. The General Partner (or, in the event there is no General Partner, any Person elected by a majority in Percentage Interest of the Partners) shall be responsible for overseeing the winding up and dissolution of the Partnership and shall take full account of the Partnership's liabilities and Property and the Property shall be liquidated as promptly as is consistent with obtaining the fair value thereof, and the proceeds therefrom, to the extent sufficient therefor, shall be applied and distributed in the following order: (a) First, to the payment and discharge of all of the Partnership's debts and liabilities to creditors other than the Partners; (b) Second, to the payment and discharge of all of the Partnership's debts and liabilities to the Partners; and (c) The balance, if any, to the Partners in accordance with their Capital Accounts, after giving effect to all contributions, distributions and allocations for all periods (other than distributions and contributions made pursuant to this Section 10.2(c) and deductions attributable thereto); provided, however, that if, prior to making distributions pursuant to this Section 10.2(c), the General Partner has a positive Capital Account and if the cumulative allocations to the Limited Partner, pursuant to Sections 3.1(a), 3.1(b), 3.4(a), and 3.4(b), were less than the sum of (A) the cumulative Priority Return accrued for the Limited Partner from the Effective Date to the date of liquidation less the amount of any guaranteed payments made pursuant to Section 2.2(e), and (B) the cumulative Losses allocated to the Limited Partner pursuant to Section 3.2, an amount otherwise distributable to the General Partner pursuant to this Section 10.2(c) equal to the amount of such shortfall shall be deemed recontributed by the General Partner to the Partnership and shall be distributed to the Limited Partner as a guaranteed payment pursuant to Section 2.2(e). 37 10.3 Special Rights to Acquire PSA Common Shares. The General Partner shall notify the Limited Partner at least 60 days prior to the final contemplated distribution pursuant to Section 10.2. The Limited Partner shall have the option, to be exercised within ten Business Days of such notice, to apply all or any portion of that distribution (plus an amount in cash equal to any prior distributions to the Limited Partner pursuant to Sections 4.2 or 10.2) to purchase as of the date of such distribution PSA Common Shares. In addition, if the distribution would cause a Stock Shortfall, the General Partner shall contribute cash equal to the amount of the Stock Shortfall to the Partnership, the Partnership shall distribute that amount to the Limited Partner as a guaranteed payment, and the Limited Partner shall concurrently use that added distribution to purchase PSA Common Shares. The number of shares to be issued shall be determined by dividing the total amount to be used to purchase shares by 98.5% of the Average Price. Any such purchase and sale shall otherwise comply with the applicable provisions of this Agreement. 10.4 Compliance with Timing Requirements of Regulations. In the event the Partnership is "liquidated" within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g), (a) distributions shall be made pursuant to this Section 10 to the Partners who have positive Capital Accounts in compliance with Regulations Section 1.704-1(b)(2)(ii)(b)(2), and (b) if a Partner's Capital Account has a deficit balance (after giving effect to all contributions, distributions and allocations for all taxable years, including the year during which such liquidation occurs), such Person shall have no obligation to make any contribution to the capital of the Partnership with respect to such deficit, and such deficit shall not be considered a debt owed to the Partnership or any other Person for any purpose whatsoever. In the discretion of the General Partner, a pro rata portion of the distributions that would otherwise be made to the Partners pursuant to this Section 10 may be: (a) Distributed to a trust established for the benefit of the Partners for the purposes of liquidating Partnership assets, collecting amounts owed to the Partnership, and paying any contingent or unforeseen liabilities or obligations of the Partnership or of the Partners arising out of or in connection with the Partnership. The assets of any such trust shall be distributed to the Partners from time to time, in the reasonable discretion of the General Partner, in the same proportions as the amount distributed to such trust by the Partnership would otherwise have been distributed to the Partners pursuant to this Agreement; or (b) Withheld to provide a reasonable reserve for Partnership liabilities (contingent or otherwise) and to reflect the unrealized portion of any installment obligations owed to the Partnership, provided that such withheld amounts shall be distributed to the Partners as soon as practicable. 38 10.5 Rights of Partners. Except as otherwise provided in this Agreement each Partner shall look solely to the assets of the Partnership for the return of its Capital Contribution and shall have no right or power to demand or receive property other than cash from the Partnership. 