<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
Amendment No. 1
Current Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) JUNE 30, 1995
-----------------------------
STORAGE EQUITIES, 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
----------------
N/A
---
(Former name or former address, if changed since last report)
1
<PAGE>
ITEM 5. OTHER EVENTS.
------------
a. Proposed Merger and Restructure
-------------------------------
Storage Equities, Inc. (the "Company") has entered into an Agreement and
Plan of Reorganization by and among Public Storage, Inc., Public Storage
Management, Inc. and the Company, dated as of June 30, 1995 (the "Agreement and
Plan of Reorganization"). The Agreement and Plan of Reorganization and the
related Agreement of Merger are filed as Exhibit 2 hereto and are incorporated
herein by this reference.
2
<PAGE>
<TABLE>
<CAPTION>
Pages
References
----------
<S> <C>
b. Historical and Pro Forma Financial Statements
---------------------------------------------
Operating Companies to be Acquired
----------------------------------
Report of independent auditors 4
Combined Statements of Assets, Liabilities and Deficit
at December 31, 1994, 1993 and June 30, 1995 5
For the years ended December 31, 1994, 1993, 1992 and the
six months ended June 30, 1995 and 1994:
Combined Statements of Operations 6
Combined Statements of Cash Flows 7
Notes to Financial Statements 8
Real Estate Interests to be Acquired
------------------------------------
Report of independent auditors 12
Combined Summaries of Historical Information Relating to Real
Estate Interests to be Acquired for the years ended
December 31, 1994, 1993, 1992 and six months ended
June 30, 1995 and 1994 13
Notes to Combined Summaries of Historical Information relating to
Real Estate Interests to be Acquired 14
Pro Forma Consolidated Financial Statements 16
c. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations 46
-------------------------
</TABLE>
3
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Stockholder
Public Storage, Inc.
We have audited the accompanying combined statements of assets, liabilities
and deficit of the property management and advisory businesses of Public
Storage, Inc. (Operating Companies to be Acquired) 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 to be
Acquired 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 Storage Equities, Inc.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Operating Companies to be
Acquired at December 31, 1994 and 1993, and the results of its 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
July 10, 1995
4
<PAGE>
OPERATING COMPANIES TO BE ACQUIRED
COMBINED STATEMENTS OF ASSETS, LIABILITIES AND DEFICIT
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
AS OF --------------------
JUNE 30,1995 1994 1993
------------ -------- --------
(unaudited)
<S> <C> <C> <C>
Assets:
Cash (substantially restricted) $ 1,204 $ 1,388 $ 1,498
Receivables from affiliates 2,642 3,033 2,751
Other assets 88 202 559
-------- -------- --------
Total assets $ 3,934 $ 4,623 $ 4,808
======== ======== ========
Liabilities
Accounts payable $ 555 $ 1,167 $ 1,281
Interest payable 508 527 561
Senior Secured Notes due 2003
(net of $329, $359 and $519 of
issuance costs at June 30,
1995, December 31, 1994 and
1993, respectively) 67,671 70,141 74,481
-------- -------- --------
Total liabilities 68,734 71,835 76,323
-------- -------- --------
Deficit (64,800) (67,212) (71,515)
-------- -------- --------
Total liabilities and deficit $ 3,934 $ 4,623 $ 4,808
======== ======== ========
</TABLE>
See Accompanying notes.
5
<PAGE>
OPERATING COMPANIES TO BE ACQUIRED
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30 YEARS ENDED DECEMBER 31,
------------------ -----------------------------
1995 1994 1994 1993 1992
------- ------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues
Facility management fees,
primarily from affiliates $14,787 $13,620 $28,356 $26,012 $24,162
Advisory fee from affiliate 3,426 2,356 4,983 3,619 2,612
Merchandise operations 1,013 907 1,872 1,564 1,263
Interest income 61 55 199 2 31
------- ------- ------- ------- -------
Total revenues 19,287 16,938 35,410 31,197 28,068
------- ------- ------- ------- -------
Expenses
Cost of managing facilities 2,582 2,840 5,431 5,615 5,839
Cost of advisory services and
administrative expenses 1,090 817 1,850 1,410 975
Cost of merchandise 501 435 866 800 689
Interest expense 2,509 2,668 5,255 567 7,181
------- ------- ------- ------- -------
Total expenses 6,682 6,760 13,402 8,392 14,684
------- ------- ------- ------- -------
Excess of revenues over
expenses before
extraordinary item 12,605 10,178 22,008 22,805 13,384
Extraordinary items
Gain on retirement of debt - - - 14,440 3,311
------- ------- ------- ------- -------
Excess of revenues over
expenses $12,605 $10,178 $22,008 $37,245 $16,695
======= ======= ======= ======= =======
</TABLE>
See Accompanying notes.
6
<PAGE>
OPERATING COMPANIES TO BE ACQUIRED
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30 YEARS ENDED DECEMBER 31,
-------------------- --------------------------------
1995 1994 1994 1993 1992
-------- ------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Excess of revenues over expenses $ 12,605 $10,178 $ 22,008 $ 37,245 $ 16,695
Adjustments to reconcile excess of
revenues over expenses to net cash
provided by operating activities:
Depreciation and amortization 55 279 522 71 1,495
Gain on retirement of debt - - - (14,440) (3,311)
Changes in working capital components (151) (59) (435) 8 (386)
-------- ------- -------- -------- --------
Total adjustments (96) 220 87 (14,361) (2,202)
-------- ------- -------- -------- --------
Net cash provided by operating activities 12,509 10,398 22,095 22,884 14,493
-------- ------- -------- -------- --------
Cash flows from financing activities:
Repurchase of debt - - - (42,905) (6,143)
Issuance of Senior Secured Notes, net of
issuance costs - - - 74,475 -
Principal payments on Senior Secured Notes (2,500) (2,250) (4,500) - -
Net distributions to affiliates (10,193) (4,292) (17,705) (53,277) (8,082)
-------- ------- -------- -------- --------
Net cash used in financing activities (12,693) (6,542) (22,205) (21,707) (14,225)
-------- ------- -------- -------- --------
Net increase (decrease) in cash (184) 3,856 (110) 1,177 268
Cash at beginning of period
(including restricted cash) 1,388 1,498 1,498 321 53
-------- ------- -------- -------- --------
Cash at end of period (including
restricted cash) $ 1,204 $ 5,354 $ 1,388 $ 1,498 $ 321
======== ======= ======== ======== ========
Supplemental disclosure:
Interest paid $ 2,498 $ 2,570 $ 5,129 $ 1,168 $ 5,962
======== ======= ======== ======== ========
Restricted cash $ 576 $ 1,008 $ - $ 1,111 $ -
======== ======= ======== ======== ========
</TABLE>
See Accompanying notes.
7
<PAGE>
OPERATING COMPANIES TO BE ACQUIRED
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"). PSMI, PSCP and Adviser are
subsidiaries of Public Storage, Inc. ("PSI"). Under an Agreement and Plan
of Reorganization dated June 30, 1995, the Operating Companies, along with
real estate assets owned by PSI (other than its interest in Storage
Equities, Inc.) ("Real Estate Interests"), would be acquired by Storage
Equities, Inc. ("SEI"), a California corporation organized as a real estate
investment trust (the "Merger").
The accompanying financial statements have been prepared from the books and
records of the Operating Companies and present the assets, liabilities and
deficit of the Operating Companies as of December 31, 1994 and 1993 and
June 30, 1995, and the related revenues and expenses for the years ended
December 31, 1994, 1993, 1992 and the six months ended June 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 operated as a stand-alone entity. Information
subsequent to December 31, 1994 is unaudited.
PSMI operated and managed, at June 30, 1995, pursuant to property
management agreements, 1,074 self-storage mini-warehouses, including 1,014
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 June 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.
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. Depreciation and amortization. Depreciation expense represents
depreciation on equipment and is provided on a straight-line basis
over the estimated useful life of three years. Amortization expense
represents amortization of debt issuance costs and is provided on the
effective interest method over the life of the debt.
8
<PAGE>
4. 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.
5. Income taxes. The financial statements exclude the effects of income
taxes since they reflect a partial presentation (after allocated
costs).
6. Deficit. Deficit 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. 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, $1.0 million and $0.6 million are
included in cash as of December 31, 1993, June 30, 1994 and 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:
<TABLE>
<S> <C>
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
===========
</TABLE>
D. 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, $14,019,000 and $12,866,000 were earned on properties in which
PSI and SEI have an interest for the years ended December 31, 1994, 1993,
1992 and for the six months ended June 30, 1995 and 1994, respectively. The
management agreements, except as noted below, are cancelable by either
party upon sixty days notice.
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.
9
<PAGE>
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.
E. 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 provides 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 provides
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.
The Adviser is not entitled to its advisory fee with respect to services
rendered during any quarter in which full cumulative dividends on SEI's
senior preferred stock have not been paid or declared and funds therefor
set aside for payment.
The Adviser is also entitled to a disposition fee equal to 20% of the total
net realized gain (as defined) from the disposition of SEI's investments.
Payment of the disposition fees is subject to limitations based on SEI's
distributions.
The advisory contract may be terminated at any time by either party upon
sixty days written notice. Except under certain conditions, upon
termination, the Adviser generally will be entitled to receive (i) an
amount equal to the accrued and unpaid portion of the disposition fee, (ii)
an amount equal to 20% of the total net unrealized gain (as defined), less
20% of unrealized losses (as defined) and (iii) an amount equal to 15% of
adjusted income (as defined) from October 1, 1991 to the date of
termination minus the advisory fee paid from October 1, 1991 to the date of
termination.
The Adviser pays the salaries and expenses of the executive officers, the
acquisition staff of SEI and other corporate overhead, including rent.
10
<PAGE>
F. 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, $336,000 and $356,000 is included in the
Statements of Operations for the years ended December 31, 1994, 1993, and
1992 and the six months ended June 30, 1995 and 1994, respectively, related
to these leases.
Minimum lease payments due under these leases as of December 31, 1994 are:
<TABLE>
<S> <C>
1995 $841,000
1996 397,000
1997 129,000
1998 107,000
1999 5,000
</TABLE>
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 Deficit.
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
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Stockholder
Public Storage, Inc.
We have audited the accompanying combined summaries of historical information
relating to real estate interests to be acquired (the "Combined Summaries")
for each of the three years in the period ended December 31, 1994. The
Combined Summaries are the responsibility of management. Our responsibility
is to express an opinion on the Combined Summaries 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 Combined Summaries are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the Combined Summaries. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall Combined
Summaries presentation. We believe that our audits provide a reasonable basis
for our opinion.
The accompanying Combined Summaries were prepared for the purpose of complying
with rule 3-14 of Regulation S-X of the Securities and Exchange Commission for
inclusion in a Form 8-K of Storage Equities, Inc.
In our opinion, the Combined Summaries present fairly the operating revenues
and specified expenses of the real estate interests to be acquired 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
July 10, 1995
12
<PAGE>
COMBINED SUMMARIES OF HISTORICAL INFORMATION RELATING TO
REAL ESTATE INTERESTS TO BE ACQUIRED
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
-------------------- --------------------------------
1995 1994 1994 1993 1992
-------- -------- -------- -------- --------
(UNAUDITED)
--------------------
<S> <C> <C> <C> <C> <C>
Operating revenues:
Rental revenues $126,230 $118,899 $244,165 $221,938 $198,917
Interest income 1,424 1,823 3,719 4,602 5,986
-------- -------- -------- -------- --------
127,654 120,722 247,884 226,540 204,903
-------- -------- -------- -------- --------
Specified expenses:
Cost of operations 38,211 37,450 75,566 73,111 70,801
Management fees paid to affiliates 7,472 7,181 14,592 13,226 11,825
Depreciation 21,052 21,031 41,982 42,808 43,556
General and administrative 2,748 2,759 5,904 6,135 7,830
Interest expense 5,088 5,023 9,981 10,860 11,038
-------- -------- -------- -------- --------
74,571 73,444 148,025 146,140 145,050
-------- -------- -------- -------- --------
Excess of operating revenues
over specified expenses: $ 53,083 $ 47,278 $ 99,859 $ 80,400 $ 59,853
======== ======== ======== ======== ========
REAL ESTATE INTERESTS BEING ACQUIRED:
Excess of operating revenues
over specified expenses: $ 12,601 $ 11,120 $ 23,697 $ 18,773 $ 14,283
======== ======== ======== ======== ========
</TABLE>
See Accompanying notes.
13
<PAGE>
NOTES TO COMBINED SUMMARIES OF HISTORICAL INFORMATION
RELATING TO REAL ESTATE INTERESTS TO BE ACQUIRED
A. Background and Basis for Combination
The accompanying Combined Summaries of Historical Information Relating to
Real Estate Interests to be Acquired (the "Combined Summaries") include the
results of operations for the years ended December 31, 1994, 1993, and 1992
and the six months ended June 30, 1995 for the real estate assets in which
Storage Equities, Inc. ("SEI") proposes to acquire an interest ("Real
Estate Interests").
Under an Agreement and Plan of Reorganization dated June 30, 1995, the Real
Estate Interests, along with the Operating Companies of Public Storage,
Inc. (PSI), would be acquired by SEI.
B. Real Estate Interests
SEI is acquiring Real Estate Interests comprised of Real Estate Equity
Interests and ten notes receivable. Real Estate Equity Interests include
equity ownership in sixty-three REITs and partnerships which own 511 mini-
warehouse and 15 commercial facilities, all operated under the "Public
Storage" name.
Specifically, the Real Estate Equity Interests consists of:
. Class A, B, C and D shares of finite life REITs. These shares represent
between 15% and 30% of the economic interest in each entity;
. General and limited partner interests, on average, representing
approximately 25% of the economic interest in each entity; and
. Seven properties, consisting of six mini-warehouses and one business
park in which a 100% fee interest is being acquired.
Depreciation expense represents depreciation on the assets of the Real
Estate Equity Interests in which an interest is being acquired and is
typically provided on a straight line basis over the estimated useful life
of twenty five years.
The sixty-three REITs and partnerships in which SEI is acquiring an
interest have the following assets, liabilities, owner's equity and income
for the years ended December 31, 1994, 1993 and 1992 and the six months
ended June 30, 1995:
<TABLE>
<CAPTION>
Six Months
Ended June Years ended December 31,
30, 1995 ------------------------------------
(unaudited) 1994 1993 1992
----------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Assets $1,248,071 $1,273,297 $1,312,289 $1,342,144
Liabilities 138,288 130,206 131,435 133,267
--------------------------------------------------
Owners' equity $1,109,783 $1,143,091 $1,180,854 $1,208,877
==================================================
Net income $ 52,023 $ 97,774 $ 78,635 $ 58,022
==================================================
</TABLE>
14
<PAGE>
C. Mortgage loans
Included in the Real Estate Interests are ten notes receivable 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 Summaries 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. Debt
SEI will assume approximately $4,807,000 (as of December 31, 1994) in debt
consisting 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:
<TABLE>
<S> <C>
1995 $ 213,000
1996 231,000
1997 1,038,000
1998 2,633,000
1999 561,000
Thereafter 131,000
----------
$4,807,000
==========
</TABLE>
E. Environmental Matters
The majority of the Real Estate Equity Interests were developed or acquired
prior to the time it was customary to conduct environmental assessments.
However, subsequent to their development or acquisition, many of the
properties have had environmental assessments completed. These assessments
did not indicate the requirement for significant remediation or further
assessments.
15
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated financial statements
were prepared to reflect the Merger transaction between SEI and PSMI. As a
condition to closing the Merger, the SEI Articles of Incorporation must be
amended to increase the number of authorized shares of, and reclassify, the
outstanding SEI Common Stock into Common Stock and Class B Common Stock. Prior
to the Merger, PSCP, the Adviser and Real Estate Interests will be combined
into PSMI. Upon consummation of the Merger, (i) PSMI will be merged with and
into SEI, which will be the surviving corporation, (ii) SEI will be renamed
"Public Storage, Inc.," and (iii) the capital stock of PSMI will be converted
into an aggregate of 30,000,000 shares of Common Stock and 7,000,000 shares of
Class B Common Stock, subject to post closing adjustment.
Immediately following the Merger, SEI will own 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 and one commercial property, (5) equity interests in 16 REITs
which, exclusive of SEI's facilities, own an aggregate of 219 mini-warehouses
and 13 commercial properties, (6) property management contracts, exclusive of
SEI's facilities, for 604 mini-warehouses and 26 commercial properties (563 of
which collectively are owned by entities affiliated with PSI), and (7) a 95%
economic interest in a merchandise company which currently sells locks and
boxes to PSI's mini-warehouse tenants and others.
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, SEI 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, SEI 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, SEI 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, SEI 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, SEI 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, SEI 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 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, SEI 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.
16
<PAGE>
MERGERS:
. On September 30, 1994, SEI completed a merger transaction with Public
Storage Properties VIII, Inc. ("PSP VIII") whereby SEI 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 SEI
Common Stock and $17,341,000 in cash.
. On February 28, 1995, SEI 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 SEI
Common Stock and $21,427,000 in cash.
. On June 30, 1995, SEI completed a merger transaction with Public
Storage Properties VII, Inc. ("PSP VII") whereby SEI 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 SEI Common Stock and $14,007,000 in cash.
The pro forma consolidated balance sheet at June 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 six months
ended June 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 consolidated statement of cash flows for the six
months ended June 30, 1995 and year ended December 31, 1994 have been prepared
on the same basis as the pro forma consolidated statement of income for the
same period.
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 SEI 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 SEI, the combined financial statements
of the "Operating Companies," and the combined summaries of historical
information relating to the operating revenues and specified expenses of "Real
Estate Interests." The following pro forma consolidated financial statements
do not purport to represent what SEI'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 SEI's results of operations for any future
date or period.
17
<PAGE>
INDEX TO PRO FORMA FINANCIAL INFORMATION
<TABLE>
<S> <C>
. Pro forma consolidated balance sheet at June 30, 1995................ 19
. Pro forma consolidated statements of income:
. For the six months ended June 30, 1995........................... 24
. For the year ended December 31, 1994............................. 25
. Pro forma consolidated statements of cash flows:
. For the six months ended June 30, 1995........................... 37
. For the year ended December 31, 1994............................. 38
</TABLE>
18
<PAGE>
STORAGE EQUITIES, INC.
CONSOLIDATED PRO FORMA BALANCE SHEET
JUNE 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
SEI PRE-MERGER
--------------------------------------------------
PRO FORMA
ADJUSTMENTS
FOR THE SEI OPERATING PRO FORMA SEI
ASSETS SEI ISSUANCE OF PRE-MERGER COMPANIES MERGER POST-MERGER
(HISTORICAL) EQUITY (1) (PRO FORMA) (HISTORICAL) ADJUSTMENTS(2) (PRO FORMA)
-------------- ------------ -------------- ------------ -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 89,759,000 $(84,673,000) $ 5,086,000 $ 1,204,000 $ - $ 6,290,000
Investments in real
estate entities 13,923,000 6,692,000 20,615,000 - 365,000,000 385,615,000
Real estate facilities,
net of accumulated
depreciation 994,006,000 130,361,000 1,124,367,000 - 19,943,000 1,144,310,000
Mortgage loans
receivable, primarily
from affiliates 14,352,000 (14,352,000) - - 7,987,000 7,987,000
Intangible assets - - - - 235,045,000 235,045,000
Other assets 4,817,000 - 4,817,000 2,730,000 - 7,547,000
-------------- ------------ -------------- ------------ ------------ --------------
Total assets $1,116,857,000 $ 38,028,000 $1,154,885,000 $ 3,934,000 $627,975,000 $1,786,794,000
============== ============ ============== ============ ============ ==============
LIABILITIES AND
SHAREHOLDERS' EQUITY
Note payable to banks $ - $ - $ - $ - $ - $ -
Senior Notes - - - 67,671,000 329,000 68,000,000
Mortgage notes payable 58,497,000 44,716,000 103,213,000 - 4,706,000 107,919,000
-------------- ------------ -------------- ------------ ------------ --------------
Total debt 58,497,000 44,716,000 103,213,000 67,671,000 5,035,000 175,919,000
Accrued and other
liabilities 34,160,000 - 34,160,000 1,063,000 2,000,000 37,223,000
Minority interest 131,536,000 (6,688,000) 124,848,000 - - 124,848,000
Shareholders' equity:
Preferred Stock, $.01 par
value, 50,000,000 shares
authorized:
Senior Preferred Stock 277,650,000 - 277,650,000 - - 277,650,000
Convertible Preferred
Stock 57,500,000 - 57,500,000 - - 57,500,000
Common stock, $.10 par
value, 60,000,000
shares authorized
42,042,616 shares issued
and outstanding
(79,042,616 pro forma
shares issued and
outstanding)
Common Stock (72,042,616
issued and outstanding) 4,205,000 - 4,205,000 - 3,000,000 7,205,000
Class B (7,000,000
issued and outstanding) - - - - 700,000 700,000
Paid-in capital 561,985,000 - 561,985,000 - 552,440,000 1,114,425,000
Cumulative net income 202,236,000 - 202,236,000 - - 202,236,000
Cumulative distribution
paid (210,912,000) - (210,912,000) - - (210,912,000)
Deficit - - - (64,800,000) 64,800,000 -
-------------- ------------ -------------- ------------ ------------ --------------
Total shareholders'
equity 892,664,000 - 892,664,000 (64,800,000) 620,940,000 1,448,804,000
-------------- ------------ -------------- ------------ ------------ --------------
Total liabilities
and shareholders'
equity $1,116,857,000 $ 38,028,000 $1,154,885,000 $ 3,934,000 $627,975,000 $1,786,794,000
============== ============ ============== ============ ============ ==============
Book Value per share of
Common Stock $ 13.26 $ 13.26 $ 15.46
============== ============== ==============
</TABLE>
See Accompanying Notes to Pro Forma Consolidated Balance Sheet.
19
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
June 30, 1995
(Unaudited)
1. Issuance of Common Stock
------------------------
On May 31, 1995, SEI issued 5,482,200 shares of its Common Stock raising
net offering proceeds of approximately $82.0 million. As of June 30, 1995,
SEI had not utilized substantially all of the net offering proceeds;
however, utilization of the proceeds therefrom is expected as follows:
<TABLE>
<S> <C>
Net offering proceeds:
Common Stock......................................................... $82,068,000
Less: Utilization of net offering proceeds as of June 30, 1995...... (4,209,000)
-----------
Remaining net offering proceeds at June 30, 1995.................. $77,859,000
===========
Uses:
Cash portion of real estate facilities pending
acquisition as of June 30, 1995 (see below)........................ $71,293,000
Acquisition of limited partnership units of unconsolidated
real estate entities (consisting of units in affiliated
partnerships which are not part of the Real Estate
Interests to be acquired).......................................... 6,692,000
Acquisition of minority interests (see below)........................ 6,688,000
Use of cash reserves................................................. (6,814,000)
-----------
$77,859,000
===========
</TABLE>
The following pro forma adjustments were made to reflect the above transactions:
<TABLE>
<S> <C>
. Investment in real estate entities has been increased to reflect the cost of
the acquired limited partnership units in ten partnerships affiliated with
SEI (these acquisitions were completed on August 31, 1995)...................... $ 6,692,000
. Real estate facilities were increased to reflect the acquisition of
mini-warehouse facilities
Cash portion of acquisition cost.............................................. $ 71,293,000
Cancellation of mortgage notes receivable secured by acquired
mini-warehouses facilities.................................................. 14,352,000
Assumption of mortgage notes payable secured by acquired
mini-warehouse facilities................................................... 44,716,000
------------
$130,361,000
============
</TABLE>
The pro forma adjustment to real estate facilities includes the pending
acquisition of 11 mini-warehouse facilities and two business parks with an
aggregate cost of approximately $44.2 million which have not been completed
as of August 31, 1995. These real estate facilities are owned by six 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 SEI and the assumption of mortgage debt secured by the
facilities. There is no assurance that such transactions
20
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
June 30, 1995
(Unaudited)
will be approved by the limited partners of each of the partnerships and
therefore consummated; however, SEI believes, based on past experience, that
the approval of the limited partners is probable.
<TABLE>
<S> <C>
. Mortgage notes receivable were decreased to reflect the cancellation of
notes in connection with the acquisition of mini-warehouse facilities
securing such notes............................................................ $(14,352,000)
============
. Mortgage notes payable were increased to reflect the assumption of
such notes in connection with the acquisition of mini-warehouse
facilities..................................................................... $ 44,716,000
============
. Minority interest was decreased to reflect the acquisition of such
interests...................................................................... $ (6,688,000)
============
</TABLE>
In July and August 1995, SEI completed cash tender offers to acquire limited
partnership units in PS Partners VI, Ltd., a limited partnership in which SEI
currently owns significant interests in and whose accounts are consolidated
with SEI. Pursuant to these tender offers, SEI acquired in aggregate $6.7
million of limited partnership units in the partnership. The acquisition of
units has the effect of reducing minority interest.
2. Merger Pro Forma Adjustments
----------------------------
The Merger will be 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. Upon completion of the Merger, the outstanding shares of PSMI
capital stock will be 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, and SEI will be renamed "Public Storage, Inc."
Immediately following the Merger, SEI will own 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 and one
commercial property, (5) equity interests in 16 REITs which, exclusive of
SEI's facilities, own an aggregate of 219 mini-warehouses and 13 commercial
properties, (6) property management contracts, exclusive of SEI's
facilities, for 652 mini-warehouses and 29 commercial properties (611 of
which collectively are owned by entities affiliated with PSI), and (7) a
95% economic interest in a merchandise company which currently sells locks
and boxes to PSI's mini-warehouse tenants and others.
21
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
June 30, 1995
(Unaudited)
SEI 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 is as follows:
<TABLE>
<S> <C>
Purchase cost:
-------------
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".................................................... $235,045,000
Fair value of net assets acquired from the "Operating Companies"
Cash........................................................................................................ 1,204,000
Other assets................................................................................................ 2,730,000
Senior note payable (face amount of note at June 30, 1995).................................................. (68,000,000)
Accrued and other liabilities............................................................................... (1,063,000)
------------
Total fair value of net assets of the "Operating Companies"............................................... 169,916,000
------------
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..................................................... (545,000)
Fair value of all-inclusive trust deeds:
Mortgage notes receivable.................................................................................... 7,987,000
Mortgage notes payable....................................................................................... (4,161,000)
------------
Total fair value of the net assets of the "Real Estate Interests"......................................... 388,224,000
------------
$558,140,000
============
</TABLE>
----------
(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.
22
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1995
(UNAUDITED)
The following pro forma adjustments have been made to reflect the Merger as of
June 30, 1995:
. 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.................................................. $365,000,000
============
. Real estate facilities has been increased to reflect the
fair value of the seven properties to be acquired in the
Merger......................................................... $ 19,943,000
============
. Mortgage loans receivable has been increased to reflect the
fair value of the all-inclusive trust deeds to be acquired
in the Merger.................................................. $ 7,987,000
============
. Intangible assets have been increased to reflect intangible
assets relating to the "Operating Companies"................... $235,045,000
============
. Secured notes has been adjusted by an amount to reflect the
face amount of the secured note at June 30, 1995............... $ 329,000
============
. Mortgage notes payable has been increased to reflect the
mortgage notes secured by all-inclusive trust deeds and
properties to be acquired in the Merger........................ $ 4,706,000
============
. 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
============
. Deficit has been eliminated to reflect the acquisition
of the net assets of the "Operating Companies"................. $ 64,800,000
============
23
<PAGE>
STORAGE EQUITIES, INC.
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
SEI
-----------------------------------------------------
PRO FORMA ADJUSTMENTS
-----------------------
ISSUANCE OF
PREFERRED & SEI
SEI COMMON REIT PRE-MERGER
(HISTORICAL) STOCK(1) MERGERS(2) (PRO FORMA)
------------ ----------- ---------- ------------
<S> <C> <C> <C> <C>
REVENUES:
Rental Income $88,068,000 $12,542,000 $8,465,000 $109,075,000
Facility management fees - - - -
Advisory fee income - - - -
Merchandise operations - - - -
Equity in earnings of
real estate entities - 383,000 - 383,000
Interest and other Income 3,042,000 (988,000) 25,000 2,079,000
----------- ----------- ---------- ------------
91,110,000 11,937,000 8,490,000 111,537,000
----------- ----------- ---------- ------------
EXPENSES:
Cost of operations 32,342,000 4,217,000 3,489,000 40,048,000
Cost of managing facilities - - - -
Cost of merchandise - - - -
Depreciation and
amortization 16,926,000 2,567,000 1,254,000 20,747,000
General and administrative 1,736,000 - 149,000 1,885,000
Advisory fee 3,426,000 397,000 213,000 4,036,000
Interest expense 3,214,000 957,000 1,017,000 5,188,000
----------- ----------- ---------- ------------
57,644,000 8,138,000 6,122,000 71,904,000
----------- ----------- ---------- ------------
Income before minority
interest in income and
gain on disposition of
real estate 33,466,000 3,799,000 2,368,000 39,633,000
Minority interest in
income (3,715,000) 145,000 - (3,570,000)
----------- ----------- ---------- ------------
Net Income $29,751,000 $ 3,944,000 $2,368,000 $ 36,063,000
=========== =========== ========== ============
Net income allocable to
preferred shareholders $13,308,000 $ 2,342,000 $ - $ 15,650,000
Net income allocable to
Class B Shareholders - - - -
Net income allocable to
Common Stock shareholders 16,443,000 1,602,000 2,368,000 20,413,000
----------- ----------- ---------- ------------
Net Income $29,751,000 $ 3,944,000 $2,368,000 $ 36,063,000
=========== =========== ========== ============
PER SHARE OF COMMON STOCK:
Net Income $ 0.50(3) $ 0.48(3)
=========== ============
Weighted Average Shares 32,707,556(3) 42,108,048(3)
=========== ============
RATIO OF EARNINGS TO
COMBINED FIXED CHARGES
AND PREFERRED STOCK
DIVIDENDS (7) 2.08 2.04
=========== ============
<CAPTION>
PSMI
--------------------------------------------------------------
COMBINED
OPERATING REAL ESTATE PSMI
COMPANIES INTERESTS PRO FORMA OPERATIONS
(HISTORICAL) (HISTORICAL)(4) ADJUSTMENTS(4) (PRO FORMA)
----------- --------------- -------------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Rental Income $ - $ - $ 1,637,000 $ 1,637,000
Facility management fees 14,787,000 - 87,000 14,874,000
Advisory fee income 3,426,000 - 610,000 4,036,000
Merchandise operations 1,013,000 - - 1,013,000
Equity in earnings of
real estate entities - 12,601,000 (1,060,000) 11,541,000
Interest and other Income 61,000 - 398,000 459,000
----------- ----------- ----------- -----------
19,287,000 12,601,000 1,672,000 33,560,000
----------- ----------- ----------- -----------
EXPENSES:
Cost of operations - - 548,000 548,000
Cost of managing facilities 2,582,000 - (170,000) 2,412,000
Cost of merchandise 501,000 - - 501,000
Depreciation and
amortization - - 247,000 247,000
General and administrative 1,090,000 - (228,000) 862,000
Advisory fee - - - -
Interest expense 2,509,000 - 180,000 2,689,000
----------- ----------- ----------- -----------
6,682,000 - 577,000 7,259,000
----------- ----------- ----------- -----------
Income before minority
interest in income and
gain on disposition of
real estate 12,605,000 12,601,000 1,095,000 26,301,000
Minority interest in
income - - - -
----------- ----------- ----------- -----------
Net Income $12,605,000 $12,601,000 $ 1,095,000 $26,301,000
=========== =========== =========== ===========
Net income allocable to
preferred shareholders $ - $ - $ - $ -
Net income allocable to
Class B Shareholders - - - -
Net income allocable to
Common Stock shareholders 12,605,000 12,601,000 1,095,000 26,301,000
----------- ----------- ----------- -----------
Net Income $12,605,000 $12,601,000 $ 1,095,000 $26,301,000
=========== =========== =========== ===========
PER SHARE OF COMMON STOCK:
Net Income
Weighted Average Shares
RATIO OF EARNINGS TO
COMBINED FIXED CHARGES
AND PREFERRED STOCK
DIVIDENDS (7)
<CAPTION>
PRO FORMA SEI
MERGER POST-MERGER
ADJUSTMENTS(5) (PRO FORMA)
-------------- ------------
<S> <C> <C>
REVENUES:
Rental Income $ - $110,712,000
Facility management fees (6,307,000) 8,567,000
Advisory fee income (4,036,000) -
Merchandise operations - 1,013,000
Equity in earnings of
real estate entities (6,109,000) 5,815,000
Interest and other Income - 2,538,000
------------ ------------
(16,452,000) 128,645,000
------------ ------------
EXPENSES:
Cost of operations (6,307,000) 34,289,000
Cost of managing facilities - 2,412,000
Cost of merchandise - 501,000
Depreciation and
amortization 2,938,000 23,932,000
General and administrative - 2,747,000
Advisory fee (4,036,000) -
Interest expense - 7,877,000
------------ ------------
(7,405,000) 71,758,000
------------ ------------
Income before minority
interest in income and
gain on disposition
of real estate (9,047,000) 56,887,000
Minority interest in
income - (3,570,000)
------------ ------------
Net income $ (9,047,000) $ 53,317,000
============ ============
Net income allocable to
preferred shareholders $ - $ 15,650,000
Net income allocable to
Class B Shareholders - -
Net income allocable to
Common Stock shareholders (9,047,000) 37,667,000
------------ ------------
Net Income $ (9,047,000) $ 53,317,000
============ ============
PER SHARE OF COMMON STOCK:
Net Income $ 0.52(6)
============
Weighted Average Shares 72,108,048(6)
============
RATIO OF EARNINGS TO
COMBINED FIXED CHARGES
AND PREFERRED STOCK
DIVIDENDS (7) 2.66
============
</TABLE>
See Accompanying Notes to Pro Forma Consolidated Statements of Income.
24
<PAGE>
STORAGE EQUITIES, INC.
