UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 [Fee Required]
For the fiscal year ended December 31, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [No Fee Required]
For the transition period from to
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Commission File Number 1-10709
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PUBLIC STORAGE PROPERTIES XI, INC.
----------------------------------
(Exact name of registrant as specified in its charter)
California 95-4300881
- ------------------------------------ ------------------------------------
(State or other jurisdiction (IRS Employer Identification Number)
of incorporation or organization)
701 Western Avenue
Glendale, California 91201-2349
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 244-8080
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Securities registered pursuant to Section 12(b) of the Act
Common Stock Series A, $.01 par value American Stock Exchange
- ------------------------------------ ------------------------------------
(Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act
None
----------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-- --
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Company's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
--
The aggregate market value of the voting stock held by non-affiliates of the
Company as of February 28, 1998: Common Stock Series A, $.01 Par
Value-$31,987,178 (computed on the basis of $20-1/8 per share which was the
reported closing sale price of the Company's Common Stock Series A on the
American Stock Exchange on February 28, 1998).
The number of shares outstanding of the Company's classes of common stock as of
February 28, 1998:
Common Stock, $.01 Par Value - Series A 1,819,937 shares
Common Stock, $.01 Par Value - Series B 184,453 shares
Common Stock, $.01 Par Value - Series C 522,618 shares
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DOCUMENTS INCORPORATED BY REFERENCE
NONE
<PAGE>
PUBLIC STORAGE PROPERTIES XI, INC.
PART I.
ITEM 1. BUSINESS
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General
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Public Storage Properties XI, Inc. (the "Company") is a real estate
investment trust ("REIT") organized as a California corporation that was formed
to succeed to the business of Public Storage Properties XI, Ltd., a California
limited partnership (the "Partnership"), in a reorganization transaction
completed on December 31, 1990.
The Partnership offered 84,000 units of limited partnership interest (the
"Units") to the public in June 1984. The Partnership's general partners were PSI
Associates II, Inc. ("PSA"), a California corporation, and B. Wayne Hughes
("Hughes"). PSA was an affiliate of Public Storage Management, Inc., a
California corporation (see below).
Effective midnight December 31, 1990, the Partnership transferred all of
its assets and liabilities to the Company pursuant to a plan of Reorganization
approved by a majority of the limited partners. In exchange for the
Partnership's assets and liabilities, the Company issued 2,121,212 shares of
common stock Series A ("Series A shares"), 184,453 shares of common stock Series
B ("Series B shares") and 522,618 shares of common stock Series C ("Series C
shares") of the Company to the Partnership. The Partnership then made a
liquidating distribution to the limited partners by distributing 99 percent of
the Series A shares (on the basis of 25 Series A shares for each Unit). The
remaining 1 percent of the Series A shares and all of the Series B shares and
Series C shares were distributed to the general partners in respect of their
interests in the Partnership. Subsequent thereto, the Partnership was dissolved.
The Company has elected to be taxed as a REIT for Federal income tax purposes.
The Company is a finite life REIT, with a term until December 31, 2038 (the
same as the predecessor Partnership). Pursuant to the Company's by-laws, in 1997
the Company was required to present the shareholders with a proposal for the
sale or financing of the properties and, in the case of a sale, a liquidation of
the Company, unless the properties have already been sold or financed. See "Sale
or Financing" below.
The Company's investment objectives are (as were the Partnership's) to
maximize cash flow from operations and to maximize capital appreciation.
The Company has acquired 15 properties, all of which are in operation. The
Company believes that its mini-warehouses have attractive operating
characteristics.
In 1995, there were a series of mergers among Public Storage Management,
Inc. (which was the Company's mini-warehouse operator), Public Storage, Inc. and
their affiliates (collectively, "PSMI"), culminating in the November 16, 1995
merger (the "PSMI Merger") of PSMI into Storage Equities, Inc., a REIT listed on
the New York Stock Exchange. In the PSMI Merger, Storage Equities, Inc. was
renamed Public Storage, Inc. ("PSI") and PSI acquired substantially all of
PSMI's United States real estate operations and became the operator of the
Company's mini-warehouse properties. Hughes, the Company's Chief Executive
Officer, and members of his family (the "Hughes Family") are the major
shareholders of PSI. As a result of the PSMI Merger, PSI owns all of the shares
of the Company's common stock that was owned by PSMI or its affiliates, and PSI
has an option to acquire all of the shares of the Company's common stock owned
by Hughes.
Investments in Facilities
- -------------------------
At December 31, 1997, the Company owned 15 facilities located in 7 states:
Arizona (3), California (3), Connecticut (1), Kansas (1), Nevada (2), New York
(1) and Texas (4). These facilities consist of 11 mini-warehouses, two business
park facilities and two combination mini-warehouse/business park facilities.
The Company believes that its operating results have benefited from
favorable industry trends and conditions. Notably, the level of new
mini-warehouse construction has decreased while consumer demand has increased.
In addition, the Company's mini-warehouses are characterized by a low level of
capital expenditures to maintain their condition and appearance.
2
<PAGE>
Mini-warehouses
Mini-warehouses, which comprise the majority of the Company's investments
(approximately 81% of the Company's revenues for the twelve months ended
December 31, 1997), are designed to offer accessible storage space for personal
and business use at a relatively low cost. A user rents a fully enclosed space
which is for the user's exclusive use and to which only the user has access on
an unrestricted basis during business hours. On-site operation is the
responsibility of resident managers who are supervised by area managers. Some
mini-warehouses also include rentable uncovered parking areas for vehicle
storage. Leases for mini-warehouse space may be on a long-term or short-term
basis, although typically spaces are rented on a month-to-month basis. Rental
rates vary according to the location of the property and the size of the storage
space.
Users of space in mini-warehouses include both individuals and large and
small businesses. Individuals usually employ this space for storage of, among
other things, furniture, household appliances, personal belongings, motor
vehicles, boats, campers, motorcycles and other household goods. Businesses
normally employ this space for storage of excess inventory, business records,
seasonal goods, equipment and fixtures.
Mini-warehouses in which the Company has invested generally consist of
three to seven buildings containing an aggregate of between 350 to 750 storage
spaces, most of which have between 25 and 400 square feet and an interior height
of approximately 8 to 12 feet.
The Company experiences minor seasonal fluctuations in the occupancy levels
of mini-warehouses with occupancies higher in the summer months than in the
winter months. The Company believes that these fluctuations result in part from
increased moving activity during the summer.
The Company's mini-warehouses are geographically diversified and are
generally located in heavily populated areas and close to concentrations of
apartment complexes, single family residences and commercial developments.
However, there may be circumstances in which it may be appropriate to own a
property in a less populated area, for example, in an area that is highly
visible from a major thoroughfare and close to, although not in, a heavily
populated area. Moreover, in certain population centers, land costs and zoning
restrictions may create a demand for space in nearby less populated areas.
As with most other types of real estate, the conversion of mini-warehouses
to alternative uses in connection with a sale or otherwise would generally
require substantial capital expenditures. However, the Company does not intend
to convert its mini-warehouses to other uses.
Commercial Properties
The Company's non-mini-warehouse investments are business parks and
low-rise office buildings. The business parks include both industrial and office
space. Industrial space may be used for, among other things, light manufacturing
and assembly, storage and warehousing, distribution and research and development
activities. The Company believes that most of the office space is occupied by
tenants who are also renting industrial space. The remaining office space is
used for general office purposes. A business park may also include facilities
for commercial uses such as banks, travel agencies, restaurants, office supply
shops, professionals or other tenants providing services to the public.
A business park property is typically divided into units ranging in size
from 600 to 5,000 square feet. Parking is open or covered, and the ratio of
spaces to rentable square feet ranges from one to four per thousand square feet,
depending upon the use of the property and its location. Office space generally
requires a greater parking ratio than most industrial uses.
Property Operators
- ------------------
The Company's mini-warehouse properties are managed by PSI (as successor to
PSMI) pursuant to a Management Agreement and the Company's commercial properties
are managed by American Office Park Properties, L.P. ("AOPPLP") pursuant to a
Management Agreement. AOPPLP is an operating partnership formed to own and
operate business parks in which PSI has a significant economic interest. The
general partner of AOPPLP is American Office Park Properties, Inc., an affiliate
of PSI.
3
<PAGE>
Under the supervision of the Company, PSI and AOPPLP coordinate the
operation of the facilities, establish rental policies and rates, direct
marketing activity, and direct the purchase of equipment and supplies,
maintenance activity, and the selection and engagement of all vendors, supplies
and independent contractors.
PSI and AOPPLP engage, at the expense of the Company, employees for the
operation of the Company's facilities, including resident managers, assistant
managers, relief managers, and billing and maintenance personnel. Some or all of
these employees may be employed on a part-time basis and may also be employed by
other persons, partnerships, REITs or other entities owning facilities operated
by PSI or AOPPLP.
In the purchasing of services such as advertising (including broadcast
media advertising) and insurance, PSI and AOPPLP attempt to achieve economies by
combining the resources of the various facilities that they operate. Facilities
operated by PSI and AOPPLP have historically carried comprehensive insurance,
including fire, earthquake, liability and extended coverage.
PSI has developed systems for space inventory, accounting and handling
delinquent accounts, including a computerized network linking PSI operated
facilities. Each project manager is furnished with detailed operating procedures
and typically receives facilities management training from PSI. Form letters
covering a variety of circumstances are also supplied to the project managers. A
record of actions taken by the project managers when delinquencies occur is
maintained.
The Company's facilities are typically advertised via signage, yellow
pages, flyers and broadcast media advertising (television and radio) in
geographic areas in which many of the Company's facilities are located.
Broadcast media and other advertising costs are charged to the Company's
facilities located in geographic areas affected by the advertising. From time to
time, PSI or AOPPLP adopt promotional programs, such as temporary rent
reductions, in selected areas or for individual facilities.
For as long as the respective Management Agreement is in effect, PSI has
granted the Company a non-exclusive license to use two PSI service marks and
related designs (and AOPPLP has granted the Company a non-exclusive license to
use a PSI service mark and related designs), including the "Public Storage"
name, in conjunction with rental and operation of facilities managed pursuant to
the Management Agreement. Upon termination of the respective Management
Agreement, the Company would no longer have the right to use the service marks
and related designs except as described below. Management believes that the loss
of the right to use the service marks and related designs could have a material
adverse effect on the Company's business.
Each Management Agreement, as amended in February 1995, provides that (i)
the Management Agreement will expire in February 2002 provided that in February
of each year it shall be automatically extended for one year (thereby
maintaining a seven-year term) unless either party notifies the other that the
Management Agreement is not being extended, in which case it expires on the
first anniversary of its then scheduled expiration date. Each Management
Agreement may also be terminated by either party for cause, but if terminated
for cause by the Company, the Company retains the rights to use the service
marks and related designs until the then scheduled expiration date, if
applicable, or otherwise a date seven years after such termination.
Certain of the directors and officers of the Company are also directors and
officers of PSI.
Competition
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Competition in the market areas in which the Company operates is
significant and affects the occupancy levels, rental rates and operating
expenses of certain of the Company's facilities. Competition may be accelerated
by any increase in availability of funds for investment in real estate. Recent
increases in plans for development of mini-warehouses is expected to further
intensify competition among mini-warehouse operators in certain market areas. In
addition to competition from mini-warehouses operated by PSI, there are three
other national firms and numerous regional and local operators. The Company
believes that the significant operating and financial experience of its
executive officers and directors, PSI, AOPPLP and the "Public Storage" name,
should enable the Company to continue to compete effectively with other
entities.
4
<PAGE>
Other Business Activities
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A corporation owned by the Hughes Family reinsures policies against losses
to goods stored by tenants in the Company's mini-warehouses. The Company
believes that the availability of insurance reduces the potential liability of
the Company to tenants for losses to their goods from theft or destruction. This
corporation receives the premiums and bears the risks associated with the
insurance.
A corporation, in which PSI has a 95% economic interest and the Hughes
Family has a 5% economic interest, sells locks, boxes and tape to tenants to be
used in securing their spaces and moving their goods. PSI believes that the
availability of locks, boxes and tape for sale promotes the rental of spaces.
Sale or Financing
- -----------------
The by-laws of the Company provide that, during 1997, unless shareholders
have previously approved such a proposal, the shareholders will be presented
with a proposal to approve or disapprove (a) the sale or financing of all or
substantially all of the properties and (b) the distribution of the proceeds
from such transaction and, in the case of a sale, the liquidation of the
Company. The Company has proposed to merge with American Office Park Properties,
Inc. in lieu of liquidating. See "Proposed Merger".
Employees
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As of December 31, 1997, the Company had 52 employees, 30 persons who
render services on behalf of the Company on a full-time basis and 22 persons who
render services on a part-time basis (6 of whom were executive officers). These
persons include resident managers, assistant managers, relief managers, district
managers, and administrative and maintenance personnel.
Federal Income Tax
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The Company intends to continue to operate in a manner so as to qualify as
a REIT under the Internal Revenue Code of 1986, as amended, but no assurance can
be given that the Company will be able to continue to qualify at all times. By
qualifying as a REIT, the Company can deduct dividend distributions to its
shareholders for Federal income tax purposes, thus effectively eliminating the
"double taxation" (at the corporate and shareholder levels) that typically
applies to corporate dividends. The Company believes it is in compliance with
these requirements and, accordingly, no provision for income taxes has been
made.
Year 2000 Compliance
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PSI has completed an initial assessment of its computer systems. The
majority of the computer programs were installed or upgraded over the past few
years and are Year 2000 compliant. Some of the older computer programs utilized
by PSI were written without regard for Year 2000 issues and could cause a system
failure or miscalculations with possible disruption of operations. Each of these
computer programs and systems has been evaluated to be upgraded or replaced as
part of PSI Year 2000 project.
The cost of the Year 2000 project will be allocated to all companies that
use the PSI computer systems. The cost of the Year 2000 project which is
expected to be allocated to the Company is less than $40,000. The cost of new
software will be will be capitalized and the cost of maintenance to existing
systems will be expensed as incurred.
The project is expected to be completed by March 31, 1999 which is prior to
any anticipated impact on operating systems. PSI believes that with
modifications to existing software and, in some instances, the conversion to new
software, the Year 2000 issue will not pose significant operational problems.
However, if such modifications are not made, or are not completed timely, the
Year 2000 issue could have a material impact on the operations of the Company.
The costs of the project and the date on which PSI believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events. There can be
no guarantee that these estimates will be achieved and actual results could
differ materially from those anticipated.
5
<PAGE>
Proposed Merger
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The Company and American Office Park Properties, Inc. (AOPP), the general
partner of AOPPLP, have agreed, subject to certain conditions, to merge,
pursuant to an Amended and Restated Agreement and Plan of Reorganization by and
among The Company, AOPP and PSI dated as of December 17, 1997. AOPP, an
affiliate of PSI, owns and operates commercial properties directly and through
AOPPLP. Upon the merger of AOPP into the Company, each of the 1,819,937
outstanding shares of the Company common stock series A (other than shares held
by holders of the Company Common stock series A (" Series A Shareholders") who
have properly exercised dissenters' rights under California law ) would continue
to be owned by the Series A Shareholders or converted into the right to receive
cash as follows: (i) with respect to up to 20% of the outstanding common stock
series A of the Company, $20.50 in cash and (ii) the balance of the outstanding
common stock series A of the Company would continue to be owned by the Series A
Shareholder. In the merger, (i) each share of the Company's common stock series
B and each share of the Company's common stock series C would be converted into
.8641 shares of the Company's common stock series A (or up to 20% in cash) and
(ii) each share of AOPP's capital stock will be converted into 1.18 shares of
the Company's common stock series A (or up to 20% in cash). After the merger,
the Company would have approximately 14,200,000 outstanding shares of common
stock series A (assuming no cash elections, with approximately an additional
6,222,000 shares reserved for issuance upon conversion of partnership interests
of AOPPLP into the Company's common stock series A. After the merger, the
ownership of the Company by public shareholders will be reduced significantly.
As a result of the merger, the Company's name will be changed to PS Business
Parks, Inc. and AOPPLP's name will be changed to PS Business Parks, L.P.
Concurrently with the merger, the Company will exchange 13 mini-warehouses for
11 commercial properties owned by PSI. The merger is conditioned on, among other
requirements, approval by the Company's shareholders. After the merger, the
Company will be a self-managed and self-advised REIT which will own and operate
directly and through AOPPLP 62 commercial properties located in 10 states with
approximately 6.9 million net rentable square feet of space and, in addition,
will manage, for a fee, 36 commercial properties. A meeting of the Company's
shareholders is scheduled for March 16, 1998. If the merger is approved at the
March 16, 1998 meeting, it is expected to close shortly thereafter.
6
<PAGE>
ITEM 2. PROPERTIES.
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The following table sets forth information as of December 31, 1997 about
properties owned by the Company:
<TABLE>
<CAPTION>
Size of Net Rentable Number of Completion
Location Parcel Area Spaces Date
-------------------------------------- ---------- --------------- --------- -----------
ARIZONA
<S> <C> <C> <C> <C>
Phoenix, Black Cyn. Hwy. (a) 3.33 acres 71,000 sq. ft. 366 Jul. 1985
Phoenix, Grand Ave. (a) 6.68 acres 111,000 sq. ft. 417 May 1985
Tempe, Broadway Rd. 1.47 acres 45,000 sq. ft. 403 Oct. 1984
CALIFORNIA
Colma, El Camino Real 2.72 acres 51,000 sq. ft. 494 Dec. 1984
Pasadena, Arroyo Parkway I (b) 2.61 acres 110,000 sq. ft. 935 Feb. 1985
So. San Francisco, Produce (a) 1.67 acres 41,000 sq. ft. 23 Mar. 1986
CONNECTICUT
Branford, U.S. Route (c) 2.76 acres 37,000 sq. ft. 327 Nov. 1984
KANSAS
Overland Park, I-435 (a) 4.34 acres 62,000 sq. ft. 42 Apr. 1985
NEW YORK
Long Island, Southern Blvd. 4.00 acres 60,000 sq. ft. 545 Jun. 1986
NEVADA
Las Vegas, Charleston Blvd. 1.76 acres 54,000 sq. ft. 442 Oct. 1984
Las Vegas, Tropicana Ave. 1.93 acres 66,000 sq. ft. 531 Nov. 1984
TEXAS
Arlington, Pioneer Pkwy. 2.50 acres 61,000 sq. ft. 544 Jul. 1985
Austin, Ben White Blvd. 2.62 acres 53,000 sq. ft. 453 Feb. 1986
Houston, Antoine Dr. 2.75 acres 62,000 sq. ft. 558 Oct. 1984
Jacinto City, I-10 1.88 acres 45,000 sq. ft. 393 Nov. 1984
</TABLE>
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(a) The property or a portion of the property has been developed as a business
park.
(b) Property subject to a partial condemnation action by the City of Pasadena.
Action will result in reduction in size and reconfiguration of property.
(c) This property's net rentable area contains office space or a combination of
office and light industrial space.
Substantially all of the Company's facilities were acquired prior to the
time that it was customary to conduct environmental investigations in connection
with property acquisitions. During the fourth quarter of 1995, the Company
completed environmental assessments of its properties to evaluate the
environmental condition of, and potential environmental liabilities of such
properties. These assessments were performed by an independent environmental
consulting firm. Based on the assessments, the Company expensed $106,000 in 1995
for known environmental remediation requirements.
The Company's properties are operated to maximize cash flow through the
regular review of and, when warranted by market conditions, adjustments to
scheduled rents. Approximately 81% of the Company's portfolio (based on revenues
for 1997) are mini-warehouses and the balance consists of commercial properties.
As reflected in the table below, the Company has experienced stable property
operations:
7
<PAGE>
<TABLE>
<CAPTION>
For the year ended December 31,
-------------------------------------------
1997 1996 1995
---------- --------------- ------------
<S> <C> <C> <C>
Weighted average occupancy level (1) 93% 92% 92%
Realized annual rent per occupied square foot (1) (2) $8.96 $8.67 $8.34
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(1) Mini-warehouse facilities only.
(2) Realized rent per square 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. Includes administrative and late fees.
</TABLE>
Additional information is set forth below with respect to the
Pasadena/Arroyo Parkway I and Overland Park properties because they are the only
properties with a book value of at least 10% of the total assets of the Company
or that have accounted for gross revenues of at least 10% of the aggregate gross
revenues of the Company.
PASADENA/ARROYO PARKWAY I. This mini-warehouse property is located in
Pasadena, California, just south of the central business district and
approximately eight miles northeast of downtown Los Angeles. The property is
surrounded by densely populated residential developments.
The 2.61-acre property, which was completed in 1985, consists of one
building containing approximately 110,000 net rentable square feet divided into
935 units. No tenant occupies 10% or more of the rentable area. At December 31,
1997, the property was 95% occupied by 888 tenants.
Set forth below is a schedule showing the occupancy rate and the rent per
square foot for the property at the dates indicated:
Annual Realized
Rent Per Square
Date Occupancy Rate Foot
------------------------ ------------------ --------------------
December 31, 1997 95% $12.17
December 31, 1996 93 11.27
December 31, 1995 90 10.84
December 31, 1994 92 10.38
December 31, 1993 92 9.91
OVERLAND PARK. This property, a business park, is located in Overland Park,
Kansas, which is a suburban community approximately ten miles south of downtown
Kansas City, Missouri. The business park offers a combination of office space
and industrial space. The office space is suitable for general management use
and interaction with customers. The industrial space is suitable for light
manufacturing, assembly, distribution or research and development.
The property has good exposure and accessibility from Interstate 435 near
Metcalf Avenue, a busy surface street leading to downtown Kansas City. Situated
on 4.34 acres, the business park contains approximately 62,000 net rentable
square feet divided into 42 units. The property, which opened in 1985, was 98%
occupied at December 31, 1997 by 39 tenants. No tenant occupies 10% or more of
the rentable area.
Set forth below is a schedule showing the occupancy rate and the rent per
square foot for the property at the dates indicated:
Annual Realized
Rent Per Square
Date Occupancy Rate Foot
------------------------ ------------------ --------------------
December 31, 1997 98% $9.76
December 31, 1996 99 9.26
December 31, 1995 93 8.91
December 31, 1994 90 8.97
December 31, 1993 90 9.52
8
<PAGE>
A schedule showing the total annual base rent and percentage of total
income relating to leases according to their expiration dates is set forth
below:
Year of Total Amt. Percentage of
Expiration* Base Rent Total Income
------------------------ ------------------ --------------------
1998 $332,000 60.04%
1999 151,000 27.31
2000 48,000 8.68
2001 18,000 3.25
2002 4,000 0.72
------------------ --------------------
Total $553,000 100.00%
================== ====================
- --------------
* Assumes that none of the renewal options included in the leases will be
exercised.
ITEM 3. LITIGATION.
----------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
----------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter 1997.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
----------------------------------------------------------------------
The Company's Series A shares are registered under Section 12(b) of the
Securities Exchange Act of 1934 on the American Stock Exchange ("AMEX"), and
commenced trading on March 27, 1991 under the symbol PSM. The Series B and
Series C shares were not registered under Section 12 of the Securities and
Exchange Act of 1934 and no public trading market exists for the Series B and
Series C shares.
The Company's Articles of Incorporation provide that the Series B shares
and Series C shares will convert automatically into Series A shares on a
share-for-share basis (the "Conversion") when (A) the sum of (1) all cumulative
dividends and other distributions from all sources paid with respect to the
Series A shares (including liquidating distributions, but not including payments
made to redeem such stock other than in liquidation) and (2) the cumulative
Partnership distributions from all sources with respect to all Units (including
the General Partners' 1% interest) equals (B) the product of $20 multiplied by
the number of the then outstanding "Original Series A shares". The term
"Original Series A shares" means the Series A shares issued in the
Reorganization.
In general, the Series A shares, Series B shares and Series C shares have
equal voting rights. The Company's bylaws provide that during the period prior
to the conversion of the Series B and Series C shares into Series A shares, in
all shareholder matters voted on by the Partnership's general partners (the
"General Partners") or their successors in interest as holders of Series B and
Series C shares, other than the election and removal of directors and other
proposals relating to the control of the Company and its business, the General
Partners and any successors in interest have agreed to vote their Series B and
Series C shares with the holders of a majority of the outstanding unaffiliated
Series A shares entitled to vote.
9
<PAGE>
Market Prices and Dividends
- ---------------------------
The following table sets forth the high and low sales prices on the AMEX
composite tape per Series A share and dividends per Series A share and Series B
share for fiscal 1996 and 1997:
<TABLE>
<CAPTION>
Sales Price Cash Dividends
Year Quarter Ended High Low Declared*
- ----------- -------------------------------------- -------- ------- ---------------
<C> <C> <C> <C> <C>
1996 March 31 $18-3/8 $16-7/8 $0.34
June 30 18-7/8 17-5/8 0.34
September 30 20-1/2 18-1/2 0.34
December 31 20-3/8 19-1/8 0.34
1997 March 31 $20-3/8 $19-3/8 $0.34
June 30 20-1/8 19-3/8 0.34
September 30 21-7/16 19-5/16 0.34
December 31 23-1/2 20-1/2 0.34
</TABLE>
* No dividends were declared on the Series C shares.
As of December 31, 1997, there were approximately 940 holders of record of
the Company's Series A shares.
Holders of Series A shares are entitled to receive distributions when, as
and if declared by the Board of Directors out of any funds legally available for
that purpose. The Company, as a REIT, is required to distribute, prior to filing
its tax return, at least 95% of its "real estate investment trust taxable
income," which, as defined by the relevant tax statutes and regulations, is
generally equivalent to net taxable ordinary income. Under certain
circumstances, the Company can rectify a failure to meet this distribution
requirement by paying dividends after the close of a particular taxable year.
A principal policy of the Company is to make quarterly cash distributions.
The Company intends to make quarterly cash distributions out of funds legally
available, as determined by the Company's Board of Directors.
For Federal income tax purposes, distributions to shareholders are treated
as ordinary income, capital gains, return of capital or a combination thereof,
and for the past three years all distributions have been classified as ordinary
income.
Under generally accepted accounting principles, net income exceeded
distributions for each of the past three years.
Series A shares are entitled to participate equally in distributions when
declared by the Board of Directors and in the Company's net assets upon
dissolution and liquidation after repayment of the Company's liabilities. The
Series B shares (prior to conversion into Series A shares) are not entitled to
participate in distributions attributable to sales or financings of the
properties or the liquidation of the Company, but will participate in other
distributions on the same basis as the Series A shares. The Series C shares
(prior to conversion into Series A shares) are not entitled to participate in
any distributions, including liquidating distributions.
Repurchase of Company's common stock
- ------------------------------------
If considered to be an attractive investment opportunity or in other
appropriate circumstances, the Company may repurchase its Series A shares out of
legally available funds, if approved by the Board of Directors.
As of February 27, 1997, the Board of Directors has authorized the Company
to repurchase up to 400,000 Series A shares. From 1991 through 1996, the Company
repurchased 301,275 Series A shares. The Company repurchased 36,400 Series A
shares during 1996; no additional Series A shares were repurchased in 1997 or
during the period from January 1, 1998 to February 28, 1998.
10
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
-----------------------
The following selected historical financial information has been derived
from the audited financial statements of the Company.
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(In thousands, except per share data)
Operating data:
- ---------------
REVENUES:
<S> <C> <C> <C> <C> <C>
Rental income $7,561 $7,220 $6,859 $6,651 $6,387
Interest and other income 82 33 19 21 40
------- ------- ------- ------- -------
7,643 7,253 6,878 6,672 6,427
------- ------- ------- ------- -------
EXPENSES:
Cost of operations 2,324 2,334 2,265 2,107 2,083
Management fees paid to affiliates 440 394 400 388 371
Depreciation 1,198 1,150 1,105 1,046 1,047
General and administrative 201 217 205 208 233
Environmental cost - - 106 - -
Interest expense - 3 1 - -
------- ------- ------- -------- -------
4,163 4,098 4,082 3,749 3,734
------- ------- ------- -------- -------
NET INCOME $3,480 $3,155 $2,796 $2,923 $2,693
======= ======= ======= ======== =======
Balance sheet data:
- -------------------
Total assets $28,846 $28,129 $28,388 $28,767 $30,055
Shareholders' equity 27,371 26,617 26,883 27,398 28,592
Net income per Series A share(2):
Basic $1.77 $1.59 $1.37 $1.39 $1.23
Diluted $1.38 $1.24 $1.09 $1.11 $1.00
Distributions declared per share(3)(4):
Series A $1.36 $1.36 $1.36 $1.36 $1.36
Series B $1.36 $1.36 $1.36 $1.36 $1.36
Book value per share(5): $10.83 $10.53 $10.49 $10.56 $10.71
Weighted average Common shares outstanding:
Basic- Series A 1,820 1,831 1,863 1,926 1,988
Diluted- Series A 2,527 2,538 2,571 2,633 2,696
Other data:
- -----------
Net cash provided by
operating activities $4,382 $4,485 $3,786 $3,899 $3,780
Net cash used in investing activities (491) (507) (472) (216) (135)
Net cash used in financing activities (2,726) (3,434) (3,322) (4,143) (2,989)
Funds from operations (1) 4,678 4,305 4,007 3,969 3,740
Capital expenditures
to maintain facilities (491) (507) (472) (216) (135)
</TABLE>
11
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)
------------------------------------
(1) Funds from operations (FFO) is defined by the Company, consistent with
the definition of FFO by the National Association of Real Estate
Investment Trusts (NAREIT), as net income (loss) (computed in accordance
with generally accepted accounting principles) before depreciation and
extraordinary or non-recurring items. FFO is presented because the
Company, as well as many industry analysts, consider FFO to be one
measure of the performance of the Company, ie, one that generally
reflects changes in the Company's net operating income. FFO does not take
into consideration scheduled principal payments on debt and capital
improvements. Accordingly, FFO is not necessarily a substitute for the
Company's cash flow or net income as a measure of the Company's liquidity
or operating performance or ability to pay distributions. Furthermore,
the NAREIT definition of FFO does not address the treatment of certain
items and all REITs do not treat items the same way in computing FFO.
Accordingly, comparisons of levels of FFO among REITs may not necessarily
be meaningful.
(2) Net income per share is presented on a basic and diluted basis. The
earnings per share amount prior to 1997 have been reflected as required
to comply with statement of Financial Accounting Standards No. 128,
Earnings per Share. For further discussion of earnings per share and the
impact of Statement No. 128, see notes to the financial statements
beginning on page F-6. Basic earnings per share represents the
shareholders' rights to distribution out of the respective period's net
income, which is calculated by dividing net income after reduction for
any distributions made to the holders of the Company Common Stock Series
B (holders of the Company Common Stock Series C are not entitled to cash
distributions) by the weighted average number of shares of the Company
Common Stock Series A. (See note 4 below.) Diluted earnings per share
assumes conversion of the Company Common Stock Series B and C into the
Company Common Stock Series A.
(3) In connection with the reorganizations of the Company Partnership, the
Company issued the Company Common Stock Series A, B and C. The capital
structure of the Company was designed to reflect the economic rights of
the limited partners and general partners in the Company Partnership and
the capital shares were distributed to the limited and general partners
in respect of their interest in the Company Partnership.
The Company's Common Stock Series A shares are entitled to 100% of cash
distributions from operations from the Company until (a) the sum of (1)
all cumulative dividends and other distributions from all sources to the
holders of the Common Stock Series A shares and (2) the cumulative the
Company distributions from all sources with respect to all units equal
(b) the product of $20 multiplied by the number of the then-outstanding
"Common Stock Series A shares," at which time the Company Common Stock
Series B and Common Stock Series C shares will automatically convert to
the Company Common Stock Series A shares ("Conversion").
As of December 31, 1997, Conversion will occur when $4,783,000 in
additional distributions are made to holders of the Company Common Stock
Series A (assuming no further repurchases of the Company Common Stock
Series A).
(4) For federal income tax purposes, distributions on the Company Common
Stock for 1993, 1994, 1995, 1996, and 1997 were from ordinary income. For
GAAP income purposes, net income exceeded distributions for 1994-1997;
for 1993, distributions exceeded net income by $258,000. Distributions
for each year include distributions declared during the fourth quarter
and paid in January. The difference between the components of
distributions for GAAP purposes and tax purposes results primarily from
the methods used to compute depreciation expense.(footnote to be update)
(5) Book value per share computed based on the number of shares of the
Company Common Stock Series A, B and C outstanding at the end of the
period.
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
-----------------------------------------------------------------------
RESULTS OF OPERATIONS.
- ----------------------
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996.
-----------------------------------------------------------------------
Net income in 1997 was $3,480,000 compared to $3,155,000 in 1996, representing
an increase of $325,000 or 10%. Net income per diluted Series A share was $1.38
in 1997 compared to $1.24 in 1996, representing an increase of $.14 or 11% per
share. These increases are due to an increase in property net operating income.
During 1997, property net operating income (rental income less cost of
operations, management fees paid to affiliates and depreciation expense)
increased $257,000 from $3,342,000 in 1996 to $3,599,000 in 1997. This increase
is attributable to an increase in rental income at the Company's mini-warehouse
and business park operations.
Rental income for the mini-warehouse operations increased $267,000 or 5%
from $5,876,000 in 1996 to $6,143,000 in 1997. Cost of operations (including
management fees paid to an affiliate of the Company) increased $24,000 or 1%
from $2,056,000 in 1996 to $2,080,000 in 1997. The results of these changes was
a net increase in property net operating income before depreciation expense of
$243,000 or 6% from $3,820,000 in 1996 to $4,063,000 in 1997. The increase in
rental income is primarily due to an increase in rental rates at a majority of
the Company's mini-warehouse properties. The increase in cost of operations is
primarily due to an increase in management fees and property taxes partially
offset by decreases in snow removal and tenant legal claims costs. Snow removal
costs were higher in 1996 than amounts typically incurred due to higher than
normal snow levels experienced at the Company's mini-warehouse properties
located in the eastern states.
Property net operating income before depreciation expense with respect to
the Company's business park operations increased by $62,000 or 9% from $673,000
in 1996 to $735,000 in 1997. This increase is due to an increase in rental
income at the Company's four business park facilities as a result of increases
in rental rates. Cost of operations remained stable in 1997 compared to 1996.
Weighted average occupancy levels were 93% for the mini-warehouse
facilities and 98% for the business park facilities in 1997 compared to 92% for
the mini-warehouse facilities and 97% for the business park facilities in 1996
In 1995, the Company prepaid eight months of 1996 management fees on its
mini-warehouse discounted at the rate of 14% per year to compensate for early
payment. As a result, management fee expense for the twelve month ended December
31, 1996 was $26,000 lower than it would have been without the discounted fee
structure.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995.
-----------------------------------------------------------------------
Net income in 1996 was $3,155,000 compared to $2,796,000 in 1995, representing
an increase of $359,000 or 13%. Net income per diluted Series A share was $1.24
in 1996 compared to $1.09 in 1995, representing an increase of $.15 or 14% per
share. These increases are primarily due to an increase in property net
operating income combined with the favorable impact of comparing to expenses for
1995 which included a non-recurring charge for environmental assessments and
provision for future remediation costs.
During 1996, property net operating income (rental income less cost of
operations, management fees paid to affiliates and depreciation expense)
increased $253,00 from $3,089,000 in 1995 to $3,342,000 in 1996. This increase
is primarily attributable to an increase in rental income at the Company's
mini-warehouse and business park operations.
Rental income for the mini-warehouse operations increased $245,000 or 4%
from $5,631,000 in 1995 to $5,876,000 in 1996. Cost of operations (including
management fees paid to an affiliate of the Company) increased $63,000 or 3%
from $1,993,000 in 1995 to $2,056,000 in 1996. The results of these changes was
a net increase in property net operating income before depreciation expense of
$181,000 or 5% from $3,639,000 in 1995 to $3,820,000 in 1996. The increase in
rental income is primarily due to an increase in rental rates at a majority of
the Company's mini-warehouse properties. The increase in cost of operations is
primarily due to increases in payroll, repairs and maintenance and advertising
expense. Repairs and maintenance increased due mainly to an increase in snow
removal and landscaping costs. Snow removal costs increased due to the higher
than normal snow levels experienced at the Company's mini-warehouse properties
located in the eastern states.
13
<PAGE>
Property net operating income before depreciation expense with respect to
the Company's business park operations increased by $117,00 or 21% from $556,000
in 1995 to $673,000 in 1996. This increase is due to an increase in rental
income at the Company's four business park facilities as a result of increases
in rental rates. Cost of operations remained stable in 1996 compared to 1995.
Weighted average occupancy levels were 92% for the mini-warehouse
facilities and 97% for the business park facilities in 1996 compared to 92% for
the mini-warehouse facilities and 95% for the business park facilities in 1995.
In 1995, the Company prepaid eight months of 1996 management fees on its
mini-warehouse operations (based on the management fees for the comparable
period during the calendar year immediately preceding the prepayment) discounted
at the rate of 14% per year to compensate for early payment. In 1996, the
Company expensed the prepaid management fees. The amount is included in
management fees paid to affiliates in the statements of income. As a result of
the prepayment, the Company saved approximately $26,000 in management fees,
based on the management fees that would have been payable on rental income
generated in 1996 compared to the amount prepaid.