11. INDEMNIFICATION 11.1 Indemnification. The Partnership shall indemnify and hold harmless the Partners, their Affiliates, the Limited Partner's advisor, and their respective officers, directors, employees, agents and principals (individually, an "Indemnitee") from and against any and all losses, claims, demands, costs, damages, liabilities, joint and several, expenses of any nature (including reasonable attorneys' fees and disbursements), judgments, fines, settlements and other amounts arising from any and all claims, demands, actions, suits or proceedings, whether civil, criminal, administrative or investigative, in which the Indemnitee was involved or may be involved, or threatened to be involved, as a party or otherwise, arising out of or incidental to the business of the Partnership, excluding liabilities to any Partner, regardless of whether the Indemnitee continues to be a Partner, an Affiliate, or an officer, director, employee, agent or principal of the Partner at the time any such liability or expense is paid or incurred, to the fullest extent permitted by the Act and all other applicable laws; provided that such indemnity shall not extend to actions not taken in good faith by any such Indemnitee and shall not extend to actions taken by the property manager (which is indemnified under the Management Agreement) in its capacity as such pursuant to the Management Agreement. 11.2 Expenses. Expenses incurred by an Indemnitee in defending any claim, demand, action, suit or proceeding subject to Section 11.1 shall, from time to time, be advanced by the Partnership prior to the final disposition of such claim, demand, action, suit or proceeding upon receipt by the Partnership of an undertaking by or on behalf of the Indemnitee to repay such amount if it shall be determined that such Person is not entitled to be indemnified as authorized in Section 11.1. 11.3 Indemnification Rights Nonexclusive. The indemnification provided by Section 11.1 shall be in addition to any other rights to which those indemnified may be entitled under any agreement, vote of the Partners, as a matter of law or equity or otherwise, both as to action in the Indemnitee's capacity as a Partner, the General Partner, an Affiliate or an officer, director, employee, agent or principal of a Partner and as to any action in another capacity, and shall continue as to an Indemnitee who has ceased to serve in such capacity and shall inure to the benefit of the heirs, successors, assigns and administrators of the Indemnitee. 11.4 Errors and Omissions Insurance. The Partnership may purchase and maintain insurance, at the Partnership's expense, on behalf of the General Partner, the Partners and such other Persons as the General Partner shall determine, against any liability that may be asserted against, or any expense that may be incurred by, such Person in connection with the activities of the Partnership and/or the General Partner's or the Partners' acts or omissions as the General Partner and Partners of the Partnership regardless of whether the Partnership would have the power to indemnify such Person against such liability under the provisions of this Agreement. 39 11.5 Assets of the Partnership. Any indemnification under Section 11.1 shall be satisfied solely out of the assets of the Partnership. No Partner shall be subject to personal liability or required to fund or to cause to be funded any obligation by reason of these indemnification provisions. 12. DEFAULTING EVENT REMEDIES 12.1 Election to Purchase Defaulting Partner's Interest. In the event that a Partner becomes a Defaulting Partner, the nondefaulting Partner shall have the option to purchase the Interest of the Defaulting Partner in the Partnership, with any such election to be made by the nondefaulting Partner giving notice of such election to the Defaulting Partner within 30 days after the nondefaulting Partner first discovers that the other Partner has become a Defaulting Partner (and so notifies the Defaulting Partner in writing). In the event that the General Partner is the Defaulting Partner and shall at that time be able to exercise the option to purchase the Interest of the Limited Partner under Section 9.1, then the General Partner can exercise its Section 9.1 option within 30 days after such notice, provided that (i) the consideration for the Limited Partner's Interest shall be an amount that, when taken into account with all prior distributions to the Limited Partner (including guaranteed payments), will cause the Limited Partner to have received the return of its Capital Contributions and an aggregate return accrued from the Effective Date to the date of payment computed at the Maximum Return (as defined in Section 9.4(h)), and (ii) the closing under Section 9.5 shall take place within 20 days following the date of exercise of such option. 12.2 Purchase Price of Defaulting Partner's Interest. If either Partner becomes a Defaulting Partner, in the event that the nondefaulting Partner elects under Section 12.1 to purchase the Defaulting Partner's Interest, the purchase price of such Interest shall be 60% of the Adjusted Capital Contribution of the Defaulting Partner; provided, however, that the nondefaulting Partner shall receive a credit against such purchase price in the amount of any delinquent capital contributions due from the Defaulting Partner and any expenses of closing such purchase. This option to purchase the interest of the Defaulting Partner at a discount is deemed reasonable by the Partners and is intended to serve as agreed upon liquidated damages and not as a penalty, the amount of the actual damages suffered by the nondefaulting partner being difficult if not impossible to ascertain. In the event that the nondefaulting Partner elects under Section 12.1 to purchase the Defaulting Partner's Interest, then the Partnership shall not make any distributions on or before the closing of the purchase of such Interest, and any such distributions which would have been made to the Defaulting Partner shall be distributed to the nondefaulting Partner on or after the closing. At such time as the purchase price of the Defaulting Partner's Interest has been determined, the nondefaulting Partner shall give notice of the amount thereof to the Defaulting Partner and the closing shall be held on a date selected by the nondefaulting Partner within ten Business Days thereafter. 