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
Commission File Number 1-10850
PUBLIC STORAGE PROPERTIES XX, INC.
----------------------------------
(Exact name of registrant as specified in its charter)
California 95-4300893
- ------------------------------- -----------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
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-$18,608,150 (computed on the basis of $22 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 860,734 shares
Common Stock, $.01 Par Value - Series B 90,859 shares
Common Stock, $.01 Par Value - Series C 257,432 shares
DOCUMENTS INCORPORATED BY REFERENCE
(a) Information required by Part III will be included in an amendment to
this Form 10-K under cover of a Form 10- K/A filed within 120 days of the
Company's 1997 fiscal year, which information is incorporated by reference into
Part III.
<PAGE>
PUBLIC STORAGE PROPERTIES XX, INC.
PART I.
ITEM 1. BUSINESS
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General
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Public Storage Properties XX, 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 XX, Ltd., a California
limited partnership (the "Partnership"), in a reorganization transaction
completed on August 27, 1991.
The Partnership offered 100,000 units of limited partnership interest (the
"Units") to the public in July 1989; 41,377 units were sold. 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 August 27, 1991, 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 1,044,874 shares of common stock Series A
("Series A shares"), 90,859 shares of common stock Series B ("Series B shares")
and 257,432 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). However, pursuant to the Company's
by-laws, in 1999 the Company will be 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 7 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 7 mini-warehouse facilities located
in 5 states: California (2), Illinois (2), Minnesota (1), Missouri (1) and Ohio
(1).
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 somewhat from the peak mid-1980 levels
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 Company's investments, 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.
Operating Strategies
- --------------------
The Company's mini-warehouses are operated by PSI under the "Public
Storage" name, which the Company believes is the most recognized name in the
mini-warehouse industry. The major elements of the Company's operating
strategies are as follows:
* Capitalize on "Public Storage's" name recognition. PSI, together with its
predecessor, has more than 20 years of operating experience in the
mini-warehouse business, and is the largest operator of mini-warehouses in
the United States. PSI believes that its marketing and advertising programs
improve its competitive position in the market. PSI's in-house Yellow Pages
staff designs and places advertisements in approximately 700 directories.
Commencing in early 1996, PSI began to experiment with a telephone
reservation system designed to provide added customer service. Customers
calling either PSI's toll-free telephone referral system, (800) 44-STORE,
or a mini-warehouse facility are directed to PSI's reservation system where
a trained representative discusses with the customer space requirements,
price and location preferences and also informs the customer of other
products and services provided by PSI. The telephone reservation system
supports rental activity at all of the Company's properties. PSI's
toll-free telephone referral system services approximately 160,000 calls
per month from potential customers inquiring as to the nearest Public
Storage mini-warehouse.
* Maintain high occupancy levels and increase realized rents. Average
occupancy for the Company's mini-warehouses has decreased from 94% in 1996
to 92% in 1997. Realized monthly rents per occupied square foot increased
from $8.45 in 1996 to $9.28 in 1997.
3
<PAGE>
* Systems and controls. PSI has an organizational structure and a property
operation system, "CHAMP" (Computerized Help and Management Program), which
links its corporate office with each mini-warehouse. This enables PSI to
obtain daily information from each mini-warehouse and to achieve
efficiencies in operations and maintain control over its space inventory,
rental rates, promotional discounts and delinquencies. Expense management
is achieved through centralized payroll and accounts payable systems and a
comprehensive property tax appeals department, and PSI has an extensive
internal audit program designed to ensure proper handling of cash
collections.
* Professional property operation. In addition to the approximately 150
support personnel at the Public Storage corporate offices, there are
approximately 2,700 on-site personnel who manage the day-to-day operations
of the mini-warehouses in the Public Storage system. These on-site
personnel are supervised by 110 district managers, 15 regional managers and
three divisional managers (with an average of 13 years' experience in the
mini-warehouse industry) who report to the president of the mini-warehouse
property operator (who has 12 years of experience with the Public Storage
organization). PSI carefully selects and extensively trains the operational
and support personnel and offers them a progressive career path. See
"Property Operator."
Property Operator
- -----------------
The Company's mini-warehouse properties are managed by PSI under a
Management Agreement (as amended, the "Management Agreement").
Under the supervision of the Company, PSI coordinates the operation of the
facilities, establishes rental policies and rates, directs marketing activity,
and directs the purchase of equipment and supplies, maintenance activity, and
the selection and engagement of all vendors, supplies and independent
contractors.
PSI engages, 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.
In the purchasing of services such as advertising (including broadcast
media advertising) and insurance, PSI attempts to achieve economies by combining
the resources of the various facilities that it operates. Facilities operated by
PSI 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 adopts promotional programs, such as temporary rent reductions, in
selected areas or for individual facilities.
For as long as the Management Agreement is in effect, PSI has granted the
Company a non-exclusive license to use two PSI service marks 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 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.
The 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. The 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.
4
<PAGE>
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 and the "Public Storage" name, should
enable the Company to continue to compete effectively with other entities.
Other Business Activities
- -------------------------
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 1999, 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.
Employees
- ---------
As of December 31, 1997, the Company had 28 employees, 14 persons who
render services on behalf of the Company on a full-time basis and 14 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
- --------------------
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 $30,000. This cost will be
expensed as incurred.
5
<PAGE>
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
- ---------------
In February 1998, the Company and PSI agreed, subject to certain
conditions, to merge. Upon the merger, each outstanding share of the Company's
common stock series A (other than shares held by PSI or by holders of the
Company's common stock series A ("Series A Shareholders") who have properly
exercised dissenters' rights under California law ("Dissenting Shares")) will be
converted into the right to receive cash, PSI common stock or a combination of
the two, as follows: (i) with respect to a certain number of shares of the
Company's common stock series A (not to exceed 20% of the outstanding common
stock series A of the Company, less any Dissenting Shares), upon a Series A
Shareholder's election, $22.57 in cash, subject to reduction as described below
or (ii) that number (subject to rounding) of shares of PSI common stock
determined by dividing $22.57, subject to reduction as described below, by the
average of the per share closing prices on the New York Stock Exchange of PSI
common stock during the 20 consecutive trading days ending on the fifth trading
day prior to the special meeting of the Company's shareholders. The
consideration paid by PSI to the Series A Shareholders in the merger will be
reduced by the amount of cash distributions required to be paid to the Series A
Shareholders by the Company prior to completion of the merger (estimated at
$0.93 per share) in order to satisfy the Company's REIT distribution
requirements ("Required REIT Distributions"). The consideration received by the
Series A Shareholders in the merger, however, along with any Required REIT
Distributions, will not be less than $22.57 per share of the Company's common
stock series A, which amount represents the market value of the Company's real
estate assets at October 1, 1997 (based on an independent appraisal) and
interest of the Series A Shareholders in the estimated net asset value of its
other assets at April 30, 1998. Additional distributions will be made to the
Series A Shareholders to cause the Company's estimated net asset value allocable
to the Series A Shareholders as of the date of the merger to be substantially
equivalent to $22.57 per share. Upon the merger, each share of the Company's
common stock series B and common stock series C (other than shares held by PSI)
would be converted into the right to receive $10.90 in PSI common stock (valued
as in the case of the Company's common stock series A) plus (i) any additional
distributions equal to the amount by which the Company's estimated net asset
value allocable to the holders of the Company's common stock series B and C as
of the date of the merger exceeds $10.90 per share and (ii) the estimated
Required REIT Distributions payable to the holders of the Company's common stock
series B of $0.93 per share. The common stock of the Company held by PSI will be
canceled in the merger. The merger is conditioned on, among other requirements,
approval by the Company's shareholders. It is expected that the merger will
close in the first half of 1998. PSI is the Company's mini-warehouse operator
and owns 24.18% of the total combined shares of the Company's common stock
series A, B and C.
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
----------------------------- ----------- --------------- ---------- ---------
CALIFORNIA
<S> <C> <C> <C> <C>
Los Angeles, Airdrome St. 1.20 acres 56,000 sq. ft. 670 Sep. 1989
Santa Rosa, Hopper Ave. 2.31 acres 55,000 sq. ft. 573 Nov. 1989
ILLINOIS
Aurora, Farnsworth Ave. 5.45 acres 60,000 sq. ft. 530 Jul. 1989
Chicago, So. Chicago Ave. 1.38 acres 52,000 sq. ft. 580 Dec. 1991
MINNESOTA
Golden Valley, Winnetka Ave. 2.03 acres 44,000 sq. ft. 474 Dec. 1989
MISSOURI
St. Louis, Benham Rd. 3.95 acres 63,000 sq. ft. 567 Nov. 1990
OHIO
Cleveland, 117th St. 4.11 acres 70,000 sq. ft. 631 Apr. 1989
</TABLE>
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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 $156,000 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. As reflected in the table below, the Company has experienced
overall improved property operations:
<TABLE>
<CAPTION>
For the year ended December 31,
-------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Weighted average occupancy level 92% 94% 92%
Realized annual rent per occupied
square foot (1) $9.28 $8.45 $7.82
Operating margin: (2)
Before reduction for depreciation expense 60% 62% 61%
After reduction for depreciation expense 46% 47% 45%
</TABLE>
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(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.
(2) Operating margin (before reduction for depreciation expense) is computed by
dividing rental income less cost of operations by rental income. Operating
margin (after reduction for depreciation expense) is computed by dividing
rental income less cost of operations and depreciation by rental income.
7
<PAGE>
Additional information is set forth below with respect to the Santa
Rosa/Hopper Avenue, Los Angeles/Airdrome Street, Aurora/Farnsworth Avenue, St.
Louis/Benham, Cleveland/117th Street and Chicago/South Chicago Avenue properties
because they each have a book value of at least 10% of the estimated total
assets of the Company or that have accounted for gross revenues of at least 10%
of the aggregate gross revenues of the Company.
SANTA ROSA/HOPPER AVENUE. This mini-warehouse is located in Santa Rosa,
California, approximately 50 miles north of San Francisco in Sonoma County. The
surrounding area includes commercial, industrial and residential developments.
The 2.31-acre property, which was completed in November 1989, has
approximately 55,000 net rentable square feet divided into 573 units. No tenant
occupies 10% or more of the rentable area. As of December 31, 1997, the property
was 99% occupied by 567 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
Date Occupancy Rate Square Foot
---- -------------- -----------
December 31, 1997 99% $8.67
December 31, 1996 97 8.01
December 31, 1995 96 7.26
December 31, 1994 92 7.02
December 31, 1993 92 6.53
LOS ANGELES/AIRDROME STREET. This mini-warehouse is located in Los Angeles,
California, approximately seven miles west of downtown Los Angeles. The property
is visible from Venice Boulevard, a major traffic thoroughfare in the area. The
area surrounding the site contains residential units, commercial developments
and office buildings.
The 1.2-acre property, which was completed in September 1989, has
approximately 56,000 net rentable square feet divided into 670 units. No tenant
occupies 10% or more of the rentable area. As of December 31, 1997, the property
was 87% occupied by 583 tenants.
Set forth below is a schedule showing the occupancy rate and the rent per
square foot for the facility at the dates indicated:
Annual Realized
Rent Per
Date Occupancy Rate Square Foot
---- -------------- -----------
December 31, 1997 87% $13.73
December 31, 1996 88 13.17
December 31, 1995 88 12.55
December 31, 1994 88 12.19
December 31, 1993 79 11.80
AURORA/FARNSWORTH AVENUE. This mini-warehouse is located approximately 32
miles southwest of downtown Chicago, Illinois, in an area which has experienced
increased development in recent years. The property is located near commercial,
office and industrial developments as well as single and multi-family
residential units.
The 5.45-acre property, which was completed in July 1989, has approximately
60,000 net rentable square feet divided into 530 units. No tenant occupies 10%
or more of the rentable area. As of December 31, 1997, the property was 88%
occupied by 466 tenants.
8
<PAGE>
Set forth below is a schedule showing the occupancy rate and the rent per
square foot for the facility at the dates indicated:
Annual Realized
Rent Per
Date Occupancy Rate Square Foot
---- -------------- -----------
December 31, 1997 88% $8.65
December 31, 1996 94 7.67
December 31, 1995 95 7.08
December 31, 1994 95 6.29
December 31, 1993 93 5.73
ST. LOUIS/BENHAM. This mini-warehouse is located approximately 11 miles
northwest of downtown St. Louis, Missouri. The surrounding area includes a
combination of residential and commercial developments.
The 3.95-acre property, which was completed in November 1990, has
approximately 63,000 net rentable square feet divided into 567 units. The
property commenced operations on November 21, 1990. No tenant occupies 10% or
more of the rentable area. As of December 31, 1997, the property was 90%
occupied by 510 tenants.
Set forth below is a schedule showing the occupancy rate and the rent per
square foot for the facility at the dates indicated:
Annual Realized
Rent Per
Date Occupancy Rate Square Foot
---- -------------- -----------
December 31, 1997 90% $7.16
December 31, 1996 96 6.48
December 31, 1995 96 5.96
December 31, 1994 86 5.66
December 31, 1993 76 5.19
CLEVELAND/117TH STREET. This mini-warehouse is located five miles from
downtown Cleveland, Ohio at the intersection of 117th Street and Western Avenue.
The property is visible from 117th Street, which is a busy thoroughfare linking
three major highways in the area: the 71 Freeway, Interstate 90 and the 2
Freeway. The local area includes industrial developments and single and
multi-family units.
