-----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, FGW+Z1g+8qogWjFT5Odn+3f/uMRZmF8f/Sc7Z6LsbPw+dXjPj3ra4+05bu5Uz60U PJ75SZBvawz9mKqKdNyUOA== 0000898430-95-002503.txt : 19951201 0000898430-95-002503.hdr.sgml : 19951201 ACCESSION NUMBER: 0000898430-95-002503 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19951116 ITEM INFORMATION: Acquisition or disposition of assets ITEM INFORMATION: Other events FILED AS OF DATE: 19951129 SROS: NYSE 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: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08389 FILM NUMBER: 95597012 BUSINESS ADDRESS: STREET 1: 600 N BRAND BLVD STREET 2: SUITE 300 CITY: GLENDALE STATE: CA ZIP: 91203 BUSINESS PHONE: 8182448080 FORMER COMPANY: FORMER CONFORMED NAME: STORAGE EQUITIES INC DATE OF NAME CHANGE: 19920703 8-K 1 FORM 8-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K Current Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 Date of Report (Date of earliest event reported) NOVEMBER 16, 1995 --------------------- PUBLIC STORAGE, INC. -------------------- (Exact name of registrant as specified in its charter) CALIFORNIA 1-8389 95-3551121 - ---------- ------ ---------- (State or other jurisdiction (Commission (I.R.S. Employer of incorporation) File Number) Identification Number) 600 NORTH BRAND BLVD., GLENDALE, CALIFORNIA 91203-1241 ------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (818) 244-8080 -------------- STORAGE EQUITIES, INC. ---------------------- (Former name or former address, if changed since last report) ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS. ------------------------------------ On November 16, 1995, Public Storage Management, Inc. ("PSMI") was merged into the Registrant (the "Merger") pursuant to an Agreement and Plan of Reorganization by and among Public Storage, Inc. ("Old Public Storage"), PSMI and the Registrant, dated as of June 30, 1995 (the "Agreement and Plan of Reorganization"), as amended by an Amendment to Agreement and Plan of Reorganization by and among Old Public Storage, PSMI, and the Registrant, dated as of November 13, 1995 (the "Amendment"). In the Merger, the Registrant's name was changed from Storage Equities, Inc. to Public Storage, Inc. The Agreement and Plan of Reorganization and the Amendment, which are referenced under Item 7, are incorporated herein by this reference. ITEM 5. OTHER EVENTS. ------------ HISTORICAL AND PRO FORMA FINANCIAL STATEMENTS
Page References ---------- Report of Independent Auditors.................................................................. 3 Combined Statements of Assets, Liabilities and Equity at December 31, 1994 and,................. 4 1993 and September 30, 1995 For the years ended December 31, 1994, 1993, 1992 and the nine months ended September 30, 1995 and 1994: Combined Statements of Operations............................................................ 5 Combined Statements of Cash Flows............................................................ 6 Notes to Financial Statements................................................................ 7 Pro Forma Consolidated Financial Statements ------------------------------------------- Pro Forma Consolidated Balance Sheet at September 30, 1995................................... 14 Pro Forma Consolidated Statements of Income: For the nine months ended September 30, 1995............................................. 18 For the year ended December 31, 1994..................................................... 19
2 REPORT OF INDEPENDENT AUDITORS The Shareholder of Public Storage, Inc. We have audited the accompanying combined statements of assets, liabilities and equity of the property management and advisory businesses and real estate assets of Public Storage, Inc. (Operating Companies and Real Estate Interests) as of December 31, 1994 and 1993 and the related combined statements of operations and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The accompanying financial statements of the Operating Companies and Real Estate Interests were prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission for inclusion in a Form 8- K of Public Storage, Inc. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Operating Companies and Real Estate Interests at December 31, 1994 and 1993, and results of operations and its cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Los Angeles, California October 6, 1995 3 OPERATING COMPANIES AND REAL ESTATE INTERESTS COMBINED STATEMENTS OF ASSETS, LIABILITIES AND EQUITY (IN THOUSANDS OF DOLLARS)
AS OF AS OF DECEMBER 31, --------------------------------------- SEPTEMBER 30, 1995 1994 1993 ------------------ ------------------ ------------------ (unaudited) Assets: Cash $ 547 $ 1,388 $ 387 Restricted cash 1,021 - 1,111 Receivables from affiliates 3,008 3,033 2,751 Notes receivable 6,695 8,141 8,433 Investments in real estate entities 78,198 68,445 56,861 Real estate facilities: Land 5,710 5,710 5,710 Buildings 14,337 14,326 14,282 ------------------- ------------------ ------------------ 20,047 20,036 19,992 Accumulated depreciation (2,576) (2,207) (1,718) ------------------- ------------------ ------------------ 17,471 17,829 18,274 Other assets 84 202 559 ------------------- ------------------ ------------------ Total assets $ 107,024 $ 99,038 $ 88,376 =================== ================== ================== Liabilities Accounts payable $ 763 $ 1,167 $ 1,281 Interest payable 1,712 527 561 Secured notes payable 4,440 4,807 5,015 Senior Secured Notes due 2003 (net of $314, $359 and $519 of issuance costs at September 30, 1995, December 31, 1994 and 1993, respectively) 67,686 70,141 74,481 ------------------- ------------------ ------------------ Total liabilities 74,601 76,642 81,338 ------------------- ------------------ ------------------ Equity 32,423 22,396 7,038 ------------------- ------------------ ------------------ Total liabilities and equity $ 107,024 $ 99,038 $ 88,376 =================== ================== ==================
See accompanying notes 4 OPERATING COMPANIES AND REAL ESTATE INTERESTS COMBINED STATEMENTS OF OPERATIONS (IN THOUSANDS OF DOLLARS)
NINE MONTHS ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31, --------------------------- ----------------------------------------- 1995 1994 1994 1993 1992 ----------- ----------- ----------- ----------- ----------- (unaudited) Revenues Facility management fees, primarily from affiliates $ 19,902 $ 18,492 $ 25,224 $ 23,105 $ 21,416 Equity in earnings of real estate entities 20,485 18,093 24,555 19,742 15,026 Advisory fee from affiliate 5,462 3,644 4,983 3,619 2,612 Merchandise operations 1,613 1,423 1,872 1,564 1,263 Rental revenues 2,474 2,345 3,152 2,884 2,867 Interest income 705 733 996 792 847 ----------- ----------- ----------- ----------- ----------- Total revenues 50,641 44,730 60,782 51,706 44,031 ----------- ----------- ----------- ----------- ----------- Expenses Cost of managing facilities 3,877 3,632 4,909 5,544 5,839 Cost of advisory services and administrative expenses 1,414 1,280 1,850 1,410 975 Cost of merchandise 779 666 866 800 689 Cost of rental operations 676 635 834 813 653 Depreciation 439 767 1,011 556 476 Interest expense 3,988 4,235 5,607 1,005 7,732 ----------- ----------- ----------- ----------- ----------- Total expenses 11,173 11,215 15,077 10,128 16,364 ----------- ----------- ----------- ----------- ----------- Income before extraordinary item 39,468 33,515 45,705 41,578 27,667 Extraordinary item Gain on retirement of debt - - - 14,440 3,311 ----------- ----------- ----------- ----------- ----------- Net income $ 39,468 $ 33,515 $ 45,705 $ 56,018 $ 30,978 =========== =========== =========== =========== ===========
See accompanying notes. 5
OPERATING COMPANIES AND REAL ESTATE INTERESTS COMBINED STATEMENTS OF CASH FLOWS (IN THOUSANDS OF DOLLARS) NINE MONTHS ENDED SEPTEMBER 30 YEARS ENDED DECEMBER 31, ----------------------------- ---------------------------------------------- 1995 1994 1994 1993 1992 -------------- ------------- ------------- --------------- -------------- (unaudited) Cash flows from operating activities: Net Income $ 39,468 $ 33,515 $ 45,705 $ 56,018 $ 30,978 Adjustment to reconcile net income to net cash provided by operating activities: Depreciation and amortization 439 767 1,011 556 1,971 Less: Equity in earnings of real estate entities (20,485) (18,093) (24,555) (19,742) (15,026) Distributions from real estate entities 10,732 9,797 12,971 9,843 9,645 Gain on retirement of debt - - - (14,440) (3,311) Change in restricted cash (1,021) (298) 1,111 (1,111) - Other 899 1,106 (435) 8 (386) -------------- ------------- ------------ -------------- ------------ Total adjustments (9,436) (6,721) (9,897) (24,886) (7,107) -------------- ------------- ------------ -------------- ------------ Net cash provided by operating activities 30,032 26,794 35,808 31,132 23,871 -------------- ------------- ------------ -------------- ------------ Cash flows from investing activities: Payments eceived on notes receivable 1,446 219 292 390 224 Capital expenditures (35) (33) (44) (103) (38) -------------- ------------- ------------ -------------- ------------ Net cash provided by investing activities 1,411 186 248 287 186 -------------- ------------- ------------ -------------- ------------ Cash flows from financing activities: Principal payments on debt (2,867) (2,387) (4,708) (185) (137) Repurchase of debt - - - (42,905) (6,143) Issuance of Senior Secured Notes, net of issuance costs - - - 74,475 - Net distributions to affiliates (29,417) (18,733) (30,347) (62,738) (17,509) -------------- ------------- ------------ -------------- ------------ Net cash used in financing activities (32,284) (21,120) (35,055) (31,353) (23,789) -------------- ------------- ------------ -------------- ------------ Net increase (decrease) in cash (841) 5,860 1,001 66 268 Cash at beginning of period 1,388 387 387 321 53 -------------- ------------- ------------ -------------- ------------ Cash at end of period $ 547 $ 6,247 $ 1,388 $ 387 $ 321 ============== ============= ============ ============== ============ Supplemental disclosure: Interest paid $ 2,758 $ 2,834 $ 5,481 $ 1,606 $ 6,513 ============== ============= ============ ============== ============