12.3 Remedies Nonexclusive. The option of the nondefaulting Partner to purchase the Interest of the Defaulting Partner under Section 12.1 is not the exclusive remedy of the nondefaulting Partner, but it is merely cumulative of, and in addition to, any rights or remedies which the nondefaulting Partner or the Partnership may have at law or in equity against or with respect to such Defaulting Partner, provided that any recovery under this Agreement against a Defaulting Partner shall be limited to the Defaulting Partner's interest in the Partnership. Without limiting its right to seek and recover damages for the Defaulting Event, a nondefaulting Partner may at its option: (i) replace the Defaulting Partner's representative(s) on the Investment Committee with its own representative(s), provided that no purchase, sale or financing of Property, other than pursuant to Section 12.2, shall be taken except with the consent of the Partners, (ii) remove the General Partner, (iii) terminate the Management Agreement (Exhibit D) or (iv) apply to any Capital Contribution with respect to which the General Partner is in default the management fees otherwise payable to PSA Affiliates under the Management Agreement for a period of up to 120 days, during which the PSA Affiliates shall not terminate the Management Agreement for nonpayment of such management fees. 40 13. REPRESENTATIONS AND WARRANTIES 13.1 Representations and Warranties of the General Partner. The General Partner hereby represents and warrants to the Limited Partner and the Partnership that: (a) The General Partner is a duly organized and validly existing corporation in good standing under the laws of the State of California, duly qualified to do business in all states in which the General Partner is required to so qualify in order to legally perform its obligations hereunder, and has the requisite power and authority to enter into and carry out the terms of this Agreement; (b) All action required to be taken by the General Partner to consummate this Agreement has been taken by the General Partner and no further approval of any board, court or other body is necessary in order to permit the General Partner to consummate this Agreement; (c) Neither the execution and delivery of, nor the performance of, nor the compliance with, this Agreement has resulted (or will result) in any violation of, be in conflict with, invalidate, cancel or make inoperative interfere with, or constitute a default under, or result in the creation of any lien, encumbrance or any other charge upon the Project (each reference in this Section 13.1 to a Project refers to each of the Projects described on Exhibit A and shall be deemed reconfirmed by the General Partner as to each additional Project as same is acquired by the Partnership) pursuant to any charter, bylaw, venture agreement, partnership agreement, trust agreement, mortgage, deed of trust, indenture, contract, agreement, permit, judgment, decree or order to which the General Partner is a party or by which the Project or any portion thereof is bound, and there is no default and no event or omission has occurred which, but for the passing of time or the giving of notice, or both, would constitute a default on the part of the General Partner under this Agreement; (d) There is no action, proceeding or investigation pending or, to the General Partner's actual knowledge, threatened (nor any basis therefor) which questions, directly or indirectly, the validity or enforceability of this Agreement as to the General Partner or which would materially and adversely affect the Project, and no lien against the Project has arisen or exists under Federal or state tax or other laws, other than liens for current real property taxes and assessments not yet due and payable; (e) The General Partner has no actual knowledge of any title defect, lien, encumbrance, adverse claim or other matter relating to the title to the Project or to the title insurance coverage for the Project which it has not disclosed in writing to the Partnership's title company or which is not shown by the public records; 41 (f) No representation, warranty or covenant of the General Partner in this Agreement, or in any document or certificate furnished or to be furnished to the Limited Partner pursuant thereto, contains or will contain any untrue statement of a material fact or omits or will omit to state any material fact necessary to make the statements or facts contained therein not misleading, and all such representations, warranties or statements of the General Partner are based, to the General Partner's actual knowledge, upon current, accurate and complete information as of the time of their making, and there have been, to the General Partner's actual knowledge, no changes in such information subsequent thereto; (g) The General Partner has disclosed to the Limited Partner all material matters known to the General Partner in connection with the Project and all related projections, studies and budgets; (h) This Agreement has been duly executed by the General Partner and is and will remain and valid and binding agreement, enforceable in accordance with its terms; (i) There are no judgments or decrees of any kind against the General Partner unpaid or unsatisfied of record in any court of any city, county, state or of the United States; the General Partner is not in the hands of a receiver and has not committed an act of bankruptcy and an order for relief has not been entered with respect to the General Partner; there are no due and unpaid business license taxes of the General Partner, and there are no due and unpaid income, property or sales taxes of the General Partner which constitute a lien against the Project or could, with the passage of time, constitute such a lien, except the lien of any such taxes which are not yet due and payable, except, in each case, where the existence of such