Annual Report (Form 10-K), fiscal year 1994

ITEM 1. BUSINESS -------- General ------- Storage Equities, Inc. (the "Company") is an equity real estate investment trust ("REIT") organized as a corporation under the laws of California on July 10, 1980. The Company is one of the largest owners of mini-warehouses (self-service facilities offering storage space for personal and business use) in the United States and the largest owner of mini- warehouses operated under the "Public Storage" name. The Company has also invested to a much smaller extent in existing business parks containing commercial and industrial rental space. At December 31, 1994, the Company had equity interests (through direct ownership, as well as general and limited partnership interests) in 402 facilities located in 37 states, including 368 mini-warehouses, 16 business parks and 18 combination mini- warehouse/business park facilities. Some of the general partnership and limited partnership interests represent a de minimis interest in the assets. In addition, at December 31, 1994, the Company also held mortgage notes receivable secured by 12 other mini-warehouses.
The Company's operations are managed, pursuant to contractual arrangements, by Public Storage Advisers, Inc. (the "Adviser"), the Company's investment advisor, by Public Storage Management, Inc. ("PSMI"), its mini-warehouse property operator and by Public Storage Commercial Properties Group, Inc. ("PSCP"), its commercial property operator. All operations are under the general supervision of the Company's Board of Directors (the "Board of Directors"), including investments in new facilities, which are reviewed and approved by the Board of Directors and are subject to restrictions in the Company's Bylaws. The Advisor, PSMI, PSCP and the Company's executive officers are affiliated with Public Storage, Inc. ("PSI"). PSI believes that, together with its affiliates, it is the largest operator of mini-warehouse facilities in the United States and Canada.
The Company has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended. To the extent that the Company continues to qualify as a REIT, it will not be taxed, with certain limited exceptions, on the net income that is distributed to its shareholders.
The Company believes that the significant real estate and financial experience of its executive officers and directors, the Adviser, PSMI and PSCP, combined with the Company's capital structure, national investment scope, geographic diversity, economies of scale and the "Public Storage" name, should enable the Company to compete effectively in the acquisition and operation of facilities. The Company's strategy is to continue to acquire interests in facilities located in or near heavily populated areas that are expected to generate current cash flow and provide capital appreciation. The Company generally acquires facilities with operating histories. However, the Company may also acquire facilities that have
been recently developed if future cash flow from the facilities can be reasonably anticipated and if the facilities exhibit appreciation potential. The joint acquisition of facilities with seven of a group of eight public limited partnerships affiliated with the Adviser (these eight partnerships are referred to collectively as the "PSP Partnerships") has enabled the Company to invest in a large number of facilities over a broad geographic base. Facilities have been acquired for cash, securities, the cancellation of mortgage notes receivable secured by the facilities and the assumption of debt or any combination thereof.
Investment Objectives ---------------------
The Company's primary objective is to maximize shareholder value through internal growth (by increasing funds from operations and cash available for distributions) and acquisitions of additional real estate investments. The Company believes that its access to capital, geographic diversification and operating efficiencies resulting from its size will enhance its ability to achieve these objectives.
Equity Investments ------------------
The Company's equity investments consist of 147 wholly-owned facilities, 211 facilities held jointly with the PSP Partnerships and 44 facilities in which the Company has an indirect ownership interest through its limited and general partnership interests in the PSP Partnerships and other real estate entities.
At December 31, 1994, the Company had direct ownership interests or partnership interests in properties located in 37 states, including 368 mini-warehouses, 16 business parks and 18 properties with both mini- warehouse and office space.
Since the Company's investments are primarily mini-warehouses, the ability of the Company to preserve its investments and achieve its objectives is dependent in large part upon success in this field. Historically, the Company's mini-warehouse property interests have generally shown a high degree of consistency in generating cash flows, despite changing economic conditions. The Company believes that its mini-warehouses have attractive characteristics consisting of high profit margins, high average occupancy levels, a broad tenant base and low levels of capital expenditures to maintain their condition and appearance. See below for discussion of competition and "ITEM 2.



ITEM 2. PROPERTIES ----------
At December 31, 1994, the Company had direct ownership interests or partnership interests in 402 properties located in 37 states: Alabama (14 properties), Arizona (5), California (95), Colorado (14), Connecticut (3), Delaware (3), Florida (32), Georgia (9), Hawaii (1), Illinois (5), Indiana (8), Kansas (13), Kentucky (2), Louisiana (3), Maryland (9), Massachusetts (1), Michigan (2), Minnesota (1), Missouri (9), Nebraska (1), Nevada (8), New Hampshire (2), New Jersey (13), New York (4), North Carolina (6), Ohio (20), Oklahoma (5), Oregon (11), Pennsylvania (7), Rhode Island (2), South Carolina (1), Tennessee (7), Texas (60), Utah (5), Virginia (12), Washington (7), and Wisconsin (2). These properties consist of 368 mini-warehouses, 16 business parks and 18 combination mini-warehouses/business parks.