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
SEI
---------------------------------------------------------------------
PRO FORMA ADJUSTMENTS
------------------------------
ISSUANCE
OF PREFERRED & SEI
SEI COMMON REIT PRE-MERGER
(HISTORICAL) STOCK(1) MERGERS(2) (PRO FORMA)
------------ -------------- ----------- ------------
<S> <C> <C> <C> <C>
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 - 748,000 - 748,000
estate entities
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)
============ ============
RATIO OF EARNINGS TO
COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDENDS (7) 2.22 1.93
============ ============
<CAPTION>
PSMI
-----------------------------------------------------------------
COMBINED
OPERATING REAL ESTATE PSMI
COMPANIES INTERESTS PRO FORMA OPERATIONS
(HISTORICAL) (HISTORICAL)(4) ADJUSTMENTS(4) (PRO FORMA)
------------ --------------- ------------- ------------
<S> <C> <C> <C> <C>
REVENUES:
Rental Income $ - $ - $ 3,152,000 $ 3,152,000
Facility management fees 28,356,000 - 576,000 28,932,000
Advisory fee income 4,983,000 - 2,493,000 7,476,000
Merchandise operations 1,872,000 - - 1,872,000
Equity in earnings of real
estate entities - 23,697,000 (2,085,000) 21,612,000
Interest and other Income 199,000 - 797,000 996,000
----------- ----------- ----------- -----------
35,410,000 23,697,000 4,933,000 64,040,000
----------- ----------- ----------- -----------
EXPENSES:
Cost of operations - - 1,023,000 1,023,000
Cost of managing facilities 5,431,000 - (529,000) 4,902,000
Cost of merchandise 866,000 - - 866,000
Depreciation and amortization - - 489,000 489,000
General and administrative 1,850,000 - (255,000) 1,595,000
Advisory fee - - - -
Interest expense 5,255,000 - 352,000 5,607,000
----------- ----------- ----------- -----------
13,402,000 - 1,080,000 14,482,000
----------- ----------- ----------- -----------
Income before minority
interest in income and
gain on disposition of
real estate 22,008,000 23,697,000 3,853,000 49,558,000
Minority interest in income - - - -
----------- ----------- ----------- -----------
22,008,000 23,697,000 3,853,000 49,558,000
Gain on disposition of real
estate - - - -
----------- ----------- ----------- -----------
Net Income $22,008,000 $23,697,000 $ 3,853,000 $49,558,000
=========== =========== =========== ===========
Net income allocable to
preferred shareholders $ - $ - $ - $ -
Net income allocable to
Class B Shareholders - - - -
Net income allocable to
Common Stock shareholders 22,008,000 23,697,000 3,853,000 49,558,000
----------- ----------- ----------- -----------
Net Income $22,008,000 $23,697,000 $ 3,853,000 $49,558,000
=========== =========== =========== ===========
PER SHARE OF COMMON STOCK:
Net Income
Weighted Average Shares
RATIO OF EARNINGS TO
COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDENDS (7)
<CAPTION>
PRO FORMA SEI
MERGER POST-MERGER
ADJUSTMENTS(5) (PRO FORMA)
-------------- ------------
<S> <C> <C>
REVENUES:
Rental Income $ - $218,370,000
Facility management fees (12,937,000) 15,995,000
Advisory fee income (7,476,000) -
Merchandise operations - 1,872,000
Equity in earnings of real
estate entities (12,217,000) 10,143,000
Interest and other Income - 2,250,000
------------ ------------
(32,630,000) 248,630,000
------------ ------------
EXPENSES:
Cost of operations (12,937,000) 67,655,000
Cost of managing facilities - 4,902,000
Cost of merchandise - 866,000
Depreciation and amortization 5,876,000 47,336,000
General and administrative - 4,659,000
Advisory fee (7,476,000) -
Interest expense - 16,350,000
------------ ------------
(14,537,000) 141,768,000
------------ ------------
Income before minority
interest in income and
gain on disposition of
real estate (18,093,000) 106,862,000
Minority interest in income - (6,918,000)
------------ ------------
(18,093,000) 99,944,000
Gain on disposition of real
estate - 203,000
------------ ------------
Net Income $(18,093,000) $100,147,000
============ ============
Net income allocable to
preferred shareholders $ - $ 31,206,000
Net income allocable to
Class B Shareholders - -
Net income allocable to
Common Stock shareholders (18,093,000) 68,941,000
------------ ------------
Net Income $(18,093,000) $100,147,000
============ ============
PER SHARE OF COMMON STOCK:
Net Income $ 0.96(6)
Weighted Average Shares ============
71,844,644(6)
============
RATIO OF EARNINGS TO
COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDENDS (7) 2.48
============
</TABLE>
See Accompanying Notes to Pro Forma Consolidated Statement of Income.
25
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
For the Six Months Ended June 30, 1995 and Year Ended December 31, 1994
(Unaudited)
1. Issuance of preferred and Common Stock
--------------------------------------
During 1994 and 1995, SEI issued shares of both its preferred and Common
Stock as follows:
. On February 15, 1994, SEI 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, SEI 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, SEI 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, SEI 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 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 Note 2 below).
. On February 1, 1995, SEI 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, SEI issued 2,300,000 shares of Series F Preferred Stock.
The aggregate net offering proceeds ($55.5 million) were used 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 VI merger).
. On May 31, 1995, SEI 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
SEI'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 will be utilized to acquire
additional real estate facilities and minority interests. Currently
pending, are the acquisition of 11 mini-warehouse facilities and two
business parks with an aggregate acquisition cost of $44.2 million,
consisting of the cancellation of $7.9 million of mortgage notes
receivable, the assumption of $11.9 million of mortgage notes payable,
and cash totaling $24.4 million.
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:
26
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
For the Six Months Ended June 30, 1995 and Year Ended December 31, 1994
(Unaudited)
<TABLE>
<CAPTION>
YEAR
SIX MONTHS ENDED
ENDED DECEMBER 31,
JUNE 30, 1995 1994
------------- -----------
<S> <C> <C>
. 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............................ $12,542,000 $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 SEI's
cancellation of mortgage notes
receivable, in connection with the
acquisition of the above
properties, from which SEI
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 $67,000 in 1995
and $693,000 in 1994).................. $ (988,000) $(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............................ $ 4,217,000 $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............ $ 2,567,000 $ 7,917,000
=========== ===========
</TABLE>
27
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
For the Six Months Ended June 30, 1995 and Year Ended December 31, 1994
(Unaudited)
<TABLE>
<CAPTION>
YEAR
SIX MONTHS ENDED
ENDED DECEMBER 31,
JUNE 30, 1995 1994
------------- ------------
<S> <C> <C>
. 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........................... 2,254,000 4,801,000
SEI 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 SEI
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.................. $ 957,000 $(1,135,000)
=========== ===========
. Minority interest in income has
been decreased due to the
acquisition of such minority
interests by SEI........................ $ 145,000 $ 2,563,000
=========== ===========
. Advisory fees have been
increased to reflect the effect of
the above adjustments................... $ 397,000 $ 1,794,000
=========== ===========
</TABLE>
28
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
For the Six Months Ended June 30, 1995 and Year Ended December 31, 1994
(Unaudited)
2. REIT Mergers
------------
During 1994 and 1995, SEI 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:
<TABLE>
<CAPTION>
YEAR
SIX MONTHS ENDED
ENDED DECEMBER 31,
JUNE 30, 1995 1994
------------- ------------
<S> <C> <C>
. 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 SEI 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
========== ===========
</TABLE>
29
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
For the Six Months Ended June 30, 1995 and Year Ended December 31, 1994
(Unaudited)
<TABLE>
<CAPTION>
YEAR
SIX MONTHS ENDED
ENDED DECEMBER 31,
JUNE 30, 1995 1994
------------- ------------
<S> <C> <C>
. 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 SEI 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 SEI'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 SEI's Common Stock.......................... $ 213,000 $ 699,000
========== ==========
</TABLE>
30
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
For the Six Months Ended June 30, 1995 and Year Ended December 31, 1994
(Unaudited)
3. Net income per share of Common Stock has been computed as follows:
-----------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR
SIX MONTHS ENDED
ENDED DECEMBER 31,
JUNE 30, 1995 1994
------------- ------------
<S> <C> <C>
Historical net income.................................. $ 29,751,000 $ 42,118,000
Less: Historical preferred stock dividends............. (13,308,000) (16,846,000)
------------ ------------
Income applicable to Common Stock shareholders......... $ 16,443,000 $ 25,272,000
============ ============
Historical weighted average shares of Common Stock..... 32,707,556 24,077,055
============ ============
Historical net income per share of Common Stock........ $ 0.50 $ 1.05
============ ============
Pro forma net income................................... $ 36,063,000 $ 68,682,000
Less: Pro forma preferred stock dividends(1)........... (15,650,000) (31,206,000)
------------ ------------
Income applicable to Common Stock shareholders......... $ 20,413,000 $ 37,476,000
============ ============
Pro forma weighted average shares of Common Stock(2)... 42,108,048 41,844,644
============ ============
Pro forma net income per share of Common Stock......... $ 0.48 $ 0.90
============ ============
</TABLE>
(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
$390,000 higher for the six months ended June 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
$0.03 per common for the year ended December 31, 1994 ($0.01 for the six
months ended June 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.
31
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
For the Six Months Ended June 30, 1995 and Year Ended December 31, 1994
(Unaudited)
4. Pro forma adjustments to the historical "Operating Companies" and "Real
-----------------------------------------------------------------------
Estate Interests":
------------------
The historical operations of the "Real Estate Interests" included in the
pro forma financial statements represents PSMI's equity interest in the
combined operations of such assets (based on the equity method of
accounting) as derived from the "Combined Summaries of Historical
Information Relating to Operating Revenues and Specified Expenses - Real
Estate Interests."
Included in these Combined Summaries financial statements are (i) the
operating results of the seven real estate facilities in which SEI will be
acquiring a fee simple interest pursuant to the Merger and (ii) all-
inclusive trust deeds. The following pro forma adjustments have been made
to reflect the operating results (i.e. rental income and operating
expenses) and the related interest income and expense with respect to the
all-inclusive deeds of trust and mortgage notes payable, the net amounts of
which are included in "Equity in earnings of real estate entities" in the
column titled "Real Estate Interests":
<TABLE>
<CAPTION>
YEAR
SIX MONTHS ENDED
ENDED DECEMBER 31,
JUNE 30, 1995 1994
------------- ------------
<S> <C> <C>
. A pro forma adjustment has been
made to reflect the historical
rental income.......................... $ 1,637,000 $ 3,152,000
=========== ===========
. A pro forma adjustment has been
made to reflect the historical
interest income related to the
acquired all-inclusive deeds of
trust (mortgage notes receivable)...... $ 398,000 $ 797,000
=========== ===========
. A pro forma adjustment has been
made to reflect the historical
cost of operations..................... $ 548,000 $ 1,023,000
=========== ===========
. A pro forma adjustment has been
made to reflect the historical
depreciation and amortization.......... $ 247,000 $ 489,000
=========== ===========
. A pro forma adjustment has been
made to interest expense to
reflect:
the historical interest expense
related to the mortgage notes
payable secured by the real estate
facilities (which will be assumed
by SEI pursuant to the Merger)....... $ 21,000 $ 31,000
the historical interest expense
related to the mortgage notes
payable secured by all-inclusive
deeds of trust....................... 159,000 321,000
----------- -----------
Total adjustment to interest
expense........................... $ 180,000 $ 352,000
=========== ===========
. A pro forma adjustment has been
made to adjust the historical
Equity in earnings of real estate
entities to eliminate the net
property operations included in
the "Real Estate Interests" for
the above property operating
adjustments............................ $(1,060,000) $(2,085,000)
=========== ===========
</TABLE>
32
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
For the Six Months Ended June 30, 1995 and Year Ended December 31, 1994
(Unaudited)
In addition, 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 SEI 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."
<TABLE>
<CAPTION>
YEAR
SIX MONTHS ENDED
ENDED DECEMBER 31,
JUNE 30, 1995 1994
------------- ------------
<S> <C> <C>
. 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 SEI during 1995 and
1994..................................... $ 87,000 $ 576,000
========= ==========
. A pro forma adjustment has been
made to the Advisory fee income to
reflect the adjustments (Notes 1
and 2) to SEI's advisory fee
expense in connection with the
issuance of Preferred and Common
Stock, the REIT Mergers, and
SEI's increased operating income......... $ 610,000 $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) $ (529,000)
========= ==========
. A pro forma adjustment has been
made to General and administrative
expense to eliminate certain
non-recurring costs and expenses......... $(228,000) $ (255,000)
========= ==========
</TABLE>
33
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
For the Six Months Ended June 30, 1995 and Year Ended December 31, 1994
(Unaudited)
5. Pro forma Merger adjustments:
----------------------------
<TABLE>
<CAPTION>
YEAR
SIX MONTHS ENDED
ENDED DECEMBER 31,
JUNE 30, 1995 1994
------------- ---------------
<S> <C> <C>
. The "Operating Companies" have
included in Facility management
fee income fees paid by SEI for
the management of its real estate
facilities (likewise, SEI 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 SEI
will acquire an interest in
pursuant to the acquisition of the
Real Estate Interests):
Facility management fee income........ $(6,307,000) $(12,937,000)
=========== ============
Cost of operations.................... $(6,307,000) $(12,937,000)
=========== ============
As a result of the Merger,
Advisory fee income and expense
will no longer occur.
Accordingly, a pro forma
adjustment has been made to each:
Advisory fee income................... $(4,036,000) $ (7,476,000)
========== ============
Advisory fee (expense)................ $(4,036,000) $ (7,476,000)
=========== ============
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. SEI
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........ $(6,109,000) $(12,217,000)
=========== ============
. A pro forma adjustment has been
made to increase depreciation and
amortization to reflect the
amortization of the Intangible
assets ($235.0 million) over a 40
year life. See Note 3 to the Pro
Forma Consolidated Balance Sheet......... $ 2,938,000 $ 5,876,000
=========== ============
</TABLE>
34
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
For the Six Months Ended June 30, 1995 and Year Ended December 31, 1994
(Unaudited)
6. Pro forma net income per share of Common Stock has been computed as
-------------------------------------------------------------------
follows:
--------
<TABLE>
<CAPTION>
YEAR
SIX MONTHS ENDED
ENDED DECEMBER 31,
JUNE 30, 1995 1994
------------- ------------
<S> <C> <C>
Pro forma net income.......................................... $ 53,317,000 $100,147,000
Less: Pro forma preferred stock dividends..................... (15,650,000) (31,206,000)
------------ ------------
Income allocable to common shareholders....................... 37,667,000 68,941,000
Less: Pro forma income allocable to Class B shareholders (1).. - -
------------ ------------
Income allocable to Common Stock shareholders................. $ 37,667,000 $ 68,941,000
============ ============
Pro forma weighted average shares of Common Stock (2)......... 72,108,048 71,844,644
============ ============
Pro forma net income per share of Common Stock................ $ 0.52 $ .96
============ ============
</TABLE>
(1) The Class B Common Stock is (i) not entitled to participate in
distributions until the later to occur of FFO per Common Share reaching
$1.80 (during any period of four consecutive quarters) or the expiration of
four years after the Closing; thereafter, the Class B Common Stock will
participate in distributions (other than liquidating distribution) at the
rate of 97% of the per share distributions on the Common Stock provided
that cumulative distributions at the rate of at least $.22 per quarter per
share have been paid on the Common Stock, (ii) not entitled to liquidating
distributions, (iii) not be entitled to vote (except as expressly required
by California law) and (iv) automatically convertible into Common Stock, on
a share for share basis, upon the later to occur of FFO per Common Share
reaching $3.00 per share for any period of four consecutive quarters or the
expiration of seven years after the Closing. The inclusion of the Class B
Common Stock in the determination of earnings per share has been determined
to be anti-dilutive (after giving effect to the pro forma additional income
required to satisfy the above contingencies, and accordingly, the
conversion of Class B Common Stock into Common Stock has not been assumed.
For these purposes, FFO means net income (loss) (computed in accordance
with generally accepted accounting principles before (i) gain (loss) on
early extinguishment of debt, (ii) minority interest in income and (iii)
gain (loss) on disposition of real estate, adjusted as follows: (i) plus
depreciation and amortization (including SEI's pro rata share of
depreciation and amortization from unconsolidated equity interests and
amortization of assets acquired in the Merger), and (ii) less FFO
attributable to minority interest. FFO per Common Share means FFO less
preferred stock dividends (other than dividends on convertible preferred
stock) divided by the outstanding weighted average shares of Common Stock
assuming conversion of all outstanding convertible securities and the Class
B Common Stock.
(2) As adjusted to give effect to the issuance of 30,000,000 additional
shares of Common Stock in connection with the Merger.
35
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
For the Six Months Ended June 30, 1995 and Year Ended December 31, 1994
(Unaudited)
7. For purposes of these computations, earnings consists of net income before
minority interest in income, loss on early extinguishment of debt and gain
on disposition of real estate plus fixed charges (other than preferred
stock dividends) and less the portion of minority interest in income for
those consolidated minority interests which had no fixed charges during the
period. Fixed charges and preferred stock dividends consist of interest
expense and the dividend requirements of SEI's Series A, Series B, Series
C, Series D, Series E, Series F and Convertible Preferred Stock.
36
<PAGE>
STORAGE EQUITIES, INC.
PRO FORMA CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
SEI
-------------------------------------------------------------------
PRO FORMA ADJUSTMENTS
-----------------------------
ISSUANCE OF
PREFERRED & SEI
SEI COMMON REIT PRE-MERGER
(HISTORICAL) STOCK(1) MERGERS(2) (PRO FORMA)
------------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net Income $ 29,751,000 $ 3,944,000 $ 2,368,000 $ 36,063,000
Depreciation and
amortization 16,859,000 2,634,000 1,254,000 20,747,000
Minority Interest in income 3,715,000 (145,000) - 3,570,000
Less: Equity in earnings of
real estate entities - - - -
Distributions from real
estate entities - - - -
Other (851,000) - (61,000) (912,000)
------------- ------------ ----------- -------------
Total adjustments 19,723,000 2,489,000 1,193,000 23,405,000
------------- ------------ ----------- -------------
Cash provided by operating
activities 49,474,000 6,433,000 3,561,000 59,468,000
------------- ------------ ----------- -------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Principal payments on
mortgage notes receivable 311,000 (311,000) - -
Acquisition of minority
interest (10,735,000) - - (10,735,000)
Acquisition of real estate
facilities (61,980,000) - - (61,980,000)
Construction in process (3,400,000) - - (3,400,000)
Purchase cost of the mergers (21,427,000) - - (21,427,000)
Capital expenditures (3,306,000) (522,000) (157,000) (3,985,000)
Other (1,031,000) - - (1,031,000)
------------- ------------ ----------- -------------
Cash (used in) provided by
investing activities (101,568,000) (833,000) (157,000) (102,558,000)
------------- ------------ ----------- -------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Principal payments on bank
debt (25,447,000) (8,636,000) (917,000) (35,000,000)
Principal payments on
senior notes - - - -
Proceeds from the issuance
of Common Stock 80,340,000 - - 80,340,000
Proceeds from the issuance
of Preferred Stock 108,377,000 - - 108,377,000
Principal payments on
mortgage debt (5,418,000) (411,000) - (5,829,000)
Distributions to
shareholders (28,194,000) (3,548,000) (2,240,000) (33,982,000)
Distributions to affiliates - - - -
Distribution to minority
interests (9,107,000) 386,000 - (8,721,000)
Reinvestment by minority
interests 1,151,000 (103,000) - 1,048,000
------------- ------------ ----------- -------------
Cash provided by (used in)
financing activities 121,702,000 (12,312,000) (3,157,000) 106,233,000
------------- ------------ ----------- -------------
Net increase (decrease) in
cash and cash equivalents 69,608,000 (6,712,000) 247,000 63,143,000
Cash and cash equivalents at
the beginning of the period 20,151,000 - 4,374,000 24,525,000
------------- ------------ ----------- -------------
Cash and cash equivalents
at the end of the period $ 89,759,000 $ (6,712,000) $ 4,621,000 $ 87,668,000
============= ============ =========== =============
FUNDS FROM OPERATIONS(5) $ 41,218,000 $ 51,659,000
============= =============
<CAPTION>
PSMI
------------------------------------------------------------------
COMBINED
OPERATING REAL ESTATE PSMI
COMPANIES INTERESTS PRO FORMA OPERATIONS
(HISTORICAL) (HISTORICAL)(3) ADJUSTMENTS(3) (PRO FORMA)
------------ --------------- -------------- ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net Income $ 12,605,000 $ 12,601,000 $ 1,095,000 $ 26,301,000
Depreciation and
amortization 55,000 - 247,000 302,000
Minority Interest in income - - - -
Less: Equity in earnings of
real estate entities - (12,601,000) 1,060,000 (11,541,000)
Distributions from real
estate entities - 6,642,000 (1,307,000) 5,335,000
Other (151,000) - - (151,000)
------------ ------------ ----------- ------------
Total adjustments (96,000) (5,959,000) - (6,055,000)
------------ ------------ ----------- ------------
Cash provided by operating
activities 12,509,000 6,642,000 1,095,000 20,246,000
------------ ------------ ----------- ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Principal payments on
mortgage notes receivable - - 155,000 155,000
Acquisition of minority
interest - - - -
Acquisition of real estate
facilities - - - -
Construction in process - - - -
Purchase cost of the mergers - - - -
Capital expenditures - - (8,000) (8,000)
Other - - - -
------------ ------------ ----------- ------------
Cash (used in) provided by
investing activities - - 147,000 147,000
------------ ------------ ----------- ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Principal payments on bank
debt - - - -
Principal payments on
senior notes (2,500,000) (2,500,000)
Proceeds from the issuance
of Common Stock - - - -
Proceeds from the issuance
of Preferred Stock - - - -
Principal payments on
mortgage debt - - (101,000) (101,000)
Distributions to
shareholders - - - -
Distributions to affiliates (10,193,000) - - (10,193,000)
Distribution to minority
interests - - - -
Reinvestment by minority
interests - - - -
------------ ------------ ----------- ------------
Cash provided by (used in)
financing activities (12,693,000) - (101,000) (12,794,000)
------------ ------------ ----------- ------------
Net increase (decrease) in
cash and cash equivalents (184,000) 6,642,000 1,141,000 7,599,000
Cash and cash equivalents at
the beginning of the period 1,388,000 - - 1,388,000
------------ ------------ ----------- ------------
Cash and cash equivalents
at the end of the period $ 1,204,000 $ 6,642,000 $ 1,141,000 $ 8,987,000
============ ============ =========== ===========
FUNDS FROM OPERATIONS(5)
<CAPTION>
PRO FORMA SEI
MERGER POST-MERGER
ADJUSTMENTS(4) (PRO FORMA)
-------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net Income $ (9,047,000) $ 53,317,000
Depreciation and
amortization 2,938,000 23,987,000
Minority Interest in income - 3,570,000
Less: Equity in earnings of
real estate entities 6,109,000 (5,432,000)
Distributions from real
estate entities - 5,335,000
Other - (1,063,000)
------------ -------------
Total adjustments 9,047,000 26,397,000
------------ -------------
Cash provided by operating
activities - 79,714,000
------------ -------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Principal payments on
mortgage notes receivable - 155,000
Acquisition of minority
interest - (10,735,000)
Acquisition of real estate
facilities - (61,980,000)
Construction in process - (3,400,000)
Purchase cost of the mergers - (21,427,000)
Capital expenditures - (3,993,000)
Other - (1,031,000)
------------ -------------
Cash (used in) provided by
investing activities - (102,411,000)
------------ -------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Principal payments on bank
debt - (35,000,000)
Principal payments on
senior notes (2,500,000)
Proceeds from the issuance
of Common Stock - 80,340,000
Proceeds from the issuance
of Preferred Stock - 108,377,000
Principal payments on
mortgage debt - (5,930,000)
Distributions to shareholders (13,200,000) (47,182,000)
Distributions to affiliates 10,193,000 -
Distribution to minority
interests - (8,721,000)
Reinvestment by minority
interests - 1,048,000
------------ -------------
Cash provided by (used in)
financing activities (3,007,000) 90,432,000
------------ -------------
Net increase (decrease) in
cash and cash equivalents (3,007,000) 67,735,000
Cash and cash equivalents at
the beginning of the period - 25,913,000
------------ -------------
Cash and cash equivalents
at the end of the period $ (3,007,000) $ 93,648,000
============ =============
FUNDS FROM OPERATIONS(5) $ 82,792,000
=============
</TABLE>
See Accompanying Notes to Pro Forma Consolidated Statement of Cash Flows.
37
<PAGE>
STORAGE EQUITIES, INC.
PRO FORMA CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
SEI
----------------------------------------------------------------------
PRO FORMA ADJUSTMENTS
-------------------------------
ISSUANCE
OF PREFERRED SEI
SEI & COMMON REIT PRE-MERGER
(HISTORICAL) STOCK(1) MERGERS (2) (PRO FORMA)
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 42,118,000 $ 18,482,000 $ 8,082,000 $ 68,682,000
Depreciation and
amortization 27,581,000 8,610,000 4,780,000 40,971,000
Minority interest in income 9,481,000 (2,563,000) - 6,918,000
Less: Equity interest
in earnings of real
estate entities - - - -
Distributions from real
estate entities - - - -
Gain on disposition of real
estate - - (203,000) (203,000)
Other 3,654,000 - (1,069,000) 2,585,000
------------- ------------- ------------ -------------
Total adjustments 40,716,000 6,047,000 3,508,000 50,271,000
------------- ------------- ------------ -------------
Cash provided by operating
activities 82,834,000 24,529,000 11,590,000 118,953,000
------------- ------------- ------------ -------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Principal payments on
mortgage notes receivable 6,785,000 (1,387,000) - 5,398,000
Investment in real estate
partnerships (78,000) (6,692,000) - (6,770,000)
Acquisition of mortgage
notes receivable (4,020,000) - - (4,020,000)
Acquisition of minority
interests (51,711,000) (14,695,000) - (66,406,000)
Acquisition of real estate
facilities (93,026,000) (133,903,000) - (226,929,000)
Proceeds from insurance
settlement 1,666,000 - 800,000 2,466,000
Purchase cost of the mergers (20,972,000) - (35,435,000) (56,407,000)
Capital expenditures (8,312,000) (1,631,000) (2,331,000) (12,274,000)
------------- ------------- ------------ -------------
Cash (used in) provided by
investing activities (169,668,000) (158,308,000) (36,966,000) (364,942,000)
------------- ------------- ------------ -------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Principal payments on bank
debt (10,323,000) (22,995,000) 33,318,000 -
Proceeds from the issuance
of Common Stock 110,280,000 80,340,000 - 190,620,000
Proceeds from the issuance
of Preferred Stock 57,899,000 108,377,000 - 166,276,000
Principal payments on
mortgage debt (8,233,000) (1,479,000) - (9,712,000)
Distributions to
shareholders (38,095,000) (20,440,000) (7,299,000) (65,834,000)
Distributions to affiliates - - - -
Distribution to minority
interests (23,037,000) 5,468,000 - (17,569,000)
Reinvestment by minority
interests 7,962,000 (1,936,000) - 6,026,000
------------- ------------- ------------ -------------
Cash provided by (used in)
financing activities 96,453,000 147,335,000 26,019,000 269,807,000
------------- ------------- ------------ -------------
Net increase (decrease) in
cash and cash equivalents 9,619,000 13,556,000 643,000 23,818,000
Cash and cash equivalents
at the beginning of the
year 10,532,000 - 4,687,000 15,219,000
------------- ------------- ------------ -------------
Cash and cash equivalents
at the end of the year $ 20,151,000 $ 13,556,000 $ 5,330,000 $ 39,037,000
============= ============= ============ =============
FUNDS FROM OPERATIONS (5) $ 56,143,000 $ 98,799,000
============= =============
<CAPTION>
PSMI
------------------------------------------------------------------
COMBINED
OPERATING REAL ESTATE PRO FORMA PSMI
COMPANIES INTERESTS ADJUSTMENTS OPERATIONS
(HISTORICAL) (HISTORICAL)(3) (3) (PRO FORMA)
------------ --------------- ----------- ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 22,008,000 $ 23,697,000 $ 3,853,000 $ 49,558,000
Depreciation and
amortization 522,000 - 127,000 649,000
Minority interest in income - - - -
Less: Equity interest
in earnings of real
estate entities - (23,697,000) 2,085,000 (21,612,000)
Distributions from real
estate entities - 12,602,000 (2,574,000) 10,028,000
Gain on disposition of real
estate - - - -
Other (435,000) - - (435,000)
------------ ------------ ----------- ------------
Total adjustments 87,000 (11,095,000) (362,000) (11,370,000)
------------ ------------ ----------- ------------
Cash provided by operating
activities 22,095,000 12,602,000 3,491,000 38,188,000
------------ ------------ ----------- ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Principal payments on
mortgage notes receivable - - 292,000 292,000
Investment in real estate
partnerships - - - -
Acquisition of mortgage
notes receivable - - - -
Acquisition of minority
interests - - - -
Acquisition of real estate
facilities - - - -
Proceeds from insurance
settlement - - - -
Purchase cost of the mergers - - - -
Capital expenditures - - (44,000) (44,000)
------------ ------------ ----------- ------------
Cash (used in) provided by
investing activities - - 248,000 248,000
------------ ------------ ----------- ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Principal payments on bank
debt - - - -
Proceeds from the issuance
of Common Stock - - - -
Proceeds from the issuance
of Preferred Stock - - - -
Principal payments on
mortgage debt (4,500,000) - (208,000) (4,708,000)
Distributions to
shareholders - - - -
Distributions to affiliates (17,705,000) - - (17,705,000)
Distribution to minority
interests - - - -
Reinvestment by minority
interests - - - -
------------ ------------ ----------- ------------
Cash provided by (used in)
financing activities (22,205,000) - (208,000) (22,413,000)
------------ ------------ ----------- ------------
Net increase (decrease) in
cash and cash equivalents (110,000) 12,602,000 3,531,000 16,023,000
Cash and cash equivalents
at the beginning of the
year 1,498,000 - - 1,498,000
------------ ------------ ----------- ------------
Cash and cash equivalents
at the end of the year $ 1,388,000 $ 12,602,000 $ 3,531,000 $ 17,521,000
============ ============ =========== ============
FUNDS FROM OPERATIONS (5)
<CAPTION>
PRO FORMA SEI
MERGER POST-MERGER
ADJUSTMENTS(4) (PRO FORMA)
-------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $(18,093,000) $ 100,147,000
Depreciation and
amortization 5,876,000 47,496,000
Minority interest in income - 6,918,000
Less: Equity interest
in earnings of real
estate entities 12,217,000 (9,395,000)
Distributions from real
estate entities - 10,028,000
Gain on disposition of real
estate - (203,000)
Other - 2,150,000
------------ -------------
Total adjustments 18,093,000 56,994,000
------------ -------------
Cash provided by operating
activities - 157,141,000
------------ -------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Principal payments on
mortgage notes receivable - 5,690,000
Investment in real estate
partnerships - (6,770,000)
Acquisition of mortgage
notes receivable - (4,020,000)
Acquisition of minority
interests - (66,406,000)
Acquisition of real estate
facilities - (226,929,000)
Proceeds from insurance
settlement - 2,466,000
Purchase cost of the mergers (2,000,000) (58,407,000)
Capital expenditures - (12,318,000)
------------ -------------
Cash (used in) provided by
investing activities (2,000,000) (366,694,000)
------------ -------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Principal payments on bank
debt - -
Proceeds from the issuance
of Common Stock - 190,620,000
Proceeds from the issuance
of Preferred Stock - 166,276,000
Principal payments on
mortgage debt - (14,420,000)
Distributions to
shareholders (25,500,000) (91,334,000)
Distributions to affiliates 17,705,000 -
Distribution to minority
interests - (17,569,000)
Reinvestment by minority
interests - 6,026,000
------------ -------------
Cash provided by (used in)
financing activities (7,795,000) 239,599,000
------------ -------------
Net increase (decrease) in
cash and cash equivalents (9,795,000) 30,046,000
Cash and cash equivalents
at the beginning of the
year - 16,717,000
------------ -------------
Cash and cash equivalents
at the end of the year $ (9,795,000) $ 46,763,000
============ =============
FUNDS FROM OPERATIONS (5) $ 158,016,000
=============
</TABLE>
See Accompanying Notes to Pro Forma Consolidated Statement of Cash Flows.
38
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1995 and Year Ended December 31, 1994
(Unaudited)
1. Issuance of Preferred and Common Stock
--------------------------------------
During 1994 and 1995, SEI issued shares of both its preferred and Common
Stock (See Note 1 to the Pro Forma Consolidated Statements of Income).
