<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
Commission file no. 0-30502
LIBERTY SELF-STOR, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
MARYLAND 94-6542723
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
8500 STATION STREET, SUITE 100, MENTOR, OHIO 44060
(Address of Principal Executive Offices)
Issuer's Telephone Number, Including Area Code: (440) 974-3770
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [__]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
SHARES OF COMMON STOCK OUTSTANDING AS OF November 1, 2000: 3,031,618
---------
Transition Small Business Disclosure Format (check one): YES [_] NO [X]
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Liberty Self-Stor, Inc. and Subsidiary
Quarterly Report on Form 10-QSB
For the Quarter Ended September 30, 2000
<TABLE>
<CAPTION>
Table of Contents
PART I Page
----
<S> <C>
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis or Plan of Operation 17
PART II
Item 1. Legal Proceedings 23
Item 6. Exhibits and Reports on Form 8-K 23
</TABLE>
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PART I
ITEM 1. FINANCIAL STATEMENTS.
The accompanying unaudited financial statements should be read in conjunction
with the Annual Report on Form 10-KSB for fiscal year ended December 31, 1999 of
Liberty Self-Stor, Inc. (the "Company"). These statements have been prepared in
accordance with the instructions for the Securities and Exchange Commission Form
10-QSB and do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
In the opinion of the Company's management, all material adjustments of a normal
recurring nature considered necessary for a fair presentation of results of
operations for the interim periods have been included. The results of operations
for the nine months ended September 30, 2000 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2000.
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Liberty Self-Stor, Inc. and Subsidiary
Consolidated Balance Sheets
September 30, 2000 and December 31, 1999
<TABLE>
<CAPTION>
ASSETS
------
September 30,
2000 December 31,
(Unaudited) 1999
------------- ------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 270,778 $ 450,512
Accounts receivable 33,373 55,642
Related party receivable 127,959 --
Investment in mortgage-related assets, at market value -- 1,390,131
Restricted cash 3,049 3,623
Other current assets 49,444 71,240
----------- -----------
Total current assets 484,603 1,971,148
PROPERTY AND EQUIPMENT:
Land 4,023,319 2,528,966
Buildings and improvements 25,429,661 22,403,996
Furniture and equipment 196,018 171,721
----------- -----------
29,648,998 25,104,683
Less - Accumulated depreciation 740,954 7,643
----------- -----------
28,908,044 25,097,040
OTHER ASSETS:
Goodwill, net 302,744 68,581
Other assets 45,618 11,740
----------- -----------
Total assets $29,741,009 $27,148,509
=========== ===========
</TABLE>
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<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
LIABILITIES:
Current maturities of long-term debt $ 2,007,263 $ 441,587
Notes payable to related party 500,000 500,000
Accounts payable 268,506 614,743
Accounts payable to related party 102,613 102,613
Accrued expenses 460,801 536,154
------------ ------------
Total current liabilities 3,339,183 2,195,097
LONG-TERM DEBT, net of current maturities 21,207,258 18,851,160
OTHER LONG-TERM LIABILITIES 34,468 41,620
MINORITY INTEREST LIABILITY 3,619,730 4,250,102
COMMITMENTS AND CONTINGENCIES (Note 10)
SHAREHOLDERS' EQUITY:
Serial preferred stock - $.001 stated value: 2,000,000
shares authorized, no shares issued and outstanding
Common stock - $.001 stated value: 50,000,000 shares
Authorized; 3,031,618 shares issued and outstanding 3,031,618 3,031,618
Paid-in capital 22,755,694 22,755,694
Distributions in excess of income (24,246,942) (23,976,782)
------------ ------------
Total shareholders' equity 1,540,370 1,810,530
------------ ------------
Total liability and shareholders' equity $ 29,741,009 $ 27,148,509
============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
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Liberty Self-Stor, Inc. and Subsidiary
Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 2000 and 1999
(Unaudited)
[CAPTION]
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
GROSS REVENUES:
Revenues from real estate operations $ 1,058,801 $ -- $ 2,935,743 $ --
Interest and other 10,978 25,005 25,744 69,657
----------- ----------- ----------- -----------
Total Revenues 1,069,779 25,005 2,961,487 69,657
OPERATING EXPENSES:
Interest expense 501,952 -- 1,340,094 --
Property taxes and insurance 118,860 -- 338,616 --
Property operating expenses 243,959 -- 608,053 --
Legal and professional fees 32,954 82,149 159,289 136,751
General and administrative,
including amounts paid to
related parties of $36,000 in
2000 and $30,000 in 1999 216,923 20,397 673,372 76,412
Depreciation, amortization and other 264,805 -- 742,595 --
----------- ----------- ----------- -----------
Total expenses 1,379,453 102,546 3,862,019 213,163
----------- ----------- ----------- -----------
Loss before minority interest (309,674) (77,541) (900,532) (143,506)
Minority interest 216,771 -- 630,372 --
----------- ----------- ----------- -----------
Net loss $ (92,903) $ (77,541) $ (270,160) $ (143,506)
=========== =========== =========== ===========
NET LOSS PER COMMON
SHARE - BASIC AND DILUTED $ (0.03) $ (0.03) $ (0.09) $ (0.05)
=========== =========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
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Liberty Self-Stor, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (270,160) $ (143,506)
Adjustments to reconcile net loss to
net cash used in operating activities:
Unrealized gain on mortgage-related assets -- 333
Depreciation and amortization 739,994 --
Minority interest liability (630,372) --
Changes in operating assets and liabilities:
Restricted cash 574 351,328
Accounts receivable 22,269 --
Related party receivable (127,959) --
Other current assets 21,796 (247,023)
Other assets (274,724) --
Accounts payable (346,237) (10,388)
Other liabilities (75,353) 7,600
Accrued expenses (7,152) --
----------- -----------
Net cash used in operating activities (947,324) (41,656)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (4,544,315) --
Proceeds (purchases) investment in mortgage-related assets 1,390,131 (1,554,573)
Return of principal from mortgage-related assets -- 1,290,551
----------- -----------
Net cash used in investing activities (3,154,184) (264,022)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes payable (328,819) --
Borrowings on notes payable 4,250,593 --
----------- -----------
Net cash provided by financing activities 3,921,774 --
----------- -----------
DECREASE IN CASH (179,734) (305,678)
CASH AND CASH EQUIVALENTS,
beginning of period 450,512 600,173
----------- -----------
CASH AND CASH EQUIVALENTS,
end of period $ 270,778 $ 294,495
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
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Liberty Self-Stor, Inc. and Subsidiary
Notes to Consolidated Financial Statements
September 30, 2000
(Unaudited)
1. GENERAL
Liberty Self-Stor, Inc. (the "Company" or "Liberty") is a corporation organized
under the laws of the State of Maryland for the purpose of operating, managing,
developing, expanding and investing in self-storage facilities. The Company was
formerly known as Meridian Point Realty Trust '83 ("Meridian"). On December 29,
1999, Meridian was merged with and reincorporated into Liberty.