The Company's facilities are generally operated to maximize cash flow through the regular review and, when warranted by market conditions, adjustment of scheduled rents. At December 31, 1994, the weighted average occupancy level and the weighted average monthly realized rent per rentable square foot for the Company's mini-warehouse facilities were approximately 90% and $.59, respectively, and for the business park facilities approximately 95% and $.69, respectively.
None of the Company's current investments involves 5% or more of the Company's total assets, gross revenues or net income.
The Company's current practice is to conduct environmental investigations in connection with property acquisitions. The Company is also in the process of conducting environmental investigations for those facilities which were acquired prior to the time that it was customary to conduct extensive environmental investigations in connection with the property acquisitions. Although there can be no assurance, the Company is not aware of any environmental contamination of any of its facilities which individually or in the aggregate would be material to the Company's overall business, financial condition, or results of operations.
Mini-Warehouse Business -----------------------
Mini-warehouses 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 his exclusive use. On-site management and operation are the responsibility of resident managers who are supervised by district managers. Some mini-warehouses also include rentable parking areas for vehicle storage.
Users of space in mini-warehouses are individuals and large and small businesses. Individuals usually employ this space for storage of 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 eight to twelve feet. The project grounds generally are fenced and well lighted with electronic gates to control access.
The Company has experienced some minor seasonal fluctuations in the occupancy levels of mini-warehouses with occupancies higher in the summer months than in the winter months. PSMI believes that these fluctuations are the result at least in part from increased moving activity during the summer.
The Company's mini-warehouses are diversified as to geographic location 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.
Business Parks --------------
A business park typically includes both industrial and office space. Industrial space may be used for, among other things, light manufacturing and assembly, storage and warehousing, distribution and research and development activities. The Company believes that most of the office space will be occupied by tenants who are also renting industrial space. The remaining office space will be used for general office purposes. A business park may also include facilities for commercial uses such as banks or other savings institutions, travel agencies, restaurants, office supply shops, professionals or other tenants providing services to the public.
The Company's business parks typically consist of one to ten buildings located on three to 12 acres and contain from approximately 55,000 to 175,000 square feet of rentable space. A business park property is typically divided into units ranging in size from 600 to 5,000 square feet. However, the Company may acquire business parks that do not have these characteristics. The larger facilities have on-site personnel. Parking is open or covered, and the ratio of spaces to rentable square feet ranges from one to four per thousand square feet, depending upon the use of the property and its location. Office space generally requires a greater parking ratio than most industrial uses.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS ----------------- There are no material legal proceedings pending against the Company.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- There were no matters submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders.
PART II -------
ITEM 5.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER ----------------------------------------------------------------- MATTERS -------
a. Market Price of the Registrant's Common Equity:
The Common Stock has been listed on the New York Stock Exchange since October 19, 1984.
The following table sets forth the high and low sales prices of the Common Stock on the New York Stock Exchange composite tapes for the applicable periods.
As of February 28, 1995, there were approximately 11,960 holders of record of the Common Stock.
b. Related Common Stockholder Matters:
Storage Equities, Inc. has paid quarterly distributions to its shareholders since 1981, its first full year of operations. Distributions paid per share of Common Stock for 1994 amounted to $.85.
Holders of Common Stock are entitled to receive distributions when and if declared by the Company's Board of Directors out of any funds legally available for that purpose. The Company is required to distribute at least 95% of its net taxable ordinary income to maintain its REIT status for federal income tax purposes. It is management's intention to pay distributions of not less than this required amount.
For Federal tax purposes, distributions to shareholders are treated as ordinary income, capital gains, return of capital or a combination thereof. Distributions to common shareholders were $.85, $.84, and $.84 for 1994, 1993 and 1992, respectively and in each case represents ordinary income.
c. Registrant's Preferred Equity:
On October 26, 1992, the Company completed a public offering of 1,825,000 shares ($25 stated value per share) of 10% Cumulative Preferred Stock, Series A ("Series A Preferred Stock"). The Series A Preferred Stock has general preference rights over the Common Stock with respect to distributions and liquidation proceeds. During 1994, the Company paid dividends totaling $4,562,500 ($2.50 per preferred share).
On March 25, 1993, the Company completed a public offering of 2,300,000 shares ($25 stated value per share) of 9.20% Cumulative Preferred Stock, Series B ("Series B Preferred Stock"). The Series B Preferred Stock has general preference rights over the Common Stock with respect to distributions and liquidation proceeds. During 1994, the Company paid dividends totaling $5,339,500 ($2.30 per preferred share).