The 4.11-acre property, which was completed in April 1989, has
approximately 70,000 net rentable square feet divided into 631 units. No tenant
occupies 10% or more of the rentable area. As of December 31, 1997, the property
was 94% occupied by 593 tenants.
Set forth below is a schedule showing the occupancy rate and the rent per
square foot for the facility at the dates indicated:
Annual Realized
Rent Per
Date Occupancy Rate Square Foot
---- -------------- -----------
December 31, 1997 94% $7.60
December 31, 1996 95 6.71
December 31, 1995 95 6.14
December 31, 1994 94 5.86
December 31, 1993 94 5.31
9
<PAGE>
CHICAGO/SOUTH CHICAGO AVENUE. This mini-warehouse is located approximately
ten miles southeast of downtown Chicago on South Chicago Avenue. Development in
the surrounding area includes a combination of residential units, commercial
development and light manufacturing.
The 1.38-acre property, which was completed in December 1991, has
approximately 52,000 net rentable square feet divided into 580 units. No tenant
occupies 10% or more of the rentable area. As of December 31, 1997, the property
was 93% occupied by 539 tenants.
Set forth below is a schedule showing the occupancy rate and the rent per
square foot for the facility at the dates indicated:
Annual Realized
Rent Per
Date Occupancy Rate Square Foot
---- -------------- -----------
December 31, 1997 93% $11.27
December 31, 1996 94 9.95
December 31, 1995 89 9.30
December 31, 1994 88 8.88
December 31, 1993 79 8.94
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 September 16, 1991 under the symbol PSZ. The Series B and
Series C shares were not registered under Section 12 of the Securities 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.
10
<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 $17-3/8 $16-1/4 $0.28
June 30 17-3/8 16-3/8 0.28
September 30 19-1/2 16-3/8 0.28
December 31 22-1/4 19-1/8 0.75 (1)
1997 March 31 $22-7/8 $20-1/2 $0.28
June 30 22-3/4 21-7/8 0.28
September 30 22 19-3/8 0.28
December 31 21-3/4 20-3/4 0.68(2)
</TABLE>
* No dividends were declared on the Series C shares.
(1) Includes special dividend of $.47.
(2) Includes special dividend of $.40.
As of December 31, 1997, there were approximately 653 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, the amount of distributions
declared to shareholders exceeded income by $80,000 during 1996.
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.
The Board of Directors has authorized the Company to repurchase up to
300,000 Series A shares. Through 1996, the Company repurchased 184,140 Series A
shares. No Series A shares were repurchased in 1997 or through February 28,
1998.
11
<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 $3,420 $3,192 $2,913 $2,742 $2,426
Interest and other income 46 34 43 57 33
-------- ------------- ------------ -------------- -----------
3,466 3,226 2,956 2,799 2,459
-------- ------------- ------------ -------------- -----------
EXPENSES:
Cost of operations 1,165 1,045 969 969 912
Management fees paid to affiliate 205 169 175 164 146
Depreciation 475 469 471 483 480
General and administrative 112 102 100 109 115
Environmental cost - - 156 - -
Interest expense - 2 - - -
-------- ------------- ------------ -------------- -----------
1,957 1,787 1,871 1,725 1,653
-------- ------------- ------------ -------------- -----------
NET INCOME $1,509 $1,439 $1,085 $1,074 $806
======== ============= ============ ============== ===========
Balance sheet data:
- -------------------
Total cash and cash equivalents $ 1,252 $ 881 $ 538 $ 1,347 $ 1,968
Total assets $15,752 $15,726 $15,739 $16,819 $17,763
Shareholders' equity 14,595 14,548 14,697 16,085 16,984
Net income per Series A share(2):
Basic $1.59 $1.49 $1.06 $1.00 $0.71
Fully diluted $1.25 $1.18 $0.85 $0.81 $0.59
Dividends declared per share(3)(4):
Series A $1.52 $1.59 $1.40 $1.03 $0.87
Series B $1.52 $1.59 $1.40 $1.03 $0.87
Book value (at end of period)(5) $12.07 $12.03 $12.06 $12.43 $12.51
Weighted average Common shares outstanding:
Basic- Series A 861 867 898 982 1,019
Diluted- Series A 1,209 1,216 1,246 1,330 1,368
Other data:
Net cash provided by
operating activities $2,016 $1,959 $1,629 $1,557 $1,282
Net cash used in investing activities (132) (64) (41) (172) (44)
Net cash used in financing activities (1,513) (1,552) (2,397) (2,006) (1,025)
Funds from operations (1) 1,984 1,908 1,712 1,557 1,286
Capital expenditures
to maintain facilities (132) (64) (41) (24) (44)
12
</TABLE>
<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 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 $10,046,000 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, distributions exceeded net income in 1993, 1994, 1995, and
1996 by $157,000, $19,000, $287,000, and $80,000 respectively.
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.
(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.
13
<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.
--------------------------------------------------------------------------
Netincome in 1997 was $1,509,000 compared to $1,439,000 in 1996, representing an
increase of $70,000 or 5%. Net income per diluted Series A share was $1.25 in
1997 compared to $1.18 in 1996, representing an increase of $.07 or 6% 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 an affiliate and depreciation expense)
increased $66,000 from $1,509,000 in 1996 to $1,575,000 in 1997. This increase
is attributable to an increase in rental income at the Company's mini-warehouse
operations.
Rental income for the mini-warehouse operations increased $228,000 or 7%
from $3,192,000 in 1996 to $3,420,000 in 1997. Cost of operations (including
management fees paid to an affiliate of the Company) increased $156,000 or 13%
from $1,214,000 in 1996 to $1,370,000 in 1997. The results of these changes was
a net increase in property net operating income before depreciation expense of
$72,000 or 4% from $1,978,000 in 1996 to $2,050,000 in 1997. Rental income
increased primarily due to an increase in rental rates at all seven of the
Company's properties. The increase in cost of operations is mainly due to
increases in management fees, payroll, advertising and property tax expense.
Weighted average occupancy levels for the Company's mini-warehouse
facilities were 92% and 94% in 1997 and 1996, respectively.
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 $22,000 lower than it would have without the discounted fee
structure.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995.
-----------------------------------------------------------------------
Net income in 1996 was $1,439,000 compared to $1,085,000 in 1995,
representing an increase of $354,000 or 33%. Net income per diluted Series A
share was $1.18 in 1996 compared to $.85 in 1995, representing an increase of
$.33 or 39% 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 an affiliate and depreciation expense)
increased $211,000 from $1,298,000 in 1995 to $1,509,000 in 1996. This increase
is primarily attributable to an increase in rental income at the Company's
mini-warehouse operations.
Rental income for the mini-warehouse operations increased $279,000 or 10%
from $2,913,000 in 1995 to $3,192,000 in 1996. Cost of operations (including
management fees paid to an affiliate of the Company) increased $70,000 or 6%
from $1,144,000 in 1995 to $1,214,000 in 1996. The results of these changes was
a net increase in property net operating income before depreciation expense of
$209,000 or 12% from $1,769,000 in 1995 to $1,978,000 in 1996. Rental income
increased primarily due to an increase in rental rates at all seven of the
Company's properties. The increase in cost of operations is mainly due to
increases in payroll, advertising and property tax expense. The increase in
property taxes is mainly attributable to a one-time tax refund received at the
Company's Los Angeles, California property in early 1995 from appealing prior
years tax assessments.
Weighted average occupancy levels for the Company's mini-warehouse
facilities were 94% and 92% in 1996 and 1995, respectively.
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 affiliate in the statements of income. As a result of
the prepayment, the Company saved approximately $22,000 in management fees,
based on the management fees that would have been payable on rental income
generated in 1996 compared to the amount prepaid.
14
<PAGE>
During 1996, the Company incurred $2,000 in interest expense on its line of
credit facility.
MINI-WAREHOUSE OPERATING TRENDS.
- --------------------------------
The following table illustrates the operating trends for the Company's 7
mini-warehouses:
<TABLE>
<CAPTION>
For the year ended December 31,
----------------------------------------
1997 1996 1995
--------- ------------ ---------
<S> <C> <C> <C>
Weighted average occupancy level 92% 94% 92%
Realized annual rent per occupied
square foot (1) $9.28 $8.45 $7.82
Operating margin: (2)
Before reduction for depreciation expense 60% 62% 61%
After reduction for depreciation expense 46% 47% 45%
</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.
(2) Operating margin (before reduction for depreciation expense) is computed by
dividing rental income less cost of operations by rental income. Operating
margin (after reduction for depreciation expense) is computed by dividing
rental income less cost of operations and depreciation by rental income.
LIQUIDITY AND CAPITAL RESOURCES.
- --------------------------------
CAPITAL STRUCTURE. The Company's financial profile has been characterized
by increasing net income, 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 (net income plus depreciation)
reflects the cash generated from the Company's business before distributions to
shareholders, capital expenditures and principal payments on debt. Net cash
provided by operating activities has increased over the past years from
$1,629,000 in 1995 to $2,016,000 in 1997.
The Company has an unsecured revolving credit facility with a bank for
borrowings up to $750,000 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 until maturity. 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 $150,000 on its line of
credit facility. At December 31, 1997, there was no outstanding balance on the
credit facility.
15
<PAGE>
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.
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------
1997 1996 1995
--------- -------------- -------------
<S> <C> <C> <C>
Net income $1,509,000 $1,439,000 $1,085,000
Environmental cost - - 156,000
Depreciation 475,000 469,000 471,000
Changes in working capital 32,000 51,000 (83,000)
--------- -------------- -------------
Net cash provided by operating activities 2,016,000 1,959,000 1,629,000
Capital improvements to maintain facilities (132,000) (64,000) (41,000)
--------- -------------- -------------
Funds available for distributions to
shareholders and repurchase of stock 1,884,000 1,895,000 1,588,000
Cash distributions to shareholders (1,513,000) (1,363,000) (1,250,000)
--------- -------------- -------------
Excess funds available for principal
payments, cash distributions to
shareholders and repurchase of stock $371,000 $532,000 $338,000
========= ============== =============
</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. For
1997, the Company anticipates expending approximately $159,000 for capital
improvements. 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 $1,984,000 and $1,908,000, 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 $ 1,509,000 $ 1,439,000 $ 1,085,000
Environmental cost - - 156,000
Depreciation 475,000 469,000 471,000
--------------- ------------------ ----------------
Funds from operation $ 1,984,000 $ 1,908,000 $ 1,712,000
=============== ================== ================
</TABLE>
In February 1994, the Company purchased 10,000 common shares of Public
Storage, Inc. ("PSI"), a publicly traded real estate investment trust and an
affiliate of the Company, for $148,000. The market value of these securities at
December 31, 1997 was $294,000. The Company recognized $9,000 in dividends
during 1997 and 1996.
The Company believes its geographically diverse portfolio has resulted in a
relatively stable and predictable investment portfolio.
16
<PAGE>
On November 12, 1997, the Company's Board of Directors declared a regular
quarterly distribution per share of $0.28. In addition, consistent with the
Company's REIT distribution requirements, the Company's Board of Directors
declared a special distribution of $0.40 per share. The distributions are
payable on January 15, 1998 to shareholders of record on December 31, 1997.
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 $102,000. The amount has been expensed as management fees paid to
affiliate during 1996.
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:
<TABLE>
<CAPTION>
Series A Series B Total
----------------- ----------------- -----------------
<S> <C> <C> <C>
1988 $52,000 $4,000 $56,000
1989 196,000 17,000 213,000
1990 209,000 18,000 227,000
1991 339,000 30,000 369,000
1992 568,000 50,000 618,000
1993 884,000 79,000 963,000
1994 999,000 94,000 1,093,000
1995 1,243,000 129,000 1,372,000
1996 1,373,000 146,000 1,519,000
1997 1,306,000 140,000 1,446,000
----------------- ----------------- -----------------
Total $7,169,000 $707,000 $7,876,000
================= ================= =================
</TABLE>
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 $7,169,000 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 $10,046,000 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 1995,
1996 and 1997 by attributing distributions in 1995, 1996 and 1997 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
$352,000.
17
<PAGE>
The Company's Board of Directors has authorized the Company to purchase up
to 300,000 shares of Series A common stock. As of December 31, 1997, the Company
had purchased and retired 184,140 shares of Series A common stock.