See accompanying notes 6 OPERATING COMPANIES AND REAL ESTATE INTERESTS NOTES TO COMBINED FINANCIAL STATEMENTS A. Basis of Presentation The financial statements include the property management operations of Public Storage Management, Inc. ("PSMI") and Public Storage Commercial Properties Group, Inc. ("PSCP"), the advisory business of Public Storage Adviser, Inc. ("Adviser") and merchandise sales operations of PSMI (collectively "Operating Companies") and the real estate assets in which Storage Equities, Inc. ("SEI") acquired an interest ("Real Estate Interests"). PSMI, PSCP and Adviser are subsidiaries of Public Storage, Inc. ("PSI"). Under an Agreement and Plan of Reorganization dated June 30, 1995, on November 16, 1995 the Operating Companies, along with the Real Estate Interests, were acquired by SEI, a California corporation organized as a real estate investment trust (the "Merger") and SEI changed its name to Public Storage, Inc.. The accompanying financial statements have been prepared from the books and records of the Operating Companies and the accounts related to the Real Estate Interests and present the assets, liabilities and equity of the Operating Companies and Real Estate Interests as of December 31, 1994 and 1993 and September 30, 1995, and the related revenues and expenses for the years ended December 31, 1994, 1993, 1992 and the nine months ended September 30, 1995 and 1994. Accordingly, these statements do not purport to represent the financial position or results of operations of PSI or any of its subsidiaries. The Combined Statements of Operations may not necessarily be indicative of the revenues and expenses that would have resulted had the Operating Companies and Real Estate Interests operated as a stand-alone entity. Information subsequent to December 31, 1994 is unaudited. PSMI operated and managed, at September 30, 1995, pursuant to property management agreements, 1,076 self-storage mini-warehouses, including 1,016 facilities owned by SEI, PSI or entities affiliated with PSI. It operated all of the United States mini-warehouses operating under the "Public Storage" name and all of those in which SEI has an interest. PSCP operated and managed, at September 30, 1995, pursuant to property management agreements, 45 commercial office buildings and light industrial business parks, including 35 facilities owned by SEI, PSI or entities affiliated with PSI, which operate under the Public Storage name in the United States and all commercial facilities in which SEI has an interest. The Adviser acts, pursuant to an advisory contract, as an investment advisor to SEI. It advises SEI with respect to its investments and administers the daily corporate operations of SEI for an advisory fee (see Advisory Contract) and pays the salaries and expenses of the executive officers, the acquisition staff of SEI and other corporate overhead, including rent. PSMI sells merchandise (primarily locks and boxes) to customers and tenants at substantially all of the mini-warehouse facilities managed by PSMI. These products are ancillary to renting storage space and are provided as a convenience to the tenants. Real Estate Interests consist of partial equity interests in 63 REITs and partnerships, which own 505 mini-warehouses and 14 commercial facilities, a fee interest in six mini-warehouses and one commercial facility, all operated under the "Public Storage" name, and 10 mortgage notes receivable secured by mini-warehouse facilities. 7 B. Summary of Significant Accounting Policies 1. Method of accounting. The financial statements are prepared in accordance with generally accepted accounting principles. 2. Cash and cash equivalents. Cash and cash equivalents consist of demand deposits and cash investments which are highly liquid investments with a maturity of three months or less. Cash is invested in commercial paper and US Government securities. 3. Real estate facilities. Cost of land includes appraisal fees and legal fees related to acquisition and closing costs. Buildings reflect costs incurred to develop mini-warehouses and to a lesser extent business park facilities. The mini-warehouse facilities provide self- service storage spaces for lease, generally on a month-to month basis, to the general public. 4. Depreciation and amortization. Depreciation expense represents depreciation on real estate facilities and equipment and is provided on a straight-line basis over the estimated useful life of twenty-five years and three years, respectively. Amortization expense represents amortization of debt issuance costs and is provided on the effective interest method over the life of the debt. 5. Allocated costs. Included in the accompanying Statements of Operations are allocations of expenses for corporate overhead, including salaries of support personnel, facilities and other expenses, incurred by the Operating Companies. The personnel and facilities subject to these allocations support other entities affiliated with PSI. In management's opinion, the allocation methodology, which is based on the estimated utilization of such services and costs, provides a reasonable allocation of the costs that were incurred by the Operating Companies. 6. Income taxes. The financial statements exclude the effects of income taxes since they reflect a partial presentation (after allocated costs). 7. Equity. Equity represents the excess of assets over liabilities and reflects the effect of net distributions, capital transactions, and loans between the Operating Companies and affiliated companies. C. Notes Receivable Notes receivable includes ten notes with an aggregate carrying amount of $8,141,000 at December 31, 1994 and which are secured by mini-warehouse facilities. Four of the notes are subject to underlying mortgage debt. Interest income and interest expense are included in the Combined Statements of Operations with respect to the notes receivable and underlying mortgage debt, respectively. The notes receivable have interest rates ranging from 7.0% to 14.5% (weighted average of 11.8%) and mature from 1995 to 2013. The underlying mortgages have interest rates ranging from 7.1% to 9.9% (weighted average of 7.5%) and are due from 1997 to 2000. D. Investments in Real Estate Entities Investments in real estate entities consist generally of a 20% to 30% interest in 63 affiliated REITs and partnerships which own 505 mini- warehouses and 14 business parks, all operated under the "Public Storage" name. These investments are accounted for using the equity method of accounting, recognizing in income its proportionate share of the earnings while correspondingly increasing the investment balance and accounting for distributions as a reduction in the investment balance. The impact of facility management fees paid by these unconsolidated affiliated entities have been eliminated to the extent of PSI's investment in each entity ($2.9 million and $2.5 million for the year ended December 31, 1994 and nine months ended September 30, 1995, respectively). 8 E. Secured Notes Payable Secured Notes Payable ($4,807,000 as of December 31, 1994) consist of underlying debt related to four of the notes receivable and mortgage debt secured by one facility. The debt bears interest at rates ranging from 7.1% to 9.9%. The repayment of principal related to this debt at December 31, 1994 is due as follows: 1995 $ 213,000 1997 1,038,000 1998 2,633,000 1999 561,000 Thereafter 131,000 ---------- $4,807,000 ==========
F. Long-term Debt During 1992 and 1993, debt of PSMI was extinguished through a series of purchases from unaffiliated note holders, resulting in "extraordinary" gains from retirement of debt of $3.3 million and $14.4 million in 1992 and 1993, respectively. In November 1993, PSMI issued $75 million in Senior Secured Notes due 2003 ("Notes"). The Notes bear interest at 7.08%, with interest and principal payments due semi-annually. The Notes are collateralized by cash flow rights from the property management agreements for mini-warehouses and other assets of PSI, including trademarks and marketable and non-marketable securities of affiliates. The Notes have various restrictive covenants on dividends, investments and additional indebtedness. As required by the Notes, cash is segregated between the amount which must be invested pursuant to the terms of the Notes (restricted cash) and an amount which may be used to declare dividends or invested without restriction. Restricted funds of $1.1 million, none and $1.0 million are included in cash as of December 31, 1993, and 1994 and September 30, 1995, respectively. In addition, the Notes contain various financial covenants. PSMI is in compliance with all covenants. As of December 31, 1994, the scheduled principal payments of the Notes were as follows: 1995 $ 5,000,000 1996 5,750,000 1997 6,500,000 1998 7,250,000 1999 8,000,000 Thereafter 38,000,000 ----------- $70,500,000 ===========