On June 30, 1994, the Company completed a public offering of 1,200,000 shares ($25 stated value per share) of Adjustable Rate Cumulative Preferred Stock, Series C ("Series C Preferred Stock"). The Series C Preferred Stock has general preference rights over the Common Stock with respect to distributions and liquidation proceeds. During 1994, the Company paid dividends totaling $1,250,000 ($1.042 per preferred share, pro rated from June 30, 1994 through December 31, 1994, the period during which the Series C Preferred Stock was outstanding).
On September 1, 1994, the Company completed a public offering of 1,200,000 shares ($25 stated value per share) of 9.5% Cumulative Preferred Stock, Series D ("Series D Preferred Stock"). The Series D Preferred Stock has general preference rights over the Common Stock with respect to distributions and liquidation proceeds. During 1994, the Company paid dividends totaling $950,000 ($.792 per preferred share, pro rated from September 1, 1994 through December 31, 1994, the period during which the Series D Preferred Stock was outstanding).
On February 1, 1995, the Company completed a public offering of 2,195,000 shares ($25 stated value per share) of 10% Cumulative Preferred Stock, Series E ("Series E Preferred Stock"). The Series E Preferred Stock has general preference rights over the Common Stock with respect to distributions and liquidation proceeds.
The Series A, Series B, Series C, Series D and Series E Preferred Stock collectively are referred to as the "Senior Preferred Stock."
On July 15, 1993, the Company completed a public offering of 2,300,000 shares ($25 stated value per share) of 8.25% Convertible Preferred Stock ("Convertible Preferred Stock"). The Convertible Preferred Stock has general preference rights over the Common Stock (and ranks junior to the Senior Preferred Stock) with respect to distributions and liquidation proceeds. During 1994 the Company paid dividends totaling $4,743,800 ($2.063 per preferred share).
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA -----------------------
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS ----------------------------------------------------------------------- OF OPERATIONS -------------
The following discussion and analysis should be read in conjunction with the Company's consolidated financial statements and notes thereto.
The Company generates its income principally through the operations of real estate facilities which include 147 facilities wholly-owned by the Company, 211 facilities owned jointly with the PSP Partnerships and 28 facilities which the Company indirectly owns through its ownership of partnership interests in the PSP Partnerships. All of such facilities are consolidated for financial statement purposes. In addition, the Company has small ownership interests in 16 facilities which are not consolidated with the Company.
RESULTS OF OPERATIONS ---------------------
Year ended December 31, 1994 compared to year ended December 31, 1993: ----------------------------------------------------------------------
Net income in 1994 was $42,118,000 compared to $28,036,000 in 1993, representing an increase of $14,082,000. Net income per common share was $1.05 per share in 1994 compared to $.98 per share in 1993, representing an increase of $.07 per share. In determining net income per common share, preferred stock dividends ($16,846,000 and $10,888,000 in 1994 and 1993, respectively) reduced income allocable to the common stockholders. The increase was primarily the result of improved property operations at the Company's "Same Store" facilities (mini-warehouse facilities owned since December 31, 1990), the acquisition of additional real estate facilities during 1994, 1993 and 1992, and the acquisition of additional partnership interests.
The Company's revenues are generated principally through the operations of its real estate facilities. The Company's core business is the operation of mini-warehouse facilities which, in 1994, represented approximately 90% of the Company's property operations (based on the 1994 rental income). The Company's portfolio of mini-warehouses are geographically located in 37 states and are operated under the "Public Storage" name.
During 1994, property net operating income (rental income less cost of operations and depreciation expense) improved compared to 1993. Rental income increased $32,642,000 or 30% from $109,203,000 in 1993 to $141,845,000 in 1994, cost of operations increased $10,700,000 or 25% from $42,116,000 in 1993 to $52,816,000 in 1994, and property depreciation expense increased $3,175,000 from $24,924,000 in 1993 to $28,099,000 in 1994 or 13%, resulting in a net increase in property operating income of $18,767,000 or 45%. Property net operating income prior to the reduction for depreciation increased by $21,942,000 or 33%. These increases were the result of improved property operations for the "Same Store" facilities, the acquisition of a total of 122 additional mini-warehouse facilities and one
business park facility during 1994, 1993 and 1992, and improved property operations at the Company's business park facilities.
Property net operating income for the "Same Store" facilities increased by $2,617,000 or 6.8% from $38,608,000 in 1993 to $41,225,000 in 1994. Property net operating income prior to the reduction of depreciation expense for the "Same Store" facilities increased by $3,668,000 or 6.6% from $55,574,000 in 1993 to $59,242,000 in 1994. These increases continue the upward trend of improved operations at these facilities over the past four years as net operating income prior to reductions of depreciation expense increased by approximately 9.4% in 1993, 6.1% in 1992, and 2.0% in 1991 compared to the respective prior year. These increases are principally due to increased occupancy levels combined with an increase in average rental rates.