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's 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 $30,000. This cost 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
- ---------------
In February 1998, the Company and PSI agreed, subject to certain
conditions, to merge. Upon the merger, each outstanding share of the Company's
common stock series A (other than shares held by PSI or by holders of the
Company's common stock series A ("Series A Shareholders") who have properly
exercised dissenters' rights under California law ("Dissenting Shares")) will be
converted into the right to receive cash, PSI common stock or a combination of
the two, as follows: (i) with respect to a certain number of shares of the
Company's common stock series A (not to exceed 20% of the outstanding common
stock series A of the Company, less any Dissenting Shares), upon a Series A
Shareholder's election, $22.57 in cash, subject to reduction as described below
or (ii) that number (subject to rounding) of shares of PSI common stock
determined by dividing $22.57, subject to reduction as described below, by the
average of the per share closing prices on the New York Stock Exchange of PSI
common stock during the 20 consecutive trading days ending on the fifth trading
day prior to the special meeting of the Company's shareholders. The
consideration paid by PSI to the Series A Shareholders in the merger will be
reduced by the amount of cash distributions required to be paid to the Series A
Shareholders by the Company prior to completion of the merger (estimated at
$0.93 per share) in order to satisfy the Company's REIT distribution
requirements ("Required REIT Distributions"). The consideration received by the
Series A Shareholders in the merger, however, along with any Required REIT
Distributions, will not be less than $22.57 per share of the Company's common
stock series A, which amount represents the market value of the Company's real
estate assets at October 1, 1997 (based on an independent appraisal) and
interest of the Series A Shareholders in the estimated net asset value of its
other assets at April 30, 1998. Additional distributions will be made to the
Series A Shareholders to cause the Company's estimated net asset value allocable
to the Series A Shareholders as of the date of the merger to be substantially
equivalent to $22.57 per share. Upon the merger, each share of the Company's
common stock series B and common stock series C (other than shares held by PSI)
would be converted into the right to receive $10.90 in PSI common stock (valued
as in the case of the Company's common stock series A) plus (i) any additional
distributions equal to the amount by which the Company's estimated net asset
value allocable to the holders of the Company's common stock series B and C as
of the date of the merger exceeds $10.90 per share and (ii) the estimated
Required REIT Distributions payable to the holders of the Company's common stock
series B of $0.93 per share. The common stock of the Company held by PSI will be
canceled in the merger. The merger is conditioned on, among other requirements,
approval by the Company's shareholders. It is expected that the merger will
close in the first half of 1998. PSI is the Company's mini-warehouse operator
and owns 24.18% of the total combined shares of the Company's common stock
series A, B and C.
18
<PAGE>
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.
-------------------------------------------------
Incorporated by reference herein is information required by this item,
which is to be included in an amendment on Form 10-K/A to this Form 10-K filed
within 120 days of the end of the Registrant's 1997 fiscal year.
ITEM 11. EXECUTIVE COMPENSATION.
-----------------------
Incorporated by reference herein is information required by this item,
which is to be included in an amendment on Form 10-K/A to this Form 10-K filed
within 120 days of the end of the Registrant's 1997 fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
-------------------------------------------------------------
Incorporated by reference herein is information required by this item,
which is to be included in an amendment on Form 10-K/A to this Form 10-K filed
within 120 days of the end of the Registrant's 1997 fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
-------------------------------------------------
Incorporated by reference herein is information required by this item,
which is to be included in an amendment on Form 10-K/A to this Form 10-K filed
within 120 days of the end of the Registrant's 1997 fiscal year.
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:
None.
(c) Exhibits:
See Exhibit Index contained herein.
19
<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 XX, INC.
Dated: March 9, 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 9, 1998
- ------------------------- Officer and Director
B. Wayne Hughes (Principal Executive Officer)
/s/ Vern O. Curtis Director March 9, 1998
- -------------------------
Vern O. Curtis
/s/ Jack D. Steele Director March 9, 1998
- -------------------------
Jack D. Steele
/s/ David P. Singelyn Vice President and Chief Financial March 9, 1998
- ------------------------- Officer (Principal Financial Officer
David P. Singelyn and Principal Accounting Officer)
20
</TABLE>
<PAGE>
PUBLIC STORAGE PROPERTIES XX, 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 XX, Inc.
We have audited the accompanying balance sheets of Public Storage Properties XX,
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 XX,
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 XX, INC.
BALANCE SHEETS
December 31, 1997 and 1996
1997 1996
------------- -------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 1,252,000 $ 881,000
Marketable securities of affiliate,
at market value (cost of $148,000) 294,000 310,000
Rent and other receivables 43,000 40,000
Prepaid expenses 57,000 46,000
Real estate facilities at cost:
Building, land improvements and equipment 11,927,000 11,795,000
Land 5,824,000 5,824,000
------------- -------------
17,751,000 17,619,000
Less accumulated depreciation (3,645,000) (3,170,000)
------------- -------------
14,106,000 14,449,000
------------- -------------
Total assets $ 15,752,000 $ 15,726,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 419,000 $ 383,000
Dividends payable 647,000 714,000
Note payable to bank - -
Advance payments from renters 91,000 81,000
Shareholders' equity:
Series A common, $.01 par value,
1,393,165 shares authorized,
860,734 shares issued and outstanding 8,000 8,000
Convertible Series B common, $.01 par
value, 90,859 shares authorized,
issued and outstanding 1,000 1,000
Convertible Series C common, $.01 par
value, 257,432 shares authorized,
issued and outstanding 3,000 3,000
Paid-in-capital 15,634,000 15,634,000
Cumulative net income 6,679,000 5,170,000
Cumulative distributions (7,876,000) (6,430,000)
Unrealized gain in marketable securities 146,000 162,000
------------- -------------
Total shareholders' equity 14,595,000 14,548,000
------------- -------------
Total liabilities and shareholders' equity $ 15,752,000 $ 15,726,000
============= =============
</TABLE>
See accompanying notes.
F-2
<PAGE>
<TABLE>
<CAPTION>
PUBLIC STORAGE PROPERTIES XX, 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 $ 3,420,000 $ 3,192,000 $ 2,913,000
Dividends from marketable securities of affiliate 9,000 9,000 9,000
Interest income 37,000 25,000 34,000
------------ ------------ ------------
3,466,000 3,226,000 2,956,000
------------ ------------ ------------
COSTS AND EXPENSES:
Cost of operations 1,165,000 1,045,000 969,000
Management fees paid to affiliate 205,000 169,000 175,000
Depreciation 475,000 469,000 471,000
Administrative 112,000 102,000 100,000
Interest expense - 2,000 -
Environmental cost - - 156,000
------------ ------------ ------------
1,957,000 1,787,000 1,871,000
------------ ------------ ------------
NET INCOME $ 1,509,000 $ 1,439,000 $ 1,085,000
============ ============ ============
Basic earnings per share-Series A $ 1.59 $ 1.49 $ 1.06
============ ============ ============
Diluted earnings per share-Series A $ 1.25 $ 1.18 $ 0.85
============ ============ ============
Dividends declared per share:
Series A $ 1.52 $ 1.59 $ 1.40
============ ============ ============
Series B $ 1.52 $ 1.59 $ 1.40
============ ============ ============
Weighted average Common shares outstanding:
Basic- Series A 860,734 867,309 898,001
============ ============ ============
Diluted- Series A 1,209,025 1,215,600 1,246,292
============ ============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
<TABLE>
<CAPTION>
PUBLIC STORAGE PROPERTIES XX, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
For each of the three years in the period ended
December 31, 1997
Convertible
Series A Series B
Shares Amount Shares Amount
------- ------- -------- --------
<S> <C> <C> <C> <C>
Balances at December 31, 1994 945,534 $9,000 90,859 $1,000
Net income
Repurchase of shares (74,800) (1,000)
Unrealized gain
in marketable securities
Cash distributions declared:
$1.40 per share-Series A
$1.40 per share-Series B
------- ------- -------- --------
Balances at December 31, 1995 870,734 8,000 90,859 1,000
Net income
Repurchase of shares (10,000) -
Unrealized gain
in marketable securities
Cash distributions declared:
$1.59 per share-Series A
$1.59 per share-Series B
------- ------- -------- --------
Balances at December 31, 1996 860,734 8,000 90,859 1,000
Net income
Repurchase of shares
Unrealized loss
in marketable securities
Cash distributions declared:
$1.52 per share-Series A
$1.52 per share-Series B
------- ------- -------- --------
Balances at December 31, 1997 860,734 $8,000 90,859 $1,000
======= ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
PUBLIC STORAGE PROPERTIES XX, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
For each of the three years in the period ended
December 31, 1997
Unrealized
Convertible Cumulative gain (loss) Total
Series C Paid-in net Cumulative in marketable shareholders'
Shares Amount Capital income distributions securities equity
------- ------ ----------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1994 257,432 $3,000 $16,969,000 $2,646,000 $(3,539,000) $(4,000) $16,085,000
Net income 1,085,000 1,085,000
Repurchase of shares (1,146,000) (1,147,000)
Unrealized gain
in marketable securities 46,000 46,000
Cash distributions declared:
$1.40 per share-Series A (1,243,000) (1,243,000)
$1.40 per share-Series B (129,000) (129,000)
------- ------ ----------- ---------- ----------- ----------- -----------
Balances at December 31, 1995 257,432 3,000 15,823,000 3,731,000 (4,911,000) 42,000 14,697,000
Net income 1,439,000 1,439,000
Repurchase of shares (189,000) (189,000)
Unrealized gain
in marketable securities 120,000 120,000
Cash distributions declared:
$1.59 per share-Series A (1,373,000) (1,373,000)
$1.59 per share-Series B (146,000) (146,000)
------- ------ ----------- ---------- ----------- ----------- -----------
Balances at December 31, 1996 257,432 3,000 15,634,000 5,170,000 (6,430,000) 162,000 14,548,000
Net income 1,509,000 1,509,000
Repurchase of shares
Unrealized loss
in marketable securities (16,000) (16,000)
Cash distributions declared:
$1.52 per share-Series A (1,306,000) (1,306,000)
$1.52 per share-Series B (140,000) (140,000)
------- ------ ----------- ---------- ----------- ----------- -----------
Balances at December 31, 1997 257,432 $3,000 $15,634,000 $6,679,000 $(7,876,000) $146,000 $14,595,000
======= ====== =========== ========== =========== =========== ===========
</TABLE>
See accompany notes.
F4
<PAGE>
<TABLE>
<CAPTION>
PUBLIC STORAGE PROPERTIES XX, 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 $ 1,509,000 $ 1,439,000 $ 1,085,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 475,000 469,000 471,000
Increase in rent and other receivables (3,000) (12,000) (9,000)
Increase in prepaid expenses (11,000) (19,000) (2,000)
Amortization (payment) of prepaid management fees - 102,000 (102,000)
Increase (decrease) in accounts payable 36,000 (13,000) 182,000
Increase (decrease) in advance payments from renters 10,000 (7,000) 4,000
------------- ------------- -------------
Total adjustments 507,000 520,000 544,000
------------- ------------- -------------
Net cash provided by operating activities 2,016,000 1,959,000 1,629,000
------------- ------------- -------------
Cash flows from investing activities:
Additions to real estate facilities (132,000) (64,000) (41,000)
------------- ------------- -------------
Net cash used in investing activities (132,000) (64,000) (41,000)
------------- ------------- -------------
Cash flows from financing activities:
Distributions paid to shareholders (1,513,000) (1,363,000) (1,250,000)
Borrowing on credit facility - 150,000 -
Repayment of borrowing on credit facility - (150,000) -
Purchase of Company Series A common stock - (189,000) (1,147,000)
------------- ------------- -------------
Net cash used in financing activities (1,513,000) (1,552,000) (2,397,000)
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 371,000 343,000 (809,000)
Cash and cash equivalents at the beginning of the year 881,000 538,000 1,347,000
------------- ------------- -------------
Cash and cash equivalents at the end of the year $ 1,252,000 $ 881,000 $ 538,000
============= ============= =============
Supplemental schedule of non-cash
investing and financing activities:
Decrease (increase) in fair value of
marketable securities of affiliate $ 16,000 $ (120,000) $ (46,000)
============= ============= =============
Unrealized (loss) gain on
marketable securities of affiliate $ (16,000) $ 120,000 $ 46,000
============= ============= =============
</TABLE>
See accompanying notes.
F-5
<PAGE>
PUBLIC STORAGE PROPERTIES XX, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
1. DESCRIPTION OF BUSINESS
Public Storage Properties XX, 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 XX, Ltd. (the "Partnership") in a reorganization
transaction which was effective August 27, 1991 (the "Reorganization").
The Company owns and operates seven self-storage facilities located in five
states.
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 1999, 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 mini-warehouse 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.
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.
F-6
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Real Estate Facilities (continued):
At December 31, 1997, the basis of real estate facilities (excluding land)
for Federal income tax purposes (after adjustment for accumulated depreciation
of $2,562,000) is $9,344,000.
Revenue Recognition:
Property rents are recognized as earned.
Investment in Affiliate:
In February 1994, the Company purchased 10,000 common shares of Public
Storage, Inc. (PSI), a publicly traded REIT and an affiliate of the Company, for
$148,000. The Company has designated its portfolio of marketable securities as
being available for sale. Accordingly, at December 31, 1997 and 1996, the
Company has recorded the marketable securities at fair value, based upon the
closing quoted price of the securities at December 31, 1997 and 1996, and has
recorded a corresponding unrealized loss, gain totaling $16,000 and $120,000,
respectively, in shareholders' equity. The Company recognized $9,000 in
dividends in 1997, 1996 and 1995.
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 $156,000 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").
Under the terms of the agreement, PSI operates the mini-warehouse facilities for
a fee equal to 6% of the facilities' monthly gross revenue (as defined).
The 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. The 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 $102,000. The amount was expensed as management fees paid to affiliate
during 1996.
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 $7,169,000 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 $10,046,000 in
additional distributions with respect to the Series A shares have been made.
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 $13,283,000 $13,626,000
Convertible Series B 342,000 241,000
Convertible Series C 970,000 681,000
------------ ------------
Total $14,595,000 $14,548,000
============ ============
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.
F-8
<PAGE>
4. SHAREHOLDERS' EQUITY (CONTINUED)
The Company's Board of Directors has authorized the Company to purchase up
to 300,000 shares of the Company's Series A common stock. As of December 31,
1997, the Company had purchased and retired 184,140 shares of Series A common
stock, of which 10,000 were purchased and retired in 1996.