G. Management Agreements The property management agreements generally provide for compensation equal to six percent of the gross revenues of the mini-warehouse facilities managed, and five percent of the gross revenues of the commercial facilities managed. Management fees of $26,835,000, $24,554,000, $22,656,000, $18,777,000 and $17,400,000 were earned on properties in which PSI and SEI have an interest for the years ended December 31, 1994, 1993, 1992 and for the nine months ended September 30, 1995 and 1994, respectively. The management agreements, except as noted below, are cancelable by either party upon sixty days notice. 9 The impact of property management fees paid to PSI for properties which it owns and by unconsolidated affiliated entities in which PSI has an interest have been eliminated to the extent of PSI's investment ($3.1 million and $2.6 million for the year ended December 31, 1994 and nine months ended September 30, 1995, respectively). For the property management fees, under the supervision of the property owners, PSMI and PSCP coordinate 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. PSMI and PSCP assist and advise the property owners in establishing policies for the hire, discharge and supervision of employees for the operation of their facilities, including resident managers, assistant managers, relief managers and billing and maintenance personnel. For the duration of the management agreements, PSMI grants to the property owners a non-exclusive license to use two PSI service marks and related designs, including the "Public Storage" name. Upon termination of the management agreement, the property owner would no longer have the right to use the service marks and related designs, except as described below. In February 1995, the management agreements of sixteen companies (including SEI) were amended to revise the termination provision. The management agreements, as amended, provide that the agreements with respect to properties directly owned by the sixteen companies will expire seven years from the date modified, provided that on each anniversary of such modification, it shall be automatically extended for one year (thereby maintaining a seven year term) unless either party notifies the other that the agreement is not being extended. With respect to properties in which SEI has an interest, but are not wholly-owned by SEI, the management agreements may be terminated upon sixty days notice by SEI and upon seven years notice by the Operating Companies. The management agreements of the sixteen companies may also be terminated by either party for cause, but if terminated by the property owner, for cause, the property owner will retain the rights to use the PSI service marks until the scheduled expiration date. Regardless of the termination provisions, all management agreements with PSI affiliated entities are subject to termination upon the sale of the facilities. H. Advisory Contract Pursuant to an advisory contract, the Adviser, for an advisory fee, directs SEI, under the supervision of SEI's Board of Directors, with respect to its investments and daily corporate operations. The contract provided for the monthly payment of advisory fees equal to the sum of (i) 12.75% of SEI's adjusted income (as defined, and after reduction for SEI's share of capital improvements) per share of SEI common stock on the first 14,989,454 shares outstanding and (ii) 6% of adjusted income per share on common shares in excess of 14,989,454 of SEI common stock. The advisory contract provide d s that, in computing the advisory fee, adjusted income will be reduced by dividends paid on all SEI preferred stock and that the Adviser will also receive an amount equal to 6% of such dividends. Pursuant to the merger, SEI acquired the Adviser, and accordingly, the payment of advisory fees terminated. The Adviser paid the salaries and expenses of the executive officers, the acquisition staff of SEI and other corporate overhead, including rent. I. Contingencies PSI and PSMI have entered into various operating leases including a lease for the facilities utilized by personnel of the Operating Companies. Rent of $748,000, $725,000, $777,000, $537,000 and 10 $559,000 is included in the Statements of Operations for the years ended December 31, 1994, 1993, and 1992 and the nine months ended September 30, 1995 and 1994, respectively, related to these leases. Minimum lease payments due under these leases as of December 31, 1994 are:
1995 $841,000 1996 397,000 1997 129,000 1998 107,000 1999 5,000
In connection with the management of mini-warehouses, the Operating Companies have established trust accounts to collect, from various property owners, on a monthly basis, amounts for property tax payments. Payments of the property tax bills which generally occur annually or semi-annually are made from these accounts. Funds relating to these property tax impounds held on behalf of non-affiliates and affiliates in the approximate amounts of $913,000 and $1,000,000, respectively, at December 31, 1994 and $891,000 and $1,183,000, respectively, at December 31, 1993. The impounds are not reflected in the accompanying Statement of Assets, Liabilities and Equity. The Operating Companies are involved in various legal proceedings arising from the normal course of business. In the opinion of management, the ultimate outcome of these proceedings will not have a material effect on the Operating Companies' financial position, results of operations or its liquidity. 11 PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS In a series of November 1995 mergers among Public Storage Management, Inc. and its affiliates (collectively "PSMI"), which was Storage Equities, Inc.'s ("SEI") mini-warehouse property operator, culminating in the merger of PSMI into SEI, (the "Merger"), SEI changed its name to Public Storage, Inc. (the "Company" or "PSI"), became self-administered and self-managed and acquired substantially all of the United States real estate operations of PSMI. The outstanding capital stock of PSMI was converted into an aggregate of 30,000,000 shares of Common Stock and the right to receive 7,000,000 shares of Class B Common Stock. The Class B Common Stock shall be issued upon the later to occur of (i) January 2, 1996 pr (ii) the date on which the Company shall have sold and issued securities providing a cumulative total of $50 million or more in additional Shareholders' equity. The following pro formas financial statements have been prepared in connection with the proposed issuance of $100 million of preferred stock. Although no pro forma adjustments have been made to reflect the proposed issuance of $100 million of preferred stock, pro forma adjustments have been made to reflect the issuance of the 7,000,000 shares of Class B Common Stock. The following unaudited pro forma consolidated financial statements were prepared to reflect the Merger transaction between the Company and PSMI. Pursuant to the Merger, the Company acquired substantially all of the United States real estate operations of PSMI consisting of the Operating Companies and the Real Estate Interests, which include (1) the "Public Storage" name, (2) seven wholly owned properties, (3) all inclusive deeds of trust secured by ten mini-warehouses, (4) general and limited partnership interests in 47 limited partnerships owning an aggregate of 286 mini-warehouses, (5) equity interests in 16 REITs which, exclusive of the Company's facilities, own an aggregate of 218 mini-warehouses and 14 commercial properties, (6) property management contracts, exclusive of the Company's facilities, for 563 mini- warehouses and, through a 95% economic interest in a subsidiary PSCP, 24 commercial properties (522 of which collectively are owned by entities affiliated with PSI), and (7) a 95% economic interest in another subsidiary that currently sells locks and boxes in mini-warehouses operated by the Company. In addition to adjustments to reflect the proposed Merger, pro forma adjustments were made to reflect the following transactions: ISSUANCE OF PREFERRED AND COMMON STOCK: . On February 15, 1994, the Company issued 5,484,000 shares of Common Stock in a public offering. The net offering proceeds were approximately $76.5 million, which combined with the use of cash reserves were used to repay debt, acquire real estate facilities, acquire mortgage notes receivable and acquire additional minority interests. . On June 30, 1994, the Company issued 1,200,000 shares of Adjustable Rate Cumulative Preferred Stock, Series C (the "Series C Preferred Stock"). The aggregate net offering proceeds of the offering ($28.9 million) were used to retire bank borrowings (borrowings which were used primarily to acquire real estate facilities and minority interests in real estate partnerships). . On September 1, 1994, the Company issued 1,200,000 shares of 9.5% Cumulative Preferred Stock, Series D (the "Series D Preferred Stock"). The aggregate net offering proceeds of the offering ($29.0 million) were used to acquire real estate facilities and minority interests in real estate partnerships. . On November 25, 1994, the Company issued 2,500,000 shares of Common Stock in a public offering. The offering provided net proceeds of approximately $33.8 million, which were utilized to repay borrowings on SEI's credit facilities (borrowings which were used to fund the acquisition of real estate facilities, minority interests and the cash portion of the PSP VIII merger, see below). . On February 1, 1995, the Company issued 2,195,000 shares of 10% Cumulative Preferred Stock, Series E (the "Series E Preferred Stock"). The aggregate net offering proceeds of $52.9 million were used to acquire real estate facilities, minority interests in real estate partnerships and retire bank borrowings (borrowings which were used to acquire real estate facilities). . On May 3, 1995, the Company issued 2,300,000 shares of 9.75% Cumulative Preferred Stock, Series F (the "Series F Preferred Stock"). The aggregate net offering proceeds of $55.5 million were used to acquire real 12 estate facilities, minority interests in real estate partnerships and retire bank borrowings (borrowings which were used to acquire real estate facilities). . On May 31, 1995, the Company issued 5,482,200 shares of Common Stock in a public offering. The aggregate net offering proceeds of $82.0 million were used to acquire real estate facilities. MERGERS: . On September 30, 1994, the Company completed a merger transaction with Public Storage Properties VIII, Inc. ("PSP VIII") whereby the Company acquired all of the outstanding shares of PSP VIII's common stock for an aggregate cost of $55,839,000, consisting of the issuance of 2,593,914 shares of Common Stock and $17,341,000 in cash. . On February 28, 1995, the Company completed a merger transaction with Public Storage Properties VI, Inc. ("PSP VI") whereby SEI acquired all of the outstanding shares of PSP VI's common stock for an aggregate cost of $65,343,000, consisting of the issuance of 3,147,015 shares of Common Stock and $21,427,000 in cash. . On June 30, 1995, the Company completed a merger transaction with Public Storage Properties VII, Inc. ("PSP VII") whereby the Company acquired all of the outstanding shares of PSP VII's common stock for an aggregate cost of $70,064,000 consisting of the issuance of approximately 3,517,272 shares of Common Stock and $14,007,000 in cash. The pro forma consolidated balance sheet at September 30, 1995 has been prepared to reflect (i) the issuance and utilization of the remaining net offering proceeds of the Common Stock issued on May 31, 1995, and (ii) the proposed Merger with PSMI. The pro forma consolidated statement of income for the nine months ended September 30, 1995 has been prepared assuming (i) the issuance of preferred and Common Stock and the utilization of the proceeds therefrom, (ii) the merger transactions with PSP VI and PSP VII, and (iii) the proposed Merger, as if all such transactions were completed at the beginning of the period. The pro forma consolidated statement of income for the year ended December 31, 1994 has been prepared assuming (i) the issuance of the Preferred and Common Stock and the utilization of the proceeds therefrom, (ii) the merger transactions with PSP VIII, PSP VI and PSP VII, and (iii) the proposed Merger, as if all such transactions were completed on January 1, 1994. The pro forma adjustments are based upon available information and upon certain assumptions as set forth in the notes to the pro forma consolidated financial statements that the Company believes are reasonable in the circumstances. The pro forma condensed consolidated financial statements and accompanying notes should be read in conjunction with the historical consolidated financial statements of the Company, the combined financial statements of the Operating Companies and the Real Estate Interests to be acquired. The following pro forma consolidated financial statements do not purport to represent what the Company's results of operations would actually have been if the transactions in fact had occurred at the beginning of the respective periods or to project the Company's results of operations for any future date or period. 