From January 1, 1992 through December 31, 1994, the Company acquired a total of 122 mini-warehouse facilities, 23 of which were acquired pursuant to a merger transaction on September 30, 1994. During 1994 and 1993 these newly acquired mini-warehouses contributed approximately $22,490,000 and $5,504,000 of property net operating income prior to the reduction of depreciation, respectively.
Property net operating income with respect to the Company's business park operations improved by $2,668,000 from a net operating loss of $429,000 in 1993 to net operating income of $2,239,000 in 1994. Property net operating income prior to the reduction of depreciation expense with respect to the Company's business park operations improved by $1,288,000 from $6,009,000 in 1993 to $7,297,000 in 1994. These improvements are principally due to the improved performance of the Company's business park facility located in Culver City, California, where property net operating income increased by approximately $511,000 combined with the 1994 acquisition of a facility located in Monterey Park, California which provided property net operating income of $710,000 in 1994.
Weighed average occupancy levels were 90% for the mini-warehouse facilities and 95% for the business park facilities in 1994 compared to 89% for the mini-warehouse facilities and 90% for the business park facilities in 1993.
Interest and other income decreased from $5,477,000 in 1993 to $5,351,000 in 1994. The decrease is primarily attributable to the cancellation of mortgage notes receivable totaling $24,441,000 (face amount) during 1994 in connection with the acquisition of the underlying real estate facilities securing the mortgage notes.
Interest expense increased from $6,079,000 in 1993 to $6,893,000 in 1994, representing an increase of $814,000. This increase is primarily attributable to the overall increase in average debt outstanding in 1994 compared to 1993 as a result of increased borrowings on its bank credit facilities in
1994 compared to 1993. The Company principally uses its credit facilities to finance the acquisition of real estate investments which are subsequently repaid with the net proceeds from the sale of the Company's securities. The weighted average interest on the credit facility and the mortgage notes outstanding at December 31, 1994 was approximately 7.3% and 9.3%, respectively. Also during the third and fourth quarters of 1994, the Company wrote-off $700,000 of debt issuance costs and $300,000 of fees to establish the new bank credit facility.
"Minority interest in income" represents the income allocable to equity (partnership) interests in the PSP Partnerships (whose accounts are consolidated with the Company) which are not owned by the Company. Since 1990, the Company has acquired portions of these equity interests through its acquisition of limited and general partnership interests in the PSP Partnerships. As reflected in the table below, these acquisitions have resulted in reductions to the "Minority interest in income" from what it would otherwise have been in the absence of such acquisitions, and accordingly, have increased the Company's share of the consolidated PSP Partnerships' income:
The acquisition of these partnership interests has provided the Company with increased liquidity through cash distributions from the PSP Partnerships. The Company expects to continue to acquire additional partnership interests in the PSP Partnerships during 1995. See LIQUIDITY AND CAPITAL RESOURCES.
Advisory fees increased by $1,364,000 from $3,619,000 in 1993 to $4,983,000 in 1994. The advisory fee, which is based on a contractual computation, increased as a result of increased adjusted net income (as defined) per common share combined with the issuance of additional common and preferred stock during 1994 and 1993 (See Note 9 to the Company's financial statements for a description of the contract).
Year ended December 31, 1993 compared to year ended December 31, 1992: ----------------------------------------------------------------------
Net income in 1993 was $28,036,000 compared to $15,123,000 in 1992, representing an increase of $12,913,000. Net income per common share was $.98 per share in 1993 compared to $.90 per share in 1992, representing an increase of $.08 per share. Net income in 1992 included a gain on the partial condemnation by a governmental authority of a mini-warehouse facility of $398,000 or $.02 per common share. In addition, in determining net income per common share, preferred stock dividends ($10,888,000 and $812,100 in 1993 and 1992, respectively) reduced income allocable to the common stockholders.
Income before gain on disposition of real estate was $28,036,000 in 1993 compared to $14,725,000 in 1992, representing an increase of $13,311,000 or 90%. The increase was primarily the result of improved property operations for properties owned throughout 1993 and 1992, the acquisition of additional real estate facilities during 1993 and 1992, the acquisition of additional partnership interests , increased interest income and reduced interest expense.