Pro forma adjustments have been made to the pro forma consolidated
statements of income to reflect the uses of the proceeds as if the
transactions were completed at the beginning of the year ended December 31,
1994. Similarly, the following pro forma adjustments were made to reflect
the effect on net cash provided by operating activities:
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED DECEMBER 31,
JUNE 30, 1995 1994
------------- -------------
<S> <C> <C>
"Net income" was adjusted to reflect
the overall effect of the above
offerings and the use of the net
proceeds therefrom on the pro forma
consolidated net income................ $ 3,944,000 $ 18,482,000
=========== =============
"Depreciation and amortization" has
been increased to reflect the
incremental difference between the
actual depreciation expense included
in the historical statements of
operations and the pro forma
depreciation expense as if the
facilities were in operation for a
full period (including a pro forma
adjustment for the amortization of
mortgage note receivable discounts
totaling $67,000 and $693,000 in 1995
and 1994, respectively - See Note 1 to
the Pro Forma Consolidated Statements
of Income)............................. $ 2,634,000 $ 8,610,000
=========== =============
"Minority interest in income" has been
adjusted to reflect similar
adjustments to the pro forma
consolidated statements of income...... $ (145,000) $ (2,563,000)
=========== =============
The following pro forma adjustments
have been made to cash flows from
investing and financing activities:
"Principal payments on mortgage
notes receivable" was decreased to
reflect the elimination of
historical payments relating to the
canceled mortgage notes (which were
canceled in connection with the
acquisition of real estate
facilities)......................... $ (311,000) $ (1,387,000)
=========== =============
"Investment in real estate entities
has been increased to reflect the
acquisition of limited partnership
units in unconsolidated affiliated
partnerships........................ $ - $ (6,692,000)
=========== =============
"Acquisitions of minority interests
in real estate partnerships" was
increased to reflect the
acquisitions of such interests,
which occurred subsequent to the
period.............................. $ - $ (14,695,000)
=========== =============
"Acquisitions of real estate
facilities" was increased to
reflect the acquisitions of real
estate facilities, which occurred
subsequent to the period............ $ - $(133,903,000)
=========== =============
"Capital improvements to real estate
facilities" was increased to
reflect the estimated additional
capital improvements which would
have been incurred during the
period for the acquired real estate
facilities.......................... $ (522,000) $ (1,631,000)
=========== =============
</TABLE>
39
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1995 and Year Ended December 31, 1994
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED DECEMBER 31,
JUNE 30, 1995 1994
------------- -------------
<S> <C> <C>
"Net proceeds (pay downs) from note
payable to bank" has been adjusted
to reflect the pro forma use of the
offering proceeds to pay down the
historical borrowings on SEI's
credit facilities during the year
ended December 31, 1994............. $ - $ (22,995,000)
=========== =============
"Net proceeds from the issuance of
Common Stock" was increased to
reflect the net proceeds from the
issuance of Common Stock on May
31, 1995, which occurred
subsequent to the period............ $ - $ 80,340,000
=========== =============
"Net proceeds from the issuance of
preferred stock" was increased to
reflect the net proceeds from the
issuance of Series E and Series F
Preferred Stock, which occurred
subsequent to the period............ $ - $ 108,377,000
=========== =============
"Principal payments on bank debt"
has been decreased to reflect
additional principal payments
with the use of the net proceeds
of the issuance of Preferred and
Common Stock........................ $(8,636,000) $ -
=========== =============
"Principal payments on mortgage
notes payable" was increased to
reflect the payments which would
have been made during the period
with respect to the mortgage notes
payable which were assumed in
connection with the acquisition of
real estate facilities.............. $ (411,000) $ (1,479,000)
=========== =============
"Distributions paid to shareholders"
has been increased to reflect the
additional distributions which
would have been paid to the holders
of the Common Stock, Series C,
Series D, Series E and Series F
Preferred Stock issued during 1994
and 1995, as if the common and
preferred stock were outstanding
for the entire period............... $(3,548,000) $ (20,440,000)
=========== =============
"Distributions from operations to
minority interest in real estate
partnerships" has been adjusted
to reflect the reduction in
distributions to minority interests
which would have resulted in
connection with the acquisition of
minority interests by SEI, assuming
SEI had completed such acquisitions
at the beginning of the period...... $ 386,000 $ 5,468,000
=========== =============
"Reinvestment by minority interests
into real estate partnerships" has
been adjusted to reflect the
reduction which would have
resulted in connection with the
acquisition of minority interests
by SEI, assuming SEI had completed
such acquisitions at the beginning
of the period....................... $ (103,000) $ (1,936,000)
=========== =============
</TABLE>
40
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1995 and Year Ended December 31, 1994
(Unaudited)
2. REIT Mergers
------------
During 1994 and 1995, SEI completed the REIT Mergers. 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 to reflect the effect on net cash provided by operating activities:
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED DECEMBER 31,
JUNE 30, 1995 1994
------------- -------------
<S> <C> <C>
An adjustment has been made to reflect
the pro forma increase in net income
as a result of the PSP REIT merger
transaction............................ $2,368,000 $ 8,082,000
========== ============
An adjustment has been made to reflect
the pro forma increase in depreciation
as a result of the PSP REIT merger
transaction............................ $1,254,000 $ 4,780,000
========== ============
An adjustment has been made to reflect
the historical gain on disposition of
real estate of the PSP REITs........... $ - $ (203,000)
========== ============
A pro forma adjustment has been made to
reflect the PSP REITs' historical net
change in other assets and liabilities
during the period...................... $ (61,000) $ (1,069,000)
========== ============
In addition, pro forma adjustments were
made to cash flows from investing and
financing activities as follows:
A pro forma adjustment has been made to
reflect the PSP REITs' historical
proceeds from insurance settlements.... $ - $ 800,000
========== ============
"Purchase cost of mergers" has been
adjusted to reflect the cash portion
of the purchase price, including costs
and expense ($21.4 million for PSP VI
and $14.0 million for PSP VII)......... $ - $(35,435,000)
========== ============
A pro forma adjustment has been made to
reflect the PSP REITs' historical
capital improvements................... $ (157,000) $ (2,331,000)
========== ============
Net proceeds (pay downs) from note
payable to bank has been adjusted to
reflect:
. the historical activity of
the PSP REITs................... $ (917,000) $ -
. the pro forma borrowings to
consummate the REIT Mergers..... - 33,318,000
---------- ------------
$ (917,000) $ 33,318,000
========== ============
</TABLE>
41
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1995 and Year Ended December 31, 1994
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED DECEMBER 31,
JUNE 30, 1995 1994
------------- -------------
<S> <C> <C>
Distributions paid to shareholders has
been increased to reflect the pro
forma distributions which would have
been paid as a result of each of the
REIT Mergers (assuming the historical
distribution rate of $.44 and $.85 per
share of Common Stock for the Six
months ended June 30, 1995 and year
ended December 31, 1994):
PSP VIII:
--------
. Historical distributions
prior to merging with SEI....... $ - $ (2,949,000)
. Pro forma adjustment to
eliminate historical
distribution prior to merging
with SEI........................ - 2,949,000
. Pro forma distributions assuming
merger occurred at the beginning
of fiscal 1994 based on
2,593,914 shares issued in the
merger........................... (571,000) (2,205,000)
. Less amounts included in the SEI
historical distributions........ 571,000 571,000
------------ ------------
Pro forma adjustment for PSP
VIII........................ - (1,634,000)
------------ ------------
PSP VI:
------
. Historical distributions
prior to merging with SEI....... (1,221,000) (4,886,000)
. Pro forma adjustment to
eliminate historical
distribution prior to merging
with SEI........................ 1,221,000 4,886,000
. Pro forma distributions
assuming merger occurred at
the beginning of fiscal 1994
based on 3,147,015 shares
issued in the merger............ (1,385,000) (2,675,000)
. Less amounts included in the
SEI historical distributions.... 693,000 -
------------ ------------
Pro forma adjustment for
PSP VI...................... (692,000) (2,675,000)
------------ ------------
PSP VII:
-------
. Historical distributions
prior to merging with SEI....... (2,132,000) (4,271,000)
. Pro forma adjustment to
eliminate historical
distribution prior to merging
with SEI........................ 2,132,000 4,271,000
. Pro forma distributions
assuming merger occurred at
the beginning of fiscal 1994
based on 3,517,272 shares
issued in the merger............ (1,548,000) (2,990,000)
. Less amounts included in the
SEI historical distributions.... - -
------------ ------------
Pro forma adjustment for
PSP VII..................... (1,548,000) (2,990,000)
------------ ------------
Total pro forma adjustment..... $(2,240,000) $ (7,299,000)
============ ============
</TABLE>
42
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1995 and Year Ended December 31, 1994
(Unaudited)
3. Pro forma adjustments to the historical "Operating Companies" and "Real
-----------------------------------------------------------------------
Estate Interests":
------------------
The following pro forma adjustments have been made to the Pro Forma
Consolidated Statements of Cash Flows corresponding to the adjustments made
to the respective Pro Forma Consolidated Statements of Income (See Note 4
to the Pro Forma Consolidated Statements of Income).
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED DECEMBER 31,
JUNE 30, 1995 1994
------------- -------------
<S> <C> <C>
An adjustment has been made to reflect
the pro forma increase in net income
as a result of the pro forma
adjustments to the Pro Forma
Consolidated Statements of Income...... $ 1,095,000 $ 3,853,000
=========== ===========
An adjustment has been made to reflect
the pro forma increase in depreciation
and amortization....................... $ 247,000 $ 127,000
=========== ===========
An adjustment has been made to
eliminate the historical property and
all-inclusive trust deed operating
results included in equity in earnings
of real estate entities" included in
the "Real Estate Interests." See Note
4 to the Pro Forma Consolidated
Statements of Income................... $ 1,060,000 $ 2,085,000
=========== ===========
An adjustment has been made to
eliminate the historical property and
all-inclusive trust deeds cash flow
which is included in real estate
entities included in the "Real Estate
Interests." See Note 4 to the Pro
Forma Consolidated Statements of
Income................................. $(1,307,000) $(2,574,000)
=========== ===========
In addition, pro forma adjustments were
made to cash flows from investing and
financing activities as follows:
A pro forma adjustment has been made
to reflect the historical principal
payments on the mortgage notes
receivable secured by all-inclusive
deeds of trust...................... $ 155,000 $ 292,000
=========== ===========
A pro forma adjustment has been made
to reflect historical capital
improvements on the seven
properties to be acquired in the
Merger.............................. $ (8,000) $ (44,000)
=========== ===========
A pro forma adjustment has been made
to reflect the historical principal
payments on the mortgage notes
payable secured by all-inclusive
deeds of trusts..................... $ (101,000) $ (208,000)
=========== ===========
</TABLE>
43
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1995 and Year Ended December 31, 1994
(Unaudited)
4. Pro forma Merger adjustments:
-----------------------------
The following pro forma adjustments have been made to the Pro Forma
Consolidated Statements of Cash Flows corresponding to the adjustments made
to the respective Pro Forma Consolidated Statements of Income (See Note 5
to the Pro Forma Consolidated Statements of Income).
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED DECEMBER 31,
JUNE 30, 1995 1994
------------- -------------
<S> <C> <C>
An adjustment has been made to reflect
the pro forma decrease in net income
as a result of the pro forma
adjustments to the Pro Forma
Consolidated Statements of Income...... $ (9,047,000) $(18,093,000)
============ ============
An adjustment has been made to reflect
the pro forma increase in depreciation
and amortization....................... $ 2,938,000 $ 5,876,000
============ ============
An adjustment has been made to adjust
historical depreciation included in
the "Equity in earnings of real estate
entities" included in the "Real Estate
Interests" to reflect the depreciation
of the difference between the fair
value of the acquired interests and
the underlying carrying value on each
of the investees books................. $ 6,109,000 $ 12,217,000
============ ============
In addition, pro forma adjustments were
made to cash flows from investing and
financing activities as follows:
A pro forma adjustment has been made to
Purchase cost of mergers to reflect
the cash portion of the Merger (direct
costs and expense of the Merger)....... $ - $ (2,000,000)
============ ============
A pro forma adjustment has been made to
eliminate the historical Distributions
to affiliates included in the
"Operating Companies".................. $ 10,193,000 $ 17,705,000
============ ============
A pro forma adjustment has been made to
reflect the distributions to the
shares of Common Stock to be issued
pursuant to the Merger (distributions
are based on historical distributions
per share of Common Stock at $.44 per
share for the first six months of 1995
and $.85 per share for fiscal 1994).... $(13,200,000) $(25,500,000)
============ ============
</TABLE>
44
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1995 and Year Ended December 31, 1994
(Unaudited)
5. Funds from operations:
----------------------
FFO means net income (loss) (computed in accordance with GAAP) before
(i) loss on early extinguishment of debt (ii) minority interest in income
and (iii) gain/loss on disposition of real estate, adjusted as follows:
(i) plus depreciation and amortization (including SEI's pro-rata share of
depreciation and amortization of unconsolidated equity interests and
amortization of assets acquired in the Merger), and (ii) less FFO
attributable to minority interests. FFO is a supplemental performance
measure for equity REITs used by industry analysts. FFO does not take into
consideration principal payments on debt, capital improvements,
distributions and other obligations of SEI. Accordingly, FFO is not a
substitute for SEI's net cash provided by operating activities or net
income as a measure of SEI's liquidity or operating performance or ability
to pay distributions.
45
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEI HISTORICAL
The following discussion and analysis should be read in conjunction with
the consolidated financial statements of SEI appearing in SEI's Annual Report on
Form 10-K for the year ended December 31, 1994, as amended (the "1994 10-K"),
and Quarterly Report on Form 10-Q for the period ended June 30, 1995.
Results of Operations
Six months ended June 30, 1995 compared to the six months ended June 30,
------------------------------------------------------------------------
1994 Net income for the six months ended June 30, 1995 was $29,751,000
----
compared to $18,940,000 for the same period in 1994, representing an increase of
$10,811,000. Net income allocable to common shareholders increased to
$16,443,000 for the six months ended June 30, 1995 from $11,642,000 for the six
months ended June 30, 1994. The increase in net income and net income allocable
to common shareholders were primarily the result of improved property operations
for the Same Store facilities, the acquisition of additional real estate
facilities during 1995 and 1994, and the acquisition of additional partnership
interests during 1995 and 1994. Net income per common share was $.50 per share
(based on weighted average shares outstanding of 32,707,556) for the six months
ended June 30, 1995 compared to $.52 per share (based on weighted average shares
outstanding of 22,436,885) for the same period in 1994. The decrease in net
income per share was principally due to increasing depreciation expense
allocable to the common stock shareholders, including depreciation allocable to
the limited partnership interests acquired by the Company.
During the six months ended June 30, 1995, property net operating income
(rental income less cost of operations and depreciation expense) improved
compared to the same period in 1994. Rental income increased $22,821,000 or 35%
from $65,247,000 for the six months ended June 30, 1994 to $88,068,000 for the
same period in 1995, cost of operations increased $7,654,000 or 31% from
$24,688,000 for the six months ended June 30, 1994 to $32,342,000 for the same
period in 1995 and depreciation expense increased by $3,451,000 from $13,453,000
for the six months ended June 30, 1994 to $16,904,000 for the same period in
1995, resulting in a net increase in property net operating income of
$11,716,000 or 43%. Property net operating income prior to the reduction for
depreciation expense increased by $15,167,000 or 37% from $40,559,000 for the
six months ended June 30, 1994 to $55,726,000 for the same period in 1995.
The Company generally analyzes the operating results of its real estate
portfolio in three different categories; (i) mini-warehouse properties owned
since December 31, 1991 (referred to as "Same Stores"), consisting of 246 mini-
warehouses, (ii) mini-warehouse facilities acquired subsequent to December 31,
1991 (referred to as "Newly Acquired"), consisting of 208 mini-warehouses, and
(iii) 19 business park facilities. The Company's revenues are generated
principally through the operation of its real estate facilities. The Company's
core business, however, is the operation of mini-warehouse facilities which,
during the six months ended June 30, 1995, represented approximately 90% of the
Company's property operations (based on 1995 rental income).
Property net operating income for the Same Store facilities increased by
$785,000 or 4.0% from $19,758,000 for the six months ended June 30, 1994 to
$20,543,000 for the six months ended June 30, 1995. Property net operating
income prior to the reduction for depreciation expense for the Same Store
facilities increased by $1,302,000 or 4.6% from $28,484,000 for the six months
ended June 30, 1994 to $29,786,000 for the six months ended June 30, 1995. These
increases are principally due to increased average rental rates. Weighted
average occupancy levels were 89% for the Same Store facilities for each of the
six months ended June 30, 1995 and 1994. Realized monthly rent per square foot
for these facilities was $.60 and $.58 for the six months ended June 30, 1995
and 1994, respectively. Property operating expenses prior to the reduction for
depreciation increased by $286,000 or 2% from $16,503,000 for the six months
ended June 30, 1994 to $16,789,000 for the six months ended June 30, 1995.
46
<PAGE>
The Newly Acquired facilities contributed approximately $16,364,000 and
$6,420,000 of property net operating income for the six months ended June 30,
1995 and 1994, respectively ($21,472,000 and $8,457,000 of property net
operating income prior to the reduction for depreciation expense for the six
months ended June 30, 1995 and 1994, respectively). These increases reflect the
acquisition of 85 and 71 mini-warehouses in 1995 and 1994, respectively.
Property net operating income for Newly Acquired facilities which were owned
throughout each of the six months ended June 30, 1995 and 1994 (52 facilities),
were $5,314,000 and $4,955,000 respectively, representing an increase of
$359,000 or 7% ($6,997,000 and $6,542,000 of property net operating income prior
to the reduction for depreciation expense for the six months ended June 30, 1995
and 1994, respectively, representing an increase of $455,000 or 7%). These
increases are principally due to increased weighted average occupancy levels
combined with an increase in average rental rates. Weighted average occupancy
levels were 88% for these 52 facilities for the six months ended June 30, 1995
compared to 87% for the same period in 1994. Realized monthly rent per square
foot for these facilities was $0.65 and $0.63 for the six months ended June 30,
1995 and 1994, respectively. Property operating expenses for these 52 facilities
(prior to the reduction for depreciation) increased by $89,000 or 2.5% from
$3,542,000 for the six months ended June 30, 1994 to $3,631,000 for the six
months ended June 30, 1995.
Property net operating income with respect to the Company's business park
operations increased by $987,000 from $928,000 for the six months ended June 30,
1994 to $1,915,000 for the same period in 1995. Property net operating income
prior to the reduction for depreciation expense with respect to the Company's
business park operations increased by $850,000 from $3,618,000 for the six
months ended June 30, 1994 to $4,468,000 for the same period in 1995. The
increase is due principally to the acquisition of a business park facility
during the second quarter of 1994 which contributed approximately $469,000 to
the increase in the property net operating income. Weighted average occupancy
levels were 96% for the business park facilities for the six months ended June
30, 1995 compared to 95% for the same period in 1994. The monthly average
realized rent per square foot for the business park facilities was $0.73 and
$0.68 for the six months ended June 30 1995 and 1994, respectively.
Interest and other income decreased from $3,293,000 for the six months
ended June 30, 1994 to $3,042,000 for the same period in 1995 for a net decrease
of $251,000. The decrease is primarily attributable to the reduction in interest
income from mortgage notes receivable partially offset by increased interest
income on the cash balances. The Company canceled approximately $8,466,000 and
$24,441,000 of mortgage notes receivable during 1995 and 1994, respectively, in
connection with the acquisition of real estate facilities securing such notes.
As a result, interest income from the mortgage notes receivable decreased from
$2,641,000 to $1,120,000 for the six months ended March 31, 1994 and 1995,
respectively, as the average outstanding mortgage notes receivable balance was
significantly lower ($18,950,000) during the six months ended June 30, 1995
compared to the same period in 1994 ($48,055,000). As of June 30, 1995, the
mortgage notes bear interest at stated rates ranging from 8.5% to 11.97% and
effective interest rates ranging from 10.0% to 14.8%.
On May 31, 1995, the Company completed a public offering of its common
stock raising net proceeds of approximately $82 million. Throughout the month of
June 1995, the net proceeds remained invested in short-term interest bearing
securities (with weighted average yields of approximately 5.6% per annum). As a
result interest income from cash balances increased by approximately $691,000.
Depreciation and amortization expense was $16,926,000 and $13,541,000 for
the six months ended June 30, 1995 and 1994, respectively, representing an
increase of $3,385,000 which is due to the acquisition of additional properties
in 1994 and 1995. Net income allocable to the common shareholders includes net
depreciation and amortization expense of approximately $11,467,000 ($0.35 per
common share) and $5,741,000 ($0.26 per common share) for the six months ended
June 30, 1995 and 1994, respectively. This increase is due to increased
depreciation from the acquisition of real estate facilities combined with
increased allocations of depreciation from the consolidated PSP Partnerships to
the Company's shareholders. During 1994 and 1995, the Company acquired
additional partnership interests in the PSP Partnerships (see below) and as a
result an increasing amount of depreciation expense from the existing real
estate portfolio has been allocated to the Company rather than to the minority
interest.
General and administrative expense was $1,736,000 and $1,380,000 for the
six months ended June 30, 1995 and 1994, respectively, representing an increase
of $356,000. This increase is due to the growth in the Company's capital base
combined with certain costs incurred in connection with the acquisition of
additional real estate facilities.
47
<PAGE>
"Minority interest in income" represents the income allocable to equity
(partnership) interests in the PSP Partnerships (whose accounts are consolidated
with the Company) which are not owned by the Company. Since 1990, the Company
has acquired portions of these equity interests through its acquisition of
limited and general partnership interests in the PSP Partnerships. These
acquisitions have resulted in reductions to the "Minority interest in income"
from what it would otherwise have been in the absence of such acquisitions, and
accordingly, have increased the Company's share of the consolidated PSP
Partnerships' income. See Table on page 51. In determining income allocable to
the minority interest for the six months ended June 30, 1995 and 1994
consolidated depreciation and amortization expense of approximately $5,392,000
and $7,294,000, respectively, was allocated to the minority interest. The
decrease in depreciation allocated to the minority interest was principally the
result of the acquisition of limited partnership units by the Company.
The acquisition of these partnership interests has provided the Company
with increased liquidity through cash distributions from the PSP Partnerships.
From January 1, 1995 through August 31, 1995, SEI acquired additional
partnership interests in the PSP Partnerships of approximately $17.0 million and
has no plans to acquire any significant additional interests during the
remainder of 1995.
Advisory fees increased by $1,070,000 from $2,356,000 for the six months
ended June 30, 1994 to $3,426,000 for the same period in 1995. The advisory
fee, which is based on a contractual computation, increased as a result of
increased adjusted net income (as defined) per common share combined with the
issuance of additional preferred and common stock during 1994 and 1995.
Year ended December 31, 1994 compared to year ended December 31, 1993. Net
---------------------------------------------------------------------
income in 1994 was $42,118,000 compared to $28,036,000 in 1993, representing an
increase of $14,082,000. Net income per share of Common Stock was $1.05 per
share in 1994 compared to $.98 in 1993, representing an increase of $.07 per
share. In determining net income per common share, preferred stock dividends
($16,846,000 and $10,888,000 in 1994 and 1993, respectively) reduced income
allocable to the Common Stock. The increase was primarily the result of improved
property operations at SEI's Same Store mini-warehouses, the acquisition of
additional real estate facilities during 1994, 1993 and 1992, and the
acquisition of additional partnership interests.
During 1994, property net operating income improved compared to 1993.
Rental income increased $32,642,000, or 30%, from $109,203,000 in 1993 to
$141,845,000 in 1994, cost of operations increased $10,700,000, or 25%, from
$42,116,000 in 1993 to $52,816,000 in 1994, and property depreciation expense
increased $3,175,000 from $24,924,000 in 1993 to $28,099,000 in 1994, or 13%,
resulting in a net increase in property operating income of $18,767,000, or 45%.
Property net operating income prior to the reduction of depreciation increased
by $21,942,000, or 33%. These increases were the result of improved property
operations for the Same Store mini-warehouses, the acquisition of a total of 123
additional mini-warehouse facilities and one business park facility during 1994,
1993 and 1992, and improved property operations at SEI's business park
facilities.
Property net operating income for the Same Store mini-warehouses increased
by $2,583,000, or 6.7%, from $38,383,000 in 1993 to $40,966,000 in 1994.
Property net operating income prior to the reduction of depreciation for the
Same Store mini-warehouses increased by $3,634,000, or 6.6%, from $55,266,000 in
1993 to $58,900,000 in 1994. These increases continue the upward trend of
improved operations at these facilities over the past three years as net cash
flow increased by approximately 9.7% in 1993, and 6.1% in 1992 compared to the
respective prior year. These increases are principally due to increased
occupancy levels combined with an increase in average rental rates. Weighted
average occupancy levels were 90.3% for the Same Store mini-warehouse facilities
for the year ended December 31, 1994 compared to 89.5% for the same period in
1993. Realized monthly rent per square foot for these facilities was $.59 and
$.56 for the year ended December 31, 1994 and 1993, respectively.
From January 1, 1992 through December 31, 1994, SEI acquired a total of 123
mini-warehouse facilities, 23 of which were acquired pursuant to a merger
transaction on September 30, 1994. During 1994 and 1993 these newly acquired
mini-warehouses contributed approximately $22,831,000 and $5,812,000 of property
net operating income prior to the reduction of depreciation, respectively.
48
<PAGE>
Property net operating income with respect to SEI's business park
operations improved by $2,668,000 from a net operating loss of $429,000 in 1993
to net operating income of $2,239,000 in 1994. Property net operating income
prior to the reduction of depreciation with respect to SEI's business park
operations improved by $1,289,000 from $6,009,000 in 1993 to $7,298,000 in 1994.
These improvements are principally due to the improved performance of SEI's
business park facility located in Culver City, California, where property net
operating income increased by approximately $511,000 combined with the 1994
acquisition of a facility located in Monterey Park, California which provided
property net operating income of $710,000 in 1994. Weighted average occupancy
levels were 95.3% for the business park facilities for the year ended December
31, 1994 compared to 93.1% for the same period in 1993.
Interest and other income decreased from $5,477,000 in 1993 to $5,351,000
in 1994. The decrease is primarily attributable to the cancellation of mortgage
notes receivable totaling $24,441,000 (face amount) during 1994 in connection
with the acquisition of the underlying real estate facilities securing the
mortgage notes.
Interest expense increased from $6,079,000 in 1993 to $6,893,000 in 1994,
representing an increase of $814,000. This increase is primarily attributable
to the overall increase in average debt outstanding in 1994 compared to 1993 as
a result of increased borrowings on its bank credit facilities in 1994 compared
to 1993. SEI principally uses its credit facilities to finance the acquisition
of real estate investments which are subsequently repaid with the net proceeds
from the sale of SEI's securities. The weighted average annual interest on the
credit facility and the mortgage notes outstanding at December 31, 1994 was
approximately 7.3% and 9.3%, respectively. Also during the third and fourth
quarters of 1994, SEI wrote-off $700,000 of debt issuance costs and $300,000 of
fees to establish the new bank credit facility.
Advisory fees increased by $1,364,000 from $3,619,000 in 1993 to $4,983,000
in 1994. The advisory fee, which is based on a contractual computation,
increased as a result of increased adjusted net income (as defined) per common
share combined with the issuance of additional common and preferred stock during
1994 and 1993.
Year ended December 31, 1993 compared to year ended December 31, 1992. Net
---------------------------------------------------------------------
income in 1993 was $28,036,000 compared to $15,123,000 in 1992, representing an
increase of $12,913,000. Net income per share of Common Stock was $.98 in 1993
compared to $.90 in 1992, representing an increase of $.08 per share. Net
income in 1992 included a gain on the partial condemnation by a governmental
authority of a mini-warehouse facility of $398,000 or $.02 per share of Common
Stock. In addition, in determining net income per common share, preferred stock
dividends ($10,888,000 and $812,100 in 1993 and 1992, respectively) reduced
income allocable to Common Stock.
Income before gain on disposition of real estate was $28,036,000 in 1993
compared to $14,725,000 in 1992, representing an increase of $13,311,000, or
90%. The increase was primarily the result of improved property operations for
properties owned throughout 1993 and 1992, the acquisition of additional real
estate facilities during 1993 and 1992, the acquisition of additional
partnership interests, increased interest income and reduced interest expense.
During 1993, property net operating income (rental income less cost of
operations and expense) improved compared to 1992. Rental income increased
$13,317,000, or 13.9%, from $95,886,000 in 1992 to $109,203,000 in 1993, cost of
operations increased $3,768,000, or 9.8%, from $38,348,000 in 1992 to
$42,116,000 in 1993, and depreciation expense increased $2,888,000 from
$22,036,000 in 1992 to $24,924,000 in 1993, resulting in a net increase in
property operating income of $6,661,000, or 18.8%. Property net operating
income prior to the reduction for depreciation increased by $9,549,000, or
16.6%. These increases were the result of (i) improved property operations at
the "Same Store" facilities and (ii) the acquisition of 11 additional mini-
warehouse facilities during 1992 (four of which were acquired on December 30,
1992) and 41 additional mini-warehouse facilities during 1993 (13 of which were
acquired on December 30, 1993) partially offset by reduced property operations
at SEI's business park facilities.
Property net operating income for the "Same Store" facilities increased by
$4,535,000, or 13.4%, from $33,848,000 in 1992 to $38,383,000 in 1993. Property
net operating income prior to the reduction of depreciation expense for the
"Same Store" facilities increased by $4,893,000, or 9.7%, from $50,373,000 in
1992
49
<PAGE>
to $55,266,000 in 1993. These increases continue the upward trend of
improved operations at these facilities over the past three years as net
operating income prior to reduction for depreciation expense increased by
approximately 6.1% in 1992 compared to 1991 and 2.0% in 1991 compared to 1990.
These increases are principally due to increased occupancy levels combined with
a slight increase in average rental rates.
The real estate facilities which were acquired during 1993 and 1992
contributed approximately $4,209,000 and $635,000 of property net operating
income in 1993 and 1992, respectively ($5,812,000 and $959,000 of property net
operating income prior to the reduction for depreciation expense in 1993 and
1992, respectively).
Property net operating income with respect to SEI's business park
operations decreased by $1,448,000 from $1,019,000 in 1992 to a net operating
loss of $429,000 in 1993. Property net operating income prior to the reduction
of depreciation expense with respect to SEI's business park operations decreased
by $197,000, or 3.2%, from $6,206,000 in 1992 to $6,009,000 in 1993. These
decreases are principally due to the performance of SEI's business park facility
located in Culver City, California, where property net operating income
decreased by approximately $590,000 due to a decline in occupancy and increased
expenses. SEI's business park facility manager, PSCP, has been actively
marketing the facility and has improved occupancy and property operations at the
facility in 1994.
Weighted average occupancy levels were 89% for the mini-warehouse
facilities and 93% for the business park facilities in 1993 compared to 86% for
the mini-warehouse facilities and 90% for the business park facilities in 1992.
Interest and other income increased from $1,562,000 in 1992 to $5,477,000
in 1993 for a net increase of $3,915,000. The increase is primarily
attributable to the acquisition of mortgage notes receivable totaling
$61,088,000 (face amount). The mortgage notes bear interest at stated rates
ranging from 6.125% to 11.97% and effective interest rates ranging from 10.00%
to 14.74%. The overall average outstanding mortgage notes receivable balance
for the year ended December 31, 1993 was approximately $54,453,000 generating an
overall average effective yield of 11.04%.
Interest expense decreased from $9,834,000 in 1992 to $6,079,000 in 1993
for a net decrease of $3,755,000. The decrease in interest expense is primarily
attributable to overall decreases in average debt outstanding as mortgage notes
payable were reduced by $19,141,000 during 1993 combined with reduced average
borrowings on SEI's credit facilities during 1993 as compared to 1992. The
weighted average interest on the mortgage notes outstanding at December 31, 1993
was approximately 10.0%.
"Minority interest in income" represents the income allocable to equity
(partnership) interests in the PSP Partnerships (whose accounts are consolidated
with SEI) which are not owned by SEI. Since 1990, SEI has acquired portions of
these equity interests through its acquisition of limited and general
partnership interests in the PSP Partnerships. As reflected in the following
table, these acquisitions have resulted in reductions to the "Minority interest
in income" from what it would otherwise have been in the absence of such
acquisitions, and accordingly, have increased SEI's share of the consolidated
PSP Partnerships' income:
50
<PAGE>
<TABLE>
<CAPTION>
For the Six Months
Ended June 30, For the Year Ended December 31,
------------------------- -----------------------------------------
1995 1994 1994 1993 1992
----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Combined net income of the
consolidated PSP Partnerships $ 9,163,000 $ 8,055,000 $17,150,000 $12,237,000 $ 9,722,000
SEI's share of net income of
the consolidated PSP
Partnerships resulting from
partnership interests
acquired since 1990 (5,448,000) (3,264,000) (7,669,000) (4,946,000) (2,827,000)
----------- ------------ ----------- ----------- -----------
Remaining "Minority interest
in income" as reflected in
the SEI's consolidated
financial statements $ 3,715,000 $ 4,791,000 $ 9,481,000 $ 7,291,000 $ 6,895,000
=========== =========== =========== =========== ===========
</TABLE>
Advisory fees increased by $1,007,000 from $2,612,000 in 1992 to $3,619,000
in 1993. The advisory fee, which is based on a contractual computation,
increased as a result of increased adjusted net income (as defined) per common
share combined with the issuance of additional preferred stock during 1993 (See
Note 9 to SEI's financial statements for a description of the contract).
Property Operating Trends
The following table illustrates property operating trends for the last
three years:
<TABLE>
<CAPTION>
Six Months
Ended June 30, Year Ended December 31,
---------------- ------------------------
1995 1994 1994 1993 1992
------ ------ ----- ---- ----
<S> <C> <C> <C> <C> <C>
Change in property net operating income
("NOI") over prior year for the "Same
Store" facilities:
After reductions for depreciation.... 4.0% 10.1% 6.7% 13.4% 8.2%
Prior to reductions for depreciation. 4.6% 8.3% 6.6% 9.7% 6.1%
Change in NOI over prior year for all
properties:
After reductions for depreciation.... 43.2% 39.3% 44.5% 18.8% 7.3%
Prior to reductions for depreciation. 37.4% 29.3% 32.7% 16.6% 5.3%
Weighted average occupancy levels for
the year for "Same Store" facilities(1) 89.3% 89.3% 90.3% 89.5% 86.8%
Realized monthly rent per square foot
for "Same Store" facilities(1)(2)...... $ .60 $ .58 $ .59 $ .56 $ .55
Gross Profit Margin (loss):(3)
Mini-warehouse facilities............ 46.5% 45.1% 46.5% 49.0% 42.2%
Business park facilities(4).......... 22.0% 12.8% 15.1% (3.3)% 7.8%
Overall for all facilities........... 44.1% 41.4% 43.0% 38.6% 37.0%
Pre-depreciation operating margin:(5)
Mini-warehouse facilities............ 64.6% 63.7% 64.1% 63.5% 61.9%
Business park facilities(4).......... 51.4% 50.1% 49.1% 45.9% 47.8%
Overall for all facilities........... 63.3% 62.2% 62.8% 61.4% 60.0%
</TABLE>
---------
(1) Results for the six months ended June 30, 1995 are not necessarily
indicative of the results that may be expected for the year ended December
31, 1995. SEI experiences minor seasonal fluctuations in the occupancy
levels of
51
<PAGE>
mini-warehouses with occupancies and property performance
generally higher in the summer months than in the winter months.
(2) Realized rent per foot represents the actual revenue earned per occupied
square foot. Management believes this is a more relevant measure than the
posted rental rates, since posted rates can be discounted through the use of
promotions.
(3) Gross Profit Margin is computed by dividing NOI (rental income less cost of
operations and depreciation) by gross revenues.
(4) Decrease in Gross Profit Margin and pre-depreciation operating margin, in
1993, is principally due to the reductions in property operations at the
Culver City and Lakewood facilities as discussed above.
(5) Pre-depreciation operation margin is computed by dividing NOI prior to the
reduction of depreciation expense by gross revenues.
Trends in property operations are due to:
. Increasing occupancy levels due to the reduced construction from mid-
1980's levels and promotion of SEI's facilities.
. Increasing realized rents per square foot of mini-warehouse space due
to increased demand and reduced need for promotional discounting of
mini-warehouse space due to improved occupancy.
. Increasing revenues due to increasing realized rents and occupancy
levels offset in part by modest increase in expenses (approximately 2%
for the first six months of 1995, 5% in 1994, 1% in 1993, and 3% in
1992 on Same Store facilities) including increases in payroll offset
by reductions in promotional expenditures.
Liquidity and Capital Resources
Capital Structure. SEI's financial profile is characterized by a low level
-----------------
of debt, increasing net income, increasing FFO and a conservative dividend
payout ratio with respect to its Common Stock. These attributes reflect
management's desire to "match" asset and liability maturities, to minimize
refinancing risks and to retain capital to take advantage of acquisition and
development opportunities and to provide financial flexibility.
Since 1992 SEI has taken a variety of steps to enhance its capital
structure, including:
. The public issuance of approximately $335 million of preferred stock.
The preferred stock does not require redemption or sinking fund payments
by SEI.
. The public issuance of approximately $197 million of Common Stock.
. The issuance of approximately $138.4 million of Common Stock in the
mergers with Public Storage Properties VIII, Inc., Public Storage
Properties VI, Inc., and Public Storage Properties, VII, Inc.
. The retention of approximately $34.7 million of funds available for debt
payments or reinvestment.
As a result of these transactions, SEI's capitalization has increased.
Shareholders' equity increased from $188.1 million on December 31, 1991 to
$892.7 million on June 30, 1995. The increased equity combined with reductions
in total debt has resulted in an improvement in SEI's debt to equity ratio from
55.4% at December 31, 1991 to 6.6% at June 30, 1995. SEI's ratio of debt to
total assets also decreased from 19.0% at December 31, 1991 to 5.2% at June 30,
1995.
52
<PAGE>
SEI does not believe it has any significant refinancing risks with respect
to its mortgage debt and nominal interest rate risks associated with its
variable rate mortgage debt which had a principal balance of $16.7 million at
June 30, 1995. SEI uses its bank credit facility primarily to fund acquisitions
and provide financial flexibility and liquidity. The $125 million unsecured
credit facility bears interest at LIBOR plus .75% to 1.50%, depending upon
interest coverage. At June 30, 1995, SEI had no borrowings under this facility.
SEI anticipates that its net cash provided by operating activities will
continue to be sufficient over at least the next 12 months to provide for
capital improvements, debt service requirements and distributions to
shareholders and minority interests. Net cash provided by operating activities
was $79.2 million, $59.5 million and $44.0 million for 1994, 1993 and 1992,
respectively ($49.5 million and $36.5 million for the six months ended June 30,
1995 and 1994, respectively).