13 PUBLIC STORAGE, INC. (FORMERLY STORAGE EQUITIES, INC.) CONSOLIDATED PRO FORMA BALANCE SHEET SEPTEMBER 30, 1995 (UNAUDITED)
SEI PRE-MERGER ----------------------------------------------------- PRO FORMA ADJUSTMENTS FOR THE ACQUISITION OF SEI SEI REAL ESTATE PRE-MERGER ASSETS (HISTORICAL) FACILITIES (1) (PRO FORMA) --------------- ------------------ --------------- Cash and cash equivalents $ 14,697,000 $ (10,771,000) $ 3,926,000 Investments in real estate entities 12,151,000 - 12,151,000 Real estate facilities, net of accumulated depreciation 1,144,709,000 23,739,000 1,168,448,000 Mortgage loans receivable, primarily from affiliates 10,103,000 (6,927,000) 3,176,000 Intangible assets - - - Other assets 8,401,000 - 8,401,000 --------------- ------------------ --------------- Total assets $1,190,061,000 $ 6,041,000 $1,196,102,000 =============== ================== =============== LIABILITIES AND SHAREHOLDERS' EQUITY Note payable to banks $ 5,000,000 $ - $ 5,000,000 Senior Notes - - - Mortgage notes payable 105,689,000 6,041,000 111,730,000 --------------- ------------------ --------------- Total debt 110,689,000 6,041,000 116,730,000 Accrued and other liabilities 22,636,000 - 22,636,000 Minority interest 133,795,000 - 133,795,000 Shareholders' equity: Preferred Stock, $.01 par value, 50,000,000 shares authorized: Senior Preferred Stock 277,650,000 - 277,650,000 Convertible Preferred Stock 85,970,000 - 85,970,000 Common stock, $.10 par value, 60,000,000 shares authorized 42,064,283 shares issued and outstanding (79,042,616 pro forma shares issued and outstanding) Common Stock (72,064,283 issued and outstanding pro forma) 4,207,000 - 4,207,000 Class B (7,000,000 issued and outstanding pro forma) - - - Paid-in capital 562,168,000 - 562,168,000 Cumulative net income 221,706,000 - 221,706,000 Cumulative distribution paid (228,760,000) - (228,760,000) Equity - - - --------------- ------------------ --------------- Total shareholders' equity 922,941,000 - 922,941,000 --------------- ------------------ --------------- Total liabilities and shareholders' equity $1,190,061,000 $ 6,041,000 $1,196,102,000 =============== ================== =============== COMBINED OPERATING COMPANIES AND REAL ESTATE PSI ASSETS INTERESTS PRO FORMA MERGER POST-MERGER (HISTORICAL) ADJUSTMENTS (2) (PRO FROMA) --------------- ------------------ --------------- Cash and cash equivalents $ 1,568,000 $ - $ 5,494,000 Investments in real estate entities 78,198,000 286,802,000 377,151,000 Real estate facilities, net of accumulated depreciation 17,471,000 2,472,000 1,188,391,000 Mortgage loans receivable, primarily from affiliates 6,695,000 - 9,871,000 Intangible assets - 236,757,000 236,757,000 Other assets 3,092,000 - 11,493,000 --------------- ------------------ --------------- Total assets $ 107,024,000 $ 526,031,000 $1,829,157,000 =============== ================== =============== LIABILITIES AND SHAREHOLDERS' EQUITY Note payable to banks $ - $ - $ 5,000,000 Senior Notes 67,686,000 314,000 68,000,000 Mortgage notes payable 4,440,000 - 116,170,000 --------------- ------------------ --------------- Total debt 72,126,000 314,000 189,170,000 Accrued and other liabilities 2,475,000 2,000,000 27,111,000 Minority interest - - 133,795,000 Shareholders' equity: Preferred Stock, $.01 par value, 50,000,000 shares authorized: Senior Preferred Stock - - 277,650,000 Convertible Preferred Stock - - 85,970,000 Common stock, $.10 par value, 60,000,000 shares authorized 42,064,283 shares issued and outstanding (79,042,616 pro forma shares issued and outstanding) Common Stock (72,064,283 issued and outstanding pro forma) - 3,000,000 7,207,000 Class B (7,000,000 issued and outstanding pro forma) - 700,000 700,000 Paid-in capital - 552,440,000 1,114,608,000 Cumulative net income - - 221,706,000 Cumulative distribution paid - - (228,760,000) Equity 32,423,000 (32,423,000) - --------------- ------------------ --------------- Total shareholders' equity 32,423,000 523,717,000 1,479,081,000 --------------- ------------------ --------------- Total liabilities and shareholders' equity $ 107,024,000 $ 526,031,000 $1,829,157,000 =============== ================== ===============
See Accompanying Notes to Pro Forma Consolidated Balance Sheets. 14 PUBLIC STORAGE, INC. (FORMERLY STORAGE EQUITIES, INC.) NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 1995 (UNAUDITED) 1. Acquisition of real estate facilities: -------------------------------------- The Company is currently pursuing the acquisition of eight mini-warehouse facilities with an aggregate cost of approximately $23.7 million which have not been completed as of September 30, 1995. These real estate facilities are owned by three limited partnerships and the general partner is currently in the process of seeking the approval of the limited partners of the partnerships to sell the partnerships' real estate facilities to SEI for cash, the cancellation of mortgage debt owed to the Company and the assumption of mortgage debt secured by the facilities. There is no assurance that such transactions will be approved by the limited partners of each of the partnerships and therefore consummated; however, the Company believes, based on past experience, that the approval of the limited partners is probable. The following pro forma adjustments were made to reflect the above transactions: . Real estate facilities were increased to reflect the acquisition of mini-warehouse facilities Cash portion of acquisition cost..................... $ 10,771,000 Cancellation of mortgage notes receivable secured by acquired mini-warehouses facilities................ 6 927,000 Assumption of mortgage notes payable secured by acquired mini-warehouse facilities................. 6,041,000 ------------ $ 23,739,000 ============ . Mortgage notes receivable were decreased to reflect the cancellation of notes in connection with the acquisition of mini-warehouse facilities securing such notes.................................... $ (6,927,000) ============ . Mortgage notes payable were increased to reflect the assumption of such notes in connection with the acquisition of mini-warehouse facilities........... $ 6,041,000 ============
2. Merger Pro Forma Adjustments ---------------------------- The Merger has been accounted for using the purchase method of accounting and the total purchase cost will be allocated to the acquired net assets; first to the tangible and identifiable intangible assets and liabilities acquired based upon their respective fair values, and the remainder will be allocated to the excess of purchase cost over fair value of assets acquired. The outstanding shares of PSMI capital stock were converted into an aggregate of 30,000,000 shares of Common Stock and 7,000,000 shares of Class B Common Stock, subject to adjustment. Pursuant to the Merger, the Company acquired substantially all of the United States operations of PSMI consisting of the Operating Companies and the Real Estate Interests, which include (1) the "Public Storage" name, (2) seven wholly owned properties, (3) all inclusive deeds of trust secured by ten mini- warehouses, (4) general and limited partnership interests in 47 limited partnerships owning an aggregate of 286 mini-warehouses, (5) equity interests in 16 REITs which, exclusive of the Company's facilities, own an aggregate of 218 mini-warehouses and 14 commercial properties, (6) property management contracts, exclusive of the Company's facilities, for 563 mini-warehouses and 24 commercial properties (522 of which collectively are owned by entities affiliated with PS M I), and (7) a 95% economic interest in a merchandise company which currently sells locks and boxes to the Company's mini-warehous e tenants and others. 15 PUBLIC STORAGE, INC. (FORMERLY STORAGE EQUITIES, INC.) NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 1995 (UNAUDITED) The Company has determined the purchase cost of the net assets to be acquired in the Merger to be equal to the fair value of the securities issued combined with direct costs of the Merger. The fair value of the Common Stock is based on the average closing market prices on the NYSE for the thirty consecutive trading days prior to the date the Merger Agreement was executed (June 30, 1995). The fair value of the Class B Common Stock (which is not publicly traded) is based on an independent appraisal. The aggregate purchase cost and its preliminary allocation to the historical assets and liabilities assuming the Merger was consummated on September 30, 1995 is as follows:
Purchase cost (1): ------------------ Issuance of 30,000,000 shares of Common Stock (at $16.088 per share) (1)..................... $ 482,640,000 Issuance of 7,000,000 shares of Class B Common Stock (at $10.50 per share)................... 73,500,000 Estimated direct costs and expenses of the Merger............................................ 2,000,000 ------------- $ 558,140,000 ============= Preliminary allocation of purchase cost: ---------------------------------------- Intangible assets attributable to the Operating Companies (2)................................ 236,757,000 Fair value of net assets acquired from the Operating Companies Cash..................................................................................... 1,568,000 Other assets............................................................................. 3,092,000 Senior note payable (face amount of note at September 30, 1995).......................... (68,000,000) Accrued and other liabilities............................................................ (2,475,000) ------------- Total fair value of net assets of the Operating Companies.............................. 170,942,000 ------------- Fair value of real estate investments (including general and limited partnership interests and equity interests in REITs).................................................... 365,000,000 Fair value of fee simple interest in seven properties........................................ 19,943,000 Fair value of mortgage debt secured by properties acquired................................... (515,000) Fair value of all-inclusive trust deeds: Mortgage notes receivable.................................................................. 6,695,000 Mortgage notes payable..................................................................... (3,899,000) ------------ Total fair value of the net assets of the Real Estate Interests to be acquired......... 387,198,000 ------------ $ 558,140,000 ============
- -------------------- (1) Pursuant to the terms of the Merger, the number of shares of Common Stock and Class B Common Stock to be issued as consideration for the Merger will not be subjected to market price fluctuations. In addition, with respect to the determination of the value of consideration to be paid for the acquisition, market fluctuations subsequent to the announcement of the proposed Merger were not taken into consideration. (2) Intangible assets consist of the following: Management contracts $165,000,000 Excess purchase cost over identifiable tangible and intangible assets 71,757,000 ------------ $236,757,000
The following pro forma adjustments have been made to reflect the Merger as of September 30, 1995: 16 PUBLIC STORAGE, INC. (FORMERLY STORAGE EQUITIES, INC.) NOTES TO PRO FORMA CONSOLIDATEDBALANCE SHEET SEPTEMBER 30, 1995 (UNAUDITED) . Pro forma Merger adjustments: ----------------------------- . Investments in real estate entities has been increased to reflect the fair value of real estate investments acquired in the Merger: Fair value of real estate investments............................................. $ 365,000,000 Less: historical carrying value................................................... (78,198,000) ------------ Pro forma adjustment............................................................. $ 286,802,000 ============ . Real estate facilities has been increased to reflect the fair value of the seven properties to be acquired in the Merger: Fair value of real estate facilities.............................................. 19,943,000 Less: historical carrying value................................................... (17,471,000) ------------ Pro forma adjustment............................................................ 2,472,000 ============ . Intangible assets have been increased to reflect intangible assets relating to the Operating Companies.......................................................... $ 236,757,000 ============ . Secured notes has been adjusted by an amount to reflect the face amount of the secured note at September 30, 1995.............................................. 314,000 ============ . Accrued and other liabilities has been increased for the estimated costs and expenses of the Merger.......................................................... $ 2,000,000 ============ . Shareholders' equity has been increased to reflect the following: Issuance of 30,000,000 shares of Common Stock ($.10 par value per share).......... $ 3,000,000 ============ Issuance of 7,000,000 shares of Class B Common Stock ($.10 par value per share).......................................................................... $ 700,000 ============ . Paid-in capital has been increased to reflect the value of issued shares of Common Stock and Class B Common Stock in excess of par value (30,000,000 shares of Common Stock at $16.088 per share and 7,000,000 shares of Class B Common Stock at $10.50 per share less aggregate par value of $3,700,000)................................................................ $ 552,440,000 ============ . Equity has been eliminated to reflect the acquisition of the net assets of the Operating Companies and Real Estate Interests to be acquired........................ $ (32,423,000) ============
17 PUBLIC STORAGE, INC. (FORMERLY STORAGE EQUITIES, INC.) PRO FORMA CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 (UNAUDITED)
SEI - PRE-MERGER ----------------------------------------------------------------------- PRO FORMA ADJUSTMENTS --------------------------------- ISSUANCE OF PREFERRED SEI SEI & COMMON REIT PRE-MERGER (HISTORICAL) STOCK(1) MERGERS(2) (PRO FORMA) ----------------- ---------------- --------------- ----------------- REVENUES: Rental Income $143,587,000 $15,540,000 $8,465,000 $167,592,000 Facility management fees - - - - Advisory fee income - - - - Merchandise operations - - - - Equity in earnings of real estate entities - 383,000 - 383,000 Interest and other Income 4,461,000 (1,766,000) 25,000 2,720,000 ----------------- ---------------- --------------- ----------------- 148,048,000 14,157,000 8,490,000 170,695,000 ----------------- ---------------- --------------- ----------------- EXPENSES: Cost of operations 52,169,000 5,146,000 3,489,000 60,804,000 Cost of managing facilities - - - - Cost of merchandise - - - - Depreciation and amortization 27,887,000 3,126,000 1,254,000 32,267,000 General and administrative 2,611,000 - 149,000 2,760,000 Advisory fee 5,462,000 450,000 175,000 6,087,000 Interest expense 5,249,000 1,543,000 1,017,000 7,809,000 ----------------- ---------------- --------------- ----------------- 93,378,000 10,265,000 6,084,000 109,727,000 ----------------- ---------------- --------------- ----------------- Income before minority interest in income and gain on disposition of real estate 54,670,000 3,892,000 2,406,000 60,968,000 Minority interest in income (5,449,000) 145,000 - (5,304,000) ----------------- ---------------- --------------- ----------------- Net Income $ 49,221,000 $ 4,037,000 $2,406,000 $ 55,664,000 ================= ================ =============== ================= Net income allocable to preferred shareholders $ 21,904,000 $ 2,342,000 $ - $ 24,246,000 Net income allocable to Class B Shareholders - - - - Net income allocable to Common Stock shareholders 27,317,000 1,695,000 2,406,000 31,418,000 ----------------- ---------------- --------------- ----------------- Net Income $ 49,221,000 $ 4,037,000 $2,406,000 $ 55,664,000 ================= ================ =============== ================= PER SHARE OF COMMON STOCK: Net Income $ 0.76(3) $ 0.75(3) ================= ================= Weighted Average Shares 35,847,202(3) 42,144,020(3) ================= ================= PSMI ----------------------------------------- COMBINED COMBINED OPERATING OPERATION COMPANIES COMPANIES AND REAL AND REAL PRO FORMA ESTATE PRO FORMA ESTATE MERGER PSI INTERESTS ADJUSTMENTS(4) INTERESTS ADJUSTMENTS(5) POST-MERGER (HISTORICAL) (PRO FORMA) (PRO FORMA) ---------------- ---------------- ---------------- ---------------- ---------------- REVENUES: Rental Income $ 2,474,000 $ - $ 2,474,000 $ - $170,066,000 Facility management fees 19,902,000 91,000 19,993,000 (9,770,000) 10,223,000 Advisory fee income 5,462,000 625,000 6,087,000 (6,087,000) - Merchandise operations 1,613,000 - 1,613,000 - 1,613,000 Equity in earnings of real 20,485,000 - 20,485,000 (9,163,000) 11,705,000 estate entities Interest and other Income 705,000 - 705,000 - 3,425,000 ---------------- ---------------- ---------------- ---------------- ---------------- 50,641,000 716,000 51,357,000 (25,020,000) 197,032,000 ---------------- ---------------- ---------------- ---------------- ---------------- EXPENSES: Cost of operations 676,000 - 676,000 (9,770,000) 51,710,000 Cost of managing facilities 3,877,000 (170,000) 3,707,000 - 3,707,000 Cost of merchandise 779,000 - 779,000 - 779,000 Depreciation and amortization 439,000 - 439,000 7,103,000 39,809,000 General and administrative 1,414,000 (228,000) 1,186,000 - 3,946,000 Advisory fee - - - (6,087,000) - Interest expense 3,988,000 - 3,988,000 - 11,797,000 ---------------- ---------------- ---------------- ---------------- ---------------- 11,173,000 (398,000) 10,775,000 (8,754,000) 111,748,000 ---------------- ---------------- ---------------- ---------------- ---------------- Income before minority interest in income and gain on disposition of real estate 39,468,000 1,114,000 40,582,000 (16,266,000) 85,284,000 Minority interest in income - - - - (5,304,000) ---------------- ---------------- ---------------- ---------------- ---------------- Net Income $39,468,000 $ 1,114,000 $40,582,000 $(16,266,000) $79,980,000 ================ ================ ================ ================ ================ Net income allocable to preferred shareholders $ - $ - $ - $ - $24,246,000 Net income allocable to Class B Shareholders - - - - - Net income allocable to Common Stock shareholders 39,468,000 1,114,000 40,582,000 (16,266,000) 55,734,000 ---------------- ---------------- ---------------- ---------------- ---------------- Net Income $39,468,000 $ 1,114,000 $40,582,000 $(16,266,000) $79,980,000 ================ ================ ================ ================ ================ PER SHARE OF COMMON STOCK: Net Income $ 0.77(6) ================ Weighted Average Shares 72,144,020(6) ================
See Accompanying Notes to Pro Forma Consolidated Statements of Income. 18