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 $750,000 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 bank's
LIBOR rate plus 2.25%. Interest is payable monthly until maturity. 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 $150,000
on its line of credit facility. At December 31, 1996, 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 $10 million.
6. PROPOSED MERGER
In February 1998, the Company and Public Storage, Inc. ("PSI") agreed,
subject to certain conditions, to merge. Upon the merger, each outstanding share
of the Company's common stock series A (other than shares held by PSI or by
holders of the Company's common stock series A ("Series A Shareholders") who
have properly exercised dissenters' rights under California law ("Dissenting
Shares")) will be converted into the right to receive cash, PSI common stock or
a combination of the two, as follows: (i) with respect to a certain number of
shares of the Company's common stock series A (not to exceed 20% of the
outstanding common stock series A of the Company, less any Dissenting Shares),
upon a Series A Shareholder's election, $22.57 in cash, subject to reduction as
described below or (ii) that number (subject to rounding) of shares of PSI
common stock determined by dividing $22.57, subject to reduction as described
below, by the average of the per share closing prices on the New York Stock
Exchange of PSI common stock during the 20 consecutive trading days ending on
the fifth trading day prior to the special meeting of the Company's
shareholders. The consideration paid by PSI to the Series A Shareholders in the
merger will be reduced by the amount of cash distributions required to be paid
to the Series A Shareholders by the Company prior to completion of the merger
(estimated at $0.93 per share) in order to satisfy the Company's REIT
distribution requirements ("Required REIT Distributions"). The consideration
received by the Series A Shareholders in the merger, however, along with any
Required REIT Distributions, will not be less than $22.57 per share of the
Company's common stock series A, which amount represents the market value of the
Company's real estate assets at October 1, 1997 (based on an independent
appraisal) and interest of the Series A Shareholders in the estimated net asset
value of its other assets at April 30, 1998. Additional distributions will be
made to the Series A Shareholders to cause the Company's estimated net asset
value allocable to the Series A Shareholders as of the date of the merger to be
substantially equivalent to $22.57 per share. Upon the merger, each share of the
Company's common stock series B and common stock series C (other than shares
held by PSI) would be converted into the right to receive $10.90 in PSI common
stock (valued as in the case of the Company's common stock series A) plus (i)
any additional distributions equal to the amount by which the Company's
estimated net asset value allocable to the holders of the Company's common stock
series B and C as of the date of the merger exceeds $10.90 per share and (ii)
the estimated Required REIT Distributions payable to the holders of the
Company's common stock series B of $0.93 per share. The common stock of the
Company held by PSI will be canceled in the merger.
F-9
<PAGE>
6. PROPOSED MERGER (CONTINUED)
The merger is conditioned on, among other requirements, approval by the
Company's shareholders. It is expected that the merger will close in the first
half of 1998. PSI is the Company's mini-warehouse operator and owns 24.18% of
the total combined shares of the Company's common stock series A, B and C.
7. 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 $ 807,000 $ 845,000 $ 912,000 $ 902,000
---------- --------- ---------- ----------
Expenses 513,000 469,000 456,000 519,000
---------- --------- ---------- ----------
Net income $ 294,000 $ 376,000 $ 456,000 $ 383,000
========== ========== ========== ==========
Basic earnings per share- Series A $0.31 $0.41 $0.50 $0.37
========== ========== ========== ==========
Diluted earnings per share- Series A $0.24 $0.31 $0.38 $0.32
========== ========== ========== ==========
Three months ended
--------------------------------------------------------
March 1996 June 1996 Sept. 1996 Dec. 1996
---------- --------- ---------- ----------
Revenues $755,000 $793,000 $836,000 $842,000
---------- --------- ---------- ----------
Expenses 464,000 423,000 423,000 477,000
---------- --------- ---------- ----------
Net income $291,000 $370,000 $413,000 $365,000
========== ========== ========== ==========
Basic earnings per share- Series A $0.31 $0.39 $0.45 $0.34
========== ========== ========== ==========
Diluted earnings per share- Series A $0.24 $0.30 $0.34 $0.30
========== ========== ========== ==========
</TABLE>
The 1996 and first three quarters of 1997 earnings per share amounts have
been reflected to comply with Statement of Financial Accounting Standards No.
128, Earnings per Share.
F-10
<PAGE>
<TABLE>
<CAPTION>
PUBLIC STORAGE PROPERTIES XX, 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>
4/89 Cleveland / W 117th - $1,010,000 $1,467,000 $116,000
9/89 Los Angeles / Airdrome St - 361,000 1,506,000 24,000
7/89 Aurora / Farnsworth - 2,811,000 2,013,000 121,000
11/89 Santa Rosa / Hopper - 714,000 1,614,000 58,000
12/89 Golden Valley / Winnetka - 165,000 1,247,000 24,000
11/90 St Louis / Benham - 534,000 1,672,000 280,000
7/91 Chicago/S Chicago Ave. - 222,000 1,563,000 229,000
---------------------------------------------------------------
- $5,817,000 $11,082,000 $852,000
===============================================================
</TABLE>
<TABLE>
<CAPTION>
PUBLIC STORAGE PROPERTIES XX, INC.
SCHEDULE III - REAL ESTATE
AND ACCUMULATED DEPRECIATION
Life on Which
Gross Carrying Amount At December 31, 1997 Depreciation in
Bldg., Land Latest Income
Date Imp & Equipment Accumulated Statements is
Completed Description Land Total Depreciation Computed
- ------------- ------------------------- ---------- -------------- ------------- ------------- -------------
Mini-warehouses:
<S> <C> <C> <C> <C> <C> <C>
4/89 Cleveland / W 117th $1,010,000 $1,583,000 $2,593,000 ($541,000) 5-25 Years
9/89 Los Angeles / Airdrome St 361,000 1,530,000 1,891,000 (507,000) 5-25 Years
7/89 Aurora / Farnsworth 2,811,000 2,134,000 4,945,000 (693,000) 5-25 Years
11/89 Santa Rosa / Hopper 714,000 1,672,000 2,386,000 (552,000) 5-25 Years
12/89 Golden Valley / Winnetka 165,000 1,271,000 1,436,000 (411,000) 5-25 Years
11/90 St Louis / Benham 534,000 1,952,000 2,486,000 (472,000) 5-25 Years
7/91 Chicago/S Chicago Ave. 229,000 1,785,000 2,014,000 (469,000) 5-25 Years
------------------------------------------------------------------
$5,824,000 $11,927,000 $17,751,000 ($3,645,000)
==================================================================
F-11
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PUBLIC STORAGE PROPERTIES XX, 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 $ 17,619,000 $ 17,555,000 $ 17,514,000
Additions during the period:
Improvements 132,000 64,000 41,000
Deductions during the period - - -
---------- ---------- ----------
Balance at the close of the period $ 17,751,000 $ 17,619,000 $ 17,555,000
========== ========== ==========
ACCUMULATED DEPRECIATION RECONCILIATION
Years Ended December 31,
----------------------------------------------------
1997 1996 1995
---------- ---------- ----------
Balance at the beginning of the period $ 3,170,000 $ 2,701,000 $ 2,230,000
Additions during the period:
Depreciation 475,000 469,000 471,000
Deductions during the period - - -
---------- ---------- ----------
Balance at the close of the period $ 3,645,000 $ 3,170,000 $ 2,701,000
========== ========== ==========
</TABLE>
(b) The aggregate depreciable cost of real estate (excluding land) for
Federal income tax purposes is 11,906,000.
<PAGE>
PUBLIC STORAGE PROPERTIES XX, INC.
EXHIBIT INDEX
(Item 14(c))
2 Agreement and Plan of Reorganization between Public Storage, Inc. and
Registrant dated as of February 13, 1998. Filed herewith.
3.1 Articles of Incorporation. Previously filed with the Securities and
Exchange Commission as an exhibit to the Company'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. Previously filed
with the Securities and Exchange Commission as an exhibit to the Company'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. Previously filed with the Securities and
Exchange Commission as an exhibit to the Company's Annual Report on Form
10-K for the year ended December 31, 1991 and incorporated herein by
reference.
3.4 Amendments to Bylaws Adopted on July 30, 1992. Previously filed with the
Securities and Exchange Commission as an exhibit to the Company's Annual
Report on Form 10-K for the year ended December 31, 1992 and incorporated
herein by reference.
10.1 Amended Management Agreement dated February 21, 1995 between the Company
and Public Storage Management, Inc. Previously filed with the Securities
and Exchange Commission as an exhibit to the Company's Annual Report on
Form 10-K for the year ended December 31, 1994 and incorporated herein by
reference.
10.2 Amendment to Amended Management Agreement dated August 8, 1995 between the
Company, Public Storage Management, Inc. and Storage Equities, Inc.
Previously filed with the Securities and Exchange Commission as an exhibit
to the Company's Quarterly Report on Form 10-Q for the period ended
September 30, 1995 and incorporated herein by reference.
10.3 Revolving Note and Loan Agreement between the Company and The First
National Bank of Boston dated as of December 29, 1995. Previously filed
with the Securities and Exchange Commission as an exhibit to the Company's
Annual Report on Form 10-K for the year ended December 31, 1995 and
incorporated herein by reference.
27 Financial Data Schedule. Filed herewith.
Exhibit 2
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION ("Agreement") is entered into
as of this 13th day of February, 1998, by and among PUBLIC STORAGE, INC., a
California corporation ("PSI") and PUBLIC STORAGE PROPERTIES XX, INC., a
California corporation ("PSP20").
A. The parties intend that this Agreement shall constitute a Plan of
Reorganization for purposes of Section 368(a) of the Internal Revenue Code of
1986, as amended. The Plan of Reorganization provides for the merger of PSP20
with and into PSI in accordance with the applicable provisions of the General
Corporation Law of California (the "GCLC") and the Agreement of Merger
substantially in the form attached hereto as Exhibit A ("Merger Agreement").
B. The Boards of Directors of PSI and PSP20 believe that it is in the
best interests of such corporations and their respective shareholders to enter
into and complete this Agreement and they have approved this Agreement and the
transactions contemplated hereby.
NOW, THEREFORE, the parties agree as follows:
1. Adoption of Plan. The parties hereby adopt the Plan of
Reorganization hereinafter set forth.
2. The Merger.
2.1 Completion of the Merger. At the Effective Time (as defined
below), PSP20 will be merged with and into PSI (the "Merger") in accordance with
the terms, conditions and provisions of this Agreement and the Merger Agreement.
The Merger shall become effective at the time at which the Merger Agreement,
together with the requisite Officers' Certificates of PSI and PSP20 are filed
with the California Secretary of State in accordance with the GCLC (the
"Effective Time"). PSI and PSP20 are sometimes collectively referred to herein
as the "Constituent Corporations" and PSI, as the surviving corporation of the
Merger, is sometimes referred to herein as the "Surviving Corporation."
2.2 Effect of the Merger. At the Effective Time:
2.2.1 Constituent Corporations. The separate corporate
existence of PSP20 shall cease and the Surviving Corporation shall thereupon
succeed, without other transfer, to all the rights and property of PSP20 and
shall be subject to all the debts and liabilities of PSP20 in the same manner as
if the Surviving Corporation had itself incurred them; all rights of creditors
and all liens upon the property of each of the Constituent Corporations shall be
preserved unimpaired, provided that such liens upon property of PSP20 shall be
limited to the property affected thereby immediately prior to the Effective
Time; and any action or proceeding pending by or against PSP20 may be prosecuted
to judgment, which shall bind the Surviving Corporation, or the Surviving
Corporation may be proceeded against or substituted in its place.
2.2.2 Articles and Bylaws. The Articles of Incorporation
and the Bylaws of PSI, as then amended, shall continue to be the Articles of
Incorporation and the Bylaws of the Surviving Corporation until changed as
provided by law and their respective provisions.
2.2.3 Officers and Directors. The officers and directors
of PSI shall continue as officers and directors of the Surviving Corporation
until their successors are elected and qualified as provided by law and in
accordance with the Articles of Incorporation and Bylaws of the Surviving
Corporation.
1
<PAGE>
2.3 Conversion of Common Stock Series A. The manner of
converting the outstanding shares of Common Stock Series A ($.01 par value) of
PSP20 (the "PSP20 Shares") into cash and/or shares of Common Stock ($.10 par
value) of PSI (the "PSI Shares") shall be as follows:
2.3.1 Cash Election. At the Effective Time, subject to
Sections 2.6 and 6.8 hereof, each PSP20 Share as to which a cash election has
been made in accordance with the provisions of Section 2.5 hereof and has not
been revoked, relinquished or lost pursuant to Section 2.5 hereof (the "Cash
Election Shares") shall be converted into and shall represent the right to
receive $22.57 in cash (the "Cash Election Price"). As soon as practicable after
the Effective Time, the registered holders of Cash Election Shares shall be paid
the cash to which they are entitled hereunder in respect of such Cash Election
Shares.
2.3.2 Share Exchange. At the Effective Time, subject to
Sections 2.4, 2.5, 2.7 and 6.8 hereof, each PSP20 Share (other than Cash
Election Shares and PSP20 Shares owned by PSI) shall be converted into that
number of PSI Shares equal to, rounded to the nearest thousandth, the quotient
(the "Conversion Number") derived by dividing $22.57 by the average of the per
share closing prices on the New York Stock Exchange, Inc. (the "NYSE") of PSI
Shares during the 20 consecutive trading days ending on the fifth trading day
prior to the meeting of shareholders of PSP20 provided for in Section 6.2
hereof. If, prior to the Effective Time, PSI should split or combine the PSI
Shares, or pay a stock dividend, the Conversion Number will be appropriately
adjusted to reflect such action.