Funds Available for Principal Payments and Investment. SEI believes that
-----------------------------------------------------
important measures of its performance as well as its liquidity are funds
available for principal payments and investment and funds provided by operating
activities.
The following table summarizes SEI's ability to pay the minority interests'
distributions, its distributions to the preferred and Common Stock shareholders
and fund capital improvements to maintain the facilities through the use of
funds provided by operating activities. The remaining funds are available to
make both scheduled and optional principal payments on debt and for investment.
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
------------------ ----------------------------
1995 1994 1994 1993 1992
-------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Net income............................... $ 29,751 $ 18,940 $ 42,118 $ 28,036 $ 15,123
Depreciation and amortization............ 16,926 13,541 28,274 24,998 22,405
Minority interest in income.............. 3,715 4,791 9,481 7,291 6,895
Gain on disposition of real estate....... - - - - (398)
Amortization of discounts on mortgage
notes receivable........................ (67) (506) (693) (848) -
-------- -------- -------- -------- --------
Funds provided by operating activities... 50,325 36,766 79,180 59,477 44,025
FFO allocable to minority interests...... (9,107) (12,085) (23,037) (23,647) (22,892)
-------- -------- -------- -------- --------
FFO...................................... 41,218 24,681 56,143 35,830 21,133
Less: preferred stock dividends.......... (13,308) (7,298) (16,846) (10,888) (812)
-------- -------- -------- -------- --------
FFO allocable to Common Stock............ 27,910 17,383 39,297 24,942 20,321
Capital improvements to maintain
facilities:
Mini-warehouses...................... (2,397) (1,468) (6,360) (3,520) (3,541)
Business parks....................... (909) (830) (1,952) (2,915) (1,612)
Add back: minority interest share of
capital improvements to maintain
facilities.............................. 859 849 2,948 2,935 2,975
-------- -------- -------- -------- --------
Funds available for principal payments,
distributions on Common Stock and
investment.............................. 25,463 15,934 33,933 21,442 18,143
Cash distributions to Common Stock....... (14,886) (9,931) (21,249) (14,728) (13,424)
-------- -------- -------- -------- --------
Funds available for principal payments
and investment.......................... $ 10,577 $ 6,003 $ 12,684 $ 6,714 $ 4,719
======== ======== ======== ======== ========
</TABLE>
The increases in funds provided by operating activities and funds available
for principal payments and investment over the past three years is primarily due
to (i) increasing property net operating income at the Same Store mini-
warehouses, (ii) the acquisition of limited and general partnership interests in
certain partnerships and (iii) the leverage created through the issuance of
preferred stock and the utilization of the net proceeds in real estate
investments which have provided net cash flows in excess of the preferred stock
dividend requirements. These factors have improved the cash flow position of
the Common Stock as FFO allocable to the Common Stock has increased over the
same period at a rate greater than the increase in number of common shares.
53
<PAGE>
The significant increase in capital improvements in 1994 compared to 1993
for the mini-warehouse facilities is due to the acquisition of new facilities in
1994 and 1993 combined with approximately $800,000 of non-recurring expense to
upgrade certain facilities in Texas to provide for climate controlled storage
units.
FFO increased to $56,143,000 for the year ended December 31, 1994 compared
to $35,830,000 in 1993 and $21,133,000 in 1992. FFO has increased to
$41,218,000 for the six months ended June 30, 1995 from $24,681,000 for the same
period in 1994. FFO allocable to Common Stock increased to $39,297,000 for the
year ended December 31, 1994 compared to $24,942,000 in 1993 and $20,321,000 in
1992. FFO allocable to the Common Stock has increased to $27,910,000 for the
six months ended June 30, 1995 compared to $17,383,000 for the same period in
1994. Funds from operations is a supplemental performance measure for equity
real estate investment trusts used by industry analysts. Funds from operations
does not take into consideration scheduled principal payments on debt, capital
improvements, distributions and other obligations of SEI. Accordingly, funds
from operations is not a substitute for SEI's cash flow (either from operating,
investing or financing activities) or net income as a measure of SEI's liquidity
or operating performance.
During 1995, SEI has budgeted approximately $8 million for capital
improvements ($2 million of which is directly attributable to the minority
interest in respect of its ownership interest) to maintain its facilities.
During 1994, SEI incurred capital improvements of approximately $8.3 million.
SEI believes that it is not subject to any significant refinancing risks.
During 1993 and 1994, SEI either repaid or extended the maturities of its
mortgage notes such that in no year, until 1999, will there be more than $9.0
million of principal payments on mortgage notes becoming due and payable.
Net cash used in investing activities increased from $21.0 million in 1992
to $137.4 million in 1993 to $169.6 million in 1994. This increase is
principally due to the acquisition of additional real estate facilities and
minority interests. Net cash provided by financing activities increased from
net cash uses of $21.1 million in 1992 to net cash provided of $80.1 million in
1993 and $100.00 million in 1994. This increase is principally due to the
issuance of both common and preferred stock in 1993 and 1994 partially offset by
increased distributions to SEI's shareholders.
In March 1995, SEI acquired two parcels of land located in Atlanta, Georgia
on which SEI is currently developing mini-warehouse facilities. One facility
opened in late August 1995 and the other is scheduled to open in December 1995.
The estimated aggregate cost of these facilities is approximately $8.0 million.
SEI believes its geographically diverse portfolio has resulted in a
relatively stable and predictable investment portfolio with increasing overall
property performance over the past four years.
54
<PAGE>
OPERATING COMPANIES TO BE ACQUIRED
The following discussion should be read in conjunction with the Combined
Financial Statements of the Operating Companies to be Acquired and notes
thereto. The Combined Financial Statements include the property management
operations of PSMI and PSCP, the advisory business of the Adviser and
merchandise operations of PSMI (collectively "Operating Companies").
Description of Businesses Included
PSMI operated and managed, pursuant to property management agreements,
1,074 self-storage mini-warehouses at June 30, 1995. PSCP operated and managed,
pursuant to management agreements, 45 commercial office buildings and light
industrial business parks at June 30, 1995. These facilities constitute all of
the United States mini-warehouses and business parks doing business under the
"Public Storage" name and all those in which SEI has an interest. The property
management agreements generally provide for compensation equal to six percent,
in the case of PSMI, of the gross revenues of the facilities managed, and five
percent, in the case of PSCP, of the gross revenues of the facilities managed.
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.
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. The advisory fee is
equal to (i) 12.75% of SEI's adjusted income (as defined, and after a reduction
for SEI's share of capital improvements) per share of Common Stock on the first
14,989,454 common shares, (ii) 6% of the adjusted income per share on common
shares in excess of 14,989,454, and (iii) 6% of all dividends paid on SEI
preferred stock. The Adviser pays the salaries and expenses of SEI's executive
officers, facility acquisition staff and rent.
Merchandise operations consists of the sale of locks and boxes to customers
and tenants at substantially all the mini-warehouse facilities managed by PSMI.
These products are ancillary to renting storage space and are provided as a
convenience to the tenants. This activity is not part of the rental activity of
the mini-warehouse facilities.
Results of Operations
Six months ended June 30, 1995 compared to six months ended June 30, 1994:
-------------------------------------------------------------------------
Net income of the Operating Companies for the six months ended June 30, 1995 was
$12,605,000 compared to $10,178,000 for the same period in 1994, representing an
increase of $2,427,000, or 24%.
During the six months ended June 30, 1995, net income increased as revenues
increased 14% while expenses remained constant. Revenues for the six months
ended June 30, 1995 were $19,287,000 compared to $16,938,000 in 1994. This
increase of $2,349,000, or 14%, is primarily due to increases in mini-warehouse
facility management fees of $1,167,000 and in advisory fees of $1,070,000,
resulting from higher revenues from facilities, due principally to higher
occupancies at mini-warehouse facilities (89.1% in 1995 compared to 87.8% in
1994) and higher monthly realized rental rates ($0.70 in 1995 compared to $0.67
in 1994). In addition to improved property operations, advisory fees increased
due to SEI's acquisition of additional properties and larger capital base.
Cost and expenses remained stable between periods with increases in
advisory and administrative expenses offset by decreases in costs of managing
facilities and interest expense. Advisory and administrative expenses increased
due to the expansion of the acquisition staff due to increased property
acquisition and development activities at SEI. Cost of managing facilities
decreased due to a reduction of bonus expenses and depreciation charges offset
in part by the incurrence of non-recurring legal expenses. As a result, net
operating income (revenues less expenses before interest income and expense) was
$15,053,000 in 1995 compared to
55
<PAGE>
$12,791,000 in 1994, an increase of $2,262,000 or 18%. Details of the changes in
revenues and operating income for each operating segment are discussed below.
Year ended December 31, 1994 compared to year ended December 31, 1993: Net
---------------------------------------------------------------------
income of the Operating Companies for the year ended December 31, 1994 was
$22,008,000 compared to $37,245,000 for 1993. The decrease of $15,237,000 is
primarily the result of $14,440,000 in extraordinary gains from the retirement
of debt in early 1993 which did not occur in 1994.
Revenues and net operating income improved in 1994, primarily as a result
of increased revenues associated with higher occupancies and rental rates at the
facilities, while expenses (before interest) grew modestly at 4%. Revenues for
1994 were $35,410,000 compared to $31,197,000 in 1993. This increase of
$4,213,000, or 14%, is primarily due to increases in mini-warehouse facility
management fees ($2,344,000) and advisory fees ($1,364,000) resulting from
higher revenues from facilities, due principally to higher occupancies and
monthly realized rental rates at mini-warehouse facilities (89.0% compared to
86.6% and $0.68 per square foot to $0.64 per square foot for 1994 and 1993,
respectively). In addition to improved property operations, advisory fees
increased due to SEI's acquisition of additional properties and issuance of
additional capital.
Cost and expenses (before interest) were $8,147,000 in 1994 compared to
$7,825,000 in 1993, a $322,000 increase. This increase is attributable to an
increase in advisory services cost related from an expansion of the acquisition
staff due to increased property acquisition activities at SEI. Cost of
merchandise activities also increased reflecting costs associated with increased
sales. These costs were partially offset by a decline in costs of managing
facilities due to reductions in non-salary expenses. As a result, net operating
income was $27,064,000 in 1994 compared to $23,370,000 in 1993, an increase of
$3,694,000, or 16%, primarily related to the higher revenues and modest
increases in operating expenses. Details of the changes in revenues and
operating income for each operating segment are discussed below.
The Operating Companies issued $75 million of notes in late 1993. The
interest expense for 1994 was $5,255,000 (representing a full year of interest
expense) compared to $567,000 in 1993 (representing interest expense on debt
outstanding for one month).
During 1992 and 1993, PSMI and PSI extinguished debt of PSMI through a
series of purchases from unaffiliated note holders. In November 1993, PSMI
issued $75 million in Senior Secured Notes due 2003. Due to the timing of the
debt retired and the subsequent issuance of new debt, interest expense in 1993
was significantly lower than in 1992 and in 1994 when debt was outstanding for
the entire year.
Year ended December 31, 1993 compared to year ended December 31, 1992: Net
---------------------------------------------------------------------
income of the Operating Companies for the year ended December 31, 1993 was
$37,245,000 compared to $16,695,000 for 1992. The increase of $20,550,000
results from improvement in net operating income, gain on retirement of debt and
lower interest expense. Extraordinary gains related to the retirement of debt
in early 1993 and 1992 were $14,440,000 and $3,311,000, respectively. In
addition, as discussed above, interest expense was $567,000 in 1993, compared to
$7,181,000 in 1992. The impact of the changes related to gains on debt and
interest expense accounts for $17,743,000 of the improvement in net income for
1993 compared to 1992.
Revenues and net operating income improved in 1993, primarily as a result
of increased revenues associated with higher occupancies and rental rates at the
mini-warehouse facilities. Revenues for the year of 1993 were $31,197,000
compared to $28,068,000 in 1992. This increase of $3,129,000 or 11% is
primarily due to increases in mini-warehouse facility management fees
($1,850,000) and advisory fees ($1,007,000) resulting from higher revenues from
facilities, due principally to higher occupancies and monthly realized rental
rates at mini-warehouse facilities (86.6% compared to 82.3% and $0.64 per square
foot to $0.63 per square foot for 1993 and 1992, respectively). In addition to
improved property operations, advisory fees increased due to SEI's acquisition
of additional properties and issuance of additional capital.
Cost and expenses (before interest) were $7,825,000 in 1993 compared to
$7,503,000 in 1992, as an increase of $322,000 or 4%. The increase is due to
the incurrence of non-recurring legal fees in 1993 associated with the advisory
services. This increase was partially offset by a decrease in cost of managing
facilities due to a favorable comparison to 1992 which includes $450,000 in non-
recurring expenses for computer consulting,
56
<PAGE>
professional services, donations and third party management costs. Operating
income was $23,370,000 in 1993 compared to $20,534,000 in 1992, an increase of
$2,836,000, or 14%. Details of the changes in revenues and net operating income
for each of the segments are discussed below.
As reflected in the table below, the four operating segments contained in
the financial statements are profitable with consistent overall growth. Each of
the operating segments is dependent upon the growth and profitability of the
mini-warehouse and commercial facilities. The following compares the revenues
and operating income (excluding interest income and expense) for the four
operating segments for the years ended December 31, 1994, 1993 and 1992 and the
six-month periods ended June 30, 1995 and 1994.
<TABLE>
<CAPTION>
Six months ended
June 30, Years ended December 31,
--------------------- --------------------------------
1995 1994 1994 1993 1992
------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
Revenues:
Facilities management fees, primarily
from affiliates:
Mini-warehouse facilities................. $13,768 $12,639 $26,383 $24,088 $22,218
Commercial facilities..................... 1,019 981 1,973 1,924 1,944
Advisory fees from affiliate.............. 3,426 2,356 4,983 3,619 2,612
Merchandise operations.................... 1,013 907 1,872 1,564 1,263
------- ------- ------- ------- -------
$19,226 $16,883 $35,211 $31,195 $28,037
======= ======= ======= ======= =======
Net operating income:
Facilities management, primarily
from affiliates:
Mini-warehouse facilities................. $11,579 $10,088 $21,368 $18,947 $16,906
Commercial facilities..................... 626 692 1,557 1,450 1,417
Advisory services......................... 2,336 1,539 3,133 2,209 1,637
Merchandise operations.................... 512 472 1,006 764 574
------- ------- ------- ------- -------
Net operating income...................... $15,053 $12,791 $27,064 $23,370 $20,534
======= ======= ======= ======= =======
</TABLE>
The compound growth rates of revenues and net operating income for the
period 1992 through 1994 are as follows:
<TABLE>
<CAPTION>
Growth rates 1992-1994
-------------------------------
1994 operating Net operating
Operating segment margin(1) Revenues income
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Facilities management, primarily from
affiliates:
Mini-warehouse facilities.......................... 81% 9% 12%
Commercial facilities.............................. 79% 1% 5%
Advisory services.................................... 63% 38% 38%
Merchandise operations............................... 54% 22% 32%
</TABLE>
-----------
(1) Operating margin is defined as net operating income (revenues less related
cost of operation) divided by revenues for each operating segment.
Each of the above operating segments, except Merchandise operations, has
cost structures consisting primarily of fixed costs. As such, an increase in
revenues generally results in a corresponding increase in the operating income
of such segment.
Property Management. PSMI is the largest operator of mini-warehouses in
-------------------
the United States. All of the facilities operated by PSMI and PSCP are operated
under the "Public Storage" trademark which carries strong name recognition.
57
<PAGE>
Operating income from property management services has consistently
increased resulting from increasing management fees while expenses have remained
relatively constant. The increase in management fees is the result of an
increase in the number of facilities under management and an increase in
property level revenues resulting from increased property occupancies and rental
rates.
The following table shows property information for mini-warehouse and
commercial facilities under management. Average management fees paid per
facility under management increased between 3% and 9% per annum resulting from
an increase in occupancies and rental rates of properties managed.
<TABLE>
<CAPTION>
Six months ended
June 30, Year ended December 31,
-------------------- --------------------------------
1995 1994 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Mini-warehouse facilities
-------------------------
Number of facilities under management
at end of period....................... 1,074 1,046 1,067 1,040 1,020
Square feet under management at end
of period (in millions)................ 62.9 61.6 62.3 60.2 60.1
Rental revenues (in millions)............ $ 233.7 $ 217.0 $ 447.2 $ 407.0 $ 377.9
Average per facility under management:
Rental revenues.................... $218,600 $207,500 $424,700 $395,600 $367,300
Management fees incurred........... $ 12,800 $ 12,100 $ 24,700 $ 23,200 $ 21,800
Weighted average occupancy......... 89.1% 87.8% 89.0% 86.6% 82.3%
Realized monthly rental rate
per sq. ft (1).................. $ 0.70 $ 0.67 $ 0.68 $ 0.64 $ 0.63
<CAPTION>
Six months ended
June 30, Year ended December 31,
-------------------- --------------------------------
1995 1994 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Commercial facilities (2)
-------------------------
Number of facilities under management
at end of period....................... 78 78 78 78 80
Square feet under management at end
of period (in millions)................ 5.2 5.2 5.2 5.2 5.3
Rental revenues (in millions)............ $ 20.3 $ 20.0 $ 39.6 $ 38.1 $ 38.7
Average per facility under management:
Rental revenues.................... $260,300 $256,400 $507,100 $487,400 $484,100
Management fees incurred........... $ 13,000 $ 12,600 $ 25,300 $ 24,700 $ 24,300
Weighted average occupancy......... 94.4% 93.6% 94.0% 90.6% 85.2%
Realized monthly rental rate
per sq. ft (1)................... $ 0.69 $ 0.68 $ 0.68 $ 0.66 $ 0.72
</TABLE>
----------
(1) Realized rent per square foot represents the actual revenue earned per
occupied square foot. Management believes this is a more relevant measure
than posted rental rates, since posted rates can be discounted through the
use of promotions.
(2) Includes the commercial operations at mini-warehouse facilities (33
facilities at June 30, 1995).
Trends in property operations are due to:
. Increasing occupancy levels due to the decreased levels of new supply in
the industry, growth in demand and promotion of the facilities by PSMI
and PSCP.
. Increasing realized rents per square foot of mini-warehouse space due to
increased demand facilitating price increases and reduced promotional
discounting of mini-warehouse space.
The rental revenues of the facilities are typically higher in the second
and third quarters primarily because of the timing of rental rate increases and
because mini-warehouse facilities tend to experience greater occupancy during
the spring and summer months reflecting the moving patterns of individual users.
58
<PAGE>
The facilities managed by the Operating Companies are located in or near
major metropolitan markets in 38 states. Geographic diversity reduces the
impact of regional economic downturns on the Operating Companies and provides a
greater degree of stability to management fees earned. No single facility
accounted for more than .5% of management fees earned in 1994.
The four states in which the largest concentration of facilities (mini-
warehouse and commercial facilities combined) are located and their operating
trends are as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE OCCUPANCIES
--------------------------------------------
At
June 30, Six months
1995 ended June 30, Year Ended December 31,
% of ---------------- --------------------------
Total 1995 1994 1994 1993 1992
----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
California 30% 87.7% 85.5% 86.3% 84.5% 82.2%
Texas 12% 89.1% 88.3% 89.4% 88.2% 87.5%
Florida 7% 86.9% 88.6% 89.0% 87.6% 84.0%
Illinois 5% 91.7% 88.9% 90.8% 84.1% 74.0%
Other 46% 90.9% 90.1% 91.3% 88.9% 82.3%
----------------------------------------------------------
Total 100% 89.5% 88.3% 89.4% 87.1% 82.6%
==========================================================
<CAPTION>
WEIGHTED AVERAGE REALIZED MONTHLY RENT
PER SQUARE FOOT (1)
--------------------------------------------
At
June 30, Six months
1995 ended June 30, Year Ended December 31,
% of ---------------- --------------------------
Total 1995 1994 1994 1993 1992
----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
California 30% $0.81 $0.80 $0.81 $0.78 $0.79
Texas 12% 0.56 0.54 0.55 0.53 0.52
Florida 7% 0.66 0.65 0.66 0.58 0.58
Illinois 5% 0.67 0.64 0.65 0.62 0.62
Other 46% 0.66 0.63 0.62 0.60 0.56
----------------------------------------------------------
Total 100% $0.70 $0.67 $0.68 $0.64 $0.63
==========================================================
</TABLE>
---------
(1) Realized rent per square foot represents the actual revenue earned per
occupied square foot. Management believes this is a more relevant measure
than posted rental rates, since posted rates can be discounted through the
use of promotions.
Most of the facilities managed by PSMI and PSCP are owned by SEI, PSI or
entities affiliated with PSI. Of the 1,119 facilities operated by PSMI and
PSCP, 70 are operated under management contracts with third parties who are not
affiliated with SEI or PSI. These 70 properties accounted for management fees
of $1,521,000, $1,458,000 and $1,506,000 in 1994, 1993 and 1992, respectively,
representing approximately 5% of all management fees earned in those periods.
Approximately 30% of the management fees from third-party contracts are earned
on 26 properties owned by a single owner. These 26 properties have been under
management since 1988.
Cost of managing facilities consists primarily of salaries and wages and
the related expenses of senior property management personnel as noted below:
<TABLE>
<CAPTION>
Six months ended
June 30, Year ended December 31,
----------------- ---------------------------
1995 1994 1994 1993 1992
(In thousands)
<S> <C> <C> <C> <C> <C>
Salaries and wages.... $1,957 $2,147 $4,011 $4,127 $3,925
Other expenses........ 625 693 1,420 1,488 1,914
====== ====== ====== ====== ======
Total............. $2,582 $2,840 $5,431 $5,615 $5,839
====== ====== ====== ====== ======
</TABLE>
Salaries and wages include base salaries and bonuses of property management
personnel. The base salaries have remained relatively constant except for an
increase of $227,000 in 1994 related to an increase in the
59
<PAGE>
number of regional management personnel resulting from an increase in the number
of properties under management. This increase in base salary was offset by
reduced bonus expense in 1994 compared to 1993 of approximately $300,000.
Bonus expense included in salaries and wages reflects incentive bonuses
based on the achievement of specific goals. Included in salaries and wages for
the years ended December 31, 1994, 1993, 1992 and the six months ended June 30,
1995 and 1994 are bonuses of $804,000, $1,103,000, $816,000, $158,000 and
$364,000, respectively.
Other expenses have declined each year due to expense controls. Included in
other expenses for the year ended December 31, 1992 are non-recurring expense of
approximately $450,000 for computer consulting, professional services, donations
and costs associated with the management of third-party properties. The
decrease in other expense from the six months ended June 30, 1995 is partially
the result of a $220,000 decrease in depreciation and amortization of computer
hardware and software costs as compared to 1994 levels partially offset by non-
recurring legal expenses in 1995 associated with the management of commercial
facilities.
Advisory Services. The Adviser's fees increased at a compound annual rate
-----------------
of 38% from 1992 through 1994. This reflects the improvement of SEI's cash flow
from operations and an increase in the capital base of SEI. The improvement in
SEI's cash flow from operations resulted from improved property operating
results. SEI's overall property operating trends have shown consistent
improvement with growth in net operating income prior to reductions for
depreciation over the same period in the prior year on same stores of 6.1%,
9.7%, 6.6% and 4.6% for the years 1992, 1993, 1994 and the six months ended June
30, 1995, respectively.
In addition, since 1992, SEI has acquired additional assets with the
proceeds from the issuance of additional capital stock, primarily Common Stock
and preferred stock. This growth in SEI has resulted in increased advisory
fees. Specifically, between 1992 and June 30, 1995, SEI issued $335 million in
preferred stock, $197 million in Common Stock, and $138 million Common Stock in
connection with mergers.
Cost of advisory services and administrative expenses consists of salaries
and expenses of SEI's executive officers and acquisition staff and corporate
expenses including rent. Cost of advisory services and administrative expenses
increased in 1993 due to the incurrence of non-recurring legal expenses and
increased in 1994 due to the expansion of the acquisition staff.
Merchandise Operations. Operating income from Merchandise Operations,
----------------------
which accounts for less than 4% of the 1994 operating income of the Operating
Companies, increased due to price increases, an increase in the number of
facilities at which merchandise is offered (from 900 at December 31, 1992 to 975
facilities at June 30, 1995) and the introduction of boxes to the product line
in 1993 (available at 206 facilities at June 30, 1995). Inventory of $75,000 is
included in other assets at June 30, 1995 relating to Merchandise Operations.
Liquidity and Capital Resources
The Operating Companies financial profile is characterized by $68.0 million
of fixed rate, fully amortizing debt and an increasing level of funds available
for principal payments, distributions and investment.
The Operating Companies have $68.0 million of notes outstanding as of June
30, 1995. The notes bear interest at a fixed rate of 7.08% and are fully
amortizing through the year 2003. Assumption of the notes is subject to the
lenders' consent. Principal payments for the next five years and thereafter are
as follows:
<TABLE>
<S> <C>
1995 (July-December)... $ 2,500,000
1996................... 5,750,000
1997................... 6,500,000
1998................... 7,250,000
1999................... 8,000,000
Thereafter............. 38,000,000
-----------
$68,000,000
===========
</TABLE>
60
<PAGE>
Cash provided by operating activities for the Operating Companies were
$14.5 million, $22.9 million, $22.1 million and $12.5 million for the years of
1992, 1993 and 1994 and six months ended June 30, 1995, respectively. These
cash flows have been sufficient to cover capital expenditures and debt service
requirements.
The Operating Companies believe that important measures of performance, as
well as liquidity, are funds from operations (FFO) and earnings before
interests, taxes, depreciation and amortization (EBITDA). FFO and EBITDA are
supplemental performance measures for real estate investment trusts used by
industry analysts. FFO and EBITDA does not take into consideration scheduled
principal payments on debt, capital improvements, distributions or other
obligations. Accordingly, FFO and EBITDA are not a substitute for cash flow
from operations or net income as a measure of the Company's liquidity or
operating performance.
The following table summarizes the Operating Companies FFO and EBITDA:
<TABLE>
<CAPTION>
Six months ended
June 30, Years ended December 31,
----------------- -----------------------------
1995 1994 1994 1993 1992
------- ------- ------- -------- -------
(in thousands)
<S> <C> <C> <C> <C> <C>
Net income......................... $12,605 $10,178 $22,008 $ 37,245 $16,695
Depreciation and amortization...... 55 279 522 71 1,495
Gains on extinguishment of debt.... - - - (14,440) (3,311)
------- ------- ------- -------- -------
Funds available for principal
payments, distributions and
investment (FFO).................. 12,660 10,457 22,530 22,876 14,879
------- ------- ------- -------- -------
Interest expense................... 2,509 2,668 5,255 567 7,181
------- ------- ------- -------- -------
Earnings before interest, taxes,
depreciation and amortization
(EBITDA)......................... $15,169 $13,125 $27,785 $ 23,443 $22,060
======= ======= ======= ======== =======
</TABLE>
Capital expenditures related to the Operating Companies have been and are
expected to continue to be insignificant.
61
<PAGE>
REAL ESTATE INTERESTS
The following discussion should be read in conjunction with the Combined
Summaries of Historical Information relating to Real Estate Interests to be
Acquired and notes thereto.
Real Estate Interests consist of equity interests in 63 REITs and
partnerships which own 511 mini-warehouses and 15 commercial facilities
(including the seven properties in which a fee interest is being acquired), all
operated under the "Public Storage" name, none of which SEI currently has an
interest in, and 10 mortgage notes receivable secured by mini-warehouse
facilities. When combined with SEI's facilities, they represent substantially
all the mini-warehouse and commercial facilities operated in the United States
under the "Public Storage" name. These Real Estate Interests consist of:
. Series A, B, C and D shares of finite life REITs. These shares
represent between 15% and 30% of the economic interest in each entity;
. General and limited partner capital and incentive compensation interests
representing on average approximately 25% of the economic
interest in each entity;
. Seven properties, consisting of fee interest in six mini-warehouses and
one business park and notes receivable.
Results of Operations
Six months ended June 30, 1995 compared to the six months ended June 30,
------------------------------------------------------------------------
1994: The excess of operating revenues over specified expenses in the aggregate
----
of ownership entities in which Real Estate Interests are being acquired for the
six months ended June 30, 1995 was $53,083,000 compared to $47,278,000 for the
same period in 1994, representing an increase of 12%. The excess of operating
revenues over specified expenses for the Real Estate Interests which SEI is
acquiring was $12,601,000 for the six months ended June 30, 1995 compared to
$11,120,000 for the six months ended June 30, 1994, an improvement of $1,481,000
or 13%. The improved results reflect the general improvement of the 526 mini-
warehouse and commercial facilities owned by the ownership entities in which SEI
is acquiring an interest, primarily due to higher occupancies and rental rates
of the mini-warehouses. Occupancies of the mini-warehouse improved from 87.6%
for the first six months of 1994 to 89.6% in the first six months of 1995, and
realized rental rates improved from $0.70 per square feet to $0.73 per square
feet for the comparable periods.
Year ended December 31, 1994 compared to the year ended December 31, 1993:
-------------------------------------------------------------------------
The excess of operating revenues over specified expenses in the aggregate of
ownership entities in which Real Estate Interests are being acquired for the
year ended December 31, 1994 was $99,859,000 compared to $80,400,000 for 1993,
representing an increase of 24%. The excess of operating revenues over
specified expenses for the Real Estate Interests which SEI is acquiring was
$23,697,000 for 1994 compared to $18,773,000 for the same period in 1993, an
improvement of $4,924,000 or 26%. During 1994, two mini-warehouses were opened
by the ownership entities in which SEI is acquiring an interest. The
improvement is also reflective of the general improvement of the 524 mini-
warehouse and commercial facilities operated in both 1994 and 1993 due to
improved occupancies and rental rates. Occupancies for the mini-warehouses
improved from 85.3% in 1993 to 88.9% in 1994 while realized rental rates
improved to $0.71 per square foot from $0.68 per square foot in 1993.
Year ended December 31, 1993 compared to the year ended December 31, 1992:
-------------------------------------------------------------------------
The excess of operating revenues over specified expenses in the aggregate of
ownership entities in which Real Estate Interests are being acquired for the
year ended December 31, 1993 was $80,400,000 compared to $59,853,000 for 1992,
representing an increase of 34%. The excess of operating revenues over
specified expenses for the Real Estate Interests which SEI is acquiring was
$18,773,000 for 1993 compared to $14,283,000 for 1992, an improvement of 31%.
This improvement reflects the opening of one mini-warehouse in 1993 and the
general improvement of the mini-warehouse and commercial facilities.
Occupancies at the mini-warehouses improved to 85.3% from 79.1% in 1992.
Realized rental rates improved to $0.68 per square foot in 1993 from $0.65 per
square foot in 1992.
62
<PAGE>
The following presents the combined operating trends of the Real Estate
Interests which consist of 526 facilities and the notes receivable:
<TABLE>
<CAPTION>
Six months ended
June 30, Years ended December 31,
------------------- ---------------------------
1995 1994 1994 1993 1992
------------------- ---------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Aggregate of ownership entities
-------------------------------
in which Real Estate Interests are
----------------------------------
being acquired:
---------------
Operating revenues in excess of
specified expenses:
After depreciation expense -
operating income............. $53,083 $47,278 $ 99,859 $ 80,400 $ 59,853
Before depreciation expense.. 74,135 68,309 141,841 122,208 103,409
Real Estate Interests being acquired:
-------------------------------------
Operating revenues in excess of
specified expenses:
After depreciation expense -
operating income............. $12,601 $11,120 $ 23,697 $ 18,773 $ 14,283
Before depreciation expense... 17,378 16,045 33,196 28,609 24,317
</TABLE>
The growth in net operating income of the Real Estate Interests is due to
improved operations of the mini-warehouses and commercial facilities. The
following table illustrates the operating trends of the mini-warehouse and
commercial facilities for the last three years and the six months ended June
30, 1995 and 1994:
<TABLE>
<CAPTION>
Six months ended
June 30, Years ended December 31,
------------------------- -----------------------------------
1995 1994 1994 1993 1992
------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C>
MINI-WAREHOUSES
---------------
Number of facilities............. 511 509 511 509 508
Weighted average occupancy
for period...................... 89.6% 87.6% 88.9% 85.3% 79.1%
Realized monthly rent per
square foot..................... $ 0.73 $ 0.70 $ 0.71 $ 0.68 $ 0.65
Rental revenues (in thousands)... $117,779 $110,566 $227,647 $205,715 $183,576
Property net operating income
(in thousands)(2)............... 75,985 69,686 145,315 127,407 108,277
Gross profit margin(3)........... 64.5% 63.0% 63.8% 61.9% 59.0%
Capital expenditures to maintain
facilities (in thousands)....... $ 1,883 $ 1,534 $ 4,707 $ 4,543 $ 4,387
Rentable square feet (in
millions)....................... 29.7 29.6 29.7 29.6 29.5
COMMERCIAL FACILITIES(1)
------------------------
Number of facilities............. 33 33 33 33 32
Weighted average occupancy for
period.......................... 94.2% 92.9% 93.5% 91.3% 84.0%
Realized monthly rent per
square foot..................... $ 0.78 $ 0.78 $ 0.77 $ 0.79 $ 0.80
Rental revenues (in thousands)... $ 8,451 $ 8,333 $ 16,518 $ 16,223 $ 15,341
Property net operating income
(in thousands)(2)............... 4,562 4,582 8,692 8,194 8,014
Gross profit margin(3)........... 54.0% 55.0% 52.6% 50.5% 52.2%
Capital expenditures to maintain
facilities (in thousands)....... $ 529 $ 697 $ 1,301 $ 1,241 $ 1,385
Rentable square feet (in
millions)....................... 1.9 1.9 1.9 1.9 1.9
</TABLE>
-----------------------
(1) Includes the commercial operations at 18 mini-warehouse facilities
(2) Property net operating income is Rental revenues less costs of operations
before depreciation expense.
(3) Gross profit margin is computed by dividing Property net operating income
by Rental revenues.
63
<PAGE>
All the mini-warehouses included in the Real Estate Interests have
essentially the same operating, physical and location characteristics. These
characteristics include high average occupancies compared to relatively low
break-even occupancy requirements, geographic diversity, concentration in major
metropolitan cities, and increasing realized rents and occupancies.
Substantially all of these facilities were developed by PSI and have an average
age of 9.5 years.