During 1996, the Company incurred $3,000 in interest expense on its line of
credit facility.
Mini-warehouse Operating Trends.
- --------------------------------
The following table illustrates the operating trends for the Company's 13
mini-warehouses:
<TABLE>
<CAPTION>
For the year ended December 31,
-------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Weighted average occupancy level 93% 92% 92%
Realized annual rent per occupied square foot (1) $8.96 $8.67 $8.34
</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 the posted rental rates, since posted rates can be discounted
through the use of promotions. Includes administrative and late fees.
LIQUIDITY AND CAPITAL RESOURCES.
- --------------------------------
CAPITAL STRUCTURE. The Company's financial profile has been characterized
by increasing cash provided by operating activities and increasing funds from
operations ("FFO").
NET CASH PROVIDED BY OPERATING ACTIVITIES AND FUNDS FROM OPERATIONS.
The Company believes that important measures of its performance as well as
liquidity are net cash provided by operating activities and FFO.
Net cash provided by operating activities reflects the cash generated from
the Company's business before distributions to shareholders and capital
expenditures.
The Company has an unsecured revolving credit facility with a bank for
borrowings up to $3,000,000 for working capital purposes and to repurchase the
Company's stock. Outstanding borrowings on the credit facility, at the Company's
option, bear interest at either the bank's prime rate plus .25% or the LIBOR
rate plus 2.25%. Interest is payable monthly. On December 31, 1999, all unpaid
principal and accrued interest is due and payable. During the first quarter of
1996, the Company borrowed and repaid $250,000 on its line of credit facility.
At December 31, 1997, there was no outstanding balance on the credit facility.
The following table summarizes the Company's ability to make capital
improvements to maintain its facilities through the use of cash provided by
operating activities. The remaining cash flow is available to the Company to pay
distributions to shareholders and repurchase its stock.
14
<PAGE>
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------
1997 1996 1995
----------- ---------------- -------------
<S> <C> <C> <C>
Net income $3,480,000 $3,155,000 $2,796,000
Environmental cost - - 106,000
Depreciation 1,198,000 1,150,000 1,105,000
Changes in working capital (296,000) 180,000 (221,000)
----------- ---------------- -------------
Net cash provided by operating activities 4,382,000 4,485,000 3,786,000
Capital improvements to maintain facilities (491,000) (507,000) (472,000)
----------- ---------------- -------------
Funds available for distributions to
shareholders and repurchase of stock 3,891,000 3,978,000 3,314,000
Cash distributions to shareholders (2,726,000) (2,749,000) (2,793,000)
----------- ---------------- -------------
Excess funds available for principal
payments, cash distributions to
shareholders and repurchase of stock $1,165,000 $1,229,000 $521,000
=========== ================ =============
</TABLE>
The Company believes that its rental revenues and interest and other income
will be sufficient over at least the next twelve months to meet the Company's
operating expenses, capital improvements and distributions to shareholders.
During 1995, the Company's property operator commenced a program to enhance the
visual appearance of the mini-warehouse facilities operated by it. Such
enhancements include new signs, exterior color schemes, and improvements to the
rental offices. The vast majority of the costs associated with these
enhancements were incurred in 1995 and 1996.
FFO is defined by the Company, consistent with the definition of FFO by the
National Association of Real Estate Investment Trusts (NAREIT), as net income
(loss) (computed in accordance with generally accepted accounting principles)
before depreciation and extraordinary or non-recurring items. FFO for the years
ended December 31, 1997 and 1996 was $4,678,000 and $4,305,000, respectively.
FFO is presented because the Company, as well as many industry analysts,
consider FFO to be one measure of the performance of the Company, i.e., one that
generally reflects changes in the Company's net operating income. FFO does not
take into consideration scheduled principal payments on debt and capital
improvements. Accordingly, FFO is not necessarily a substitute for the Company's
cash flow or net income, as a measure of the Company's liquidity or operating
performance or ability to pay distributions. Furthermore, the NAREIT definition
of FFO does not address the treatment of certain items and all REITs do not
treat items the same way in computing FFO. Accordingly, comparisons of levels of
FFO among REITs may not necessarily be meaningful.
Funds from operations is computed as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Net income $ 3,480,000 $ 3,155,000 $ 2,796,000
Environmental cost - - 106,000
Depreciation 1,198,000 1,150,000 1,105,000
------------- ------------- -------------
Funds from operation $ 4,678,000 $ 4,305,000 $ 4,007,000
============= ============= =============
</TABLE>
During the second quarter of 1995, the Company borrowed $145,000 from an
affiliate for working capital purposes. The advance, which was repaid in May
1995, bore interest at the prime rate plus .25%. Interest expense of $1,000 was
charged to income in 1995 with respect to this advance.
The Company believes its geographically diverse portfolio has resulted in a
relatively stable and predictable investment portfolio.
On November 12, 1997, the Company's Board of Directors declared a regular
quarterly distribution per share of $0.34 payable on January 15, 1998 to
shareholders of record on December 31, 1997.
15
<PAGE>
DISTRIBUTIONS
- -------------
The Company has established a conservative distribution policy. The
aggregate amount of dividends paid or accrued to the shareholders in each year
since inception of the Company were as follows:
Series A Series B Total
----------- ---------- -----------
1984 $858,000 $75,000 $933,000
1985 1,061,000 92,000 1,153,000
1986 1,273,000 111,000 1,384,000
1987 1,751,000 152,000 1,903,000
1988 2,307,000 201,000 2,508,000
1989 2,758,000 240,000 2,998,000
1990 2,865,000 249,000 3,114,000
1991 3,204,000 282,000 3,486,000
1992 2,738,000 251,000 2,989,000
1993 2,700,000 251,000 2,951,000
1994 2,612,000 251,000 2,863,000
1995 2,530,000 252,000 2,782,000
1996 2,484,000 252,000 2,736,000
1997 2,474,000 252,000 2,726,000
----------- ---------- -----------
Total $31,615,000 $2,911,000 $34,526,000
=========== ========== ===========
The Convertible Series B shares and Convertible Series C shares will
convert automatically into Series A shares on a share-for-share basis (the
"Conversion") when (A) the sum of (1) all cumulative dividends and other
distributions from all sources paid with respect to the Series A shares
(including liquidating distributions, but not including payments made to redeem
such stock other than in liquidation) and (2) the cumulative Partnership
distributions from all sources with respect to all units equals (B) the product
of $20 multiplied by the number of the then outstanding "Original Series A
shares". The term "Original Series A shares" means the Series A shares issued in
the Reorganization. Through December 31, 1997, the Company has made and declared
cumulative cash distributions of approximately $31,615,000 with respect to the
Series A shares. Accordingly, assuming no repurchases or redemptions of Series A
shares after December 31, 1997, Conversion will occur when $4,783,000 in
additional distributions with respect to the Series A shares have been made.
REIT DISTRIBUTION REQUIREMENT
- -----------------------------
The Company has elected and intends to continue to qualify as REIT for
Federal income tax purposes. As a REIT, the Company must meet, among other
tests, sources of income, share ownership, and certain asset tests. As a REIT,
the Company is not taxed on that portion of its taxable income which is
distributed to its shareholders provided that at least 95% of its taxable income
is so distributed to its shareholders prior to filing the Company's tax return.
Under certain circumstances, the Company can rectify a failure to meet the 95%
distribution test by making distributions after the close of a particular
taxable year and attributing those distributions to the prior year's taxable
income. The Company has satisfied the REIT distribution requirement for 1997 by
attributing distributions in 1998 to the prior year's taxable income. The extent
to which the Company will be required to attribute distributions to the prior
year will depend on the Company's operating results (taxable income) and the
level of distributions as determined by the Board of Directors. The basic
difference between book income and taxable income is depreciation expense. In
1997, the Company's Federal tax depreciation was $1,330,000.
The Company's Board of Directors has authorized the Company to purchase up
to 400,000 shares of Series A common stock. As of December 31, 1997, the Company
had purchased and retired 301,275 shares of Series A common stock.
16
<PAGE>
YEAR 2000 SYSTEM ISSUES
- -----------------------
PSI has completed an initial assessment of its computer systems. The
majority of the computer programs were installed or upgraded over the past few
years and are Year 2000 compliant. Some of the older computer programs utilized
by PSI were written without regard for Year 2000 issues and could cause a system
failure or miscalculations with possible disruption of operations. Each of these
computer programs and systems has been evaluated to be upgraded or replaced as
part of PSI Year 2000 project.
The cost of the Year 2000 project will be allocated to all companies that
use the PSI computer systems. The cost of the Year 2000 project which is
expected to be allocated to the Company is less than $40,000. The cost of new
software will be capitalized and the cost of maintenance to existing systems
will be expensed as incurred.
The project is expected to be completed by March 31, 1999 which is prior to
any anticipated impact on operating systems. PSI believes that with
modifications to existing software and, in some instances, the conversion to new
software, the Year 2000 issue will not pose significant operational problems.
However, if such modifications are not made, or are not completed timely, the
Year 2000 issue could have a material impact on the operations of the Company.
The costs of the project and the date on which PSI believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events. There can be
no guarantee that these estimates will be achieved and actual results could
differ materially from those anticipated.
Proposed Merger
- ---------------
See "Item 1. Business - Proposed Merger" for a description of a proposed
merger involving the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
--------------------------------------------
Company's financial statements are included elsewhere herein. Reference is
made to the Index to Financial Statements and Financial Statement Schedule in
Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
----------------------------------------------------------------
None.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
------------------------------------------------
Set forth below is information regarding the current directors and
executive officers of the Company:
Name Positions
- ------------------------ --------------------------------------------------
B. Wayne Hughes Chairman of the Board and Chief Executive Officer
Harvey Lenkin President
David P. Singelyn Vice President and Chief Financial Officer
David Goldberg Vice President and General Counsel
A. Timothy Scott Vice President and Tax Counsel
Obren B. Gerich Vice President and Secretary
Vern O. Curtis Director
Jack D. Steele Director
17
<PAGE>
B. Wayne Hughes, age 64, has been Chairman of the Board and Chief Executive
Officer of the Company since its inception in 1990. Mr. Hughes has been a
director of PSI, the Company's mini-warehouse property operator, since its
organization in 1980 and was President and Co-Chief Executive Officer from 1980
until November 1991 when he became Chairman of the Board and sole Chief
Executive Officer. Mr. Hughes has been Chairman of the Board and Chief Executive
Officer since 1990 of Public Storage Properties XX, Inc. ("PSP20"), an
affiliated REIT. From 1989-90 until the respective dates of merger, he was
Chairman of the Board and Chief Executive Officer of Public Storage Properties
VI, Inc., Public Storage Properties VII, Inc., Public Storage Properties VIII,
Inc., Public Storage Properties IX, Inc., Public Storage Properties X, Inc.,
Public Storage Properties XII, Inc., Public Storage Properties XIV, Inc.
("PSP14"), Public Storage Properties XV, Inc. ("PSP15"), Public Storage
Properties XVI, Inc. ("PSP16"), Public Storage Properties XVII, Inc. ("PSP17"),
Public Storage Properties XVIII, Inc. ("PSP18"), Public Storage Properties XIX,
Inc. ("PSP19"), PS Business Parks, Inc., Partners Preferred Yield, Inc.,
Partners Preferred Yield II, Inc., Partners Preferred Yield III, Inc. and
Storage Properties, Inc. ("SPI") (collectively, the "Merged Public Storage
REITs"), affiliated REITs that were merged into PSI between September 1994 and
June 1997. He has been active in the real estate investment field for over 25
years.
Harvey Lenkin, age 61, has been President of the Company since its
inception in 1990. Mr. Lenkin has been employed by PSI for 20 years and became
President and a director of PSI in November 1991. He has been President of PSP20
since 1990. Mr. Lenkin was President of the Merged Public Storage REITs from
1989-90 until the respective dates of merger and was also a director of SPI from
1989 until June 1996. He is a director of the National Association of Real
Estate Investment Trusts (NAREIT).
David P. Singelyn, age 36, a certified public accountant, was Controller of
the Company from November 1995 until December 1996 when he became Vice President
and Chief Financial Officer. Mr. Singelyn has been employed by PSI since 1989
and became Vice President and Treasurer of PSI in November 1995. He was
Controller of PSP20 from November 1995 until December 1996 when he became Vice
President and Chief Financial Officer. He was Vice President and Controller of
SPI from 1991 until June 1996. From 1987 to 1989, Mr. Singelyn was Controller of
Winchell's Donut Houses, L.P.
David Goldberg, age 48, became Vice President and General Counsel of the
Company in December 1995. Mr. Goldberg became Senior Vice President and General
Counsel of PSI in November 1995. He joined PSI's legal staff in June 1991. From
December 1982 until May 1991, he was a partner in the law firm of Sachs &
Phelps, then counsel to PSI.
A. Timothy Scott, age 46, became Vice President and Tax Counsel of the
Company in November 1996. Mr. Scott became Senior Vice President and Tax Counsel
of PSI in November 1996. From June 1991 until joining PSI, he practiced tax law
as a shareholder of the law firm of Heller, Ehrman, White & McAuliffe, counsel
to PSI. Prior to June 1991, his professional corporation was a partner in the
law firm of Sachs & Phelps, then counsel to PSI.
Obren B. Gerich, age 59, a certified public accountant, has been Vice
President and Secretary of the Company since its inception in 1990 and was Chief
Financial Officer until November 1995. He has been a Vice President of PSI since
1980, became Senior Vice President of PSI in November 1995 and was Chief
Financial Officer of PSI until November 1991. Mr. Gerich has been Vice President
and Secretary of PSP20 since 1990 and was Chief Financial Officer until November
1995. He was Vice President and Secretary of the Merged Public Storage REITs
from 1989-90 until the respective dates of merger.
Vern O. Curtis, age 63, Chairman of the Audit Committee, is a private
investor. Mr. Curtis has been a director of the Company since its inception in
1990. Mr. Curtis has also been a director of PSP20 since 1990. Mr. Curtis is
also a director of the Pimco Funds, Pimco Commercial Mortgage Securities Trust,
Inc. and Fresh Choice, Inc. He was a director of the Merged Public Storage REITs
from 1989-90 until the respective dates of merger. Mr. Curtis was Dean of
Business School of Chapman College from 1988 to 1990 and President and Chief
Executive Officer of Denny's, Inc. from 1980 to 1987.
Jack D. Steele, age 74, a member of the Audit Committee, has been a
director of the Company since its inception in 1990. Mr. Steele has also been a
director of PSP20 since 1990. He is also a director of M.C. Gill and CRG
Compensation Resource Group. Mr. Steele is a business consultant. He was a
director of the Merged Public Storage REITs from 1989-90 until the respective
dates of merger. Mr. Steele was Chairman - Board Services of Korn/Ferry
International from 1986 to 1988 and Dean of School of Business and Professor at
the University of Southern California from 1975 to 1986.
18
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
----------------------
Compensation of Directors
- -------------------------
Each of the Company's directors, other than B. Wayne Hughes, currently
receives director's fees of $2,000 per year plus $200 for each meeting attended.
In addition, each of the members of the Audit Committee receives $100 for each
meeting of the Audit Committee attended. The policy of the Company is to
reimburse directors for reasonable expenses.
Compensation of Executive Officers
- ----------------------------------
Set forth below is certain compensation relating to B. Wayne Hughes, the
Company's current Chief Executive Officer. The Company has no executive officer
who earned $100,000 or more in 1997 for services rendered to the Company.
Summary Compensation Table
Annual Compensation
Name and Principal Position Year Salary
- -------------------------------- ------------ ------------
B. Wayne Hughes 1997 $1,000
Chairman of the Board and 1996 1,000
Chief Executive Officer 1995 1,000
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company does not have a compensation committee. Mr. Hughes, the current
Chief Executive Officer of the Company, is a current member of the Board of
Directors. Mr. Hughes is a director and the chief executive officer of PSP20
(and during part of 1997, Mr. Hughes was a director and the chief executive
officer of PSP14, PSP15, PSP16, PSP17, PSP18 and PSP19). Mr. Hughes also is the
chief executive officer and a director of PSI, of which Harvey Lenkin, the
current President of the Company, is the president and a director. Neither PSI
nor PSP20 has (nor did PSP14, PSP15, PSP16, PSP17, PSP18 or PSP19 have) a
compensation committee.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ----------------------------------------------
MANAGEMENT AGREEMENTS. The Company currently has management agreements with
PSI and AOPPLP. Under the management agreements, the Company pays PSI a fee of
6% of the gross revenues of the Company's mini-warehouses ($370,000 in 1997) and
pays AOPPLP a fee of 5% of the gross revenues of the Company's commercial
properties ($70,000 in 1997). The Company believes that the terms of the
management agreements are as favorable as would be obtained from unrelated third
parties.
PROPOSED MERGER AND EXCHANGE. The Company and AOPP have agreed, subject to
certain conditions, to merge, pursuant to an Amended and Restated Agreement and
Plan of Reorganization by and among PSP11, AOPP and PSI dated as of December 17,
1997. AOPP, an affiliate of PSI, owns and operates commercial properties
directly and through AOPPLP. Upon the merger of AOPP into the Company, each of
the 1,819,937 outstanding shares of the Company's Common Stock Series A ("Series
A Shares") (other than shares held by holders of the Company's Series A Shares
("Series A Shareholders") who have properly exercised dissenters' rights under
California law) would continue to be owned by the Series A Shareholders or
converted into the right to receive cash as follows: (i) with respect to up to
20% of the outstanding Series A Shares, $20.50 in cash and (ii) the balance of
the outstanding Series A Shares would continue to be owned by the Series A
Shareholders. In the merger, (i) each share of the Company's Common Stock Series
B ("Series B Shares") and each share of the Company's Common Stock Series C
("Series C Shares") would be converted into 0.8641 Series A Shares (or up to 20%
in cash) and (ii) each share of AOPP's capital stock would be converted into
1.18 Series A Shares (or up to 20% in cash). The Series A Shares are listed on
the American Stock Exchange and the Series B Shares and Series C Shares are
owned by PSI and B. Wayne Hughes. There are 707,071 outstanding Series B and
Series C Shares (of which 47,824 Series C Shares will be canceled prior to the
19
<PAGE>
merger) and approximately 10,000,000 outstanding shares of AOPP common stock.
After the merger, the Company would have approximately 14,200,000 Series A
Shares (assuming no cash elections), with approximately an additional 6,222,000
shares reserved for issuance upon conversion of partnership interests of AOPPLP
into Series A Shares. After the merger, the Series A Shares will be
reconstituted as common stock. Concurrently with the merger, the Company will
exchange 13 mini-warehouses for 11 commercial properties owned by PSI. The
merger is conditioned on approval by the Company's shareholders. PSI and B.
Wayne Hughes own 223,712 Series A Shares and 707,071 Series B and Series C
Shares and the Company's current directors and executive officers, excluding B.
Wayne Hughes, own an additional 800 Series A Shares. In addition, (i) PSI owns
3,492,423.93 shares of AOPP common stock and PSI and its affiliated partnerships
own 6,190,979 units of partnership interest of AOPPLP and (ii) the current
directors and executive officers own or have options to purchase a total of
28,697 shares of AOPP common stock (outstanding options to purchase shares of
AOPP common stock will be assumed by the Company in the merger and converted to
options to purchase shares of the Company's common stock on the basis of 1.18
shares of the Company's common stock for each share of AOPP common stock).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
---------------------------------------------------------------
Security Ownership of Certain Beneficial Owners
- -----------------------------------------------
Information regarding beneficial ownership of shares of the Company's
common stock by B. Wayne Hughes (a beneficial owner of more than 5% of the
Company's combined outstanding shares of Common Stock Series A, Common Stock
Series B and Common Stock Series C) is set forth in the second table below. The
following table sets forth information with respect to the only other person
known to the Company to be the beneficial owner of more than 5% of the Company's
combined outstanding shares of Common Stock Series A, Common Stock Series B and
Common Stock Series C (or Common Stock Series A):
<TABLE>
<CAPTION>
Shares of Common Stock,
$.01 Par Value,
Beneficially Owned as of
March 9, 1998 (1)
-------------------------
Name and Address Number of Shares (2)(3) Percent
- ----------------------------------- ------------------------ ----------------
<S> <C> <C>
PSI A: 223,712(4) A: 12.3%
701 Western Avenue B: 184,453(4) B: 100.0%
Glendale, California 91201-2397 C: 522,618(4) C: 100.0%
------------------------ ----------------
930,783(4)(5) 36.8%
</TABLE>
- ------------------------------------
(Footnotes to the table are set forth following the table under "Security
Ownership of Management" below).
Security Ownership of Management
- --------------------------------
The following table sets forth information concerning the security
ownership of each director of the Company (including B. Wayne Hughes, the only
executive officer named under Item 11) and of all directors and executive
officers of the Company as a group:
20
<PAGE>
<TABLE>
<CAPTION>
Shares of Common Stock,
$.01 Par Value,
Beneficially Owned a of
March 9, 1998 (1)
------------------------
Name Number of Shares (2)(3) Percent
----------------------------------- ------------------------ ----------------
<S> <C> <C>
B. Wayne Hughes A: 424.0(6) A: (7)
B: 36,890.6(6) B: 20.0%
C: 104,523.6(6) C: 20.0%
----------------------------------- ------------------------ ----------------
141,838.2(5)(6) 5.6%
Vern O. Curtis A: 500.0 (7)
Jack D. Steele A: 100.0(8) (7)
All Directors and Executive A: 1,224.0(6)(8)(9) A: (7)
Officers as a Group B: 36,890.6(6) B: 20.0%
(eight persons) C: 104,523.6(6) C: 20.0%
----------------------------------- ------------------------ ----------------
142,638.2(5)(6)(8)(9) 5.6%
</TABLE>
- ------------------------------------
(1) Except as otherwise indicated and subject to applicable community
property and similar statutes, the persons listed as beneficial owners of
the shares have sole voting and investment power with respect to the
shares.
(2) Capital letters "A", "B" and "C" denote share information with respect to
Common Stock Series A, Common Stock Series B and Common Stock Series C,
respectively.
(3) The Company's current Articles of Incorporation provide that the Common
Stock Series B and Common Stock Series C will convert automatically into
Common Stock Series A on a share-for-share basis when (A) the sum of (1)
all cumulative dividends and other distributions from all sources paid
with respect to the Common Stock Series A (including liquidating
distributions, but not including payments made to redeem such stock other
than in liquidation) and (2) the cumulative Partnership distributions
from all sources with respect to all Partnership units (including the
general partners' 1% interest) equals (B) the product of $20 multiplied
by the number of then outstanding "Original Series A Shares." The term
"Original Series A Shares" means the shares of Common Stock Series A
issued in the Reorganization.
(4) Includes (i) 223,288 shares of Common Stock Series A, 147,562.4 shares of
Common Stock Series B and 418,094.4 shares of Common Stock Series C owned
by PSI as to which PSI has sole voting and dispositive power and (ii) 424
shares of Common Stock Series A, 36,890.6 shares of Common Stock Series B
and 104,523.6 shares of Common Stock Series C which PSI has an option to
acquire (together with other securities) from B. Wayne Hughes as trustee
of the B.W. Hughes Living Trust and as to which PSI has sole voting power
(pursuant to an irrevocable proxy) and no dispositive power.
(5) Includes Common Stock Series A, Common Stock Series B and Common Stock
Series C.
(6) Includes 424 shares of Common Stock Series A, 36,890.6 shares of Common
Stock Series B and 104,523.6 shares of Common Stock Series C owned by B.
Wayne Hughes as trustee of the B.W. Hughes Living Trust as to which Mr.
Hughes has sole dispositive power and no voting power; PSI has an option
to acquire these shares and an irrevocable proxy to vote these shares
(see footnote (4) above).
(7) Less than 0.1%.
21
<PAGE>
(8) Shares held by a bank custodian of a simplified employee pension for the
benefit of Mr. Steele.
(9) Includes shares held of record or beneficially by members of the
immediate family of officers of the Company and shares held by custodians
of individual retirement accounts for the benefit of officers of the
Company (or members of their immediate families).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
------------------------------------------------
See "Compensation Committee Interlocks and Insider Participation -- Certain
Relationships and Related Transactions" under Item 11.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
----------------------------------------------------------------
(a) List of Documents filed as part of the Report.
1. Financial Statements: See Index to Financial Statements
and Financial Statement Schedule.
2. Financial Statement Schedules: See Index to Financial
Statements and Financial Statement Schedule.
3. Exhibits: See Exhibit Index contained herein.
(b) Reports on Form 8-K filed during the last quarter of
the period ended December 31, 1997:
Form 8-K/As dated October 21, 1997 and December 17, 1997
(filed January 8, 1998) were filed relating to the proposed
merger of AOPP into the Company.
(c) Exhibits:
See Exhibit Index contained herein.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereto duly authorized.
PUBLIC STORAGE PROPERTIES XI, INC.
Dated: March 13, 1998 By:/s/ Harvey Lenkin
-------------------------
Harvey Lenkin, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
<S> <C> <C>
/s/ B. Wayne Hughes Chairman of the Board, Chief Executive March 13, 1998
------------------------- Officer and Director
B. Wayne Hughes (Principal Executive Officer)
/s/ Vern O. Curtis Director March 13, 1998
-------------------------
Vern O. Curtis
/s/ Jack D. Steele Director March 13, 1998
-------------------------
Jack D. Steele
/s/ David P. Singelyn Vice President and Chief Financial Officer March 13, 1998
--------------------- (Principal Financial Officer and
David P. Singelyn Principal Accounting Officer)
</TABLE>
23
<PAGE>
PUBLIC STORAGE PROPERTIES XI, INC.
INDEX TO
FINANCIAL STATEMENTS
AND
FINANCIAL STATEMENT SCHEDULE
(Item 14 (a))
<TABLE>
<CAPTION>
Page
References
----------
<S> <C>
Report of Independent Auditors F-1
Financial Statements and Schedule:
Balance Sheets as of December 31, 1997 and 1996 F-2
For each of the three years in the period ended December 31, 1997:
Statements of Income F-3
Statements of Shareholders' Equity F-4
Statements of Cash Flows F-5
Notes to Financial Statements F-6 - F-10
Schedule for the years ended December 31, 1997, 1996 and 1995:
III Real Estate and Accumulated Depreciation F-11 - F-12
</TABLE>
All other schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the financial
statements or the notes thereto.
<PAGE>
Report of Independent Auditors
The Board of Directors and Shareholders
Public Storage Properties XI, Inc.
We have audited the accompanying balance sheets of Public Storage Properties XI,
Inc. as of December 31, 1997 and 1996, and the related statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. Our audits also included the schedule listed in the
index at item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule 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.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Public Storage Properties XI,
Inc. at December 31, 1997 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/ ERNST & YOUNG LLP
February 18, 1998
Los Angeles, California
F-1
<PAGE>
<TABLE>
<CAPTION>
PUBLIC STORAGE PROPERTIES XI, INC.
BALANCE SHEETS
December 31, 1997 and 1996
1997 1996
--------------- ---------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 2,455,000 $ 1,290,000
Rent and other receivables 37,000 53,000
Prepaid expenses 417,000 142,000
Real estate facilities at cost:
Building, land improvements and equipment 27,017,000 26,526,000
Land 12,118,000 12,118,000
--------------- ---------------
39,135,000 38,644,000
Less accumulated depreciation (13,198,000) (12,000,000)
--------------- ---------------
25,937,000 26,644,000
--------------- ---------------
Total assets $ 28,846,000 $ 28,129,000
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 615,000 $ 633,000
Dividends payable 681,000 681,000
Advance payments from renters 179,000 198,000
Shareholders' equity:
Series A common, $.01 par value,
2,828,989 shares authorized,
1,819,937 shares issued and
outstanding 18,000 18,000
Convertible Series B common, $.01 par
value, 184,453 shares authorized,
issued and outstanding 2,000 2,000
Convertible Series C common, $.01 par
value, 522,618 shares authorized,
issued and outstanding 5,000 5,000
Paid-in-capital 32,421,000 32,421,000
Cumulative net income 29,451,000 25,971,000
Cumulative distributions (34,526,000) (31,800,000)
--------------- ---------------
Total shareholders' equity 27,371,000 26,617,000
--------------- ---------------
Total liabilities and shareholders' equity $ 28,846,000 $ 28,129,000
=============== ===============
See accompanying notes.
F-2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PUBLIC STORAGE PROPERTIES XI, INC.
STATEMENTS OF INCOME
For each of the three years in the
period ended December 31, 1997
1997 1996 1995
-------------- -------------- --------------
REVENUES:
<S> <C> <C> <C>
Rental income $ 7,561,000 $ 7,220,000 $ 6,859,000
Interest income 82,000 33,000 19,000
-------------- -------------- --------------
7,643,000 7,253,000 6,878,000
-------------- -------------- --------------
COSTS AND EXPENSES:
Cost of operations 2,324,000 2,334,000 2,265,000
Management fees paid to affiliates 440,000 394,000 400,000
Depreciation 1,198,000 1,150,000 1,105,000
Administrative 201,000 217,000 205,000
Environmental cost - - 106,000
Interest expense - 3,000 1,000
-------------- -------------- --------------
4,163,000 4,098,000 4,082,000
-------------- -------------- --------------
NET INCOME $ 3,480,000 $ 3,155,000 $ 2,796,000
============== ============== ==============
Basic earnings per share-Series A $ 1.77 $ 1.59 $ 1.37
============== ============== ==============
Diluted earnings per share-Series A $ 1.38 $ 1.24 $ 1.09
============== ============== ==============
Dividends declared per share:
Series A $ 1.36 $ 1.36 $ 1.36
============== ============== ==============
Series B $ 1.36 $ 1.36 $ 1.36
============== ============== ==============
Weighted average Common shares outstanding:
Basic- Series A 1,819,937 1,830,845 1,863,470
============== ============== ==============
Diluted- Series A 2,527,008 2,537,916 2,570,541
============== ============== ==============
See accompanying notes.
F-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PUBLIC STORAGE PROPERTIES XI, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
For each of the three years in the period ended
December 31, 1997
Convertible Convertible
Series A Series B Series C
Shares Amount Shares Amount Shares Amount
--------- -------- ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1994 1,888,537 $19,000 184,453 $2,000 522,618 $5,000
Net income
Repurchase of shares (32,200) -
Cash distributions declared:
$1.36 per share - Series A
$1.36 per share - Series B
--------- -------- ------- ------ ------- ------
Balances at December 31, 1995 1,856,337 19,000 184,453 2,000 522,618 5,000
Net income
Repurchase of shares (36,400) (1,000)
Cash distributions declared:
$1.36 per share - Series A
$1.36 per share - Series B
--------- -------- ------- ------ ------- ------
Balances at December 31, 1996 1,819,937 18,000 184,453 2,000 522,618 5,000
Net income
Repurchase of shares
Cash distributions declared:
$1.36 per share - Series A
$1.36 per share - Series B
--------- -------- ------- ------ ------- ------
Balances at December 31, 1997 1,819,937 $18,000 184,453 $2,000 522,618 $5,000
========= ======= ======= ====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
PUBLIC STORAGE PROPERTIES XI, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
For each of the three years in the period ended
December 31, 1997
Cumulative Total
Paid-in net Cumulative shareholders'
Capital income distributions equity
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Balances at December 31, 1994 $33,634,000 $20,020,000 $(26,282,000) $27,398,000
Net income 2,796,000 2,796,000
Repurchase of shares (529,000) (529,000)
Cash distributions declared:
$1.36 per share - Series A (2,530,000) (2,530,000)
$1.36 per share - Series B (252,000) (252,000)
----------- ----------- ------------ -----------
Balances at December 31, 1995 33,105,000 22,816,000 (29,064,000) 26,883,000
Net income 3,155,000 3,155,000
Repurchase of shares (684,000) (685,000)
Cash distributions declared:
$1.36 per share - Series A (2,484,000) (2,484,000)
$1.36 per share - Series B (252,000) (252,000)
----------- ----------- ------------ -----------
Balances at December 31, 1996 32,421,000 25,971,000 (31,800,000) 26,617,000
Net income 3,480,000 3,480,000
Repurchase of shares
Cash distributions declared:
$1.36 per share - Series A (2,474,000) (2,474,000)
$1.36 per share - Series B (252,000) (252,000)
----------- ----------- ------------ -----------
Balances at December 31, 1997 $32,421,000 $29,451,000 $(34,526,000) $27,371,000
=========== =========== ============ ===========
</TABLE>
See accompanying notes.
F-4
<PAGE>
<TABLE>
<CAPTION>
PUBLIC STORAGE PROPERTIES XI, INC.
STATEMENTS OF CASH FLOWS
For each of the three years in the
period ended December 31, 1997
1997 1996 1995
------------- ------------- -------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $ 3,480,000 $ 3,155,000 $ 2,796,000
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation 1,198,000 1,150,000 1,105,000
Decrease (increase) in rent and other receivables 16,000 34,000 (53,000)
Increase in prepaid expenses (275,000) (79,000) (4,000)
Amortization (payment) of prepaid management fees - 205,000 (205,000)
(Decrease) increase in accounts payable (18,000) 24,000 151,000
Decrease in advance payments from renters (19,000) (4,000) (4,000)
------------- ------------- -------------
Total adjustments 902,000 1,330,000 990,000
------------- ------------- -------------
Net cash provided by operating activities 4,382,000 4,485,000 3,786,000
------------- ------------- -------------
Cash flows from investing activities:
Additions to real estate facilities (491,000) (507,000) (472,000)
------------- ------------- -------------
Net cash used in investing activities (491,000) (507,000) (472,000)
------------- ------------- -------------
Cash flows from financing activities:
Distributions paid to shareholders (2,726,000) (2,749,000) (2,793,000)
Advances from affiliate - - 145,000
Repayment of advances from affiliate - - (145,000)
Borrowing on credit facility - 250,000 -
Repayment of borrowing on credit facility - (250,000) -
Purchase of Company Series A common stock - (685,000) (529,000)
------------- ------------- -------------
Net cash used in financing activities (2,726,000) (3,434,000) (3,322,000)
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 1,165,000 544,000 (8,000)
Cash and cash equivalents at the beginning of the year 1,290,000 746,000 754,000
------------- ------------- -------------
Cash and cash equivalents at the end of the year $ 2,455,000 $ 1,290,000 $ 746,000
============= ============= =============
</TABLE>
See accompanying notes.
F-5
<PAGE>
PUBLIC STORAGE PROPERTIES XI, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
1. DESCRIPTION OF BUSINESS
Public Storage Properties XI, Inc. (the "Company") is a
California corporation which has elected to qualify as a real estate
investment trust ("REIT") for Federal income tax purposes. The Company
succeeded to the business of Public Storage Properties XI, Ltd. (the
"Partnership") in a reorganization transaction which was effective
December 31, 1990 (the "Reorganization").
The Company owns and operates 13 self-storage facilities located
in six states and 2 business park facilities containing commercial or
industrial spaces located in California and Kansas.
The term of the Company is until all properties have been sold
and, in any event, not later than December 31, 2038. The bylaws of the
Company provide that, during 1997, unless shareholders have previously
approved such a proposal, the shareholders will be presented with a
proposal to approve or disapprove (a) the sale or financing of all or
substantially all of the properties and (b) the distribution of the
proceeds from such transaction and, in the case of a sale, the
liquidation of the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Income Taxes:
The Company has and intends to continue to qualify as a REIT, as
defined in Section 856 of the Internal Revenue Code (the Code). As a
REIT, the Company is not taxed on that portion of its taxable income
which is distributed to its shareholders provided that the Company
meets the requirements of the Code. The Company believes it is in
compliance with these requirements and, accordingly, no provision for
income taxes has been made.
Statements of Cash Flows:
For purposes of financial statement presentation, the Company
considers all highly liquid debt instruments purchased with a maturity
of three months or less to be cash equivalents.
Real Estate Facilities:
Cost of land includes appraisal and legal fees related to
acquisition and closing costs. Buildings, land improvements and
equipment reflect costs incurred through December 31, 1997 and 1996 to
develop primarily mini-warehouse facilities and to a lesser extent,
business park facilities. The mini-warehouse facilities provide
self-service storage spaces for lease, usually on a month-to-month
basis, to the general public. The buildings and equipment are
depreciated on the straight-line basis over estimated useful lives of
25 and 5 years, respectively.
F-6
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Real Estate Facilities (continued):
In 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121 ("Statement 121"),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of." Statement 121 requires impairment losses to
be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying amount.
Statement 121 also addresses the accounting for long-lived assets that
are expected to be disposed of. The Company adopted Statement 121 in
1996 and based on current circumstances, such adoption did not have
any effect on the financial statements.
At December 31, 1997, the basis of real estate facilities
(excluding land) for Federal income tax purposes (after adjustment for
accumulated depreciation of $17,442,000 is $9,443,000.
Revenue Recognition:
Property rents are recognized as earned.
Net Income Per Share:
In 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share. Statement 128 replaced the
calculation of primary and fully diluted earnings per share with basic
and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of convertible
securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per
share amounts for all periods have been presented to conform to the
Statement 128 requirements.
Net income per share is presented on a basic and diluted basis.