2.4 No Fractional Shares. Notwithstanding any other term or
provision of this Agreement, no fractional PSI Shares and no certificates or
script therefor, or other evidence of ownership thereof, will be issued in the
Merger. In lieu of any such fractional share interests, each holder of PSP20
Shares who would otherwise be entitled to such fractional share will, upon
surrender of the certificate representing such PSP20 Shares, receive a whole PSI
Share if such fractional share to which such holder would otherwise have been
entitled is .5 of an PSI Share or more, and such fractional share shall be
disregarded if it represents less than .5 of an PSI Share; provided, however,
that, such fractional share shall not be disregarded if such fractional share to
which such holder would otherwise have been entitled represents .5 of 1% or more
of the total number of PSI Shares such holder is entitled to receive in the
Merger. In such event, such holder shall be paid an amount in cash (without
interest), rounded to the nearest $.01, determined by multiplying (i) the per
share closing price on the NYSE of the PSI Shares at the Effective Time by (ii)
the fractional interest.
2.5 Procedure for Cash Election. At the time of the mailing of
the Proxy Statement and Prospectus provided for in Section 6.5 hereof, PSI will
send to each holder of record of PSP20 Shares at the record date for PSP20
meetings of shareholders referred to in Section 6.2 hereof a cash election form
(the "Form of Election") providing such holder with the option to elect to
receive the Cash Election Price with respect to all or any portion of such
holder's PSP20 Shares. Any such election to receive the cash payment
contemplated by Section 2.3.1 hereof shall have been properly made only if
American Stock Transfer & Trust Company (the "Depositary") shall have received
at its designated office, by 5:00 p.m., New York time, on the last business day
preceding the day of such meeting of shareholders, a Form of Election properly
completed and accompanied by certificates for the shares to which such Form of
Election relates (or an appropriate guarantee of delivery in a form and on terms
satisfactory to PSI), as set forth in such Form of Election. Any Form of
Election may be revoked by the person submitting the same to the Depositary only
by written notice received by the Depositary prior to 5:00 p.m., New York time,
on the last business day before the day of the meeting of shareholders referred
to in Section 6.2 hereof. In addition, all Forms of Election shall automatically
be revoked if the Depositary is notified in writing by the parties hereto that
the Merger have been abandoned. If a Form of Election is revoked pursuant to
this Section 2.5, the certificate or certificates or any guarantee of delivery
in respect of the PSP20 Shares to which such Form of Election relates shall be
promptly returned to the person submitting the same to the Depositary. The
Depositary may determine whether or not elections to receive cash have been
properly made or revoked pursuant to this Section 2.5, and any such
determination shall be conclusive and binding. If the Depositary determines that
any election to receive cash was not properly or timely made, the PSP20 Shares
covered thereby shall not be treated as Cash Election Shares, and shall be
converted in the Merger as provided in Section 2.3.2 hereof. The Depositary may,
with the agreement of PSI and PSP20, establish such procedures, not inconsistent
with this Section 2.5, as may be necessary or desirable to implement this
Section 2.5.
2
<PAGE>
2.6 Procedure for Proration.
2.6.1 No Proration of PSP20 Shares. If the aggregate
number of Cash Election Shares and Dissenting Shares (as defined below) of PSP20
is 20% or less than the number of PSP20 Shares outstanding as of the record date
for the meeting of shareholders of PSP20 referred to in Section 6.2, then each
Cash Election Share of PSP20 shall be converted in the Merger into the right to
receive the Cash Election Price for PSP20 Shares.
2.6.2 Proration of PSP20 Shares. If the aggregate number
of Cash Election Shares and Dissenting Shares of PSP20 exceeds 20%, then each
Cash Election Share of PSP20 shall be converted in the Merger into the right to
receive cash or into PSI Shares as follows: the number of Cash Election Shares
of PSP20 owned by a holder of PSP20 Shares that shall be converted into the
right to receive the Cash Election Price for PSP20 Shares shall equal the number
obtained by multiplying (i) (A) 20% of outstanding PSP20 Shares less (B) the
number of Dissenting Shares (as hereinafter defined) of PSP20, if any, by (ii) a
fraction of which the numerator shall be the number of Cash Election Shares
owned by such holder and the denominator shall be the aggregate number of Cash
Election Shares of PSP20. The balance of such Cash Election Shares shall be
converted into PSI Shares in accordance with the provisions of Section 2.3.2
hereof. Notwithstanding the foregoing, PSI, in its sole discretion, may allow
Cash Election Shares of PSP20 to receive the Cash Election Price for PSP20
Shares even if the aggregate number of Cash Election Shares and Dissenting
Shares of PSP20 exceeds 20% of the number of PSP20 Shares outstanding as of the
record date for the meeting of shareholders of PSP20 referred to in Section 6.2,
provided that in no event shall the number of Cash Election Shares exceed 50% of
the outstanding PSP20 Shares.
2.7 Dissenting Shares. PSP20 Shares held by a holder who has
demanded and perfected his right to an appraisal of such shares in accordance
with Section 1300 et seq. of the GCLC and who has not effectively withdrawn or
lost his right to appraisal ("Dissenting Shares") shall not be converted into or
represent the right to receive cash and/or PSI Shares, but the holder thereof
shall be entitled only to such rights as are granted by Section 1300 et seq. of
the GCLC. Each holder of Dissenting Shares who becomes entitled to payment for
PSP20 Shares pursuant to these provisions of the GCLC shall receive payment
therefor from the Surviving Corporation in accordance therewith. If any holder
of PSP20 Shares who demands appraisal in accordance with Section 1300 et seq. of
the GCLC shall effectively withdraw with the consent of the Surviving
Corporation or lose (through failure to perfect or otherwise) his right to
appraisal with respect to PSP20 Shares, such PSP20 Shares shall automatically be
converted into the right to receive PSI Shares pursuant to Section 2.3.2 hereof.
2.8 PSI Shares Unaffected. The Merger shall effect no change in
any of the outstanding PSI Shares and no outstanding PSI Shares shall be
converted or exchanged as a result of the Merger, and no cash shall be
exchangeable, and no securities shall be issuable, with respect thereto.
2.9 Cancellation of Shares Held or Owned by Parties. At the
Effective Time, any PSP20 Shares owned by PSI shall be cancelled and retired and
no shares shall be issuable, and no cash shall be exchangeable, with respect
thereto.
2.10 Exchange of Certificates. After the Effective Time, each
holder of a certificate theretofore evidencing outstanding PSP20 Shares which
were converted into PSI Shares pursuant hereto, upon surrender of such
certificate to The First National Bank of Boston (the "Exchange Agent") or such
other agent or agents as shall be appointed by the Surviving Corporation, shall
be entitled to receive a certificate representing the number of whole PSI Shares
into which the PSP20 Shares theretofore represented by the certificate so
surrendered shall have been converted as provided in Section 2.3.2 hereof and
cash payment in lieu of fractional share interests, if any, as provided in
Section 2.4 hereof. As soon as practicable after the Effective Time, the
Exchange Agent will send a notice and a transmittal form to each holder of PSP20
Shares of record at the Effective Time whose stock shall have been converted
into PSI Shares, advising such holder of the effectiveness of the Merger and the
procedure for surrendering to the Exchange Agent certificates evidencing PSP20
Shares in exchange for certificates evidencing PSI Shares.
2.11 Status Until Surrendered. Until surrendered as provided in
Section 2.10 hereof, each outstanding certificate which, prior to the Effective
Time, represented PSP20 Shares (other than Cash Election Shares and Dissenting
3
<PAGE>
Shares, if any) will be deemed for all corporate purposes to evidence ownership
of the number of whole PSI Shares into which the PSP20 Shares evidenced thereby
were converted. However, until such outstanding certificates formerly evidencing
PSP20 Shares are so surrendered, no dividend payable to holders of record of PSI
Shares shall be paid to the holders of such outstanding certificates in respect
of PSP20 Shares, but upon surrender of such certificates by such holders there
shall be paid to such holders the amount of any dividends (without interest)
theretofore paid with respect to such whole PSI Shares as of any record date on
or subsequent to the Effective Time and the amount of any cash (without
interest) payable to such holder in lieu of fractional share interests pursuant
to Section 2.4 hereof.
2.12 Transfer of Shares. After the Effective Time, there shall
be no further registration of transfers of PSP20 Shares on the records of PSP20
and, if certificates formerly evidencing such shares are presented to the
Surviving Corporation, they shall be cancelled and exchanged for certificates
evidencing PSI Shares and cash in lieu of fractional share interests as herein
provided.
2.13 Conversion of Common Stock Series B and C. At the Effective
Time, subject to Section 6.8 hereof, each share of Common Stock Series B and C
($.01 par value) of PSP20 (other than shares owned by PSI) shall be converted
(or deemed to be converted) into that number of PSI Shares equal to, rounded to
the nearest thousandth, the quotient derived by dividing $10.90 by the average
per share closing prices on the NYSE of PSI Shares during the 20 consecutive
trading days ending on the fifth trading day prior to the meeting of
shareholders of PSP20 provided for in Section 6.2 hereof. If, prior to the
Effective Time, PSI should split or combine the PSI Shares, or pay a stock
dividend, such conversion number will be appropriately adjusted to reflect such
action. At the Effective Time, any Common Stock Series B and C of PSP20 owned by
PSI shall be cancelled and retired and no shares shall be issuable with respect
thereto.
3. Closing.
3.1 Time and Place of Closing. If this Agreement is approved by
the shareholders of PSP20, a meeting (the "Closing") shall take place as
promptly as practicable thereafter at which the applicable parties will exchange
certificates and other documents as required by this Agreement. Such Closing
shall take place at such time and place as PSI may designate. The date of the
Closing shall be referred to as the "Closing Date."
3.2 Execution and Filing of Merger Agreement. At or before the
Closing and after shareholder approval of PSP20, the applicable parties shall
execute and deliver the Merger Agreement, together with the requisite Officers'
Certificates, for filing with the California Secretary of State. The Merger
Agreement, together with the requisite Officers' Certificates, shall be duly
filed with the California Secretary of State in accordance with the GCLC as soon
as practicable following the Closing.
4. Representations, Warranties and Agreements of PSP20. PSP20
represents, warrants and agrees with PSI that:
4.1 Authorization. Subject to approval of this Agreement by the
shareholders of PSP20, (i) the execution, delivery and performance of this
Agreement by PSP20 has been duly authorized and approved by all necessary
corporate action of PSP20, and (ii) PSP20 has necessary corporate power and
authority to enter into this Agreement, to perform its obligations hereunder and
to complete the transactions contemplated hereby.
4.2 Organization and Related Matters. PSP20 is a corporation
duly organized, existing and in good standing under the laws of the State of
California with all requisite corporate power and authority to own, lease and
operate its properties and to carry on its business as and where now owned,
leased, operated or carried on, as the case may be; and is duly qualified to do
business as a foreign corporation and is in good standing in each jurisdiction
in which the property owned, leased or operated by it or the nature of the
business carried on by it requires such qualification and where the failure to
so qualify would have a material adverse effect on the business, properties,
results of operations or financial condition of PSP20. PSP20 has no direct or
indirect equitable or beneficial interest in any other corporation other than
PSCC, Inc.
4
<PAGE>
4.3 Capital Stock. The authorized capital stock of PSP20
consists solely of (i) 1,393,709 shares of Common Stock Series A ($.01 par
value), 860,734 of which were issued and outstanding as of December 31, 1997,
(ii) 90,859 shares of Common Stock Series B ($.01 par value), all of which were
issued and outstanding as of December 31, 1997 and (iii) 257,432 shares of
Common Stock Series C ($.01 par value), all of which were issued and outstanding
as of December 31, 1997. All of the issued and outstanding shares of Common
Stock Series A, B and C of PSP20 have been duly and validly authorized and
issued, and are fully paid and nonassessable. There are no options or agreements
to which PSP20 is a party or by which it is bound calling for or requiring the
issuance of any of PSP20's capital stock, except that the shares of Common Stock
Series B and C are convertible into shares of Common Stock Series A in
accordance with PSP20's Articles of Incorporation.
4.4 Consents and Approvals; No Violation. Assuming approval of
the Merger and of this Agreement by the shareholders of PSP20, neither the
execution and delivery of this Agreement nor the consummation by PSP20 of the
transactions contemplated hereby will: (i) conflict with or result in any breach
of any provision of its Articles of Incorporation or Bylaws; (ii) require any
consent, waiver, approval, authorization or permit of, or filing with or
notification to, any governmental or regulatory authority, except (A) in
connection with the applicable requirements, if any, of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), (B) pursuant to
the applicable requirements of the federal securities laws and the rules and
regulations promulgated thereunder, (C) the filing of the Merger Agreement and
Officers' Certificates pursuant to the GCLC and appropriate documents with the
relevant authorities of other states in which PSP20 is authorized to do
business, (D) in connection with any state or local tax which is attributable to
the beneficial ownership of PSP20's real property, (E) as may be required by any
applicable state securities or takeover laws, or (F) where the failure to obtain
such consent, approval, authorization or permit, or to make such filing or
notification, would not in the aggregate have a material adverse effect on PSP20
or adversely affect the ability of PSP20 to consummate the transactions
contemplated hereby; (iii) result in a violation or breach of, or constitute a
default (or give rise to any right of termination, cancellation or acceleration)
under any of the terms, conditions or provisions of any note, license, mortgage,
agreement or other instrument or obligation to which PSP20 is a party or any of
its properties or assets may be bound, except for such violations, breaches and
defaults which, in the aggregate, would not have a material adverse effect on
PSP20 or adversely affect the ability of PSP20 to consummate the transactions
contemplated hereby; or (iv) assuming the consents, approvals, authorizations or
permits and filings or notifications referred to in this Section 4.4 are duly
and timely obtained or made, violate any order, writ, injunction, decree,
statute, rule or regulation applicable to PSP20 or its properties or assets,
except for violations which would not in the aggregate have a material adverse
effect on PSP20 or adversely affect the ability of PSP20 to consummate the
transactions contemplated hereby.