64
<PAGE>
Most facilities operate at consistently high occupancy levels, with over 80% of
the 526 facilities operating at 85% occupancy or better at June 30, 1995. The
following table reflects the occupancy distribution as of June 30, 1995:
OCCUPANCY DISTRIBUTION
AT JUNE 1995
[Bar chart appears here illustrating the occupancy distribution at June 1995]
<TABLE>
<CAPTION>
Occupancy Percentage No. of Facilities
-------------------- -----------------
<S> <C>
0% - 50% 1
50% - 55% 2
55% - 60% 1
60% - 65% 1
65% - 70% 11
70% - 75% 8
75% - 80% 21
80% - 85% 44
85% - 90% 115
90% - 95% 195
95% - 100% 127
</TABLE>
The facilities of the ownership entities are located in the major metropolitan
markets in 38 states. Geographic diversity reduces the impact from regional
economic downturns and provides a greater degree of stability to revenues. The
following table illustrates the geographic diversity of the facilities at June
30, 1995 as measured by rentable square feet:
GEOGRAPHIC DIVERSITY OF REAL ESTATE INTERESTS
(based on rentable square feet at June 30, 1995)
[Pie chart appears here which illustrates by region the geographic diversity of
the facilities at June 30, 1995 based on rentable square feet]
<TABLE>
<S> <C>
South Western 27%
North Western 18%
North Eastern 18%
Mid Western 17%
South Central 10%
South Eastern 10%
</TABLE>
65
<PAGE>
The four states in which the largest concentration of facilities (mini-
warehouse and commercial facilities combined) are located and their operating
trends are as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE OCCUPANCIES
-------------------------------------------------------------------
At Six months
June 30, ended June 30, Year Ended December 31,
1995 ------------------- ---------------------------------
% of Total 1995 1994 1994 1993 1992
------------------------------------ -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
California 32% 87.1% 84.2% 85.2% 82.8% 79.3%
Texas 9 88.8% 89.2% 90.1% 88.6% 88.7%
Illinois 8 91.7% 88.3% 90.7% 83.4% 71.7%
Florida 6 87.3% 89.8% 89.9% 87.0% 83.6%
Other 45 92.0% 90.1% 91.5% 87.6% 78.6%
------------------------------------ -----------------------------------
Total 100% 89.8% 87.9% 89.2% 85.7% 79.4%
==================================== ===================================
<CAPTION>
WEIGHTED AVERAGE REALIZED MONTHLY RENT PER SQUARE FOOT
-------------------------------------------------------------------
At Six months
June 30, ended June 30, Year Ended December 31,
1995 ------------------- ---------------------------------
% of Total 1995 1994 1994 1993 1992
------------------------------------ -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
California 32% $0.81 $0.81 $0.81 $0.79 $0.79
Texas 9 0.63 0.62 0.62 0.61 0.58
Illinois 8 0.67 0.64 0.65 0.62 0.62
Florida 6 0.74 0.70 0.71 0.70 0.64
Other 45 0.71 0.67 0.67 0.64 0.59
------------------------------------ -----------------------------------
Total 100% $0.73 $0.71 $0.71 $0.69 $0.66
==================================== ===================================
</TABLE>
Trends in property operations are due to:
. increasing occupancy levels due to the decreased levels of new supply
in the industry and promotion of the facilities by PSMI and PSCP.
. increasing realized rents per square foot of mini-warehouse space due
to increased demand and reduced need for promotional discounting of
mini-warehouse space due to improved occupancy.
The rental revenues of the facilities are typically higher in the second
and third quarters primarily because of the timing of rental rate increases and
because mini-warehouse facilities tend to experience greater occupancy during
the spring and summer months reflecting the moving patterns of individual users.
The Real Estate Interests encompass in excess of 295,000 rental spaces
throughout 38 states and 79 major metropolitan markets No single facility
generates more than .7% of revenues or has more than .6% of the rentable square
footage. No single tenant occupies more than .1% of the rentable square footage
or accounts for more than .1% of the revenue.
Liquidity and Capital Resources. The Real Estate Interests in which SEI
is acquiring an interest are characterized by low leverage and an increasing
level of funds available for principal payments, distributions and investments.
66
<PAGE>
The REITs and partnerships in which SEI is acquiring an interest have
relatively low overall debt, with 54 of the 63 entities owning 426 of the 526
properties having no debt. As of December 31, 1994, nine of the entities have
debt totaling $94 million which matures through 2002.
Debt maturities for the next five years and thereafter are as follows:
<TABLE>
<S> <C>
1995................. $11,036,000
1996................. 4,543,000
1997................. 4,352,000
1998................. 28,727,000
1999................. 24,113,000
Thereafter........... 21,167,000
-----------
$93,938,000
===========
</TABLE>
Cash provided by operating activities for the Real Estate Interests are
$103.4 million, $123.2 million, $141.8 and $74.1 million for the years of 1992,
1993 and 1994 and six months ended June 30, 1995, respectively. These cash flows
have been sufficient to cover capital expenditures and debt service
requirements.
PSI believes that important measures of performance, as well as liquidity,
are funds from operations (FFO) and earnings before interests, taxes,
depreciation and amortization (EBITDA). FFO and EBITDA are supplemental
performance measures for real estate investment trusts used by industry
analysts. FFO and EBITDA does not take into consideration scheduled principal
payments on debt, capital improvements, distributions or other obligations.
Accordingly, FFO and EBITDA are not a substitute for cash flow from operations
or net income as a measure of the Company's liquidity or operating performance.
The following tables summarizes the Real Estate Interests' FFO and EBITDA:
<TABLE>
<CAPTION>
FFO
----------------------------------------------------------
Six months ended
June 30, Years ended December 31,
-------------------- ----------------------------------
1995 1994 1994 1993 1992
-------- -------- --------- --------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Operating revenues in excess of specified expenses.. $ 53,083 $ 47,278 $ 99,859 $ 80,400 $ 59,853
Depreciation and amortization....................... 21,052 21,031 41,982 42,808 43,556
-------- -------- --------- --------- --------
Funds provided by operations (FFO).................. 74,135 68,309 141,841 123,208 103,409
FFO attributable to other equity interest........... (56,757) (52,264) (108,645) (94,599) (79,092)
-------- -------- --------- --------- --------
Funds available for principal payments,
distributions and investment (FFO to be acquired).. $ 17,378 $ 16,045 $ 33,196 $ 28,609 $ 24,317
======== ======== ========= ========= ========
<CAPTION>
EBITDA
----------------------------------------------------------
Six months ended
June 30, Years ended December 31,
-------------------- ----------------------------------
1995 1994 1994 1993 1992
-------- -------- --------- --------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Funds from operations............................... $ 74,135 $ 68,309 $ 141,841 $ 123,208 $103,409
Interest expense.................................... 5,088 5,023 9,981 10,860 11,038
-------- -------- --------- --------- --------
Earnings before interest, taxes, depreciation
and amortization (EBITDA).......................... 79,223 73,332 151,822 134,068 114,447
EBITDA attributable to other equity interests....... (60,443) (56,084) (115,932) (102,498) (87,012)
-------- -------- --------- --------- --------
EBITDA to be acquired............................... $ 18,780 $ 17,248 $ 35,890 $ 31,570 $ 27,435
======== ======== ========= ========= ========
Percentage increase in EBITDA over prior year....... 8.9% 14.3% 13.7% 15.1% 18.5%
======== ======== ========= ========= ========
</TABLE>
67
<PAGE>
FFO and EBITDA attributable to other equity interests represents the FFO
and EBITDA attributable to owners other than the interests to be acquired by
SEI. Prior to the merger, SEI has a de minimis interest in four of the sixty-
three entities which is included in the lines "attributable to other equity
interests".
Capital expenditures to maintain facilities for the Real Estate Interests
being acquired by SEI were $1,310,000, $1,351,000 and $1,295,000 for the years
ended December 31, 1994, 1993 and 1992, respectively, and $541,000 and $490,000
for the six months ended June 30, 1995 and 1994, respectively.
In connection with the acquisition of the notes receivable and seven
properties (100% fee interest being acquired), SEI will assume approximately
$4,706,000 in debt consisting of underlying debt related to four of the notes
receivable and mortgage debt secured by one of the facilities. This debt bears
interest at rates ranging from 7.1% to 9.9% and with maturity dates ranging
through the year 2000. SEI believes the cash flow from the Real Estate Interests
being acquired will be sufficient to meet the repayment requirements of the debt
being assumed.
68
<PAGE>
SEI PRO FORMA
The following is a discussion of operations after giving effect to (i)
the issuance and investment of approximately $500 million of additional
capital through the issuance of preferred stock and Common Stock in public
offerings and the issuance of Common Stock in connection with the mergers of
Public Storage Properties VI, VII and VIII, Inc., and (ii) the proposed merger
of PSMI with and into SEI, including the acquisition of the Real Estate
Interests; all as if such transactions were completed at the beginning of
1994. This discussion is based on the unaudited Pro-Forma Balance Sheet as of
June 30, 1995 and the Statements of Income for the six-month period ended June
30, 1995 and the year ended December 31, 1994. Upon completion of the Merger,
including the acquisition of the Real Estate Interests, SEI will be a fully
integrated, self-advised and self-managed REIT. SEI will acquire the "Public
Storage" name and trademark, proprietary operating systems, property
management agreements on over 1,100 facilities and equity interest in over 500
geographically diversified facilities.
Operating Results - SEI Historical compared to SEI Pre-Merger Pro Forma
Six months ended June 30, 1995. Pre-Merger pro forma net income for the
------------------------------
six months ended June 30, 1995 was $36,063,000 compared to the historical net
income of $29,751,000, representing an increase of $6,312,000. Pro forma net
income allocable to the Common Stock increased to $20,413,000 for the six
months ended June 30, 1995 compared to historical net income allocable to the
Common Stock shareholders of $16,443,000 for the same period, representing an
increase of $3,970,000. The increases in net income and net income allocable
to the Common Stock were the result of (i) the additional issuances of equity
securities during 1995, and the use of the proceeds therefrom to acquire
additional real estate assets, and (ii) the merger transactions with Public
Storage Properties VI, Inc. (completed February 28, 1995) and Public Storage
Properties VII, Inc., (completed June 30, 1995), as if such transactions were
completed at the beginning of the period. Pre-Merger pro forma net income per
share of Common Stock was $.48 per share (based on weighted average shares
outstanding of 42,108,048) for the six months ended June 30, 1995 compared to
the historical net income per share of Common Stock of $.50 (based on weighted
average shares of Common Stock outstanding of 32,707,556) for the same period.
The decrease in net income per share of Common Stock is principally due to
additional depreciation expense as a result of the acquisition of additional
real estate facilities combined with additional preferred stock dividends.
During 1995, SEI issued in public offerings shares of its Series E
Preferred Stock (February 1, 1995, net proceeds of $52.9 million), Series F
Preferred Stock (May 3, 1995, net proceeds of $55.5 million) and Common Stock
(May 31, 1995, net proceeds of $82.0 million). The aggregate net proceeds
have been used to fund the cash portion of the acquisition cost of real estate
facilities, limited partnership units in the PSI limited partnerships and
mergers.
During the first six months of 1995, SEI acquired 88 real estate
facilities (including 61 real estate facilities acquired in connection with
the mergers of Public Storage Properties VI, Inc. and Public Storage
Properties VII, Inc.). Since June 30, 1995, SEI acquired an additional 23
real estate facilities and is currently in the process of acquiring an
additional 13 real estate facilities. Rental income, cost of operations and
depreciation expense all increased compared to the respective historical
amounts due to the operating results of real estate facilities acquired during
1995 (including those real estate facilities in which SEI is currently in the
process of acquiring). These transactions increased SEI's capitalization by
approximately $250 million and resulted in an increase in its wholly-owned
property portfolio from 143 to 267.
The consideration for the above real estate facilities included
cancellation of mortgage notes receivable, assumption of mortgage debt and
cash. As a result, interest income decreased related to the canceled mortgage
notes receivable and interest expense increased to reflect additional interest
expense on the assumed mortgage debt.
69
<PAGE>
Year Ended December 31, 1994. Pre-Merger pro forma net income for the
----------------------------
year ended December 31, 1994 was $68,682,000 compared to the historical net
income of $42,118,000, representing an increase of $26,564,000. Pre-Merger
pro forma net income allocable to the Common Stock increased to $37,476,000
for the year ended December 31, 1994 compared to historical net income
allocable to Common Stock of $25,272,000 for the same period, representing an
increase of $12,204,000. The increases in net income and net income allocable
to the Common Stock were the result of (i) the additional issuances of equity
capital during 1994 and 1995, and the use of the proceeds therefrom to acquire
additional real estate assets, and (ii) the merger transactions with Public
Storage Properties VI, Public Storage Properties VII, Inc. and Public Storage
Properties VIII, Inc. Pre-Merger pro forma net income per share of Common
Stock was $.90 per share (based on weighted average shares outstanding of
41,844,644) for the year ended December 31, 1994 compared to the historical
net income per share of $1.05 (based on weighted average shares of Common
Stock outstanding of 24,077,055) for the same period. The decrease in net
income per share of Common Stock is principally due to additional depreciation
expense as a result of the acquisition, of additional real estate facilities
combined with additional preferred stock dividends.
In addition to the public offering of equity securities during 1995, SEI
issued in public offerings during 1994 shares of its Series C Preferred Stock
(June 30, 1994, net proceeds of $28.9 million), Series D Preferred Stock
(September 1, 1994, net proceeds of $29.0 million) and Common Stock (February
15, 1994 and November 25, 1994, aggregate net proceeds of $110.3 million).
The aggregate net proceeds have been used to fund the cash portion of the
acquisition cost of real estate facilities, limited partnership units in the
PSI limited partnerships and mergers with Public Storage Properties VI, VII
and VIII. These transactions increased SEI's capitalization by approximately
$500 million and resulted in an increase in its wholly owned property
portfolio from 71 to 267.
During 1994, SEI acquired 71 mini-warehouse facilities and one business
park facility (including 23 facilities acquired in the merger with Public
Storage Properties VIII, Inc.). Rental income, cost of operations and
depreciation expense all increased compared to the respective historical
amounts due to the operating results of real estate facilities acquired during
1994 and 1995 (including those real estate facilities in which SEI is
currently in the process of acquiring).
The consideration for the above real estate facilities included
cancellation of mortgage notes receivable, assumption of mortgage debt and
cash. As a result, interest income decreased related to the canceled mortgage
notes receivable and interest expense increased to reflect additional interest
expense on the assumed mortgage debt.
Throughout 1994 and 1995, pursuant to cash tender offers, SEI acquired
limited partnership units in each of the PSI limited partnerships. These
acquisitions have resulted in reductions to the "Minority interest in income"
from what it would otherwise have been in the absence of such acquisitions,
and accordingly, have increased SEI's share of the consolidated PSI limited
partnerships' income. As a result of these acquisitions, minority interest in
income decreased from $9,481,000 to $6,918,000.
Operating Results - SEI Pre-Merger Pro Forma compared to Post-Merger
Pro Forma
Upon consummation of the Merger, (i) PSMI will be merged with and into
SEI, which will be the surviving corporation, (ii) SEI will be renamed "Public
Storage, Inc.," and (iii) the capital stock of PSMI will be 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.
Immediately following the Merger, SEI will become self managed and self
advised, and will own 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-
70
<PAGE>
warehouses, (4) general and limited partnership interests in 47 limited
partnerships owning an aggregate of 286 mini-warehouses and one commercial
property, (5) equity interests in 16 REITs which, exclusive of SEI's facilities,
own an aggregate of 219 mini-warehouses and 13 commercial properties, (6)
property management contracts, exclusive of SEI's facilities, for 604 mini-
warehouses and 26 commercial properties (563 of which collectively are owned by
entities affiliated with PSI), and (7) a 95% economic interest in a merchandise
company which currently sells locks and boxes to mini-warehouse tenants and
others.
Six months ended June 30, 1995. Post-Merger pro forma net income for the
------------------------------
six months ended June 30, 1995 was $53,317,000 compared to the Pre-Merger pro
forma net income of $36,063,000, representing an increase of $17,254,000 or
48%. Post-Merger pro forma net income allocable to Common Stock increased to
$37,667,000 for the six months ended June 30, 1995 compared to the Pre-Merger
pro forma net income allocable to Common Stock of $20,413,000 for the same
period or an increase of 85%. Post-Merger pro forma net income per share of
Common Stock was $.52 per share or 8% higher (based on weighted average shares
outstanding of 72,108,048) for the six months ended June 30, 1995 compared to
the Pre-Merger pro forma net income per share of $.48 (based on weighted
average shares outstanding of 42,108,048) for the same period. The lower
increase in per share income of 8% compared to the 85% increase in net income
allocable to the Common Stock is due to the significant increase (71%) in the
number of shares of Common Stock issued as a result of the Merger.
The Post-Merger pro forma net income increased as a result of (i)
property operations of the seven wholly owned properties, (ii) interest income
and expense related to the all-inclusive deeds of trust, (iii) equity in
earnings of limited partnerships and REITs, (iv) facility management fees and
operating expenses relating to the property management contracts, (v) the
elimination of the advisory fee as a result of becoming self advised offset in
part by additional administrative costs, reflecting primarily executive
compensation and rent previously paid for by the Adviser and (vi) operating
results of the merchandise company.
Year ended December 31, 1994. Post-Merger pro forma net income for the
----------------------------
year ended December 31, 1994 was $100,147,000 compared to the Pre-Merger pro
forma net income of $68,682,000, representing an increase of $31,465,000, or
46%. Post-Merger pro forma net income allocable to Common Stock increased to
$68,941,000 for the year ended December 31, 1994 compared to the Pre-Merger
pro forma net income allocable to Common Stock of $37,476,000 for the same
period, an increase of 84%. Post-Merger pro forma net income per share of
Common Stock was $.96 per share or 7% higher (based on weighted average shares
outstanding of 71,844,644) for the year ended December 31, 1994 compared to
the Pre-Merger pro forma net income per share of $.90 (based on weighted
average shares outstanding of 41,844,644) for the same period. The lower
increase in per share income of 7% compared to 84% increase in net income
allocable to Common Stock is due to the significant increase in the number of
shares to be issued as a result of the Merger.
Similar to the six months ended June 30, 1995, Post-Merger pro forma net
income increased as a result of (i) property operations of the seven wholly
owned properties, (ii) interest income and expense related to the all-
inclusive deeds of trust, (iii) equity in earnings of real estate entities
with respect to the acquired partnership and equity interests in limited
partnerships and REITs, respectively, (iv) facility management fees and
operating expenses relating to the property management contracts, (v) the
elimination of the advisory fee as a result of becoming self-advised, offset
in part by additional administrative costs, reflecting primarily executive
compensation and rent previously paid for by the Adviser, and (vi) operating
results of the merchandise company.
71
<PAGE>
Liquidity and Capital Resources
Capital Structure. The following table summarizes SEI's capital
-----------------
structure on an historic and pro forma (pre- and post-Merger) basis at June
30, 1995:
<TABLE>
<CAPTION>
At
June 30, 1995
----------------------------------------
SEI SEI
SEI Pre-Merger Post-Merger
(Historical) (Pro Forma) (Pro Forma)
----------- ----------- -----------
(In thousands, except per share data)
<S> <C> <C> <C>
Line of credit with banks...... $ - $ - $ -
Senior notes................... - - 68,000
Mortgage notes payable......... 58,497 103,213 107,919
---------- ---------- ----------
Total debt................. 58,497 103,213 175,919
Minority interest.............. 131,536 124,848 124,848
Shareholders' equity:
Senior Preferred Stock......... 277,650 277,650 277,650
Convertible Preferred Stock.... 57,500 57,500 57,500
Common Stock................... 557,514 557,514 1,112,954
Class B Common Stock........... - - 700
---------- ---------- ----------
Total shareholders' equity... 892,664 892,664 1,448,804
---------- ---------- ----------
Total capitalization........... $1,082,697 $1,120,725 $1,749,571
========== ========== ==========
Book value per share of
Common Stock................. $13.26 $13.26 $15.46
========== ========== ==========
</TABLE>
Comparison of Historical vs. Post-Merger Pro Forma Capitalization.
-----------------------------------------------------------------
. Total shareholders' equity will increase by approximately $556.1
million or 62%, which will be directly attributable to the Common
Stock issued in the Merger.
. Total debt will increase from the historical amount of $58.5 million
at June 30, 1995 to $175.9 million. The increase in debt is
principally the result of (i) mortgage debt ($44.7 million) either
assumed or estimated to be assumed in connection with property
acquisitions subsequent to June 30, 1995 combined with the assumption
of (ii) senior notes payable ($68.0 million) to be assumed in
connection with the Merger and (iii) mortgage debt of $4.7 million in
connection with the Merger.
. Preferred stock as a percentage of total shareholders' equity will
decrease from approximately 31% (historical) at June 30, 1995 to
approximately 19% on a Post-Merger pro forma basis at June 30, 1995.
. SEI's debt to equity ratio will increase from 7% (historical) to 12%
(Post-Merger), however, its ratio of earnings to fixed charges
(interest expense and preferred stock dividends) improves from 2.22
for 1994 to 2.48 on a Post-Merger pro forma basis for the same
period due to the overall reduction in leverage (debt and preferred
stock to total capitalization) from 36% to a Post-Merger pro-forma
of 29% of total capitalization.
72
<PAGE>
Funds available for principal payments and investment. SEI anticipates
-----------------------------------------------------
that funds provided by operating activities will continue to be sufficient
over at least the next 12 months to provide for capital improvements, debt
service requirements and distributions to shareholders.
The following table summarizes SEI's ability to pay the minority
interests' distributions, its distributions to the preferred and Common Stock
shareholders and fund capital improvements to maintain the facilities through
the use of funds provided by operating activities. The remaining funds are
available to make both scheduled and optional principal payments on debt, pay
distributions on Common Stock and for investment.
<TABLE>
<CAPTION>
Six Months Ended June 30, 1995 Year Ended December 31, 1994
------------------------------------------- -------------------------------------------
SEI SEI SEI SEI
SEI Pre-Merger Post-Merger SEI Pre-Merger Post-Merger
(Historical) (Pro Forma) (Pro Forma) (Historical) (Pro Forma) (Pro Forma)
------------ ----------- ------------ ------------ ----------- -----------
(amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net income........................ $ 29,751 $ 36,063 $ 53,317 $ 42,118 $ 68,682 $100,147
Depreciation and amortization..... 16,926 20,747 23,987 28,274 40,971 47,496
Depreciation from unconsolidated
real estate entities............. - - 10,639 - - 21,227
Minority interest in income....... 3,715 3,570 3,570 9,481 6,918 6,918
Less: Gain on disposition of
real estate...................... - - - - (203) (203)
Amortization of discounts on
mortgage notes receivable........ (67) - - (693) - -
-------- -------- -------- -------- -------- --------
Funds provided by operating
activities....................... 50,325 60,380 91,513 79,180 116,368 175,585
FFO allocable to minority
interests........................ (9,107) (8,721) (8,721) (23,037) (17,569) (17,569)
-------- -------- -------- -------- -------- --------
FFO............................... 41,218 51,659 82,792 56,143 98,799 158,016
Less: preferred stock dividends... (13,308) (15,650) (15,650) (16,846) (31,206) (31,206)
-------- -------- -------- -------- -------- --------
FFO allocable to Common Stock..... 27,910 36,009 67,142 39,297 67,593 126,810
Capital improvements to
-----------------------
maintain facilities:
--------------------
Mini-warehouses................. (2,397) (3,076) (3,084) (6,360) (10,322) (10,366)
Business parks.................. (909) (909) (909) (1,952) (1,952) (1,952)
Add back: minority
interest share of capital
improvements to maintain
facilities....................... 859 800 800 2,948 2,455 2,455
-------- -------- -------- -------- -------- --------
Funds available for
principal payments,
distributions on Common
Stock and investment............. 25,463 32,824 63,949 33,933 57,774 116,947
Cash distributions on
Common Stock..................... (14,886) (18,332) (31,532) (21,249) (34,628) (60,128)
-------- -------- -------- -------- -------- --------
Funds available for
principal payments and
investment....................... $ 10,577 $ 14,492 $ 32,417 $ 12,684 $ 23,146 $ 56,819
======== ======== ======== ======== ======== ========
</TABLE>
For the six months ended June 30, 1995, Post-Merger pro forma FFO was
$82,792,000 compared to the Pre-Merger FFO of $51,659,000, representing an
increase of $31,133,000. Post-Merger pro forma FFO allocable to Common Stock
(after deducting preferred stock dividends) was $67,142,000 compared to the
Pre-Merger amount of $36,009,000 for the six months ended June 30, 1995.
Post-Merger pro forma weighted average shares of Common Stock outstanding
during the period was 72,108,048 compared to Pre-Merger weighted average
shares of Common Stock of 42,108,048. Historically, SEI's FFO allocable to
Common Stock was $27,910,000 for the six months ended June 30, 1995
(32,707,556 weighted average shares of Common Stock outstanding).
For the year ended December 31, 1994, Post-Merger pro forma FFO was
$158,016,000 compared to the Pre-Merger pro forma FFO of $98,799,000,
representing an increase of $59,217,000. Post-Merger pro forma FFO allocable
to Common Stock (after deducting preferred stock dividends) was $126,810,000
compared to the Pre-Merger amount of $67,593,000 for the year ended December
31, 1994. Post-Merger pro forma weighted average shares of Common Stock
outstanding during the period was 71,844,644 compared to Pre-Merger weighted
average shares of Common Stock outstanding of
73
<PAGE>
41,844,644. Historically, SEI's FFO applicable to Common Stock was $39,297,000
for the year ended December, 31, 1994 (24,077,055 weighted average shares of
Common Stock outstanding).
On a historical basis, for the six months ended June 30,1995 and the year
ended December 31, 1994, SEI retained $10.6 million and $12.7 million,
respectively, of funds to make principal payments on debt and additional
investments. On a Post-Merger, pro forma basis for the six months ended June
30, 1995 and the year ended December 31, 1994, SEI would have retained $32.4
million and $56.8 million, respectively, to make principal payments on debt
and additional investments. After considering distributions paid to other
investors related to the Real Estate Interests, SEI would have retained $23.5
million and $40.1 million on a Post Merger pro forma basis for the six months
ended June 30, 1995 and the year ended December 31, 1994, respectively.
SEI will be accounting for the Real Estate Interest using the equity
method of accounting, and accordingly, earnings will be recognized based upon
SEI's interest in each of the partnerships and REITs. The interest for a
period is based upon SEI's share of the increase or decrease in the net assets
of the entities. Provisions of these partnerships and REITs, however,
provide for the payment of preferred cash distributions to other investors
(until certain specified amounts have been paid) without regard to the pro
rata interest of all investors in current earnings. As a result, actual cash
distributions to be paid to SEI for a period of time will be less than SEI's
FFO from these entities. On a pro forma basis, FFO distributable to SEI
during 1994 and the six months ended June 30, 1995 would have been
approximately $16.7 million and $8.9 million, respectively, less than FFO.
Preferred cash distributions paid to other investors during each period have
the effect of increasing SEI's economic interest in each of the respective
entities and reducing the amount of future preference payments which must be
paid to other investors before cash distributions will be shared on a pro rata
basis with respect to each investor's actual interest. The aggregate future
preference payments to other investors is approximately $130 million and is
expected to be paid over approximately 15 years, with approximately 50% of the
amount being paid over the next 3.5 years.
SEI's Post-Merger pro forma debt at June 30, 1995 is estimated to be
$175,919,000. Approximate principal maturities are as follows:
<TABLE>
<S> <C>
1995 (July 1995 - December 1995)........... $ 1,341,000
1996....................................... 15,913,000
1997....................................... 11,109,000
1998....................................... 11,476,000
1999....................................... 23,948,000
Thereafter................................. 112,132,000
------------
Total...................................... $175,919,000
============
</TABLE>
SEI's low leverage, substantially unencumbered asset base and its $125
million line of credit provide it with a significant degree of financial
flexibility (both historically and pro forma, post-merger).
74
<PAGE>
Distributions. SEI has a conservative distribution policy that is, among
-------------
other things, supported by FFO allocable to Common Stock and SEI's requirement
to maintain its REIT status. SEI's conservative distribution policy permits
it, after funding its distributions and capital improvements, to retain
significant funds to make additional investments and debt reductions. During
1992, 1993, 1994 and the first six months of 1995, SEI distributed to Common
Stock shareholders 66%, 59%, 54% and 53% of its FFO allocable to Common Stock,
respectively, allowing it to retain approximately $35 million after capital
improvements and preferred stock dividend requirements. Historical
distributions to shareholders during 1994 and the first six months of 1995
were as follows:
<TABLE>
<CAPTION>
Six Months Ended June 30, Year Ended December 31,
1995 1994
----------------------------- -----------------------------
Distributions Total Distributions Total
Per Share Distributions Per Share Distributions
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Series A Preferred Stock............. $1.250 $ 2,282,000 $2.500 $ 4,563,000
Series B Preferred Stock............. 1.150 2,744,000 2.300 5,340,000
Series C Preferred Stock............. 1.066 1,279,000 1.042 1,250,000
Series D Preferred Stock............. 1.188 1,426,000 0.792 950,000
Series E Preferred Stock............. 1.042 2,286,000 - -
Series F Preferred Stock............. 0.400 919,000 - -
Convertible Preferred Stock.......... 1.031 2,372,000 2.063 4,743,000
----------- -----------
13,308,000 16,846,000
Common Stock......................... 0.440 14,886,000 0.850 21,249,000
----------- -----------
$28,194,000 $38,095,000
=========== ===========
</TABLE>
On a Post-Merger, pro forma basis, SEI's distributions to Common Stock
shareholders would have been approximately 47% of its FFO available to Common
Stock shareholders for both the year ended December 31, 1994 and the six
months ended June 30, 1995.
As a REIT, SEI is not taxed on that portion of its taxable income which
is distributed to its shareholders provided that at least 95% of its taxable
income in any year is so distributed prior to filing of SEI's tax return with
respect to such year. SEI has satisfied the REIT distribution requirement
since 1980. SEI has satisfied the REIT distribution requirement for 1992, 1993
and 1994 by attributing distributions in 1993, 1994 and 1995 to the prior
year's taxable income. SEI may be required, over each of the next several
years, to attribute distributions made after the close of the taxable year to
the prior year, but shareholders will be treated for federal income tax
purposes as having received such distributions in the taxable years in which
they are actually made.
As a result of the Merger with PSMI, SEI's taxable income will increase
substantially. Further, as a result of: (i) the lack of distributions on the
Class B Common Stock for a minimum of four years and (ii) the taxable income-
related to PSMI (approximately $38 million in 1994) exceeding the
distributions on the Common Stock issued ($.88/share or $26.4 million/year),
SEI's overall level of distributions may have to increase.
Future Transactions. SEI intends to continue to expand its asset and
-------------------
capital base through the acquisition of real estate assets and interests in
real estate assets from unaffiliated parties and affiliates of PSI through
direct purchases, merger, tender offers or other transactions.
75
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
---------------------------------
c. Exhibits.
--------
2. 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 (the "Agreement and Plan of
Reorganization"), and form of Agreement of Merger between Storage
Equities, Inc. and Public Storage Management, Inc. (Exhibit A to
the Agreement and Plan of Reorganization).
23. Consent of Ernst & Young LLP.
76
<PAGE>
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 hereunto duly authorized.
STORAGE EQUITIES, INC.
Date: September 7, 1995 By: /s/ Harvey Lenkin
------------------------ -----------------------------
Harvey Lenkin
President
77
<PAGE>
EXHIBIT 2
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
Exhibits to this Agreement (except Exhibit A, Agreement of Merger, which is
filed herewith) have been omitted and will be furnished to the Securities and
Exchange Commission upon request.
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<C> <S> <C>
1. DEFINITIONS........................................................... 1
2. THE MERGER; CLOSING................................................... 6
2.1. The Merger..................................................... 6
2.2. Closing........................................................ 6
2.3. Effective Time................................................. 6
3. EFFECT OF MERGER...................................................... 7
3.1. Articles of Incorporation...................................... 7
3.2. Bylaws......................................................... 7
3.3. Officers and Directors......................................... 7
4. CONVERSION OF SHARES; POST-CLOSING ADJUSTMENTS; ESCROW................ 7
4.1. Conversion of PSMI Shares...................................... 7
4.2. Post-Closing Adjustment........................................ 8
4.3. SEI Shares Unaffected.......................................... 9
4.4. Surrender of Certificates...................................... 9
4.5. Fractional Shares.............................................. 10
4.6. Transfer of Shares............................................. 10
4.7. Lost, Stolen or Destroyed Certificates......................... 10
4.8. Indemnification Shares; Claims Against the Escrow.............. 10
5. REPRESENTATIONS AND WARRANTIES OF PSI AND PSMI........................ 12
5.1. Organization and Related Matters............................... 12
5.2. Ownership Interests............................................ 12
5.3. Authority...................................................... 13
5.4. Capital Stock.................................................. 13
5.5. Litigation..................................................... 13
5.6. No Violation or Conflict....................................... 14
5.7. Compensation................................................... 14
5.8. Employee Benefit Plans......................................... 14
5.9. Labor Matters.................................................. 16
5.10. Taxes.......................................................... 16
5.11. Intellectual Property.......................................... 17
5.12. Financial Statements........................................... 18
5.13. Absence of Certain Changes or Events........................... 18
5.14. Books and Records.............................................. 18
5.15. Contracts and Leases........................................... 19
5.16. Title to Assets; Encumbrances.................................. 19
5.17. Real Property.................................................. 19
5.18. Environmental Matters.......................................... 20
</TABLE>
-i-
<PAGE>
<TABLE>
<C> <S> <C>
5.19. Affiliated Transactions........................................ 22
5.20. Brokers and Finders............................................ 22
5.21. Proxy Statement................................................ 22
5.22. Insurance...................................................... 23
5.23. Licenses; Compliance With Law.................................. 23
5.24. Governmental Approvals......................................... 23
5.25. Disclosure..................................................... 24
6. REPRESENTATIONS AND WARRANTIES OF SEI................................. 24
6.1. Organization and Related Matters............................... 24
6.2. Authorization.................................................. 24
6.3. Capital Stock.................................................. 25
6.4. Litigation..................................................... 25
6.5. Compliance With Other Instruments, Etc. ....................... 25
6.6. Reports and Financial Statements............................... 26
6.7. Brokers and Finders............................................ 26
6.8. Proxy Statement................................................ 27
6.9. Disclosure..................................................... 27
7. ADDITIONAL COVENANTS AND AGREEMENTS................................... 27
7.1. Conduct of Business of PSI Entities............................ 27
7.2. Other Transactions............................................. 29
7.3. Meeting of Shareholders........................................ 30
7.4. Proxy Statement................................................ 30
7.5. Filings; Other Action.......................................... 30
7.6. Access to Information.......................................... 31
7.7. Tax Matters.................................................... 31
7.8. Restructure.................................................... 31
7.9. Management and Advisory Agreements............................. 31
7.10. Intellectual Property Rights................................... 32
7.11. Employees...................................................... 32
7.12. Tax-Free Exchange and REIT Status.............................. 32
7.13. Public Statements.............................................. 32
7.14. Notice of Certain Events....................................... 33
7.15. Director and Officer Indemnification........................... 33
7.16. Recapitalization............................................... 33
7.17. PSI/PSMI Disclosure Statement.................................. 33
7.18. Listing of SEI Shares.......................................... 34
7.19. Further Action................................................. 34
8. CONDITIONS............................................................ 34
8.1. Conditions to Each Party's Obligations......................... 34
8.2. Conditions to Obligations of PSMI to Effect the Merger......... 35
8.3. Conditions to Obligation of SEI to Effect the Merger........... 35
</TABLE>
-ii-
<PAGE>
<TABLE>
<C> <S> <C>
9. TERMINATION........................................................... 38
9.1. Termination by Mutual Consent.................................. 38
9.2. Termination by Either SEI or PSMI.............................. 38
9.3. Effect of Termination and Abandonment.......................... 39
10. MISCELLANEOUS......................................................... 39
10.1. Expenses....................................................... 39
10.2. Notices, Etc. ................................................. 39
10.3. Survival....................................................... 40
10.4. Modification or Amendment...................................... 40
10.5. Waiver......................................................... 40
10.6. No Assignment.................................................. 41
10.7. Entire Agreement............................................... 41
10.8. Remedies Cumulative............................................ 41
10.9. Parties in Interest............................................ 41
10.10. Governing Law.................................................. 41
10.11. Name, Captions, Etc. .......................................... 41
10.12. Severability................................................... 42
10.13. Counterparts................................................... 42
10.14. Interpretation................................................. 42
10.15. Further Action................................................. 42
</TABLE>
EXHIBITS
--------
Exhibit A - Merger Agreement
Exhibit B - PSI Entities
Exhibit C - Officers of Surviving Corporation
Exhibit D - Outline of Rights, Preferences, Privileges and
Restrictions of SEI Class B Shares
-iii-
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION (the "AGREEMENT"), dated as of June
30, 1995, by and among Storage Equities, Inc., a California corporation ("SEI"),
Public Storage, Inc., a California corporation ("PSI"), and Public Storage
Management, Inc., a California corporation ("PSMI").