Basic earnings per share represents the Series A shareholders' rights
to distributions out of the respective period's net income, which is
calculated by dividing net income after reduction for distributions to
the Convertible Series B shareholders (Series C shareholders are not
entitled to cash distributions) by the weighted average number of
outstanding Series A shares (Note 4). Diluted earnings per share
assumes conversion of the Convertible Series B and Series C shares
into Series A shares.
Use of Estimates:
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could
differ from those estimates.
Environmental Cost:
Substantially all of the Company's facilities were acquired prior
to the time that it was customary to conduct environmental
investigations in connection with property acquisitions. During the
fourth quarter of 1995, the Company completed environmental
assessments of its properties to evaluate the environmental condition
of, and potential environmental liabilities of such properties. These
assessments were performed by an independent environmental consulting
firm. Based on the assessments, the Company expensed $106,000 in 1995
for known environmental remediation requirements. Although there can
be no assurance, the Company is not aware of any environmental
contamination of any of its property sites which individually or in
the aggregate would be material to the Company's overall business,
financial condition, or results of operations.
F-7
<PAGE>
3. RELATED PARTY TRANSACTIONS
The Company has a management agreement with Public Storage, Inc.
("PSI") pursuant to which PSI operates the Company's mini-warehouse
facilities for a fee equal to 6% of the facilities' monthly gross
revenue (as defined). The Company's business parks are managed by
American Office Park Properties, LP ("AOPPLP") pursuant to a
management contract. AOPPLP, an affiliate of PSI, operates the
Company's business parks for a fee equal to 5% of the facilities
monthly gross income.
Each Management Agreement, as amended in February 1995, provides
that the agreement will expire in February 2002 provided that in
February of each year it shall be automatically extended for one year
(thereby maintaining a seven-year term) unless either party notifies
the other that the Management Agreement is not being extended, in
which case it expires, on the first anniversary of its then scheduled
expiration date. Each Management Agreement may also be terminated by
either party for cause, but if terminated for cause by the Company,
the Company retains the rights to use the service marks and related
designs until the then scheduled expiration date, if applicable, or
otherwise a date seven years after such termination.
In August 1995, the Management Agreement for the mini-warehouse
facilities was amended to provide that upon demand from PSI made prior
to December 15, 1995, the Company agreed to prepay (within 15 days
after such demand) up to 12 months of management fees (based on the
management fees for the comparable period during the calendar year
immediately preceding such prepayment) discounted at the rate of 14%
per year to compensate for early payment. In November 1995, the
Company prepaid, to PSI, 8 months of 1996 management fees at a cost of
$205,000. The amount was expensed as management fees paid to affiliate
during 1996.
During the second quarter of 1995, the Company borrowed $145,000
from an affiliate for working capital purposes. The advance, which was
repaid in May 1995, bore interest at the prime rate plus .25%.
Interest expense of $1,000 was charged to income in 1995 with respect
to this advance.
4. SHAREHOLDERS' EQUITY
Series A shares are entitled to all distributions of cash from
sale or refinancing and participate ratably with the Convertible
Series B shares in distributions of cash flow from operations. The
Convertible Series C shares (prior to conversion into Series A shares)
will not participate in any distributions.
The Convertible Series B shares and Convertible Series C shares
will convert automatically into Series A shares on a share-for-share
basis (the "Conversion") when (A) the sum of (1) all cumulative
dividends and other distributions from all sources paid with respect
to the Series A shares (including liquidating distributions, but not
including payments made to redeem such stock other than in
liquidation) and (2) the cumulative Partnership distributions from all
sources with respect to all units equals (B) the product of $20
multiplied by the number of the then outstanding "Original Series A
shares". The term "Original Series A shares" means the Series A shares
issued in the Reorganization. Through December 31, 1997, the Company
has made and declared cumulative cash distributions of approximately
$31,615,000 with respect to the Series A shares. Accordingly, assuming
no repurchases or redemptions of Series A shares after December 31,
1997, Conversion will occur when $4,783,000 in additional
distributions with respect to the Series A shares have been made.
F-8
<PAGE>
4. SHAREHOLDERS' EQUITY (CONTINUED)
Assuming liquidation of the Company at its net book value at
December 31, 1997 and 1996, each Series of common shares would receive
the following as a liquidating distribution:
1997 1996
--------------- ---------------
Series A $ 21,566,000 $ 21,449,000
Convertible Series B 1,425,000 1,348,000
Convertible Series C 4,380,000 3,820,000
--------------- ---------------
Total $ 27,371,000 $ 26,617,000
=============== ===============
The Series B and Series C shareholders have agreed that 47,824
of the Series A shares received upon conversion of the Convertible
Series B and Convertible Series C shares will not be entitled to
distributions attributable to sale or financing proceeds. This
agreement, which is binding on transferees of such Series A shares, is
reflected in the liquidation values applicable to the Series A and
Convertible Series B and C shares.
The Series A shares, Convertible Series B shares and Convertible
Series C shares have equal voting rights. The holders of the
Convertible Series B and Convertible Series C shares have agreed to
vote along with the majority of the unaffiliated Series A shareholders
on matters other than control of the Company and its business.
The Company's Board of Directors has authorized the Company to
purchase up to 400,000 shares of the Company's Series A common stock.
As of December 31, 1997, the Company had purchased and retired 301,275
shares of Series A common stock, of which 36,400 and 32,200 were
purchased and retired in 1996 and 1995, respectively.
For Federal income tax purposes, all distributions declared by
the Board of Directors in 1997, 1996 and 1995 were ordinary income.
5. NOTE PAYABLE TO BANK
The Company has an unsecured revolving credit facility with a
bank for borrowings up to $3,000,000 for working capital purposes and
to repurchase the Company's stock. Outstanding borrowings on the
credit facility, at the Company's option, bear interest at either the
bank's prime rate plus .25% or the LIBOR rate plus 2.25%. Interest is
payable monthly. On December 31, 1999, all unpaid principal and
accrued interest is due and payable.
During the first quarter of 1996, the Company borrowed and repaid
$250,000 on its line of credit facility. At December 31, 1997, there
was no outstanding balance on the credit facility.
Under covenants of the credit facility, the Company is (1)
required to maintain a ratio of liabilities to assets (as defined) for
each fiscal quarter of not more than .3 to 1.0, (2) required to
maintain a debt coverage ratio (as defined) for each fiscal quarter of
not less than 8 times the debt service, (3) required to maintain a
fixed charge coverage ratio (as defined) for each fiscal quarter of
not less than 1.0 to 1.0 and (4) required to maintain a minimum
shareholder's equity (as defined) for each fiscal quarter of $20
million. The Company was in compliance with all covenants in 1997.
F-9
<PAGE>
6. QUARTERLY RESULTS (UNAUDITED)
The following is a summary of unaudited quarterly results of
operations:
<TABLE>
<CAPTION>
Three months ended
---------------------------------------------------------
March 1997 June 1997 Sept. 1997 Dec. 1997
------------ ------------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues $1,836,000 $1,900,000 $1,963,000 $1,944,000
------------ ------------- ------------- ------------
Expenses 1,053,000 1,008,000 1,042,000 1,060,000
------------ ------------- ------------- ------------
Net income $783,000 $892,000 $921,000 $884,000
============ ============= ============= ============
Basic earnings per share- Series A $0.40 $0.45 $0.47 $0.45
============ ============= ============= ============
Diluted earnings per share- Series A $0.31 $0.35 $0.36 $0.36
============ ============= ============= ============
Three months ended
---------------------------------------------------------
March 1996 June 1996 Sept. 1996 Dec. 1996
------------ ------------- ------------- ------------
Revenues $1,741,000 $1,822,000 $1,858,000 $1,832,000
------------ ------------- ------------- ------------
Expenses 1,004,000 1,017,000 1,028,000 1,049,000
------------ ------------- ------------- ------------
Net income $737,000 $805,000 $830,000 $783,000
============ ============= ============= ============
Basic earnings per share- Series A $0.37 $0.40 $0.42 $0.40
============ ============= ============= ============
Diluted earnings per share- Series A $0.29 $0.32 $0.32 $0.31
============ ============= ============= ============
</TABLE>
The 1996 and first three quarter of 1997 earnings per share
amounts have been reflected to comply with Statement of Financial
Accounting Standards No. 128, Earnings per share.
7. Proposed Merger (unaudited)
The Company and American Office Park Properties, Inc. (AOPP), the
general partner of AOPPLP, have agreed, subject to certain conditions,
to merge, pursuant to an Amended and Restated Agreement and Plan of
Reorganization by and among The Company, AOPP and PSI dated as of
December 17, 1997. AOPP, an affiliate of PSI, owns and operates
commercial properties directly and through AOPPLP. Upon the merger of
AOPP into the Company, each of the 1,819,937 outstanding shares of the
Company common stock series A (other than shares held by holders of
the Company Common stock series A (" Series A Shareholders") who have
properly exercised dissenters' rights under California law ) would
continue to be owned by the Series A Shareholders or converted into
the right to receive cash as follows: (i) with respect to up to 20% of
the outstanding common stock series A of the Company, $20.50 in cash
and (ii) the balance of the outstanding common stock series A of the
Company would continue to be owned by the Series A Shareholder. In the
merger, (i) each share of the Company's common stock series B and each
share of the Company's common stock series C would be converted into
.8641 shares of the Company's common stock series A (or up to 20% in
cash) and (ii) each share of AOPP's capital stock will be converted
into 1.18 shares of the Company's common stock series A (or up to 20%
in cash). After the merger, the Company would have approximately
14,200,000 outstanding shares of common stock series A (assuming no
cash elections, with approximately an additional 6,222,000 shares
reserved for issuance upon
F-10
<PAGE>
7. Proposed Merger (unaudited)
(continued)
conversion of partnership interests of AOPPLP into the Company's
common stock series A. After the merger, the ownership of the Company
by public shareholders will be reduced significantly. As a result of
the merger, the Company's name will be changed to PS Business Parks,
Inc. and AOPPLP's name will be changed to PS Business Parks, L.P.
Concurrently with the merger, the Company will exchange 13
mini-warehouses for 11 commercial properties owned by PSI. The merger
is conditioned on, among other requirements, approval by the Company's
shareholders. After the merger, the Company will be a self-managed and
self-advised REIT which will own and operate directly and through
AOPPLP 62 commercial properties located in 10 states with
approximately 6.9 million net rentable square feet of space and, in
addition, will manage, for a fee, 36 commercial properties. A meeting
of the Company's shareholders is scheduled for March 16, 1998. If the
merger is approved at the March 16, 1998 meeting, it is expected to
close shortly thereafter.
F-11
<PAGE>
<TABLE>
<CAPTION>
PUBLIC STORAGE PROPERTIES XI, INC.
SCHEDULE III - REAL ESTATE
AND ACCUMULATED DEPRECIATION
Initial Cost Costs
Bldg., Land subsequent to
Date Imp & construction
Completed Description Encumbrances Land Equipment (Improvements)
- -------------------------------------------------------------------------------------------------------
Mini-warehouses:
<S> <C> <C> <C> <C> <C>
11/84 Branford / Owens Commerce - $551,000 $904,000 $93,000
10/84 Houston / De Soto Dr - 882,000 1,111,000 121,000
10/84 Las Vegas / Charleston - 543,000 1,065,000 99,000
12/84 Colma / El Camino Real - 675,000 1,406,000 79,000
02/85 Pasadena /Arroyo Pkwy I - 3,021,000 3,764,000 185,000
10/84 Tempe / E Broadway - 346,000 916,000 60,000
11/84 Las Vegas / Tropicana Ave - 590,000 1,135,000 93,000
11/84 Houston / East Freeway - 394,000 970,000 152,000
05/85 Phoenix / N 43rd Ave - 193,000 969,000 86,000
07/85 Phoenix / Black Canyon - 201,000 1,025,000 98,000
12/85 Nesconset / Southern Blvd - 429,000 1,871,000 114,000
02/86 Austin / Ben White Blvd - 700,000 972,000 74,000
07/85 Arlington / E Pioneer Pkwy - 590,000 1,187,000 103,000
Business Parks:
04/85 Overland Park / I-435 - 1,172,000 2,671,000 827,000
05/85 Phoenix / 43RD Ave - 493,000 1,658,000 197,000
07/85 Phoenix / Black Canyon Hwy - 236,000 610,000 55,000
03/86 S. San Francisco / San - 1,102,000 2,017,000 330,000
Mateo
----------------------------------------------------------------
- $12,118,000 $24,251,000 $2,766,000
================================================================
</TABLE>
<TABLE>
<CAPTION>
PUBLIC STORAGE PROPERTIES XI, INC.
SCHEDULE III - REAL ESTATE
AND ACCUMULATED DEPRECIATION
Life on Which
Depreciation in
Gross Carrying Amount At December 31, 1997 Latest Income
Date Bldg., Land Imp Accumulated Statements is
Completed Description Land & Equipment Total Depreciation Computed
- --------------------------------------------------------------------------------------------------------------------------
Mini-warehouses:
<S> <C> <C> <C> <C> <C> <C>
11/84 Branford / Owens Commerce $551,000 $997,000 $1,548,000 ($505,000) 5-25 Years
10/84 Houston / De Soto Dr 882,000 1,232,000 2,114,000 (624,000) 5-25 Years
10/84 Las Vegas / Charleston 543,000 1,164,000 1,707,000 (609,000) 5-25 Years
12/84 Colma / El Camino Real 675,000 1,485,000 2,160,000 (734,000) 5-25 Years
02/85 Pasadena /Arroyo Pkwy I 3,021,000 3,949,000 6,970,000 (1,980,000) 5-25 Years
10/84 Tempe / E Broadway 346,000 976,000 1,322,000 (513,000) 5-25 Years
11/84 Las Vegas / Tropicana Ave 590,000 1,228,000 1,818,000 (629,000) 5-25 Years
11/84 Houston / East Freeway 394,000 1,122,000 1,516,000 (559,000) 5-25 Years
05/85 Phoenix / N 43rd Ave 193,000 1,055,000 1,248,000 (529,000) 5-25 Years
07/85 Phoenix / Black Canyon 201,000 1,123,000 1,324,000 (537,000) 5-25 Years
12/85 Nesconset / Southern Blvd 429,000 1,985,000 2,414,000 (914,000) 5-25 Years
02/86 Austin / Ben White Blvd 700,000 1,046,000 1,746,000 (473,000) 5-25 Years
07/85 Arlington / E Pioneer Pkwy 590,000 1,290,000 1,880,000 (629,000) 5-25 Years
Business Parks:
04/85 Overland Park / I-435 1,172,000 3,498,000 4,670,000 (1,730,000) 5-25 Years
05/85 Phoenix / 43RD Ave 493,000 1,855,000 2,348,000 (823,000) 5-25 Years
07/85 Phoenix / Black Canyon Hwy 236,000 665,000 901,000 (316,000) 5-25 Years
03/86 S. San Francisco / San 1,102,000 2,347,000 3,449,000 (1,094,000) 5-25 Years
Mateo
----------------------------------------------------------------
$12,118,000 $27,017,000 $39,135,000 ($13,198,000)
================================================================
F-12
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PUBLIC STORAGE PROPERTIES XI, INC.
REAL ESTATE RECONCILIATION
SCHEDULE III (CONTINUED)
(a) The following is a reconciliation of costs and related accumulated
depreciation.
COSTS RECONCILIATION
Years Ended December 31,
----------------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
<S> <C> <C> <C>
Balance at the beginning of the period $ 38,644,000 $ 38,149,000 $ 37,726,000
Additions during the period:
Improvements 491,000 507,000 472,000
Deductions during the period - (12,000) (49,000)
---------------- ---------------- ----------------
Balance at the close of the period $ 39,135,000 $ 38,644,000 $ 38,149,000
================ ================ ================
ACCUMULATED DEPRECIATION RECONCILIATION
Years Ended December 31,
----------------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
Balance at the beginning of the period $ 12,000,000 $ 10,862,000 $ 9,806,000
Additions during the period:
Depreciation 1,198,000 1,149,000 1,105,000
Deductions during the period - (11,000) (49,000)
---------------- ---------------- ----------------
Balance at the close of the period $ 13,198,000 $ 12,000,000 $ 10,862,000
================ ================ ================
</TABLE>
(b) The aggregate depreciable cost of real estate (excluding land) for Federal
income tax purposes is $26,885,000.
F-13
<PAGE>
PUBLIC STORAGE PROPERTIES XI, INC.
EXHIBIT INDEX
(Item 14(c))
2.1 Amended and Restated Agreement and Plan of Reorganization among
Registrant, American Office Park Properties, Inc. ("AOPP") and Public
Storage, Inc. ("PSI") dated as of December 17, 1997. Filed with
Registrant's Registration Statement No. 333-45405 and incorporated
herein by reference.
3.1 Amended and Restated Articles of Incorporation. Filed with
Registrant's Annual Report on Form 10-K for the year ended December
31, 1991 and incorporated herein by reference.
3.2 Certificate of Amendment of Articles of Incorporation. Filed with
Registrant's Annual Report on Form 10-K for the year ended December
31, 1992 and incorporated herein by reference.
3.3 Amended and Restated Bylaws, as amended. Filed with Registrant's
Registration Statement No. 333-45405 and incorporated herein by
reference.
10.1 Amended Management Agreement dated February 21, 1995 between
Registrant and Public Storage Management, Inc. Filed with Registrant's
Annual Report on Form 10-K for the year ended December 31, 1994 and
incorporated herein by reference.
10.2 Amended Management Agreement dated February 21, 1995 between
Registrant and Public Storage Commercial Properties Group, Inc. Filed
with Registrant's Annual Report on Form 10-K for the year ended
December 31, 1994 and incorporated herein by reference.
10.3 Amendment to Amended Management Agreement dated August 8, 1995 among
Registrant, Public Storage Management, Inc. and Storage Equities, Inc.
Filed with Registrant's Quarterly Report on Form 10-Q for the period
ended September 30, 1995 and incorporated herein by reference.
10.4 Amended Management Agreement between Storage Equities, Inc. and Public
Storage Commercial Properties Group, Inc. dated as of February 21,
1995. Filed with PSI's Annual Report on Form 10-K for the year ended
December 31, 1994 and incorporated herein by reference.
10.5 Revolving Note and Loan Agreement between Registrant and The First
National Bank of Boston dated December 29, 1995. Filed with
Registrant's Annual Report on Form 10-K for the year ended December
31, 1995 and incorporated herein by reference.
10.6 Revolving Loan by PSI to American Office Park Properties, L.P. (the
"Operating Partnership") dated as of December 16, 1997. Filed with
Registrant's Registration Statement No. 333-45405 and incorporated
herein by reference.
*10.7 AOPP's 1997 Stock Option and Incentive Plan. Filed with Registrant's
Registration Statement No. 333-45405 and incorporated herein by
reference.
10.8 Second Amended and Restated Agreement of Limited Partnership of the
Operating Partnership. Filed herewith.
10.9 Merger and Contribution Agreement dated as of December 23, 1997 among
Acquiport Two Corporation, Acquiport Three Corporation, New York State
Common Retirement Fund, the Operating Partnership, AOPP and AOPP
Acquisition Corp. Three. Filed with Registrant's Registration
Statement No. 333-45405 and incorporated herein by reference.
10.10 Agreement Among Shareholders and Company dated as of December 23, 1997
among Acquiport Two Corporation, AOPP, the Operating Partnership and
PSI. Filed with Registrant's Registration Statement No. 333-45405 and
incorporated herein by reference.
<PAGE>
10.11 Amendment to Agreement Among Shareholders and Company dated as of
January 21, 1998 among Acquiport Two Corporation, AOPP, the Operating
Partnership and PSI. Filed with Registrant's Registration Statement
No. 333-45405 and incorporated herein by reference.
10.12 Non-Competition Agreement dated as of December 23, 1997 among PSI,
AOPP, the Operating Partnership and Acquiport Two Corporation. Filed
with Registrant's Registration Statement No. 333-45405 and
incorporated herein by reference.
**10.13 Employment Agreement between AOPP and Ronald L. Havner, Jr. dated as
of December 23, 1997. Filed with Registrant's Registration Statement
No. 333-45405 and incorporated herein by reference.
**10.14 Employment Agreement between AOPP and Mary Jayne Howard dated as of
December 23, 1997. Filed with Registrant's Registration Statement No.
333-45405 and incorporated herein by reference.
10.15 Common Stock Purchase Agreement dated as of January 23, 1998 among
AOPP and the Investors signatory thereto. Filed with Registrant's
Registration Statement No. 333-45405 and incorporated herein by
reference.
10.16 Registration Rights Agreement dated as of January 30, 1998 among AOPP
and the Investors signatory thereto. Filed with Registrant's
Registration Statement No. 333-45405 and incorporated herein by
reference.
27 Financial Data Schedule. Filed herewith.
99 AOPP Pro Forma Consolidated Financial Statements. Filed herewith.
- ---------------
* Compensatory benefit plan.
** Management contract.
SECOND AMENDED AND RESTATED Exhibit 10.8
AGREEMENT OF LIMITED PARTNERSHIP
OF
AMERICAN OFFICE PARK PROPERTIES, L.P.
[EXHIBITS TO THIS AGREEMENT HAVE BEEN OMITTED AND WILL BE FURNISHED TO THE
SECURITIES AND EXCHANGE COMMISSION UPON REQUEST.]
<PAGE>
SECOND AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
AMERICAN OFFICE PARK PROPERTIES, L.P.
This SECOND AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP
("Agreement"), dated as of February 24, 1998, of AMERICAN OFFICE PARK
PROPERTIES, L.P. (the "Partnership") is entered into by and among AMERICAN
OFFICE PARK PROPERTIES, INC., a California corporation (the "General Partner"),
and the Persons whose names are set forth on the attached Exhibit A as the
Limited Partners, together with any other Persons who become Partners in the
Partnership as provided below.
A. This Agreement amends and restates in its entirety that certain
Amended and Restated Agreement of Limited Partnership of American Office Park
Properties, L.P., dated as of December 11, 1997, as amended by that certain
First Amendment also dated as of December 11, 1997, that certain Second
Amendment dated as of December 15, 1997, and that certain Third Amendment dated
as of December 23, 1997.
B. The Partners desire to ratify the formation of the Partnership, and
to set forth their respective rights and duties relating to the Partnership on
the terms as provided in this Agreement.
The parties agree as follows:
1. DEFINED TERMS
The following definitions shall be applied to the terms used in this
Agreement for all purposes, unless otherwise clearly indicated to the contrary.
"ACT" means the California Revised Uniform Limited Partnership Act, as
it may be amended from time to time, and any successor to such statute.
"ADDITIONAL FUNDS" shall have the meaning set forth in Section
4.1(b)(1).
"ADDITIONAL LIMITED PARTNER" means a Person admitted to the
Partnership as a Limited Partner in accordance with the terms of this Agreement
and who is shown as such on the books and records of the Partnership.
"AFFILIATE" means, with respect to any Person, (a) any Person directly
or indirectly controlling, controlled by or under common control with such
Person, (b) any Person owning or controlling 10 percent or more of the
outstanding voting interests of such Person, (c) any Person of which such Person
owns or controls 10 percent or more of the voting interest, or (d) any officer,
director, general partner or trustee of such Person or any Person referred to in
clauses (a), (b) and (c) above.
<PAGE>
"AGREEMENT" means this Amended and Restated Agreement of Limited
Partnership, as it may be amended, supplemented or restated from time to time.
"ARTICLES OF INCORPORATION" means the Amended and Restated Articles of
Incorporation of the General Partner filed with the Office of the Secretary of
State of the State of California on November 13, 1995, as amended or restated
from time to time, or the articles of incorporation, as amended, of any
permitted successor by merger to the General Partner.
"ASSIGNEE" means a Person to whom one or more Partnership Units (as
defined below) have been transferred in a manner permitted under this Agreement,
but who has not become a Substituted Limited Partner, and who has the rights set
forth in Section 11.5.
"AVAILABLE CASH" means with respect to any period for which such
calculation is being made:
(a) all cash revenues and funds received by the Partnership from
whatever source (excluding the proceeds of any capital contribution) plus
the amount of any reduction (including, without limitation, a reduction
resulting because the General Partner determines such amounts are no longer
necessary) in reserves, working capital accounts or other cash or similar
balances of the Partnership referred to in clause (b)(iv) below;
(b) less the sum of the following (except to the extent made with
the proceeds of any capital contribution):
(i) all interest, principal and other debt payments made
during such period by the Partnership,
(ii) all cash expenditures (including capital expenditures)
made by the Partnership during such period,
(iii) investments in any entity (including loans made to the
entity) to the extent that such investments are not otherwise
described in clauses (b)(i) or (ii), and
(iv) the amount of any increase during such period in
reserves, working capital accounts or other cash or similar balances
that the General Partner determines is necessary or appropriate to
meet the needs of the Partnership in its sole and absolute discretion.
Notwithstanding the foregoing, Available Cash shall not include any cash
received or reductions in reserves, or take into account any disbursements made
or reserves established, after commencement of the dissolution and liquidation
of the Partnership.
"BUSINESS DAY" means any day except a Saturday, Sunday or other day on
which commercial banks in Los Angeles, California are authorized or required by
law to close.
"CAPITAL ACCOUNT" means the Capital Account maintained for a Partner
pursuant to Section 4.4.
2
<PAGE>
"CERTIFICATE" means the Certificate of Limited Partnership relating to
the Partnership filed in the office of the Secretary of State of the State of
California, as amended from time to time in accordance with the terms of this
Agreement and the Act.
"CODE" means the Internal Revenue Code of 1986, as amended. Any
reference in this Agreement to a specific section or sections of the Code shall
be deemed to include a reference to any corresponding provision of future law.
"COMMON SHARES" means the shares of Common Stock, $.10 par value per
share, of the General Partner.
"EVENT OF DISSOLUTION" has the meaning set forth in Section 13.1.
"GENERAL PARTNER" means American Office Park Properties, Inc., a
California corporation, or its successors as a general partner of the
Partnership.
"GENERAL PARTNERSHIP INTEREST" means a Partnership Interest held by a
General Partner with respect to its interest as a general partner of the
Partnership. For purposes of allocations and distributions, but not for voting
purposes, a General Partnership Interest may be expressed as a number of
Partnership Units.
"IRS" means the Internal Revenue Service of the United States.
"INCAPACITY" or "INCAPACITATED" means:
(a) as to any Partner who is a natural person death or total
physical disability, as reasonably determined by the General Partner or by
an entry by a court of competent jurisdiction adjudicating such Partner as
incompetent to manage his or her Person or estate,
(b) as to any corporation that is a Partner, the filing of a
certificate of dissolution,
(c) as to any partnership or limited liability company that is a
Partner, the dissolution and commencement of winding up of the partnership
or limited liability company,
(d) as to any estate that is a Partner, the distribution by the
fiduciary of the estate's entire interest in the Partnership,
(e) as to any trustee of a trust that is a Partner, the
termination of the trust (but not the substitution of a new trustee) or
(f) as to any Partner, the bankruptcy of such Partner. For
purposes of this definition, bankruptcy of a Partner shall be deemed to
have occurred when
(i) the Partner commences a voluntary proceeding seeking
liquidation, reorganization or other relief under any bankruptcy,
insolvency or similar law now or later in effect,
(ii) the Partner executes and delivers a general assignment
for the benefit of the Partner's creditors,
3
<PAGE>
(iii) the Partner files an answer or other pleading
admitting or failing to contest the material allegations of a petition
filed against the Partner in any voluntary or involuntary, proceeding
under any bankruptcy, or similar law now or later in effect,
(iv) the Partner seeks, consents to or acquiesces in the
appointment of a trustee, receiver or liquidator for the Partner or
for all or any substantial part of the Partner's properties,
(v) any involuntary proceeding seeking liquidation,
reorganization or other relief under any bankruptcy, insolvency or
other similar law now or later in effect has not been dismissed within
60 days after its commencement,
(vi) the appointment of a trustee, receiver or liquidator
that has not been vacated or stayed within 90 days of such
appointment, or
(vii) an appointment referred to in clause (vi) is not
vacated within 90 days after the expiration of any such stay.
"INDEMNITEE" means:
(a) any Person made a party to a proceeding by reason of his or
her status as (i) a General Partner, (ii) a Limited Partner, or (iii) an
officer of the Partnership or of the General Partner, and
(b) such other Persons (including Affiliates of the General
Partner or the Partnership) as the General Partner may designate from time
to time (whether before or after the event giving rise to potential
liability), in its sole and absolute discretion.
"LIMITED PARTNER" means any Person named as a Limited Partner in
Exhibit A attached to this Agreement, as such Exhibit may be amended from time
to time, or any Substituted Limited Partner or Additional Limited Partner, in
such Person's capacity as a Limited Partner in the Partnership.
"LIMITED PARTNERSHIP INTEREST" means a Partnership Interest of a
Limited Partner (and any Partnership Interest of the General Partner other than
the General Partnership Interest) in the Partnership representing a fractional
part of the Partnership Interests of all Limited Partners.
"LIQUIDATOR" has the meaning set forth in Section 13.2.
"NEW SECURITIES" has the meaning set forth in Section 4.2(c).
"NOTICE OF REDEMPTION" means the Notice of Redemption substantially in
the form of Exhibit B to this Agreement.
"OPTION PLANS" means the option plans for Common Shares or Units, as
the case may be, restricted share plans or employee benefit plans established by
the General Partner or the Partnership.
4
<PAGE>
"PARTNER" means a General Partner or a Limited Partner, and "Partners"
means the General Partner and the Limited Partners.
"PARTNERSHIP" means the limited partnership formed under the Act and
pursuant to this Agreement, and any successor to that limited partnership.
"PARTNERSHIP INTEREST" means an ownership interest in the Partnership
and includes any and all benefits to which the holder of such a Partnership
Interest may be entitled as provided in this Agreement, together with all
obligations of such Person to comply with the terms and provisions of this
Agreement. A Partnership Interest may be expressed as a number of Partnership
Units.
"PARTNERSHIP RECORD DATE" means the record date established by the
General Partner either (a) for the distribution of Available Cash pursuant to
Section 5.1, which shall be the same as the record date established by the
General Partner for a distribution to its shareholders of some or all of its
portion of such distribution, or (b) for determining the Partners entitled to
vote on or consent to any proposed action for which the consent or approval of
the Partners is sought.
"PARTNERSHIP UNIT" or "UNIT" means a fractional, undivided share of
the Partnership Interests of all Partners issued pursuant to Sections 4.1 and
4.2, in such number as set forth on Exhibit A, as such Exhibit may be amended
from time to time, and as such numbers may be adjusted as a result of changes in
the Unit Adjustment Factor. The ownership of Partnership Units may be evidenced
by a non-transferable, non-negotiable certificate for Units substantially in the
form attached as Exhibit C.
"PARTNERSHIP YEAR" means the fiscal year of the Partnership, which
shall be the calendar year.
"PERCENTAGE INTEREST" means, as to a Partner, its interest in the
Partnership as determined by dividing the Partnership Units owned by such
Partner by the total number of Partnership Units then outstanding and as
specified in the attached Exhibit A, as such Exhibit may be amended from time to
time.
"PERSON" means an individual, corporation, partnership, limited
liability company, association, trust, estate or other entity or organization.
"PREFERRED SHARES" shall mean the shares of Non-Voting Preferred
Stock, $.10 par value per share, of the General Partner.
"PROFIT" and "LOSS" have the meaning set forth in Section 6.1(f).
"REDEEMING PARTNER" has the meaning set forth in Section 8.6(a).
"REDEMPTION AMOUNT" means an amount of cash per Partnership Unit equal
to the Value on the Valuation Date of the Common Shares that the Redeeming
Partner being redeemed would have been entitled to receive if the General
Partner were to assume the Partnership's obligation to redeem Partnership Units
of such Redeeming Partner pursuant to Section 8.6(d) by issuing Common Shares.
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"REDEMPTION RIGHT" has the meaning set forth in Section 8.6(a).
"REGULATIONS" means the Income Tax Regulations promulgated under the
Code, as such regulations may be amended from time to time (including
corresponding provisions of succeeding regulations).
"REIT" means a real estate investment trust under Section 856 of the
Code.
"SECURITIES ACT" means the Securities Act of 1933, as the same shall
be amended from time to time.
"SHARES" means any Common Shares issued to a Limited Partner upon
conversion of such Limited Partner's Units pursuant to Section 8.6(d).
"SHARES AMOUNT" means a number of Common Shares equal to the number of
Partnership Units (as appropriately adjusted pursuant to changes in the Unit
Adjustment Factor) offered for redemption by a Redeeming Partner; provided that,
if the General Partner issues to all holders of Common Shares rights, options,
warrants or convertible or exchangeable securities entitling such holders to
subscribe for or purchase Shares or any other securities or property
(collectively, the "rights"), then the Shares Amount shall also include such
rights that a holder of that number of Shares would be entitled to receive.
"SPECIFIED REDEMPTION DATE" means the tenth Business Day after receipt
by the General Partner of a Notice of Redemption.
"SUBSIDIARY" means, with respect to any Person, any corporation or
other entity of which a majority of (a) the voting power of the voting equity
securities or (b) the outstanding equity interests is owned, directly or
indirectly, by such Person.
"SUBSTITUTED LIMITED PARTNER" means a Person who is admitted as a
Limited Partner to the Partnership pursuant to Section 11.4.
"UNIT ADJUSTMENT FACTOR" means initially 1.0 provided that in the
event that the General Partner
(a) declares or pays a dividend on its outstanding
Common Shares in Common Shares or makes a distribution to all holders
of its outstanding Common Shares in Common Shares,
(b) subdivides its outstanding Common Shares or
(c) combines its outstanding Common Shares into a smaller number
of Common Shares,
the Unit Adjustment Factor shall be adjusted to be a fraction, the numerator of
which shall be the number of Common Shares issued and outstanding on the record
date for such dividend, distribution, subdivision or combination (assuming for
such purposes that such dividend, distribution, subdivision or combination has
occurred as of such time), and the denominator of which shall be the actual
number of Common Shares (determined without the above assumption) issued and
outstanding on the record date for such dividend, distribution, subdivision or
combination. If another entity shall become the General Partner (the "Successor
Entity"), the Unit Adjustment Factor shall be adjusted to be a fraction, the
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numerator of which is the value of one share of the predecessor General Partner,
determined as of the date when the Successor Entity becomes the General Partner,
and the denominator of which is the value of one share of the Successor Entity,
determined as of that same date. The Board of Directors of the General Partner
shall determine when an adjustment to the Unit Adjustment Factor is necessary.
The Board's determination as to whether an adjustment is necessary and the
amount of such adjustment shall be conclusive absent manifest error. Any
adjustment to the Unit Adjustment Factor shall become effective immediately
after the effective date of such event retroactive to the record date, if any,
for such event (provided, however, if a Notice of Redemption is given prior to
such a record date but the Specified Redemption Date is after the record date,
then the change in the Unit Adjustment Factor with respect to that Redeeming
Partner shall be retroactive to the date of the Notice of Redemption). In the
event of any change in the Unit Adjustment Factor, the number of Partnership
Units held by each Partner shall be proportionately adjusted by multiplying the
number of Partnership Units held by such Partner immediately prior to the change
in the Unit Adjustment Factor by the new Unit Adjustment Factor; the intent of
this provision is for one Partnership Unit to remain exchangeable for one Common
Share without dilution.
"VALUATION DATE" means the date of receipt by the General Partner of a
Notice of Redemption or, if such date is not a Business Day, the first
subsequent Business Day.
"VALUE" means, with respect to a Common Share, the average of the
daily market price for the ten (10) consecutive trading days immediately
preceding the Valuation Date. The market price for each such trading day shall
be:
(a) if the Common Shares are listed or admitted to trading on any
securities exchange or the Nasdaq National Market, the closing price,
regular way, on such day, or if no such sale takes place on such day, the
average of the closing bid and asked prices on such day;
(b) if the Common Shares are not listed or admitted to trading on
any securities exchange or the Nasdaq National Market, th0e last reported
sale price on such day or, if no sale takes place on such day, the average
of the closing bid and asked prices on such day, as reported by a reliable
quotation source designated by the General Partner; or
(c) if the Common Shares are not listed or admitted to trading on
any securities exchange or the Nasdaq National Market and no such last
reported sale price or closing bid and asked prices are available, the
average of the reported high bid and low asked prices on such day, as
reported by a reliable quotation source designated by the General Partner,
or if there shall be no bid and asked prices on such day, the average of
the high bid and low asked prices, as so reported, on the most recent day
(not more than 10 days prior to the date in question) for which prices have
been so reported; provided that if there are no bid and asked prices
reported during the 10 days prior to the date in question, the Value of the
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Common Shares shall be determined by the General Partner acting in good
faith on the basis of such quotations and other information as it
considers, in its reasonable judgment, appropriate.
If a holder of Common Shares would be entitled to receive rights to purchase
Common Shares ("Common Share Rights") issued to all holders of Common Shares,
then the Value of such Common Share Rights shall be determined by the General
Partner acting in good faith on the basis of such quotations and other
information as it considers, in its reasonable judgment, appropriate.