Meridian was formed as a self-liquidating/finite-life real estate investment
trust ("REIT"). Under this self-liquidating policy, Meridian could not invest
net proceeds from sales or refinancings in additional properties. Meridian was
formed on June 24, 1982 and commenced operations on April 12, 1983. On February
23, 1996, Meridian sold all of its real estate properties except for the
Charleston Business Park ("Charleston"). On August 22, 1997, Meridian sold the
Charleston property. Following the sale, Meridian's assets had consisted almost
entirely of cash and cash equivalents and investments in mortgage-related
assets. An annual meeting of shareholders was held on September 22, 1998, for
the purpose of electing trustees and approving and adopting a plan of
liquidation. The proposed plan of liquidation was defeated by shareholders and a
new Board of Trustees was elected. The vote was declared official on September
28, 1998.
On December 28, 1999, an annual meeting of shareholders was held for the purpose
of electing trustees and approving and adopting certain proposals including, but
not limited to, approval of the reincorporation of Meridian into Liberty and the
formation of an operating partnership, LSS I Limited Partnership ("LSS"), a
Delaware limited partnership, with the members of Liberty Self-Stor, Ltd., an
Ohio limited liability company (the "Ohio LLC"). The members of the Ohio LLC
were Richard M. Osborne, Chairman and Chief Executive Officer of Liberty, Thomas
J. Smith, Liberty's President and Chief Operating Officer, and Retirement
Management Company, an Ohio corporation owned by Mr. Osborne.
All of the proposals were approved by the shareholders and adopted on December
28, 1999. As a result, Meridian was merged with and reincorporated into Liberty
Self-Stor, Inc., a perpetual-life REIT. As a perpetual-life REIT, Liberty is now
able to invest proceeds from sales and refinancings in additional properties. In
addition, each member of the Ohio LLC exchanged their membership interests for
Class A limited partnership interests in LSS, resulting in LSS being the sole
member of the Ohio LLC. Liberty contributed its net assets, primarily cash and
investments, to LSS in exchange for the sole general partner interest therein
and Class B limited partnership interests. The Class A limited partnership
interests are redeemable for cash or, at the election of Liberty, convertible
into shares of Liberty stock on a one-for-one basis. The Class B limited
partnership interests are not entitled to redemption or a preferred return. At
September 30, 2000, Liberty and the former members of the Ohio LLC have 30% and
70% equity interests in LSS, respectively. The minority interest liability of
$3,619,730 at September 30, 2000, represents the 70% interest in the net assets
of LSS held by the former members of the Ohio LCC. After completion of the
formation transactions, LSS owned and operated 15 self-storage facilities. At
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September 30, 2000, Liberty owned and operated 17 self-storage facilities and
one additional facility was under construction.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
---------------------------
Pursuant to the terms of the partnership agreement of LSS, Liberty, as sole
general partner, controls LSS. Accordingly, Liberty accounts for its investment
in LSS utilizing the consolidation method, recognizing minority interest to the
extent of the Class A limited partnership interests issued to the former members
of the Ohio LLC. The statement of operations of Liberty for the nine months
ended September 30, 2000 includes the results of operations of LSS for the
entire period.
Acquisition of Properties
-------------------------
The consummation of the LSS formation transactions discussed in Note 1 were
accounted for utilizing the purchase method of accounting, with LSS being the
acquirer. As such, the historical net carrying values of the assets and
liabilities of the Ohio LLC were adjusted to their estimated fair values. The
purchase price allocation remains preliminary at September 30, 2000 and is
subject to change based upon final determination of the fair values of assets
acquired and liabilities assumed. No adjustments were made to the historical net
carrying values of assets and liabilities of Meridian.
The following unaudited pro forma for the nine months ended September 30, 2000
and 1999 is presented showing the effect of the reincorporation and
reorganization as if they had been consummated on January 1, 1999.
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Revenues $ 2,935,743 $ 2,678,406
Net Loss (270,160) (175,074)
Net loss per share - basic
and diluted $ (.09) $ (.06)
</TABLE>
Cash and Cash Equivalents
-------------------------
Liberty considers all investments with an original maturity of three months or
less to be cash equivalents.