4.5 Litigation. There is no litigation, proceeding or
governmental investigation which, individually or in the aggregate, is or may be
material and adverse, pending or, to the knowledge of PSP20, threatened against
PSP20 or involving any of its properties or assets.
4.6 SEC Reports. Since January 1, 1994, PSP20 has filed all
forms, reports and documents with the Securities and Exchange Commission ("SEC")
required to be filed by it pursuant to the federal securities laws and the rules
and regulations promulgated by the SEC thereunder, all of which complied in all
material respects with all applicable requirements of the federal securities
laws and such rules and regulations (collectively, the "PSP20 SEC Reports").
None of the PSP20 SEC Reports, including without limitation any financial
statements or schedules included therein, at the time filed contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading.
4.7 Financial Statements. The financial statements included in
the PSP20 SEC Reports complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, have been prepared in accordance with generally
accepted accounting principles applied on a basis consistent with prior periods
(except as otherwise noted therein), and present fairly the financial position
of PSP20 as of their respective dates, and the results of operations of PSP20
for the periods presented therein (subject, in the case of the unaudited interim
financial statements, to normal year-end adjustments).
5
<PAGE>
4.8 Absence of Certain Changes or Events. Since January 1, 1997,
the business of PSP20 has been carried on only in the ordinary and usual course
and there has not been any material adverse change in its business, results of
operations or financial condition, or any damage or destruction in the nature of
a casualty loss, whether covered by insurance or not, that would materially and
adversely affect its properties, business or results of operations.
4.9 S-4 Registration Statement and Proxy Statement and
Prospectus. None of the information supplied or to be supplied by PSP20 for
inclusion or incorporation by reference in the S-4 Registration Statement or the
Proxy Statement and Prospectus (as such terms are defined in Section 6.5 hereof)
will (i) in the case of the S-4 Registration Statement, at the time it becomes
effective and at the Effective Time, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading, or (ii) in the
case of the Proxy Statement and Prospectus, at the time of the mailing of the
Proxy Statement and Prospectus and at the time of the meetings of the
shareholders of PSP20, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which they
are made, not misleading.
4.10 Insurance. All material insurance of PSP20 is currently in
full force and effect and PSP20 has reported all claims and occurrences to the
extent required by such insurance.
4.11 Disclosure. The representations and warranties by PSP20 in
this Agreement and any certificate or document delivered by it pursuant hereto
do not and will not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements contained herein or
therein not misleading.
5. Representations, Warranties and Agreements of PSI. PSI hereby
represents, warrants and agrees with PSP20 that:
5.1 Authorization. The execution, delivery and performance of
this Agreement by PSI have been duly authorized and approved by all necessary
corporate action of PSI, and PSI has all necessary corporate power and authority
to enter into this Agreement, to perform its obligations hereunder and to
complete the transactions contemplated hereby.
5.2 Organization and Related Matters. PSI is a corporation duly
organized, existing and in good standing under the laws of the State of
California, with all requisite corporate power and authority to own, lease and
operate its properties and to carry on its business as and where now owned,
leased, operated or carried on, as the case may be; and is duly qualified to do
business as a foreign corporation and is in good standing in each jurisdiction
in which the property owned, leased or operated by it or the nature of the
business carried on by it requires such qualification and where the failure to
so qualify would have a material adverse effect on the business, properties,
results of operations or financial condition of PSI.
5.3 Capital Stock. The authorized capital stock of PSI consists
solely of (i) 200,000,000 shares of Common Stock ($.10 par value), 105,102,145
of which were issued and outstanding as of December 31, 1997, (ii) 7,000,000
shares of Class B Common Stock ($.10 par value), all of which were issued and
outstanding as of December 31, 1997, (iii) 50,000,000 shares of Preferred Stock
($.10 par value), 13,261,884 of which were issued and outstanding as of December
31, 1997 and (iv) 200,000,000 shares of Equity Stock ($.01 par value), 225,000
of which were issued and outstanding at December 31, 1997. All of the issued and
outstanding shares of Common Stock, Class B Common Stock, Preferred Stock and
Equity Stock of PSI have been duly and validly authorized and issued, and are
fully paid and nonassessable. The issuance of the PSI Shares in the Merger has
been duly and validly authorized and, when issued and delivered as provided in
this Agreement, the PSI Shares will have been duly and validly issued, fully
paid and nonassessable; and the shareholders of PSI have no preemptive rights
with respect to any shares of capital stock of PSI.
5.4 Consents and Approvals; No Violation. Neither the execution
and delivery of this Agreement nor the consummation by PSI of the transactions
contemplated hereby will: (i) conflict with or result in any breach of any
provision of its Articles of Incorporation or Bylaws; (ii) require any consent,
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waiver, approval, authorization or permit of, or filing with or notification to,
any governmental or regulatory authority, except (A) in connection with the
applicable requirements, if any, of the HSR Act, (B) pursuant to the applicable
requirements of the federal securities laws and the rules and regulations
promulgated thereunder, (C) the filing of the Merger Agreement and Officers'
Certificates pursuant to the GCLC and appropriate documents with the relevant
authorities of other states in which PSI is authorized to do business, (D) in
connection with any state or local tax which is attributable to the beneficial
ownership of the real property of PSP20, (E) as may be required by any
applicable state securities or takeover laws, or (F) where the failure to obtain
such consent, approval, authorization or permit, or to make such filing or
notification, would not in the aggregate have a material adverse effect on PSI
or adversely affect the ability of PSI to consummate the transactions
contemplated hereby; (iii) result in a violation or breach of, or constitute a
default (or give rise to any right of termination, cancellation or acceleration)
under any of the terms, conditions or provisions of any note, license, mortgage,
agreement or other instrument or obligation to which PSI is a party or any of
its properties or assets may be bound, except for such violations, breaches and
defaults which, in the aggregate, would not have a material adverse effect on
PSI or adversely affect the ability of PSI to consummate the transactions
contemplated hereby; or (iv) assuming the consents, approvals, authorizations or
permits and filings or notifications referred to in this Section 5.4 are duly
and timely obtained or made, violate any order, writ, injunction, decree,
statute, rule or regulation applicable to PSI or its properties or assets,
except for violations which would not in the aggregate have a material adverse
effect on PSI or adversely affect the ability of PSI to consummate the
transactions contemplated hereby.
5.5 Litigation. There is no litigation, proceeding or
governmental investigation which, individually or in the aggregate, is or may be
material and adverse, pending or, to the knowledge of PSI, threatened against
PSI or involving any of its properties or assets.
5.6 SEC Reports. Since January 1, 1994, PSI has filed all forms,
reports and documents with the SEC required to be filed by it pursuant to the
federal securities laws and the rules and regulations promulgated by the SEC
thereunder, all of which complied in all material respects with all applicable
requirements of the federal securities laws and such rules and regulations
(collectively, the "PSI SEC Reports"). None of the PSI SEC Reports, including
without limitation any financial statements or schedules included therein, at
the time filed contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
5.7 Financial Statements. The financial statements included in
PSI's SEC Reports complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with generally accepted
accounting principles applied on a basis consistent with prior periods (except
as otherwise noted therein), and present fairly the financial position of PSI as
of their respective dates, and the results of operations of PSI for the periods
presented therein (subject, in the case of the unaudited interim financial
statements, to normal year-end adjustments).
5.8 Absence of Certain Changes or Events. Since January 1, 1997,
the business of PSI has been carried on only in the ordinary and usual course
and there has not been any material adverse change in its business, results of
operations or financial condition, or any damage or destruction in the nature of
a casualty loss, whether covered by insurance or not, that would materially and
adversely affect its properties, business or results of operations.
5.9 S-4 Registration Statement and Proxy Statement and
Prospectus. None of the information supplied or to be supplied by PSI for
inclusion or incorporation by reference in the S-4 Registration Statement or the
Proxy Statement and Prospectus (as those terms are defined in Section 6.5
hereof) will (i) in the case of the S-4 Registration Statement, at the time it
becomes effective and at the Effective Time, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein not misleading, or (ii) in
the case of the Proxy Statement and Prospectus, at the time of the mailing of
the Proxy Statement and Prospectus and at the time of the meetings of the
shareholders of PSP20, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which they
are made, not misleading.
5.10 Insurance. All material insurance of PSI is currently in
full force and effect and PSI has reported all claims and occurrences to the
extent required by such insurance.
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5.11 Disclosure. The representations and warranties by PSI in
this Agreement and any certificate or document delivered by it pursuant hereto
do not and will not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements contained herein or
therein not misleading.
6. Covenants and Agreements.
6.1 Ordinary Course. Except as contemplated by this Agreement,
during the period from the date of this Agreement to the Effective Time, each of
PSI and PSP20 will carry on its business in the ordinary course in substantially
the same manner as heretofore conducted and use all reasonable efforts to: (a)
preserve intact its present business, organization and goodwill, (b) maintain
all permits, licenses and authorizations required by applicable laws, and (c)
keep available the services of its present employees and preserve its
relationships with customers, suppliers, lenders, lessors, governmental entities
and others having business or regulatory dealings with it. PSP20 will not issue
any capital stock or debt securities convertible into capital stock. PSI and
PSP20 will promptly notify the others of any event or occurrence not in the
ordinary and usual course of business or which may have a material adverse
effect on the properties or financial condition of such party.
6.2 Meetings of Shareholders. PSP20 will take all action
necessary in accordance with applicable law to convene a meeting of its
shareholders as promptly as practicable to consider and vote upon approval of
this Agreement, it being understood that the principal terms of the Agreement
must be approved by the affirmative vote of a majority of the outstanding shares
of Common Stock Series A, B and C of PSP20, counted together as a single class
with the shares of Common Stock Series B and C voted with the holders of a
majority of the unaffiliated shares of Common Stock Series A.
6.3 Tax Reporting. Each of PSI and PSP20 agrees to report the
Merger for federal and state income tax purposes, as a reorganization of the
type described in Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as
amended.
6.4 Acquisition Proposals. PSP20 will not initiate, solicit or
encourage, directly or indirectly, any inquiries or the making of any proposal
with respect to a merger, consolidation, share exchange or similar transaction
involving PSP20, or any purchase of all or any significant portion of either of
their assets, or any equity interest in either of them, other than the
transactions contemplated hereby (an "Acquisition Proposal"), or engage in any
negotiations concerning, or provide any confidential information or data to, or
have any discussions with, any person relating to an Acquisition Proposal;
provided, however, that the Board of Directors of PSP20 may furnish or cause to
be furnished information and may participate in such discussions and
negotiations through its representatives with persons who have sought the same
if the failure to provide such information or participate in such negotiations
and discussions might cause the members of the Board of Directors of PSP20 to
breach their fiduciary duty to the shareholders of PSP20 under applicable law as
advised by counsel. PSP20 will notify PSI immediately if any such inquiries or
proposals are received by, any such information is requested from, or any such
negotiations or discussions are sought to be initiated or continued with PSP20,
and will keep PSI informed of the status and terms of any such proposals and any
such negotiations or discussions.
6.5 Registration and Proxy Statements. PSP20 will promptly
prepare and file with the SEC a preliminary proxy statement in connection with
the vote of shareholders of PSP20 with respect to the Merger. PSI will, as
promptly as practicable, prepare and file with the SEC a registration statement
on Form S-4 (the "S-4 Registration Statement"), containing a combined proxy
statement/prospectus, in connection with the registration under the Securities
Act of 1933, as amended (the "Securities Act") of the PSI Shares to be issued to
holders of PSP20 Shares in the Merger (such combined proxy statement/prospectus,
together with any amendments thereof or supplements thereto, in each case in the
form or forms to be mailed to the shareholders of PSP20, being herein called the
"Proxy Statement and Prospectus"). PSI and PSP20 will use their best efforts to
have or cause the S-4 Registration Statement to be declared effective as
promptly as practicable, and also will take any other action required to be
taken under federal or state securities laws, and PSP20 will use its best
efforts to cause the Proxy Statement and Prospectus to be mailed to its
shareholders at the earliest practicable date. PSP20 agrees that if at any time
prior to the Effective Time any event with respect to PSP20 should occur which
is required to be described in an amendment of, or a supplement to, the Proxy
Statement and Prospectus or the S-4 Registration Statement, such event shall be
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so described, and such amendment or supplement shall be promptly filed with the
SEC and, as required by law, disseminated to the shareholders of PSP20 and (ii)
the Proxy Statement and Prospectus will (with respect to PSP20) comply as to
form in all material respects with the requirements of the federal securities
laws. PSI agrees that (i) if at any time prior to the Effective Time any event
with respect to PSI should occur which is required to be described in an
amendment of, or a supplement to, the Proxy Statement and Prospectus or the S-4
Registration Statement, such event shall be so described, and such amendment or
supplement shall be promptly filed with the SEC and, as required by law,
disseminated to the shareholders of PSP20 and (ii) the Proxy Statement and
Prospectus will (with respect to PSI) comply as to form in all material respects
with the requirements of the federal securities laws.