2. ORGANIZATIONAL MATTERS
2.1 ORGANIZATION AND FORMATION: APPLICATION OF ACT.
(a) ORGANIZATION AND FORMATION OF PARTNERSHIP. The General Partner and
the Limited Partners ratify the formation and continuation of the Partnership as
a limited partnership according to all of the terms and provisions of this
Agreement and otherwise in accordance with the Act. The General Partner is the
sole general partner and the Limited Partners are the sole limited partners of
the Partnership.
(b) APPLICATION OF ACT. The Partnership is a limited partnership
subject to the provisions of the Act and the terms and conditions set forth in
this Agreement. Except as expressly provided in this Agreement to the contrary,
the rights and obligations of the Partners and the administration and
termination of the Partnership shall be governed by the Act. No Partner has any
interest in any Partnership Property, and the Partnership Interest of each
Partner shall be personal property for all purposes.
2.2 NAME. The name of the Partnership is American Office Park Properties,
L.P. The Partnership's business may be conducted under any other name or names
deemed advisable by the General Partner, including the name of the General
Partner or any Affiliate of the General Partner. The words "Limited
Partnership," "L.P.," "Ltd." or similar words or letters shall be included in
the Partnership's name where necessary for the purposes of complying with the
laws of any jurisdiction that so requires. The General Partner in its sole and
absolute discretion may change the name of the Partnership at any time and from
time to time and shall notify the Limited Partners of such change in the next
regular communication to the Limited Partners; provided that the name of the
Partnership may not be changed to include the name of any Limited Partner
without the written consent of that Limited Partner.
2.3 PRINCIPAL OFFICE. The address of the principal office of the
Partnership shall be located at 701 Western Avenue, Glendale, California 91201,
or such other place as the General Partner may from time to time designate by
notice to the Limited Partners. The Partnership may maintain offices at such
other place or places within or outside the State of California as the General
Partner deems advisable.
2.4 TERM. The term of the Partnership commenced as of January 1, 1997, and
shall continue until December 31, 2096, unless it is dissolved sooner pursuant
to the provisions of Article 13 or as otherwise provided by law.
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3. PURPOSE
3.1 PURPOSE AND BUSINESS. The purpose and nature of the business to be
conducted by the Partnership is:
(a) to conduct any business that may be lawfully conducted by a
limited partnership organized pursuant to the Act,
(b) to enter into any partnership, joint venture or other similar
arrangement to engage in any of the foregoing or the ownership of
interests in any entity engaged in (directly or indirectly) any of the
foregoing and
(c) to do anything necessary or incidental to the foregoing;
provided, however, that each of the foregoing clauses (a), (b) and (c) shall be
limited and conducted in such a manner as to permit the General Partner at all
times to be classified as a REIT, unless the General Partner provides notice to
the Partnership that it intends to cease or has ceased to qualify as a REIT. The
Partners acknowledge that the status of the General Partner as a REIT inures to
the benefit of all Partners and not solely to the benefit of the General Partner
and its affiliates.
3.2 POWERS. The Partnership is empowered to do any and all acts and things
necessary, appropriate, proper, advisable, incidental to or convenient for the
furtherance and accomplishment of the purposes and business described in this
Agreement and for the protection and benefit of the Partnership; provided that
the Partnership shall not take, or refrain from taking, any action that, in the
judgment of the General Partner, in its sole and absolute discretion, (a) could
adversely affect the ability of the General Partner to continue to qualify as a
REIT, (b) could subject the General Partner to any additional taxes under
Section 857 or Section 4981 of the Code or (c) could violate any law or
regulation of any governmental body or agency having jurisdiction over the
General Partner or its securities, unless such action (or inaction) shall have
been specifically consented to by the General Partner in writing.
3.3 PARTNERSHIP ONLY FOR PURPOSES SPECIFIED. The Partnership shall be a
partnership only for the purposes specified in Section 3.1, and this Agreement
shall not be deemed to create a partnership among the Partners with respect to
any activities whatsoever other than the activities within the purposes of the
Partnership as specified in Section 3.1. Except as otherwise provided in this
Agreement, no Partner shall have any authority to act for, bind, commit or
assume any obligation or responsibility on behalf of the Partnership, its
properties or any other Partner. No Partner, in its capacity as a Partner under
this Agreement, shall be responsible or liable for any indebtedness or
obligation of another Partner, nor shall the Partnership be responsible or
liable for any indebtedness or obligation of any Partner, incurred either before
or after the execution and delivery of this Agreement by such Partner, except as
to those responsibilities, liabilities, indebtedness or obligations incurred
pursuant to and as limited by the terms of this Agreement and the Act.
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3.4 REPRESENTATIONS AND WARRANTIES BY THE PARTIES.
(a) Each Partner that is an individual represents and warrants to each
other Partner that:
(i) the consummation of the transactions contemplated by this
Agreement to be performed by such Partner will not result in a breach
or violation of or a default under, any agreement by which such
Partner or any of such Partner's property is or are bound, or any
statute, regulation, order or other law to which such Partner is
subject, and
(ii) such Partner shall inform the Partnership whether such
Partner is a "foreign person" within the meaning of Section 1445(f) of
the Code.
(b) Each Partner that is not an individual represents and warrants to
each other Partner that:
(i) all transactions contemplated by this Agreement to be
performed by it have been duly authorized by all necessary action,
including without limitation, that of its general partner(s),
committee(s), trustee(s), beneficiaries, directors and/or
shareholder(s), as the case may be, as required,
(ii) the consummation of such transactions shall not result in a
breach or violation of, or a default under, its partnership agreement,
trust agreement, charter or by-laws, as the case may be, any agreement
by which such Partner or any of such Partner's properties or any of
its partners, beneficiaries, trustees or shareholders, as the case may
be, is or are bound, or any statute, regulation, order or other law to
which such Partner or any of its partners, trustees, beneficiaries or
shareholders, as the case may be, is or are subject and
(iii) such Partner shall inform the Partnership whether such
Partner is a "foreign person" within the meaning of Section 1445(f) of
the Code.
(c) Each Limited Partner further represents, warrants and agrees that,
it does not and will not, without the prior written consent of the General
Partner, actually own or constructively own (under the attribution rules of Code
Section 318, as modified by Code Section 856(d)(5)) stock of any corporation, or
an interest in the assets and profits of any other entity, from which the
General Partner or the Partnership, directly or indirectly, derives material
rental income from real property that would be excluded from "rents from real
property" pursuant to Code Section 856(d)(2)(B).
(d) Upon the request of the General Partner, each Limited Partner will
disclose to the General Partner the amount of Common Shares or other shares of
capital stock of the General Partner that it actually owns or constructively
owns and shall further disclose to the General Partner any ownership in the
stock, assets or net profits of any corporation or other entity from which the
General Partner or the Partnership, directly or indirectly, derives material
rental income from real property.
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(e) Each Partner represents and warrants that it is an "accredited
investor" as defined in Rule 501 promulgated under the Securities Act. Each
Partner represents, warrants and agrees that it has acquired and continues to
hold its interest in the Partnership for its own account for investment only and
not for the purpose of, or with a view toward, the resale or distribution of all
or any part of that interest, nor with a view toward selling or otherwise
distributing such interest or any part of that interest at any particular time
or under any predetermined circumstances. Each Partner further represents and
warrants that it is a sophisticated investor, able and accustomed to handling
sophisticated financial matters for itself, particularly real estate
investments, and that it has a sufficiently high net worth that it does not
anticipate a need for the funds it has invested in the Partnership in what it
understands to be a highly speculative and illiquid investment.
(f) The representations and warranties contained in this Section 3.4
shall survive the execution and delivery of this Agreement by each Partner and
the dissolution, liquidation and termination of the Partnership.
(g) Each Partner acknowledges that no representations as to potential
profit, distributions, cash flows, funds from operations or yield, if any, in
respect of the Partnership or the General Partner have been made by any Partner
or any employee or representative or Affiliate of any Partner, and that
projections and any other information, including, without limitation, financial
and descriptive information and documentation, that may have been in any manner
submitted to such Partner shall not constitute any representation or warranty of
any kind or nature, express or implied.
4. CAPITAL CONTRIBUTIONS;
ISSUANCE OF UNITS;
CAPITAL ACCOUNTS
4.1 CAPITAL CONTRIBUTIONS OF THE PARTNERS.
(a) INITIAL CAPITAL CONTRIBUTIONS. At the time of the execution of
this Agreement, the Partners shall make or shall have made the capital
contributions set forth in Exhibit A to this Agreement. The Partners shall own
Partnership Units in the amounts set forth in Exhibit A and shall have a
Percentage Interest in the Partnership as set forth in Exhibit A, which
Percentage Interest shall be adjusted in Exhibit A from time to time by the
General Partner to the extent necessary to reflect accurately redemptions,
conversions, capital contributions, the issuance of additional Partnership
Units, transfers of Partnership Interests permitted under Article 11, or similar
events having an effect on a Partner's Percentage Interest. Sixty-six Thousand,
Eight Hundred and Eighty-five (66,885) Partnership Units held by the General
Partner (representing one percent (1%) of all outstanding Partnership Units as
of the date of the initial capital contributions to the Partnership) shall be
deemed to be the General Partnership Interest.
(b) ADDITIONAL CAPITAL CONTRIBUTIONS.
(1) No Partner shall be assessed or, except as provided for in
Sections 4.1(b)(2) below, and except for any such amounts that a Limited Partner
may be obligated to repay under Section 10.5 (withholding provision), be
required to contribute additional funds or other property to the Partnership.
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Any additional funds or other property required by the Partnership, as
determined by the General Partner in its sole discretion ("Additional Funds"),
may, at the option of the General Partner and without an obligation to do so
(except as provided for in Section 4.1(b)(2)), be contributed by the General
Partner as additional capital contributions. If and as the General Partner or
any other Partner makes additional capital contributions to the Partnership,
each such Partner shall receive additional Partnership Units as provided for in
Section 4.2.
(2) The proceeds of any and all funds raised by or through the
General Partner through the issuance of additional shares of the General Partner
(whether Common Shares or Preferred Shares) shall be contributed to the
Partnership as additional capital contributions, and in such event the General
Partner shall be issued additional Partnership Units pursuant to Section 4.2
below. In any such case, if the proceeds so contributed are less than the gross
proceeds of the issuance (i.e., due to any underwriter's discount or other
expenses incurred in connection with the issuance), the General Partner's
capital contribution shall be deemed to equal the amount of the gross proceeds
(i.e., the net proceeds actually contributed, plus any underwriter's discount or
other expenses incurred, and any such discount or expense shall be deemed to
have been incurred on behalf of the Partnership).
(c) RETURN OF CAPITAL CONTRIBUTIONS. Except as otherwise expressly
provided in this Agreement, the capital contribution of each Limited Partner
will be returned to that Partner only in the manner and to the extent provided
in Article 5 and Article 13, and no Partner may withdraw from the Partnership or
otherwise have any right to demand or receive the return of its capital
contribution to the Partnership (as such), except as specifically provided in
this Agreement. Under circumstances requiring a return of any capital
contribution, no Partner shall have the right to receive property other than
cash, except as specifically provided in this Agreement. No Partner shall be
entitled to interest on any capital contribution or Capital Account
notwithstanding any disproportion between the Partners in their capital
contributions or Capital Accounts. Except as specifically provided in this
Agreement, the General Partner shall not be liable for the return of any portion
of the capital contribution of any Limited Partner, and the return of such
capital contribution shall be made solely from Partnership assets.
(d) LIABILITY OF LIMITED PARTNERS. No Limited Partner shall have any
further personal liability to contribute money to, or in respect of, the
liabilities or the obligations of the Partnership, nor shall any Limited Partner
be personally liable for any obligations of the Partnership, except as otherwise
provided in this Article 4 or in the Act. No Limited Partner shall be required
to make any contributions to the capital of the Partnership other than its
initial capital contribution.
(e) NO OBLIGATIONS FOR DEFICIT CAPITAL ACCOUNTS. If any Partner has a
deficit balance in its Capital Account (after giving effect to all
contributions, distributions and allocations for all taxable years, including
those during any year in which a liquidation occurs), such Partner shall have no
obligation at the time of liquidation or otherwise to make any contribution to
the capital of the Partnership with respect to that deficit, and the deficit
shall not be considered a debt owed to the Partnership or to any other Person
for any purpose.
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4.2 ISSUANCES OF ADDITIONAL PARTNERSHIP INTERESTS.
(a) ISSUANCES IN GENERAL. The General Partner is authorized to
cause the Partnership to issue such additional Partnership Units or other
Partnership Interests for any Partnership purpose at any time or from time to
time, including Units in one or more series of any classes, with such
designations, preferences and relative, participating, optional or other special
rights, powers and duties, including rights, powers and duties senior to other
Partnership Interests, all as shall be determined by the General Partner,
subject to California law, including, without limitation, with respect to (i)
the allocations of items of Partnership income, gain, loss, deduction and credit
to each such class or series of Partnership Interests, (ii) the right of each
such class or series of Partnership Interests to share in Partnership
distributions, and (iii) the rights of each class or series of Partnership
Interests upon dissolution and liquidation of the Partnership, for such
consideration and on such terms and conditions as shall be established by the
General Partner in its sole and absolute discretion, all without the approval of
any Limited Partners except to the extent specifically provided in this
Agreement. The General Partner may also amend the Agreement to provide for the
issuance of Partnership Units the Redemption Right of which will relate to
Preferred Shares on such terms as are determined by the General Partner.
(b) ISSUANCE TO THE GENERAL PARTNER. In the case of the issuance
of additional Partnership Units or other Partnership Interests to the General
Partner: (i) the agreement to issue the additional Partnership Interests must
arise in connection with an issuance of or agreement to issue shares of the
General Partner, which shares have designations, preferences and other rights,
all such that the economic interests are substantially similar to the
designations, preferences and other rights of the additional Partnership
Interests that would be issued to the General Partner in accordance with this
Section 4.2(b), and (ii) the General Partner shall agree to make a capital
contribution to the Partnership in an amount equal to the proceeds raised in
connection with the issuance of such shares of the General Partner. For this
purpose, if the General Partner merges with another entity, assets of the other
entity acquired as a result of the merger shall be treated as acquired by the
General Partner in connection with the "issuance" of the shares held by the
other entities' shareholders in the surviving entity.
(c) ISSUANCE OF ADDITIONAL SHARES. The General Partner is
explicitly authorized to issue additional Common Shares or Preferred Shares of
the General Partner, or rights, options, warrants or convertible or exchangeable
securities containing the right to subscribe for or purchase Common Shares and
Preferred Shares ("New Securities") and in connection with the issuance: (i) the
General Partner shall contribute the proceeds from the issuance of such New
Securities and from the exercise of rights contained in such New Securities to
the Partnership or agree as provided in Section 7.6 at the option of the
Partnership to make such a contribution, and (ii) upon the contribution, the
Partnership shall issue to the General Partner, Partnership Interests or rights,
options, warrants or convertible or exchangeable securities of the Partnership
having designations, preferences and other rights, all such that the economic
interests are substantially similar to those of the New Securities. In
connection with the issuance of Partnership Interests that are substantially
similar to New Securities, the General Partner is authorized to modify or amend
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the distributions or allocations under this Agreement solely to the extent
necessary to give effect to the designations, preferences and other rights
pertaining to such Partnership Interests.
(d) FORFEITURE OF SHARES. If the Partnership or the General
Partner acquires Common Shares as a result of the forfeiture of such Common
Shares under a restricted or similar share plan, then the General Partner shall
cause the Partnership to cancel that number of Partnership Units equal to the
number of Common Shares so acquired, and, if the Partnership acquired such
Common Shares, it shall transfer such Common Shares to the General Partner for
cancellation.
(e) ISSUANCE PURSUANT TO OPTION PLANS.
(1) Upon the exercise of an option to acquire Common Shares
of the General Partner that is granted by the Partnership or the General
Partner, the optionee shall transfer the exercise price to the Partnership, and
the Partnership shall purchase from the General Partner for fair market value at
the time of exercise the number of Common Shares with respect to which options
were exercised and shall transfer the shares to the optionee. The General
Partner shall immediately transfer the proceeds received for the Common Shares
to the Partnership in exchange for a number of Units equal to the number of
Common Shares sold.
(2) The General Partner shall cause the Partnership to issue
Partnership Units of the Partnership upon the exercise by any optionee of an
option to acquire Partnership Units granted by the Partnership pursuant to the
Option Plans in accordance with the terms of the Option Plans. Partnership Units
so issued shall represent Limited Partnership Interests.
4.3 NO PREEMPTIVE RIGHTS. Except to the extent expressly granted by the
General Partner pursuant to a written agreement, no Person shall have any
preemptive, preferential or other similar right with respect to (a) additional
capital contributions or loans to the Partnership, or (b) issuance or sale of
any Partnership Units.
4.4 CAPITAL ACCOUNTS. A separate capital account (a "Capital Account")
shall be established and maintained for each Partner in accordance with
Regulations Section 1.704-1(b)(2)(iv) and the terms of this Agreement. The
General Partner is authorized to revalue the property of the Partnership to its
fair market value (as determined by the General Partner, in its sole discretion,
and taking into account Section 7701(g) of the Code) in accordance with
Regulations Section 1.704-1(b)(2)(iv)(f). When the Partnership's property is
revalued by the General Partner, the Capital Accounts of the Partners shall be
adjusted in accordance with Regulations Section 1.704-1(b)(2)(iv)(f) and (g).
4.5 GENERAL PARTNER LOANS OR FUNDING. The General Partner may, or to the
extent the General Partner enters into a "Funding Debt" (i.e., any debt incurred
by or on behalf of the General Partner for the purpose of providing funds to the
Partnership), the General Partner shall, lend Additional Funds to the
Partnership or contribute the funds to the Partnership for a Partnership
Interest paying a preferred return (a "General Partner Funding"). If the General
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Partner enters into such a Funding Debt, the General Partner Funding will
consist of the proceeds from such Funding Debt and if the funds are loaned to
the Partnership, the loan will be on the same terms and conditions, including
interest rate, repayment schedule and costs and expenses, incurred in connection
with such Funding Debt, and in the case of a contribution to the Partnership,
the preferred partnership interest will substantially reflect the terms of the
Funding Debt. Otherwise, any General Partner Funding made pursuant to this
Section 4.5 shall be on terms and conditions no less favorable to the
Partnership than would be available to the Partnership from any third party. If
a Funding Debt or debt issued by the Partnership is comprised, in whole or in
part, of debt convertible into or exchangeable for Common Shares or other equity
interests in the General Partner and any portion of such debt is converted into
or exchanged for Common Shares, the General Partner shall have the right, but
not the obligation, to convert the equivalent amount of the General Partner
Funding into additional Partnership Interests.
4.6 LOANS BY THIRD PARTIES. The Partnership may incur debt, or enter into
other similar credit, guarantee, financing or refinancing arrangements for any
purpose (including, without limitation, in connection with any further
acquisition of properties) from any Person that is not the General Partner upon
such terms as the General Partner determines appropriate; provided that, the
Partnership shall not incur any debt under which a breach, violation or default
would be deemed to occur by virtue of the transfer of any Limited Partnership
Interest.
5. DISTRIBUTIONS
5.1 REQUIREMENT AND CHARACTERIZATION OF DISTRIBUTIONS. The General Partner
shall, commencing in 1998, distribute at least quarterly an amount equal to all
Available Cash generated by the Partnership during such quarter or shorter
period to the Partners who are Partners on the Partnership Record Date with
respect to such quarter or shorter period (i) first, with respect to any class
of Partnership Interests issued pursuant to Section 4.2 that is entitled to a
preference over other Partnership Units on the distribution of Available Cash
(and among such classes in order of the preferences designated between those
classes, and pro rata within each such class), and (ii) then, in accordance with
their respective Percentage Interests on such Partnership Record Date; provided
that in no event may a Redeeming Partner receive a distribution of Available
Cash with respect to a Unit if such Partner is entitled to receive a
distribution with respect to a Common Share for which such Unit has been
redeemed or exchanged. It will be the policy of the Partnership, commencing in
1998, to make distributions per Unit that are equal to the per share
distributions made by the General Partner with respect to its Common Shares, and
in any case the per Unit and per share distributions will be equal during the
Partnership Years 1998, 1999, and 2000. The General Partner shall make such
efforts, as it determines in its sole and absolute discretion, to cause the
Partnership to distribute its operating cash flow in a manner that would ensure
that such distributions are treated by the Limited Partners as "operating cash
flow distributions" within the meaning of Regulations Section 1.707-4(b)(2).
5.2 AMOUNTS WITHHELD. All amounts withheld pursuant to the Code or any
provisions of any state, local or foreign tax law and Section 10.5 with respect
to any allocation, payment or distribution to the General Partner or any Limited
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Partners or Assignees shall be treated as amounts distributed to the General
Partner or such Limited Partners or Assignees pursuant to Section 5.1 for all
purposes under this Agreement.
5.3 DISTRIBUTIONS UPON LIQUIDATION. Proceeds from any sale or other
disposition of all or substantially all of the assets of the Partnership or a
related series of transactions that, taken together, results in the sale or
other disposition of all or substantially all of the assets of the Partnership
shall be distributed to the Partners in accordance with Section 13.2.
5.4 DISTRIBUTIONS IN KIND. No Partner has any right to demand and receive
property other than cash. The General Partner may determine, in its sole and
absolute discretion, to make a distribution in kind to the Partners of
Partnership assets, and such assets shall be distributed in such a fashion as to
ensure that the fair market value is distributed and allocated in accordance
with Articles 5 and 6.
5.5 REIT DISTRIBUTION REQUIREMENTS. Notwithstanding anything to the
contrary in this Agreement, the General Partner may cause the Partnership to
distribute amounts sufficient to enable the General Partner to pay shareholder
dividends that will allow the General Partner to (i) meet its distribution
requirement for qualification as a REIT as set forth in Section 857(a)(1)of the
Code and (ii) avoid any federal income or excise tax liability imposed by the
Code.
6. ALLOCATIONS
6.1 ALLOCATION OF PROFIT AND LOSS.
(a) GENERAL. Except as otherwise set forth in this Agreement, Profit
and Loss and items of income, gain, expense, or loss of the Partnership for each
fiscal year of the Partnership shall be allocated among the Partners in
accordance with their respective Percentage Interests. The provisions of this
Section 6.1 shall be amended appropriately in the event that the General Partner
causes the Partnership to issue Units with different preferences or redemption
rights.
(b) NONRECOURSE DEDUCTIONS AND MINIMUM GAIN CHARGEBACK.
Notwithstanding any provision to the contrary:
(i) any expense of the Partnership that is a "nonrecourse
deduction" within the meaning of Regulations Section 1.704-2(b)(1)
shall be allocated in accordance with the Partners' respective
Percentage Interests,
(ii) any expense of the Partnership that is a "partner
nonrecourse deduction" within the meaning of Regulations Section
1.704-2(i)(2) shall be allocated in accordance with Regulations
Section 1.704-2(i)(l),
(iii) if there is a net decrease in "partnership minimum gain"
within the meaning of Regulations Section 1.704-2(g)(1) that would
subject a Partner to a "minimum gain chargeback" within the meaning of
Regulations Section 1.704-2(f) for any Partnership taxable year, items
of gain and income shall be allocated among the Partners in accordance
with (to the minimum extent allowable) Regulations Section 1.704-2(f)
and the ordering rules contained in Regulations Section 1.704-2(j),
and
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(iv) if there is a net decrease within the meaning of Regulations
Section 1.704-2(i)(4) in "partner nonrecourse debt minimum gain"
within the meaning of Regulations Section 1.704-2(i)(5) that would
subject a Partner to a minimum gain chargeback for any Partnership
taxable year, items of gain and income shall be allocated among the
Partners in accordance with (to the minimum extent allowable)
Regulations Section 1.704-2(i)(4) and the ordering rules contained in
Regulations Section 1.704-2(j).
A Partner's "interest in partnership profits" for purposes of determining its
share of the nonrecourse liabilities of the Partnership within the meaning of
Regulations Section 1.752-3(a)(3) shall be such Partner's Percentage Interest.
(c) QUALIFIED INCOME OFFSET. If a Partner receives in any taxable year
an adjustment, allocation, or distribution described in subparagraphs (4),(5) or
(6) of Regulations Section 1.704(b)(2)(ii)(d) that causes or increases a
negative balance in such Partner's Capital Account that exceeds the sum of such
Partner's share of "partnership minimum gain" and "partner nonrecourse debt
minimum gain," as determined in accordance with Regulations Sections 1.704-2(g)
and 1.704-2(i), such Partner shall be allocated specially for such taxable year
(and, if necessary, later taxable years) items of income and gain in an amount
and manner sufficient to eliminate such negative Capital Account balance as
quickly as possible as provided in Regulations Section 1.704-1(b)(2)(ii)(d).
(d) CAPITAL ACCOUNT DEFICITS. Loss shall not be allocated to a Partner
to the extent that such allocation would cause (or increase) a deficit in such
Partner's Capital Account (after reduction to reflect the items described in
Regulations Section 1.704-1(b)(2)(ii)(d)(4), (5) and (6)) to exceed the sum of
such Partner's shares of "partnership minimum gain" (Regulations Section
1.704-2(g)(1)) and "partner nonrecourse debt minimum gain" (Regulations Section
1.704-2(i)(5)). Any Loss in excess of that limitation shall be allocated to the
General Partner.
(e) ALLOCATIONS UPON CHANGES IN PARTNERSHIP INTERESTS. If a Partner
transfers any part or all of its Partnership Interest or upon changes in the
outstanding Partnership Interests (such as the issuance or redemption of
Partnership Interests), the distributive shares of the various items of Profit
and Loss and other items attributable to those Partnership Interests allocable
among the Partners during such fiscal year of the Partnership shall be allocated
between the transferor and the transferee Partner or between the persons treated
a Partners prior to such event and those treated as Partners after the event as
the General Partner deems appropriate to take into account their varying
interests during that period (which may include interim closings of the books,
prorations of items, using daily, weekly, monthly, or quarterly proration
periods, etc.). The General Partner, in its sole discretion, shall determine the
method or methods to be used to allocate the distributive shares of items
between the Partners. In addition, allocations of items among the Partners may
be changed by agreement between the General Partner and the affected Limited
Partner or Limited Partners, without amendment of this Agreement or consent of
the other Limited Partners.
(f) DEFINITION OF PROFIT AND LOSS. "Profit" and "Loss" and any items
of income, gain, expense, or loss referred to in this Agreement shall be
determined by the General Partner in accordance with the Partnership's "book"
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income computed under federal income tax accounting principles taking into
account Regulations Section 1.704-1(b)(2)(iv) and the effect of any revaluation
of Partnership property in accordance with Regulations Section
1.704-1(b)(2)(iv)(f), except that Profit and Loss shall not include items of
income, gain, expense and loss that are specifically allocated, such as pursuant
to Section 6.1(b) or 6.1(c).
(g) TAX ALLOCATIONS. All allocations of income, Profit, gain, Loss,
and expense (and all components of those items) for federal income tax purposes
shall be allocated among the Partners in the same manner as such allocations of
"book" income, gain, loss or deduction are allocated pursuant to this Section
6.1, except as otherwise required by Section 704(c) of the Code and Regulations
Section 1.704-1(b)(4). The General Partner shall have the authority to elect the
method to be used by the Partnership for allocating items of income, gain, and
expense as required by Section 704(c) of the Code and such election shall be
binding on all Partners.
(h) CURATIVE ALLOCATION. The allocations set forth in Section 6.1(b),
(c) and (d) (the "Regulatory Allocations") are intended to comply with certain
regulatory requirements, including the requirements of Regulations Section
1.704-1(b) and 1.704-2. Notwithstanding the provisions of Section 6.1(b),(c) and
(d), the Regulatory Allocations shall be taken into account in allocating other
items of income, gain, loss and deduction among the Partners so that, to the
extent possible, the net amount of such allocations of other items and the
Regulatory Allocations to each Partner shall be equal to the net amount that
would have been allocated to each such Partner if the Regulatory Allocations had
not occurred. In applying this Section 6.1(h), a Partner's share of partnership
minimum gain and partner nonrecourse debt minimum gain (within the meaning of
Regulations Sections 1.704-2(g) and 1.704-2(i), respectively) at any point in
time shall be treated as an amount of income or gain that has already been
allocated to the Partner.
6.2 SUBSTANTIAL ECONOMIC EFFECT. It is the intent of the Partners that
the allocations of Profit and Loss and items of income, gain, expense and loss
under the Agreement have substantial economic effect (or be consistent with the
Partners' interests in the Partnership in the case of the allocation of losses
attributable to nonrecourse debt) within the meaning of Section 704(b) of the
Code as interpreted by the related Regulations. Article 6 and other relevant
provisions of this Agreement shall be interpreted in a manner consistent with
that intent.
7. MANAGEMENT AND OPERATIONS OF BUSINESS
7.1 MANAGEMENT.
(a) POWERS OF GENERAL PARTNER. Except as otherwise expressly
provided in this Agreement, all management powers over the business and affairs
of the Partnership are exclusively vested in the General Partner, and no Limited
Partner shall have any right to participate in or exercise control or management
power over the business and affairs of the Partnership. Notwithstanding anything
to the contrary in this Agreement, the General Partner may not be removed by the
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Limited Partners. In addition to the powers that are granted to the General
Partner under any other provision of this Agreement, the General Partner shall
have full power and authority to do all things deemed necessary or desirable by
it to conduct the business of the Partnership, to exercise all powers set forth
in Section 3.2 and to effectuate the purposes set forth in Section 3.1,
including, without limitation:
(1) the making of any expenditures, the lending or borrowing of
money (including, without limitation, making prepayments on loans and
borrowing money to permit the Partnership to make distributions to its
Partners in such amounts as will permit the General Partner (so long
as the General Partner qualifies as a REIT) to avoid the payment of
any federal income tax (including, for this purpose, any excise tax
pursuant to Section 4981 of the Code) and to make distributions to its
shareholders sufficient to permit the General Partner to maintain REIT
status), the assumption or guarantee of, or other contracting for,
indebtedness and other liabilities, the issuance of evidences of
indebtedness (including the securing of same by mortgage, deed of
trust or other lien or encumbrance on the Partnership's assets) and
the incurring of any obligations it deems necessary for the conduct of
the activities of the Partnership; provided, that all such borrowing,
incurrence of debt and prepayments shall be subject to the limitations
set forth in Sections 4.5 and 4.6;
(2) the making of tax, regulatory and other filings, or rendering
of periodic or other reports to governmental or other agencies having
jurisdiction over the business or assets of the Partnership;
(3) the acquisition, disposition, sale, conveyance, mortgage,
pledge, encumbrance, hypothecation, contribution or exchange of any
assets of the Partnership or the merger or other combination of the
Partnership with or into another entity on such terms as the General
Partner deems proper; provided, however, that: (i) no sale, exchange,
disposition or other transfer of any property of the Partnership
contributed on January 2, 1997 shall occur prior to December 31, 1998
without the prior written consent of the General Partner; (ii) the
sale of all or substantially all of the assets of the Partnership and
a Business Combination (as defined in Section 8.7(a)) shall require
the consent set forth in Section 8.7(b); and (iii) certain sales of
any Designated Property (as defined in Section 8.8) may require the
consent of specified persons as set forth in Section 8.8.
(4) the use of the assets of the Partnership (including, without
limitation, cash on hand) for any purpose consistent with the terms of
this Agreement and on any terms it sees fit, including, without
limitation, the financing of the conduct of the operations of the
General Partner, the Partnership or any of the Partnership's
Subsidiaries, the lending of funds to other Persons (including the
Partnership's Subsidiaries) and the repayment of obligations of the
Partnership and its Subsidiaries and any other Person in which it has
an equity investment and the making of capital contributions to its
Subsidiaries, the holding of any real, personal and mixed property of
the Partnership in the name of the Partnership or in the name of a
nominee or trustee (subject to Section 7.11), the creation, by grant
or otherwise, of easements or servitudes, and the performance of any
and all acts necessary or appropriate to the operation of the
Partnership assets including, without limitation, applications for
rezoning, objections to rezoning, constructing, altering, improving,
repairing, renovating, rehabilitating, razing, demolishing or
condemning any improvements or property of the Partnership;
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(5) the negotiation, execution, and performance of any contracts,
conveyances or other instruments (including with Affiliates of the
Partnership to the extent provided in Section 7.7) that the General
Partner considers useful or necessary to the conduct of the
Partnership's operations or the implementation of the General
Partner's powers under this Agreement, including, without limitation,
the execution and delivery of leases on behalf of or in the name of
the Partnership (including the lease of Partnership property for any
purpose and without limit as to the term of the lease, whether or not
such term (including renewal terms) shall extend beyond the date of
termination of the Partnership and whether or not the portion so
leased is to be occupied by the lessee or, in turn, subleased in whole
or in part to others);
(6) the opening and closing of bank accounts, the investment of
Partnership funds in securities, certificates of deposit and other
instruments, and the distribution of Partnership cash or other
Partnership assets in accordance with this Agreement;
(7) the establishment of one or more divisions of the
Partnership, the selection and dismissal of employees of the
Partnership or the General Partner (including, without limitation,
employees having titles such as "president," "vice president,"
"secretary" and "treasurer"), and the engagement and dismissal of
agents, outside attorneys, accountants, engineers, appraisers,
consultants, contractors and other professionals on behalf of the
General Partner or the Partnership and the determination of their
compensation and other terms of employment or hiring;
(8) the maintenance of such insurance for the benefit of the
Partnership and the Partners as it deems necessary or appropriate;
(9) the formation of, or acquisition of an interest in, and the
contribution of property to, any further limited or general
partnerships, joint ventures, limited liability companies or other
relationships that it deems desirable (including, without limitation,
the acquisition of interests in, and the contribution of property to,
its Subsidiaries and any other Person in which it has an equity
investment from time to time);
(10) the control of any matters affecting the rights and
obligations of the Partnership, including the conduct of litigation
and the incurring of legal expense and the settlement of claims and
litigation, and the indemnification of any Person against liabilities
and contingencies to the extent permitted by law;
(11) the undertaking of any action in connection with the
Partnership's direct or indirect investment in its Subsidiaries or any
other Person (including, without limitation, the contribution or loan
of funds by the Partnership to such Persons);
(12) the determination of the fair market value of any
Partnership property distributed in kind using such reasonable method
of valuation as it may adopt;
(13) the issuance of Partnership Units to any Subsidiary that may
be necessary for such Subsidiary to satisfy such Subsidiary's
obligations under the Option Plans, in exchange for the transfer to
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the Partnership by such Subsidiary of the price per Partnership Unit
required by the Option Plans to be paid by Subsidiaries;
(14) the management, operation, leasing, landscaping, repair,
alteration, demolition or improvement of any real property or
improvements owed by the Partnership or any Subsidiary of the
Partnership;
(15) the exercise, directly or indirectly, through any
attorney-in-fact acting under a general or limited power of attorney,
of any right, including the right to vote, appurtenant to any asset or
investment held by the Partnership;
(16) the exercise of any of the powers of the General Partner
enumerated in this Agreement on behalf of or in connection with any
Subsidiary of the Partnership or any other Person in which the
Partnership has a direct or indirect interest, or jointly with any
such Subsidiary or other Person;
(17) the enforcement of any rights against any Partner pursuant
to representations, warranties, covenants and indemnities relating to
such Partner's contribution of property or assets to the Partnership;
(18) the exercise of any of the powers of the General Partner
enumerated in this Agreement on behalf of any Person in which the
Partnership does not have an interest pursuant to contractual or other
arrangements with such Person; and
(19) the making, execution and delivery of any and all deeds,
leases, notes, deeds to secure debt, mortgages, deeds of trust,
security agreements, conveyances, contracts, guarantees, warranties,
indemnities, waivers, releases or legal instruments or agreements in
writing necessary or appropriate in the judgment of the General
Partner for the accomplishment of any of the powers of the General
Partner enumerated in this Agreement.
(b) NO APPROVAL REQUIRED FOR ABOVE POWERS. Each of the Limited
Partners agrees that the General Partner is authorized to execute, deliver and
perform the above-mentioned agreements and transactions on behalf of the
Partnership without any further act, approval or vote of the Partners,
notwithstanding any other provision of this Agreement (except as otherwise
specifically provided in paragraph (a)(3) of Section 7.1), the Act or any
applicable law, rule or regulation. The execution, delivery or performance by
the General Partner or the Partnership of any agreement authorized or permitted
under this Agreement shall not constitute a breach by the General Partner of any
duty that the General Partner may owe the Partnership or the Limited Partners or
any other Persons under this Agreement or of any duty stated or implied by law
or equity.
(c) INSURANCE. The General Partner may cause the Partnership to obtain
and maintain casualty, liability and other insurance on the properties of the
Partnership and liability insurance for the Indemnities under this Agreement in
such amounts as the General Partner, in its sole and absolute discretion, deems
appropriate and reasonable from time to time.
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(d) WORKING CAPITAL RESERVES. The General Partner may cause the
Partnership to establish and maintain working capital reserves in such amounts
as the General Partner, in its sole and absolute discretion, deems appropriate
and reasonable from time to time.
(e) NO OBLIGATIONS TO CONSIDER TAX CONSEQUENCES TO LIMITED PARTNERS.