Property and Equipment
----------------------
Property and equipment acquired in connection with Liberty's acquisition of the
Ohio LLC were valued based upon an appraisal done in 1999, while assets acquired
since the reorganization are valued at cost. All property and equipment are
depreciated using the straight-line method over estimated useful lives of 25
years for buildings and improvements and 5 years for furniture and equipment.
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Goodwill
--------
Goodwill associated with LSS's acquisition of the Ohio LLC (approximately
$68,000) and the acquisition of the Springfield, Ohio self-storage facility
(approximately $240,000) is being amortized on a straight-line basis over an
estimated useful life of 20 years.
Asset Impairment
----------------
Liberty reviews the properties for impairment when events or changes in
circumstances indicate the carrying amounts of the properties may not be
recoverable. When such conditions exist, management estimates future cash flows
from operations. If the estimated undiscounted future cash flows are less than
the carrying amount of the asset, an adjustment to reduce the carrying amount to
the related property's estimated fair market value would be recorded and an
impairment loss would be recognized. Liberty does not believe that there are any
factors or circumstances indicating impairment of any of its investment in its
properties or goodwill.
Revenue Recognition
-------------------
Liberty's rental revenue is derived from monthly rentals of self-storage units.
Rental revenue is recognized in the period the rent is earned which is typically
on a monthly basis.
Estimates, Risks and Uncertainties
----------------------------------
The preparation of financial statements in conformity with generally accepted
accounting principals requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
From time to time, Liberty is subject to legal claims arising in the ordinary
course of business in connection with Liberty's ownership of real estate and
leasing of such real estate to tenants. Liberty maintains liability insurance,
subject to customary deductibles and accordingly, management does not believe
the ultimate resolution of such matter will have a material effect on Liberty's
financial position or results of operations.
Fair Value of Financial Instruments
-----------------------------------
Fair value is determined by using available market information and appropriate
valuation methodologies. Liberty's principal financial instruments are cash and
cash equivalents, restricted cash, accounts receivable, investments in mortgage
related assets, and the notes payable. Cash and cash equivalents and restricted
cash, due to their short maturities, and the liquidity of accounts receivable,
are carried at amounts which reasonably approximate fair value. Investments in
mortgage related assets were recorded at fair value. In the opinion of
management, the carrying values of notes payable at September 30, 2000
approximate their respective fair values as of such date.
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3. RELATED PARTY RECEIVABLE
At September 30, 2000, a related party receivable existed in the amount of
$127,959, which represented funds loaned to Liberty Self-Stor II, Ltd., a
company controlled by Mr. Osborne.
4. INVESTMENTS IN MORTGAGE-RELATED ASSETS
At December 31, 1999, Liberty held investments in Real Estate Mortgage
Investment Conduits ("REMICs"). Liberty had classified these investments as
trading securities under Statement of Financial Accounting Standard No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." Accordingly,
the loss on these investments was $9,843 in 2000 and $7,351 in 1999. During the
three months ended March 31, 2000, these investments were sold and the loss was
included in interest and other in the consolidated statement of operations.
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
9/30/00 12/31/99
---------- ----------
<S> <C> <C>
Mortgage notes payable to a bank with monthly installments of $84,367 including
interest at 7.72%, amortized over a twenty year period with a maturity date of
June 1, 2003, secured by certain real property and personally guaranteed by a
stockholder of Liberty. $9,233,835 $9,418,466
Mortgage note payable to a bank with monthly installments of $9,695 including
interest at 6.76%, amortized over a twenty year period with a maturity date of
May 20, 2002, secured by certain real property and personally guaranteed by a
stockholder of Liberty. 1,210,905 1,235,526
Mortgage note payable to a bank with monthly installments of $7,268 including
interest at 8.02% amortized over a twenty-five year period with a maturity
date of October 31, 2002, secured by certain real property and personally
guaranteed by a stockholder of Liberty. 902,596 913,402
</TABLE>
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<TABLE>
<S> <C> <C>
Mortgage note payable to a bank with monthly installments of $2,035 including
interest at 7.60% amortized over a twenty-three year period with a maturity
date of June 1, 2003, secured by certain real property and personally
guaranteed by a stockholder of Liberty. 259,107 262,544
Mortgage note payable to a bank with monthly installments of $4,287 including
interest at 7.68% amortized over a twenty-three year period with a maturity
date of October 31, 2002, secured by certain real property and personally
guaranteed by a stockholder of Liberty. 542,329 549,446
Note payable to a corporation, due 1,188 months after August 1996, monthly
interest payments of $2,000, secured by certain real property and personally
guaranteed by a stockholder of Liberty. 250,000 250,000
Mortgage note payable to a bank for construction and term financing of real
property, interest at 8.17% amortized over a twenty year period with a
maturity date of July 1, 2002 secured by certain real property and personally
guaranteed by a stockholder of Liberty. 2,602,495 2,647,246
Mortgage note payable to a bank with monthly installments of $15,769 including
interest at 8.0% amortized over a twenty year period with a maturity date of
June 4, 2009, secured by certain real property and personally guaranteed by a
stockholder of Liberty. 1,856,979 1,884,000
Mortgage note payable to individuals in monthly installments of $5,207 including
interest at 8.5% payable on a twenty year amortization, due June 2004,
secured by certain real property. 583,847 593,157
Mortgage note payable to a bank for construction and term financing of real
property, interest currently at 8.5% amortized over an eighteen year period
with a maturity date of June 1, 2003, secured by certain real property and
personally guaranteed by a stockholder of Liberty. 650,723 570,000