During 1993, property net operating income (rental income less cost of operations and expense) improved compared to 1992. Rental income increased $13,317,000 or 13.9% from $95,886,000 in 1992 to $109,203,000 in 1993, cost of operations increased $3,768,000 or 9.8% from $38,348,000 in 1992 to $42,116,000 in 1993, and depreciation expense increased $2,888,000 from $22,036,000 in 1992 to $24,924,000 in 1993, resulting in a net increase in property operating income of $6,661,000 or 18.8%. Property net operating income prior to the reduction for depreciation increased by $9,549,000 or 16.6%. These increases were the result of (i) improved property operations at the "Same Store" facilities and (ii) the acquisition of 11 additional mini-warehouse facilities during 1992 (four of which were acquired on December 30, 1992) and 41 additional mini-warehouse facilities during 1993 (13 of which were acquired on December 30, 1993) partially offset by reduced property operations at the Company's business park facilities.
Property net operating income for the "Same Store" facilities increased by $4,486,000 or 13.1% from $34,122,000 in 1992 to $38,608,000 in 1993. Property net operating income prior to the reduction of depreciation expense for the "Same Store" facilities increased by $4,783,000 or 9.4% from $50,791,000 in 1992 to $55,574,000 in 1993. These increases continue the upward trend of improved operations at these facilities over the past three years as net operating income prior to reduction for depreciation expense increased by approximately 6.1% in 1992 compared to 1991 and 2.0% in 1991 compared to 1990. These increases are principally due to increased occupancy levels combined with a slight increase in average rental rates.
The real estate facilities which were acquired during 1993 and 1992 contributed approximately $5,504,000 and $542,000 of property net operating income prior to the reduction for depreciation expense in 1993 and 1992, respectively.
Property net operating income with respect to the Company's business park operations decreased by $1,448,000 from $1,019,000 in 1992 to a net operating loss of $429,000 in 1993. Property net operating income prior to the reduction of depreciation expense with respect to the Company's business park operations decreased by $195,000 or 3% from $6,204,000 in 1992 to $6,009,000 in 1993. These decreases are principally due to the performance of the Company's business park facility located in Culver City, California, where property net operating income decreased by approximately $590,000 due to a decline in occupancy and increased expenses. The Company's business park facility manager, PSCP, has been actively marketing the facility and has improved occupancy and property operations at the facility in 1994.
Weighed average occupancy levels were 89% for the mini-warehouse facilities and 90% for the business park facilities in 1993 compared to 86% for the mini-warehouse facilities and 90% for the business park facilities in 1992.
Interest and other income increased from $1,562,000 in 1992 to $5,477,000 in 1993 for a net increase of $3,915,000. The increase is primarily attributable to the acquisition of mortgage notes receivable totaling $61,088,000 (face amount). The mortgage notes bear interest at stated rates ranging from 6.125% to 11.97% and effective interest rates ranging from 10.00% to 14.74%. The overall average outstanding mortgage notes receivable balance for the year ended December 31, 1993 was approximately $54,453,000 generating an overall average effective yield of 11.04%.
Interest expense decreased from $9,834,000 in 1992 to $6,079,000 in 1993 for a net decrease of $3,755,000. The decrease in interest expense is primarily attributable to overall decreases in average debt outstanding as mortgage notes payable were reduced by $19,141,000 during 1993 combined with reduced average borrowings on the Company's credit facilities during 1993 as compared to 1992. The weighted average interest on the mortgage notes outstanding at December 31, 1993 was approximately 10.0%.
"Minority interest in income" represents the income allocable to equity (partnership) interests in the PSP Partnerships (whose accounts are consolidated with the Company) which are not owned by the Company. Since 1990, the Company has acquired portions of these equity interests through its acquisition of limited and general partnership interests in the PSP Partnerships. As reflected in the preceding table, these acquisitions have resulted in reductions to the "Minority interest in income" from what it would otherwise have been in the absence of such acquisitions, and accordingly, have increased the Company's share of the consolidated PSP Partnerships' income:
Advisory fees increased by $1,007,000 from $2,612,000 in 1992 to $3,619,000 in 1993. The advisory fee, which is based on a contractual computation, increased as a result of increased adjusted net income (as defined) per common share combined with the issuance of additional preferred stock during 1993 (See Note 9 to the Company's financial statements for a description of the contract).
Property Operating Trends ------------------------- The following tables illustrates property operating trends for the last three years:
----------- (1) Weighted average occupancy and realized rent per foot are not presented for all facilities because such information would not be comparative and does not differ materially from the "Same Store" information. (2) Realized rent per foot represents the actual revenue earned per occupied square foot. Management believes this is a more relevant measure than the posted rental rates, since posted rates can be discounted through the use of promotions. (3) Gross Profit Margin is computed by dividing NOI (rental income less cost of operations and depreciation) by gross revenues. (4) Decrease in Gross Profit Margin and pre-depreciation operating margin, in 1993, is principally due to the reductions in property operations at the Culver City and Lakewood facilities as discussed above. (5) Pre-depreciation operation margin is computed by dividing NOI prior to the reduction of depreciation expense by gross revenues.