RECITALS
A. The parties intend that the reorganization contemplated by this
Agreement (the "PLAN OF REORGANIZATION") qualify as a "reorganization" under the
provisions of Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as
amended.
B. Prior to implementation of the Plan of Reorganization, PSI and PSMI
contemplate a restructure of various of their affiliated corporations, including
a liquidation by merger of PSI with and into its parent, PSI Holdings, Inc.
("PSIH") followed by a merger of PSIH with and into PSMI, and SEI contemplates
amending its Articles of Incorporation to effect a recapitalization.
C. The Plan of Reorganization provides for the merger of PSMI with and
into SEI in accordance with the applicable provisions of the General Corporation
Law of California (the "GCLC") and an Agreement of Merger substantially in the
form attached hereto as Exhibit A (the "MERGER AGREEMENT").
---------
D. The Boards of Directors of SEI, PSI, and PSMI believe that it is in
the best interests of such corporations and their respective shareholders to
enter into and complete this Agreement and they each have approved this
Agreement and the transactions contemplated hereby.
NOW, THEREFORE, in consideration of the mutual representations,
warranties, and agreements set forth herein, the parties hereby agree as
follows:
1. DEFINITIONS
As used in this Agreement, the following terms shall have the respective
meanings set forth below:
"Acquisition Proposal": As defined in Section 7.2.
"Affiliate": As defined in Rule 12b-2 under the Exchange Act.
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"Authorization": Any consent, approval or authorization of, expiration
or termination of any waiting period requirement (including pursuant to the HSR
Act) by, or filing, notice, registration, qualification, declaration or
designation with, any Governmental Body.
"Benefit Arrangement": As defined in Section 5.8(a).
"Business Combination": As defined in Section 4.1(b).
"Certificates": As defined in Section 4.1(c).
"Closing": As defined in Section 2.2.
"Closing Date": The date on which the Closing occurs.
"Code": The Internal Revenue Code of 1986, as amended.
"Damages": means any provable or ascertainable loss, liability, damage,
cost, obligation or expense (including reasonable costs of investigation,
defense and prosecution of litigation and attorneys' fees) incurred by SEI.
"Effective Time": As defined in Section 2.3.
"Employee Plan": As defined in Section 5.8(a).
"Employees": As defined in Section 5.8(a).
"ERISA": The Employee Retirement Income Security Act of 1974, as
amended, and all regulations promulgated thereunder as in effect from time to
time.
"ERISA Affiliate": Any trade or business, whether or not incorporated,
that is now or has at any time in the past been treated as a single employer
with PSMI or any of its Affiliates under Section 414(b) or (c) of the Code and
the Treasury Regulations thereunder.
"Exchange": Either the NYSE or the national securities exchange (as
defined in Section 12(b) of the Exchange Act) or automated quotation system upon
which the SEI Common Shares are then listed for trading.
"Exchange Act": The Securities Exchange Act of 1934, as amended.
"Excluded Companies": Collectively, PS Insurance Company, Ltd., PSI
Securities Corp., Canadian Mini-Warehouse Management, Ltd., Canadian Mini-
Warehouse Properties, Ltd. and Canadian Diversified Storage.
"EY Report": As defined in Section 4.2(a).
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"Final Determination": (a) (i) A decision of the United States Tax
Court, which has become final and non-appealable, or (ii) a judgment, decree or
other order by another court or other tribunal with appropriate jurisdiction,
which has become final and non-appealable; (b) a final and binding settlement or
compromise with the Internal Revenue Service or another administrative agency
with appropriate jurisdiction, including, but not limited to, a closing
agreement under Section 7121 of the Code; (c) a deficiency assessment or other
determination which is not protested or appealed by the taxpayer within the
appropriate period for protest or appeal and which therefore has become final
and non-appealable; or (d) any final disposition by reason of the expiration of
all applicable statutes of limitations.
"Governmental Body": Any federal, state, municipal, political
subdivision or other governmental department, commission, board, bureau, agency,
authority or instrumentality, whether domestic or foreign.
"HSR Act": The Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended.
"Hughes": B. Wayne Hughes.
"Indemnification Escrow Agent": As defined in Section 4.8(a).
"Indemnification Escrow Agreement": As defined in Section 4.8(a).
"Indemnification Period": As defined in Section 4.8(b).
"Indemnification Shares": As defined in Section 4.8(a).
"Knowledge": The term "knowledge" or "best knowledge" and any
derivatives thereof when applied to any party to this Agreement shall refer to
the knowledge of a particular fact or matter which such party or any director,
officer or senior manager thereof has or could reasonably be expected to have,
discover or become aware of as a result of the conduct of the party's business
or the performance of his or her duties in the ordinary course, but no
information known by any other employee, or any attorney, accountant or other
representative of such party, shall be imputed to such party.
"Market Value": For purposes of this Agreement, the per-share value of
SEI Common Shares, which shall be the average of the SEI Common Shares daily
closing price on the Exchange for each of the thirty (30) trading days on which
SEI Common Shares were traded immediately preceding the determination date, for
purposes of the adjustment, if any, to the number of SEI Shares (as set forth in
Section 4.2(b)), or for purposes of calculating the amount of Indemnification
Shares, if any, to be withheld or delivered (as set forth in Section 4.8).
"Material Agreements": As defined in Section 5.15.
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"Merger": The merger of PSMI with and into SEI as contemplated by
Section 2.1.
"NYSE": The New York Stock Exchange, Inc.
"Original AA Report": As defined in Section 4.2(a).
"Partnership": As defined in Section 5.2.
"Permitted Liens": As defined in Section 5.16.
"Person": Any individual or corporation, company, partnership, trust,
incorporated or unincorporated association, joint venture or other entity of any
kind.
"Proxy Statement": As defined in Section 7.4.
"PSAI": Public Storage Advisers, Inc., a California corporation.
"PSCP": Public Storage Commercial Properties, Inc., a California
corporation.
"PSI Entities": Collectively, the entities that are listed on Exhibit B,
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all of which shall be merged with and into PSMI in the Restructure.
"PSI Entities Material Adverse Effect": As defined in Section 5.1.
"PSI Equity Adjustment": As defined in Section 4.2(a).
"PSI Intellectual Property Rights": Any intellectual property rights in
the United States of America or abroad, including patents, patent applications,
trademarks, trademark applications and registrations, service marks, service
mark applications and registrations, tradenames, tradename applications and
registrations, copyrights, copyright applications and registrations, licenses,
logos, corporate and partnership names and customer lists, proprietary
processes, formulae, inventions, trade secrets, know-how, development tools and
other proprietary rights used by any of the PSI Entities, pertaining to any
product, software, system or service manufactured, marketed, licensed,
sublicensed, used or sold by any PSI Entity in the conduct of its business or
used, employed or exploited in the development, license, sale, marketing,
distribution or maintenance thereof, and all documentation and media
constituting, describing or relating to the above, including, but not limited
to, manuals, memoranda, know-how, notebooks, software, records and disclosures.
"PSI/PSMI Disclosure Statement": The disclosure statement to be
delivered by PSMI to SEI pursuant to Section 7.17.
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"PSI Real Estate Investments": The real estate investments (consisting
of partnership interests and REIT stock) of the PSI Entities reflected in the
Original AA Report and the Updated AA Report.
"PSMI Common Shares": Common Stock, par value $.10 per share, of PSMI,
outstanding at the Effective Time.
"PSMI Shareholders": Collectively, B. Wayne Hughes, Tamara L. Hughes and
any other person who is a shareholder of PSMI immediately prior to the Effective
Time.
"Recapitalization": The recapitalization of SEI as described in Section
7.16.
"REIT": A real estate investment trust.
"Restructure": As defined in Section 7.8.
"SEC": The Securities and Exchange Commission.
"SEI Class B Shares": Shares of Class B Common Stock, $.10 par value per
share, of SEI to be created in the Recapitalization.
"SEI Common Shares": Shares of Common Stock, $.10 par value per share,
of SEI.
"SEI Material Adverse Effect": As defined in Section 6.1.
"SEI Preferred Shares": Shares of Preferred Stock, $.10 par value per
share, of SEI.
"SEI SEC Reports": As defined in Section 6.6.
"SEI Shares": Collectively, SEI Common Shares and SEI Class B Shares.
"SEI Shareholders Meeting": As defined in Section 7.3.
"Special Committee": The Special Committee of the Board of Directors of
SEI, appointed specifically for the purpose of considering the Merger and
related transactions.
"Surviving Corporation": SEI as the surviving corporation in the Merger.
"Tax" or "Taxes": Any federal, state, local or foreign income, profit,
transfer, excise, sales, capital stock, license, franchise, personal, ad
valorem, property, sales, use, gross receipts, payroll, employment, windfall
profits, environmental, social security, Medicare, occupation, customs,
unemployment, estimated, stamp, real property or other tax of any kind
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character or description whatsoever, including any charge, fee, levy, import
duty, license or assessment imposed by any Governmental Body, together with any
related liabilities, penalties, fines, additions to tax or interest, whether
disputed or not.
"Tax Return": Any tax return, information return, withholding tax
return, declaration of estimated tax, tax report, customs declaration, claim for
refund or information return or other documents (including without limitation
any related supporting schedules, statements or information) filed or required
to be filed with any Tax authority or Governmental Body in connection with the
determination, assessment or collection of any Taxes or the administration of
any laws, regulations or administrative requirements relating to any Taxes.
"Updated AA Report": As defined in Section 4.2(b).
"Valuation": As defined in Section 4.2(a).
2. THE MERGER; CLOSING
2.1. THE MERGER
At the Effective Time, (i) PSMI shall be merged with and into SEI in
accordance with the terms and conditions of this Agreement and the Merger
Agreement; (ii) the separate corporate existence of PSMI shall cease and SEI
shall be the surviving corporation and shall continue to be governed by the laws
of the State of California; and (iii) SEI's name shall be changed to "Public
Storage, Inc."
2.2. CLOSING
Subject to Article 9 hereof and the fulfillment or waiver of the
conditions set forth in Article 8, the closing of the transactions contemplated
by this Agreement (the "CLOSING") shall take place at (i) the offices of Heller,
Ehrman, White & McAuliffe, 601 South Figueroa Street, Los Angeles, California,
on the last day of the month following the SEI Shareholders Meeting, or (ii)
such other place and/or time and/or on such other date as SEI and PSMI may agree
or as may be necessary to permit the fulfillment or waiver of the conditions set
forth in Article 8.
2.3. EFFECTIVE TIME
At or before the Closing and after the SEI Shareholders Meeting, SEI and
PSMI shall execute and deliver the Merger Agreement, together with the requisite
Officers' Certificates, for filing with the California Secretary of State in
accordance with the GCLC. The Merger shall become effective on the date and at
the time (the "EFFECTIVE TIME") at which the Merger Agreement, together with the
requisite Officers' Certificates, are filed with the California Secretary of
State, which shall occur as soon as practicable after the Closing.
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3. EFFECT OF MERGER
3.1. ARTICLES OF INCORPORATION
The Articles of Incorporation of SEI, as amended by the Merger Agreement
at the Effective Time, shall continue to be the Articles of Incorporation of the
Surviving Corporation until duly amended in accordance with the terms thereof
and the GCLC.
3.2. BYLAWS
The Bylaws of SEI, as amended at the Effective Time, shall continue to be
the Bylaws of the Surviving Corporation until duly amended in accordance with
the terms thereof, the Articles of Incorporation of the Surviving Corporation
and the GCLC.
3.3. OFFICERS AND DIRECTORS
The directors of SEI at the Effective Time shall continue as directors of
the Surviving Corporation from and after the Effective Time. The persons whose
names are set forth on Exhibit C shall serve as the executive officers of the
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Surviving Corporation from and after the Effective Time, holding the positions
indicated opposite their respective names, until changed as provided by the GCLC
and the Articles of Incorporation and Bylaws of the Surviving Corporation.
4. CONVERSION OF SHARES; POST-CLOSING ADJUSTMENTS; ESCROW
4.1. CONVERSION OF PSMI SHARES
(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. The SEI Shares shall be allocated among the PSMI
Shareholders in such proportions as they shall agree.
(b) If, prior to the Effective Time, SEI should split or combine the SEI
Common Shares, or pay a stock dividend or other stock distribution in SEI Common
Shares, or otherwise change the SEI Common Shares into, or exchange SEI Common
Shares for, any other securities (whether pursuant to or as part of a merger,
consolidation, acquisition of property or stock, separation, reorganization or
liquidation of SEI as a result of which the SEI Shareholders receive cash, stock
or other property in exchange for, or in connection with, their SEI Shares (a
"BUSINESS COMBINATION")), or make any other dividend or distribution (other than
cash) on the SEI Common Shares, then the number of SEI Shares will be
appropriately adjusted to reflect such split, combination, dividend,
distribution, Business Combination or change.
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(c) The PSMI Shares to be converted into SEI Shares pursuant to this
Section 4.1 shall cease to be outstanding, shall be cancelled and retired and
shall cease to exist, and each holder of a certificate or certificates
representing any such PSMI Shares (the "CERTIFICATES") shall thereafter cease to
have any rights with respect to such PSMI Shares, except the right to receive
for each of the PSMI Shares, upon the surrender of such Certificate in
accordance with Section 4.4, the SEI Shares specified above (subject to the
provisions of Section 4.8).
4.2. POST-CLOSING ADJUSTMENT
(a) For purposes of this Agreement and this Section 4.2 (i) "VALUATION"
shall mean the value of PSI Real Estate Investments, as valued by Arthur
Andersen & Co. LLP in its report dated June 13, 1995 (the "ORIGINAL AA REPORT")
or in the "Updated AA Report" (as defined in Section 4.2(b)(i)(A)) and (ii) "PSI
EQUITY ADJUSTMENT" shall mean the difference between (a) the book value of the
combined assets (other than the PSI Real Estate Investments, fee interests in
seven properties and SEI Common Shares) of the PSI Entities less their
liabilities, determined on an accrual basis as of the Closing Date, and (b) the
negative amount of $64,503,000, representing the book value of Notes Receivable
Secured by AITDS as of December 31, 1994, less (i) the book value of Mortgage
Notes Payable as of December 31, 1994, and less (ii) $68,000,000 principal
amount of PSMI Senior Secured Notes Payable, all determined on an accrual basis.
The PSI Equity Adjustment and the number of SEI Common Shares owned by the PSI
Entities on the Closing Date will be reflected in a report by Ernst & Young LLP
("EY REPORT").
(b) The number of SEI Common Shares issuable in the Merger shall be
subject to adjustment as follows:
(i) First, the number of SEI Common Shares issuable in the Merger
shall be adjusted as follows:
(A) Within 60 days following the Closing Date, SEI shall
cause Arthur Andersen & Co. LLP to deliver an updated report (the
"UPDATED AA REPORT") to the PSMI Shareholders and to SEI. The Updated
AA Report shall (i) be prepared in a manner consistent with the
methodology used in preparing the Original AA Report, and (ii) value
only the PSI Real Estate Investments in existence at the Closing Date
that were not in existence at December 31, 1994.
(B) SEI shall promptly issue a number of additional SEI
Common Shares obtained by dividing the amount of the valuation in the
Updated AA Report by the Market Value as of the Closing Date. Such
additional shares shall be allocated among the PSMI Shareholders in
such proportions as they shall agree.
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(ii) Second, following any adjustment to the number of SEI Common
Shares in Section 4.2(b)(i), the number of SEI Common Shares issuable in
the Merger shall be subject to further adjustment as follows:
(A) Within 60 days following the Closing Date, SEI shall
cause Ernst & Young LLP to deliver the EY Report to the PSMI
Shareholders and to SEI.
(B) If the EY Report reflects a PSI Equity Adjustment in an
amount less than zero, Hughes shall be required to return to SEI that
number of SEI Common Shares determined by dividing the amount of such
deficiency by the Market Value as of the Closing Date. If the EY
Report reflects a PSI Equity Adjustment in an amount greater than
zero, SEI shall promptly issue such number of additional SEI Common
Shares obtained by dividing the amount of such excess by the Market
Value as of the Closing Date. Such additional shares shall be
allocated among the PSMI Shareholders in such proportions as they
shall agree.
(iii) The amount of the valuation in the Updated AA Report under
Section 4.2(b)(i) shall be offset by the amount of any deficiency under
Section 4.2(b)(ii).
(iv) Third, following any adjustment to the number of SEI Common
Shares in Sections 4.2(b)(i) and 4.2(b)(ii), SEI shall promptly issue a
number of SEI Common Shares equal to the number of SEI Common Shares
reflected in the EY Report. Such additional shares shall be allocated among
the PSMI Shareholders in such proportions as they shall agree.
4.3. SEI SHARES UNAFFECTED
The Merger shall effect no change in any of the outstanding SEI Common
Shares or SEI Preferred Shares and no outstanding SEI Common Shares or SEI
Preferred Shares shall be converted or exchanged as a result of the Merger, and
no securities shall be issuable with respect thereto. Notwithstanding the
foregoing, any SEI Common Shares owned by any PSI Entity at the Effective Time
shall be cancelled and retired and SEI Common Shares shall be issuable therefor
as provided in Section 4.2(b)(iv).
4.4. SURRENDER OF CERTIFICATES
Subject to the provisions of Section 4.8, at the Closing, PSMI shall
cause each holder of PSMI Shares to surrender the Certificates representing the
PSMI shares to SEI and such holders shall be entitled to receive in exchange
therefor certificates representing the number and class of SEI Shares into which
such PSMI Shares shall be converted pursuant to Section 4.1.
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4.5. FRACTIONAL SHARES
Notwithstanding any other term or provision of this Agreement, no
fractional SEI Shares and no certificates or scrip therefor, or other evidence
of ownership thereof, will be issued in the Merger. In lieu of any such
fractional share interests, each holder of PSMI Shares who would otherwise be
entitled to such fractional share will, upon surrender of Certificates
representing such PSMI Shares, receive a whole SEI Share if such fractional
share to which such holder would otherwise have been entitled is .5 of an SEI
Share or more, and such fractional share shall be disregarded if it represents
less than .5 of an SEI Share.
4.6. TRANSFER OF SHARES
No transfers of PSMI Shares shall be made on the stock transfer books
of PSMI after the close of business on the day prior to the Closing.
4.7. LOST, STOLEN OR DESTROYED CERTIFICATES
If any Certificate shall have been lost, stolen or destroyed, upon the
making of an affidavit of that fact by the Person claiming such Certificate to
be lost, stolen or destroyed and, if required by the Surviving Corporation, the
posting by such Person of a bond in such reasonable amount as the Surviving
Corporation may direct as indemnity against any claim that may be made against
it with respect to such Certificate, the Surviving Corporation will issue in
exchange for such lost, stolen or destroyed Certificate SEI Shares deliverable
in respect thereof pursuant to this Agreement.
4.8. INDEMNIFICATION SHARES; CLAIMS AGAINST THE ESCROW
(a) At the Closing, the SEI Class B Shares (the "INDEMNIFICATION
SHARES") shall be deposited in escrow with Wells Fargo Bank, as escrow agent, or
such other party as 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 Escrow Agreement (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.
Subject to the limitations in this Section 4.8, SEI shall be entitled
to recover from Hughes personally the amount of any Damages that may be suffered
by SEI by reason of (i) any breach of representation or warranty made by PSI or
PSMI in Article 5, (ii) any breach by PSI or PSMI of any covenant or agreement
on its part contained in this Agreement, (iii) any liability or out-of-pocket
expenses suffered by SEI in its capacity as general partner of any of the
Partnerships to the extent such liability or expense arises out of facts or
circumstances in existence prior to the Closing Date or (iv) any liability for
Taxes assessed against SEI (including penalties and interest and including
interest payable pursuant to Section 852(e)(3) of the Code) as successor to PSMI
and the other PSI Entities (irrespective of which party is primarily liable
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under the laws of the applicable Governmental Body) including liabilities
resulting from a determination by an applicable Governmental Body that the spin-
off of any of the Excluded Companies does not qualify under Section 355(a)(1) of
the Code. Notwithstanding the foregoing, SEI shall not be entitled to
indemnification or to seek Damages for any liability with respect to which SEI
would have been obligated to indemnify any PSI Entity, if such liability had
arisen prior to the Effective Time. Claims for indemnification hereunder
(either during the Indemnification Period or thereafter) shall be limited to the
recovery of Damages in the amount of the Indemnification Shares, and no claims
for indemnification hereunder shall be made by SEI until Damages (arising from a
single claim or in the aggregate from multiple claims) equal or exceed $100,000,
in which case the full dollar amount of any Damages shall be recoverable.
(b) For purposes of this Section 4.8, the "INDEMNIFICATION PERIOD"
shall begin as of the Closing Date and shall continue through the third
anniversary thereof. Nevertheless, any covenant, agreement, representation or
warranty in respect of which indemnity may be sought pursuant to this Section
4.8 shall survive the time at which it would otherwise terminate if written
notice of the inaccuracy or breach thereof specifying in reasonable detail the
Damages (including the amount thereof) giving rise to such right to indemnity,
shall have been delivered to Hughes prior to such time.
At the termination of the Indemnification Period, Indemnification
Shares not required to reimburse SEI for any Damages which constitute an
indemnifiable claim, or which are not pending determination as an
indemnification claim, shall be returned by the Indemnification Escrow Agent to
the PSMI Shareholders owning such shares and SEI's rights to indemnification
shall terminate except as otherwise expressly set forth herein. Notwithstanding
the foregoing, SEI shall be entitled to continuing indemnification from Hughes
with respect to (A) the matters set forth in (a)(iv) above or any breach of
representation or warranty made by PSI and PSMI in Section 5.10, which
indemnification obligation shall continue until the expiration of the applicable
statutory period of limitations under the Code, and (B) the matters set forth in
(a)(iii) above or any breach of representation or warranty made by PSI or PSMI
in Section 5.16, which indemnification obligation shall continue through the
fifth anniversary of the Closing Date.
(c) Notwithstanding the escrow of the Indemnification Shares, any
dividends or other distributions declared and paid on such shares shall continue
to be paid by SEI to the PSMI Shareholders owning such shares. Any securities
received by the Indemnification Escrow Agent in respect of any Indemnification
Shares held in escrow as a result of a stock split or combination of SEI Class B
Shares, payment of a stock dividend or other stock distribution in or on SEI
Class B Shares, or change of SEI Class B Shares into any other securities
pursuant to or as part of a Business Combination or otherwise, shall be held by
the Indemnification Escrow Agent as, and shall be included within the definition
of Indemnification Shares. Indemnification procedures shall be as stipulated in
the Indemnification Escrow Agreement.
(d) For purposes of this Section 4.8, the satisfaction of any Damages
owed hereunder shall be made by any of the following: (i) delivery to SEI by
the Indemnification
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Escrow Agent or by Hughes of that number of Indemnification Shares calculated by
dividing the dollar amount of any Damages by the then Market Value of the SEI
Common Shares after applying thereto the percentage discount attributable to the
SEI Class B Shares for purposes of determining the aggregate purchase price and
reducing such discount by 1/84th thereof for each calendar month that has
elapsed from the Closing Date; (ii) delivery by Hughes of that number of SEI
Common Shares with a then Market Value equal to any Damages; or (iii) payment by
Hughes of cash in an amount equal to any Damages. Any Indemnification Shares or
SEI Common Shares returned to SEI hereunder shall be treated, to the extent
permitted by law, by the PSMI Shareholders and SEI as a purchase price
adjustment.
5. REPRESENTATIONS AND WARRANTIES OF PSI AND PSMI
Except as set forth on the PSI/PSMI Disclosure Statement, PSI and PSMI
hereby represent and warrant to SEI that as of the date hereof:
5.1. ORGANIZATION AND RELATED MATTERS
Each PSI Entity is a corporation duly incorporated, validly existing
and in good standing under the laws of the State of California and has all
requisite corporate power and authority to own, lease and operate its
properties, and to carry on its business as now conducted and proposed by such
PSI Entity to be conducted; and each of PSI and PSMI has all requisite corporate
power and authority to enter into this Agreement and to carry out the provisions
of this Agreement and consummate the transactions contemplated hereby. Each PSI
Entity is duly qualified and in good standing in each jurisdiction in which the
property owned, leased, managed or operated by it or the nature of the business
conducted by it makes such qualification necessary and where the failure to be
so qualified has or would be reasonably expected (so far as can be foreseen at
the time) to have a material adverse effect on the business, properties,
operations, condition (financial or other) or prospects of the PSI Entities,
considered as a single enterprise (a "PSI ENTITIES MATERIAL ADVERSE EFFECT").
True and correct copies of each PSI Entity's Articles of Incorporation and
Bylaws have been made available to SEI.
5.2. OWNERSHIP INTERESTS
The PSI/PSMI Disclosure Statement sets forth a true and complete list,
including the name and jurisdiction of organization, of each joint venture,
general partnership and limited partnership of which each PSI Entity is,
directly or indirectly, a partner (a "PARTNERSHIP") and of each corporation,
association, trust or other entity in which any PSI Entity holds, directly or
indirectly, any capital stock or other equity or ownership or proprietary
interest, and in each such case the nature and extent of its ownership or other
interest therein. The partnership agreements for each Partnership are listed in
the PSI/PSMI Disclosure Statement and true and correct copies have been made
available to SEI. Each PSI Entity owns the percentages of each class of equity
interest of each Partnership as set forth in the PSI/PSMI Disclosure Statement
and its respective Partnership agreement, free and clear of all restrictions,
liens, security interests, charges, encumbrances and interests of third parties.
With respect to such
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Partnerships, each PSI Entity's rights and interests as a partner as identified
in the respective Partnership agreements are unimpaired and in full force and
effect. Each PSI Entity owns the capital stock or other interest of each such
corporation, association, trust or other entity as set forth in the PSI/PSMI
Disclosure Statement, free and clear of all restrictions, liens, security
interests, charges, encumbrances and interests of third parties.
5.3. AUTHORITY
This Agreement and the consummation of the transactions contemplated
hereby (including the Restructure) have been approved by the Board of Directors
and all of the shareholders of each of PSI and PSMI and have been duly
authorized by all other necessary corporate action on the part of PSI and PSMI.
This Agreement has been duly executed and delivered by a duly authorized officer
of each of PSI and PSMI and constitutes a valid and binding agreement of each of
PSI and PSMI, enforceable against PSI and PSMI in accordance with its terms,
except as may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium and other similar laws of general application that may affect the
enforcement of creditors' rights generally and by general equitable principles.
5.4. CAPITAL STOCK
Following the Restructure and immediately prior to the Effective Time,
(i) the authorized and outstanding capital stock of PSMI will be as set forth in
the PSI/PSMI Disclosure Statement, (ii) all outstanding PSMI Shares will be duly
authorized, validly issued, fully paid and nonassessable, (iii) no class of
capital stock of PSMI will be entitled to preemptive or cumulative voting
rights, (iv) there will be no outstanding options, warrants, calls, rights,
commitments or any other agreements of any character to which PSMI is a party or
by which it may be bound, requiring it to issue, transfer, sell, purchase,
redeem or acquire any shares of capital stock or any securities or rights
convertible into, exchangeable for or evidencing the right to subscribe for or
acquire any shares of capital stock, and (v) no Person will have any right to
require PSMI to repurchase or otherwise acquire any of such Person's outstanding
securities.
5.5. LITIGATION
There are no actions, suits, investigations or proceedings
(adjudicatory, rulemaking or otherwise) pending or, to the knowledge of PSI or
PSMI, threatened against any PSI Entity (or any Employee Plan or Benefit
Arrangement), or any property (including intellectual property) of any PSI
Entity, in any court or before any arbitrator of any kind or before or by any
Governmental Body, except actions, suits, investigations or proceedings that, in
the aggregate, do not have and would not be reasonably expected (so far as can
be foreseen at the time) to have (a) a PSI Entities Material Adverse Effect or
(b) a material adverse effect on the ability of PSI and PSMI to perform their
obligations under this Agreement. No PSI Entity is subject to any judgment,
decree, injunction, rule or order of any court, Governmental Body or arbitrator
which prohibits or restricts the consummation of the transactions contemplated
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hereby or would reasonably be expected to have (so far as can be foreseen at the
time) a PSI Entities Material Adverse Effect.
5.6. NO VIOLATION OR CONFLICT
No PSI Entity is in violation of any term of (a) its charter, bylaws
or other organizational documents, (b) any Material Agreement, (c) any
applicable law, ordinance, rule or regulation of any Governmental Body, or (d)
any applicable order, judgment or decree of any court, arbitrator or
Governmental Body, except, as to subsections (a) through (d) of this Section,
where such violation, individually or in the aggregate, does not have and would
not be reasonably expected (so far as can be foreseen at the time) to have a PSI
Entities Material Adverse Effect or a material adverse effect on the ability of
PSI and PSMI to perform their obligations under this Agreement. The execution,
delivery and performance of this Agreement by PSI and PSMI and of the
transactions contemplated hereby (including the Restructure) will not result in
any violation of or conflict with, constitute a default under, or require any
consent under any term of the charter or bylaws of PSI or PSMI or any Material
Agreement, instrument, permit, license, law, ordinance, rule, regulation, order,
judgment or decree to which any PSI Entity is a party or to which any of its
material assets are subject, or result in the creation of (or impose any
obligation on any PSI Entity to create) any mortgage, lien, charge, security
interest or other encumbrance upon any of the properties or assets of any PSI
Entity pursuant to any such term, except where such violation, conflict or
default, or the failure to obtain such consent or the creation of such
encumbrances, individually or in the aggregate, does not have and would not be
reasonably expected (so far as can be foreseen at the time) to have a PSI
Entities Material Adverse Effect or a material adverse effect on the ability of
PSI or PSMI to perform its obligations under this Agreement.
5.7. COMPENSATION
The PSI/PSMI Disclosure Statement includes a true and accurate
statement of the present and proposed annual salaries for officers of PSI
Entities who will become officers of the Surviving Corporation.
5.8. EMPLOYEE BENEFIT PLANS
(a) The PSI/PSMI Disclosure Statement sets forth a true and complete
list of all the following: (i) each "employee benefit plan," as such term is
defined in Section 3(3) of ERISA (each an "EMPLOYEE PLAN"), and (ii) each other
plan, program, policy, contract or arrangement providing for bonuses, pensions,
deferred pay, stock or stock-related awards, severance pay, salary continuation
or similar benefits, hospitalization, medical, dental or disability benefits,
life insurance or other employee benefits, or contract or agreement for
compensation to or for any current or former employees, agents, directors or
independent contractors of any PSI Entity ("EMPLOYEES") or any beneficiaries or
dependents of any Employee whether or not insured or funded, (A) pursuant to
which any PSI Entity has any liability or (B) constituting an employment or
severance agreement or arrangement with any officer or director
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of any PSI Entity (each, a "BENEFIT ARRANGEMENT"). PSMI has made available to
SEI with respect to each Employee Plan and Benefit Arrangement: (i) a true and
complete copy of all written documents comprising such Employee Plan or Benefit
Arrangement or, if there is no such written document, an accurate and complete
description of such Employee Plan or Benefit Arrangement; (ii) the most recent
Form 5500 or Form 5500-C (including all schedules thereto), if applicable; (iii)
the most recent financial statements and actuarial reports, if any; (iv) the
summary plan description currently in effect and all material modifications
thereof, if any; and (v) the most recent Internal Revenue Service determination
letter, if any. All material contributions required to be made as of the date
hereof to the Employee Plans and Benefit Arrangements have been made or provided
for. No PSI Entity has contributed to, or has been required to contribute to,
any "multiemployer plan" (as defined in Sections 3(37) and 4001(a)(3) of ERISA).
No PSI Entity maintains or contributes to any plan or arrangement which provides
or has any liability to provide life insurance, medical or other employee
welfare benefits to any employee or former employee upon his or her retirement
or termination of employment and no PSI Entity has ever represented, promised or
contracted (whether in oral or written form) to any employee or former employee
that such benefits would be provided.
(b) Each Employee Plan and Benefit Arrangement has been established
and maintained in all material respects in accordance with its terms and in
material compliance with all applicable laws, including, but not limited to,
ERISA and the Code. No PSI Entity nor any of their current or former directors,
officers or employees, nor, to the knowledge of PSI and PSMI, any other
disqualified Person or party-in-interest with respect to any Employee Plan, has
engaged directly or indirectly in any "prohibited transaction," as such term is
defined in Section 4975 of the Code or Section 406 of ERISA.
(c) No PSI Entity has an Employee Plan that is subject to Title IV of
ERISA and no PSI Entity has had an ERISA Affiliate (other than another PSI
Entity) at any time since the earlier of its inception and September 2, 1974.
(d) Neither the execution or delivery of this Agreement nor the
consummation of the transactions contemplated hereby (either alone or together
with any additional or subsequent events) constitutes an event under any
Employee Plan, Benefit Arrangement or loan to, or individual agreement or
contract with, an Employee that may result in any payment (whether severance pay
or otherwise), restriction or limitation upon the assets of any Employee Plan or
Benefit Agreement, acceleration of payment or vesting, increase in benefits or
compensation, or require funding, with respect to any Employee, or the
forgiveness of any loan or other commitment of any Employees.
(e) All contributions required under applicable law or the terms of
any Employee Plan or other agreement relating to an Employee Plan to be paid by
any PSI Entity have been completely and timely made to each Employee Plan when
due, and each PSI Entity has established adequate reserves on its books to meet
liabilities for contributions accrued but that have not been made because they
are not yet due and payable.
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(f) No amounts paid or payable by any PSI Entity to or with respect to
any Employee will fail to be deductible for federal income tax purposes by
reason of Section 280G of the Code.
(g) No Employees and no beneficiaries or dependents of Employees are
or may become entitled under any Employee Plan or Benefit Arrangement to post-
employment welfare benefits of any kind, including, without limitation, death or
medical benefits, other than coverage mandated by Section 4980B of the Code.