</TABLE>
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<TABLE>
<S> <C> <C>
Construction and permanent financing loan payable to a bank in monthly
installments of $2,397 including interest at 7.25% with a maturity date of May
1, 2001, secured by certain real property and personally
guaranteed by a stockholder of Liberty. 297,785 298,319
Mortgage note payable to a bank for construction and term financing of real
property, interest at 8.5% amortized over an eighteen year period with a
maturity date of October 31, 2002, secured by certain real property and
personally guaranteed by a stockholder of Liberty. 823,507 670,641
Mortgage note payable to a bank for term financing, interest at 9.1% amortized
over a twenty year period with a maturity date of June 1, 2005, secured by
certain real property and personally guaranteed by a stockholder
of Liberty. 1,588,424 --
Mortgage note payable to an individual with monthly installments of $3,777
including interest at 7.75% amortized over a twenty-five-year period with a
maturity date of June 30, 2025, secured by certain real property and
personally guaranteed by a stockholder of Liberty. 497,789 --
Mortgage note payable to a bank for construction and term financing of real
property, interest at 9.25% amortized over a twenty year period with a
maturity date of November 18, 2010, secured by certain real property and
personally guaranteed by a stockholder of Liberty. 737,789 --
Mortgage note payable to a bank for construction and term financing of real
property, interest at 8.38% amortized over a twenty-four year period with a
maturity date of December 1, 2005, secured by certain real property and
personally guaranteed by a stockholder of Liberty. This note is classified as
current due to certain provisions contained in the note. 1,176,411 --
----------- -----------
$23,214,521 $19,292,747
Less Current Maturities 2,007,263 441,587
----------- -----------
$21,207,258 $18,851,160
</TABLE>
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Long-term debt matures as follows:
<TABLE>
<C> <C>
2001 $ 4,105,054
2002 11,973,122
2003 758,650
2004 1,639,993
2005 169,090
Thereafter 2,561,349
-----------
$21,207,258
</TABLE>
During the three and nine months ended September 30, 2000, Liberty paid $501,952
and $1,340,094 of interest on its debt instruments, respectively.
6. NOTE PAYABLE TO RELATED PARTY:
Liberty has an unsecured note payable to its Chairman and Chief Executive
Officer in the amount of $500,000 at September 30, 2000. The note is payable
upon demand and bears interest at a variable rate which was 9.50% at September
30, 2000.
7. EARNINGS PER SHARE:
Basic earnings per share of common stock for 2000 and beneficial interest for
1999 is determined by dividing net loss by the weighted average number of shares
of common stock or beneficial interest outstanding during the period. Weighted
average number of shares outstanding was 3,031,618 for both 2000 and 1999.
During the quarters ended September 30, 2000 and 1999, Liberty paid no cash
distributions to its shareholders.
8. INCOME TAXES:
Liberty has previously elected to be taxed as a REIT pursuant to Section 856 (c)
(1) of the Internal Revenue Code of 1986, as amended (the "Code"), and intends
to be taxed as a REIT under the Code for the fiscal year ending December 31,
2000. The REIT provisions of the Code generally allow a REIT to deduct dividends
paid to shareholders in computing the Company's taxable income. In addition,
Liberty has net operating loss carryforwards for future years of approximately
$4,000,000. These net operating loss carryforwards will expire at various dates
through 2019. Utilization of the loss carryforwards could be limited if there is
a substantial change in ownership of Liberty. No provisions for federal or state
income taxes have been made in the accompanying consolidated statements of
operations.
To quality for REIT status, Liberty must meet a number of highly technical
organizational and operational requirements on a continuing basis. Those
requirements seek to ensure, among other things, that the gross income and
investments of a REIT are largely real estate related, with certain other
permitted assets, that a REIT distributes substantially all its ordinary taxable
income to shareholders on a current basis and that the REIT's ownership is not
overly concentrated. Due
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to the complex nature of these rules, the limited available guidance concerning
interpretation of the rules, the importance of ongoing factual determinations
and the possibility of adverse changes in or interpretations of the law,
administrative interpretations of the law and developments at Liberty, no
assurance can be given regarding Liberty's qualification as a REIT for any
particular year.
If Liberty failed to quality as a REIT, it would be taxed as a regular
corporation, and distributions to shareholders would not be deductible in
computing Liberty's taxable income. Also, if Liberty failed to qualify as a
REIT, distributions to stockholders would no longer be required. Moreover,
Liberty might not be able to elect to be treated as a REIT for the four taxable
years after the year during which Liberty ceased to qualify as a REIT. If
Liberty later requalified as a REIT, it might be required to pay a full
corporate-level tax on any unrealized gain associated with its assets as of the
date of requalification and to make distributions equal to any earnings
accumulated during the period of non-REIT status.
9. OTHER RELATED PARTY TRANSACTIONS:
Before leaving office, the previous Board created the Meridian Indemnity Trust
(the "Trust") to pay for the expense of defending themselves against potential
litigation. The Trust was initially funded with $350,000 of Meridian funds, the
remaining balance which has been reflected as restricted cash in the
accompanying balance sheet as of September 30, 2000 and December 31, 1999. The
majority of the funds were disbursed in 1999.
In connection with the proxy solicitation by Meridian '83 Shareholders'
Committee for Growth, Turkey Vulture Fund XIII, Ltd. (the "Fund"), incurred
expenses of $102,613 which was included in general and administrative expenses
in the statement of operations for the year ended December 31, 1998. The current
board authorized the expense reimbursement because of the benefit to Liberty of
the proxy solicitation. The reimbursement was conditioned upon the authorization
by the shareholders of the conversion to a perpetual-life REIT through an
amendment to the Declaration of Trust. Richard M. Osborne, Liberty's Chairman of
the Board and Chief Executive Officer, is the sole manager of the Fund. The
$102,613 is shown as an accounts payable on Liberty's balance sheet because Mr.