condition or conditions would not, individually or in the aggregate, have a material adverse effect on the business operations, assets or financial condition of the General Partner; the General Partner has received no notice of any alleged violation of, and, to the General Partner's actual knowledge, there is no violation by the General Partner or the Project of, any Federal, state or local law, rule or regulation affecting the Project, other than violations that, individually or in the aggregate, would have no material adverse effect on the Project; (j) To the General Partner's actual knowledge, no person or entity has any oral or written right, agreement or option to acquire all or any portion of the Project or any interest or estate therein, other than as reflected in the public records or as provided in writing to the title company insuring title to a Project; (k) To the General Partner's actual knowledge, the Project is not subject to or affected by any special assessment for public improvements or otherwise, whether or not presently a lien on the land; the General Partner has not made any commitment to any governmental authority, utility company, school board, church or other religious body, homeowner or homeowner's association or any other organization, group or individual relating to the Project which would impose an obligation upon the Partnership or its successors or assigns to make any contributions or dedications of money or land (other that water and sewer), or to construct, install or maintain any improvements of a public or private nature as part of the Project or upon separate lands; other than as estimated in the Business Plans, no governmental authority has imposed any requirement that the General Partner pay directly or indirectly any special fees or contributions or incur any expenses or obligations in connection with the development of the Project or any portion thereof, other than any regular and nondiscriminatory local real estate or school taxes assessed against the Project; and the Project is separately assessed for real property tax assessment purposes and is not combined with any other real property for tax assessment purposes; 42 (l) To the General Partner's actual knowledge, the Project has not been used at any time for the disposal, release, handling, transportation, treatment, processing or storage of any Hazardous Materials in such amounts that would reasonably necessitate any response or corrective action, including any such action under any Hazardous Materials Laws; the General Partner has not received any written or oral notice or other communication of pending or threatened claims, actions, suits, proceedings or investigations against the General Partner with respect to the Project or any property adjacent to the Project and related to (i) the disposal or release of solid, liquid or gaseous waste into the environment, (ii) the disposal, release, handling, transportation, treatment, processing or storage of any Hazardous Materials, (iii) the placement of structures or Hazardous Materials into waters of the United States, (iv) the presence of any Hazardous Materials in any building or structure or otherwise located on the Project or such adjacent property, or (v) any alleged violation of any Hazardous Materials Law; to the General Partner's actual knowledge, no soil or water in, under or adjacent to the Project is contaminated by any Hazardous Materials; to the General Partner's actual knowledge, there are no underground tanks or any other underground storage facilities located on the Project; to the General Partner's actual knowledge, neither the Project nor any property adjacent to the Project is included on the National Priority List or any other Federal or state "superfund" or "superlien" list, nor is there any current action or investigation pending which could result in any such inclusion; (m) The General Partner has not received any notice of any pending or threatened condemnation, expropriation, eminent domain, change in grade of public street or similar proceeding affecting all or any portion of the Project, and the General Partner has no knowledge that any such proceeding is contemplated; (n) To the General Partner's actual knowledge, except as otherwise indicated on any Project survey approved by the Investment Committee, the Project has not been mapped by the Federal Emergency Management Agency as being in an area designated as a "flood hazard area" in accordance with the document entitled "Department of Housing and Urban Development, Federal Insurance Administration - Special Flood Hazard Area Maps" or mapped as being within the 100-year flood plain as depicted on the U.S. Army Corps of Engineers Geodetic Maps of such flood plain areas, and the Project is not located within an area identified by any governmental agency as being within an Alquist-Priolo Zone or having special earthquake hazards; (o) All public utilities (including, without limitation, water, sanitary sewer, storm sewer, electricity, telephone, drainage and other utility facilities) necessary for the normal operation of the Project are or will be available to the Project; all of the utilities either enter the Project through adjoining public streets or, if they pass or will pass through adjoining private land, do so or will do so in accordance with valid and recorded public easements or private easements which will inure to the benefit of the Partnership; and the General Partner has not received any complaint or claim with respect to storm water flow from any owner of adjacent property or otherwise, and the General Partner is not aware of any reason for any such complaint; 43 (p) The Project has vehicular and pedestrian ingress and egress to paved and dedicated streets abutting or adjoining the Project with curb cut or driveway permits from all