Trends in property operations are due to:
. Increasing occupancy levels due to the decreased levels of new supply in the industry and promotion of the Company's facilities by property operators, PSMI and PSCP.
. Increasing realized rents per square foot of mini-warehouse space due to increased demand and reduced need for promotional discounting of mini- warehouse space to improve occupancy.
. Increasing revenues due to increasing realized rents and occupancy levels offset in part by modest increase in expenses (approximately 5% in 1994, 1% in 1993, 3% and in 1992 on "Same Store" facilities) due to expense controls including modest increases in payroll offset by reductions in promotional expenditures.
Liquidity and Capital Resources -------------------------------
Capital Structure -----------------
The Company's financial profile is characterized by a low level of debt to total capitalization, increasing net income, increasing cash flow from operations, increasing funds from operations ("FFO") and a conservative dividend payout ratio with respect to the common stock. These reflect management's desire to "match" asset and liability maturities, to minimize refinancing risks and to retain capital to take advantage of acquisition opportunities and to provide financial flexibility.
Over the last three years the Company has taken a variety of steps to enhance its capital structure, including:
. The public issuance of $45.6 million of Series A Preferred Stock in 1992, $57.5 million of Series B Preferred Stock in 1993, $57.5 million of Convertible Preferred Stock in 1993, $30 million of Adjustable Rate Preferred Stock in June 1994 and $30 million of Series D Preferred Stock in September 1994. None of these issues requires redemption or sinking funds by the Company.
. The public issuance of $ 80.8 million of common stock in February 1994 and $34.5 million in November 1994.
. The issuance of $37.4 million of common stock in the merger with Public Storage Properties VIII, Inc. in September 1994.
The Company does not believe it has any significant refinancing risks with respect to its mortgage debt and nominal interest rate risks associated with its variable rate mortgage debt which had a principal balance of $18.4 million at December 31, 1994. The Company uses its $115 million of bank credit
facilities primarily to fund acquisitions and provide financial flexibility and liquidity. The credit facility bears interest at LIBOR plus 1.25%. At December 31, 1994, the Company had borrowings of $25.4 million under this facility, all of which was repaid with the net proceeds of the January 1995 preferred stock offering.
As a result of these transactions, the Company's capitalization has increased. Shareholders' equity increased from $188,112,500 on December 31, 1991 to $587,786,000 on December 31, 1994. The increased equity combined with reductions in total debt has resulted in an improvement in the Company's debt to equity ratio from 55% at December 31, 1991 to 13% at December 31, 1994. The Company's ratio of debt to total assets also decreased from 19% at December 31, 1991 to 9% at December 31, 1994. In addition, in January 1995, the Company issued approximately $55 million of its 10% Series E Preferred Stock the net proceeds of which have been used to repay bank borrowings and acquire additional real estate investments.
Cash Provided by Operations and Funds From Operations ("FFO") -------------------------------------------------------------
The Company believes that important measures of its performance as well as its liquidity are cash provided by operations and FFO.
Net cash provided by operations (net income plus depreciation, amortization and minority interest) reflects the cash generated from the Company's business before distributions to various equity holders, including the preferred shareholders, capital expenditures or mandatory principal payments on debt. Net cash provided by operations has increased over the past three years from $44,025,000 in 1992 to $79,180,000 in 1994.
The following table summarizes the Company's ability to pay the minority interests' distributions, its dividends to the preferred shareholders and capital improvements to maintain the facilities through the use of cash provided by operating activities. The remaining cash flow is available to the Company to make both scheduled and optional principal payments on debt, pay distributions to common shareholders and for reinvestment.
The increases in cash provided by operating activities and funds available for principal payments on debt, common dividends and reinvestment over the past three years is primarily due to (i) increasing property net operating income at the "Same Store" facilities, (ii) the acquisition of limited and general partnership interests in the PSP Partnerships and (iii) the leverage created through the issuance of preferred stock and the utilization of the net proceeds in real estate investments which have provided net cash flows in excess of the preferred stock dividend requirements. These factors have improved the cash flow position of the common shareholders as FFO applicable to the common shareholders has increased over the same period at a rate greater than the increase in number of common shares. The significant increase in capital improvements in 1994 compared to 1993 for the mini-wareshouse facilities is due to the acquisition of new facilities in 1994 and 1993 combined with approximately $800,000 of non-recurring expense to upgrade certain facilities in Texas to provide for climate controlled storage units. See the consolidated statements of cash flows for the each of the three years in the period ended December 31, 1994 for additional information regarding the Company's investing and financing activities.