Osborne has informed Liberty's management that he is not requiring payment at
this time.
Mr. Osborne is the sole manager of Liberty Self-Stor II, Ltd., an Ohio limited
liability company, which is the owner of a truck rental business, which makes
trucks available for short-term rental to the general public, including tenants
of the self-storage facilities, and provides for the retail sale of locks,
boxes, packing materials, propane gas and related merchandise at the
self-storage facilities. Liberty has entered into a cost sharing agreement with
Liberty Self-Stor II with respect to the sharing of employees and space at the
offices of the self-storage facilities for the benefit of both companies.
At September 30, 2000, Liberty had cash and cash equivalents of $175,992 at a
financial institution which is partially owned by a group controlled by Mr.
Osborne.
On December 28, 1999, the shareholders approved Liberty's lease of its executive
offices from OsAir, Inc., a company owned by Mr. Osborne. The rent for the
initial term is $4,000 per month.
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At September 30, 2000, $36,000 of this related party expense is included in
general and administrative expenses.
In June 2000, Liberty purchased 4.4 acres of vacant land in Westlake, Ohio from
Liberty Self-Stor II, Ltd., which is controlled by Mr. Osborne, for $784,385.
In October 2000, Liberty will purchase a facility, that is primarily
self-storage, located in Painesville, Ohio from Liberty Self-Stor II, Ltd.,
which is controlled by Mr. Osborne. The facility also has additional office and
retail space. Liberty will receive the facility and cash totaling $3.3 million
in exchange for Liberty's assumption of $3.3 million in debt from Liberty
Self-Stor II, Ltd.
10. COMMITMENTS AND CONTINGENCIES:
The ownership of real estate entails environmental risks and potential liability
to owners, including former owners. Environmental investigation at the Golden
Cove property sold to Meridian Industrial Trust ("MIT") in 1997 indicated that
soil at the property contained volatile organic compounds in concentrations that
exceeded the clean-up goals typically cited by the California Regional Water
Quality Control Board (the "RWQCB"). As part of the sale transaction, Meridian
(Liberty's predecessor) was obligated to fully fund the remediation costs, for
which it had previously accrued $140,000 in 1994. Approximately $95,000 had been
expended by Meridian for remediation costs through September 30, 2000, and
Liberty does not believe that any additional costs will be incurred. However,
there can be no assurance to that effect. Liberty, as successor to Meridian, may
be entitled to seek contribution and indemnity for the remediation costs against
other potentially responsible parties who may have caused the contamination at
the property.
In the late 1980's, the San Francisco Bay Region of the RWQCB requested that
Meridian investigate and characterize soil and groundwater contamination at the
Charleston property which was sold by Meridian in August 1997. Meridian engaged
an environmental engineering firm that discovered the presence of
trichloroethlylene and other solvent chemicals in the groundwater. The RWQCB
deferred issuing a Site Cleanup Requirements ("SCRs") order to give Meridian
time to complete the pending sale of the property. As part of the sale, the
purchaser agreed to indemnify Meridian broadly against the pending SCRs and
other types of environmental claims. The indemnity is backed by an environmental
insurance policy placed with Reliance Insurance Company of Illinois. It is
possible that the RWQCB could still name Meridian, or Liberty as successor to
Meridian, when it ultimately issues its SCRs order for the property based on the
Company's former ownership. If that occurs, Meridian or Liberty would tender the
SCRs order to the purchaser for compliance. Similarly, Meridian or Liberty would
tender any other environmental claims brought against it to the purchaser
pursuant to the indemnity.
11. EMPLOYEE BENEFITS:
The 1999 Stock Option Plan ("the Plan") permits the grant of nonstatutory stock
options ("NSSOs"), incentive stock options ("ISOs" and together with NSSOs,
"Options"), and restricted shares. The Plan was adopted to attract and retain
qualified and competent persons who are key to Liberty, including key employees,
officers, and directors. The Plan provides for the grant to employees of ISOs
within the meaning of Section 422 of the Code, for grant of NSSOs to eligible
employees (including officers and directors) and non-employee directors and for
the grant of
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<PAGE> 17
restricted share awards. Liberty may grant up to 300,000 options or restricted
shares pursuant to the Plan. As of September 30, 2000, 180,000 options have been
granted.
Liberty follows the disclosure provisions of Statement of Financial Accounting
Standard No. 123, "Accounting for Stock-Based Compensation," and accordingly, no
expense was recognized for options and restricted shares granted.
12. ACQUISITIONS:
Effective in May 2000, Liberty completed the purchase of a 59,450 square foot
self-storage facility in Springfield, Ohio for $2,251,570. The facility consists
of 747 self-storage units on 4.6 acres. The purchase price was financed with a
$1.6 million mortgage with a bank and $0.5 million from a note to the seller.
Effective in May 2000, Liberty purchased 1.8 acres of land in Cleveland, Ohio
for $122,253 in cash. Construction of a 59,950 self-storage facility on the
property commenced in June 2000 and is expected to be completed in the fourth
quarter of 2000. Upon completion, the facility will consist of 619 self-storage
units. Construction is being financed by a construction loan from a bank.
Liberty began renting the completed units in September 2000.
Effective in June 2000, Liberty purchased 4.4 acres of land in Westlake, Ohio
for $784,385 from Liberty Self-Stor II, Ltd., which is controlled by Richard M.
Osborne. Construction of a 77,700 square foot self-storage facility on the
property commenced in August 2000 and is expected to be completed in the first
quarter of 2001. Once completed, the facility will consist of 540 self-storage
units. The land purchase and construction is being financed with a $1.5 million
construction loan from a bank.