5.9. LABOR MATTERS
No PSI Entity is a party to, or bound by, any collective bargaining
agreement, contract or other agreement or understanding with a labor union or
labor organization. There is no unfair labor practice or labor arbitration
proceeding pending or, to the knowledge of PSMI or PSI, threatened against any
PSI Entity relating to its business. To the knowledge of PSMI and PSI, there
are no organizational efforts with respect to the formation of a collective
bargaining unit presently being made or threatened involving employees of any
PSI Entity.
5.10. TAXES
Each PSI Entity has (i) timely filed with each Governmental Body all
Tax Returns required to be filed by it, either separately or as a member of an
affiliated group, with respect to all applicable Taxes for all years and periods
(or portions thereof) for which any such Tax Returns were due and all such Tax
Returns are true, correct and complete in all respects and were prepared in the
manner required by applicable law, (ii) paid all Taxes due whether or not shown
on such Tax Returns or claimed to be due by any Governmental Body and (iii)
properly accrued on its respective financial statements all Taxes due for which
each such PSI Entity may be liable in its own right (including, without
limitation, by reason of being a member of an affiliated group) or as a
transferee of the assets of, or successor to, any corporation, person,
association, partnership, joint venture or other entity for periods subsequent
to the periods covered by such returns. There are no liens for Taxes on any
property or assets of any PSI Entity other than liens for current property taxes
not yet due. The Tax Returns of each PSI Entity are not being and have not been
examined by any Governmental Body for any past year or periods to and including
the calendar year December 31, 1994. No PSI Entity has been requested to, or
has, executed or filed with the IRS or any other Governmental Body any agreement
extending the statute of limitations period of any Taxes. For each PSI Entity,
the applicable federal statutes of limitations have closed for all taxable years
through 1987. No PSI Entity is a party to any pending action or any formal or
informal proceeding by any Governmental Body for a deficiency, assessment or
collection of Taxes, and no claim for any deficiency, assessment or collection
of Taxes has been asserted, or to its best knowledge threatened, against it,
including claims by an authority in a jurisdiction where it does not file Tax
Returns that it is or may be subject to taxation in that jurisdiction.
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Each PSI Entity has withheld and paid all Taxes required to have been
withheld and paid in connection with amounts paid or owing to any employee,
independent contractor, creditor, shareholder or other third party. No PSI
Entity (i) has executed or filed a consent under Section 341(f) of the Code
concerning collapsible corporations or has been at any time, a "collapsible
corporation" as defined in Section 341(b) of the Code; (ii) is a party to any
agreement relating to the allocation of, sharing, payment of, or indemnity for,
Taxes; or (iii) has liability for Taxes of any Person under Section 1.1502-6 of
the Treasury Regulations (or any similar provision of state, local or foreign
law), including liability as a transferee or successor, by contract or
otherwise. Each PSI Entity has established (and until the Closing shall
continue to establish and maintain) on its books and records reserves that are
adequate for the payment of all Taxes not yet due and payable.
Any PSI Entity that is, or has been at any time, a "United States Real
Property Holding Corporation" within the meaning of Section 897(c)(2) of the
Code, qualifies or qualified as a "domestically-controlled REIT" within the
meaning of Section 897(h) of the Code. No other PSI Entities are, or have ever
been, "United States Real Property Holding Corporations" within the meaning of
Section 897(c)(2) of the Code.
No PSI Entity has made any payments, is obligated to make any
payments, or is a party to an agreement that could obligate it to make any
payments that will not be deductible under Section 280G of the Code. Each PSI
Entity has disclosed to the Internal Revenue Service all positions taken on its
federal income Tax Returns which could give rise to a substantial understatement
of Tax under Section 6662 of the Code.
Tax Returns required to be filed with respect to the short taxable
year of each PSI Entity, will, when filed, be true, correct and complete in all
respects.
5.11. INTELLECTUAL PROPERTY
(a) The PSI/PSMI Disclosure Statement sets forth a complete list of
the PSI Intellectual Property Rights registered or filed by each PSI Entity and
a list of all licenses, sublicenses and agreements to which any PSI Entity is a
party regarding PSI Intellectual Property Rights material to any PSI Entity's
business. To the knowledge of PSI and PSMI, the PSI Entities possess the right
to use all intellectual property rights, whether PSI Intellectual Property
Rights or other such rights, necessary for the conduct of their respective
businesses.
(b) To the knowledge of PSI and PSMI, no PSI Entity has infringed upon
or misappropriated any intellectual property rights of third parties, and no PSI
Entity has received any charge, complaint, claim or notice alleging any such
interference, infringement, misappropriation or violation. To the knowledge of
PSI and PSMI, no third party has interfered with, infringed upon,
misappropriated or otherwise come into conflict with any PSI Intellectual
Property Rights except for any such interference, infringement, misappropriation
or violation which has not had, and is not likely to have, a PSI Entities
Material Adverse Effect.
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(c) At the Closing, PSMI will have the exclusive right to transfer and
assign to SEI all of the PSI Intellectual Property Rights. None of such PSI
Intellectual Property Rights is subject to any liens, security interests,
charges, encumbrances or interests of third parties, or requires any consent,
approval or waiver to be transferred and assigned to SEI by way of the Merger.
5.12. FINANCIAL STATEMENTS
Each of PSI and PSMI has provided to SEI true and correct copies of
its (i) audited consolidated balance sheets as of December 31, 1992, 1993 and
1994, and related audited statements of income and cash flows for the fiscal
years then ended, and (ii) unaudited consolidated balance sheets as of March 31,
1995 and related unaudited statements of income and other statements for the
fiscal quarter then ended. Each of such balance sheets (including the related
notes) referred to in subsection (i) hereof presents fairly, in all material
respects, the consolidated financial position of each of PSI and PSMI and their
subsidiaries as of the respective dates thereof, and the other related
statements (including the related notes) included therein present fairly, in all
material respects, the results of their operations and their cash flows for the
respective periods or as of the respective dates set forth therein, all in
conformity with generally accepted accounting principles consistently applied
during the periods involved, except as otherwise noted in the auditor's report.
Each of such balance sheets referred to in subsection (ii) hereof presents
fairly, in all material respects, the assets, liabilities, and shareholders'
equity of PSI and PSMI and their subsidiaries as of the respective dates
thereof, and the other related statements included therein present fairly, in
all material respects, the results of their operations for the respective
periods or as of the respective dates set forth therein, all on a basis
consistent with prior periods.
5.13. ABSENCE OF CERTAIN CHANGES OR EVENTS
Except for the Restructure and as otherwise contemplated or as
permitted herein in Section 7.1 or elsewhere, during the period since March 31,
1995, (a) the business of each PSI Entity has been conducted only in the
ordinary course, (b) no PSI Entity has entered into any material transaction
other than in the ordinary course, and (c) there has not been any change in the
business, financial condition, results of operations, properties, assets,
liabilities or prospects of any PSI Entity which, in the aggregate, would have,
or would be reasonably likely to have, a PSI Entities Material Adverse Effect.
5.14. BOOKS AND RECORDS
(a) The books of account and other financial records of each PSI
Entity are in all material respects true, complete and correct, and accurately
reflect in all material respects the assets and liabilities of such PSI Entity.
(b) The minute books and other records of each PSI Entity have been
made available to SEI, contain in all material respects accurate records of all
meetings and accurately
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reflect in all material respects all other corporate action of the shareholders
and directors and any committees of the Board of Directors of each PSI Entity.
5.15. CONTRACTS AND LEASES
The PSI/PSMI Disclosure Statement contains an accurate and complete
listing of all material contracts, leases, agreements or understandings, whether
written or oral, of each PSI Entity (the "MATERIAL AGREEMENTS"). A contract,
lease, agreement or understanding is "material" if it involves (i) obligations
(contingent or otherwise) of, or payments to any PSI Entity in excess of
$100,000 per annum, (ii) partnership, management or advisory agreements in
excess of $100,000 per annum, or (iii) the license of any patent, copyright,
trade secret or other proprietary right (A) to any PSI Entity which is necessary
for that PSI Entity to carry on its business or (B) from any PSI Entity which
materially limits the ability of that PSI Entity to carry on its business. Each
Material Agreement is in full force and effect and (a) no PSI Entity nor, to the
knowledge of PSI and PSMI, any other party thereto has breached any of the above
in any material respect or is in material default thereunder, (b) no event has
occurred which, with the passage of time or the giving of notice, or both, would
constitute such a breach or default, (c) no claim of material default thereunder
has been asserted or threatened, and (d) no PSI Entity nor, to the best
knowledge of PSI and PSMI, any other party thereto is seeking the renegotiation
thereof or substitute performance thereunder.
5.16. TITLE TO ASSETS; ENCUMBRANCES
Except for properties and assets reflected in the unaudited
consolidated combined balance sheet as of March 31, 1995 or acquired since such
balance sheet date which have been sold or otherwise disposed of in the ordinary
course of business, each PSI Entity has good, valid and marketable title to (a)
all of its material properties and assets (real and personal, tangible and
intangible), and (b) all of the properties and assets purchased by each PSI
Entity since such balance sheet date in each case subject to no encumbrance,
lien, charge or other restriction of any kind or character, except for (i) liens
reflected in such balance sheet, (ii) liens consisting of zoning restrictions or
limitations on the use of real property or irregularities in title thereto which
do not materially detract from the value of, or impair the use of, such property
by any PSI Entity in the operation of its business, (iii) liens for current
taxes, assessments or governmental charges or levies on property not yet due and
delinquent and (iv) liens described in the PSI/PSMI Disclosure Statement (liens
of the type described in clauses (i), (ii) and (iii) above are hereinafter
sometimes referred to as "PERMITTED LIENS").
5.17. REAL PROPERTY
The PSI/PSMI Disclosure Statement contains an accurate and complete
list of all real property owned in whole or in part by the PSI Entities and
includes the name of the record title holder thereof and a list of all
indebtedness secured by a lien, mortgage or deed of trust thereon. Each PSI
Entity has good and marketable title in fee simple to all the real property
owned by it free and clear of all encumbrances, liens, charges or other
restrictions of any kind
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or character, except for Permitted Liens. All of the buildings, structures and
appurtenances situated on the real property owned in whole or in part by any PSI
Entity are in good operating condition and in a state of good maintenance and
repair, are adequate and suitable for the purposes for which they are presently
being used and, with respect to each, the PSI Entity has adequate rights of
ingress and egress for operation of the business of such PSI Entity in the
ordinary course. None of such buildings, structures or appurtenances (or any
equipment therein), nor the operation or maintenance thereof, to the knowledge
of PSI and PSMI, violates any restrictive covenant or any provision of federal,
state or local law, ordinance, rule or regulation, or encroaches on any property
owned by others, except for such violations or encroachments which do not have a
PSI Entities Material Adverse Effect. No condemnation proceeding is pending or
threatened which would preclude or impair the use of any such property by any
PSI Entity for the purposes for which it is currently used.
5.18. ENVIRONMENTAL MATTERS
(a) For purposes of this section, "HAZARDOUS MATERIALS" means any
wastes, substances, or materials, whether solids, liquids or gases, that are
deemed hazardous, toxic, pollutants, or contaminants, including but not limited
to substances defined as "hazardous wastes," "solid wastes," "hazardous
substances," "toxic substances," "radioactive materials," "infectious waste,"
"infectious substances," "regulated medical wastes" or other similar
designations in, or otherwise subject to regulation under, the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended by
the Superfund Amendments and Reauthorization Act of 1986, 42 U.S.C. (S) 9601 et
--
seq.; the Hazardous Materials Transportation Act, 49 U.S.C. (S) 1802 et seq.;
--- ------
the Resource Conservation and Recovery Act, 42 U.S.C. (S) 9601 et seq.; the
------
Clean Water Act, 33 U.S.C. (S) 1251 et seq.; the Safe Drinking Water Act, 42
------
U.S.C. (S) 300f et seq.; the Clean Air Act, 42 U.S.C. (S) 7401 et seq.; or other
------ ------
applicable federal, state, or local laws, including any plans, rules,
regulations, orders, or ordinances adopted, or other criteria and guidelines
promulgated pursuant to the preceding laws or other similar laws, regulations,
rules, orders, or ordinances now or hereafter in effect relating to the
protection of human health and the environment (collectively "ENVIRONMENTAL
LAWS"). "Hazardous Materials" includes but is not limited to polychlorinated
biphenyls (PCBs), petroleum products (including without limitation, crude oil or
any faction thereof), asbestos, urea formaldehyde, and lead-based paints.
(b) PSI and PSMI have made available to SEI information relating to
the following items:
(i) the nature and quantities of any Hazardous Materials
generated, treated, stored, handled, transported, disposed of or released, to
the knowledge of PSI and PSMI, by any PSI Entity, together with a description of
the location of each such activity; and
(ii) a summary of the nature of any Hazardous Materials that, to
the knowledge of PSI and PSMI, have been disposed of or found at any site or
facility owned
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(including leased) presently or at any previous time by any PSI Entity or
Partnership ("PSI SITE").
(c) PSI and PSMI hereby represent and warrant that, except as set
forth in the PSI/PSMI Disclosure Statement, to their knowledge:
(i) There are no pending or threatened actions, suits, claims,
legal proceedings or any other proceedings against any PSI Entity or Partnership
based on the Environmental Laws or otherwise arising from PSI's, PSMI's or a
Partnership's activities involving Hazardous Materials;
(ii) Except as disclosed pursuant to Section 5.18(b), there are no
conditions, facilities, procedures or any other facts or circumstances which
could reasonably be expected to give rise to claims, expenses, losses,
liabilities, or governmental action against any PSI Entity or Partnership in
connection with any Hazardous Materials present at or disposed of from a PSI
Site, including without limitation the following conditions arising out of,
resulting from, or attributable to, the assets, business, or operations of any
PSI Entity, Partnership or any predecessor in interest:
(A) the presence of any Hazardous Materials on a PSI Site or
the release or threatened release of any Hazardous Materials into the
environment from a PSI Site;
(B) the off-site disposal of Hazardous Materials originating
on or from any PSI Site or the business or operations of any PSI Entity or
Partnership;
(C) the release or threatened release of any Hazardous
Materials into any storm drain, sewer, septic system or publicly owned treatment
works;
(D) any failure to comply in all material respects with
federal, state or local requirements governing occupational safety and health,
or presence or release in the air and water supply systems of any PSI Site of
any substances that pose a hazard to human health or an impediment to working
conditions; or
(E) any facility operations, procedures or designs, which do
not conform in all material respects to the statutory or regulatory requirements
of any Environmental Laws.
(iii) Neither polychlorinated biphenyls nor asbestos-containing
materials are present on or in any PSI Site.
(iv) There are no wetlands present at any PSI Site.
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(v) No PSI Site contains any underground storage tanks, or
underground piping associated with tanks, used currently or in the past for the
management of Hazardous Materials.
(d) Each PSI Entity and Partnership has been duly issued, and
currently has and will maintain through the Closing Date, all permits, licenses,
certificates and approvals required under any Environmental Law.
5.19. AFFILIATED TRANSACTIONS
Set forth in the PSI/PSMI Disclosure Statement is a list of all
current material arrangements, agreements and contracts, written or oral,
entered into by any PSI Entity with any person who is an officer, director or
Affiliate of that PSI Entity (other than any other PSI Entity or SEI), any
relative of any of the foregoing or any entity of which any of the foregoing is
an Affiliate, other than those that will be terminated as a result of, or in
connection with, the Merger.
5.20. BROKERS AND FINDERS
Neither PSI nor PSMI has entered into any contract, arrangement or
understanding with any person or firm which may result in the obligation of PSI
or PSMI or SEI to pay any finder's fees, brokerage or agent's commissions or
other like payments in connection with the negotiations leading to this
Agreement or the consummation of the transactions contemplated hereby. Except
for the fees and expenses paid or payable by SEI to Robertson Stephens & Company
LP, by SEI and PSI to Arthur Andersen & Co. LLP and by PSI to the appraisers of
the fee interests in the seven properties owned by it, neither PSI nor PSMI is
aware of any claim for payment of any investment banking fees, valuation or
appraisal fees, finder's fees, brokerage or agent's commissions or other
payments in connection with the negotiations leading to this Agreement or the
consummation of the transactions contemplated hereby.
5.21. PROXY STATEMENT
None of the information supplied or to be supplied by PSI or PSMI for
inclusion in the Proxy Statement will at the time of mailing the Proxy Statement
and at the time of the SEI Shareholders Meeting contain any untrue statement of
a material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. If at any time prior
to the Effective Time any event with respect to any PSI Entity or its officers
and directors shall occur that is required to be described in an amendment of,
or a supplement to, the Proxy Statement, PSMI shall notify SEI thereof by
reference to this Section 5.21 and cooperate with SEI in preparing and filing an
amendment or supplement with the SEC and, as required by law, disseminating to
the shareholders of SEI an amendment or supplement which accurately describes
such event or events in compliance with all provisions of applicable law.
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5.22. INSURANCE
The PSI/PSMI Disclosure Statement contains an accurate list of all
insurance policies of the PSI Entities, and each such insurance policy is in
full force and effect and issued by a reputable insurer. All premiums due with
respect to such policies have been paid, and no notice of premium increase,
cancellation or termination has been received with respect to any such policy.
Such policies (i) are sufficient for compliance with requirements of law and
with agreements to which the PSI Entities are parties, (ii) are valid,
outstanding and enforceable, (iii) provide insurance coverage for the assets and
operations of the PSI Entities to the extent and in the manner that PSMI
considers reasonable for companies engaged in business similar to that of the
PSI Entities, (iv) will remain in full force and effect through at least the
Closing Date and (v) will not be modified as a result of, or terminate or lapse
by reason of, the transactions contemplated by this Agreement. No PSI Entity
has been refused any insurance with respect to its assets or operations, nor has
its coverage been materially limited, by any insurance carrier to which it has
applied for any such insurance or with which it has carried insurance during the
last three years. The PSI Entities have reported all claims and occurrences to
the extent required by such insurance.
5.23. LICENSES; COMPLIANCE WITH LAW
Each PSI Entity has obtained from the appropriate Governmental Bodies
all approvals and licenses necessary for the conduct of its business and
operations as currently conducted, which approvals and licenses are valid and
remain in full force and effect, except where the failure to have obtained such
approvals or licenses or the failure of such licenses and approvals to be valid
and in full force and effect does not have and would not be reasonably expected
(so far as can be foreseen at the time) to have a PSI Entities Material Adverse
Effect. None of the PSI Entities has violated or failed to comply with any
statute, law, ordinance, regulation, rule, order or other legal requirement of
any Governmental Body, or any judgment, decree or order of any court, applicable
to its business or operations, except where any such violations or failures to
comply would not, individually or in the aggregate, have a PSI Material Adverse
Effect.
5.24. GOVERNMENTAL APPROVALS
Except for any filings that may be required by the HSR Act and the
filing of the Proxy Statement with the SEC pursuant to the Exchange Act, no
Authorization of or with any Governmental Body is necessary for the execution
and delivery of this Agreement by PSI or PSMI or the consummation by PSI or PSMI
of the transactions contemplated hereby (including the Restructure), other than
such Authorizations which, if not made or obtained, as the case may be, would
not, in the aggregate, have or reasonably be expected to have a PSI Entities
Material Adverse Effect.
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5.25. DISCLOSURE
The representations and warranties of PSI and PSMI contained in this
Agreement, in the PSI/PSMI Disclosure Statement, or in any written certificate
or related agreement furnished or to be furnished to SEI by any PSI Entity in
connection with the Closing pursuant to this Agreement do not contain any untrue
statement of a fact or omit to state any material fact necessary to make the
statements and information contained herein or therein, in light of the
circumstances in which they are made, not misleading.
6. REPRESENTATIONS AND WARRANTIES OF SEI
Except as set forth in the SEI SEC Reports, SEI hereby represents and
warrants to PSI and PSMI that, as of the date hereof:
6.1. ORGANIZATION AND RELATED MATTERS
SEI is a corporation duly incorporated, validly existing and in good
standing under the laws of the State of California and has all requisite
corporate power and authority to own, lease and operate its properties, to carry
on its business as now conducted and proposed by SEI to be conducted, to enter
into this Agreement and to carry out the provisions of this Agreement and
consummate the transactions contemplated hereby. SEI is duly qualified and in
good standing in each jurisdiction in which the property owned, leased or
operated by it or the nature of the business conducted by it makes such
qualification necessary and where the failure to be so qualified has or would be
reasonably expected (so far as can be foreseen at the time) to have a material
adverse effect on the business, properties, operations, condition (financial or
other) or prospects of SEI and its subsidiaries taken as a whole (a "SEI
MATERIAL ADVERSE EFFECT"). SEI has no direct or indirect equitable or
beneficial interest in any other corporation, except for qualifying REIT
subsidiaries.
6.2. AUTHORIZATION
This Agreement and the consummation of the transactions contemplated
hereby (including the Recapitalization) have been approved by the Board of
Directors of SEI, and have been duly authorized by all other necessary corporate
action on the part of SEI (except for the approval of SEI's shareholders
contemplated by Section 7.3). This Agreement has been duly executed and
delivered by a duly authorized officer of SEI and, subject to SEI shareholder
approval, constitutes a valid and binding agreement of SEI, enforceable against
SEI in accordance with its terms, except as may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium and other similar laws of
general application that may affect the enforcement of creditors' rights
generally and by general equitable principles.
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6.3. CAPITAL STOCK
The authorized capital stock of SEI consists solely of (i) 60,000,000
SEI Common Shares, approximately 42,045,000 of which are issued and outstanding
(and 700,334 and 3,872,054 of which were reserved for issuance under SEI's
employee stock option plans and for issuance upon conversion or redemption of
SEI's Convertible Preferred Stock, respectively), and (ii) 50,000,000 shares of
Preferred Stock ($.10 par value), 13,320,000 of which are issued and
outstanding, consisting of 1,825,000 shares of Series A Preferred Stock,
2,386,000 shares of Series B Preferred Stock, 2,300,000 shares of Convertible
Preferred Stock, 1,200,000 shares of Adjustable Rate Preferred Stock, 1,200,000
shares of Series D Preferred Stock, 2,195,000 shares of Series E Preferred Stock
and 2,300,000 shares of Series F Preferred Stock. All of the issued and
outstanding shares of Common Stock and Preferred Stock of SEI have been duly and
validly authorized and issued, and are fully paid and nonassessable. As a
result of the Recapitalization, the authorized capital stock of SEI will consist
solely of (i) 200,000,000 SEI Common Shares, (ii) 7,000,000 SEI Class B Shares,
and (iii) 50,000,000 shares of Preferred Stock ($.10 par value). Other than
options under SEI's employee stock option plans and SEI's Convertible Preferred
Stock and as provided in this Agreement, there are no options or agreements to
which SEI is a party or by which it is bound calling for or requiring the
issuance of any of SEI's capital stock.
The issuance of the SEI Shares in the Merger has been duly authorized,
and when issued and delivered as provided in Section 4, will be validly issued,
fully paid and nonassessable; and no shareholder of SEI has any preemptive right
of subscription or purchase in respect thereof. The issuance of the SEI Shares
in the Merger will be exempt from registration under the Securities Act and all
applicable state securities laws.
6.4. LITIGATION
There are no actions, suits, investigations or proceedings
(adjudicatory, rulemaking or otherwise) pending or, to the knowledge of SEI,
threatened against SEI, or any property (including intellectual property) of
SEI, in any court or before any arbitrator of any kind or before or by any
Governmental Body, except actions, suits, investigations or proceedings that, in
the aggregate, do not have and would not be reasonably expected (so far as can
be foreseen at the time) to have (a) a SEI Material Adverse Effect or (b) a
material adverse effect on the ability of SEI to perform its obligations under
this Agreement.
6.5. COMPLIANCE WITH OTHER INSTRUMENTS, ETC.
SEI is not in violation of any term of (a) its charter, bylaws or
other organizational documents, (b) any agreement or instrument related to
indebtedness for borrowed money or any other agreement to which it is a party or
by which it is bound, (c) any applicable law, ordinance, rule or regulation of
any Governmental Body, or (d) any applicable order, judgment or decree of any
court, arbitrator or Governmental Body, except, as to subsections (a) through
(d) of this Section, where such violation, individually or in the aggregate,
does not have
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and would not be reasonably expected (so far as can be foreseen at the time) to
have a SEI Material Adverse Effect or a material adverse effect on the ability
of SEI to perform its obligations under this Agreement. The execution, delivery
and performance of this Agreement by SEI will not result in any violation of or
conflict with, constitute a default under, require any consent under any term of
the charter, bylaws or other organizational documents of SEI or any agreement,
instrument, permit, license, law, ordinance, rule, regulation, order, judgment
or decree to which SEI is a party or to which SEI or any of its material assets
are subject, or result in the creation of (or impose any obligation on SEI to
create) any mortgage, lien, charge, security interest or other encumbrance upon
any of the properties or assets of SEI pursuant to any such term, except where
such violation, conflict or default, or the failure to obtain such consent or
the creation of such encumbrance, individually or in the aggregate, does not
have and would not be reasonably expected (so far as can be foreseen at the
time) to have (a) a SEI Material Adverse Effect or (b) a material adverse effect
on the ability of SEI to perform its obligations under this Agreement.
6.6. REPORTS AND FINANCIAL STATEMENTS
SEI has filed all reports required to be filed with the SEC since
March 31, 1994 (collectively, the "SEI SEC REPORTS"), and has previously
furnished or made available to PSI true and complete copies of all SEI SEC
Reports. None of the SEI SEC Reports, as of their respective dates (as amended
through the date hereof), contained any untrue statement of material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading. Each of the balance sheets (including the related notes)
included in the SEI SEC Reports presents fairly, in all material respects, the
consolidated financial position of SEI and its subsidiaries as of the respective
dates thereof, and the other related statements (including the related notes)
included therein present fairly, in all material respects, the results of
operations and cash flows of SEI and its subsidiaries for respective periods or
as of the respective dates set forth therein, all in conformity with generally
accepted accounting principles consistently applied during the periods involved,
except as otherwise noted therein and subject, in the case of the unaudited
interim financial statements, to normal year-end adjustments and any other
adjustments described therein. All the SEI SEC Reports, as of their respective
dates (as amended through the date hereof), complied in all material respects
with the requirements of the Exchange Act and the applicable rules and
regulations thereunder.
6.7. BROKERS AND FINDERS
Except for the fees and expenses paid or payable by SEI to Robertson
Stephens & Company LP, by SEI and PSI to Arthur Andersen & Co. LLP, and by PSI
to the appraisers of the fee interests in the seven properties owned by it, SEI
is not aware of any claim for payment of any investment banking fees, valuation
or appraisal fees, finder's fees, brokerage or agent's commissions or any other
payments in connection with the negotiations leading to this Agreement or the
consummation of the transactions contemplated hereby.
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6.8. PROXY STATEMENT
None of the information supplied or to be supplied by SEI for
inclusion or incorporation by reference in the Proxy Statement will at the time
of mailing the Proxy Statement and at the time of the SEI Shareholders Meeting,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. If at any time prior to the Effective Time any event with respect
to SEI, its officers and directors or any of its subsidiaries shall occur that
is required to be described in an amendment of, or a supplement to, the Proxy
Statement, SEI shall notify PSI and PSMI thereof by reference to this Section
6.8 and such event shall be so described, and an amendment or supplement shall
be promptly filed with the SEC and, as required by law, disseminated to the
shareholders of SEI, and such amendment or supplement shall comply with all
provisions of applicable law. The Proxy Statement will comply (with respect to
SEI) in all material respects with the requirements of the Exchange Act and the
applicable rules and regulations thereunder.
6.9. DISCLOSURE
The representations and warranties of SEI contained in this Agreement
or in any written certificate or related agreement furnished or to be furnished
to PSI and PSMI by SEI in connection with the Closing pursuant to this Agreement
do not contain any untrue statement of a material fact or omit to state any
material fact necessary to make the statements and information contained herein
or therein, in light of the circumstances in which they are made, not
misleading.
7. ADDITIONAL COVENANTS AND AGREEMENTS
7.1. CONDUCT OF BUSINESS OF PSI ENTITIES
Except as contemplated by this Agreement (including in connection with
the Restructure) or as set forth in the PSI/PSMI Disclosure Statement, during
the period from the date of this Agreement to the Effective Time, PSI and PSMI
will cause each PSI Entity to pursue its business in the ordinary course, with
no less diligence and effort than would be applied in the absence of this
Agreement; to seek to preserve intact its current business organization, keep
available the service of its current officers and employees and preserve its
relationships with customers, suppliers and others having business dealings with
it with the objective that its goodwill and ongoing business shall be unimpaired
at the Effective Time; and, to not, without the prior written consent of SEI:
(a) issue, deliver, sell, dispose of, pledge or otherwise encumber, or
authorize or propose the issuance, delivery, sale, disposition or pledge or
other encumbrances of (i) any additional shares of its capital stock of any
class, or any securities or rights convertible into, exchangeable for or
evidencing the right to subscribe for any shares of its capital stock, or any
rights, warrants, options, calls, commitments or any other agreements of any
character to
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purchase or acquire any shares of its capital stock or any securities or rights
convertible into, exchangeable for or evidencing the right to subscribe for any
shares of its capital stock, or (ii) any other securities in respect of, in lieu
of or in substitution for shares outstanding on the date hereof;
(b) redeem, purchase or otherwise acquire, or propose to redeem,
purchase or otherwise acquire, any of its outstanding securities;
(c) split, combine, subdivide or reclassify any shares of its capital
stock or declare, set aside for payment or pay any dividend, or make any other
actual, constructive or deemed distribution in respect of any shares of its
capital stock or otherwise make any payments to shareholders in their capacity
as such;
(d) adopt a plan of complete or partial liquidation, dissolution,
merger, consolidation, restructuring, recapitalization or other reorganization
(other than the Restructure and the Merger);
(e) make any acquisition, by means of merger, consolidation or
otherwise, of (i) any direct or indirect ownership interest in or assets
comprising any business enterprise or operation or (ii) except in the ordinary
course of business consistent with past practice, any other assets;
(f) adopt any amendments to its charter or bylaws;
(g) other than borrowings under existing credit facilities, or other
borrowing in the ordinary course, incur any indebtedness for borrowed money or
guarantee any such indebtedness or, except in the ordinary course of business
consistent with past practice, make any loans, advances or capital contributions
to, or investments in, any Partnership or other Person;
(h) engage in the conduct of any business the nature of which is
materially different than the business it is currently engaged in;
(i) enter into any contract, arrangement or understanding requiring
the purchase of equipment, materials, supplies or services over a period greater
than 12 months and for the expenditure of greater than $75,000 per year, which
is not cancelable without penalty on 30 days' or less notice, except in the
ordinary course of business consistent with past practice;
(j) authorize or enter into any agreement providing for property
management services to be provided by it to third party property owners on other
than customary terms;
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(k) authorize or enter into any agreement that would jeopardize the
qualification of SEI as a real estate investment trust pursuant to Section 856
of the Code if such agreement had been entered into by SEI;
(l) pledge, encumber, sell or dispose of assets of the PSI Entities,
except in the ordinary course of business consistent with past practice;
(m) modify or change in any material respect any existing Material
Agreement, except in the ordinary course of business consistent with past
practice; or
(n) authorize or announce an intention to do any of the foregoing, or
enter into any contract, agreement, commitment or arrangement to do any of the
foregoing.
7.2. OTHER TRANSACTIONS
Prior to the Effective Time, PSI and PSMI each agree (a) that neither
of them shall, and each of them shall direct and use its best efforts to cause
its respective officers, directors, employees, agents and representatives
(including any investment banker, attorney or accountant retained by it) not to
initiate, solicit or encourage, directly or indirectly, any inquiries or the
making or implementation of any proposal or offer (including, without
limitation, any proposal or offer to its shareholders or shareholders,
respectively) with respect to a merger, acquisition, tender offer, exchange
offer, consolidation or similar transaction involving, or any purchase of all or
any significant portion of the assets or any equity securities of, any PSI
Entity, other than the transactions contemplated by this Agreement (any such
proposal or offer being hereinafter referred to as an "ACQUISITION PROPOSAL") or
engage in any negotiation concerning, or provide any confidential information or
data to, or have any discussions with, any person relating to an Acquisition
Proposal, or otherwise facilitate any effort or attempt to make or implement an
Acquisition Proposal; (b) that it will immediately cease and cause to be
terminated any existing activities, discussions or negotiation with any parties
conducted heretofore with respect to any of the foregoing and each will take the
necessary steps to inform the individuals or entities referred to above of the
obligations undertaken in this Section 7.2; and (c) that it will notify SEI
immediately if any such inquiries or proposals are received by, any such
information is requested from, or any such negotiations or discussions are
sought to be initiated or continued with, it.
Prior to the Effective Time, SEI agrees that it will not, and it will
direct and use its best efforts to cause its officers, directors, employees,
agents and representatives (including any investment banker, attorney or
accountant retained by it) not to, initiate, solicit or encourage any inquiries
or the making of any proposal or offer with respect to the engagement of any
Person to manage its properties (other than PSMI or PSCP) or to act as advisor
for its operations (other than PSAI).
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7.3. MEETING OF SHAREHOLDERS
SEI will take all action necessary in accordance with applicable law
and SEI's Articles of Incorporation and Bylaws to convene a meeting of its
shareholders (the "SEI SHAREHOLDERS MEETING") as promptly as practicable to
consider and vote upon the approval of the Merger and the Recapitalization, it
being understood that the principal terms of the Merger must be approved by an
affirmative vote of (i) a majority of the outstanding SEI Shares entitled to
vote at the SEI Shareholders Meeting, and (ii) a majority of the SEI shares
voting at the SEI Shareholders Meeting not held by Wayne Hughes, PSI and their
Affiliates. Subject to the fiduciary duties of SEI's Board of Directors under
applicable law as advised by counsel, the Board of Directors of SEI shall
recommend and declare advisable such approval and SEI shall take all lawful
action to solicit, and use all reasonable efforts to obtain, such approval.
7.4. PROXY STATEMENT
SEI will, as promptly as practicable, prepare and file with the SEC a
proxy statement and a form of proxy, in connection with the vote of SEI's
shareholders with respect to the Merger and Recapitalization (such proxy
statement, together with any amendments thereof or supplements thereto, in each
case in the form or forms mailed to SEI's shareholders, is herein called the
"PROXY STATEMENT"). PSI and PSMI shall use their best efforts to obtain and
furnish to SEI the information required to be included in the Proxy Statement.
SEI will use all reasonable efforts to cause the Proxy Statement to be mailed to
shareholders of SEI at the earliest practicable date. If at any time prior to
the Effective Time any event relating to or affecting any PSI Entity or SEI
shall occur as a result of which it is necessary, in the opinion of counsel for
PSI and PSMI or of counsel for SEI, to supplement or amend the Proxy Statement
in order to make such document not misleading in light of the circumstances
existing at the time approval of the shareholders of SEI is sought, SEI
forthwith will prepare and file with the SEC an amendment or supplement to the
Proxy Statement so that such document, as so supplemented or amended, will not
contain any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements therein, in light of the
circumstances existing at such time, not misleading.