PUBLIC STORAGE, INC. (FORMERLY STORAGE EQUITIES, INC.) PRO FORMA CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1994 (UNAUDITED) SEI - PRE-MERGER ----------------------------------------------------------------------- PRO FORMA ADJUSTMENTS --------------------------------- ISSUANCE OF PREFERRED SEI SEI & COMMON REIT PRE-MERGER (HISTORICAL) STOCK(1) MERGERS(2) (PRO FORMA) ----------------- ---------------- --------------- ----------------- REVENUES: Rental Income $141,845,000 $42,701,000 $30,672,000 $215,218,000 Facility management fees - - - - Advisory fee income - - - - Merchandise operations - - - - Equity in earnings of real estate entities - 748,000 - 748,000 Interest and other Income 5,351,000 (4,315,000) 218,000 1,254,000 ----------------- ---------------- --------------- ----------------- 147,196,000 39,134,000 30,890,000 217,220,000 ----------------- ---------------- --------------- ----------------- EXPENSES: Cost of operations 52,816,000 14,639,000 12,114,000 79,569,000 Cost of managing facilities - - - - Cost of merchandise - - - - Depreciation and amortization 28,274,000 7,917,000 4,780,000 40,971,000 General and administrative 2,631,000 - 433,000 3,064,000 Advisory fee 4,983,000 1,794,000 699,000 7,476,000 Interest expense 6,893,000 (1,135,000) 4,985,000 10,743,000 ----------------- ---------------- --------------- ----------------- 95,597,000 23,215,000 23,011,000 141,823,000 ----------------- ---------------- --------------- ----------------- Income before minority interest in income and gain on disposition of real estate 51,599,000 15,919,000 7,879,000 75,397,000 Minority interest in income (9,481,000) 2,563,000 - (6,918,000) ----------------- ---------------- --------------- ----------------- 42,118,000 18,482,000 7,879,000 68,479,000 Gain on disposition of real estate - - 203,000 203,000 ----------------- ---------------- --------------- ----------------- Net Income $ 42,118,000 $18,482,000 $ 8,082,000 $ 68,682,000 ================= ================ =============== ================= Net income allocable to preferred shareholders $ 16,846,000 $14,360,000 $ - $ 31,206,000 Net income allocable to Class B Shareholders - - - - Net income allocable to Common Stock shareholders 25,272,000 4,122,000 8,082,000 37,476,000 ----------------- ---------------- --------------- ----------------- Net Income $ 42,118,000 $18,482,000 $ 8,082,000 $ 68,682,000 ================= ================ =============== ================= PER SHARE OF COMMON STOCK: Net Income $ 1.05(3) $ 0.90(3) ----------------- ----------------- Weighted Average Shares 24,077,055(3) 41,844,644(3) ================= ================= PSMI ----------------------------------------- COMBINED COMBINED OPERATING OPERATING COMPANIES COMPANIES AND EQUITY AND EQUITY SEI INTERESTS PRO FORMA INTERESTS PRO FORMA POST-MERGER (HISTORICAL) ADJUSTMENTS(4) (PRO FORMA) ADJUSTMENTS(5) (PRO FORMA) ---------------- ---------------- ---------------- ---------------- ---------------- REVENUES: Rental Income $ 3,152,000 $ - $ 3,152,000 $ - $218,370,000 Facility management fees 25,224,000 576,000 25,800,000 (12,937,000) 12,863,000 Advisory fee income 4,983,000 2,493,000 7,476,000 (7,476,000) - Merchandise operations 1,872,000 - 1,872,000 - 1,872,000 Equity in earnings of real estate entities 24,555,000 - 24,555,000 (12,217,000) 13,086,000 Interest and other Income 996,000 - 996,000 - 2,250,000 ---------------- ---------------- ---------------- ---------------- ---------------- 60,782,000 3,069,000 63,851,000 (32,630,000) 248,441,000 ---------------- ---------------- ---------------- ---------------- ---------------- EXPENSES: Cost of operations 834,000 - 834,000 (12,937,000) 67,466,000 Cost of managing facilities 4,909,000 (167,000) 4,742,000 - 4,742,000 Cost of merchandise 866,000 - 866,000 - 866,000 Depreciation and amortization 1,011,000 (362,000) 649,000 9,402,000 51,022,000 General and administrative 1,850,000 (255,000) 1,595,000 - 4,659,000 Advisory fee - - - (7,476,000) - Interest expense 5,607,000 - 5,607,000 - 16,350,000 ---------------- ---------------- ---------------- ---------------- ---------------- 15,077,000 (784,000) 14,293,000 (11,011,000) 145,105,000 ---------------- ---------------- ---------------- ---------------- ---------------- Income before minority interest in income and gain on disposition of real estate 45,705,000 3,853,000 49,558,000 (21,619,000) 103,336,000 Minority interest in income - - - - (6,918,000) ---------------- ---------------- ---------------- ---------------- ---------------- 45,705,000 3,853,000 49,558,000 (21,619,000) 96,418,000 Gain on disposition of real estate - - - - 203,000 ---------------- ---------------- ---------------- ---------------- ---------------- Net Income $45,705,000 $3,853,000 $49,558,000 $(21,619,000) $ 96,621,000 ================ ================ ================ ================ ================ Net income allocable to preferred shareholders $ - $ - $ - $ - $ 31,206,000 Net income allocable to Class B Shareholders - - - - - Net income allocable to Common Stock shareholders 45,705,000 3,853,000 49,558,000 (21,619,000) 65,415,000 ---------------- ---------------- ---------------- ---------------- ---------------- Net Income $45,705,000 $3,853,000 $49,558,000 $(21,619,000) $ 96,621,000 ================ ================ ================ ================ ================ PER SHARE OF COMMON STOCK: Net Income $ 0.91(6) ================ Weighted Average Shares 71,844,644(6) ================
See Accompanying Notes to Pro Forma Consolidated Statement of Income. 19 STORAGE EQUITIES, INC. NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND YEAR ENDED DECEMBER 31, 1994 (UNAUDITED) 1. Issuance of preferred and Common Stock -------------------------------------- During 1994 and 1995, the Company issued shares of both its preferred and Common Stock as follows: . On February 15, 1994, the Company issued 5,484,000 shares of Common Stock in a public offering. The net offering proceeds $76.5 million were used to repay debt, to acquire real estate facilities, to acquire mortgage notes receivable and to acquire additional minority interests. . On June 30, 1994, the Company issued 1,200,000 shares of Series C Preferred Stock. The aggregate net offering proceeds of the offering ($28.9 million) were used to retire bank borrowings (borrowings which were used primarily to acquire real estate facilities and minority interests in real estate partnerships). . On September 1, 1994, the Company issued 1,200,000 shares of Series D Preferred Stock. The aggregate net offering proceeds ($29.0 million) were used to acquire real estate facilities and minority interests in real estate partnerships. . On November 25, 1994, the Company issued 2,500,000 shares of Common Stock pursuant to a public offering. The aggregate offering proceeds ($33.8 million) were used to repay borrowings on the Company's credit facilities (borrowings which were used to fund the acquisition of real estate facilities, minority interests and the cash portion of the PSP VIII merger, see Note 2 below). . On February 1, 1995, the Company issued 2,195,000 shares of Series E Preferred Stock. The aggregate net offering proceeds ($52.9 million) were used to acquire real estate facilities, minority interests in real estate partnerships and retire bank borrowings (borrowings which were used to acquire real estate facilities). . On May 3, 1995, the Company issued 2,300,000 shares of Series F Preferred Stock. The aggregate net offering proceeds( $55.5 million) were used to repay borrowings on the Company's credit facilities (borrowings which were used to fund the acquisition of real estate facilities, minority interests and the cash portion of the PSP VI merger). . On May 31, 1995, the Company issued 5,482,200 shares of Common Stock pursuant to a public offering. The aggregate net offering proceeds were $82.0 million, a portion of which has been utilized to repay borrowings on the Company's credit facilities (borrowings which were used to fund the acquisition of real estate facilities, and the cash portion of the PSP VII merger). The remaining proceeds were utilized to acquire additional real estate facilities and minority interests. The following pro forma adjustments have been made to the pro forma consolidated statements of income to reflect the above uses (the acquisition of real estate facilities, minority interests and the repayment of bank borrowings) of the proceeds as if the transactions were completed as of January 1, 1994: 20 STORAGE EQUITIES, INC. NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND YEAR ENDED DECEMBER 31, 1994 (UNAUDITED)
NINE MONTHS YEAR ENDED ENDED SEPTEMBER 30, DECEMBER 31, 1995 1994 ------------------ ----------------- . Rental income has been increased to reflect the incremental difference between the actual rental income included in the historical statement of operations and the pro forma rental income as if the acquired real estate facilities were in operation for a full period.............. $15,540,000 $42,701,000 =========== =========== . Equity in earnings of real estate entities has been increased to reflect income with respect to the acquisition of limited partnership units in affiliated unconsolidated partnerships. Such acquisitions occurred subsequent to June 30, 1995 and do not represent limited partnership units in either the PSP Partnership or the partnerships included in the Real Estate Interests................................ $ 383,000 $ 748,000 =========== =========== . Interest and other income has been decreased to reflect: . cancellation of mortgage notes receivable, in connection with the acquisition of the above properties, from which the Company recognized interest income during the year ended December 31, 1994. A pro forma adjustment has been made to eliminate such interest as if the notes were canceled at the beginning of the period (including amortization of mortgage note discounts totaling $90,000 in 1995 and $693,000 in 1994)................... $(1,336,000) $(4,315,000) . elimination of historical interest income earned on excess net offering proceeds during the third quarter of 1995................................ (430,000) - ----------- ----------- $(1,766,000) $(4,315,000) =========== =========== . Cost of operations has been increased to reflect the incremental difference between the actual cost of operations included in the historical statement of income and the pro forma cost of operations as if the real estate facilities were in operation for a full period........... $ 5,146,000 $14,639,000 =========== =========== . Depreciation has been increased to reflect the incremental difference between the actual depreciation expense included in the historical statements of income and the pro forma depreciation expense as if the real estate facilities were in operation for a full period.............. $ 3,126,000 $ 7,917,000 =========== ===========