In October 2000, Liberty will purchase a 103,785 square foot facility,
consisting of 77,500 square feet of self-storage space and the balance being
office and retail space, in Painesville, Ohio from Liberty Self-Stor II, Ltd.,
which is controlled by Mr. Osborne. The facility consists of 368 self-storage
units, as well as office and retail space on 3.2 acres. In exchange for the
property, Liberty will assume $3.3 million in bank loans. Of the bank loans,
$1.3 million consists of a personal loan by a bank to Mr. Osborne. Liberty will
enter into a loan agreement with Mr. Osborne with terms that are identical to
the bank loan. Mr. Osborne will not receive any additional stock of Liberty or
any units of LSS I in connection with this purchase.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Introduction and Discussion of Known Trends, Events and Uncertainties
---------------------------------------------------------------------
On December 29, 1999, Liberty succeeded to the business of Meridian.
Meridian was formed and operated as a self-liquidating/finite-life REIT, meaning
that Meridian was intended to have limited life through provisions of its
declaration of trust which stated that the net proceeds from the sale of a
property owned by Meridian could not be reinvested but had to be distributed to
shareholders after payment of indebtedness relating to that property and other
obligations. This limited life policy essentially precluded Meridian from
acquiring new properties and reinvesting the proceeds from the disposition of
future properties into new assets. Meridian sold
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<PAGE> 18
its last remaining property in August 1997 and the limited life policy precluded
it from acquiring new properties.
Following Meridian's sale of its last remaining property in August
1997, the former board of trustees of Meridian investigated a variety of
alternatives to maximize the value of Meridian's shares. At Meridian's September
22, 1998 annual meeting, the former board of trustees proposed complete
dissolution and liquidation. This plan of dissolution and liquidation was not
approved by the shareholders and a new board of trustees was elected. In its
proxy statement, the current board indicated that, if elected, it would seek to
eliminate the limited life policy and would consider merging with a real estate
company that owns self-storage facilities.
At a special meeting of Meridian's shareholders in lieu of an annual
meeting of shareholders on December 28, 1999, Meridian's shareholders approved,
among other matters, the reincorporation in which Meridian was merged with and
into Liberty with Liberty as the surviving entity. The purpose of the
reincorporation was to eliminate Meridian's limited life policy, giving
management the opportunity to seek new investments. The merger with Liberty was
effective on December 29, 1999.
Also, at the special meeting, Meridian's shareholders approved the
acquisition of Liberty Self-Stor, Ltd., an Ohio limited liability company owned
by Richard M. Osborne, Liberty's Chairman of the Board and Chief Executive
Officer, which owned 15 self-storage facilities. The acquisition was
accomplished through the reorganization of the company as an umbrella
partnership real estate investment trust, or UPREIT. In an UPREIT structure, the
publicly held REIT is the general partner of an operating partnership which owns
the properties of the REIT.
The reorganization as an UPREIT resulted in the acquisition of Mr.
Osborne's self-storage company through the formation of an operating partnership
by Liberty and Richard M. Osborne, Thomas J. Smith and Retirement Management
Company, the members of Mr. Osborne's self-storage company. Mr. Osborne is the
sole manager and owned prior to the reorganization with Retirement Management
Company, of which Mr. Osborne is the sole shareholder, approximately 99.3% of
the self-storage company. The 99.3% includes 0.7% interest that Mr. Osborne
owned as successor to Diane M. Osborne's interest. The remaining 0.7% was owned
by Thomas J. Smith, the President, Chief Operating Officer and a director of
Liberty.
Upon the reorganization, Liberty became the general partner owning
approximately 1% of the operating partnership and a limited partner owning
approximately 28.9%, and Mr. Osborne, Mr. Smith and Retirement Management
Company are the limited partners, owning approximately 70.1% of the operating
partnership. The limited partnership interests of the operating partnership are
divided into two classes: Class A and Class B. Mr. Osborne, Mr. Smith and
Retirement Management Company received Class A limited partnership interests and
Liberty received Class B limited partnership interests. The Class A limited
partnership interests are redeemable for cash or, at the election of Liberty,
convertible into common stock on a one-for-one basis. The Class B limited
partnership interests are identical to the Class A interests in all material
respects except that the Class B interests are not redeemable or convertible.
The operating partnership is the sole owner of Mr. Osborne's
self-storage company which owns the original 15 self-storage facilities plus the
newly-acquired Springfield self-storage facility, and the Cleveland and Westlake
facilities that are under construction. The operating partnership
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<PAGE> 19
is the entity through which Liberty conducts substantially all of its business
and owns substantially of its assets, either directly or through subsidiaries.
Liberty's board of directors manages the affairs of the operating partnership by
directing the affairs of Liberty as general partner of the operating
partnership. Liberty's general partnership interests and Class B limited
partnership interests entitle it to share in cash distributions from, and in the
profits and losses of, the operating partnership in proportion to its percentage
interest therein and entitle Liberty to vote on all matters requiring a vote of
the limited partners. Liberty plans to make all future purchases of self-storage
facilities through the operating partnership. At September 30, 2000, Liberty
owned and operated 17 self-storage facilities and one additional facility was
under construction.
Recent Events
-------------
Effective in May 2000, Liberty completed the purchase of a 59,450
square foot self-storage facility in Springfield, Ohio for $2,251,570. The
facility consists of 747 self-storage units on 4.6 acres. The purchase price was
financed with a $1.6 million mortgage with a bank and $0.5 million from a note
to the seller, each of which are guaranteed by Mr. Osborne
Effective in May 2000, Liberty purchased 1.8 acres of land in
Cleveland, Ohio for $122,253 in cash. Construction of a 59,950 square foot
self-storage facility on the property commenced in June 2000 and is expected to
be completed in the fourth quarter of 2000. Upon completion, the facility will
consist of 619 self-storage units. Construction is being financed by a
construction loan from a bank.