6.6 Best Efforts. Each of PSI and PSP20 shall: (i) promptly make
its respective filings and thereafter make any other required submissions under
all applicable laws with respect to the Merger and the other transactions
contemplated hereby; and (ii) use its best efforts to promptly take, or cause to
be taken, all other actions and do, or cause to be done, all other things
necessary, proper or appropriate to consummate and make effective the
transactions contemplated by this Agreement as soon as practicable.
6.7 Registration and Listing of PSI Shares. PSI will use its
best efforts to register the PSI Shares under the applicable provisions of the
Securities Act and to cause the PSI Shares to be listed for trading on the NYSE
upon official notice of issuance.
6.8 Distributions. PSP20 will not, at any time prior to the
Effective Time, declare or pay any cash distribution on its capital stock or
make any other distribution of assets to its shareholders, except (i) regular
quarterly dividends on its Common Stock at a quarterly rate not in excess of
$.28 per share, (ii) distributions to shareholders of record immediately prior
to the Effective Time in an aggregate amount equal to the amount by which the
estimated Net Asset Value of PSP20 (as defined below) allocable to the
shareholders as of the Effective Time exceeds $22.57 per share in the case of
the PSP20 Shares and $10.90 per share in the case of the PSP20 Common Stock
Series B and C and (iii) pre-Merger cash distributions required to satisfy
PSP20's REIT distribution requirements (the number of PSI Shares issued in the
Merger and the amount receivable upon Cash Elections would be reduced on a pro
rata basis in an aggregate amount equal to such additional distributions). For
this purpose, the Net Asset Value of PSP20 is the sum of (a) the fair market
value of PSP20's real estate assets as determined by appraisal by The Nicholson
Group, Ltd. as of October 31, 1997, and (b) the book value of PSP20's non-real
estate assets as of the date of determination, and less (c) PSP20's liabilities
as of the date of determination. The determination of book value and liabilities
shall be from PSP20's financial statements prepared in accordance with generally
accepted accounting principles on a basis consistent with prior periods.
7. Conditions.
7.1 Conditions to Each Party's Obligations. The respective
obligations of each party to consummate the transactions contemplated by this
Agreement are subject to the fulfillment at or prior to the Closing of each of
the following conditions, any or all of which may be waived in whole or in part,
to the extent permitted by applicable law:
7.1.1 PSP20 Shareholder Approval. This Agreement and the
transactions contemplated hereby shall have been duly approved by the
shareholders of PSP20 as contemplated by Section 6.2.
7.1.2 Governmental and Regulatory Consents. All filings
required to be made prior to the Effective Time with, and all consents,
approvals, permits and authorizations required to be obtained prior to the
Effective Time from, governmental and regulatory authorities in connection with
the execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby (including the expiration of the waiting period
requirements of the HSR Act) shall have been made or obtained (as the case may
be) without material restrictions, except where the failure to obtain such
consents, approvals, permits and authorizations could not reasonably be expected
to have a material adverse effect on PSI, PSP20.
7.1.3 Litigation. No court or governmental or regulatory
authority of competent jurisdiction shall have enacted, issued, promulgated,
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enforced or entered any statute, rule, regulation, judgment, decree, injunction
or other order (whether temporary, preliminary or permanent) or taken any action
which prohibits the consummation of the transactions contemplated by this
Agreement; provided, however, that the party invoking this condition shall use
its best efforts to have any such judgment, decree, injunction or other order
vacated.
7.1.4 Registration Statement. The S-4 Registration
Statement shall have been declared effective and no stop order suspending
effectiveness shall have been issued, no action, suit, proceeding or
investigation by the SEC to suspend the effectiveness thereof shall have been
initiated and be continuing, and all necessary approvals under federal and state
securities laws relating to the issuance or trading of the PSI Shares shall have
been received.
7.1.5 Listing of PSI Shares on NYSE. The PSI Shares
shall have been approved for listing on the NYSE upon official notice of
issuance.
7.1.6 Fairness Opinion. The Boards of Directors of PSP20
shall have received the opinion of Robert A. Stanger & Co., Inc. in form and
substance satisfactory to them to the effect that the consideration to be
received by the shareholders of PSP20 in the Merger is fair to such shareholders
from a financial point of view, and such opinion shall not have been withdrawn
or revoked.
7.1.7 Tax Opinion. The Boards of Directors of PSI and
PSP20 shall have received a legal opinion of Hogan & Hartson L.L.P. that the
Merger will qualify as a tax-free reorganization under Section 368(a) of the
Internal Revenue Code of 1986, as amended.
7.1.8 PSI Board Approval. This Agreement and the
transactions contemplated hereby shall have been duly approved by the Board of
Directors of PSI.
7.2 Conditions to Obligations of PSI. The obligations of PSI to
consummate the transactions contemplated by this Agreement are subject to the
fulfillment at or prior to the Closing of the following conditions, which may be
waived in whole or in part by PSI to the extent permitted by applicable law:
7.2.1 Accuracy of Representations; Performance of
Agreements. Each of the representations and warranties of PSP20 contained in
this Agreement shall be true and correct in all material respects at and as of
the Closing Date as if made at and as of the Closing Date (except to the extent
they relate to a particular date) and PSP20 shall have performed or complied
with all agreements and covenants required by this Agreement to be performed or
complied with by it at or prior to the Closing.
7.2.2 Certificate of Officers. PSI shall have received
such certificates of officers of PSP20 as PSI may reasonably request in
connection with the Closing, including upon request a certificate satisfactory
to it of the Chief Executive Officer and the Chief Financial Officer of PSP20,
to the effect that, to the best of their knowledge, all representations and
warranties of PSP20 contained in this Agreement are true and correct in all
material respects at and as of the Closing Date as if made at and as of the
Closing Date, and PSP20 have performed or complied with all agreements and
covenants required by this Agreement to be performed or complied with by them at
or prior to the Closing.
7.2.3 Title to Properties; Environmental Audits. PSI in
its sole discretion shall be satisfied as to the status of title to (including
the existence and effect of liens and encumbrances), and the results of an
environmental audit of, each of the real properties owned by PSP20.
7.2.4 Trading Price of PSI Shares. The average of the
per share closing prices of the PSI Shares on the NYSE during the 20 consecutive
trading days ending on the fifth trading day prior to the meeting of
shareholders of PSP20 provided for in Section 6.2 hereof (the "Average PSI Share
Price") shall be not less than $28.
7.2.5 Dissenting Shares. The number of Dissenting Shares
shall be less than 5% of the outstanding PSP20 Shares.
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7.3 Conditions to Obligations of PSP20. The obligations of PSP20
to consummate the transactions contemplated by this Agreement are subject to the
fulfillment at or prior to the Closing of the following conditions, which may be
waived in whole or in part by PSP20 to the extent permitted by applicable law.
7.3.1 Accuracy of Representations; Performance of
Agreements. Each of the representations and warranties of PSI contained in this
Agreement shall be true and correct in all material respects at and as of the
Closing Date as if made at and as of the Closing Date (except to the extent they
relate to a particular date) and PSI shall have performed or complied in all
material respects with all agreements and covenants required by this Agreement
to be performed or complied with by it at or prior to the Closing.
7.3.2 Certificate of Officers. PSP20 shall have received
such certificates of officers of PSI as PSP20 may reasonably request in
connection with the Closing, including upon request a certificate satisfactory
to them of the Chief Executive Officer and the Chief Financial Officer of PSI,
to the effect that, to the best of their knowledge, all representations and
warranties of PSI contained in this Agreement are true and correct in all
material respects at and as of the Closing Date as if made at and as of the
Closing Date, and PSI has performed or complied with all agreements and
covenants required by this Agreement to be performed or complied with by it at
or prior to the Closing.
8. Termination.
8.1 Termination by Mutual Consent. This Agreement may be
terminated and the Merger may be abandoned at any time prior to the Effective
Time, before or after shareholder approval, by the mutual written consent of
PSI, PSP20.
8.2 Termination by PSI, PSP20. This Agreement may be terminated
and the Merger may be abandoned by action of the Board of Directors of PSI,
PSP20 if (i) the Merger shall not have been consummated by December 31, 1998
(provided that the right to terminate this Agreement under this Section 8.2(i)
shall not be available to any party whose failure to fulfill any obligation
under this Agreement has been the cause of or resulted in the failure of the
Merger to occur on or before such date); (ii) any court of competent
jurisdiction in the United States or some other governmental body or regulatory
authority shall have issued an order, decree or ruling or taken any other action
permanently restraining, enjoining or otherwise prohibiting the Merger and such
order, decree, ruling or other action shall have become final and nonappealable;
or (iii) the shareholders of PSP20 shall have failed to approve this Agreement
and the transactions contemplated hereby at its meeting of shareholders.
8.3 Termination by PSI. This Agreement may be terminated by PSI,
and the Merger may be abandoned at any time prior to the Effective Time, as to
the defaulting party if (i) PSP20 shall have failed to comply in any material
respect with any of the covenants, conditions or agreements contained in this
Agreement to be complied with or performed by such party at or prior to such
date of termination, which failure to comply has not been cured within five
business days following notice to such party of such failure to comply, or (ii)
any representation or warranty of PSP20 contained in this Agreement shall not be
true in all material respects when made, which inaccuracy or breach (if capable
of cure) has not been cured within five business days following notice to such
party of the inaccuracy or breach, or on and as of the Closing as if made on and
as of the Closing Date.
8.4 Termination by PSP20. This Agreement may be terminated by
PSP20 and the Merger may be abandoned at any time prior to the Effective Time,
before or after shareholder approval, if (i) PSI shall have failed to comply in
any material respect with any of the covenants, conditions or agreements
contained in this Agreement to be complied with or performed by PSI at or prior
to such date of termination, which failure to comply has not been cured within
five business days following notice to PSI of such failure to comply, or (ii)
any representation or warranty of PSI contained in this Agreement shall not be
true in all material respects when made, which inaccuracy or beach (if capable
of cure) has not been cured within five business days following notice to PSI of
the inaccuracy or breach, or on and as of the Closing as if made on and as of
the Closing Date.
8.5 Effect of Termination and Abandonment. In the event of
termination of this Agreement and abandonment of the Merger pursuant to this
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Section 8, no party (or any directors, officers, employees, agents or
representatives of any party) shall have any liability or further obligation to
any other party or any person who controls a party within the meaning of the
Securities Act, except as provided in Section 9.1 and except that nothing herein
will relieve any party from liability for any breach of this Agreement.
9. Miscellaneous.
9.1 Payment of Expenses. If the Merger are consummated, the
Surviving Corporation shall pay all the expenses incident to preparing for,
entering into and carrying out this Agreement and the consummation of the
transactions contemplated hereby. If the Merger are not consummated, each of PSI
and PSP20 shall pay its own expenses, except that any expenses incurred in
connection with the printing of the S-4 Registration Statement and the Proxy
Statement and Prospectus, the real estate appraisals and environmental audits of
the properties of PSP20 and preparation for real estate closings, and any filing
fees under the HSR Act, the Securities Act and the Securities Exchange Act of
1934, as amended shall be paid 50% by PSI and 50% by PSP20.
9.2 Survival of Representations, Warranties and Covenants. The
respective representations and warranties of PSI and PSP20 contained herein or
in any certificate or document delivered pursuant hereto shall expire with and
be terminated and extinguished by the effectiveness of the Merger and shall not
survive the Effective Time. The sole right and remedy arising from a
misrepresentation or breach of warranty, or from the failure of any of the
conditions to be met, shall be the termination of this Agreement by the other
party. This Section 9.2 shall not limit any covenant or agreement of the
parties, which by its terms contemplates performance after the Effective Time.
9.3 Modification or Amendment. The parties may modify or amend
this Agreement by written agreement authorized by the Boards of Directors and
executed and delivered by officers of the respective parties; provided, however,
that after approval of this Agreement by the shareholders of a party, no
amendment shall be made which changes any of the principal terms of the Merger
or this Agreement, without the approval of such shareholders.
9.4 Waiver of Conditions. The conditions to each of the parties'
obligations to consummate the Merger are for the sole benefit of such party and
may be waived by such party in whole or in part to the extent permitted by
applicable law.
9.5 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of California, without giving
effect to the principles of conflict of laws thereof.
9.6 Interpretation. This Agreement has been negotiated by the
parties and is to be interpreted according to its fair meaning as if the parties
had prepared it together and not strictly for or against any party. Each of the
capitalized terms defined in this Agreement shall, for all purposes of this
Agreement (and whether defined in the plural and used in the singular, or vice
versa), have the respective meaning assigned to such term in the Section in
which such meaning is set forth. References in this Agreement to "parties" or a
"party" refer to parties to this Agreement unless expressly indicated otherwise.
At each place in this Agreement where the context so requires, the masculine,
feminine or neuter gender includes the others and the singular or plural number
includes the other. "Including" means "including without limitation."