In exercising its authority under this Agreement, the General Partner may, but
shall be under no obligation to, take into account the tax consequences to any
Partner (including the General Partner) of any action taken (or not taken) by
any of them. The General Partner and the Partnership shall not have liability to
a Limited Partner for monetary damages or otherwise for losses sustained,
liabilities incurred or benefits not derived by such Limited Partner in
connection with such decisions, provided that the General Partner has acted in
good faith and pursuant to its authority under this Agreement.
7.2 RESTRICTIONS ON GENERAL PARTNER'S AUTHORITY. The General Partner may
not, without the written consent of all of the Limited Partners, take any action
in contravention of this Agreement, including, without limitation:
(a) taking any action that would make it impossible to carry on the
ordinary business of the Partnership, except as otherwise provided in this
Agreement; or
(b) possessing Partnership property, or assigning any rights in
specific Partnership property, for other than a Partnership purpose except as
otherwise provided in this Agreement.
In addition, without the consent of any adversely affected Limited Partner, the
General Partner may not perform any act that would subject a Limited Partner to
liability as a general partner in any jurisdiction or any other liability except
as provided in this Agreement or under the Act.
7.3 CERTIFICATE OF LIMITED PARTNERSHIP. To the extent that such action is
determined by the General Partner to be reasonable and necessary or appropriate,
the General Partner shall file amendments to and restatements of the Certificate
and do all the things to maintain the Partnership as a limited partnership (or a
partnership in which the limited partners have limited liability) under the laws
of the State of California and each other jurisdiction in which the Partnership
may elect to do business or own property. Subject to the terms of Section
8.5(a)(4) (Rights of Limited Partners to certain business records), the General
Partner shall not be required, before or after filing, to deliver or mail a copy
of the Certificate, as it may be amended or restated from time to time, to any
Limited Partner. The General Partner shall use all reasonable efforts to cause
to be filed such other certificates or documents as may be reasonable and
necessary or appropriate for the formation, continuation, qualification and
operation of a limited partnership (or a partnership in which the limited
partners have limited liability) in the State of California and any other
jurisdiction in which the Partnership may elect to do business or own property.
7.4 RESPONSIBILITY FOR EXPENSES.
(a) NO COMPENSATION. Except as provided in this Section 7.4 and
elsewhere in this Agreement (including the provisions of Articles 5 and 6
regarding distributions, payments and allocations to which it may be entitled),
the General Partner shall not be compensated for its services as general partner
of the Partnership.
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(b) RESPONSIBILITY FOR OWNERSHIP AND OPERATION EXPENSES. Except as
provided in Section 7.13, the Partnership shall be responsible for and shall pay
all expenses relating to the Partnership's ownership of its assets, and the
operation of, or for the benefit of, the Partnership, and the General Partner
shall be reimbursed on a monthly basis, or such other basis as the General
Partner may determine in its sole and absolute discretion, for all expenses it
incurs relating to the Partnership's ownership of its assets and the operation
of, or for the benefit of, the Partnership. If certain expenses are incurred for
the benefit of the Partnership and other entities, those expenses will be
allocated to the Partnership and the other entities in such a manner as the
General Partner in its sole and absolute discretion deems fair and reasonable.
Such reimbursements shall be in addition to any reimbursement to the General
Partner as a result of indemnification pursuant to Section 7.8. All payments and
reimbursements under this Agreement represent expenses of the Partnership
incurred on its behalf, and not expenses of the General Partner, and shall be so
characterized for federal income tax purposes.
(c) RESPONSIBILITY FOR ORGANIZATION OR ISSUANCE EXPENSES. Except as
provided in Section 7.13, the Partnership shall be responsible for and shall pay
(or shall reimburse the General Partner for) all expenses incurred relating to
the organization of the Partnership (including expenses relating to the issuance
of Units), as well as other costs of capital raising or property acquisition
incurred by the Partnership or General Partner with respect to funds or
properties acquired by the Partnership or by the General Partner for prompt
contribution to the Partnership, all of which expenses are considered by the
Partners to constitute expenses of, and for the benefit of, the Partnership.
7.5 PURCHASES OF SHARES BY THE GENERAL PARTNER. If the General Partner
purchases shares in connection with a share repurchase or similar program or for
the purpose of delivering those shares to satisfy an obligation under any
dividend reinvestment or equity purchase program adopted by the General Partner,
any employee equity purchase plan adopted by the General Partner or any similar
obligation or arrangement undertaken by the General Partner in the future, the
purchase price paid by the General Partner for those shares and any other
expenses incurred by the General Partner in connection with that purchase shall
be considered expenses of the Partnership and shall be reimbursable to the
General Partner, subject to the conditions that: (i) if those shares are
subsequently sold by the General Partner, the General Partner shall pay to the
Partnership any proceeds received by the General Partner for those shares
(provided that a transfer of shares for Partnership Units pursuant to Section
8.6 would not be considered a sale for this purpose); and (ii) if the shares are
not retransferred by the General Partner within thirty (30) days after the
purchase of the shares, the General Partner shall cause the Partnership to
cancel a number of Partnership Units held by the General Partner equal to the
number of shares purchased.
7.6 OUTSIDE ACTIVITIES OF THE GENERAL PARTNER. The General Partner shall
not directly or indirectly enter into or conduct any business, other than in
connection with the ownership, acquisition and disposition of Partnership
Interests as a General Partner or Limited Partner and the management of the
business of the Partnership, the General Partner's operation as a public
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reporting company with securities registered under the Securities Exchange Act
of 1934, as amended, its operation as a REIT, and such activities as are
incidental to those activities. The General Partner shall not own any assets
other than Partnership Interests, the stock of an entity qualifying as a
"qualified REIT subsidiary" under Section 856(i) of the Code, all of the
interests in a limited liability company, debts owed by the Partnership and such
bank accounts or similar instruments as it deems necessary to carry out its
responsibilities contemplated under this Agreement and the Articles of
Incorporation. Notwithstanding the foregoing, the General Partner shall be
permitted to own, directly or through Subsidiaries, interests in Partnership
properties that do not exceed 1% of the economic interest of any property, and
if appropriate for regulatory, tax, or other purposes, the General Partner also
may own, directly or through Subsidiaries, interests in assets that the
Partnership otherwise could acquire, if the General Partner grants to the
Partnership the option to acquire the assets within a period not to exceed three
years in exchange for the number of Partnership Units that would be issued if
the Partnership acquired the assets at the time of acquisition by the General
Partner. The General Partner and Affiliates of the General Partner may acquire
Limited Partnership Interests and shall be entitled to exercise all rights of a
Limited Partner relating to such Limited Partnership Interests. The provisions
of this Section 7.6 shall not be construed to limit the outside activities of
Affiliates of the General Partner.
7.7 CONTRACTS WITH AFFILIATES.
(a) LOANS. The Partnership may lend or contribute to its Subsidiaries
or other Persons in which it has an equity investment, and such Persons may
borrow funds from the Partnership, on terms and conditions established in the
sole and absolute discretion of the General Partner. The foregoing authority
shall not create any right or benefit in favor of any Subsidiary or any other
Person.
(b) TRANSFERS OF ASSETS. The Partnership may transfer assets to joint
ventures, other partnerships, corporations or other business entities in which
it is or by so transferring the assets becomes a participant upon such terms and
subject to such conditions consistent with this Agreement and applicable law.
(c) CONTRACTS WITH GENERAL PARTNER. Except as expressly permitted by
this Agreement, neither the General Partner nor any of its Affiliates shall
sell, transfer or convey any property to, or purchase any property from, the
Partnership, directly or indirectly, except pursuant to transactions that are on
terms that are fair and reasonable and no less favorable to the Partnership than
would be obtained from an unaffiliated third party.
(d) EMPLOYEE BENEFIT PLANS. The General Partner, in its sole and
absolute discretion and without the approval of the Limited Partners, may
propose and adopt on behalf of the Partnership employee benefit plans funded by
the Partnership for the benefit of employees of the General Partner, the
Partnership, Subsidiaries of the Partnership or any Affiliate of any of them in
respect of services performed, directly or indirectly, for the benefit of the
Partnership, the General Partner, or any of the Partnership's Subsidiaries,
including any such plan that requires the Partnership, the General Partner or
any of the Partnership's Subsidiaries to issue or transfer Partnership Units to
employees.
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(e) CONFLICT AVOIDANCE ARRANGEMENTS. The General Partner is expressly
authorized to enter into, in the name and on behalf of the Partnership, a right
of first opportunity arrangement, non-competition agreements and other conflict
avoidance agreements with various Affiliates of the Partnership and the General
Partner, on such terms as the General Partner, in its sole and absolute
discretion, believes are advisable.
7.8 INDEMNIFICATION.
(a) GENERAL. Except as provided in Section 7.13, the Partnership shall
indemnify an Indemnitee from and against any and all losses, claims, damages,
liabilities, joint or several, expenses (including legal fees and expenses),
judgments, fines, settlements, and other amounts arising from any and all
claims, demands, actions, suits or proceedings, civil, criminal, administrative
or investigative, that relate to the operations of the Partnership as set forth
in this Agreement in which any Indemnitee may be involved, or is threatened to
be involved, as a party or otherwise, unless it is established that: (i) the act
or omission of the Indemnitee was material to the matter giving rise to the
proceeding and either was committed in bad faith or was the result of active and
deliberate dishonesty; (ii) the Indemnitee actually received an improper
personal benefit in money, property or services; or (iii) in the case of any
criminal proceeding, the Indemnitee had reasonable cause to believe that the act
or omission was unlawful. The termination of any proceeding by judgment, order
or settlement does not create a presumption that the Indemnitee did not meet the
requisite standard of conduct set forth in this Section 7.8(a). The termination
of any proceeding by conviction or upon a plea of nolo contendere or its
equivalent, or an entry of an order of probation prior to judgment, creates a
rebuttable presumption that the Indemnitee did not meet the requirement standard
of conduct set forth in this Section 7.8(a). Any indemnification pursuant to
this Section 7.8 shall be made only out of the assets of the Partnership.
Notwithstanding the foregoing provisions, the General Partner shall be entitled
to reimbursement by the Partnership for any amounts paid by it in satisfaction
of indemnification obligations owed by the General Partner to present or former
directors of the General Partner, as provided for in or pursuant to the Articles
of Incorporation and By-Laws of the General Partner or any similar
indemnification agreements between the General Partner and such persons.
(b) IN ADVANCE OF FINAL DISPOSITION. Except as provided in Section
7.13, reasonable expenses incurred by an Indemnitee who is a party to a
proceeding may be paid or reimbursed by the Partnership in advance of the final
disposition of the proceeding upon receipt by the Partnership of (a) a written
affirmation by the Indemnitee of the Indemnitee's good faith belief that the
standard of conduct necessary for indemnification by the Partnership as
authorized in this Section 7.8 has been met, and (b) a written undertaking by or
on behalf of the Indemnitee to repay the amount if it shall ultimately be
determined that the standard of conduct was not met.
(c) NO EFFECT ON OTHER RIGHTS. The indemnification provided by this
Section 7.8 shall be in addition to any other rights to which an Indemnitee or
any other Person may be entitled under any agreement, pursuant to any vote of
the Partners, as a matter of law or otherwise, and shall continue as to an
Indemnitee who has ceased to serve in such capacity unless otherwise provided in
a written agreement pursuant to which such Indemnitee is indemnified.
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(d) INSURANCE. The Partnership may purchase and maintain insurance, on
behalf of the Indemnities and such other Persons as the General Partner shall in
its sole and absolute discretion determine, against any liability that may be
asserted against or expenses that may be incurred by such Person in connection
with the Partnership's activities, regardless of whether the Partnership would
have the power to indemnify such Person against such liability under the
provisions of this Agreement or under applicable law.
(e) EMPLOYEE BENEFIT PLANS. For purposes of this Section 7.8, the
Partnership shall be deemed to have requested an Indemnitee to serve as
fiduciary of an employee benefit plan whenever the performance by it of its
duties to the Partnership also imposes duties on, or otherwise involves services
by, it to the plan or participants or beneficiaries of the plan; excise taxes
assessed on an Indemnitee with respect to an employee benefit plan pursuant to
applicable law shall constitute fines within the meaning of Section 7.8(a); and
actions taken or omitted by the Indemnitee with respect to an employee benefit
plan in the performance of its duties for a purpose reasonably believed by it to
be in the interest of the participants and beneficiaries of the plan shall be
deemed to be for a purpose that is not opposed to the best interests of the
Partnership.
(f) NO PERSONAL LIABILITY FOR LIMITED PARTNERS. In no event may an
Indemnitee subject the Limited Partners to personal liability by reason of the
indemnification provisions set forth in this Agreement.
(g) INTERESTED TRANSACTIONS. An Indemnitee shall not be denied
indemnification in whole or in part under this Section 7.8 because the
Indemnitee had an interest in the transaction with respect to which the
indemnification applies if the transaction was otherwise permitted by the terms
of this Agreement.
(h) BINDING EFFECT. The provisions of this Section 7.8 are for the
benefit of the Indemnities, their heirs, successors, assigns and administrators
and shall not be deemed to create any rights for the benefit of any other
Persons.
(i) EFFECT OF AMENDMENT. Any amendment, modification or repeal of this
Section 7.8 or any provision of this Agreement shall be prospective only and
shall not in any way affect the rights of an Indemnitee under this Section 7.8
as in effect immediately prior to such amendment modification or repeal with
respect to claims arising from or relating to matters occurring, in whole or in
part, prior to such amendment, modification or repeal, regardless of when such
claims may arise or be asserted.
7.9 LIABILITY OF THE GENERAL PARTNER.
(a) GENERAL. Notwithstanding anything to the contrary set forth in
this Agreement, the General Partner shall not be liable for monetary damages to
the Partnership, any Partners or any Assignees for losses sustained, liabilities
incurred or benefits not derived as a result of errors in judgment or of any act
or omissions if the General Partner acted in good faith.
(b) NO OBLIGATION TO CONSIDER INTERESTS OF LIMITED PARTNERS. The
Limited Partners expressly acknowledge that the General Partner is acting on
behalf of the Partnership and the General Partner's shareholders collectively,
that the General Partner is under no obligation to consider the separate
interests of the Limited Partners (including, without limitation, the tax
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consequences to Limited Partners or Assignees) in deciding whether to cause the
Partnership to take (or decline to take) any actions that the General Partner
has undertaken in good faith on behalf of the Partnership, including the
disposition of properties of the Partnership, and that the General Partner shall
not be liable for monetary damages for losses sustained, liabilities incurred,
or benefits not derived by Limited Partners in connection with such decisions
provided the General Partner does not violate the terms of any written agreement
between the Partnership and one or more Limited Partners.
(c) ACTS OF AGENTS. Subject to its obligations and duties as General
Partner set forth in Section 7.1(a), the General Partner may exercise any of the
powers granted to it by this Agreement and perform any of the duties imposed
upon it under this Agreement either directly or indirectly or by or through its
agents. The General Partner shall not be responsible for any misconduct or
negligence on the part of any such agent appointed by it in good faith.
(d) EFFECT OF AMENDMENT. Any amendment, modification or repeal of this
Section 7.9 or any provision of this Agreement shall be prospective only and
shall not in any way affect the limitations on the General Partner's liability
to the Partnership and the Limited Partners under this Section 7.9 as in effect
immediately prior to such amendment, modification or repeal with respect to
claims arising from or relating to matters occurring, in whole or in part, prior
to such amendment, modification or repeal, regardless of when such claims may
arise or be asserted.
(e) LIMITATION OF LIABILITY OF SHAREHOLDERS, DIRECTORS AND OFFICERS OF
THE GENERAL PARTNER. Any obligation or liability of the General Partner that may
arise at any time under this Agreement or any obligation or liability that may
be incurred by it pursuant to any other instrument, transaction or undertaking
contemplated by this Agreement shall be satisfied, if at all, out of the General
Partner's assets only. No such obligation or liability shall be personally
binding upon, nor shall resort for the enforcement of any such obligation or
liability be had to, the property of any of its shareholders, directors,
officers, employees or agents, regardless of whether such obligation or
liability is in the nature of contract, tort or otherwise.
7.10 OTHER MATTERS CONCERNING THE GENERAL PARTNER.
(a) RELIANCE ON DOCUMENTS. The General Partner may rely and shall be
protected in acting or refraining from acting upon any resolution, certificate,
statement, instrument, opinion, report, notice, request, consent, order, bond,
debenture, or other paper or document believed by it to be genuine and to have
been signed or presented by the proper party or parties.
(b) RELIANCE ON CONSULTANTS AND ADVISERS. The General Partner may
consult with legal counsel, accountants, appraisers, management consultants,
investment bankers, architects, engineers, environmental consultants, and other
consultants and advisers selected by it, and any act taken or omitted to be
taken in reliance upon the opinion of such Persons as to matters that such
General Partner reasonably believes to be within such Person's professional or
expert competence shall be conclusively presumed to have been done or omitted in
good faith and in accordance with such opinion.
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(c) ACTION THROUGH OFFICERS AND ATTORNEYS. The General Partner shall
have the right, in respect of any of its powers or obligations under this
Agreement, to act through any of its duly authorized officers and a duly
appointed attorney or attorneys-in-fact. Each such attorney shall, to the extent
provided by the General Partner in the power of attorney, have full power and
authority to do and perform all and every act and duty that is permitted or
required to be done by the General Partner under this Agreement.
(d) ACTIONS TO MAINTAIN REIT STATUS OR AVOID TAXATION OF GENERAL
PARTNER. Notwithstanding any other provisions of this Agreement or the Act, any
action of the General Partner on behalf of the Partnership or any decision of
the General Partner to refrain from acting on behalf of the Partnership,
undertaken in the good faith belief that such action or omission is necessary or
advisable in order (i) to protect the ability of the General Partner to continue
to qualify as a REIT or (ii) to avoid the General Partner incurring any taxes
under Section 857 or Section 4981 of the Code, is expressly authorized under
this Agreement and is deemed approved by all of the Limited Partners.
7.11 TITLE TO PARTNERSHIP ASSETS. Title to Partnership assets, whether
real, personal or mixed and whether tangible or intangible, shall be deemed to
be owned by the Partnership as an entity, and no Partner, individually or
collectively, shall have any ownership interest in such Partnership assets or
any portion of those assets. Title to any or all of the Partnership assets may
be held in the name of the Partnership, the General Partner or one or more
nominees, as the General Partner may determine, including Affiliates of the
General Partner. The General Partner declares and warrants that any Partnership
assets for which legal title is held in the name of the General Partner or any
nominee or Affiliate of the General Partner shall be held by the General Partner
for the use and benefit of the Partnership in accordance with the provisions of
this Agreement; provided, however, that the General Partner shall use its best
efforts to cause beneficial and record title to such assets to be vested in the
Partnership as soon as reasonably practicable. All Partnership assets shall be
recorded as the property of the Partnership in its books and records,
irrespective of the name in which legal title to such Partnership assets is
held.
7.12 RELIANCE BY THIRD PARTIES. Notwithstanding anything to the contrary in
this Agreement, any Person dealing with the Partnership shall be entitled to
assume that the General Partner has full power and authority, without consent or
approval of any other Partner or Person, to encumber, sell or otherwise use in
any manner any and all assets of the Partnership and to enter into any contracts
on behalf of the Partnership, and such Person shall be entitled to deal with the
General Partner as if it were the Partnership's sole party in interest, both
legally and beneficially. Each Limited Partner waives any and all defenses or
other remedies that may be available against such Person to contest, negate or
disaffirm any action of the General Partner in connection with any such dealing.
In no event shall any Person dealing with the General Partner or its
representatives be obligated to ascertain that the terms of this Agreement have
been complied with or to inquire into the necessity or expedience of any act or
action of the General Partner or its representatives. Each and every
certificate, document or other instrument executed on behalf of the Partnership
by the General Partner or its representatives shall be conclusive evidence in
favor of any and every Person relying on or claiming under those instruments
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that (a) at the time of the execution and delivery of such certificate, document
or instrument, this Agreement was in full force and effect, (b) the Person
executing and delivering such certificate, document or instrument was duly
authorized and empowered to do so for and on behalf of the Partnership and (c)
such certificate, document or instrument was duly executed and delivered in
accordance with the terms and provisions of this Agreement and is binding upon
the Partnership.
7.13 TREATMENT OF AND LIMITATION ON PAYMENTS TO GENERAL PARTNER.
(a) REIMBURSEMENT AND INDEMNIFICATION PAYMENTS. If and to the extent
any payments to the General Partner pursuant to Sections 7.4 or 7.8 constitute
gross income to the General Partner (as opposed to the repayment of advances
made on behalf of the Partnership), those amounts shall constitute guaranteed
payments within the meaning of Section 707(c) of the Code, and shall be so
treated by the Partnership and all Partners, and shall not be treated as
distributions for purposes of computing the Partners' Capital Accounts.
(b) LIMITATION ON PAYMENTS TO GENERAL PARTNER. To the extent that the
amount paid or credited to the General Partner or its officers, directors,
employees or agents pursuant to Section 7.4 or Section 7.8 would constitute
gross income of the General Partner that is not described in Sections 856(c)(2)
or 856(c)(3) of the Code (a "GP Payment") then, notwithstanding any other
provisions of this Agreement, the amount of such GP Payment for any fiscal year
shall not exceed the lesser of:
(i) an amount equal to the excess, if any, of
(1) four and eight tenths percent (4.8%) of the General
Partner's total gross income (not including any GP
Payments or gross income from prohibited transactions) for
the fiscal year over
(2) the amount of gross income (within the meaning of Section
856(c)(2) of the Code) derived by the General Partner from
sources other than those described in subsections (A)
through (H) of Section 856(c)(2) of the Code (taking into
account Section 856(c)(5)(G), but not including the amount
of any GP Payments or gross income from prohibited
transactions); or
(ii) an amount equal to the excess, if any, of
(1) twenty-four and eight tenths percent (24.8%) of the
General Partner's total gross income (not including any GP
Payments or gross income from prohibited transactions) for
the fiscal year over
(2) the amount of gross income (within the meaning of Section
856(c)(3) of the Code) derived by the General Partner from
sources other than those described in subsections (A)
through (I) of Section 856(c)(3) of the Code (but not
including the amount of any GP Payments or gross income
from prohibited transactions);
Notwithstanding the foregoing, GP Payments in excess of the amounts set forth in
paragraphs (i) and (ii) may be made if and to the extent the General Partner, as
a condition precedent, obtains an opinion of tax counsel that the receipt of
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such excess amounts would not adversely affect the General Partner's ability to
qualify as a REIT. To the extent GP Payments may not be made in a year due to
the above limitations, such GP Payments shall carry over and be treated as
arising in the following year(s) (subject again to limitation as set forth above
in those years), for a maximum of seven years (treating amounts payable as first
being paid from the earliest year such amounts were carried over, and the next
succeeding years in chronological order). If any GP Payment is carried over for
such seven-year period and not paid, such amount shall no longer be an
obligation of the Partnership. If a GP Payment is inadvertently made in an
amount in excess of the limitations in this Section 7.13(b), such excess
payments shall be treated as a permitted loan from the Partnership to the
General Partner, to be repaid as soon as practicable following discovery of the
overpayment.
8. RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS
8.1 LIMITATION OF LIABILITY. The Limited Partners shall have no liability
under this Agreement except as expressly provided in this Agreement, including
Section 10.5 (Partnership withholding obligations), or under the Act.
8.2 MANAGEMENT OF BUSINESS. No Limited Partner or Assignee (other than the
General Partner, any of its Affiliates or any officer, director, employee,
partner, agent or trustee of the General Partner, the Partnership or any of
their Affiliates, in their capacity as such) shall take part in the operation,
management or control (within the meaning of the Act) of the Partnership's
business, transact any business in the Partnership's name or have the power to
sign documents for or otherwise bind the Partnership. The transaction of any
such business by the General Partner, any of its Affiliates or any officer,
director, employee, partner, agent or trustee of the General Partner, the
Partnership or any of their Affiliates, in their capacity as such, shall not
affect, impair or eliminate the limitations on the liability of the Limited
Partners or Assignees under this Agreement.
8.3 OUTSIDE ACTIVITIES OF LIMITED PARTNERS. Subject to any agreements
entered into pursuant to Section 7.7(e) and subject to any other agreements
entered into by a Limited Partner or its Affiliates with the General Partner,
the Partnership or a Subsidiary, the following rights shall govern outside
activities of Limited Partners:
(a) any Limited Partner (other than the General Partner) and any
officer, director, employee, agent, trustee, Affiliate or shareholder
of any Limited Partner shall be entitled to and may have business
interests and engage in business activities in addition to those
relating to the Partnership, including business interests and
activities in direct or indirect competition with the Partnership;
(b) neither the Partnership nor any Partners shall have any
rights by virtue of this Agreement in any business ventures of any
Limited Partner or Assignee;
(c) none of the Limited Partners nor any other Person shall have
any rights by virtue of this Agreement or the partnership relationship
established by this Agreement in any business ventures of any other
Person, other than the General Partner, and such Persons shall have no
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obligation pursuant to this Agreement to offer any interest in any
such business ventures to the Partnership, any Limited Partner or any
such other Person, even if such opportunity is of a character that, if
presented to the Partnership, any Limited Partner or such other
Person, could be taken by such Person;
(d) the fact that a Limited Partner may encounter opportunities
to purchase, otherwise acquire, lease, sell or otherwise dispose of
real or personal property and may take advantage of such opportunities
or introduce such opportunities to entities in which it has or has not
any interest, shall not subject such Partner to liability to the
Partnership or any of the other Partners on account of the lost
opportunity; and
(e) except as otherwise specifically provided in this Agreement,
nothing contained in this Agreement shall be deemed to prohibit a
Limited Partner or any Affiliate of a Limited Partner from dealing, or
otherwise engaging in business, with Persons transacting business with
the Partnership or from providing services relating to the purchase,
sale, rental, management or operation of real or personal property
(including real estate brokerage services) and receiving compensation
for those activities, from any Persons who have transacted business
with the Partnership or other third parties.
8.4 PRIORITY AMONG LIMITED PARTNERS. No Partner (Limited or General) or
Assignee shall have priority over any other Partner (Limited or General) or
Assignee either as to the return of capital contributions or, except to the
extent provided by Article 6 or as permitted by Section 4.2, or otherwise
expressly provided in this Agreement, as to profits, losses or distributions.
8.5 RIGHTS OF LIMITED PARTNERS RELATING TO THE PARTNERSHIP.
(a) COPIES OF BUSINESS RECORDS. In addition to other rights provided
by this Agreement or by the Act, including rights set forth in Article 14, and
except as limited by Section 8.5(c), each Limited Partner shall have the right,
for a purpose reasonably related to such Limited Partner's interest as a limited
partner in the Partnership, upon written demand with a statement of the purpose
of such demand and at such Limited Partner's own expense:
(1) to obtain a copy of the most recent annual and quarterly
reports filed with the Securities and Exchange Commission by the
General Partner pursuant to the Securities Exchange Act of 1934, as
amended;
(2) to obtain a copy of the Partnership's federal, state and
local income tax returns for each Partnership Year;
(3) to obtain a current list of the name and last known business,
residence or mailing address of each Partner;
(4) to obtain a copy of this Agreement and the Certificate and
all amendments, together with executed copies of all powers of
attorney pursuant to which this Agreement, the Certificate and all
amendments have been executed; and
(5) to obtain true and full information regarding the amount of
cash and a description and statement of any other property or services
contributed by each Partner and which each Partner has agreed to
contribute in the future, and the date on which each became a Partner.
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(b) NOTIFICATION OF CHANGES IN UNIT ADJUSTMENT FACTOR. The Partnership
shall notify each Limited Partner in writing of any change to the number of
Units as a result of a change to the Unit Adjustment Factor within ten (10)
Business Days of the date such change becomes effective.
(c) CONFIDENTIAL INFORMATION. Notwithstanding any other provision of
this Section 8.5, the General Partner may keep confidential from the Limited
Partners, for such period of time as the General Partner determines in its sole
and absolute discretion to be reasonable, any Partnership information that (i)
the General Partner believes to be in the nature of trade secrets or other
information the disclosure of which the General Partner in good faith believes
is not in the best interests of the Partnership or (ii) the Partnership is
required by law or by agreements with unaffiliated third parties to keep
confidential.
8.6 REDEMPTION RIGHT.
(a) GENERAL. Beginning one year after the date on which each Limited
Partner is admitted to the Partnership (except as otherwise contractually agreed
to by the General Partner), each Limited Partner (other than the General
Partner) shall have the right (the "Redemption Right") to cause the Partnership
to purchase on the Specified Redemption Date all or any of such Limited
Partner's Units for cash equal to the Redemption Amount, provided however, that
the General Partner has the authority to establish different payment schedules
to satisfy a Limited Partner's Redemption Right at the time the Units that are
the subject of such Redemption Right are issued. The Redemption Right may be
exercised by a Limited Partner (a "Redeeming Partner") at any time and from time
to time by delivering a Notice of Redemption to the General Partner not less
than ten (10) days prior to such redemption, provided that a Limited Partner may
not exercise the Redemption Right for less than one thousand (1,000) Partnership
Units unless such Redeeming Partner then holds less than one thousand (1,000)
Partnership Units, in which event the Redeeming Partner must exercise the
Redemption Right for all of the Partnership Units held by such Redeeming
Partner. The Assignee of any Limited Partner may exercise the rights of the
Limited Partner pursuant to this Section 8.6, and the Limited Partner shall be
deemed to have assigned those rights to the Assignee and shall be bound by the
exercise of the rights by the Limited Partner's Assignee, and payments shall be
made directly to the Assignee and not to the Limited Partner.
(b) IF DELIVERY OF COMMON SHARES IS PROHIBITED, ETC. Notwithstanding
the provisions of Section 8.6(a) and (d), a Partner shall not be entitled to
exercise the Redemption Right pursuant to Section 8.6(a) if (i) the delivery of
Common Shares to such Partner on the Specified Redemption Date would be
prohibited under the Articles of Incorporation, or (ii) in the opinion of
counsel to the General Partner, there is a significant risk that a delivery of
Common Shares to the Partner would cause the General Partner to no longer
qualify as a REIT, would constitute a violation of applicable securities laws,
or would result in the Partnership no longer being treated as a partnership for
federal income tax purposes. In addition, the consummation of a redemption shall
be subject to the expiration or termination of the applicable waiting period, if
any, under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.
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(c) SECTION 16 CONSIDERATIONS. If a Redemption Right is exercised by a
Redeeming Partner who is a "reporting person" within the meaning of Section
16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
the General Partner will promptly notify such Redeeming Partner as to whether
the Redemption Right will be satisfied with the payment of cash or through the
delivery of Common Shares. If the Partnership or the General Partner elects to
satisfy the Redemption Right with the payment of cash, the Redeeming Partner
shall have the right to either withdraw its exercise of the Redemption Right, or
delay the consummation of the redemption to the extent necessary to avoid a
"short-swing" profit under Section 16(b) of the Exchange Act.
(d) GENERAL PARTNER ASSUMPTION OF REDEMPTION RIGHT.
(1) Subject to the other provisions of this Section 8.6 and
Section 11.3 (Limited Partners' rights to transfer), beginning on the date one
year after a Limited Partner's admission to the Partnership (except as otherwise
contractually agreed to by the General Partner), the General Partner may assume
directly and satisfy the obligations of the Partnership as to a Limited
Partner's Redemption Right by paying to a Redeeming Partner either the Shares
Amount, or cash equal to the Redemption Amount as of the Specified Redemption
Date, with the choice of consideration to be determined at the sole option of
the General Partner. If the General Partner shall exercise and perform its right
to satisfy the Redemption Right in this manner, the Partnership shall have no
obligation to pay any amount to the Redeeming Partner with respect to such
Redeeming Partner's exercise of the Redemption Right, and each of the Redeeming
Partner, the Partnership, and the General Partner shall treat the transaction
between the General Partner and the Redeeming Partner as a sale of the Redeeming
Partner's Partnership Units to the General Partner for federal and state income
tax purposes. Each Redeeming Partner agrees to execute such documents as the
General Partner may reasonably require in connection with the payment of the
Redemption Amount. The General Partner shall at all times reserve and keep
available out of its authorized but unissued Common Shares, solely for the
purpose of effecting the exchange of Partnership Units for Common Shares, such
number of Common Shares as shall from time to time be sufficient to effect the
conversion of all outstanding Partnership Units, and the exercise or conversion
of all other rights to acquire Common Shares. No Limited Partner shall, solely
by virtue of being the holder of one or more Partnership Units, be deemed to be
a shareholder of or have any other interest in the General Partner.
(2) Each Redeeming Partner agrees to execute such documents as
the General Partner may reasonably require in connection with, and as a
condition of, the issuance of Common Shares upon exercise of the Redemption
Right, including, without limitation, executing and delivering an investment
representation letter with respect to the matters set forth in Section 3.4(c)
and related matters.
8.7 EXTRAORDINARY TRANSACTIONS.
(a) The General Partner may not engage in any merger, consolidation or
other combination with or into another person or sale of all or substantially
all of its assets, or any reclassification, or any recapitalization (other than
stock splits and stock dividends or other events described in the definition of
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"Unit Adjustment Factor") or change of outstanding Common Shares (a "Business
Combination"), unless (i) the Limited Partners receive, or have the opportunity
to receive, the same consideration per Unit as holders of Common Shares receive
per Common Share in the transaction (without regard to tax considerations), or
(ii) Limited Partners (other than the General Partner) holding at least 60% of
the Units held by Limited Partners (other than the General Partner) vote to
approve the Business Combination.
(b) In addition to the requirements of Section 8.7(a), the General
Partner will not consummate a Business Combination in which the General Partner
conducts a vote of the shareholders of the General Partner unless the matter is
also submitted to a vote of the Partners. For purposes of the Partnership vote,
(i) each holder of Units (including the General Partner, as to its limited and
general partnership interests) shall be entitled to a number of votes equal to
the total votes to which the holder would have been entitled in the vote of the
General Partner's shareholders if the holder's Units had been exchanged for
Common Shares upon the exercise of a Redemption Right, (ii) in the Partnership
vote, the General Partner shall be deemed to vote all Units it holds
(representing both its general and limited partnership interests) in proportion
to the manner in which the General Partner's shareholders voted (disregarding
shareholders who did not vote), and (iii) the Business Combination shall be
deemed approved by the Partnership if the votes so recorded (the deemed vote
with respect to the General Partner's interest and the actual vote of the other
holders of Units) satisfy the standard for a favorable vote of the shareholders
of the General Partner.
(c) Notwithstanding the provisions of Section 8.7(a) and (b), the
General Partner shall be permitted, without compliance with the requirements of
Section 8.7(a) or (b): (i) to transfer all or part of its partnership interest
to an entity wholly owned by the General Partner, or if the General Partner is
wholly owned by another entity (the "Parent"), to transfer all or part of its
General Partner partnership interest to the Parent, (ii) to merge into any
entity wholly-owned by the General Partner or with any parent entity that wholly
owns the General Partner (in either such case no change shall be made to the
Unit Adjustment Factor as a result of that transaction and the surviving entity
shall be treated as was the General Partner), and (iii) to merge into Public
Storage Properties XI, Inc. (in which case the Unit Adjustment Factor shall be
adjusted as provided with respect to a Successor Entity to take into account the
ratio into which shares of the General Partner will be converted into shares of
Public Storage Properties XI, Inc.).
8.8 CONSENT OF CERTAIN LIMITED PARTNERS. Each of the properties listed on
Exhibit D (as well as any subsequently acquired property, the federal income tax
basis of which is determined by reference to the federal income tax basis of a
listed property, such as a property acquired in a "like-kind exchange" for a
listed property) is referred to as a "Designated Property." The Partnership may
not sell or otherwise dispose of any Designated Property during the ten year
period commencing on the date of the contribution to the Partnership of that
Designated Property in a transaction that will cause gain recognition to the
contributing partner, without the prior written consent of Public Storage, Inc.
The limitation on disposition of the preceding sentence shall not apply if, at
the time of the disposition, Public Storage, Inc. and its affiliated
partnerships then own less than 30% of the Units owned as of the date of this
Agreement. At the time of any subsequent contributions of property to the
Partnership, the General Partner may agree with the contributor to treat the
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property as a Designated Property that may not be sold or disposed of by the
Partnership without the contributor's consent for a period to be agreed upon by
the General Partner and the contributor.
9. BOOKS, RECORDS, ACCOUNTING AND REPORTS
9.1 RECORDS AND ACCOUNTING. The General Partner shall keep or cause to be
kept at the principal office of the Partnership appropriate books and records
with respect to the Partnership's business, including, without limitation, all
books and records necessary to provide to the Limited Partners any information,
lists and copies of documents required to be provided pursuant to Section 9.3.
Any records maintained by or on behalf of the Partnership in the regular course
of its business may be kept on, or be in the form of, punch cards, magnetic
tape, photographs, micrographics or any other information storage device;
provided that the records so maintained are convertible into clearly legible
written form within a reasonable period of time. The books of the Partnership
shall be maintained for financial purposes on an accrual basis in accordance
with generally accepted accounting principles and for tax reporting purposes on
the accrual basis.
9.2 FISCAL YEAR. The fiscal year of the Partnership shall be the calendar
year.