Effective in June 2000, Liberty purchased 4.4 acres of land in
Westlake, Ohio for $784,385 from Liberty Self-Stor II, Ltd., which is controlled
by Mr. Osborne. The purchase price was financed with a $1.5 million construction
loan with a bank. Construction of a 77,700 square foot self-storage facility on
the property commenced in August 2000 and is expected to be completed in the
first quarter of 2001. Once completed, the facility will consist of 540
self-storage units.
In October 2000, Liberty will purchase a 103,785 square foot facility,
consisting of 77,500 square feet of self-storage space and the balance being
office and retail space, in Painesville, Ohio from Liberty Self-Stor II, Ltd.,
which is controlled by Mr. Osborne. The facility consists of 368 self-storage
units, as well as office and retail space on 3.2 acres. In exchange for the
property, Liberty will assume $3.3 million in bank loans. Of the bank loans,
$1.3 million consists of a personal loan by a bank to Mr. Osborne. Liberty will
enter into a loan agreement with Mr. Osborne with terms that are identical to
the bank loan. Mr. Osborne will not receive any additional stock of Liberty or
any units of LSS I in connection with this purchase.
The following discussion of the "Material Changes in Results of Operations"
should be read in conjunction with accompanying Balance Sheets and Statements of
Operations and Cash Flows and the notes thereto. The discussion of the "Material
Changes in Results of Operations" compares the results of operations of the
quarter and nine months ended September 30, 1999, when Meridian had no
operations and its assets consisted almost entirely of cash and cash
equivalents, to the results of operations for the quarter and nine months ended
September 30, 2000, after the December 29, 1999 acquisition of 15 self-storage
facilities and the acquisitions completed in 2000. Therefore, the discussion
does not present a comparison of the results of the self-storage facilities from
period to period.
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Unless otherwise defined in this report, or unless the context otherwise
requires, the capitalized words or phrases referred to in this section either:
(a) describe accounting terms that are used as line items in such financial
statements, or (b) have the meanings ascribed to them in such financial
statements and the notes thereto.
Liquidity and Capital Resources
-------------------------------
Liberty's source of near-term liquidity is its unrestricted cash, which at
September 30, 2000 totaled $270,778 as compared to $450,512 at December 31,
1999. These funds are expected to be adequate to satisfy Liberty's overhead and
operating expenses in the short term. In addition, Liberty believes that its
cash flows from the self-storage facilities will be sufficient to service its
debt for the next 12 months. However, prior to acquisition by the operating
partnership, Liberty Self-Stor, Ltd. had a history 10 consecutive quarters of
losses, and Liberty has had losses in each of the three quarters of 2000. As
Liberty continues to implement its business plan, present sources of financing
will not be adequate to support Liberty's increased cash needs. Liberty is
currently seeking additional equity financing. In the long-term, Liberty needs
this additional financing to continue to meet its debt obligations and to
finance its growth. There is no guarantee that Liberty will be able to obtain
the necessary financing or that the terms of any financing will be satisfactory
or favorable to Liberty. Long-term liquidity will depend on Liberty's ability to
obtain financing and attain profitable operations.
During the nine months ended September 30, 2000 and 1999, Liberty had no cash
distributions.
Material Changes in Results of Operations
-----------------------------------------
Revenues
--------
Rentals from real estate properties totaled $2,935,743 and $0 for the nine
months ended September 30, 2000 and 1999, respectively, and $1,058,801 and $0
for the three months ended September 30, 2000 and 1999, respectively. The
rentals for 2000 consist of business generated by the self-storage facilities
that were acquired on and after December 29, 1999. Rentals in the third quarter
were lower than anticipated due to lower than expected occupancy rates and
higher than expected bad debt from users of the self-storage facilities.
Interest and other revenues were $25,744 and $69,657 for the nine months ended
September 30, 2000 and 1999, respectively, and $10,978 and $25,005 for the three
months ended September 30, 2000 and 1999, respectively. The total for 2000
consists mainly of interest income from the savings account and reflect the sale
of the mortgage-related assets during the first quarter of this year. The total
for 1999 consists mainly of interest income from investments in mortgage-related
assets.
Expenses
--------
Property taxes and insurance for the nine months ended September 30, 2000 and
1999 were $338,616 and $0, respectively, and $118,860 and $0 for the three
months ended September 30, 2000 and 1999, respectively. The property taxes and
insurance for 2000 consist of property taxes and insurance for the self-storage
facilities acquired on and after December 29, 1999.
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<PAGE> 21
Property operating costs totaled $608,053 and $0 for the nine months ended
September 30, 2000 and 1999, respectively, and $243,959 and $0 for the three
months ended September 30,2000 and 1999, respectively. The property operating
costs for 2000 consist of operating costs for the self-storage facilities
acquired on and after December 29, 1999.
Legal and professional fees for the nine months ended September 30, 2000 and
1999 were $159,289 and $136,751 respectively, and $32,954 and $82,149 for the
three months ended September 30, 2000 and 1999, respectively. The 2000
expenditures include legal fees, accounting fees, and investor relations
expenses. Legal and professional fees primarily increased due to higher levels
of accounting fees related to Securities and Exchange Commission filing
requirements.
General and administrative expenses were $673,372 and $76,412 for the nine
months ended September 30, 2000 and 1999, respectively, and $216,923 and $20,397
for the three months ended September 30, 2000 and 1999, respectively. The
general and administrative expenses for 2000 consist of general and
administrative expenses for the self-storage facilities acquired on and after
December 29, 1999.