Funds from operations increased to $56,143,000 for the year ended December 31, 1994 compared to $35,830,000 in 1993 and $21,133,000 in 1992. Funds from operations applicable to the common shareholders (after deducting preferred stock dividends) increased to $39,297,000 for the year ended December 31, 1994 compared to $24,942,000 in 1993 and $20,321,000 in 1992. Funds from operations is defined by the National Association of Real Estate Investment Trusts, Inc. ("NAREIT") as net income (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from debt restructuring and sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. NAREIT has recently adopted revisions to the definition of funds from operations which will become effective in 1996. The most material impact of the new guidelines will be (i) amortization of deferred financing costs will be treated as an expense - i.e. it will no longer be treated as an add-back to net income and (ii) certain gains on sales of land will be included in funds from operations if deemed to be recurring. These changes will have no impact on the way the Company currently computes its funds from operations. Funds from operations is a supplemental performance measure for equity real estate investment trusts used by industry analysts. Funds from operations does not take into consideration scheduled principal payments on debt, capital improvements, distributions and other obligations of the Company. Accordingly, funds from operations is not a substitute for the Company's cash flow or net income (as discussed above) as a measure of the Company's liquidity or operating performance.
The Company believes that its rental revenues, distributions from real estate partnership interests and interest income will be sufficient over at least the next 12 months to meet the Company's operating expenses, capital improvements, debt service requirements and distributions to shareholders. During 1995, the Company has budgeted approximately $8 million for capital improvements ($2 million of which is directly attributable to the minority interest in respect of its ownership interest) to maintain its facilities. During 1994, the Company incurred capital improvements of approximately $8,312,000. The Company believes that it is not subject to any significant refinancing risks. During 1993 and 1994, the Company either repaid or extended the maturities of its mortgage notes such that in no year, until 1999, will there be more than $5.0 million of principal payments on mortgage notes becoming due and payable. See Note 7 to the Company's consolidated financial statements for principal maturities on mortgage notes payable.
The Company believes its geographically diverse portfolio has resulted in a relatively stable and predictable investment portfolio with increasing overall property performance over the past four years.
Distributions -------------
Over the past four years, the Company has established a conservative distribution policy that is, among other things, supported by its cash flow from operations (after capital expenditures and debt service), availability of cash to make such distributions and Company's ability to maintain its REIT status.
The Company's policy is also conservative with respect to FFO. The Company's conservative distribution policy permits it after funding its distributions and capital improvements, to retain significant funds to make additional investments and debt reductions. During 1992, 1993, and 1994, the Company distributed to common shareholders 66%, 59% and 54% of its FFO available to common shareholders, respectively, allowing it to retain approximately $24 million after capital improvements and preferred stock dividend requirements. Distributions to shareholders during 1994 and 1993 were as follows:
The Series C Preferred Stock and the Series D Preferred Stock were issued on June 30, 1994 and September 1, 1994, respectively. Dividends with respect to the Series C and Series D Preferred Stock are pro rated from the date of issuance through December 31, 1994. The annual distribution requirement with respect to the Series D Preferred stock is $2.50 per share. The dividend rate on the Series C Preferred Stock is adjustable. For the period from the date of issue (June 30, 1994) through September 30, 1994 was equal to 8.15% per annum and was 8.426% per annum for the fourth quarter of 1994. Thereafter, the dividend rate per annum will be adjusted quarterly and will be equal to the highest of one of three U.S. Treasury indices (Treasury Bill Rate, Ten Year Constant Maturity Rate, and Thirty Year Constant Maturity Rate) multiplied by 110%. However, the dividend rate for any dividend period will not be less than 6.75% per annum nor greater than 10.75% per annum. The dividend rate with respect to the first quarter of 1995 will be equal to 8.668% per annum.
The annual distribution level with respect to the Company's preferred stock (including the Series E Preferred Stock issued in January 1995) will be approximately $25,461,600. The distributions for the first quarter of 1995 with respect to the common stock is $.22 per common share.
REIT Distribution Requirement -----------------------------
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 prior to filing of the Company's tax return. The Company has satisfied the REIT distribution requirement since 1980.
Increasing Ownership of Real Estate Assets ------------------------------------------
The Company's growth strategies have focused on improving the operating performance of its existing properties (as discussed above) and on increasing its ownership of mini-warehouses through additional investments.
During 1994, the Company acquired 71 mini-warehouse facilities and one business park facility for an aggregate cost of $193,097,000. The acquisitions were financed through a combination of the issuance of equity securities, cancellation of mortgage notes receivable, assumption of debt and cash. Twenty-three of these facilities were acquired pursuant to a merger transaction.