9.3 REPORTS.
(a) ANNUAL REPORTS. As soon as practicable, but in no event later than
120 days after the close of each Partnership Year, the General Partner shall
cause to be mailed to each Limited Partner as of the close of the Partnership
Year, an annual report containing financial statements of the Partnership, or of
the General Partner if such statements are prepared solely on a consolidated
basis with the General Partner, for such Partnership Year, presented in
accordance with generally accepted accounting principles, such statements to be
audited by a nationally recognized firm of independent public accountants
selected by the General Partner.
(b) QUARTERLY REPORTS. If the General Partner distributes quarterly
reports to its shareholders, as soon as practicable, but in no event later than
60 days after the close of each calendar quarter (except the last calendar
quarter of each year), the General Partner shall cause to be mailed to each
Limited Partner as of the last day of the calendar quarter, a report containing
unaudited financial statements of the Partnership, or of the General Partner, if
such statements are prepared solely on a consolidated basis with the General
Partner, and such other information as may be required by applicable law or
regulation, or as the General Partner determines to be appropriate.
10. TAX MATTERS
10.1 PREPARATION OF TAX RETURNS. The General Partner shall arrange for the
preparation and timely filing of all returns of Partnership income, gains,
deductions, losses and other items required of the Partnership for federal and
state income tax purposes and shall use all reasonable efforts to furnish,
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within 90 days of the close of each taxable year, the tax information reasonably
required by the General Partner and the Limited Partners for federal and state
income tax reporting purposes. The Limited Partners shall promptly provide the
General Partner with such information relating to the Contributed Properties,
including tax basis and other relevant information, as may be reasonably
requested by the General Partner from time to time.
10.2 TAX ELECTIONS. Except as otherwise provided in this Agreement,
the General Partner shall, in its sole and absolute discretion, determine
whether to make any available election pursuant to the Code; including without
limitation, the election under Section 754 of the Code in accordance with
applicable regulations. The General Partner shall have the right to seek to
revoke any such election (including, without limitation, the election under
Section 754 of the Code) upon the General Partner's determination in its sole
and absolute discretion that such revocation is in the best interests of the
Partners.
10.3 TAX MATTERS PARTNER.
(a) GENERAL. The General Partner shall be the "tax matters
partner" of the Partnership for federal income tax purposes. Pursuant to Section
6223(c) of the Code, upon receipt of notice from the IRS of the beginning of an
administrative proceeding with respect to the Partnership, the tax matters
partner shall furnish the IRS with the name, address and profit interest of each
of the Limited Partners; provided, however, that such information is provided to
the Partnership by the Limited Partners. The Limited Partners shall provide such
information to the Partnership as the General Partner shall reasonably request.
(b) POWERS. The tax matters partner is authorized, but not
required:
(1) to enter into any settlement with the IRS with respect
to any administrative or judicial proceedings for the adjustment
of Partnership items required to be taken into account by a
Partner for income tax purposes (such administrative proceedings
being referred to as a "tax audit" and such judicial proceedings
being referred to as "judicial review"), and in the settlement
agreement the tax matters partner may expressly state that such
agreement shall bind all Partners, except that such settlement
agreement shall not bind any Partner (a) who (within the time
prescribed pursuant to the Code and Regulations) files a
statement with the IRS providing that the tax matters partner
shall not have the authority to enter into a settlement agreement
on behalf of such Partner or (b) who is a "notice partner" (as
defined in Section 6231 of the Code) or a member of a "notice
group" (as defined in Section 6223(b)(2) of the Code);
(2) in the event that a notice of a final administrative
adjustment at the Partnership level of any item required to be
taken into account by a partner for tax purposes (a "final
adjustment") is mailed or otherwise given to the tax matters
partner, to seek judicial review of such final adjustment,
including the filing of a petition for readjustment with the Tax
Court or the United States Claims Court, or the filing of a
complaint for refund with the District Court of the United States
for the district in which the Partnership's principal place of
business is located;
(3) to intervene in any action brought by any other Partner
for judicial review of a final adjustment;
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(4) to file a request for an administrative adjustment with
the IRS at any time and, if any part of such request is not
allowed by the IRS, to file an appropriate pleading (petition,
complaint or other document) for judicial review with respect to
such request;
(5) to enter into an agreement with the IRS to extend the
period for assessing any tax that is attributable to any item
required to be taken into account by a Partner for tax purposes,
or an item affected by such item; and
(6) to take any other action on behalf of the Partners of
the Partnership in connection with any tax audit or judicial
review proceeding to the extent permitted by applicable law or
regulations.
(c) ELECTING LARGE PARTNERSHIP. The General Partner, in its sole
discretion, may cause the Partnership to elect to be an "electing large
partnership" under Section 775 of the Code. In that case, the General Partner
shall be the person authorized to act on behalf of the Partnership in any
federal or related state income tax proceeding for purposes of Section 6255 of
the Code and shall be authorized to undertake any and all actions on behalf of
the Partnership to the maximum extent contemplated under Sections 6240 through
6255 of the Code (including, without limitation, to bind the Partnership and all
Partners with respect to any settlement of any proceeding).
(d) REIMBURSEMENT. The tax matters partner shall receive no
compensation for its services. All third-party costs and expenses incurred by
the tax matters partner in performing its duties as such (including legal and
accounting fees) shall be borne by the Partnership. Nothing in this Agreement
shall be construed to restrict the Partnership from engaging an accounting firm
and a law firm to assist the tax matters partner in discharging its duties under
this Agreement, so long as the compensation paid by the Partnership for such
services is reasonable. The taking of any action and the incurring of any
expense by the General Partner pursuant to this Section 10.3, except to the
extent required by law, is a matter in the sole and absolute discretion of the
General Partner, and the provisions relating to indemnification of the General
Partner set forth in Section 7.8 shall be fully applicable to the General
Partner in its capacity as such.
10.4 ORGANIZATION EXPENSES. The Partnership shall elect to deduct expenses,
if any, incurred by it in organizing the Partnership ratably over a 60-month
period as provided in Section 709 of the Code.
10.5 WITHHOLDING. Each Limited Partner authorizes the Partnership to
withhold from or pay on behalf of or with respect to such Limited Partner any
amount of federal, state, local, or foreign taxes that the General Partner
determines that the Partnership is required to withhold or pay with respect to
any amount distributable or allocable to such Limited Partner pursuant to this
Agreement, including, without limitation, any taxes required to be withheld or
paid by the Partnership pursuant to Sections 1441, 1442, 1445 or 1446 of the
Code. Any amount paid on behalf of or with respect to a Limited Partner shall
constitute a loan by the Partnership to such Limited Partner, which loan shall
be repaid by such Limited Partner within 15 days after notice from the General
Partner that such payment must be made unless (a) the Partnership withholds such
payment from a distribution that would otherwise be made to the Limited Partner
or (b) the General Partner determines, in its sole and absolute discretion, that
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such payment may be satisfied out of the available funds of the Partnership that
would, but for such payment, be distributed to the Limited Partner. Any amounts
withheld pursuant to the foregoing clauses (a) or (b) shall be treated as having
been distributed to such Limited Partner. Each Limited Partner unconditionally
and irrevocably grants to the Partnership a security interest in such Limited
Partner's Partnership Interest to secure such Limited Partner's obligation to
pay to the Partnership any amounts required to be paid pursuant to this Section
10.5. If a Limited Partner fails to pay any amounts owed to the Partnership
pursuant to this Section 10.5 when due, the General Partner may, in its sole and
absolute discretion, elect to make the payment to the Partnership on behalf of
such defaulting Limited Partner, and in such event shall be deemed to have
loaned such amount to such defaulting Limited Partner, and shall succeed to all
rights and remedies of the Partnership as against such defaulting Limited
Partner (including, without limitation, the right to receive distributions
otherwise payable by the Partnership to such defaulting Limited Partner). Any
amounts payable by a Limited Partner under this provision shall bear interest at
the base rate on corporate loans at large United States money center commercial
banks, as published from time to time in the Wall Street Journal, plus four
percentage points (but not higher than the maximum lawful rate) from the date
such amount is due (i.e., 15 days after demand) until such amount is paid in
full. Each Limited Partner shall take such actions as the Partnership or the
General Partner shall request in order to perfect or enforce the security
interest created under this provision.
11. TRANSFERS AND WITHDRAWALS
11.1 TRANSFER.
(a) DEFINITION. The term "transfer," when used in this Article 11 with
respect to a Partnership Unit, shall be deemed to refer to a transaction by
which the General Partner purports to assign its Partnership Interest to another
Person or by which a Limited Partner purports to assign its Limited Partnership
Interest to another Person, and includes a sale, assignment, gift, pledge,
encumbrance, hypothecation, mortgage, exchange or any other disposition by law
or otherwise. The term "transfer" when used in this Article 11 does not include
any redemption or repurchase of Partnership Units by the Partnership from a
Partner or acquisition of Partnership Units from a Limited Partner by the
General Partner pursuant to Section 8.6 or otherwise. No part of the interest of
a Limited Partner shall be subject to the claims of any creditor, any spouse for
alimony or support, or to legal process, and may not be voluntarily or
involuntarily alienated or encumbered except as may be specifically provided for
in this Agreement.
(b) REQUIREMENTS. No Partnership Interest shall be transferred, in
whole or in part, except in accordance with the terms and conditions set forth
in this Article 11. Any transfer or purported transfer of a Partnership Interest
not made in accordance with this Article 11 shall be null and void.
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11.2 TRANSFER OF GENERAL PARTNER'S PARTNERSHIP INTEREST.
(a) GENERAL. The General Partner may not withdraw as a General Partner
or transfer its General Partnership Interest except in connection with a
transaction described in Section 8.7.
(b) TRANSFER TO PARTNERSHIP. The General Partner may transfer Limited
Partnership Interests held by it to the Partnership.
11.3 LIMITED PARTNERS' RIGHTS TO TRANSFER.
(a) GENERAL. Except as provided in this Agreement, a Limited Partner
may not transfer its Partnership Interest without the prior written consent of
the General Partner, which consent may be given or withheld by the General
Partner in its sole and absolute discretion. Notwithstanding the foregoing,
subject to the provisions of subsections (d), (e), (f) and (g) of this Section
11.3, and Sections 11.4 and 11.6, a Limited Partner may, without the prior
written consent of the General Partner
(i) transfer all or any portion of its Partnership Interest to
the General Partner,
(ii) transfer all or any portion of its Partnership Interest to
an Affiliate, another original Limited Partner or to an "Immediate
Family" member (i.e., as to any natural Person, such natural Person's
spouse, parents, descendants, nephews, nieces, brothers and sisters),
(iii) if such Limited Partner is a natural person, transfer all
or any portion of his or her Partnership Interest upon his or her
death to such Limited Partner's estate, executor, administrator or
personal representative or to such Limited Partner's beneficiaries
pursuant to a devise or bequest or by the laws of descent and
distribution or to a trust of which such Limited Partner is a settlor
or co-settlor with a member of his or her Immediate Family and the
beneficiaries of which include no Person other than such Limited
Partner and/or such Limited Partner's Immediate Family,
(iv) transfer all or any portion of its Partnership Interest
pursuant to the exercise of the Redemption Right,
(v) pledge all or any portion of its Partnership Interest to a
lending institution, that is not an Affiliate of such Limited Partner,
as collateral or security for a bona fide loan or other extension of
credit, and transfer such pledged Partnership Interest to such lending
institution in connection with the exercise of remedies under such
loan or extension or credit, and
(vi) if such Limited Partner is a corporation, partnership or
other business entity, transfer all or any portion of its Partnership
Interest to one or more entities that are wholly owned and controlled
by such Limited Partner or by distributing Partnership Interests in a
liquidation, winding up or otherwise without consideration to the
equity owners of such corporation, partnership or business entity.
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In order to effect any transfer, the Limited Partner must deliver to the General
Partner a duly executed copy of the instrument making such transfer and such
instrument must evidence the written acceptance by the assignee of, and
compliance with, all of the terms and conditions of this Agreement and represent
that such assignment was made in accordance with all applicable laws and
regulations.
(b) GENERAL PARTNER RIGHT OF FIRST REFUSAL. A Partner shall give
to the General Partner written notice of any proposed transfer that is not
otherwise permitted pursuant to Section 11.3(a) above, which notice shall state
(i) the identity of the proposed transferee, and (ii) the amount and type of
consideration proposed to be received for the transferred Partnership Units. The
General Partner shall have ten (10) days within which to give the transferring
Partner notice of its election to acquire the Partnership Units on the proposed
terms. If the General Partner does not so elect, the transferring Partner may
transfer such Partnership Units to a third party, on economic terms no more
favorable to the transferee than the proposed terms, subject to the other
conditions of this Section 11.3.
(c) ASSUMPTION OF OBLIGATIONS. It is a condition to any transfer
otherwise permitted under this Agreement (excluding Pledges of a Partnership
Interest, but including any transfer of the pledged Partnership Interest,
whether to the secured party or otherwise, pursuant to the secured party's
exercise of its remedies under such Pledge or the related loan or extension of
credit) that the transferee assumes by operation of law or express agreement all
of the obligations of the transferor Limited Partner under this Agreement with
respect to such transferred Partnership Interest and no such transfer (other
than pursuant to a statutory merger or consolidation in which all obligations
and liabilities of the transferor Partner are assumed by a successor corporation
by operation of law) shall relieve the transferor Partner of its obligations
under this Agreement without the approval of the General Partner, in its
reasonable discretion. Notwithstanding the foregoing, any transferee of any
transferred Partnership Interest shall be subject to any and all ownership
limitations contained in the Articles of Incorporation. Any transferee, whether
or not admitted as a Substituted Limited Partner, shall take subject to the
obligations of the transferor under this Agreement. Unless admitted as a
Substitute Limited Partner, no transferee, whether by a voluntary transfer, by
operation of law or otherwise, shall have rights under this Agreement, other
than the rights of an Assignee as provided in Section 11.5.
(d) INCAPACITATED LIMITED PARTNERS. If a Limited Partner is
subject to Incapacity, the executor, administrator, trustee, committee,
guardian, conservator or receiver of such Limited Partner's estate shall have
all the rights of a Limited Partner, but not more rights than those enjoyed by
other Limited Partners for the purpose of settling or managing the estate and
such power as the Incapacitated Limited Partner possessed to transfer all or any
part of his or her interest in the Partnership. The Incapacity of a Limited
Partner, in and of itself, shall not dissolve or terminate the Partnership.
(e) TRANSFERS CONTRARY TO SECURITIES LAWS. The General Partner
may prohibit any transfer otherwise permitted under Section 11.3 by a Limited
Partner of its Partnership Units if, in the opinion of legal counsel to the
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Partnership, such transfer would require filing of a registration statement
under the Securities Act or would otherwise violate any federal or state
securities laws or regulations applicable to the Partnership or the Partnership
Units.
(f) TRANSFERS AFFECTING TAX STATUS. No transfer by a Limited
Partner of its Partnership Units (or any economic or other interest, right or
attribute) may be made to any Person, including a redemption or exchange
pursuant to Section 8.6, if (i) in the opinion of legal counsel for the
Partnership, it would cause a termination of the Partnership for federal or
state income tax purposes that the General Partner believes would have a
material adverse effect or result in the Partnership being treated for federal
income tax purposes as an association taxable as a corporation, or (ii) such
transfer is effectuated through an "established securities market" or a
"secondary market (or the substantial equivalent)" within the meaning of Section
7704 of the Code. Notwithstanding anything to the contrary in this Agreement, no
interests in the Partnership shall be issued in a transaction that is (or
transactions that are) registered or required to be registered under the
Securities Act.
(g) TRANSFERS TO HOLDERS OF NONRECOURSE LIABILITIES. No transfer
or pledge of any Partnership Units may be made to a lender to the Partnership or
any Person who is related (within the meaning of Section 1.752-4(b) of the
Regulations) to any lender to the Partnership whose loan constitutes a
"nonrecourse liability" (within the meaning of Section 1.752-1(a)(2) of the
Regulations) without the consent of the General Partner, in its sole and
absolute discretion, provided that as a condition to any such consent the lender
will be required to enter into an arrangement with the Partnership and the
General Partner to exchange or redeem for the Redemption Amount any Partnership
Units that such lender or related person owns or would acquire upon foreclosure
of a security interest simultaneously with the time at which such lender would
be deemed to be a partner in the Partnership for purposes of allocating
liabilities to such lender under Section 752 of the Code.
(h) OTHER RESTRICTIONS. In addition to any other restrictions on
transfer contained in this Agreement, in no event may a transfer or assignment
of a Partnership Interest by any Partner (including a transfer upon exercise of
the Redemption Right) be made without the consent of the General Partner in its
sole and absolute discretion:
(i) to any person or entity who lacks the legal right, power
or capacity to own a Partnership Interest;
(ii) in violation of applicable law;
(iii) of any component portion of a Partnership Interest,
such as the Capital Account, or rights to distributions, separate
and apart from all other components of a Partnership Interest,
(iv) in the event such transfer adversely affects the
General Partner's ability to qualify as a REIT or could subject
the General Partner to any additional taxes under Section 857 or
Section 4981 of the Code;
(v) if such transfer would cause the Partnership to become,
with respect to any employee benefit plan subject to Title I of
ERISA, a "party-in-interest" (as defined in Section 3(14) of
ERISA) or a "disqualified person" (as defined in Section 4975(c)
of the Code);
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(vi) if such transfer would, in the opinion of counsel to
the Partnership, cause any portion of the assets of the
Partnership to constitute assets of any employee benefit plan
pursuant to Department of Labor Regulations Section 2510.2-101;
or
(vii) if such transfer subjects the Partnership to
regulation under the Investment Partnership Act of 1940, the
Investment Advisors Act of 1940 or the Employee Retirement Income
Security Act of 1974, each as amended.
11.4 SUBSTITUTED LIMITED PARTNERS.
(a) CONSENT OF GENERAL PARTNER REQUIRED. No Limited Partner shall have
the right to substitute a transferee as a Limited Partner in its place without
the prior written consent of the General Partner, which consent may be given or
withheld by the General Partner in its sole and absolute discretion. The General
Partner's failure or refusal to permit a transferee of any such interests to
become a Substituted Limited Partner shall not give rise to any cause of action
against the Partnership or any Partner.
(b) RIGHTS AND DUTIES OF SUBSTITUTED LIMITED PARTNERS. A transferee
who has been admitted as a Substituted Limited Partner in accordance with this
Article 11 shall have all the rights and powers and be subject to all the
restrictions and liabilities of a Limited Partner under this Agreement.
(c) AMENDMENT OF EXHIBIT A. Upon the admission of a Substituted
Limited Partner, the General Partner shall amend Exhibit A to reflect the name,
address, number of Partnership Units, and Percentage Interest of such
Substituted Limited Partner and to eliminate or adjust, if necessary, the name,
address and interest of the predecessor of such Substituted Limited Partner.
11.5 ASSIGNEES. If the General Partner, in its sole and absolute
discretion, does not consent to the admission of any permitted transferee under
Section 11.4 as a Substituted Limited Partner, such transferee shall be
considered an Assignee for purposes of this Agreement. An Assignee shall be
entitled to all the rights of an assignee of a limited partnership interest
under the Act, including the right to receive distributions from the Partnership
and the share of Profit, Loss, and gain attributable to the Partnership Units
assigned to such transferee, but shall not be deemed to be an owner of
Partnership Units for any other purpose under this Agreement, and shall not be
entitled to vote such Partnership Units in any matter presented to the Limited
Partners for a vote (such vote remaining with the transferor Limited Partner).
If any such transferee desires to make a further assignment of any such
Partnership Units, such transferee shall be subject to all the provisions of
this Article 11 to the same extent and in the same manner as any Limited Partner
desiring to make an assignment of Partnership Units.
11.6 GENERAL PROVISIONS.
(a) WITHDRAWAL OF LIMITED PARTNER. No Limited Partner may
withdraw from the Partnership other than as a result of a permitted transfer of
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all of such Limited Partner's Partnership Units in accordance with this Article
11 or pursuant to a redemption of all of its Partnership Units upon exercise of
the Redemption Right.
(b) TRANSFER OF ALL PARTNERSHIP UNITS BY LIMITED PARTNER. Any
Limited Partner who shall transfer all of its Partnership Units in a transfer
permitted pursuant to this Article 11 or pursuant to the Redemption Right shall
cease to be a Limited Partner, except as otherwise provided in Section 11.5.
(c) TIMING OF TRANSFERS. Transfers pursuant to this Article 11
may only be made on the first day of a fiscal quarter of the Partnership, unless
the General Partner otherwise agrees.
12. ADMISSION OF PARTNERS
12.1 ADMISSION OF SUCCESSOR GENERAL PARTNER. A successor to all of the
General Partner's General Partnership Interest pursuant to Section 8.7 who is
proposed to be admitted as a successor General Partner shall be admitted to the
Partnership as the General Partner, effective upon such transfer, provided that,
in the case of transactions other than those described in Section 8.7(c),
Limited Partners representing a majority of the Percentage Interests (including
Limited Partnership Interests held by the General Partner) vote to admit such
person as successor General Partner, which votes shall be cast by such Limited
Partners in their sole and absolute discretion. Provided such vote of the
Limited Partners is obtained, any such transferee shall carry on the business of
the Partnership without dissolution. In each case, the admission shall be
subject to the successor General Partner executing and delivering to the
Partnership an acceptance of all of the terms and conditions of this Agreement
and such other documents or instruments as may be required to effect the
admission.
12.2 ADMISSION OF ADDITIONAL LIMITED PARTNERS.
(a) GENERAL. A Person who makes a capital contribution to the
Partnership in accordance with this Agreement or who exercises an option to
receive Partnership Units shall be admitted to the Partnership as an Additional
Limited Partner only upon furnishing to the General Partner (a) evidence of
acceptance in form satisfactory to the General Partner of all of the terms and
conditions of this Agreement, including, without limitation, the power of
attorney granted in Article 16 and (b) such other documents or instruments as
may be required in the discretion of the General Partner in order to effect such
Person's admission as an Additional Limited Partner.
(b) CONSENT OF GENERAL PARTNER REQUIRED. Notwithstanding anything to
the contrary in this Section 12.2, no Person shall be admitted as an Additional
Limited Partner without the consent of the General Partner, which consent may be
given or withheld in the General Partner's sole and absolute discretion. The
admission of any Person as an Additional Limited Partner shall become effective
on the date upon which the name of such Person is recorded on the books and
records of the Partnership, following the consent of the General Partner to such
admission.
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12.3 AMENDMENT OF AGREEMENT AND CERTIFICATE. For the admission to the
Partnership of any Partner, the General Partner shall take all steps necessary
and appropriate under the Act to amend the records of the Partnership and, if
necessary, to prepare as soon as practical an amendment of this Agreement
(including an amendment of Exhibit A) and, if required by law, shall prepare and
file an amendment to the Certificate and may for this purpose exercise the power
of attorney granted pursuant to Article 16.
13. DISSOLUTION AND LIQUIDATION
13.1 DISSOLUTION. The Partnership shall not be dissolved by the admission
of Substituted Limited Partners or Additional Limited Partners or by the
admission of a successor General Partner in accordance with the terms of this
Agreement. The Partnership shall dissolve, and its affairs shall be wound up,
upon the first to occur of any of the following ("Events of Dissolution"):
(a) the expiration of the Partnership's term as provided in Section
2.4;
(b) an event of withdrawal of the General Partner, as defined in the
Act, unless, within 90 days after the withdrawal, remaining Partners holding a
majority of the Units agree in writing to continue the business of the
Partnership and to the appointment, effective as of the date of withdrawal, of a
substitute General Partner;
(c) from and after the date of this Agreement through December 31,
2056, an election to dissolve the Partnership made by the General Partner with
the consent of the holders of a majority of the Percentage Interests (including
Limited Partnership Interests held by the General Partner), and on or after
January 1, 2056, an election to dissolve the Partnership made by the General
Partner, in its sole and absolute discretion;
(d) entry of a decree of judicial dissolution of the Partnership
pursuant to the provisions of the Act;
(e) the sale of all or substantially all of the assets and properties
of the Partnership;
(f) the merger or other combination of the Partnership with or into
another entity; or
(g) the General Partner --
(1) makes an assignment for the benefit of creditors;
(2) files a voluntary petition in bankruptcy;
(3) is adjudged a bankrupt or insolvent, or has entered against
it an order for relief in any bankruptcy or insolvency proceeding;
(4) files a petition or answer seeking for itself any
reorganization, arrangements, composition, readjustment, liquidation,
dissolution or similar relief under any statute, law or regulation;
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(5) files an answer or other pleading admitting or failing to
contest the material allegations of a petition filed against it in any
proceeding of this nature; or
(6) seeks, consents to or acquiesces in the appointment of a
trustee, receiver or liquidator of the General Partner or of all or
any substantial part of its properties.
13.2 WINDING UP.
(a) GENERAL. Upon the occurrence of an Event of Dissolution, the
Partnership shall continue solely for the purposes of winding up its affairs in
an orderly manner, liquidating its assets, and satisfying the claims of its
creditors and Partners. No Partner shall take any action that is inconsistent
with, or not necessary to or appropriate for, the winding up of the
Partnership's business and affairs. The General Partner (or, in the event there
is no remaining General Partner, any Person elected by a majority in interest of
the Limited Partners (the "Liquidator")) shall be responsible for overseeing the
winding up and dissolution of the Partnership and shall take full account of the
Partnership's liabilities and property and the Partnership property shall be
liquidated as promptly as is consistent with obtaining the fair value of the
property, and the proceeds shall be applied and distributed in the following
order:
(1) First, to the payment and discharge of all of the
Partnership's debts and liabilities to creditors other than the
Partners;
(2) Second, to the payment and discharge of or provision for all
of the Partnership's debts and liabilities to the General Partner;
(3) Third, to the payment and discharge of all of the
Partnership's debt and liabilities to the other Partners, pro rata in
accordance with amounts owed to each such Partner; and
(4) The balance, if any, to the General Partner and Limited
Partners in accordance with their Capital Accounts, after giving
effect to all contributions, distributions, and allocations for all
periods.
The General Partner shall not receive any additional compensation for
any services performed pursuant to this Article 13, other than reimbursement of
its expenses.
(b) WHERE IMMEDIATE SALE OF PARTNERSHIP'S ASSETS IMPRACTICAL.
Notwithstanding the provisions of Section 13.2(a) that require liquidation of
the assets of the Partnership, but subject to the order of priorities set forth
in that provision, if prior to or upon dissolution of the Partnership the
Liquidator determines that an immediate sale of part or all of the Partnership's
assets would be impractical or would cause undue loss to the Partners, the
Liquidator may, in its sole and absolute discretion, defer for a reasonable time
the liquidation of any assets except those necessary to satisfy liabilities of
the Partnership (including to those Partners as creditors) or, with the consent
of the Partners holding a majority of the Partnership Units, distribute to the
Partners, in lieu of cash, as tenants in common and in accordance with the
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provisions of Section 13.2(a), undivided interests in such Partnership assets as
the Liquidator deems not suitable for liquidation. Any such distributions in
kind shall be made only if, in the good faith judgment of the Liquidator, such
distributions in kind are in the best interest of the Partners, and shall be
subject to such conditions relating to the disposition and management of such
properties as the Liquidator deems reasonable and equitable and to any
agreements governing the operation of such properties at such time. The
Liquidator shall determine the fair market value of any property distributed in
kind using such reasonable method of valuation as it may adopt.
13.3 LIQUIDATION. Subject to Section 13.4, in the event the Partnership is
"liquidated" within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g),
distributions shall be made pursuant to this Article 13 to the General Partner
and Limited Partners who have positive Capital Accounts in compliance with
Regulations Section 1.704-1(b)(2)(ii)(b)(2) (including any timing requirements
of those provisions). In the discretion of the General Partner, a pro rata
portion of the distributions that would otherwise be made to the General Partner
and Limited Partners pursuant to this Article 13 may be: (a) distributed to a
liquidating trust established for the benefit of the General Partner and Limited
Partners for the purpose of liquidating Partnership assets, collecting amounts
owed to the Partnership, and paying any contingent or unforeseen liabilities or
obligations of the Partnership or of the General Partner arising out of or in
connection with the Partnership (the assets of any such trust shall be
distributed to the General Partner and Limited Partners from time to time, in
the reasonable discretion of the General Partner, in the same proportions as the
amount distributed to such trust by the Partnership would otherwise have been
distributed to the General Partner and Limited Partners pursuant to this
Agreement); or (b) withheld to provide a reasonable reserve for Partnership
liabilities (contingent or otherwise) and to reflect the unrealized portion of
any installment obligations owed to the Partnership, provided that such withheld
amounts shall be distributed to the General Partner and Limited Partners as soon
as practicable.
13.4 DEEMED DISTRIBUTION AND RECONTRIBUTION. Notwithstanding any other
provision of this Article 13, in the event the Partnership is liquidated within
the meaning of Regulations Section 1.704-1(b)(2)(ii)(g) but no Event of
Dissolution has occurred, the Partnership's property shall not be liquidated,
the Partnership's liabilities shall not be paid or discharged, and the
Partnership's affairs shall not be wound up.
13.5 RIGHTS OF LIMITED PARTNERS. Except as specifically provided in this
Agreement, each Limited Partner shall look solely to the assets of the
Partnership for the return of its capital contribution and shall have no right
or power to demand or receive property other than cash from the Partnership.
Except as specifically provided in this Agreement, no Limited Partner shall have
priority over any other Limited Partner as to the return of its capital
contributions, distributions, or allocations.
13.6 NOTICE OF DISSOLUTION. If an Event of Dissolution or an event occurs
that would, but for provisions of Section 13.1, result in a dissolution of the
Partnership, the General Partner shall, within 30 days of the event, provide
written notice of the event to each of the Partners and to all other parties
with whom the Partnership regularly conducts business (as determined in the sole
and absolute discretion of the General Partner) and shall publish notice of the
event in a newspaper of general circulation in each place in which the
Partnership regularly conducts business (as determined in the sole and absolute
discretion of the General Partner).
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13.7 CANCELLATION OF CERTIFICATE OF LIMITED PARTNERSHIP. Upon the
completion of the liquidation of the Partnership as provided in Section 13.2,
the Partnership shall be terminated and the Certificate and all qualifications
of the Partnership as a foreign limited partnership in jurisdictions other than
the State of California shall be canceled and such other actions as may be
necessary to terminate the Partnership shall be taken.
13.8 REASONABLE TIME FOR WINDING-UP. A reasonable time shall be allowed for
the orderly winding-up of the business and affairs of the Partnership and the
liquidation of its assets pursuant to Section 13.2, in order to minimize any
losses otherwise attendant upon such winding-up, and the provisions of this
Agreement shall remain in effect between the Partners during the period of
liquidation.
14. AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS
14.1 AMENDMENTS.
(a) GENERAL. Amendments to this Agreement may be proposed by the
General Partner or by any Limited Partners holding 25 percent or more of the
Partnership Units. Following such proposal, the General Partner shall submit any
proposed amendment to the Limited Partners. The General Partner shall seek the
written vote of the Partners on the proposed amendment or shall call a meeting
to vote on the proposal and to transact any other business that it may deem
appropriate. For purposes of obtaining a written vote, the General Partner may
establish a Partnership Record Date and require a response within a reasonable
specified time, but not less than 15 days, and FAILURE TO RESPOND IN SUCH TIME
PERIOD SHALL CONSTITUTE A VOTE THAT IS CONSISTENT WITH THE GENERAL PARTNER'S
RECOMMENDATION WITH RESPECT TO THE PROPOSAL. Except as provided in Section
14.1(b) or 14.1(c), a proposed amendment shall be adopted and be effective as an
amendment to this Agreement if it is approved by the General Partner and it
receives the consent of a majority of the Partnership Units held by the Limited
Partners (including Partnership Units held by the General Partner in its
capacity as a Limited Partner).
(b) GENERAL PARTNER'S POWER TO AMEND. Notwithstanding Section 14.1(a),
the General Partner shall have the power, without the consent of the Limited
Partners, to amend this Agreement as may be required to facilitate or implement
any of the following purposes:
(1) to add to the obligations of the General Partner or surrender
any right or power granted to the General Partner or any Affiliate of the
General Partner for the benefit of the Limited Partners;
(2) to reflect the admission, substitution, termination, or
withdrawal of Partners in accordance with this Agreement;
(3) to set forth the rights, powers, duties, and preferences of
the holders of any additional Partnership Interests issued pursuant to
Section 4.2(b);
(4) to reflect a change that does not adversely affect the
Limited Partners in any material respect, or to cure any ambiguity, correct
or supplement any provision in this Agreement not inconsistent with law or
with other provisions, or make other changes with respect to matters
47
<PAGE>
arising under this Agreement that will not be inconsistent with law or with
the provisions of this Agreement;
(5) to satisfy any requirements, conditions, or guidelines
contained in any order, directive, opinion, ruling or regulation of a
federal or state agency or contained in federal or state law; and
(6) to reflect such changes as are reasonably necessary for the
General Partner to maintain its status as a REIT.
The General Partner will notify the Limited Partners when any material
action under this Section 14.1(b) is taken in the next regular communication to
the Limited Partners.
(c) CONSENT OF ADVERSELY AFFECTED PARTNER REQUIRED. Notwithstanding
Section 14.1(a), this Agreement shall not be amended without the consent of each
Partner adversely affected if such amendment would:
(1) convert a Limited Partner's interest in the Partnership into
a general partner's interest,
(2) modify the limited liability of a Limited Partner,
(3) alter rights of the Partner to receive distributions pursuant
to Article 5, or the allocations specified in Article 6 (except as
permitted pursuant to Section 4.2 and Section 14.1(b)(3)),
(4) alter or modify the Redemption Right or the Redemption Amount
as set forth in Section 8.6 and related definitions,
(5) cause the termination of the Partnership prior to the time
set forth in Sections 2.5 or 13.1,
(6) affect the operation of the Unit Adjustment Factor in a
manner adverse to the Limited Partners, or
(7) impose on the Limited Partners any obligation to make
additional capital contributions to the Partnership or (viii) amend
this Section 14.1(c).
Further, no amendment may alter the restrictions of the General Partner's
authority set forth in Section 7.2 without the consent specified in that
Section.
14.2 MEETINGS OF THE PARTNERS.
(a) GENERAL. Meetings of the Partners may be called by the General
Partner and shall be called upon the receipt by the General Partner of a written
request by Limited Partners holding 25 percent or more of the Partnership Units.
The call shall state the nature of the business to be transacted. Notice of any
such meeting shall be given to all Partners not less than seven days nor more
than 30 days prior to the date of such meeting. Partners may vote in person or
by proxy at such meeting. Whenever the vote or consent of Partners is permitted
or required under this Agreement, such vote or consent may be given at a meeting
48
<PAGE>
of Partners or may be given in accordance with the procedure prescribed in
Section 14.1. Except as otherwise expressly provided in this Agreement, the
consent of holders of a majority of the Percentage Interests (including Limited
Partnership Interests held by the General Partner) shall control.
(b) ACTION BY WRITTEN CONSENT. Any action required or permitted to be
taken at a meeting of the Partners may be taken without a meeting if a written
consent setting forth the action so taken is signed by a majority of the
Percentage Interests of the Partners (or such other percentage as is expressly
required by this Agreement for such action to be taken at a meeting). Such
consent may be in one instrument or in several instruments, and shall have the
same force and effect as a vote of a majority of the Percentage Interests of the
Partners (or such other percentage as is expressly required by this Agreement
for such action to be taken at a meeting). Such consent shall be filed with the
General Partner. An action so taken shall be deemed to have been taken at a
meeting held on the effective date so certified.
(c) PROXIES. Each Limited Partner may authorize any Person or Persons
to act for him by proxy on all matters in which a Limited Partner is entitled to
participate, including waiving notice of any meeting, or voting or participating
at a meeting. Every proxy must be signed by the Limited Partner or its
attorney-in-fact. No proxy shall be valid after the expiration of 11 months from
the date of the proxy unless otherwise provided in the proxy. Every proxy shall,
unless otherwise specifically provided in the proxy, be revocable at the
pleasure of the Limited Partner executing it.
(d) CONDUCT OF MEETING. Each meeting of Partners shall be conducted by
the General Partner or such other Person as the General Partner may appoint
pursuant to such rules for the conduct of the meeting as the General Partner or
such other Person deems appropriate, including establishment of a Partnership
Record Date for such meeting.
15. GENERAL PROVISIONS
15.1 ADDRESSES AND NOTICE. All notices and demands under this Agreement
shall be in writing, and may be either delivered personally (which shall include
deliveries by courier) by telefax, telex or other wire transmission (with
request for evidence of receipt in a manner appropriate with respect to
communications of that type, provided that a confirmation copy is concurrently
sent by a nationally recognized express courier for overnight delivery) or
mailed, postage prepaid, by certified or registered mail, return receipt
requested, directed to the parties at their respective addresses set forth on
Exhibit A, as it may be amended from time to time, and, if to the Partnership,
such notices and demands sent in the foregoing manner must be delivered at its
principal place of business set forth above. Notices delivered personally or by
telefax, telex or other wire transmission shall be effective on the first
Business Day following the date of delivery or transmission. Notices that are
mailed shall be deemed to have been received three (3) Business Days following
the date so mailed. Any party may designate a different address to which notices
and demands shall subsequently be directed by written notice given in the same
manner and directed to the Partnership at its office.