7.5. FILINGS; OTHER ACTION
PSI and PSMI and SEI shall: (a) to the extent required, promptly make
all filings and thereafter make any other required submissions under the HSR Act
with respect to the Merger; (b) use all reasonable efforts to cooperate with one
another to (i) determine which Authorizations are required to be made or
obtained prior to the Effective Time in connection with the execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby and (ii) timely make and seek all such Authorizations; (c) use all
reasonable efforts to obtain in writing any consents required from third parties
in form reasonably satisfactory to SEI and PSI and PSMI necessary to effectuate
the Merger and the Recapitalization; (d) use all reasonable efforts to promptly
take, or cause to be taken, all other actions and do, or cause to be done, all
other things necessary, proper or appropriate to satisfy
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the conditions set forth in Article 8 and to consummate and make effective the
transactions contemplated by this Agreement on the terms and conditions set
forth herein as soon as practicable (including seeking to remove promptly any
injunction or other legal barrier that may prevent such consummation); and (e)
not take any action which might reasonably be expected to impair the ability of
the parties to consummate the Merger and the Recapitalization at the earliest
possible time.
7.6. ACCESS TO INFORMATION
From the date hereof until the Effective Time, PSI and PSMI will cause
the PSI Entities to give SEI, its counsel, financial advisors, auditors and
other authorized representatives full access to the offices, properties, books
and records of the PSI Entities, will furnish to SEI, its counsel, financial
advisors, auditors and other authorized representatives such financial and
operating data and other information as such persons may reasonably request and
to instruct the PSI Entities' employees, counsel and financial advisors to
cooperate with SEI in its investigation of the business of the PSI Entities;
provided that no investigation pursuant to this Section shall affect any
representation or warranty given by PSI and PSMI to SEI hereunder.
7.7. TAX MATTERS
PSI and SEI agree to report the Merger on all Tax Returns and other
filings as a tax-free reorganization under Section 368(a)(1)(A) of the Code.
7.8. RESTRUCTURE
At or prior to the Effective Date, PSI and PSMI shall use all
reasonable efforts to consummate transactions (the "RESTRUCTURE") whereby (i)
the capital stock of the Excluded Companies will be distributed to one or more
of the PSMI Shareholders, or all of the stock or assets of the Excluded
Companies will be sold to one or more of the PSMI Shareholders or to one or more
third parties, (ii) PSI will be liquidated by merger into PSI Holdings, Inc. and
(iii) the PSI Entities (other than PSMI and PSI) will be merged with and into
PSMI or with and into another entity that is subsequently merged with and into
PSMI.
7.9. MANAGEMENT AND ADVISORY AGREEMENTS
Prior to the Closing, PSI and PSMI shall use all reasonable efforts to
cause the owners of all properties managed and of all partnerships and
corporations advised by any of the PSI Entities to consent to the management of
such properties and assumption of such advisory functions by the Surviving
Corporation to the extent required by the existing management and advisory
agreements relating thereto.
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7.10. INTELLECTUAL PROPERTY RIGHTS
Prior to the Closing, PSI and PSMI shall use all reasonable efforts to
obtain all assignments or other consents necessary to vest in SEI exclusive
ownership and full use and benefit with respect to the PSI Intellectual Property
Rights listed on the PSI/PSMI Disclosure Statement.
7.11. EMPLOYEES
SEI agrees to employ at the Effective Time all employees of the PSI
Entities who are employed on the Closing Date on terms consistent with such PSI
Entities' current employment practices and at comparable levels of compensation
and positions, except that other than as otherwise provided in this Agreement
such employment shall be at will and SEI shall be under no obligation to
continue to employ any of such individuals for more than thirty (30) days after
Closing. For purposes of this Section 7.11, the term "employees" shall mean all
current employees of the PSI Entities (including those on disability or leave of
absence, paid or unpaid).
7.12. TAX-FREE EXCHANGE AND REIT STATUS
From and after the date hereof and prior to the Effective Time, except
for the transactions contemplated or permitted herein, no PSI Entity or SEI
shall knowingly take any action that would be inconsistent with the
representations and warranties made by them herein, including, but not limited
to knowingly taking any action, or knowingly failing to take any action that is
known to cause disqualification of the Merger as a reorganization within the
meaning of Section 368(a)(1)(A) of the Code. Furthermore, from and after the
date hereof and prior to the Effective Time, except for the transactions
contemplated or permitted herein, each PSI Entity shall use its best efforts to
conduct its business and file Tax Returns in a manner that would not jeopardize
the qualification of SEI after the Effective Time as a REIT within the meaning
of Section 856 of the Code.
7.13. PUBLIC STATEMENTS
The parties shall consult with each other prior to issuing any press
release or any written public statement with respect to this Agreement or the
transactions contemplated hereby and shall not issue any such press release or
written public statement prior to review and approval by the other party, except
that prior review and approval shall not be required if, in the reasonable
judgment of the party seeking to issue such release or public statement, prior
review and approval would prevent the timely dissemination of such release or
announcement in violation of any applicable law, rule, regulation or policy of
the NYSE.
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7.14. NOTICE OF CERTAIN EVENTS
Each party hereto shall promptly notify the other party of (i) any
notice or other communication from any Person alleging that the consent of such
Person is or may be required in connection with the transactions contemplated by
this Agreement; (ii) any notice or other communication from any Governmental
Body in connection with the transactions contemplated by this Agreement; and
(iii) any actions, suits, claims, investigations or proceedings commenced or, to
its knowledge threatened against, relating to or involving or otherwise
affecting either party or any of its subsidiaries which, if pending on the date
of this Agreement, would have been required to have been disclosed in the
PSI/PSMI Disclosure Statement pursuant to Section 5.5 or in the SEI SEC Reports
pursuant to Section 6.4 or which relate to the consummation of the transactions
contemplated by this Agreement.
7.15. DIRECTOR AND OFFICER INDEMNIFICATION
From and after the Effective Date, SEI shall keep in effect provisions
in its Articles of Incorporation and Bylaws providing for limitation of director
liability and indemnification of directors, officers, employees and agents at
least to the extent that such persons are entitled thereto under the Articles of
Incorporation and Bylaws of PSMI on the date hereof, subject to California law,
which provisions shall not be amended, repealed or otherwise modified in any
manner that would adversely affect the rights thereunder of individuals who at
any time prior to the Effective Time were directors, officers, employees or
agents of PSMI in respect of actions or omissions occurring at or prior to the
Effective Time (including, without limitation, the transactions contemplated by
this Agreement), unless such modification is required by law.
7.16. RECAPITALIZATION
SEI agrees to include in the Proxy Statement a proposal to amend its
Articles of Incorporation to, among other things, increase its authorized
capital stock and effect a recapitalization such that the SEI Common Shares and
SEI Class B Shares are authorized in sufficient amounts to satisfy SEI's
obligation to issue the SEI Shares in the Merger (the "RECAPITALIZATION"), and
include a provision designed to protect against violation of the 5/50 Rule as
defined in Section 8.3(q). An outline of the rights, preferences, privileges
and restrictions of the SEI Class B Shares is attached hereto as Exhibit D.
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7.17. PSI/PSMI DISCLOSURE STATEMENT
PSI and PSMI agree to deliver to SEI the PSI/PSMI Disclosure Statement
within 30 days of the date of this Agreement.
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7.18. LISTING OF SEI SHARES
SEI will use its best efforts to cause the SEI Common Shares to be
listed for trading on the NYSE upon official notice of issuance.
7.19. FURTHER ACTION
Each party hereto shall, subject to the fulfillment or waiver at or
before the Effective Time of each of the conditions set forth herein, perform
such further acts and execute such documents as may reasonably be required to
effect the Merger, the Recapitalization and the Restructure.
8. CONDITIONS
8.1. CONDITIONS TO EACH PARTY'S OBLIGATIONS
The respective obligations of each party to consummate the
transactions contemplated by this Agreement are subject to the fulfillment at or
prior to the Closing Date of each of the following conditions, which conditions
may not be waived:
(a) The Merger, this Agreement and the transactions contemplated
hereby (including the Recapitalization) shall have been duly approved by
the requisite holders of SEI capital stock in accordance with applicable
provisions of the GCLC, the Articles of Incorporation and Bylaws of SEI and
Section 7.3, and the Articles of Incorporation of SEI shall have been
amended to reflect the Recapitalization.
(b) All filings required to be made prior to the Effective Time with,
and all Authorizations required to be obtained prior to the Effective Time
from Governmental Bodies in connection with the execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby
(including the expiration of the waiting period requirements of the HSR
Act) shall have been made or obtained (as the case may be) without material
restrictions.
(c) There shall not be in effect any judgment, writ, order, injunction
or decree of any court of competent jurisdiction or Governmental Body
restraining, enjoining or otherwise preventing consummation of the
transactions contemplated by this Agreement or permitting such consummation
only subject to any condition or restriction unacceptable to either of SEI
or of PSI and PSMI, each in its reasonable judgment, nor shall there be
pending or threatened by any Governmental Body any suit, action or
proceeding, and there shall not be pending by any other Person any suit,
action or proceeding, seeking to restrain or restrict the consummation of
the Merger or other transactions contemplated by this Agreement or seeking
damages in connection therewith, which, in the reasonable judgment of
either SEI or of PSI and PSMI could have (a) a SEI Material Adverse Effect
or a PSI Entities Material Adverse Effect, respectively, or (b) a material
adverse effect
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on the ability of SEI or PSI or of PSMI, respectively, to perform its
obligations under this Agreement.
8.2. CONDITIONS TO OBLIGATIONS OF PSMI TO EFFECT THE MERGER
The obligation of PSMI to effect the Merger shall be subject to the
fulfillment at or prior to the Closing Date of the following conditions, unless
waived in writing by PSMI:
(a) SEI shall have performed its agreements contained in this
Agreement required to be performed on or prior to the Closing Date and the
representations and warranties of SEI contained in this Agreement shall be
true and correct in all material respects as of the Closing Date as if made
on the Closing Date (except for changes therein contemplated or permitted
by this Agreement), and PSMI shall have received a certificate of the
President of SEI, dated the Closing Date, certifying to such effect.
(b) From the date of this Agreement through the Effective Time,
there shall not have occurred any change in the financial condition,
business or operations of SEI that would have or would be reasonably likely
to have a SEI Material Adverse Effect.
(c) Any sums then due and owing to the PSI Entities by SEI as a
result of obligations arising out of (i) those certain Amended Management
Agreements dated as of February 21, 1995 between PSMI and SEI and between
PSCP and SEI and (ii) that certain Amended and Restated Advisory Agreement
dated as of September 30, 1991 between PSAI and SEI, shall have been paid.
(d) The holders of less than 5% of the outstanding SEI Shares
entitled to vote at the SEI Shareholders Meeting shall have exercised
dissenters rights under the GCLC.
8.3. CONDITIONS TO OBLIGATION OF SEI TO EFFECT THE MERGER
The obligations of SEI to effect the Merger shall be subject to the
fulfillment at or prior to the Closing Date of the following conditions, unless
waived in writing by SEI:
(a) PSI and PSMI shall have performed their agreements contained in
this Agreement required to be performed on or prior to the Closing Date and
the representations and warranties of PSI and PSMI contained in this
Agreement shall be true and correct in all material respects as of the
Closing Date as if made on the Closing Date (except for changes therein
contemplated or permitted by this Agreement), and SEI shall have received a
certificate of the President of PSMI, dated the Closing Date, certifying to
such effect.
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(b) SEI shall have received a legal opinion from Hogan & Hartson LLP,
in form and substance reasonably acceptable to the Special Committee, to
the effect (i) that the Merger will be treated for federal income tax
purposes as a reorganization within the meaning of Section 368(a) of the
Code (with the result that neither PSMI nor SEI will recognize gain for tax
purposes on the deemed transfer of the assets of PSMI to SEI in exchange
for the SEI stock issued to the PSMI Shareholders), and (ii) SEI will
continue to qualify as a REIT under Section 856 through 860 of the Code
following the Merger so long as (A) SEI continues to meet the stock
ownership and gross income requirements applicable to REITs (which the
management of SEI will represent will be the case) and (B) either PSMI at
the time of the Merger is not considered to have any current or accumulated
earnings and profits for tax purposes or SEI makes distributions prior to
the end of the calendar year in which the Merger occurs in an amount
sufficient to eliminate such earnings and profits.
(c) SEI shall have received from David Goldberg, Esq., a legal opinion
in form and substance reasonably acceptable to SEI and the Special
Committee covering such matters as they may shall reasonably request.
(d) From the date of this Agreement through the Effective Time, there
shall not have occurred any change in the financial condition, business or
operations of the PSI Entities, taken as a whole, that would have, or would
be reasonably likely to have, a PSI Entities Material Adverse Effect.
(e) No holders of the outstanding PSMI Shares shall have been entitled
to exercise dissenters' rights under applicable law.
(f) All assignments or other consents, if any, necessary to transfer
to the Surviving Corporation the PSI Intellectual Property Rights set forth
on the PSI/PSMI Disclosure Statement shall have been obtained.
(g) Hughes shall have executed and delivered to SEI an Option
Agreement (with an Irrevocable Proxy) providing SEI with a three-year
option to purchase for SEI Common Shares the interests owned by Hughes in
certain United States mini-warehouse partnerships and REITs, such Option
Agreement to be in form and substance acceptable to SEI and the Special
Committee.
(h) SEI shall have received from PSMI a study prepared by PSI and PSMI
of the consolidated earnings and profits of PSI, PSMI and the other PSI
Entities that shows, taking into account income of PSMI and its affiliated
corporations at the time of the Merger and distributions to PSMI and/or the
PSMI Shareholders to be made at or prior to the time of the Merger, that
PSMI will have no consolidated accumulated earnings and profits at the time
of the Merger.
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(i) SEI shall have received the PSI/PSMI Disclosure Statement and
shall not have reasonably objected to any disclosures set forth therein.
(j) The PSMI Shareholders shall have granted SEI a right of first
refusal with respect to PS Insurance Company, Ltd. and their interests in
the Canadian operations in form and substance acceptable to SEI and the
Special Committee.
(k) The SEI Common Shares to be issued pursuant to Section 4 shall
have been approved for listing on the NYSE upon official notice of
issuance.
(l) The Board of Directors of SEI and Special Committee shall have
received the opinion of Robertson, Stephens & Company LP in form and
substance satisfactory to them to the effect that the consideration in the
Merger is, from a financial point of view, fair to the public shareholders
of SEI, and such opinion shall not have been withdrawn or revoked.
(m) Each of the PSMI Shareholders and SEI shall have entered into a
Shareholder Agreement providing, among other things, for investment
representations, restrictions on transfer, general releases and handling
certain post-closing tax matters, in form and substance acceptable to SEI
and the Special Committee.
(n) Hughes and SEI shall have entered into an Indemnification Escrow
Agreement as provided in Section 4.8 in form and substance acceptable to
SEI and the Special Committee.
(o) Hughes and SEI shall have entered into an Employment Agreement for
a five-year term in form and substance acceptable to SEI and the Special
Committee.
(p) The Restructure shall have been consummated in a manner
satisfactory to SEI and the Special Committee.
(q) SEI and the Special Committee shall have received an analysis
prepared by PSI, PSMI and SEI, acceptable in form and substance to SEI and
the Special Committee, demonstrating that SEI's expected stock ownership
immediately following the Merger will comply with the Code requirement that
no more than 50% of the value of a REIT's outstanding shares may be owned,
directly or indirectly, actually or constructively, by five or fewer
individuals at any time during the last half of each of the REIT's taxable
years (the "5/50 RULE"), and SEI's Articles of Incorporation shall have
been amended, in a manner acceptable in form and substance to SEI and the
Special Committee, that is designed to protect against and prevent future
changes in ownership that might otherwise violate the 5/50 Rule.
(r) The terms and covenants of any indebtedness for which SEI shall
become obligated by virtue of the Merger shall be satisfactory to SEI.
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(s) Hughes shall have executed and delivered to SEI a Covenant Not to
Compete restricting his activities in the mini-warehouse business in the
United States for a seven-year period, in form and substance acceptable to
SEI and the Special Committee.
(t) SEI and the Special Committee shall be satisfied as to SEI's
overall exposure based on results of environmental audits of the real
properties owned by the PSI Entities and by the Partnerships and such other
factors as they shall deem appropriate.
(u) PSI or PSMI shall have obtained all consents, authorizations and
approvals in form acceptable to SEI of any and all Persons, including those
referenced in Section 7.9, required to be obtained prior to the Merger and
the consummation of the transactions contemplated by this Agreement and
required to be obtained in order that SEI may conduct the businesses of the
PSI Entities in the same manner and any without material restrictions
following the Closing.
9. TERMINATION
9.1. TERMINATION BY MUTUAL CONSENT
This Agreement may be terminated and the Merger may be abandoned at
any time prior to the Effective Time, before or after the approval by SEI
shareholders, either by the mutual written consent of SEI and PSMI or by mutual
action of their respective Boards of Directors.
9.2. TERMINATION BY EITHER SEI OR PSMI
This Agreement may be terminated and the Merger may be abandoned by
action of the Board of Directors of PSMI or SEI if (a) the Merger shall not have
been consummated by March 31, 1996, (b) the SEI Shareholders Meeting duly shall
have been convened and held and the approval of SEI's shareholders required by
Section 7.3 shall not have been obtained at such meeting or at any adjournment
thereof, or (c) a United States federal or state court of competent jurisdiction
or United States federal or state governmental, regulatory or administrative
agency or commission shall have issued an order, decree or ruling or taken any
other action permanently restraining, enjoining or otherwise prohibiting the
transactions contemplated by this Agreement and such order, decree, ruling or
other action shall have become final and non-appealable, provided, that the
party seeking to terminate this Agreement pursuant to this clause (c) shall have
used all reasonable efforts to remove such order, decree, ruling or injunction;
and provided, in the case of a termination pursuant to clause (a) above, that
the terminating party shall not have breached in any material respect its
obligations under this Agreement in any manner that shall have proximately
contributed to the occurrence of the failure referred to in said clause.
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9.3. EFFECT OF TERMINATION AND ABANDONMENT
In the event of termination of this Agreement and abandonment of the
Merger pursuant to this Article 9, no party hereto (or any of its directors or
officers) shall have any liability or further obligation to any other party to
this Agreement, except that nothing herein will relieve any party from liability
for any breach of this Agreement.
10. MISCELLANEOUS
10.1. EXPENSES
SEI shall pay the fees and expenses of Robertson, Stephens & Co. LP
and the fee of counsel to the Special Committee. The fees and expenses other
counsel incurred by any party in connection with this Agreement and the
transactions contemplated hereby, the fees and expenses of Arthur Andersen & Co.
LLP, the expenses relating to printing and distribution of the Proxy Statement
and the solicitation, and any filing fees under the HSR Act and the Exchange Act
shall be paid equally by SEI and by PSI or PSMI. If the Merger is consummated,
the fees and expenses to be paid by PSI shall be deducted in computing the PSI
Equity Adjustment under Section 4.2.
10.2. NOTICES, ETC.
All notices, requests, demands or other communications required by
or otherwise with respect to this Agreement shall be in writing and shall be
deemed to have been duly given to any party when delivered personally (by
courier service or otherwise), when delivered by facsimile and confirmed by
return facsimile, or two days after being mailed by first-class mail, postage
prepaid and return receipt requested in each case to the applicable addresses
set forth below:
If to PSI or PSMI: with a copy (which shall not
constitute notice) to:
Public Storage, Inc. Heller, Ehrman, White & McAuliffe
Public Storage Management, Inc. 601 S. Figueroa Street
Suite 300 Los Angeles, CA 90017
600 North Brand Boulevard Attention: A. Timothy Scott
Glendale, CA 91203-1241 Facsimile: (213) 614-1868
Attention: David Goldberg
Facsimile: (818) 247-3842
39
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If to SEI: with a copy (which shall not
constitute notice) to:
Storage Equities, Inc. Hogan & Hartson LLP
Suite 300 Columbia Square
600 North Brand Boulevard 555 Thirteenth Street, N.W.
Glendale, CA 92103-1241 Washington, DC 20004-1109
Attention: Harvey Lenkin Attention: David B.H. Martin, Jr.
Facsimile: (818) 247-3842 Facsimile: (202) 637-5910
and:
Kindel & Anderson
555 South Flower Street
Twenty-Ninth Floor
Los Angeles, CA 90017
Attention: Neal H. Brockmeyer
Facsimile: (213) 688-7564
or to such other address as such party shall have designated by notice so given
to each other party.
10.3. SURVIVAL
Subject to Section 4.8, the covenants, agreements, representations and
warranties of the parties hereto contained in this Agreement or in any
certificate or other writing delivered pursuant hereto or in connection herewith
shall survive the Closing.
10.4. MODIFICATION OR AMENDMENT
The parties may modify or amend this Agreement by a writing authorized
by their respective Boards of Directors and executed and delivered by officers
of the respective parties; provided, however, that after approval of this
Agreement by the shareholders of SEI, no amendment shall be made which changes
any of the principal terms of the Merger or this Agreement without the approval
of the shareholders of SEI.
10.5. WAIVER
At any time prior to the Effective Time, the parties may (a) extend
the time for the performance of any of the obligations or other acts of the
other parties hereto, (b) waive any inaccuracies in the representations and
warranties contained herein or in any document delivered pursuant hereto and (c)
waive compliance with any of the agreements or conditions contained herein. Any
agreement on the part of a party to any such extension or waiver shall be valid
if set forth in an instrument in writing signed on behalf of such party. The
failure of any party
40
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hereto to exercise any right, power or remedy provided under this Agreement or
otherwise available in respect hereof at law or in equity, or to insist upon
compliance by any other party of its obligations hereunder, and any custom or
practice of the parties at variance with the terms hereof, shall not constitute
a waiver by such party of its right to exercise any such or other right, power
or remedy or to demand such compliance.
10.6. NO ASSIGNMENT
This Agreement shall be binding upon and shall inure to the benefit of
and be enforceable by the parties and their respective successors and assigns;
provided that, except as otherwise expressly set forth in this Agreement,
neither the rights nor the obligations of any party may be assigned or delegated
without the prior written consent of the other party.
10.7. ENTIRE AGREEMENT
Except as otherwise provided herein, this Agreement embodies the
entire agreement and understanding between the parties relating to the subject
matter hereof and supersedes all prior agreements and understandings relating to
such subject matter. There are no representations, warranties or covenants by
the parties hereto relating to such matter other than those expressly set forth
in this Agreement (including the PSI/PSMI Disclosure Statement) and any writings
expressly required hereby.
10.8. REMEDIES CUMULATIVE
All rights, powers and remedies provided under this Agreement or
otherwise available in respect hereof at law or in equity shall be cumulative
and not alternative, and the exercise or beginning of the exercise of any
thereof by any party shall not preclude the simultaneous or later exercise of
any other such right, power or remedy by such party.
10.9. PARTIES IN INTEREST
This Agreement is not intended to be for the benefit of and shall not
be enforceable by any Person who or which is not a party.
10.10. GOVERNING LAW
This Agreement and all disputes hereunder shall be governed by and
construed and enforced in accordance with the internal laws of the State of
California, without regard to principles of conflict of laws.
10.11. NAME, CAPTIONS, ETC.
The name assigned to this Agreement and the section captions used
herein are for convenience of reference only and shall not affect the
interpretation or construction hereof.
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Unless otherwise specified (a) the terms "hereof," "herein" and similar terms
refer to this Agreement as a whole and (b) references herein to Articles or
Sections refer to articles or sections of this Agreement.
10.12. SEVERABILITY
If any term of this Agreement or the application thereof to any party
or circumstance shall be held invalid or unenforceable to any extent, the
remainder of this Agreement and the application of such term to the other
parties or circumstances shall not be affected thereby and shall be enforced to
the greatest extent permitted by applicable law provided that in such event the
parties shall negotiate in good faith in an attempt to agree to another
provision (in lieu of the term or application held to be invalid or
unenforceable) that will be valid and enforceable and will carry out the
parties' intentions hereunder.
10.13. COUNTERPARTS
This Agreement may be executed in any number of counterparts, each of
which shall be deemed to be an original, but all of which together shall
constitute one instrument. Each counterpart may consist of a number of copies,
each signed by less than all, but together signed by all, the parties hereto.
10.14. INTERPRETATION
This Agreement has been negotiated by the parties and is to be
interpreted according to its fair meaning as if the parties had prepared it
together and not strictly for or against any party. Each of the capitalized
terms defined in this Agreement shall, for all purposes of this Agreement (and
whether defined in the plural and used in the singular, or vice versa), have the
respective meaning assigned to such term. References in this Agreement to
"parties" or a "party" refer to parties to this Agreement unless expressly
indicated otherwise. At each place in this Agreement where the context so
requires, the masculine, feminine or neuter gender includes the others and the
singular or plural number includes the other. "Including" means "including
without limitation."
10.15. FURTHER ACTION
If at any time after the Effective Time, the Surviving Corporation
shall determine that any assignments, transfers, deeds or other assurances are
necessary or desirable to vest, perfect or confirm, of record or otherwise, in
the Surviving Corporation, title to any property or rights of any PSI Entity,
the officers of either SEI or PSMI are fully authorized in the name of such PSI
Entity or otherwise to execute and deliver such documents and do all things
necessary and proper to vest, perfect or confirm title to such property or
rights in the Surviving Corporation.
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IN WITNESS WHEREOF, this Agreement has been executed and delivered by
the parties set forth below.
STORAGE EQUITIES, INC.,
a California corporation
By: /s/ Harvey Lenkin
-------------------------------------
Title: President
------------------------------
PUBLIC STORAGE, INC.,
a California corporation
By: /s/ B. Wayne Hughes
-------------------------------------
Title: President
------------------------------
PUBLIC STORAGE MANAGEMENT, INC.,
a California corporation
By: /s/ B. Wayne Hughes
-------------------------------------
Title: Director
------------------------------
43
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Exhibit A
---------
AGREEMENT OF MERGER
THIS AGREEMENT OF MERGER ("Agreement") is entered into as of this ____
day of ______, 1995, by and between STORAGE EQUITIES, INC., a California
corporation ("SEI"), and PUBLIC STORAGE MANAGEMENT, INC., a California
corporation ("PSMI"), with reference to the following:
A. SEI was incorporated in 1980 under the laws of California, and on
the date hereof its authorized capital stock consists of (i) 200,000,000 shares
of Common Stock, $.10 par value (the "SEI Common Shares"), ___________ of which
are issued and outstanding, (ii) 7,000,000 shares of Class B Common Stock, $.10
par value, (the "SEI Class B Shares"), none of which are issued and outstanding,
and (iii) 50,000,000 shares of Preferred Stock ($.01 par value), 13,320,000 of
which are issued and outstanding (the "SEI Preferred Shares") (collectively, the
"SEI Shares").
B. PSMI was incorporated in 1972 under the laws of California, and
on the date hereof its authorized capital stock consists of ________ shares of
Common Stock, $.10 par value, ________ of which are issued and outstanding (the
"PSMI Shares").
C. SEI, PSMI and Public Storage, Inc. have entered into an Agreement
and Plan of Reorganization dated as of June 30, 1995 (the "Plan"), setting forth
certain representations, warranties, conditions and agreements pertaining to the
Merger (as defined below).
D. The Boards of Directors of SEI and PSMI have approved the Plan
and this Agreement of Merger, and the requisite shareholder approval has been
obtained.
NOW, THEREFORE, the parties agree as follows:
ARTICLE I
---------
1.1 THE MERGER. At the Effective Time (as defined below), PSMI will
be merged with and into SEI (the "Merger") and SEI will be the surviving
corporation. SEI and PSMI are sometimes collectively referred to herein as the
"Constituent Corporations" and SEI, as the surviving corporation of the Merger,
is sometimes referred to herein as the "Surviving Corporation."
1.2 EFFECTIVE TIME. The Merger shall become effective at the time
at which this Agreement, together with the requisite Officers' Certificates of
SEI and PSMI, are filed with the California Secretary of State (the "Effective
Time").
<PAGE>
1.3 EFFECT OF THE MERGER. At the Effective Time:
(a) The separate corporate existence of PSMI shall cease and the
Surviving Corporation shall thereupon succeed, without other transfer, to all
the rights and property of PSMI and shall be subject to all the debts and
liabilities of PSMI in the same manner as if the Surviving Corporation had
itself incurred them; all rights of creditors and all liens upon the property of
each of the Constituent Corporations shall be preserved unimpaired, provided
that such liens upon property of PSMI shall be limited to the property affected
thereby immediately prior to the Effective Time; and any action or proceeding
pending by or against PSMI may be prosecuted to judgment, which shall bind the
Surviving Corporation, or the Surviving Corporation may be proceeded against or
substituted in its place.
(b) The Articles of Incorporation of SEI, are amended in the
following respect at the Effective Time and thereafter as so amended shall
continue to be the Articles of Incorporation of the Surviving Corporation until
further amended in accordance with the terms thereof and as provided by law.
Article __ shall be amended to read as follows:
The name of this corporation is
Public Storage, Inc.
(c) The Bylaws of SEI, as amended by the Merger Agreement at the
Effective Time, shall continue to be the Bylaws of the Surviving Corporation
until duly amended in accordance with the terms thereof, the Articles of
Incorporation of the Surviving Corporation and as provided by law.
(d) The directors of SEI at the Effective Time shall continue as
directors of the Surviving Corporation from and after the Effective Time. The
persons whose names are set forth on Exhibit C to the Plan shall serve as the
---------
executive officers of the Surviving Corporation from and after the Effective
Time, holding the positions indicated opposite their respective names, until
changed as provided by law and the Articles of Incorporation and Bylaws of the
Surviving Corporation.
ARTICLE II
----------
2.1 CONVERSION OF PSMI SHARES.
(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 of the Plan) and 7,000,000 SEI Class B Shares. The SEI Shares shall
be allocated among the PSMI shareholders in such proportions as they shall
agree.
2
<PAGE>
(b) If, prior to the Effective Time, SEI should split or combine
the SEI Common Shares, or pay a stock dividend or other stock distribution in
SEI Common Shares, or otherwise change the SEI Common Shares into, or exchange
SEI Common Shares for, any other securities (whether pursuant to or as part of a
merger, consolidation, acquisition of property or stock, separation,
reorganization or liquidation of SEI as a result of which the SEI Shareholders
receive cash, stock or other property in exchange for, or in connection with,
their SEI Shares (a "Business Combination")), or make any other dividend or
distribution (other than cash) on the SEI Common Shares, then the number of SEI
Shares will be appropriately adjusted to reflect such split, combination,
dividend, distribution, Business Combination or change.
(c) The PSMI Shares to be converted into SEI Shares pursuant to
this Section 2.1 shall cease to be outstanding, shall be cancelled and retired
and shall cease to exist, and each holder of a certificate or certificates
representing any such PSMI Shares (the "Certificates") shall thereafter cease to
have any rights with respect to such PSMI Shares, except the right to receive
for each of the PSMI Shares, upon the surrender of such Certificate in
accordance with Section 2.3, the SEI Shares specified above (subject to the
provisions of Section 4.8 of the Plan).
2.2 SEI SHARES UNAFFECTED. The Merger shall effect no change in any
of the outstanding SEI Common Shares or SEI Preferred Shares and no outstanding
SEI Common Shares or SEI Preferred Shares shall be converted or exchanged as a
result of the Merger, and no securities shall be issuable with respect thereto.
Notwithstanding the foregoing, any SEI Common Shares owned by any PSI Entity at
the Effective Time shall be cancelled and retired.
2.3 SURRENDER OF CERTIFICATES. Subject to the provisions of Section
4.8 of the Plan, at the Closing (as defined in the Plan), PSMI shall cause each
holder of PSMI Shares to surrender the Certificates representing the PSMI shares
to SEI and such holders shall be entitled to receive in exchange therefor
certificates representing the number and class of SEI Shares into which such
PSMI Shares shall be converted pursuant to Section 2.1.
2.4 FRACTIONAL SHARES. Notwithstanding any other term or provision
of this Agreement, no fractional SEI Shares and no certificates or scrip
therefor, or other evidence of ownership thereof, will be issued in the Merger.
In lieu of any such fractional share interests, each holder of PSMI Shares who
would otherwise be entitled to such fractional share will, upon surrender of the
certificate representing such PSMI Shares, receive a whole SEI Share if such
fractional share to which such holder would otherwise have been entitled is .5
of an SEI Share or more, and such fractional share shall be disregarded if it
represents less than .5 of an SEI Share.
2.5 TRANSFER OF SHARES. No transfers of PSMI Shares shall be made
on the stock transfer books of PSMI after the close of business on the day
prior to the Closing.
3
<PAGE>
ARTICLE III
-----------
3.1 HEADINGS. The descriptive headings contained in the Sections of
this Agreement are for convenience of reference only and shall not affect in any
way the meaning or interpretation of this Agreement.
3.2 PARTIES IN INTEREST. This Agreement, and the rights, interests
and obligations created by this Agreement, shall bind and inure to the benefit
of the parties and their respective successors and permitted assigns.
3.3 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
shall be considered one and the same agreement.
3.4 FURTHER ACTION. If at any time after the Effective Time, the
Surviving Corporation shall determine that any assignments, transfers, deeds
or other assurances are necessary or desirable to vest, perfect or confirm, of
record or otherwise, in the Surviving Corporation, title to any property or
rights of PSMI or its predecessors, the officers of either Constituent
Corporation are fully authorized in the name of PSMI or its predecessors or
otherwise to execute and deliver such documents and do all things necessary and
proper to vest, perfect or confirm title to such property or rights in the
Surviving Corporation.
3.5 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of California, without giving
effect to the principles of conflict of laws thereof.
3.6 ABANDONMENT OF MERGER. The Constituent Corporations have the
power to abandon the Merger by mutual written consent prior to the filing of
this Agreement with the California Secretary of State.
4
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IN WITNESS WHEREOF, the parties have entered into this Agreement as of
the date first above written.
STORAGE EQUITIES, INC.
By: _____________________________
Harvey Lenkin
President
By: _____________________________
Sarah Hass
Secretary
PUBLIC STORAGE MANAGEMENT, INC.
By: ______________________________
Harvey Lenkin
Chairman of the Board
By: _____________________________
Obren B. Gerich
Secretary
5
<PAGE>
STORAGE EQUITIES, INC.
EXHIBIT 23 - CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Prospectus of Storage Equities, Inc. (included in the Registration Statement on
Form S-3 (No. 33-54755) for the registration of shares of its preferred stock,
shares of its common stock and warrants for the purchase of its preferred stock
and common stock and to the incorporation by reference therein of our report
dated February 7, 1995, except for Note 13, for which the date is March 13, 1995
with respect to the consolidated financial statements and schedules of Storage
Equities, Inc. in its Annual Report on Form 10-K as amended by a Form 10-K/A
(Amendment No. 2) dated April 21, 1995 for the year ended December 31, 1994
filed with the Securities and Exchange Commission.
We also consent to the incorporation by reference of our report dated
July 10, 1995 on the combined statements of assets, liabilities and deficit of
the property management and advisory businesses of Public Storage, Inc. 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,
and our report dated July 10, 1995 on the combined summaries of historical
information relating to real estate interests to be acquired for each of the
three years in the period ended December 31, 1994, in the Registration Statement
on Form S-3 (No. 33-54755) and related Prospectus.
ERNST & YOUNG LLP
Los Angeles, California
September 7, 1995