9.7 Headings. The descriptive headings contained in the Sections
and subsections of this Agreement are for convenience of reference only and
shall not affect in any way the meaning or interpretation of this Agreement.
9.8 Parties in Interest. This Agreement, and the rights,
interests and obligations created by this Agreement, shall bind and inure to the
benefit of the parties and their respective successors and permitted assigns,
and shall confer no right, benefit or interest upon any other person, including
shareholders of the respective parties.
9.9 Notices. All notices or other communications required or
permitted under this Agreement shall be in writing and shall be delivered
personally or sent by U.S. mail, postage prepaid, addressed as follows or such
other address as the party to be notified has furnished in writing by a notice
given in accordance with this Section 9.9:
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If to PSI:
Public Storage, Inc.
701 Western Avenue, Suite 200
Glendale, California 91201-2397
Attention: Harvey Lenkin
President
If to PSP20:
Public Storage Properties XX, Inc.
701 Western Avenue, Suite 200
Glendale, California 91201-2397
Attention: B. Wayne Hughes
Chief Executive Officer
Any such notice or communication shall be deemed given as of the date of
delivery, if delivered personally, or on the second day after deposit with the
U.S. Postal Service, if sent by U.S. mail.
9.10 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
shall be considered one and the same agreement.
9.11 Assignment. No rights, interests or obligations of either
party under this Agreement may be assigned or delegated without the prior
written consent of the other party.
9.12 Entire Agreement. This Agreement, including the Merger
Agreement, embodies the entire agreement and understanding between the parties
pertaining to the subject matter hereof, and supersedes all prior agreements,
understandings, negotiations, representations and discussions, whether written
or oral.
9.13 Severable Provisions. If any of the provisions of this
Agreement may be determined to be illegal or otherwise unenforceable, in whole
or in part, the remaining provisions, and any partially enforceable provisions
to the extent enforceable, shall nevertheless be binding and enforceable.
9.14 Further Action. If at any time after the Effective Time,
the Surviving Corporation shall determine that any assignments, transfers, deeds
or other assurances are necessary or desirable to vest, perfect or confirm, of
record or otherwise, in the Surviving Corporation, title to any property or
rights of PSP20, the officers of any Constituent Corporation are fully
authorized in the name of PSP20 or otherwise to execute and deliver such
documents and do all things necessary and proper to vest, perfect or confirm
title to such property or rights in the Surviving Corporation.
IN WITNESS WHEREOF, the parties have entered into this Agreement as of
the date first above written.
PUBLIC STORAGE, INC.
By: /s/ HARVEY LENKIN
-----------------------------
Harvey Lenkin
President
PUBLIC STORAGE PROPERTIES XX, INC.
By: /s/ B. WAYNE HUGHES
-----------------------------
B. Wayne Hughes
Chief Executive Officer
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Exhibit A
AGREEMENT OF MERGER
THIS AGREEMENT OF MERGER ("Agreement") is entered into as of this _____
day of _______________, 1998, by and between PUBLIC STORAGE, INC., a California
corporation ("PSI"), and PUBLIC STORAGE PROPERTIES XX, INC., a California
corporation ("PSP20"), with reference to the following:
A. PSI was incorporated in 1980 under the laws of California, and on
the date hereof its authorized capital stock consists of 200,000,000 shares of
Common Stock, $.10 par value (the "PSI Shares"), ___________ of which are issued
and outstanding, 7,000,000 shares of Class B Common Stock, $.10 par value, all
of which are issued and outstanding, 50,000,000 shares of Preferred Stock, $.01
par value, ___________ of which are issued and outstanding and 200,000,000
shares of Equity Stock, $.01 par value, _______________ of which are issued and
outstanding.
B. PSP20 was incorporated in 1990 under the laws of California, and on
the date hereof has outstanding __________ shares of Common Stock Series A, $.01
par value (the "PSP20 Shares"), _________ shares of Common Stock Series B and
_________ shares of Common Stock Series C.
C. PSI and PSP20 have entered into an Agreement and Plan of
Reorganization dated as of February 13, 1998 (the "Plan"), setting forth certain
representations, warranties, conditions and agreements pertaining to the Merger
(as defined below).
D. The Boards of Directors of PSI and PSP20 have approved the Plan and
this Agreement of Merger, and the requisite shareholder approval has been
obtained.
NOW, THEREFORE, the parties agree as follows:
ARTICLE I
1.1 The Merger. At the Effective Time (as defined below), PSP20
will be merged with and into PSI (the "Merger") and PSI shall be the surviving
corporation. PSI and PSP20 are sometimes collectively referred to herein as the
"Constituent Corporations" and PSI, as the surviving corporation of the Merger,
is sometimes referred to herein as the "Surviving Corporation."
1.2 Effective Time. The Merger shall become effective at the
time at which this Agreement, together with the requisite Officers' Certificates
of PSI and PSP20, are filed with the California Secretary of State (the
"Effective Time").
1.3 Effect of the Merger. At the Effective Time:
(a) The separate corporate existence of PSP20 shall
cease and the Surviving Corporation shall thereupon succeed, without other
transfer, to all the rights and property of PSP20 and shall be subject to all
the debts and liabilities of PSP20 in the same manner as if the Surviving
Corporation had itself incurred them; all rights of creditors and all liens upon
the property of each of the Constituent Corporations shall be preserved
unimpaired, provided that such liens upon property of PSP20 shall be limited to
the property affected thereby immediately prior to the Effective Time; and any
action or proceeding pending by or against PSP20 may be prosecuted to judgment,
which shall bind the Surviving Corporation, or the Surviving Corporation may be
proceeded against or substituted in its place.
A-1
<PAGE>
(b) The Articles of Incorporation and the Bylaws of PSI,
as then amended, shall continue to be the Articles of Incorporation and the
Bylaws of the Surviving Corporation until changed as provided by law and their
respective provisions.
(c) The directors of PSI shall continue as directors of
the Surviving Corporation until their successors are elected and qualified as
provided by law and in accordance with the Articles of Incorporation and Bylaws
of the Surviving Corporation.
ARTICLE II
2.1 Conversion of PSP20 Shares. The manner of converting the
outstanding PSP20 Shares into cash and/or PSI Shares shall be as follows:
(a) At the Effective Time, subject to Section 2.6 of the
Plan, each PSP20 Share as to which a cash election has been made in accordance
with the provisions of Section 2.5 of the Plan and has not been revoked,
relinquished or lost pursuant to Section 2.5 of the Plan (the "Cash Election
Shares") shall be converted into and shall represent the right to receive
$_______ in cash (the "Cash Election Price"). As soon as practicable after the
Effective Time, the registered holders of Cash Election Shares shall be paid the
cash to which they are entitled hereunder in respect of such Cash Election
Shares.
(b) At the Effective Time, subject to Sections 2.4, 2.5
and 2.7 of the Plan, each PSP20 Share (other than Cash Election Shares and PSP20
Shares owned by PSI) shall be converted into ______ PSI Shares.
2.2 No Fractional Shares. Notwithstanding any other term or
provision of this Agreement or the Plan, no fractional PSI Shares and no
certificates or script therefor, or other evidence of ownership thereof, will be
issued in the Merger. In lieu of any such fractional share interests, each
holder of PSP20 Shares who would otherwise be entitled to such fractional share
will, upon surrender of the certificate representing such PSP20 Shares, receive
a whole PSI Share if such fractional share to which such holder would otherwise
have been entitled is .5 of an PSI Share or more, and such fractional share
shall be disregarded if it represents less than .5 of an PSI Share; provided,
however, that, such fractional share shall not be disregarded if such fractional
share to which such holder would otherwise have been entitled represents .5 of
1% or more of the total number of PSI Shares such holder is entitled to receive
in the Merger. In such event, such holder shall be paid an amount in cash
(without interest), rounded to the nearest $.01, determined by multiplying (i)
the per share closing price on the New York Stock Exchange, Inc. of the PSI
Shares at the Effective Time by (ii) the fractional interest.
2.3 Dissenting Shares. PSP20 Shares held by a holder who has
demanded and perfected his right to an appraisal of such shares in accordance
with Section 1300 et seq. of the General Corporation Law of California (the
"GCLC") and who has not effectively withdrawn or lost his right to appraisal
("Dissenting Shares") shall not be converted into or represent the right to
receive cash and/or PSI Shares, but the holder thereof shall be entitled only to
such rights as are granted by Section 1300 et seq. of the GCLC. Each holder of
Dissenting Shares who becomes entitled to payment for PSP20 Shares pursuant to
these provisions of the GCLC shall receive payment therefor from the Surviving
Corporation in accordance therewith. If any holder of PSP20 Shares who demands
appraisal in accordance with Section 1300 et seq. of the GCLC shall effectively
withdraw with the consent of the Surviving Corporation or lose (through failure
to perfect or otherwise) his right to appraisal with respect to PSP20 Shares,
such PSP20 Shares shall automatically be converted into the right to receive PSI
Shares pursuant to Section 2.1(b) hereof.
2.4 PSI Shares Unaffected. The Merger shall effect no change in
any of the outstanding PSI Shares and no outstanding PSI Shares shall be
converted or exchanged as a result of the Merger, and no cash shall be
exchangeable and no securities shall be issuable, with respect thereto.
2.5 Cancellation of Shares Held or Owned by Parties. At the
Effective Time, any PSP20 Shares owned by PSI shall be cancelled and retired and
no shares shall be issuable, and no cash shall be exchangeable, with respect
thereto.
A-2
<PAGE>
2.6 Exchange of Certificates. After the Effective Time, each
holder of a certificate theretofore evidencing outstanding PSP20 Shares which
were converted into PSI Shares pursuant hereto, upon surrender of such
certificate to First National Bank of Boston (the "Exchange Agent") or such
other agent or agents as shall be appointed by the Surviving Corporation, shall
be entitled to receive a certificate representing the number of whole PSI Shares
into which the PSP20 Shares theretofore represented by the certificate so
surrendered shall have been converted and cash payment in lieu of fractional
share interests, if any. As soon as practicable after the Effective Time, the
Exchange Agent will send a notice and a transmittal form to each holder of PSP20
Shares of record at the Effective Time whose stock shall have been converted
into PSI Shares, advising such holder of the effectiveness of the Merger and the
procedure for surrendering to the Exchange Agent certificates evidencing PSP20
Shares in exchange for certificates evidencing PSI Shares.
2.7 Status Until Surrendered. Until surrendered as provided in
Section 2.6 hereof, each outstanding certificate which, prior to the Effective
Time, represented PSP20 Shares (other than Cash Election Shares and Dissenting
Shares, if any) will be deemed for all corporate purposes to evidence ownership
of the number of whole PSI Shares into which the PSP20 Shares evidenced thereby
were converted. However, until such outstanding certificates formerly evidencing
PSP20 Shares are so surrendered, no dividend payable to holders of record of PSI
Shares shall be paid to the holders of such outstanding certificates in respect
of PSP20 Shares, but upon surrender of such certificates by such holders there
shall be paid to such holders the amount of any dividends (without interest)
theretofore paid with respect to such whole PSI Shares as of any record date on
or subsequent to the Effective Time and the amount of any cash (without
interest) payable to such holder in lieu of fractional share interests.
2.8 Transfer of Shares. After the Effective Time, there shall be
no further registration of transfers of PSP20 Shares on the records of PSP20
and, if certificates formerly evidencing such shares are presented to the
Surviving Corporation, they shall be cancelled and exchanged for certificates
evidencing PSI Shares and cash in lieu of fractional share interests as herein
provided.
2.9 Conversion of Common Stock Series B and C. At the Effective
Time, each share of Common Stock Series B (other than shares owned by PSI) shall
be converted into ______ PSI Shares and each share of Common Stock Series C
(other than shares owned by PSI) shall be converted into ______ PSI Shares.
ARTICLE III
3.1 Headings. The descriptive headings contained in the Sections
of this Agreement are for convenience of reference only and shall not affect in
any way the meaning or interpretation of this Agreement.
3.2 Parties in Interest. This Agreement, and the rights,
interests and obligations created by this Agreement, shall bind and inure to the
benefit of the parties and their respective successors and permitted assigns.
3.3 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
shall be considered one and the same agreement.
3.4 Further Action. If at any time after the Effective Time, the
Surviving Corporation shall determine that any assignments, transfers, deeds or
other assurances are necessary or desirable to vest, perfect or confirm, of
record or otherwise, in the Surviving Corporation, title to any property or
rights of PSP20, the officers of either Constituent Corporation are fully
authorized in the name of PSP20 or otherwise to execute and deliver such
documents and do all things necessary and proper to vest, perfect or confirm
title to such property or rights in the Surviving Corporation.
3.5 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of California, without giving
effect to the principles of conflict of laws thereof.
3.6 Abandonment of Merger. The Constituent Corporations have the
power to abandon the Merger by mutual written consent prior to the filing of
this Agreement with the California Secretary of State.
A-3
<PAGE>
IN WITNESS WHEREOF, the parties have entered into this Agreement as of
the date first above written.
PUBLIC STORAGE, INC.
By: ________________________________
Harvey Lenkin
President
By: ________________________________
Obren B. Gerich
Assistant Secretary
PUBLIC STORAGE PROPERTIES XX, INC.
By: ________________________________
Harvey Lenkin
President
By: ________________________________
Obren B. Gerich
Secretary
A-4
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<PERIOD-START> Jan-01-1997
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