requisite governmental authorities; (q) The Project is zoned under the applicable zoning ordinance to permit the development of the Project for the intended uses; (r) The General Partner has not received notice of any default or breach under any covenant, condition, restriction, right-of-way or easement which may affect the Project or any portion or portions thereof which are to be performed or complied with by the owner or occupant of the Project, and no notice of any condition or circumstance which, with the giving of notice or passage of time, or both, would constitute a default or breach under any of such covenants, conditions, restrictions, rights-of-way or easements; and (s) To the General Partner's actual knowledge, the plans and specifications provided to the Limited Partner by the General Partner comply with all laws, rules and regulations applicable to the Project. 13.2 Representations and Warranties of the Limited Partner. The Limited Partner hereby represents and warrants to the General Partner and the Partnership that the Limited Partner is duly formed, validly existing and in good standing under the laws of the [state of incorporation of Limited Partner]; that it is not subject to any involuntary proceeding for the dissolution or liquidation thereof; that it has all requisite authorizations to enter into this Agreement with the General Partner and to consummate the transactions contemplated hereby; and that the parties executing this Agreement on behalf of the Limited Partner are duly authorized to so do. 13.3 Agreements of the General Partner. (a) During the term of the Partnership, the Projects shall be operated and managed as an integral part of the Public Storage network of self-storage facilities, subject to the terms of the Management Agreement. Without limiting the foregoing, the General Partner covenants and agrees that the Projects will be managed in a reasonable commercial manner consistent with the management of other self-storage projects owned by PSA Affiliates; this will include (i) causing all rents and other charges with respect to the Projects to be at competitive rates within the local market, taking into account occupancy, location, the quality of the Project and all other relevant factors; (ii) operating the Projects in a manner so as to minimize expenses applicable thereto to the extent appropriate in the operation and promotion of first class self-storage projects and maximizing the long term net profits therefrom and the value thereof; and (iii) operating the Projects in a prudent and first class manner, with all appropriate action being taken to protect and preserve them (including appropriate repairs, maintenance, insurance coverage and the like). 44 (b) The General Partner will insure and keep insured at all times all of the Projects (including the Partnership as a named insured) against loss or damage by fire and from other causes customarily insured against by companies engaged in similar businesses in such amounts as are usually insured against by such companies, and in any case as are adequate to provide reasonable protection against such loss or damage to the Projects. The General Partner also will maintain at all times (including the Partnership as a named insured) with financially sound and reputable insurers adequate insurance against loss or damage from such hazards and risks to the person and property of others as are usually insured against by companies operating businesses similar to the businesses of the Partnership. All such insurance shall be carried with financially sound and reputable insurers accorded a rating of "A-VI" or better by A.M. Best Company, Inc. (or a comparable rating by any comparable rating agency), provided that at least 75% of all coverage and the insurer with the risk of first loss in each category shall have a rating of "A-IX" or better. If the Partnership cannot obtain sufficient insurance which meets the above criteria, the General Partner will provide the Limited Partner with notice and will demonstrate that insurance cannot be obtained in accordance with the above criteria, in which case the requirement shall be reduced to "A-V" and "A-VIII," respectively. The sum of the deductible limit of all insurance coverage plus any amounts of self-insurance will not exceed $1,500,000 per occurrence. A summary of insurance presently in force has been provided to the Limited Partner and is attached hereto as Exhibit L. (c) Expenses incurred in operating the Projects shall be allocated among the Projects on the same basis on which such expenses are allocated among all other projects owned by PSA Affiliates and in a manner generally consistent with prior practice as reflected in Exhibit J. (d) The General Partner shall allocate to the Partnership only such amount of the compensation of each project manager of a Project as is comparable to the compensation of project managers of similar sized self storage facilities in the same or similar market areas that do not include retail stores. 14. MISCELLANEOUS 14.1 Notices. Any notice, payment, demand, or communication required or permitted to be given by any provision of this Agreement shall be in writing and shall be delivered personally to the Person or to an officer of the Person to whom the same is directed, or sent by facsimile transmission, by nationally recognized courier service or by first class mail, registered or certified, addressed as follows, or to such other address as such Person may from time to time specify by notice to the Partners: (a) If to the Partnership, to the Partnership's principal executive office set forth in Section 1.4; (b) If to the Limited Partner, to: [addresses for notices to Limited Partner and representatives] 45 (c) If to the General Partner, to: PSAF Development, Inc. c/o Public Storage, Inc. 701 Western Avenue Glendale, CA 91201 Attn: Mr. Hugh Horne Fax: (818) 548-9288 Any such notice shall be deemed to be delivered, given and received for all purposes as of (i) the first Business Day after it is so delivered or sent, if delivered personally or sent by facsimile transmission (with transmission confirmed), (ii) the first Business Day after delivered to a nationally recognized courier service, if sent by overnight delivery through such a courier service, or (ii) three Business Days after being deposited in the United States mail, if sent by registered or certified mail, postage and charges prepaid. Any Person may from time to time specify a different address by notice to the Partnership and the Partners. 