15.2 TITLES AND CAPTIONS. All article or Section titles or captions in this
Agreement are for convenience only. They shall not be deemed part of this
49
<PAGE>
Agreement and in no way define, limit, extend or describe the scope or intent of
any provisions of this Agreement. Except as specifically provided otherwise,
references to "Articles" and "Sections" are to Articles and Sections of this
Agreement.
15.3 PRONOUNS AND PLURALS. Whenever the context may require, any pronoun
used in this Agreement shall include the corresponding masculine, feminine or
neuter forms, and the singular form of nouns, pronouns and verbs shall include
the plural and vice versa.
15.4 FURTHER ACTION. The parties shall execute and deliver all documents,
provide all information and take or refrain from taking action as may be
necessary or appropriate to achieve the purposes of this Agreement.
15.5 BINDING EFFECT. This Agreement shall be binding upon and inure to the
benefit of the parties and their heirs, executors, administrators, successors,
legal representatives and permitted assigns.
15.6 WAIVER OF PARTITION. The Partners agree that the Partnership
properties are not and will not be suitable for partition. Accordingly, each of
the Partners irrevocably waives any and all rights (if any) that it may have to
maintain any action for partition of any of the Partnership properties.
15.7 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
among the parties with respect to the matters contained in this Agreement; it
supersedes any prior agreements or understandings among them and it may not be
modified or amended in any manner other than pursuant to Article 14.
15.8 SECURITIES LAW PROVISIONS. The Partnership Units have not been
registered under the federal or state securities laws of any state and,
therefore, may not be resold unless appropriate federal and state securities
laws, as well as the provisions of Article 11, have been complied with.
15.9 REMEDIES NOT EXCLUSIVE. Any remedies contained in this Agreement for
breaches of obligations under this Agreement shall not be deemed to be exclusive
and shall not impair the right of any party to exercise any other right or
remedy, whether for damages, injunction or otherwise.
15.10 TIME. Time is of the essence of this Agreement.
15.11 CREDITORS. None of the provisions of this Agreement shall be for the
benefit of, or shall be enforceable by, any creditor of the Partnership.
15.12 WAIVER. No failure by any party to insist upon the strict performance
of any covenant, duty, agreement or condition of this Agreement or to exercise
any right or remedy consequent upon a breach of this Agreement shall constitute
waiver of any such breach or any other covenant, duty, agreement or condition.
15.13 EXECUTION COUNTERPARTS. This Agreement may be executed in
counterparts, all of which together shall constitute one agreement binding on
all the parties to this Agreement, notwithstanding that all such parties are not
signatories to the original or the same counterpart. Each party shall become
50
<PAGE>
bound by this Agreement immediately upon affixing its signature to this
Agreement.
15.14 APPLICABLE LAW. This Agreement shall be construed in accordance with
and governed by the laws (other than the law governing the choice of law) of the
State of California, without regard to the principles of conflicts of law. In
the event of a conflict between any provision of this Agreement and any
nonmandatory provision of the Act, the provisions of this Agreement shall
control and take precedence.
15.15 INVALIDITY OF PROVISIONS. If any provision of this Agreement is or
becomes invalid, illegal or unenforceable in any respect, the validity, legality
and enforceability of the remaining provisions contained in this Agreement shall
not be affected.
15.16 NO THIRD-PARTY RIGHTS CREATED. The provisions of this Agreement are
solely for the purpose of defining the interests of the Partners, inter se; and
no other person, firm or entity (i.e., a party who is not a signatory to this
Agreement or a permitted successor to such a signatory) shall have any right,
power, title or interest by way of subrogation or otherwise, in and to the
rights, powers, title and provisions of this Agreement.
16. POWER OF ATTORNEY
16.1 POWER OF ATTORNEY.
(a) SCOPE. Each Limited Partner and each Assignee constitutes and
appoints the General Partner, any Liquidator, and authorized officers and
attorneys-in-fact of each, and each of those acting singly, in each case with
full power of substitution, as its true and lawful agent and attorney-in-fact,
with full power and authority in its name, place and stead to:
(1) execute, swear to, acknowledge, deliver, file and record
in the appropriate public offices
(i) all certificates, documents and other instruments
(including, without limitation, this Agreement and the
Certificate and all amendments or restatements of the
Agreement or the Certificate) that the General Partner or
the Liquidator deems appropriate or necessary to form,
qualify or continue the existence or qualification of the
Partnership as a limited partnership (or a partnership in
which the limited partners have limited liability) in the
State of California and in all other jurisdictions in which
the Partnership may conduct business or own property;
(ii) all instruments that the General Partner deems
appropriate or necessary to reflect any amendment, change,
modification or restatement of this Agreement in accordance
with its terms;
(iii) all conveyances and other instruments or
documents that the General Partner deems appropriate or
necessary to reflect the dissolution and liquidation of the
Partnership pursuant to the terms of this Agreement,
including, without limitation, a certificate of
cancellation;
51
<PAGE>
(iv) all instruments relating to the admission,
withdrawal, removal or substitution of any Partner pursuant
to, or other events described in, Articles 11, 12 or 13 or
the capital contribution of any Partner; and
(v) all certificates, documents and other instruments
relating to the determination of the rights, preferences and
privileges of Partnership Interests; and
(2) execute, swear to, acknowledge and file all ballots,
consents, approvals, waivers, certificates and other instruments appropriate or
necessary, in the sole and absolute discretion of the General Partner, to make,
evidence, give, confirm or ratify any vote, consent, approval, agreement or
other action that is made or given by the Partners under this Agreement or is
consistent with the terms of this Agreement or appropriate or necessary, in the
sole discretion of the General Partner, to effectuate the terms or intent of
this Agreement.
Nothing contained in this Agreement shall be construed as
authorizing the General Partner to amend this Agreement except in accordance
with Article 14 or as may be otherwise expressly provided for in this Agreement.
(b) IRREVOCABILITY. The foregoing power of attorney is declared
to be irrevocable and a power coupled with an interest, in recognition of the
fact that each of the Partners will be relying upon the power of the General
Partner to act as contemplated by this Agreement in any filing or other action
by it on behalf of the Partnership, and it shall survive and not be affected by
the subsequent Incapacity of any Limited Partner or Assignee and the transfer of
all or any portion of such Limited Partner's or Assignee's Partnership Units and
shall extend to such Limited Partner's or Assignee's heirs, successors, assigns
and personal representatives. Each such Limited Partner or Assignee agrees to be
bound by any representation made by the General Partner, acting in good faith
pursuant to such power of attorney; and each such Limited Partner or Assignee
waives any and all defenses that may be available to contest, negate or
disaffirm the action of the General Partner, taken in good faith under such
power of attorney. Each Limited Partner or Assignee shall execute and deliver to
the General Partner or the Liquidator, within 15 days after receipt of the
General Partner's request, such further designation, powers of attorney and
other instruments as the General Partner or the Liquidator, as the case may be,
deems necessary to effectuate this Agreement and the purposes of the
Partnership.
The parties have signed this Agreement as of the date specified
in the introductory paragraph of this Agreement.
GENERAL PARTNER:
AMERICAN OFFICE PARK PROPERTIES, INC.,
a California corporation
By: s/ Ronald L. Havner, Jr.
--------------------------------
Ronald L. Havner, Jr., President
and Chief Executive Officer
52
<PAGE>
LIMITED PARTNERS:
AMERICAN OFFICE PARK PROPERTIES, INC.,
a California corporation
By: s/ Ronald L. Havner, Jr.
--------------------------------
Ronald L. Havner, Jr., President
and Chief Executive Officer
PUBLIC STORAGE, INC.,
a California corporation
By: s/ David P. Singelyn
--------------------------------
David P. Singelyn, Vice President
SEI/PSP II JOINT VENTURES
a California general partnership
By: Public Storage, Inc.,
General Partner
By: s/ David P. Singelyn
--------------------------------
David P. Singelyn, Vice President
SEI/PSP III JOINT VENTURES
a California general partnership
By: Public Storage, Inc.,
General Partner
By: s/ David P. Singelyn
--------------------------------
David P. Singelyn, Vice President
PS PARTNERS V, LTD.,
a California Limited Partnership
By: Public Storage, Inc.,
General Partner
By: s/ David P. Singelyn
--------------------------------
David P. Singelyn, Vice President
53
<PAGE>
SEI/PSP V JOINT VENTURES
a California general partnership
By: Public Storage, Inc.,
General Partner
By: s/ David P. Singelyn
--------------------------------
David P. Singelyn, Vice President
SEI/PSP VI JOINT VENTURES
a California general partnership
By: Public Storage, Inc.,
General Partner
By: s/ David P. Singelyn
--------------------------------
David P. Singelyn, Vice President
SEI/PSP VI JOINT VENTURES
a California general partnership
By: Public Storage, Inc.,
General Partner
By: s/ David P. Singelyn
--------------------------------
David P. Singelyn, Vice President
SEI/PSP VII JOINT VENTURES
a California general partnership
By: Public Storage, Inc.,
General Partner
By: s/ David P. Singelyn
--------------------------------
David P. Singelyn, Vice President
PS PARTNERS VIII, LTD.,
a California Limited Partnership
By: Public Storage, Inc.,
General Partner
By: s/ David P. Singelyn
--------------------------------
David P. Singelyn, Vice President
54
<PAGE>
SEI/PSP I JOINT VENTURES
a California general partnership
By: Public Storage, Inc.,
General Partner
By: s/ David P. Singelyn
--------------------------------
David P. Singelyn, Vice President
PS PARTNERS II, LTD.,
a California limited partnership
By: Public Storage, Inc.,
General Partner
By: s/ David P. Singelyn
--------------------------------
David P. Singelyn, Vice President
PS TEXAS HOLDINGS, LTD.,
a Texas limited partnership
By: PS GPT Properties, Inc.,
a California corporation,
General Partner
By: s/ David P. Singelyn
--------------------------------
David P. Singelyn, Vice President
SEI/PSP IV JOINT VENTURES
a California general partnership
By: Public Storage, Inc.,
General Partner
By: s/ David P. Singelyn
--------------------------------
David P. Singelyn, Vice President
GALAXY PARTNERSHIP,
a Maryland general partnership
By: s/ Andrew J. Czekaj
--------------------------------
Andrew J. Czekaj, General Partner
55
<PAGE>
GALAXY ASSOCIATES, L.L.C.,
a Virginia limited liability company
By: s/ Andrew J. Czekaj
--------------------------------
Andrew J. Czekaj, Manager
FARATON CORP.,
a British Virgin Islands corporation
By: s/ John Pritchard
--------------------------------
John Pritchard, Authorized Officer
56
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000866368
<NAME> PUBLIC STORAGE PROPERTIES XI, INC.
<MULTIPLIER> 1
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Dec-31-1997
<EXCHANGE-RATE> 1
<CASH> 2,455,000
<SECURITIES> 0
<RECEIVABLES> 454,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,909,000
<PP&E> 39,135,000
<DEPRECIATION> (13,198,000)
<TOTAL-ASSETS> 28,846,000
<CURRENT-LIABILITIES> 1,475,000
<BONDS> 0
0
0
<COMMON> 25,000
<OTHER-SE> 27,346,000
<TOTAL-LIABILITY-AND-EQUITY> 28,846,000
<SALES> 0
<TOTAL-REVENUES> 7,643,000
<CGS> 0
<TOTAL-COSTS> 3,962,000
<OTHER-EXPENSES> 201,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,480,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,480,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,480,000
<EPS-PRIMARY> 1.77
<EPS-DILUTED> 1.38
</TABLE>
AOPP PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated financial statements were
prepared to reflect the proposed merger (the "Merger") of American Office Park
Properties, Inc. ("AOPP") and Public Storage Properties XI, Inc. ("PSP11"),
which is described in the Public Storage Properties XI, Inc. Proxy Statement and
Prospectus dated February 5, 1998 (the "Proxy Statement"). Under the Merger
Agreement:
* AOPP will merge into PSP11.
* Each outstanding share of PSP11 Common Stock will continue to be owned
by current holders or converted into the right to receive $20.50 in
cash. The amount of cash elections (the "Cash Elections") will be
limited to 20% of the total outstanding shares of PSP11. If a PSP11
shareholder does not elect cash, he or she will continue to own PSP11
Common Stock.
* Each share of PSP11 Common Stock Series B and each share of PSP11
Common Stock Series C will be converted into either .8641 share of
PSP11 Common Stock or the right to receive $17.71 in cash (up to 20%
of the outstanding Series B and Series C), at the option of the
shareholders. All of the Series B and Series C shareholders have
indicated that they intend to elect PSP11 Common Stock in the Merger.
* Each share of AOPP Common Stock will be converted into either 1.18
shares of PSP11 Common Stock or the right to receive $24.19 in cash
(up to 20% of the outstanding AOPP Common Stock), at the option of an
AOPP shareholder. All of the AOPP shareholders have indicated that
they intend to elect PSP11 Common Stock in the Merger.
* The surviving corporation in the Merger will be renamed "PS Business
Parks, Inc. ("PSBP")."
* Concurrent with the Merger, PSP11 will exchange (the "Exchange") 11
mini-warehouses and two properties that combine mini-warehouse and
commercial space for 11 commercial properties owned by Public Storage,
Inc. ("PSI").
The number of PSP11 Common Shares outstanding upon the consummation of the
Merger will depend in large part on the amount of shares electing cash. Since
the amount is not predictable, two scenarios of pro forma financial information
have been provided: (i) assuming maximum Cash Elections of 20% of PSP11 Common
Stock and (ii) assuming no Cash Elections.
The Merger will be treated as a reverse merger whereby AOPP will be treated as
the accounting acquirer using the purchase method. This has been determined
based upon the following:
* The business focus post Merger will continue to be that of AOPP's
which includes the acquisition, ownership and management of commercial
properties. Prior to the Merger, PSP11's business focus has been
primarily on the ownership and operation of its mini-warehouse
properties which represent approximately 81% of its portfolio.
* Following the Merger, the former shareholders and unitholders of AOPP
will own in excess of 80% of the merged companies.
In addition to adjustments to reflect the proposed Merger, pro forma adjustments
were made to reflect the following transactions:
1. On April 1, 1997, AOPP LP (the "Operating Partnership") acquired four
commercial properties from PSI in exchange for 1,235,500 OP Units.
PF-1
<PAGE>
2. On July 31, 1997, AOPP acquired two commercial properties from an
unaffiliated third party for cash totaling $33,750,000. AOPP raised
the cash for this acquisition by issuing 1,690,000 shares of AOPP
Common Stock primarily to PSI for cash totaling $33,800,000.
3. On September 24, 1997, AOPP acquired one commercial property (the
"Largo Property") from an unaffiliated third party for an aggregate
cost of $10,374,000, consisting of cash of $10,050,000 and the
issuance of 12,000 Operating Partnership units ("OP Units") having a
value of $324,000.
4. On December 10, 1997, AOPP purchased a commercial property (the
"Northpointe Property") for $3,875,000, consisting of cash of
$3,575,000 and the issuance of 11,111 OP Units having a value of
$300,000.
5. On December 24, 1997, AOPP completed a transaction where AOPP issued
1,512,718 OP Units and 2,970,134 shares of AOPP common stock to a
subsidiary of a state pension fund, and the subsidiary of the state
pension fund, through a merger and contribution, transferred to AOPP
six commercial properties (the "Acquiport Properties" - $118,655,000)
and $1,000,000 cash. The Company incurred $3,300,000 in transaction
costs. On January 9, 1998, the subsidiary of the state pension fund
exercised its option to convert the shares of OP units into shares of
AOPP common stock on a one-for-one basis.
6. In December 1997, AOPP reached an agreement in principle with a group
of institutional investors under which AOPP would issue up to
5,740,741 shares of AOPP common stock at $27.00 per share in separate
tranches. The first tranche, 1,851,852 shares or $50.0 million, was
issued in January 1998. The remainder of the shares are to be issued
as the funds are required by AOPP, in minimum increments of $20.0
million.
7. On January 13, 1998, AOPP purchased a commercial property (the
"Ammendale property") for $22,643,000, consisting of cash of
$22,450,000 and the issuance of 7,143 OP Units having a value of
$193,000.
8. In March 1998, AOPP purchased one commercial property and had an
agreement in principle to purchase another commercial property (the
"March Acquisitions", referred to in the Proxy Statement dated
February 5, 1998 as the "Proposed Acquisitions") from an unaffiliated
third party for an aggregate cost of $33,152,000, composed of
$18,200,000 cash, the issuance of 8,033 OP Units having a value of
$217,000, and the assumption of mortgage notes payable of $14,735,000.
9. No effect has been given to a capital infusion from the subsidiary of
the state pension fund referred to in 5) above. Pursuant to the terms
of the merger and contribution agreement with the subsidiary, the
subsidiary has the right to acquire additional shares in AOPP at $27
per share in order to maintain its proportional interest in AOPP prior
to the PSP 11 merger. Assuming all of the pro forma adjustments noted
above (primarily the issuance of shares to institutional investors),
the subsidiary would have the right to purchase approximately an
additional 850,000 shares of AOPP stock.
The pro forma consolidated balance sheet at December 31, 1997 has been prepared
to reflect (i) the aforementioned acquisitions and proposed acquisitions of
commercial properties which occurred after December 31, 1997 the related (ii)
conversion of OP units to AOPP Common Stock by the subsidiary of the state
pension fund, (iii) the issuance of $50.0 million of AOPP Common Stock to
institutional investors, and (iv) the proposed Merger transaction between AOPP
and PSP11.
The pro forma consolidated statement of income for the year ended December 31,
1997 has been prepared assuming (i) the aforementioned acquisitions and proposed
acquisitions of commercial properties (ii) the issuance of $50.0 million of AOPP
PF-2
<PAGE>
Common Stock to institutional investors, and (iii) the proposed Merger between
AOPP and PSP11, as if all such transactions were completed at the beginning of
fiscal 1997.
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 PSP11 and AOPP believe are reasonable in the circumstances. The
pro forma consolidated financial statements and accompanying notes should be
read in conjunction with the historical financial statements of PSP11, AOPP, and
certain financial information with respect to properties acquired and proposed
to be acquired pursuant to agreements in principle. (SEE "FINANCIAL STATEMENTS
- -ACQUIRED PROPERTIES, -EXCHANGED PROPERTIES, -BALDON, -LARGO, -ACQUIPORT
PROPERTIES AND PROPOSED ACQUISITIONS INCLUDED IN THE ABOVE REFERENCED PROXY
STATEMENT). The following pro forma consolidated financial statements do not
purport to represent what AOPP'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 AOPP's results of operations for any future date or
period.
PF-3
<PAGE>
<TABLE>
<CAPTION>
PS BUSINESS PARKS, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
December 31, 1997
(Unaudited)
(Amounts in thousands, except share and per share data)
Assuming Maximum Cash Elections of 20%
AOPP
-------------------------------------------------------
Pro Forma Adjustments
-----------------------------------------------------
Property Other AOPP
ASSETS AOPP Acquisitions Adjustments Pre-Merger
(Historical) (Note 1) (Note 2) (Pro Forma)
------------ -------- -------- -----------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 3,884 $ (40,650) $ 41,200 $ 4,434
Real estate facilities, net of accumulated 314,238 55,795 - 370,033
depreciation
Intangible assets, net of accumulated amortization 3,272 - - 3,272
Other assets 2,060 - - 2,060
Purchase cost - - - -
------------ -------- -------- -----------
Total assets $ 323,454 $ 15,145 $ 41,200 $ 379,799
============ ======== ======== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued and other liabilities $ 8,331 $ - $ (2,900) $ 5,431
Notes payable 3,500 14,735 (3,500) 14,735
Minority interest 168,665 410 (30,297) 138,778
Shareholder's equity:
Common stock , $.10 par value, 100,000,000 shares
authorized 6,549,411 issued and outstanding
(13,724,103 pro forma shares issued
and outstanding) 655 336 991
Series A - - - -
Series B - - - -
Series C - - - -
Paid-in capital 142,699 77,561 220,260
Cumulative net income 3,154 - - 3,154
Cumulative distribution paid (3,550) - - (3,550)
------------ -------- -------- -----------
Total shareholders' equity 142,958 - 77,897 220,855
------------ -------- -------- -----------
Total liabilities and shareholders' equity $ 323,454 $ 15,145 $ 41,200 $ 379,799
============ ======== ======== ===========
Book Value per share of Common Stock (Note 4) $ 21.83 $ 22.28
============ ===========
</TABLE>
<TABLE>
<CAPTION>
PS BUSINESS PARKS, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
December 31, 1997
(Unaudited)
(Amounts in thousands, except share and per share data)
Assuming Maximum Cash Elections of 20%
AOPP
-------------------------------------------------------
Adjustments
----------------------------------
PSBP
ASSETS PSP11 Purchase Valuation Post-Merger
(Historical) (Note 3) (Note 3) (Pro Forma)
------------ -------- -------- -----------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 2,455 $ (1,889) $ - $ 5,000
Real estate facilities, net of accumulated 25,937 - 23,156 419,126
depreciation
Intangible assets, net of accumulated amortization - - (1,540) 1,732
Other assets 454 - - 2,514
Purchase cost - 48,987 (48,987) -
------------ -------- -------- -----------
Total assets $ 28,846 $ 47,098 $ (27,371) $ 428,372
============ ======== ======== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued and other liabilities $ 1,475 $ - $ - $ 6,906
Notes payable - 6,373 - 21,108
Minority interest - - - 138,778
Shareholder's equity:
Common stock , $.10 par value, 100,000,000 shares
authorized 6,549,411 issued and outstanding
(13,724,103 pro forma shares issued
and outstanding) - 203 178 1,372
Series A 18 - (18) -
Series B 2 - (2) -
Series C 5 - (5) -
Paid-in capital 32,421 40,522 (32,599) 260,604
Cumulative net income 29,451 - (29,451) 3,154
Cumulative distribution paid (34,526) - 34,526 (3,550)
------------ -------- -------- -----------
Total shareholders' equity 27,371 40,725 (27,371) 261,580
------------ -------- -------- -----------
Total liabilities and shareholders' equity $ 28,846 $ 47,098 $(27,371) $ 428,372
============ ======== ======== ===========
Book Value per share of Common Stock (Note 4) $ 10.83 $ 19.06
============ ===========
</TABLE>
See Accompanying Notes to Pro Forma Consolidated Balance Sheet.
PF-4
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
December 31, 1997
(Unaudited)
(Assuming Maximum Cash Elections of 20%)
1. ACQUISITION OF REAL ESTATE FACILITIES
-------------------------------------
On January 13, 1998, AOPP purchased the Ammendale property for an aggregate
cost of $22,643,000 consisting of $22,450,000 cash and the issuance of
7,143 OP Units having a value of $193,000.
In March 1998, AOPP purchased one commercial property and had an agreement
in principle to purchase another commercial property (the "March
Acquisitions," referred to as the "Proposed Acquisitions" in the Proxy
Statement dated February 5, 1998) from unaffiliated third parties for an
aggregate cost of $33,152,000, composed of $18,200,000 cash, the issuance
of 8,033 OP Units having a value of $217,000, and the assumption of
mortgage notes payable of $14,735,000.
The following pro forma adjustments have been made to the pro forma
consolidated balance sheet as of December 31, 1997 to reflect the
acquisition and proposed acquisitions of the above commercial properties
and the related issuance of OP Units:
<TABLE>
<CAPTION>
(in 000's)
-------------------
<S> <C>
* Cash and cash equivalents has been decreased to reflect the cash
portion of the acquisition cost of the properties purchased, as
follows:
March Acquisitions............................................... $ (18,200)
Ammendale Property............................................... (22,450)
-------------------
$ (40,650)
===================
* Real estate facilities has been adjusted to reflect the acquisition
cost of the facilities acquired: $ 33,152
March Acquisitions............................................... 22,643
Ammendale Property............................................... -------------------
$ 55,795
===================
* Notes payable has been increased to reflect the principal balance of
related notes expected to be assumed by AOPP in
connection with the March Acquisitions.................................... $ 14,735
===================
* Minority interest has been increased to reflect the issuance of 15,176
OP Units in connection with the acquisition of the March
Acquisitions and Ammendale properties..................................... $ 410
===================
</TABLE>
PF-5
<PAGE>
2. OTHER ADJUSTMENTS
-----------------
On December 24, 1997, AOPP completed a transaction where AOPP issued
1,512,718 shares of OP units and 2,970,134 shares of AOPP common stock to a
subsidiary of a state pension fund, and the subsidiary of the state pension
fund, through a merger and contribution, transferred to AOPP six commercial
properties ($118,655,000) and $1,000,000 cash. The Company incurred a total
of $3,300,000 in transaction costs. Approximately $400,000 of these costs
were paid in December 1997 and approximately $2,900,000 were paid in
January 1998.
On January 9, 1998, the subsidiary of the state pension fund exercised its
option to convert the shares of OP Units into shares of AOPP common stock
on a one-for-one basis.
In December 1997, AOPP reached an agreement with a group of institutional
investors under which AOPP would issue up to 5,740,741 shares of AOPP
common stock at $27.00 per share in separate tranches. The first tranche,
1,851,852 shares or $50.0 million, was issued in January 1998. The
remainder of the shares are to be issued as the funds are required by AOPP,
in minimum increments of $20 million. Funds from the first tranche were
utilized to repay a $3,500,000 loan due to PSI, to fund remaining unpaid
costs related to the subsidiary of a state pension fund transaction, and to
complete the real estate transactions that occurred or are projected to
occur in 1998 (the March Acquisitions and Ammendale properties).
The following pro forma adjustments have been made to reflect the issuance
of $50.0 million of AOPP Common Stock to institutional investors, the
conversion of the OP Units into shares of AOPP stock, AOPP's payoff of its
loan from PSI, and the payment of remaining transaction costs for the
subsidiary of the state pension fund transaction.
<TABLE>
<CAPTION>
(in 000's)
------------
* Cash and cash equivalents has been increased to reflect the net
proceeds from the issuance of common stock to institutional investors
(gross proceeds of $50,000,000 less estimated offering
<S> <C>
costs of $2,400,000)...................................................... $ 47,600
* Cash and cash equivalents have been decreased to reflect the
utilization of a portion of the proceeds from the institutional
investors to repay the $3,500,000 loan due to PSI, and to reflect the
payment of $2,900,000 in transaction costs which were unpaid
and accrued at December 31, 1997.......................................... (6,400)
------------
$ 41,200
============
* Accounts payable and accrued liabilities have been reduced to reflect
the payment of transaction costs which were unpaid and
accrued at December 31, 1997.............................................. (2,900)
============
* Notes payable have been reduced to reflect the repayment of a
$3,500,000 loan due to PSI................................................ $ (3,500)
============
</TABLE>
PF-6
<PAGE>
<TABLE>
<CAPTION>
(in 000's)
------------
* Common Stock has been adjusted to reflect the following items:
<S> <C>
* Conversion of 1,512,718 OP Units into AOPP common stock...... $ 151
* Issuance of 1,851,852 shares of AOPP common stock to
institutional investors....................................... 185
------------------
$ 336
==================
* Paid in capital has been adjusted to reflect the following items:
* Conversion of 1,512,718 OP Units into AOPP common stock...... $ 30,146
* Issuance of 1,851,852 shares of AOPP common stock to
institutional investors....................................... 47,415
------------------
$ 77,561
==================
* Minority Interest has been adjusted to reflect the conversion of
1,512,718 OP Units into AOPP common stock ........................ $ (30,297)
==================
</TABLE>
3. MERGER PRO FORMA ADJUSTMENTS
----------------------------
The Merger will be accounted for using the purchase method of accounting
with AOPP being the accounting acquirer. 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, if any. Upon
completion of the Merger, the outstanding shares of AOPP common stock
(historical shares outstanding at December 31, 1997 combined with the
shares issued in January 1998) will be converted into an aggregate of
11,698,498 shares of PSP11 Common Stock and PSP11 will be renamed "PS
Business Parks, Inc."
In determining the cost of the Merger, AOPP evaluated as a measure of cost
of the Merger (i) the aggregate fair value of PSP11's net assets acquired,
(ii) the fair value of PSP11's Common Stock traded in the market, and (iii)
the cash election price of $20.50 per share of PSP11 Common Stock. AOPP
determined that the use of the cash price of $20.50 was a reliable measure
of the Merger cost; further, that such cash price was materially equivalent
to the Merger cost had either of the other alternatives been chosen, based
upon the following:
* The fair value of the net assets of PSP11 were readily determinable as
of August 15, 1997(date the Merger was announced). Substantially all
of the PSP11 assets were comprised of real estate facilities having
current appraised values as determined by independent appraisers. The
estimated fair value per share of PSP11 Common Stock at August 15,
1997 based upon the fair values of the net assets was approximately
$20.50 per share.
* Since AOPP is the accounting acquirer, AOPP's common stock market
price would have been an indicator of the Merger cost. However, AOPP's
common stock is not publicly traded, accordingly, AOPP evaluated
PSP11's common stock as a determination of AOPP's implied common stock
value. The market price of PSP11's Common Stock from January 1, 1997
through August 15, 1997 ranged from $20-3/8 to $19-3/8. The closing
price of PSP11's Common Stock on August 15, 1997, was $20.00. PSP11's
trading price for the one month period after the announcement of the
proposed Merger traded in the range from $19-15/16 to $20-9/16.
PF-7
<PAGE>
* Each outstanding share of PSP11 Common Stock will continue to be owned
by current holders or converted into the right to receive $20.50 in
cash. The amount of cash elections will be limited to 20% of the total
outstanding shares of PSP11. If a PSP11 shareholder does not elect
cash, he or she will continue to own PSP11 Common Stock. Similarly,
each share of AOPP Common Stock will be converted into either 1.18
shares of PSP11 Common Stock or the right to receive $24.19 in cash
(up to 20% of the outstanding AOPP Common Stock), at the option of an
AOPP shareholder.
In determining the fair value of the net assets to be acquired, historical
carrying values as of December 31, 1997 were used with respect to PSP11's other
assets and accrued liabilities since they approximate fair value and appraised
values were used for PSP11's real estate facilities. The aggregate purchase cost
and its preliminary allocation to the historical assets and liabilities is as
follows:
<TABLE>
<CAPTION>
(in 000's)
--------------
PURCHASE COST:
--------------
<S> <C>
* Issuance of 1,455,950 shares of Common Stock to PSP11's Series A
common shareholders (1,819,937 shares outstanding less assumed
shares electing cash of 363,987) at $20.50 per share.................. $ 29,847
* Issuance of 569,655 shares of Common Stock to the holders of PSP11's
Common Stock Series B and Series C (707,071 combined shares
outstanding less cancellation of 47,824 shares of Series C the
remaining of which is multiplied by the conversion ratio of 0.8641) at
$20.50 per share..................................................... 11,678
* Cash elections (assumes that 20% or 363,987 shares of the Series A
Common Stock of PSP11 elect to receive $20.50 per share in cash in the
Merger)............................................................... 7,462
-----------
Total Purchase Cost.............................................. $ 48,987
===========
PRELIMINARY ALLOCATION OF PURCHASE COST:
----------------------------------------
Cash.............................................................. $ 2,455
Other assets...................................................... 454
Accrued and other liabilities..................................... (1,475)
Real estate facilities (fair value of $48,000,000 less $447,000 of
excess aggregate fair values of net assets acquired over
purchase cost).................................................. 47,553
-----------
$ 48,987
===========
</TABLE>
PF-8
<PAGE>
The following pro forma adjustments have been made to reflect the Merger as
of December 31, 1997:
<TABLE>
<CAPTION>
(in 000's)
--------------
PURCHASE ADJUSTMENTS:
---------------------
<S> <C>
* Cash and cash equivalents have been reduced to reflect the
cash necessary to satisfy cash elections ($7,462,000) combined
with estimated direct costs and expenses of the merger of $800,000 $ (8,262)
===========
* Unallocated purchase cost has been increased to reflect the
aggregate purchase cost......................................... $ 48,987
===========
* Common stock has been increased to reflect the issuance of
2,025,605 shares with a par value of $0.10 per share............... $ 203
===========
* Paid-in Capital has been decreased to reflect the issuance of
common stock ($41,525,000 less par value of $203,000 and
estimated direct costs and expenses of the Merger of $800,000)...... $ 40,522
===========
VALUATION ADJUSTMENTS:
----------------------
* Unallocated purchase cost has been decreased to reflect the
allocation of the aggregate purchase cost............................ $ (48,987)
===========
* Real estate facilities has been increased to reflect the fair
value of the real estate facilities to be acquired in the
Merger (purchase price allocation of $47,553,000 plus related
net historical cost of management contracts on AOPP's books
with respect to such properties ($1,540,000) less PSP11
historical net book value of $25,937,000)............................ $ 23,156
===========
* AOPP's intangible assets have been reduced to reflect the
reclassification to real estate with respect to the above pro
forma adjustment...................................................... $ (1,540)
===========
* PSP11's historical equity has been eliminated as follows:
Series A common stock............................................ $ (18)
Series B common stock............................................ (2)
Series C common stock............................................ (5)
Paid-in capital.................................................. (32,421)
Cumulative net income............................................ (29,451)
Cumulative distributions......................................... 34,526
--------------------
$ (27,371)
===========
</TABLE>
PF-9
<PAGE>
ADDITIONAL MERGER RELATED ADJUSTMENTS:
- --------------------------------------
AOPP would not have sufficient cash for operations after satisfying cash
elections and closing costs of the Merger, and would borrow from its line of
credit. The following pro forma adjustments have been made to reflect these
borrowings, as well as to reflect the issuance of common stock to AOPP
shareholders pursuant to the terms of the Merger Agreement.
<TABLE>
<CAPTION>
(in 000's)
--------------------
<S> <C>
* Cash has been increased to reflect the borrowings from AOPP's line
of credit............................................................ $ 6,373
====================
* Notes payable has been increased to reflect the borrowings from
AOPP's line of credit............................................. $ 6,373
====================
* Common stock has been increased to reflect the issuance of
1,784,517 shares (par value of $0.10 per share) to the
shareholders of AOPP to adjust to the terms of the Merger
Agreement (9,913,981 pro forma shares multiplied by the
conversion ratio of 1.18 less
9,913,981 shares).................................................... $ 178
====================
* Paid-in capital has been decreased to reflect the issuance of
the above common stock to AOPP shareholders....................... $ (178)
====================
</TABLE>
EXCHANGE OF PROPERTIES
- ----------------------
Concurrent with the Merger, PSP11 will exchange 11 mini-warehouses and two
properties that combine mini-warehouse and commercial space for 11 commercial
properties owned by PSI. The fair value of the mini-warehouse facilities is
approximately $42,400,000 compared to the fair value of the 11 commercial
properties to be received of $42,900,000. Through the pro forma adjustments
above, the commercial facilities are reflected on the pro forma consolidated
balance sheet at their fair approximate values as a result of the accounting
acquisition of PSP11 by AOPP. No additional adjustments have been made to
reflect the Exchange as the relative valuations are nearly the same.
PF-10
<PAGE>
4. BOOK VALUE PER SHARE OF COMMON STOCK
Book value per share has been determined by dividing total shareholders'
equity by the outstanding shares of Common Stock. The following summarizes
the shares outstanding:
<TABLE>
<CAPTION>
Common shares
outstanding
--------------
<S> <C>
* AOPP historical shares outstanding at December 31, 1997............ 6,549,411
* AOPP shares issued to subsidiary of state pension fund in connection
with conversion of its OP Units into common stock of AOPP.......... 1,512,718
* Pro forma shares issued to institutional investors................. 1,851,852
--------------
Pre-Merger pro forma AOPP shares outstanding............ 9,913,981
* PSP11's Series A shares (assuming maximum Cash Elections, see
"Purchase cost" above).............................................. 1,455,950
* PSP11's Series B and C (see "Purchase cost" above)................. 569,655
* Incremental shares issued to AOPP shareholders based upon the
conversion of the Pre-Merger AOPP shares into PSP11
equivalents (9,913,981 pro forma shares subtracted from the
product of 9,913,981 multiplied by 1.18)........................... 1,784,517
--------------
Post-Merger pro forma AOPP shares outstanding........... 13,724,103
==============
</TABLE>
PF-11
<PAGE>
<TABLE>
<CAPTION>
PS BUSINESS PARKS, INC.