For the nine months ended September 30, 2000 and 1999, depreciation,
amortization and other totaled $742,595 and $0, respectively, and $264,805 and
$0 for the three months ended September 30, 2000 and 1999, respectively. The
depreciation, amortization and other for 2000 consists of depreciation and
amortization for the self-storage facilities acquired on and after December 29,
1999.
Interest expense was $1,340,094 and $0 for the nine months ended September 30,
2000 and 1999, respectively, and $501,952 and $0 for the three months ended
September 30, 2000 and 1999, respectively. The 2000 expense consists of interest
expense for mortgages and notes payable related to the self-storage facilities.
Net Loss
--------
As a result of the factors noted above, there was a net loss of $270,160 for the
nine months ended September 30, 2000 compared to a net loss of $143,506 for the
same period of 1999 and a net loss of $92,903 for the three months ended
September 30, 2000 compared to a net loss of $77,541 for the same period of
1999.
Funds from Operations
---------------------
Liberty believes that Funds From Operations ("FFO") is helpful to investors as a
measure of the performance of an equity REIT because, when considered in
conjunction with cash flows from operating activities, financing activities, and
investing activities, it provides investors with an understanding of the ability
of Liberty to incur and service debt and to make capital expenditures. FFO is
defined as net income (computed in accordance with generally accepted accounting
principals), excluding gains (or losses) from sales of property, plus
depreciation and amortization, and after adjustments for unconsolidated
partnerships and joint ventures. Adjustments for unconsolidated partnerships and
joint ventures will be calculated to reflect funds from operations on the same
basis. FFO should not be considered a substitute for net income or cash flows,
nor
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should it be considered an alternative to operating performance or
liquidity. The following table sets forth the calculation of FFO:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, 2000 September 30, 2000
------------------ ------------------
<S> <C> <C>
Net loss $ (92,903) $(270,160)
Depreciation of real estate and amortization
of intangible assets 264,805 742,595
Minority interest (216,771) (630,372)
--------- ---------
FFO available to common shareholders $ (44,869) $(157,937)
</TABLE>
Inflation
---------
Liberty does not believe that inflation has had or will have a direct or adverse
effect on its operations. Substantially all of the leases at the facilities
allow for monthly rent increases, which provide Liberty with the opportunity to
achieve increases in rental income as each lease matures.
Forward-Looking Statements
--------------------------
Statements that are not historical facts, including statements about Liberty's
confidence in its prospects and strategies and its expectations about growth,
are forward-looking statements that involve risks and uncertainties. These risks
and uncertainties include, but are not limited to:
- Liberty's continued tax status as a REIT,
- the failure to successfully implement Liberty's
business plans,
- the failure to successfully integrate into Liberty
recently acquired properties, including the
Springfield Mini Storage, the Painesville facility,
and the recently acquired land in Cleveland, Ohio and
Westlake, Ohio where Liberty is building new
self-storage facilities,
- the failure to obtain additional equity,
- changes in general economic conditions,
- changes in local real estate conditions,
- the inability to generate sufficient revenues to meet
operating expenses, and
- the failure to manage growth effectively.
Any investor or potential investor in Liberty must consider these
risks and others that are detailed in other filings by Liberty with the
Securities and Exchange Commission, including Liberty's Registration Statement
on Form S-4 and Form 10-KSB for the year ended December 31, 1999. These risks
and others could cause actual results to differ materially from those in the
forward-looking statements.
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Election for REIT Status
------------------------
Meridian previously elected to be taxed as a REIT pursuant to Section
856(c)(1) of the Code and Liberty intends to be taxed as a REIT under the Code
for the fiscal year ending December 31, 2000. The REIT provisions of the Code
generally allow a REIT to deduct dividends paid to stockholders in computing
Liberty's taxable income. No provisions for federal or state income taxes have
been made in the accompanying Statement of Operations.
To qualify for REIT status, Liberty must meet a number of highly
technical organizational and operations requirements on a continuing basis.
Those requirements seek to ensure, among other things, that the gross income and
investments of a REIT are largely real estate related, with other permitted
assets, that a REIT distributes substantially all its ordinary taxable income to
shareholders on a current basis and that the REIT's ownership is not overly
concentrated. Due to the complex nature of these rules, the limited available
guidance concerning interpretation of the rules, the importance of ongoing
factual determinations and the possibility of adverse changes in or
interpretations of the law, administrative interpretations of the law and
developments at Liberty, no assurance can be given regarding Liberty's
qualification as a REIT for any particular year. If Liberty failed to qualify as
a REIT, distributions to stockholders would no longer be required. In addition,
distributions originally treated as capital gain distributions could be
re-characterized as ordinary dividend distributions to shareholders. Moreover,
Liberty might not be able to elect to be treated as a REIT for the four taxable
years after the year during which Liberty or Meridian ceased to qualify as a
REIT. If Liberty later re-qualified as a REIT, it might be required to pay a
full corporate-level tax on any unrealized gain associated with its assets as of
the date of re-qualification and to make distributions equal to any earnings
accumulated during the period of non-REIT status.
PART II
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which Liberty is a party or
to which any of its assets are subject.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
27.1 Financial Data Schedule
(b) Reports on Form 8-K: None
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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.
Liberty Self-Stor, Inc.
Date: November 13, 2000 By: /s/ Richard M. Osborne
---------------------------------------
Richard M. Osborne
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: November 13, 2000 By: /s/ Sherry L. Kirchenbauer
---------------------------------------
Sherry L. Kirchenbauer,
Chief Financial Officer and Assistant
Secretary (Principal Financial and
Accounting Officer)
24