14.2 Binding Effect. Except as otherwise provided in this Agreement, every covenant, term and provision of this Agreement shall be binding upon and inure to the benefit of the Partners and their respective successors and permitted transferees and assigns. 14.3 Construction. Every covenant, term and provision of this Agreement shall be construed simply according to its fair meaning and not strictly for or against any Partner. References in this Agreement to Sections are to Sections of this Agreement unless expressly indicated otherwise. "Including" means "including without limitation." "Or" is inclusive and includes "and." 14.4 Time. Time is of the essence with respect to this Agreement. 14.5 Headings. Section and other headings contained in this Agreement are for reference purposes only and are not intended to describe, interpret, define or limit the scope, extent or intent of this Agreement or any provision hereof. 14.6 Severability. Every provision of this Agreement is intended to be severable. If any term or provision hereof is illegal or invalid for any reason whatsoever, such illegality or invalidity shall not affect the validity or legality of the remainder of this Agreement. 14.7 Incorporation by Reference. Every exhibit attached to this Agreement and referred to herein is hereby incorporated in this Agreement by reference. 14.8 Further Action. Each Partner, upon the request of the General Partner, agrees to perform all further acts and execute, acknowledge and deliver any documents which may be reasonably necessary, appropriate or desirable to carry out the provisions of this Agreement. 14.9 Variation of Pronouns. All pronouns and any variations thereof shall be deemed to refer to masculine, feminine or neuter, singular or plural, as the identity of the Person or Persons may require. 46 14.10 Governing Law. The laws of the State of California shall govern the validity of this Agreement, the construction of its terms and the interpretation of the rights and duties of the Partners. 14.11 Waiver of Action for Partition. Each Partner irrevocably waives any right that it may have to maintain any action for partition with respect to any of the Property. 14.12 Counterparts. This Agreement may be executed in any number of counterparts with the same effect as if all of the Partners had signed the same document. All counterparts shall be construed together and shall constitute one agreement. 14.13 Sole and Absolute Discretion. Except as otherwise provided in this Agreement, all actions which the Partners may take and all determinations which the Partners may make pursuant to this Agreement may be taken and made in their sole and absolute discretion. 14.14 Entire Agreement. This Agreement and the exhibits hereto, which are incorporated herein by reference, constitute the entire agreement among the parties hereto pertaining to the subject matter hereof and supersede all prior agreements, understandings, negotiations and discussions, whether oral or written. 14.15 Attorneys' Fees. Should any litigation, arbitration or other action or proceeding be commenced among the parties hereto, the party or parties prevailing in such litigation, arbitration or other action or proceeding shall be entitled, in addition to such other relief as may be granted, to a reasonable sum as and for its or their attorneys' fees and costs in such litigation, arbitration or other action or proceeding which shall be determined by the court or arbitral tribunal therein or in a separate action brought for that purpose. 14.16 Third Parties. Nothing in this Agreement, expressed or implied, is intended to confer upon any Person other than the parties hereto any rights or remedies under or by reason of this Agreement. 14.17 Waiver. No failure by any party to insist upon the strict performance of any covenant, duty, agreement or condition of this Agreement or to exercise any right or remedy consequent upon a breach thereof shall constitute a waiver of any such breach or any other covenant, duty, agreement or condition. 14.18 Amendment and Modification. This Agreement may be amended or modified by unanimous consent of the Partners. 14.19 Dispute Resolution. If any dispute or controversy among the parties hereto arises out of or relating to this Agreement or the enforcement, interpretation, performance or breach of this Agreement or as to any matters related to but not covered by this Agreement, the parties shall first consult together, at both the working and senior management levels, in good faith to find an amicable resolution of the dispute or controversy. If the parties cannot resolve the dispute or controversy by such consultation, it shall be finally resolved by binding arbitration to be held in the County of Los Angeles, State of California, under auspices of, and in accordance with, the 47 Commercial Arbitration Rules (the "Rules") of the American Arbitration Association. There shall be an arbitral tribunal consisting of three neutral arbitrators selected according to the procedures set forth in the Rules. The arbitrators may issue decisions for interim, interlocutory, provisional or partial relief (e.g., temporary restraining orders, preliminary injunctions, orders to compel discovery, orders of attachment or protective orders) during the arbitration proceedings which may be enforced in any court of competent jurisdiction. The arbitrators may also grant appropriate relief at law or in equity, including removing the General Partner, in the event the General Partner (with the participation or acquiescence of its senior management) has been guilty of fraud, gross negligence, abuse of authority or misappropriation or waste of Partnership assets. The decision of a majority of the arbitrators shall constitute an arbitral award which is final, conclusive and binding on each party, and may be entered and shall be enforceable in any court of competent jurisdiction. 