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
For the Year Ended December 31, 1997
(Unaudited)
(Amounts in thousands, except per share data)
(Assuming Maximum Cash Elections of 20%)
AOPP
---------------------------------------------------------------
Pro Forma Adjustments
----------------------------------------------
Acquisition of Acquisition of
real estate real estate Other
AOPP from affiliates from third adjustments
(Historical) (Note 1) parties (Note 3)
------------ -------- ------- --------
(Note 2)
REVENUES:
Rental income:
<S> <C> <C> <C> <C>
Commercial properties $ 30,169 $ 1,038 $ 27,024 $ -
Mini-warehouse properties - - - -
Facility management fees 956 (52) - -
Interest and other income 453 - - -
------------ -------- ------- --------
31,578 986 27,024 -
------------ -------- ------- --------
EXPENSES:
Cost of operations:
Commercial properties 12,330 363 7,759 -
Mini-warehouse properties - - - -
Cost of managing facilities 189 (12) - -
Depreciation and amortization 5,195 92 5,526 -
General and administrative 1,461 - - 300
Interest expense 1 - 1,105 -
------------ -------- ------- --------
19,176 443 14,390 300
------------ -------- ------- --------
Income before minority interest in
income 12,402 543 12,634 (300)
Minority interest in income (Note 7) (8,566) - - (1,189)
------------ -------- ------- --------
Net income (loss) $3,836 $543 $12,634 $(1,489)
============ ======== ======= ========
PER SHARE OF COMMON STOCK:
Net income (Note 4 and 6) $ 1.45
============
Weighted average shares (Note 4 and 6) 2,641
============
</TABLE>
<TABLE>
<CAPTION>
PS BUSINESS PARKS, INC.
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
For the Year Ended December 31, 1997
(Unaudited)
(Amounts in thousands, except per share data)
(Assuming Maximum Cash Elections of 20%)
AOPP
----------------------------------------------------------------------------
Merger
Adjustments
-----------
Exchange of
AOPP real estate PSBP
Pre-Merger PSP11 facilities Post-Merger
(Pro forma) (Historical) (Note 5) (Pro forma)
----------- ------------ -------- -----------
REVENUES:
Rental income:
<S> <C> <C> <C> <C>
Commercial properties $ 58,231 $ 1,418 $ 8,008 $ 67,657
Mini-warehouse properties - 6,143 (6,143) -
Facility management fees 904 - (471) 433
Interest and other income 453 82 - 535
----------- ------------ -------- -----------
59,588 7,643 1,394 68,625
----------- ------------ -------- -----------
EXPENSES:
Cost of operations:
Commercial properties 20,452 682 3,271 24,405
Mini-warehouse properties - 2,082 (2,082) -
Cost of managing facilities 177 - (93) 84
Depreciation and amortization 10,813 1,198 146 12,157
General and administrative 1,761 201 - 1,962
Interest expense 1,106 - 462 1,568
----------- ------------ -------- -----------
34,309 4,163 1,704 40,176
----------- ------------ -------- -----------
Income before minority interest in
income 25,279 3,480 (310) 28,449
Minority interest in income (Note 7) (9,755) - (168) (9,923)
----------- ------------ -------- -----------
Net income (loss) $15,524 $3,480 $(478) $18,526
=========== ============ ======== ===========
PER SHARE OF COMMON STOCK:
Net income (Note 4 and 6) $ 1.57 $ 1.38 $ 1.35
=========== ============ ===========
Weighted average shares (Note 4 and 6) 9,914 2,527 13,724
=========== ============ ===========
</TABLE>
See Accompanying Notes to Pro-Forma Consolidated Statements of Income.
PF-12
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
For the Year Ended December 31, 1997
(Unaudited)
(Assuming Maximum Cash Elections of 20%)
1. ACQUISITION OF REAL ESTATE FACILITIES FROM AFFILIATES (THE "ACQUIRED
PROPERTIES")
--------------------------------------------------------------------------
On April 1, 1997, the Operating Partnership acquired four commercial
properties from PSI in exchange for 1,235,500 OP Units.
The following pro forma adjustments have been made to the pro forma
consolidated statements of income to reflect the above as if the
transaction was completed as of January 1, 1997:
<TABLE>
<CAPTION>
(in 000's)
----------------
* Rental income has been increased to reflect:
* the pro forma rental income as if the real estate facilities acquired on
<S> <C>
April 1, 1997 were owned by AOPP throughout the entire period................ $ 4,127
* less the rental income with respect to these properties included in
AOPP's historical amounts.................................................... (3,089)
Total incremental rental income......................................... -----------------
$ 1,038
==================
* Facility management fee income has been decreased to eliminate
AOPP's historical management fee income (5% of rental income)
with respect to the commercial properties acquired on
April 1, 1997, as such fee is not collected on owned facilities............... $ (52)
==================
* Cost of operations has been increased as follows:
* To reflect the pro forma cost of operations as if the real estate
facilities acquired on April 1, 1997 were owned by AOPP throughout the
entire full period............................................................ $ 1,227
* The above adjustment excludes facility management fees, accordingly, a
pro forma adjustment has been made to reflect the actual cost of management... 41
* To eliminate cost of operations included in AOPP's historical amounts......... (905)
------------------
Total incremental cost of operations...................................... $ 363
==================
* Cost of managing facilities has been decreased to eliminate the
costs associated with the management fee income with respect to
the properties acquired on April 1, 1997. The reduction in
management fee income will result
in a reduction in cost of operations with respect to facility management.......... $ (12)
==================
* Depreciation has been increased to reflect the incremental depreciation of
the commercial properties acquired on April 1, 1997............................... $ 92
==================
</TABLE>
2. ACQUISITION OF REAL ESTATE FACILITIES FROM THIRD PARTIES
--------------------------------------------------------
During 1997 and 1998, AOPP has completed the acquisition of several
properties and has an agreement in principle to acquire one additional
property:
* Baldon Properties: In July 1997, AOPP issued 1,690,000
shares of common stock primarily to PSI for cash totaling
$33,800,000. AOPP used substantially all of the proceeds to
acquire two commercial properties in July 1997 from an
unaffiliated third party for $33,750,000 in cash.
PF-13
<PAGE>
* Largo Property: On September 24, 1997, AOPP acquired one
commercial property for an aggregate cost of $10,374,000,
consisting of $10,050,000 cash and the issuance of 12,000 OP
units having a value of $324,000.
* On December 10, 1997, AOPP purchased a commercial property
(the "Northpointe Property") for $3,875,000, consisting of
cash of $3,575,000 and the issuance of 11,111 OP units
having a value of $300,000.
* Acquiport Properties: On December 24, 1997, AOPP completed a
transaction where AOPP issued 1,512,718 OP units and
2,970,134 shares of AOPP common stock to a subsidiary of a
state pension fund, and the subsidiary of the state pension
fund, through a merger and contribution, transferred to AOPP
six commercial properties ($118,655,000) and $1,000,000
cash. The Company incurred $3,300,000 in transaction costs.
In January 1998, the subsidiary of the state pension fund
exercised its option to convert the OP units into shares of
AOPP common stock.
* March Acquisition Properties: In March 1998, AOPP purchased
one commercial property and had an agreement in principle to
purchase another commercial property from unaffiliated third
parties for an aggregate cost of $33,152,000 consisting of
cash totaling $18,200,000, the issuance of 8,033 OP Units
having a value of $217,000 and the assumption of $14,735,000
of mortgage debt.
* On January 13, 1998, AOPP purchased a commercial property
(the "Ammendale property") for $22,643,000, consisting of
cash of $22,450,000 and the issuance of 7,143 OP units
having a value of $193,000.
The following pro forma adjustments have been made to reflect the operations of
these properties as if such properties had been acquired at the beginning of the
year:
<TABLE>
<CAPTION>
(000's)
-------------
* Rental income has been increased to reflect the pro forma rental
income of the properties, as if these facilities were owned by AOPP
throughout 1997:
* Rental income for 1997 for the following properties:
<S> <C>
Baldon properties ........................................................... $ 6,570
Largo property............................................................... 1,343
Acquiport properties........................................................ 14,813
Northpointe Property......................................................... 631
Ammendale Property........................................................... 2,883
March Acquisitions........................................................... 3,916
* Less: the portion of rental income with respect to these
properties which has been included in AOPP's historical amounts...................... (3,132)
---------
$ 27,024
==========
</TABLE>
PF-14
<PAGE>
<TABLE>
<CAPTION>
(000's)
------------
<S> <C>
* Cost of operations has been increased to reflect the pro forma cost of
operations of these properties, as if they were owned by AOPP
throughout the entire period presented:
* Cost of operations for the entire year's properties'
historical operations:
Baldon............................................................... $ 2,280
Largo................................................................ 367
Acquiport Properties................................................. 3,059
Northpointe Property................................................. 125
Ammendale Property................................................... 640
March Acquisitions................................................... 1,089
* Less: the portion of cost of operations with respect to these
properties which has been included in AOPP's historical amounts.......... (1,157)
* Plus: Pro forma adjustment to reflect additional estimated personnel
cost to manage the facilities and property taxes......................... 1,356
-----
$ 7,759
==========
* Depreciation has been increased to reflect a full year's depreciation
expense.............................................................. $ 5,526
===========
* Interest expense has been increased to reflect the historical interest
expense for each of the periods presented with respect to the assumption of
mortgage notes payable ..................................................... $ 1,105
==========
3. OTHER PRO FORMA ADJUSTMENTS
---------------------------
(000's)
---------
* A pro forma adjustment has been made to increase general and
administrative expense to reflect additional costs with respect to payroll
as AOPP hires acquisition and executive personnel........................... $ 300
==========
* Many of the properties acquired were acquired by the
consolidated Operating Partnership in exchange for OP Units of
AOPP. Such ownership interests are represented as minority
interest in the consolidated financial statements. Accordingly,
a pro forma adjustment has been made to increase "Minority
interest in income" to reflect the incremental income associated
with pro forma adjustments allocable to the minority interest
(representing the difference between the pro forma amounts less
the historical amounts included in AOPP's historical financial statements)...... $ (1,189)
=========
</TABLE>
PF-15
<PAGE>
4. NET INCOME PER COMMON SHARE (AOPP PRE- MERGER PRO FORMA) HAS BEEN COMPUTED
AS FOLLOWS:
--------------------------------------------------------------------------
<TABLE>
<CAPTION>
(000's)
-------------
<S> <C>
Historical net income......................................................... $ 3,836,000
Historical weighted average common shares..................................... 2,641,258
Historical net income per common share........................................ $ 1.45
Pro forma net income.......................................................... $ 15,524,000
Pro forma weighted average common shares (1).................................. 9,913,981
Pro forma net income per common share......................................... $ 1.57
- -----------------------------------------------------------------------------------------------------------------------------------
(1)
Historical weighted average shares (common and equivalents)................... 2,641,258
Adjusted for:
Issuance of common shares in July 1997 in connection with property
acquisitions........................................................... 995,137
Issuance of common stock to subsidiary of a state pension fund (on
December 24, 1997)..................................................... 2,913,016
Issuance of common stock to subsidiary of a state pension fund in
connection with conversion of OP units into common stock............... 1,512,718
Pro forma issuance of common stock to institutional investors............. 1,851,852
---------
Total Pre-Merger pro forma weighted average shares................... 9,913,981
=========
</TABLE>
PF-16
<PAGE>
5. PRO FORMA MERGER ADJUSTMENTS - EXCHANGE OF PROPERTIES:
------------------------------------------------------
Concurrent with the Merger, PSP11 will exchange 11 mini-warehouses and
two properties that combine mini-warehouse and commercial space for 11
commercial properties owned by PSI.
<TABLE>
<CAPTION>
(000's)
---------------
* Rental income- commercial properties has been increased to
reflect the rental income with respect to the 11 commercial
<S> <C>
properties received through the Exchange..................... $ 8,008
===========
* Rental income- mini-warehouses has been decreased to eliminate
the rental income with respect to the 11 mini-warehouse
facilities and two properties that combine mini-warehouse and
commercial space given up through the Exchange............... $ (6,143)
===========
* A pro forma adjustment has made to facility management fees to:
* eliminate the historical facility management fees related
to 11 commercial properties acquired in the Exchange as such
fee will no longer be charged to these properties as AOPP
will own them............................................ $ (400)
* eliminate the historical facility management fees related
to the two commercial properties of PSP11 acquired in the
Merger................................................... (71)
--------------------
$ (471)
================
* A pro forma adjustment has been made to cost of operations to:
* eliminate historical management fees paid to AOPP to manage
PSP11's two commercial properties which are included in
historical amounts and as a result of the Merger will no
longer be incurred....................................... $ (71)
* reflect the cost of operations of the 11 commercial
properties acquired in the Exchange (before cost of
management).............................................. 3,249
* reflect the cost of management for PSP11's two commercial
properties and the 11 commercial properties acquired in the
Exchange................................................. 93
-------------
$ 3,271
===========
PF-17
<PAGE>
* Cost of operations- mini-warehouses has been
decreased to eliminate the cost of operations with
respect to the 11 mini-warehouse facilities and two
properties that combine mini-warehouse and commercial
space given up through the
Exchange..................................................... $ (2,082)
* Cost of managing facilities has been decreased to eliminate
the historical cost of managing the two PSP11 commercial
properties and the 11 commercial properties acquired in the
Exchange, such costs are reclassified to Cost of operations-
commercial properties........................................ $ (93)
===========
* A pro forma adjustment has been made to depreciation
expense to reflect the:
* Eliminate the historical depreciation expense of $ (1,198)
PSP11's facilities..................................
* Record depreciation expense based on the
acquired cost of the remaining PSP11
facilities ($47,553,000 cost, 30% allocated
to land, the remaining cost allocated to
1,344 buildings, depreciated straight-line
over 25 years). $ 1,344
-----------
$ 146
-----------
* A pro forma adjustment has been made to interest
expense to reflect interest expense related to pro
forma borrowings on AOPP's line of credit (see note 3
- Merger Pro Forma Adjustments - Additional merger
adjustments to the pro forma balance sheet)
$ 462
===========
* A pro forma adjustment has been made to increase the minority
interests' share of income based upon its pro rata ownership
interest in the above pro forma adjustments.................. $ (168)
===========
</TABLE>
PF-18
<PAGE>
6. POST-MERGER PRO FORMA NET INCOME PER SHARE OF COMMON STOCK HAS BEEN COMPUTED
AS FOLLOWS:
----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
December 31, 1997
-------------------
<S> <C>
Post-Merger pro forma net income........................................................ $ 18,526,000
Post-Merger pro forma weighted average common shares (1)................................ 13,724,103
Pro forma net income per share of Common Stock.......................................... $ 1.35
- -----------------------------------------------------------------------------------------------------------------------------------
(1)
Pre-Merger pro forma weighted average shares from Note 4 above.......................... 9,913,981
PSP11's Series A shares (see Note 4 to the Pro Forma Consolidated Balance Sheet -
Assuming Maximum Cash Elections of 20%)............................................ 1,455,950
PSP11's Series B and C (see Note 4 to the Pro Forma Consolidated Balance Sheet-
Assuming Maximum Cash Elections of 20%)............................................ 569,655
Incremental shares issued to AOPP shareholders based upon the
conversion of the Pre-Merger AOPP shares into PSP11 equivalents
(9,913,981 shares subtracted from the product of 9,913,981
multiplied by 1.18) (see Note 4 to the Pro Forma
Consolidated Balance Sheet- Assuming Maximum Cash Elections of 20%)................ 1,784,517
---------
Post-Merger pro forma weighted average Common Stock common shares....................... 13,724,103
==========
</TABLE>
7. MINORITY INTEREST:
-----------------
Minority interest represents ownership interests of OP Units in the
consolidated Operating Partnership which are not owned by AOPP. The OP
Units, subject to certain conditions of the Operating Partnership
Agreement, are convertible into Common Shares of AOPP on a one-for-one
basis. Pro forma weighted average OP Units outstanding during each period
owned by minority interests totaled 7,350,754 (after adjustment for the
conversion factor of 1.18). The following table summarizes the ownership
interests:
<TABLE>
<CAPTION>
Year Ended
December 31, 1997
------------------
<S> <C>
Pro forma AOPP Common Shares outstanding.............................................. 13,724,103
Pro forma OP Units owned by minority interests which are convertible into AOPP
Common Shares................................................................... 7,350,754
------------------
Total AOPP Common Shares outstanding assuming conversion of OP Units.......... 21,074,857
==================
Percentage ownership of AOPP Common Shares outstanding................................ 65.1%
Percentage ownership of minority interests............................................ 34.9%
------------------
Total ownership interest......................................................... 100.0%
==================
</TABLE>
PF-19
<PAGE>
<TABLE>
<CAPTION>
PS BUSINESS PARKS, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
December 31, 1997
(Unaudited)
(Amounts in thousands, except share and per share data)
Assuming No Cash Elections
AOPP
--------------------------
Pro Forma Adjustments
---------------------
Property Other
AOPP Acquisitions Adjustments
ASSETS (Historical) ( Note 1) (Note 2)
------------ --------- --------
<S> <C> <C> <C>
Cash and cash equivalents $ 3,884 $ (40,650) $ 41,200
Real estate facilities, net of accumulated 314,238 55,795 -
depreciation
Intangible assets, net of accumulated amortization 3,272 - -
Other assets 2,060 - -
Purchase cost - - -
------------ --------- --------
Total assets $ 323,454 $ 15,145 $ 41,200
============ =========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued and other liabilities $ 8,331 $ - $ (2,900)
Notes payable 3,500 14,735 (3,500)
Minority interest 168,665 410 (30,297)
Shareholder's equity:
Common stock , $.10 par value, 100,000,000 shares
authorized, 6,549,411 issued and outstanding
(14,088,090 pro forma shares 655 336
issued/outstanding)
Series A - - -
Series B - - -
Series C - - -
Paid-in capital 142,699 77,561
Cumulative net income 3,154 - -
Cumulative distribution paid (3,550) - -
------------ ----------- ----------
Total shareholders' equity 142,958 - 77,897
------------ ----------- ----------
Total liabilities and shareholders' equity $ 323,454 $ 15,145 $ 41,200
============ =========== ==========
Book Value per share of Common Stock (Note 4) $ 21.83
============
</TABLE>
<TABLE>
<CAPTION>
PS BUSINESS PARKS, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
December 31, 1997
(Unaudited)
(Amounts in thousands, except share and per share data)
Pro Forma Merger
----------------
Adjustments PSBP
---------------- --------------
PSP11 Purchase Valuation Post-Merger
ASSETS (Historical) (Note 3) (Note 3) (Pro Forma)
------------ -------- -------- -----------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 2,455 $ (800) $ - $ 6,089
Real estate facilities, net of accumulated 25,937 - 23,156 419,126
depreciation
Intangible assets, net of accumulated amortization - - (1,540) 1,732
Other assets 454 - - 2,514
Purchase cost - 48,987 (48,987) -
------------ -------- -------- -----------
Total assets $ 28,846 $ 48,187 $ (27,371) $ 429,461
============ ========= ========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued and other liabilities $ 1,475 $ $ - $ 6,906
Notes payable - - - 14,735
Minority interest - - - 138,778
Shareholder's equity:
Common stock , $.10 par value, 100,000,000 shares
authorized, 6,549,411 issued and outstanding
(14,088,090 pro forma shares - 239 179 1,409
issued/outstanding)
Series A 18 - (18) -
Series B 2 - (2) -
Series C 5 - (5) -
Paid-in capital 32,421 47,948 (32,600) 268,029
Cumulative net income 29,451 - (29,451) 3,154
Cumulative distribution paid (34,526) - 34,526 (3,550)
------------ -------- ---------- ------------
Total shareholders' equity 27,371 48,187 (27,371) 269,042
------------ -------- ---------- ------------
Total liabilities and shareholders' equity $ 28,846 $ 48,187 $ (27,371) $ 429,461
============ ========= ========== ============
Book Value per share of Common Stock (Note 4) $ 10.83 $ 19.10
============ ============
</TABLE>
See Accompanying Notes to Pro Forma Consolidated Balance Sheet.
PF-20
<PAGE>
PS BUSINESS PARKS, INC.
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
December 31, 1997
(Unaudited)
(Assuming No Cash Elections)
1. ACQUISITION OF REAL ESTATE FACILITIES
-------------------------------------
Same as Note 1 to Pro Forma Consolidated Balance Sheet (Assuming Maximum
Cash Elections of 20%).
2. OTHER ADJUSTMENTS
-----------------
Same as note 2 to Pro Forma Consolidated Balance Sheet (Assuming Maximum
Cash Elections of 20%).
3. MERGER PRO FORMA ADJUSTMENTS
----------------------------
The Merger will be accounted for using the purchase method of accounting
with AOPP being the accounting acquirer. 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, if any. Upon
completion of the Merger, the outstanding shares of AOPP common stock
(historical shares outstanding at December 31, 1997 combined with the
shares issued in December 1997 and January 1998) will be converted into an
aggregate of 11,698,498 shares of PSP11 Common Stock and PSP11 will be
renamed "PS Business Parks, Inc."
In determining the cost of the Merger, AOPP evaluated as a measure of cost
of the Merger (i) the aggregate fair value of PSP11's net assets acquired,
(ii) the fair value of PSP11's Common Stock traded in the market, and (iii)
the cash election price of $20.50 per share of PSP11 Common Stock. AOPP
determined that the use of the cash price of $20.50 was a reliable measure
of the Merger cost; further, that such cash price was materially equivalent
to the Merger cost had either of the other alternatives been chosen, based
upon the following:
* The fair value of the net assets of PSP11 were readily determinable as
of August 15 1997(date the Merger was announced). Substantially all of
the PSP11 assets were comprised on real estate facilities having
current appraised values as determined by independent appraisers. The
estimated fair value per share of PSP11 Common Stock at August 15,
1997 based upon the fair values of the net assets was approximately
$20.50 per share.
* Since AOPP is the accounting acquirer, AOPP's common stock market
price would have been an indicator of the Merger cost. However, AOPP's
common stock is not publicly traded, accordingly, AOPP evaluated
PSP11's common stock as a determination of AOPP's implied common stock
value. The market price of PSP11's Common Stock from January 1, 1997
through August 15, 1997 ranged from $20-3/8 to $19-3/8. The closing
price of PSP11's Common Stock on August 15, 1997, was $20.00. PSP11's
trading price for the one month period after the announcement of the
proposed Merger traded in the range from $19-15/16 to $20-9/16.
* Each outstanding share of PSP11 Common Stock will continue to be owned
by current holders or converted into the right to receive $20.50 in
cash. The amount of cash elections will be limited to 20% of the total
outstanding shares of PSP11. If a PSP11 shareholder does not elect
cash, he or she will continue to own PSP11 Common Stock. Similarly,
each share of AOPP Common Stock will be converted into either 1.18
shares of PSP11 Common Stock or the right to receive $24.19 in cash
(up to 20% of the outstanding AOPP Common Stock), at the option of an
AOPP shareholder.
In determining the fair value of the net assets to be acquired, historical
carrying values as of December 31, 1997 were used with respect to PSP11's
other assets and accrued liabilities since they approximate fair value and
appraised values were used for PSP11's real estate facilities. The
aggregate purchase cost and its preliminary allocation to the historical
assets and liabilities is as follows:
PF-21
<PAGE>
<TABLE>
<CAPTION>
(in 000's)
----------
PURCHASE COST:
--------------
* Issuance of 1,819,937 shares of Common Stock to PSP11's Series
<S> <C> <C>
A common shareholder at $20.50 per share......................... $37,309
* Issuance of 569,655 shares of Common Stock to the holders
of PSP11's Common Stock Series B and Series C (707,071
combined shares outstanding less cancellation of 47,824
shares of Series C the remaining of which is multiplied by
the conversion ratio of 0.8641) at $20.50 per share..................... 11,678
------
Total Purchase Cost............................................. $48,987
=======
PRELIMINARY ALLOCATION OF PURCHASE COST:
----------------------------------------
Cash............................................................ $2,455
Other assets.................................................... 454
Accrued and other liabilities................................... (1,475)
Real estate facilities (fair value of $48,000,000 less $447,000
of excess aggregate fair values of net assets acquired over
purchase cost)................................................ 47,553
------
$48,987
=======
The following pro forma adjustments have been made to reflect the Merger as of December 31, 1997:
(in 000's)
----------
PURCHASE ADJUSTMENTS:
---------------------
* Cash and cash equivalents has been reduced to reflect to
cash necessary to fund estimated direct costs and expenses
of the Merger.................................................... $(800)
========
* Unallocated purchase cost has been increased to reflect the
aggregate purchase cost....................................... $48,987
=======
* Common stock has been increased to reflect the issuance of
2,389,592 shares with a par value of $0.10 per share.......... $239
=======
* Paid-in Capital has been increased to reflect the
issuance of common stock ($48,987,000 less par value of $239,000 and
estimated direct costs and expenses of the Merger of $800,000).. $47,948
=======
PF-21
<PAGE>
VALUATION ADJUSTMENTS:
----------------------
(in 000's)
-------------
* Unallocated purchase cost has been decreased to reflect the
allocation of the aggregate purchase cost............................ $ (48,987)
==============
* Real estate facilities has been increased to reflect the fair
value of the real estate facilities to be acquired in the
Merger (purchase price allocation of $47,553,000 plus related
net cost of management contracts with respect to such
properties ($1,540,000) less PSP11
historical net book value of $25,937,000)............................ $ 23,156
==============
* AOPP's intangible assets have been reduced to reflect the
reclassification to real estate with respect to the above pro
forma
adjustment........................................................... $ (1,540)
==============
* PSP11's historical equity has been eliminated as follows:
Series A common stock............................................ (2)
Series B common stock............................................ (5)
Series C common stock............................................ (32,421)
Paid-in capital.................................................. (29,451)
Cumulative net income............................................ 34,526
Cumulative distributions......................................... ---------------------
$ (27,371)
==============
ADDITIONAL MERGER RELATED ADJUSTMENTS:
--------------------------------------
The following pro forma adjustments have been made to reflect the issuance
of common stock to AOPP shareholders pursuant to the terms of the Merger
Agreement.
(in 000's)
* Common stock has been increased to reflect the issuance of
1,784,517 shares (par value of $0.10 per share) to the
shareholders of AOPP to adjust to the terms of the Merger
Agreement (9,913,981 pro forma shares multiplied by the
conversion ratio of 1.18 less
9,913,981 shares).................................................... $ 179
==============
* Paid-in capital has been decreased to reflect the issuance of
the above common stock to AOPP shareholders....................... $ (179)
==============
</TABLE>
EXCHANGE OF PROPERTIES
----------------------
Same as Note 3 to Pro Forma Consolidated Balance Sheet (Assuming Maximum
Cash Elections of 20%) - "Exchange of Properties."
PF-23
<PAGE>
4. BOOK VALUE PER SHARE OF COMMON STOCK
------------------------------------
Book value per share has been determined by dividing total shareholders'
equity by the outstanding shares of Common Stock. The following summarizes
the shares outstanding:
<TABLE>
<CAPTION>
Common shares
outstanding
-----------
<S> <C>
* AOPP historical shares outstanding at December 31, 1997............ 6,549,411
* AOPP shares issued to subsidiary of state pension fund in
connection with conversion of its OP units into common stock of AOPP 1,512,718
* Pro forma shares issued to institutional investor group............ 1,851,852
---------
Pre-Merger pro forma AOPP shares outstanding............ 9,913,981
* PSP11's Series A shares (Assuming no Cash Elections, see
"Purchase cost" above).............................................. 1,819,937
* PSP11's Series B and C (see "Purchase cost" above)................. 569,655
* Incremental shares issued to AOPP shareholders based upon the
conversion of the Pre-Merger AOPP shares into PSP11
equivalents (9,913,981 pro forma shares subtracted from the
product of 9,913,981 multiplied by 1.18)....................................... 1,784,517
---------
Post-Merger AOPP pro forma shares outstanding........... 14,088,090
==========
</TABLE>
PF-24
<PAGE>
<TABLE>
<CAPTION>
PS BUSINESS PARKS, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
For the Year Ended December 31, 1997
(Unaudited)
(Assuming No Cash Elections)
AOPP
Pro Forma Adjustments
Acquisition of Acquisition of
real estate real estate from
AOPP from affiliates third parties
(Historical) (Note 1) (Note 2)
----------------------------------------------------
REVENUES:
Rental income:
<S> <C> <C> <C>
Commercial properties $ 30,169 $ 1,038 $ 27,024
Mini-warehouse properties - - -
Facility management fees 956 (52) -
Interest and other income 453 - -
----------------------------------------------------
31,578 986 27,024
----------------------------------------------------
EXPENSES:
Cost of operations:
Commercial properties 12,330 363 7,759
Mini-warehouse properties - - -
Cost of managing facilities 189 (12) -
Depreciation and amortization 5,195 92 5,526
General and administrative 1,461 - -
Interest Expense 1 - 1,105
----------------------------------------------------
19,176 443 14,390
----------------------------------------------------
Income before minority interest
in income 12,402 543 12,634
Minority interest in income (Note 7) (8,566) - -
----------------------------------------------------
Net income (loss) $3,836 $543 $12,634
===================================================
PER SHARE OF COMMON STOCK:
Net income (Notes 4 and 6) $ 1.45
==========
Weighted average shares 2,641
==========
</TABLE>
<TABLE>
<CAPTION>
PS BUSINESS PARKS, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
For the Year Ended December 31, 1997
(Unaudited)
(Assuming No Cash Elections)
AOPP
Adjustments
Exchange of
Other AOPP real estate PSBP
adjustments Pre-Merger PSP11 facilities Post-Merger
(Note 3) (Pro forma) (Historical) (Note 5) (Pro forma)
------------------------------------------------------------------------------
REVENUES:
Rental income:
<S> <C> <C> <C> <C> <C>
Commercial properties $ - $ 58,231 $ 1,418 $ 8,008 $ 67,657
Mini-warehouse properties - - 6,143 (6,143) -
Facility management fees - 904 - (471) 433
Interest and other income - 453 82 - 535
------------------------------------------------------------------------------
- 59,588 7,643 1,394 68,625
------------------------------------------------------------------------------
EXPENSES:
Cost of operations:
Commercial properties - 20,452 682 3,271 24,405
Mini-warehouse properties - - 2,082 (2,082) -
Cost of managing facilities - 177 - (93) 84
Depreciation and amortization - 10,813 1,198 146 12,157
General and administrative 300 1,761 201 - 1,962
Interest Expense - 1,106 - - 1,106
------------------------------------------------------------------------------
300 34,309 4,163 1,242 39,714
------------------------------------------------------------------------------
Income before minority interest
in income (300) 25,279 3,480 152 28,911
Minority interest in income (Note (1,189) (9,755) - (158) (9,913)
------------------------------------------------------------------------------
Net income (loss) $(1,489) $15,524 $3,480 $(6) $18,998
=============================================================================
PER SHARE OF COMMON STOCK:
Net income (Notes 4 and 6) $ 1.57 $ 1.38 $ 1.35
=========== =========== ==========
Weighted average shares 9,914 2,527 14,088
=========== =========== ==========
</TABLE>
See Accompanying Notes to Pro Forma Consolidated Balance Sheet.
PF-25
<PAGE>
1. ACQUISITION OF REAL ESTATE FACILITIES FROM AFFILIATES
-----------------------------------------------------
Same as Note 1 to the Pro Forma Consolidated Statements of Income (Assuming
Maximum Cash Elections of 20%).
2. ACQUISITION OF REAL ESTATE FACILITIES FROM THIRD PARTIES
-----------------------------------------------------
Same as Note 2 to the Pro Forma Consolidated Statements of Income (Assuming
Maximum Cash Elections of 20%).
3. OTHER PRO FORMA ADJUSTMENTS
--------------------------
Same as Note 3 to the Pro Forma Consolidated Statements of Income (Assuming
Maximum Cash Elections of 20%).
4. NET INCOME PER COMMON SHARE (AOPP PRE- MERGER PRO FORMA) HAS BEEN COMPUTED
AS FOLLOWS:
--------------------------------------------------------------------------
<TABLE>
<CAPTION>
(000's)
----------
<S> <C>
Historical net income .................................................... $3,836,000
Historical weighted average common shares................................. 2,641,258
Historical net income (loss) per common share............................. $1.45
Pro forma net income...................................................... $15,524,000
Pro forma weighted average common shares (1).............................. 9,913,981
Pro forma net income per common share..................................... $1.57
- -----------------------------------------------------------------------------------------------------------------------------------
(1)
Historical weighted average shares (common and equivalents)............... 2,641,258
Adjusted for:
Issuance of common shares in July 1997 in connection with property
acquisitions....................................................... 995,137
Issuance of common stock to subsidiary of a state pension fund on
December 24, 1997.................................................. 2,913,016
Issuance of common stock to subsidiary of a state pension fund in
connection with conversion of its OP units into common shares
of AOPP Inc........................................................... 1,512,718
Issuance of common stock to institutional investor group 1,851,852
----------
Total Pre-Merger pro forma weighted average shares............... 9,913,981
==========
</TABLE>
PF-26
<PAGE>
5. PRO FORMA MERGER ADJUSTMENTS - EXCHANGE OF PROPERTIES:
------------------------------------------------------
Concurrent with the Merger, PSP11 will exchange 11 mini-warehouses and two
properties that combine mini-warehouse and commercial space for 11
commercial properties owned by PSI.
<TABLE>
<CAPTION>
(000's)
-------
<S> <C>
* Rental income- commercial properties has been increased to
reflect the rental income with respect to the 11 commercial
properties received through the Exchange $8,008
===================
* Rental income- mini-warehouses has been decreased to eliminate
the rental income with respect to the 11 mini-warehouse
facilities and two properties that combine mini-warehouse and
commercial space given up through the Exchange. $(6,143)
===================
* A pro forma adjustment has made to facility management fees to:
* eliminate the historical facility management fees related to
11 commercial properties acquired in the Exchange as such fee
will no longer be charged to these properties as AOPP will own them $(400)
* eliminate the historical facility management fees related to
the two commercial properties of PSP11 acquired in the Merger (71)
-------------------
$(471)
===================
* A pro forma adjustment has been made to cost of operations to:
* eliminate historical management fees paid to AOPP to manage
PSP11's two commercial properties which are included in
historical amounts and as a result of the Merger will no
longer be incurred $(71)
* reflect the cost of operations of the 11 commercial properties
acquired in the Exchange (before cost of management) 3,249
* reflect the cost of management for the PSP11's two commercial
properties and the 11 commercial properties acquired in the Exchange 93
-------------------
$3,271
===================
* Cost of operations- mini-warehouses has been decreased to
eliminate the cost of operations with respect to the 11
mini-warehouse facilities and two properties that combine
mini-warehouse and commercial space given up through the
Exchange. $(2,082)
===================
PF-27
<PAGE>
* Cost of managing facilities has been decreased to eliminate the historical cost of
managing the two PSP11 commercial properties and the 11 commercial
properties acquired in the Exchange, such costs are reclassified to Cost
of operations- commercial properties...................................... $(93)
===================
* A pro forma adjustment has been made to:
* Eliminate the historical depreciation expense of PSP11's facilities $(1,198)
* Record depreciation expense based on the acquired cost
of the remaining PSP11 facilities ($47,553,000 cost,
30% allocated to land, the remaining cost allocated to
buildings, depreciated straight-line over 25 years).
1,344
-------------------
$146
===================
* A pro forma adjustment has been made to increase the minority interests'
share of income based upon its pro rata ownership interest................ $(158)
===================
PF-28
<PAGE>
6. PRO FORMA NET INCOME PER SHARE OF COMMON STOCK HAS BEEN COMPUTED AS FOLLOWS:
----------------------------------------------------------------------------
(000's)
-------
Post-Merger pro forma net income............................................... $18,998,000
Post-Merger pro forma weighted average Common Stock common shares (1).......... 14,088,090
Pro forma net income per share of Common Stock................................. $1.35
-------------------------------------------------------------------------------------
(1)
Pre-Merger pro forma weighted average shares from Note 4 above............. 9,913,981
PSP11's Series A shares (see Note 4 to the Pro Forma Consolidated Balance
Sheet)................................................................ 1,819,937
PSP11's Series B and C (see Note 4 to the Pro Forma Consolidated Balance
Sheet)................................................................ 569,655
Incremental shares issued to AOPP shareholders based upon the
conversion of the Pre-Merger AOPP shares into PSP11 equivalents
(9,913,981 shares subtracted from the product of 9,913,981
multiplied by 1.18) (see Note
4 to the Pro Forma Consolidated Balance Sheet)........................ 1,784,517
- ---------
Post-Merger pro forma weighted average Common Stock common shares ......... 14,088,090
==========
</TABLE>
PF-29
<PAGE>
7. MINORITY INTEREST:
Minority interest represents ownership interests of OP Units in the
consolidated Operating Partnership which are not owned by AOPP. The OP
Units, subject to certain conditions of the Operating Partnership
Agreement, are convertible into Common Shares of AOPP on a one-for-one
basis. Pro forma weighted average OP Units outstanding during each periods
owned by minority interests totaled 7,350,754 (after adjustment for
conversion factor of 1.18 and the impact of the stock dividend in December
1997). The following summarizes the ownership interests in the Pro forma
Consolidated Financial Statements:
<TABLE>
<CAPTION>
Year Ended
December 31, 1997
------------------
<S> <C>
Pro forma AOPP Common Shares outstanding................................... 14,088,090
Pro forma OP Units owned by minority interests which are convertible into
AOPP Common Shares.................................................... 7,350,754
-----------
Total AOPP Common Shares outstanding assuming conversion of OP
Units.. 21,438,844
===========
Percentage ownership of AOPP Common Shares outstanding..................... 65.7%
Percentage ownership of minority interests................................. 34.3%
-----------
Total ownership interest.............................................. 100.0%
===========
PF-30
</TABLE>