21 STORAGE EQUITIES, INC. NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND YEAR ENDED DECEMBER 31, 1994 (UNAUDITED)
NINE MONTHS YEAR ENDED ENDED SEPTEMBER 30, DECEMBER 31, 1995 1994 ------------------ ----------------- . Interest expense has been increased (decreased) to reflect the following: Interest expense was decreased to eliminate the historical interest expense related to the pay down of the debt through the use of net offering proceeds...................... $ (293,000) $(1,097,000) Mortgage notes payable were assumed in connection with the acquisition of the real estate facilities. An adjustment was made to reflect the interest expense as if the notes were assumed at the beginning of the period................ 2,840,000 4,801,000 the Company typically uses its bank line of credit to fund the cash portion of real estate acquisitions and subsequently repays the borrowings with the net proceeds of equity offerings. In Note 2 below, a pro forma adjustment has been made to reflect the interest expense relating the REIT Mergers (see Note 2), assuming that the Company borrowed on its bank line of credit to fund the cash portion of such mergers thus reflecting the pro forma cost of capital to finance the mergers. Accordingly, a pro forma adjustment has been made to offset that interest expense to reflect the repayment of bank borrowings with the net proceeds of the above preferred and Common Stock offerings............. (1,004,000) (4,839,000) ---------- ----------- Net increase (decrease) in interest expense..................... $ 1,543,000 $(1,135,000) =========== =========== . Minority interest in income has been decreased due to the acquisition of such minority interests by the Company.................................. $ 145,000 $ 2,563,000 =========== =========== . Advisory fees have been increased to reflect the effect of the above adjustments.............................. $ 450,000 $ 1,794,000 =========== ===========
22 STORAGE EQUITIES, INC. NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND YEAR ENDED DECEMBER 31, 1994 (UNAUDITED) 2. REIT Mergers ------------ During 1994 and 1995, the Company completed merger transactions (collectively, the "REIT Mergers") with PSP VIII (September 30, 1994), PSP VI (February 28, 1995), and PSP VII (June 30, 1995) (collectively the "PSP REITs"). The following pro forma adjustments have been made assuming the merger transactions with the PSP REITs were completed at the beginning of the year ended December 31, 1994:
NINE MONTHS YEAR ENDED ENDED SEPTEMBER 30, 1995 DECEMBER 31, 1994 ------------------ ----------------- . A pro forma adjustment has been made to reflect the PSP REITs historical rental income............................ $8,465,000 $30,672,000 ========== =========== . A pro forma adjustment has been made to reflect the PSP REITs historical interest and other income...................... $ 25,000 $ 218,000 ========== =========== . A pro forma adjustment has been made to reflect the PSP REITs historical cost of operations........................ $3,489,000 $12,114,000 ========== =========== . Depreciation and amortization was adjusted as follows: A pro forma adjustment has been made to reflect the PSP REITs historical depreciation.................... $1,175,000 $ 3,960,000 As a result of the REIT Mergers, the real estate facilities were recorded by the Company at their fair values (which were in excess of the historical carrying value at the PSP REITs). A pro forma adjustment has been made to reflect the incremental increase in depreciation expense based upon the allocation of the purchase cost to buildings (straight- line over 25 years)............. 79,000 820,000 ---------- ----------- $1,254,000 $ 4,780,000 ========== ===========
23 STORAGE EQUITIES, INC. NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND YEAR ENDED DECEMBER 31, 1994 (UNAUDITED)
NINE MONTHS YEAR ENDED ENDED SEPTEMBER 30, DECEMBER 31, 1995 1994 ------------------ ----------------- . General and administrative expense was adjusted as follows: A pro forma adjustment has been made to reflect the PSP REITs historical general and administrative expenses................ $191,000 $ 633,000 A pro forma adjustment has been made to reduce certain general and administrative expenses which the Company has determined would be eliminated as a result of the mergers. Such expenses include the elimination of PSP REITs board of directors fees, stock exchange listing fees, audit and tax fees and certain administrative expenses which will no longer be applicable............................. (42,000) (200,000) -------- ---------- $149,000 $ 433,000 ======== ========= . Interest expense has been increased as follows: For the pro forma, additional borrowings on the Company's bank lines of credit to consummate the merger transactions has been assumed. The pro forma interest expense was determined based on an interest rate of 9.50%. (see adjustment to interest expense included in Note 1): PSP VIII ($20.7 million borrowings outstanding from January 1, 1994 through September 30, 1994)............................. $ - $1,472,000 PSP VI ($21.4 million borrowings outstanding from January 1, 1994 through February 28, 1995)............ 339,000 2,036,000 PSP VII ($14.0 million borrowings outstanding from January 1, 1994 through June 30, 1995)................ 665,000 1,331,000 ---------- ---------- subtotal......................... 1,004,000 4,839,000 Historical interest expense of the PSP REITs........................ 13,000 146,000 --------- ---------- Total adjustment to interest expense............................ $1,017,000 $4,985,000 ========= ========= . A pro forma adjustment has been made to reflect the historical gain on the disposition of real estate of the PSP REITs............................ $ - $ 203,000 ========= ========= . A pro forma adjustment has been made to the advisory fee to reflect the above adjustments combined with the effects of the operations of the PSP REITs and the issuance of additional shares of the Company's Common Stock..... $ 175,000 $ 699,000 ========= ========
24 STORAGE EQUITIES, INC. NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND YEAR ENDED DECEMBER 31, 1994 (UNAUDITED) 3. Net income per share of Common Stock has been computed as follows: -----------------------------------------------------------------
NINE MONTHS YEAR ENDED ENDED SEPTEMBER 30, DECEMBER 31, 1995 1994 ------------------ ----------------- Historical net income....................... $ 49,221,000 $ 42,118,000 Less: Historical preferred stock dividends............................ (21,904,000) (16,846,000) ------------ ------------ Income applicable to Common Stock shareholders............................... $ 27,317,000 $ 25,272,000 ============ ============ Historical weighted average shares of Common Stock............................... 35,847,202 24,077,055 ============ ============ Historical net income per share of Common Stock...................... $ 0.76 $ 1.05 ============ ============ Pro forma net income........................ $ 55,664,000 $ 68,682,000 Less: Pro forma preferred stock dividends (1)........................ (24,246,000) (31,206,000) ------------ ------------ Income applicable to Common Stock shareholders............................... $ 31,418,000 $ 37,476,000 ============ ============ Pro forma weighted average shares of Common Stock(2)............................ 42,144,020 41,844,644 ============ ============ Pro forma net income per share of Common Stock............................... $ 0.75 $ 0.90 ============ ============
(1) As adjusted to give effect to the issuance of the Series C, Series D, Series E, and Series F Preferred Stock as if such stock were outstanding at the beginning of the period. The dividend rate on the Series C Preferred Stock is adjustable quarterly and is equal to the highest of the three separate indices as published by the Federal Reserve Board, multiplied by 110%. However, the dividend rate will not be less than 6.75% per annum nor greater than 10.75% per annum. At the date of issuance, the dividend rate was equal to 8.15% per annum, which rate was used in the determination of pro forma dividends applicable to the Series C Preferred Stock for the year ended December 31, 1994. If the dividend rate used was 10.75% per annum, the pro forma Preferred Stock dividends would have been approximately $595,000 higher for the nine months ended September 30, 1995 ($780,000 higher for the year ended December 31, 1994). Accordingly, income applicable to common shareholders would have been reduced by a like amount or approximately $0.02 per common for the year ended December 31, 1994 ($0.02 for the nine months ended September 30, 1995). (2) As adjusted to give effect to the issuance of additional shares of Common Stock in connection with the acquisition of additional investments in real estate entities, the public offering of Common Stock during 1994 and 1995, and Common Stock issued in connection with the REIT Mergers. 25 STORAGE EQUITIES, INC. NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND YEAR ENDED DECEMBER 31, 1994 (UNAUDITED) 4. Pro forma adjustments to the historical combined income of the Operating ------------------------------------------------------------------------ Companies and Real Estate Interests: ------------------------------------ The following pro forma adjustments have been made to reflect (i) additional Facility management fees and Advisory fee income as a result of pro forma adjustments made to the Company historical financial statements which have a corresponding effect on the Operating Companies and (ii) to eliminate certain non-recurring costs and expenses included in the Operating Companies.