14.20 Confidentiality. The Partners agree that the terms of this Agreement, any other agreements entered into in connection with the transactions contemplated hereby and the identities of the parties hereto and their parent companies are confidential and shall not be disclosed to any third party without the other party's prior written consent; provided, however, that any party may disclose the existence and/or terms and conditions hereof if so required by law or to such party's attorneys, accountants and other professionals subject to the professional duty not to disclose such existence and/or terms and conditions unless permitted by law, so long as such party first provides a copy of any such written request to the other party. 48 IN WITNESS WHEREOF, the undersigned have entered into this Agreement as of the date first above set forth. GENERAL PARTNER: PSAF DEVELOPMENT, INC. By /s/ Hugh W. Horne ------------------ Its Chief Operating Officer ----------------------- LIMITED PARTNER: [signature of Limited Partner] 49 EX-11 3 STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE PUBLIC STORAGE, INC. Exhibit 11 - Statement Re: Computation of Earnings Per Share
For the Three Months Ended March 31, ----------------------------------------- Primary Earnings Per Share: 1997 1996 - ------------------------------------------------------------------ ------------------- ------------------- Net income $ 42,318,000 $ 32,341,000 Less: Preferred Stock dividends: 10% Cumulative Preferred Stock, Series A (1,140,000) (1,140,000) 9.20% Cumulative Preferred Stock, Series B (1,372,000) (1,372,000) Adjustable Rate Preferred Stock, Series C (545,000) (505,000) 9.50% Cumulative Preferred Stock, Series D (713,000) (713,000) 10.0% Cumulative Preferred Stock, Series E (1,372,000) (1,372,000) 9.75% Cumulative Preferred Stock, Series F (1,401,000) (1,401,000) 8.875% Cumulative Preferred Stock, Series G (3,828,000) (3,997,000) 8.45% Cumulative Preferred Stock, Series H (3,565,000) (2,654,000) 8.625% Cumulative Preferred Stock, Series I (2,156,000) - 8.25% Convertible Preferred Stock (1,142,000) (1,186,000) Mandatory Convertible Participating Preferred Stock - (826,000) Mandatory Convertible Preferred Stock, Series CC (1,916,000) - ------------------- ------------------- Net income allocable to common shareholders $ 23,168,000 $ 17,175,000 =================== =================== Weighted Average common and common equivalent shares outstanding: Weighted average common shares outstanding 89,086,000 71,574,000 Net effect of dilutive stock options - based on treasury stock method using average market price 390,000 92,000 ------------------- ------------------- Total 89,476,000 71,666,000 =================== =================== Primary earnings per common and common equivalent share $ 0.26 $ 0.24 =================== ===================
Exhibit 11 PUBLIC STORAGE, INC. Exhibit 11 - Statement Re: Computation of Earnings Per Share
For the Three Months Ended March 31, ----------------------------------------- Fully-diluted Earnings per Common and Common Equivalent Share: 1997 1996 - -------------------------------------------------------------- -------------------- ----------------- Net income allocable to common shareholders per Primary calculation above $ 23,168,000 $ 17,175,000 Add dividends paid to holders of Convertible Preferred Stocks: 8.25% Convertible Preferred Stock 1,143,000 1,186,000 Mandatory Convertible Participating Preferred Stock - 826,000 Series CC Preferred Stock 1,916,000 - -------------------- ----------------- Net income allocable to common shareholders for purposes of determining Fully-diluted Earnings per Common and Common Equivalent Share $ 26,227,000 $ 19,187,000 ==================== ================= Weighted average common and common equivalent shares outstanding 89,476,000 71,666,000 Pro forma weighted average common shares assuming conversion of Convertible Preferred Stock: 8.25% Convertible Preferred Stock 3,769,000 3,872,000 Mandatory Convertible Participating Preferred Stock - 1,524,000 Series CC Preferred Stock 2,064,000 - -------------------- ----------------- Weighted average common and common equivalent shares for purposes of computation of Fully-diluted Earnings per Common and Common Equivalent Share 95,309,000 77,062,000 ==================== ================= Fully-diluted Earnings per Common and Common Share (1) $ 0.28 $ 0.25 ==================== =================
(1) Such amounts are anti-dilutive and are not presented in the Company's consolidated financial statements. In addition, the Company has 7,000,000 shares of Class B Common Stock which are convertible into shares of the Company's Common Stock subject to certain contingencies such as the passage of time and the attainment of certain earnings milestone by the Company. The assumption of such earnings and the pro forma conversion of the Class B Common Stock into Common Stock in the above computations would have resulted in an increase in the fully-diluted earnings per common share, and accordingly, is anti-dilutive. Exhibit 11 EX-12 4 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES PUBLIC STORAGE, INC. EXHIBIT 12 - STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Three Months Ended March 31, --------------------------- 1997 1996 ------------ ------------- Net income $ 42,318 $ 32,341 Add: Minority interest in income 2,447 2,339 Less: Gain on disposition of real estate - - Less: Minority interests in income which do not have fixed charges (2,132) (1,536) ------------ ------------- Income from continuing operations 42,633 33,144 Interest expense 1,597 2,581 ------------ ------------- Total Earnings Available to Cover Fixed Charges $ 44,230 $ 35,725 ============ ============= Total Fixed Charges - Interest expense $ 2,333 $ 2,775 ============ ============= Total Preferred Stock dividends $19,150 $ 15,166 ============ ============= Total Combined Fixed Charges and Preferred Stock dividends $ 21,483 $ 17,941 ============ ============= Ratio of Earnings to Fixed Charges 18.96 12.87 ============ ============= Ratio of Earnings to Combined Fixed Charges and Preferred Stock dividends 2.06 2.00 ============ =============
Exhibit 12 PUBLIC STORAGE, INC. EXHIBIT 12 - STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
For the Year Ended December 31, -------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ------------- ------------- -------------- -------------- ------------ (Amounts in thousands, except ratios) Net income $ 153,549 $ 70,386 $ 42,118 $ 28,036 $ 15,123 Add: Minority interest in income 9,363 7,137 9,481 7,291 6,895 Less: Gain on disposition of real estate - - - - (398) Less: Minority interests in income which do not have fixed charges (8,273) (4,700) (5,906) (737) (694) ------------- ------------- -------------- -------------- ------------ Income from continuing operations 154,639 72,823 45,693 34,590 20,926 Interest expense 8,482 8,508 6,893 6,079 9,834 ------------- ------------- -------------- -------------- ------------ Total Earnings Available to Cover Fixed Charges $ 163,121 $ 81,331 $ 52,586 $ 40,669 $ 30,760 ============= ============= ============== ============== ============ Total Fixed Charges - Interest expense $ 10,343 $ 8,815 $ 6,893 $ 6,079 $ 9,834 ============= ============= ============== ============== ============ Total Preferred Stock dividends $ 68,599 $ 31,124 $ 16,846 $ 10,889 $ 812 ============= ============= ============== ============== ============ Total Combined Fixed Charges and Preferred Stock dividends $ 78,942 $ 39,939 $ 23,739 $ 16,968 $ 10,646 ============= ============= ============== ============== ============ Ratio of Earnings to Fixed Charges 15.77 9.23 7.63 6.69 3.13 ============= ============= ============== ============== ============ Ratio of Earnings to Combined Fixed Charges and Preferred Stock dividends 2.07 2.04 2.22 2.40 2.89 ============= ============= ============== ============== ============
Exhibit 12 PUBLIC STORAGE, INC. EXHIBIT 12 - STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Supplemental disclosure of Ratio of Funds from Operations ("FFO") to fixed charges: - ----------------------------------------------------------------------------------------- Three Months Ended March 31, For the Year Ended December 31, --------------------------- ------------------------------- 1997 1996 1996 1995 ------------ ------------- ------------- ----------- FFO $ 63,372 $ 48,502 $ 224,384 $ 105,086 Interest expense 1,597 2,581 8,482 8,508 ------------ ------------- ------------- ----------- Adjusted FFO available to cover fixed charges $ 64,969 $ 51,083 $ 232,866 $ 113,594 ============ ============= ============= =========== Total Fixed Charges - Interest expense $ 2,333 $ 2,775 $ 10,343 $ 8,815 ============ ============= ============= =========== Total Preferred Stock dividends $ 19,150 $ 15,166 $ 68,599 $ 31,124 ============ ============= ============= =========== Total Combined Fixed Charges and Preferred Stock dividends $ 21,483 $ 17,941 $ 78,942 $ 39,939 ============ ============= ============= =========== Ratio of FFO to Fixed Charges 27.85 18.41 22.51 12.88 ============ ============= ============= =========== Ratio of FFO to Combined Fixed Charges and Preferred Stock dividends 3.02 2.85 2.95 2.84 ============ ============= ============= ===========
PUBLIC STORAGE, INC. EXHIBIT 12 - STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Supplemental disclosure of Ratio of Funds from Operations ("FFO") to fixed charges: - ----------------------------------------------------------------------------------------- For the Year Ended December 31, -------------------------------------------- 1994 1993 1992 ------------- ------------ ------------- FFO $ 56,143 $ 35,830 $ 21,133 Interest expense 6,893 6,079 9,834 ------------- ------------ ------------- Adjusted FFO available to cover fixed charges $ 63,036 $ 41,909 $ 30,967 ============= ============ ============= Total Fixed Charges - Interest expense $ 6,893 $ 6,079 $ 9,834 ============= ============ ============= Total Preferred Stock dividends $ 16,846 $ 10,889 $ 812 ============= ============ ============= Total Combined Fixed Charges and Preferred Stock dividends $ 23,739 $ 16,968 $ 10,646 ============= ============ ============= Ratio of FFO to Fixed Charges 9.15 6.89 3.15 ============= ============ ============= Ratio of FFO to Combined Fixed Charges and Preferred Stock dividends 2.66 2.47 2.91 ============= ============ =============
Exhibit 12 EX-27 5 FDS --
5 0000318380 PUBLIC STORAGE, INC. 1 US 3-MOS Dec-31-1997 Jan-01-1997 Mar-31-1997 1 125,436,000 0 24,745,000 0 0 150,181,000 2,247,344,000 (315,153,000) 2,681,307 39,993,000 107,909,000 0 833,209,000 10,005,000 1,579,656,000 2,681,307,000 0 101,259,000 0 33,491,000 21,406,000 0 1,597,000 42,318,000 0 42,318,000 0 0 0 42,318,000 .26 .26
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