NINE MONTHS YEAR ENDED ENDED SEPTEMBER 30, 1995 DECEMBER 31, 1994 ------------------ ----------------- . A pro forma adjustment has made to Facility management fees to reflect the incremental increase in management fees from properties (only for properties which were not previously managed by PSMI) acquired by the Company during 1995 and 1994....................... $ 91,000 $ 576,000 ========= ========== . A pro forma adjustment has been made to the Advisory fee income to reflect the adjustments (Notes 1 and 2) to the Company's advisory fee expense in connection with the issuance of Preferred and Common Stock, the REIT Mergers, and the Company's increased operating income.............................. $ 625,000 $2,493,000 ========= ========== . A pro forma adjustment has been made to Cost of managing facilities to eliminate certain non-recurring costs and expenses............................ $(170,000) $ (167,000) ========= ========== . A pro forma adjustment has been made to depreciation and amortization to eliminate certain non-recurring expenses in connection with the write- off of tenant improvements $ - $ (362,000) ========= ========== . A pro forma adjustment has been made to General and administrative expense to eliminate certain non-recurring costs and expenses.................. $(228,000) $ (255,000) ========= ==========
26 STORAGE EQUITIES, INC. NOTES TO PRO FORMA CONSIDATED STATEMENTS OF INCOME FOR THE NINE MONTHS EDNDED SEPTEMBER 30, 1995 AND YEAR ENDED DECEMBER 31, 1994 (UNAUDITED) 5. Pro forma Merger adjustments: ----------------------------
NINE MONTHS YEAR ENDED ENDED SEPTEMBER 30, DECEMBER 31, 1995 1994 ----------------- -------------- . The "Operating Companies" have included in Facility management fee income fees paid by the Company for the management of its real estate facilities (likewise, the Company has included such fees as part of Cost of operations). As a result of the Merger, this facility management fee income and operating expense will no longer occur. Accordingly, pro forma adjustments have been made to decrease both Facility management fees and cost of operations to eliminate these property management fees (the remaining facility management fees represent principally fees received from the management of properties owned by affiliated entities, which the Company will acquire an interest in pursuant to the acquisition of the Real Estate Interests): Facility management fee income..... $(9,770,000) $(12,937,000) ========== =========== Cost of operations................. $(9,770,000) $(12,937,000) ========== =========== As a result of the Merger, Advisory fee income and expense will no longer occur. Accordingly, a pro forma $(6,087,000) $ (7,476,000) adjustment has been made to each: ========== ========== Advisory fee income................ $(6,087,000) $ (7,476,000) ========== ========== Advisory fee (expense)............. . Included in the "Real Estate Interests" are general and limited partnership interests in limited partnerships and equity interests in REITs. These interests will be accounted for under the equity method. The aggregate fair value of these interests ($365 million) is in excess of the amount of the underlying historical equity in net assets of the investees by approximately $305 million. the Company attributes this difference to the fair values of the underlying real estate properties and has allocated the difference to buildings. A pro forma adjustment has been made to "Equity in earnings of real estate entities" to reflect additional depreciation expense related to the allocated difference to buildings (straight-line over a 25 year life) as if the investees were consolidated entities..................... $(9,163,000) $(12,217,000) ========== =========== 27
STORAGE EQUITIES, INC. NOTES TO PRO FORMA CONSIDATED STATEMENTS OF INCOME For the Nine Months Ended September 30, 1995 and Year Ended December 31, 1994 (Unaudited)
NINE MONTHS YEAR ENDED ENDED SEPTEMBER 30, DECEMBER 31, 1995 1994 ----------------- ---------------- . A pro forma adjustment has been made to increase depreciation and amortization to reflect the amortization of intangible assets acquired in connection with the Merger; management contracts ($165 million) and purchase price in excess of identifiable tangible and intangible assets acquired ($71 million), each of which are amortized over a 25 year period. See Note 2 to the Pro Forma Consolidated Balance................... $ 7,103,000 $ 9,402,000 ----------- -----------
6. Pro forma net income per share of Common Stock has been computed as ------------------------------------------------------------------- follows: ========
NINE MONTHS YEAR ENDED ENDED SEPTEMBER 30, DECEMBER 31, 1995 1994 ------------------ ---------------- Pro forma net income.......... $ 79,980,000 $ 96,621,000 Less: Pro forma preferred stock (24,246,000) (31,206,000) dividends.............................. ------------ ------------ . Income allocable to common shareholders 55,734,000 65,415,000 Less: Pro forma income allocable to - - Class B shareholders................... ------------ ------------ Income allocable to Common Stock 55,734,000 65,415,000 shareholders........................... ============ Pro forma weighted average shares of 72,144,020 71,844,644 Common Stock (1)....................... ============ ============ Pro forma net income per share of $ 0. 77 $ .91 Common Stock........................... ============ ============
(1) As adjusted to give effect to the issuance of 30,000,000 additional shares of Common Stock in connection with the Merger. 28 ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS. --------------------------------- (c) Exhibits. --------- 2.1 Agreement and Plan of Reorganization by and among Public Storage, Inc., Public Storage Management, Inc. and Storage Equities, Inc. dated as of June 30, 1995. Filed as Appendix A to the Registrant's Proxy Statement dated October 11, 1995 (Filed October 13, 1995) and incorporated herein by reference. 2.2 Amendment to Agreement and Plan of Reorganization by and among Public Storage, Inc., Public Storage Management, Inc. and Storage Equities, Inc. dated as of November 13, 1995. 29 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Public Storage, Inc. Date: November 28, 1995 By: /s/ Harvey Lenkin ------------------ -------------------- Harvey Lenkin President 30 EX-2.2 2 AMENDMENT TO AGMNT EXHIBIT 2.2 AMENDMENT TO AGREEMENT AND PLAN OF REORGANIZATION AMENDMENT TO AGREEMENT AND PLAN OF REORGANIZATION (the "AMENDMENT "), dated as of November 13, 1995, by and among Storage Equities, Inc. ("SEI"), a California corporation, Public Storage, Inc. ("PSI"), a California corporation, and Public Storage Management, Inc. ("PSMI"), a California corporation. RECITALS A. The parties have entered into an Agreement and Plan of Reorganization as of June 30, 1995 (the "AGREEMENT"). B. Section 8.3(q) of the Agreement provides, as a condition to closing, that SEI and the Special Committee receive an analysis demonstrating compliance immediately following the Merger with the "5/50 Rule" (as defined in the Agreement). C. In order to give greater assurance of such compliance, the parties believe that it is in their best interests and the best interests of their respective shareholders that the Agreement be modified as provided in this Amendment. D. In connection with the Merger (as defined in the Agreement), SEI, PSMI, PSI and the holders (the "Purchasers") of $68,000,000 aggregate outstanding principal amount of notes of PSMI expect to enter into Note Assumption and Exchange Agreements, dated as of November 13, 1995, pursuant to which the Purchasers and SEI will agree to modify and restate the terms of such notes in connection with the assumption of the obligations represented thereby by SEI, with such assumption and modification to be facilitated by means of the exchange of such notes for new notes to be issued by SEI. NOW, THEREFORE, the parties hereby agree as follows: 1. Section 4.1(a) of the Agreement is hereby amended to read in its entirety as follows : (a) At the Effective Time, by virtue of the Merger and without any action by holders thereof, the PSMI Shares shall be converted into the right to receive 30,000,000 SEI Common Shares (subject to adjustment pursuant to Section 4.2) and 7,000,000 SEI Class B Shares (subject to the condition to issuance provided below). The SEI Common Shares shall be issued as of the Effective Time and the SEI Class B Shares shall be issued upon the later to occur of (i) January 2, 1996 or (ii) the date on which SEI shall have sold and issued securities providing a cumulative total of $50 million or more in additional shareholders' equity (exclusive of increases in shareholders' equity resulting from the Merger) from and after November 13, 1995. The SEI Shares shall be allocated among the PSMI Shareholders in such proportions as they shall agree. 2. The first paragraph of Section 4.8(a) of the Agreement is hereby amended to read in its entirety as follows: (a) Upon issuance, the SEI Class B Shares (the "INDEMNIFICATION SHARES") shall be deposited in escrow with Wells Fargo Bank, N.A., as escrow agent, or such other party may be agreed upon by the parties prior to Closing (the "INDEMNIFICATION ESCROW AGENT"), to be held and administered in accordance with the terms and conditions of an Indemnification and an Escrow Agreement (collectively, the "INDEMNIFICATION ESCROW AGREEMENT"). The Indemnification Shares shall be registered in the name of the PSMI Shareholders owning such shares and shall be accompanied by stock powers endorsed in blank. 3. Section 8.3(r) of the Agreement is hereby amended to read in its entirety as follows: (r) The terms and covenants of any indebtedness for which SEI shall become obligated by virtue of the Merger shall be satisfactory to SEI (in this regard, SEI, PSMI, PSI and the Purchasers shall have entered into one or more agreements in form and substance reasonably satisfactory to SEI providing for the assumption of the indebtedness represented by $68,000,000 aggregate outstanding principal amount of notes of PSMI and the exchange of such notes for new notes to be issued by SEI, or they shall have made other satisfactory arrangements regarding the assumption of such obligations by SEI). 4. Other than as set forth in this Amendment, the Agreement shall remain in full force and effect, notwithstanding Section 10.7 of the Agreement. IN WITNESS WHEREOF, this Amendment has been executed and delivered by the parties set forth below. STORAGE EQUITIES, INC. a California corporation By: /s/OBREN B. GERICH -------------------- Obren B. Gerich Vice President PUBLIC STORAGE, INC., a California corporation By: /s/B. WAYNE HUGHES -------------------- B. Wayne Hughes President PUBLIC STORAGE MANAGEMENT, INC., a California corporation By: /s/B. WAYNE HUGHES -------------------- B. Wayne Hughes Director -----END PRIVACY-ENHANCED MESSAGE-----