On September 30, 1994, the Company completed a merger transaction with Public Storage Properties VIII, Inc. ("Properties 8") whereby the Company acquired all the outstanding stock of Properties 8 in exchange for cash and common stock of the Company. As a result of the Merger, Properties 8 was merged with and into the Company. Properties 8, a real estate investment trust and an affiliate of the Company's investment adviser, owned and operated 20 mini-warehouse facilities and three combination mini- warehouse/business park facilities prior to the Merger. The aggregate cost of the merger (including related costs and expenses) totaled $55,839,000 consisting of the issuance of 2,593,914 shares of the Company's common stock (with an aggregate value of $38,498,000) and $17,341,000 in cash.
During 1994, the Company significantly increased its ownership interest in the PSP Partnerships. Pursuant to cash tender offers, the Company acquired limited partnership units in the PSP Partnerships for an aggregate cost of $51,711,000. The effect of these acquisitions is to reduce the ownership interest of minority interest in the Company's existing portfolio of real estate facilities. Minority interest has decreased from $193,712,000 at December 31, 1993 to $141,227,000 at December 31, 1994.
On February 28, 1995, the Company completed a merger transaction with Public Storage Properties VI, Inc. ("Properties 6") whereby the Company acquired all the outstanding stock of Properties 6 in exchange for cash and common stock of the Company. In the merger, Properties 6 was merged with and into the Company, and the outstanding Properties 6 common stock (2,716,223 shares) was converted into an aggregate of approximately (i) 3,148,000 shares of the Company's common stock (at the rate of 1.724 shares of the Company's common stock for each share of Properties 6 common stock) and (ii) $21,427,973 in cash (at the rate of $24.05 per share of Properties 6 common stock). Properties 6, a real
estate investment trust and an affiliate of the Company's investment adviser, owned and operated 22 mini-warehouse facilities and one combination mini-warehouse/business park facilities prior to the merger.
In March 1995, the Company acquired two parcels of land located in Atlanta, Georgia on which the Company is currently developing mini-warehouse facilities. The facilities are scheduled to open in late 1995 and have an estimated aggregate cost of approximately $8 million.
Future Transactions -------------------
The Company intends to continue to expand its asset and capital base through the acquisition of real estate assets and interests in real estate assets from unaffiliated parties and affiliates of the Adviser through direct purchases, mergers, tender offers or other transactions. The Company expects to fund these transactions with borrowings under its $115 million credit facility combined with undistributed operating cash flow. The Company intends to repay amounts borrowed under the credit facility from undistributed operating cash flow or from the public or private placement of securities.
Proposed Restructure --------------------
The Company has formed a special committee of independent directors which, in March 1995, selected Robertson, Stephens & Company, L.P., as financial advisor. The special committee was formed to consider a transaction which the Company would be combined with substantially all of the United States real estate operations of PSI, and the Company would become self- advised and self-managed. Although no terms have been established, it is expected that the Company would issue shares of its common stock in the transaction. There is no agreement between the Company and PSI and no assurance that an agreement can be reached or that a transaction can be completed. Any such transaction would be subject, among other things, to prior approval of the Company's common shareholders and a fairness opinion from Robertson, Stephens & Company, L.P.
PSI, organized in 1972, has been engaged, directly and through subsidiaries, in the acquisition, development, construction of mini- warehouses and, to a lesser extent, other commercial properties in the United States and Canada. PSMI, PSCP and the Adviser are subsidiaries of PSI. PSMI and PSCP operated approximately 1,150 facilities in the United States, including the Company's approximately 430 facilities, and PSI has direct or indirect ownership interests in approximately 1,060 facilities in the United States, including the Company's facilities.
Proposed Merger ---------------
On February 1, 1995, the Company and Public Storage Properties VII, Inc. ("Properties 7"), a publicly traded equity real estate investment trust and an affiliate of the Adviser agreed, subject to certain conditions, to merge. Upon the merger, each outstanding share of Properties 7 common stock would be converted, at the election of the shareholders of Properties 7, into either shares of the Company's common stock with a market value of $18.95 or, with respect to up to 20% of the Properties 7 common stock, $18.95 in cash. Properties 7 has 3,806,491 outstanding shares of common stock. The merger agreement is conditioned on, among other requirements, receipt of satisfactory fairness opinions by Properties 7 and the Company and approval by the shareholders of both Properties 7 and the Company. PSI and its affiliates have significant relationships with both Properties 7 and the Company, own approximately 28% of the Properties 7 common stock and have informed Properties 7 and the Company that they intend to vote their shares for the merger and intend to elect to convert their shares of Properties 7 into common shares of the Company.
Tender offers -------------
In January 1995, the Company completed a cash tender offer for limited partnership units in PS Partners VIII, Ltd. acquiring 6,815 units at $260 per unit. In February 1995, the Company completed a cash tender offer for limited partnership units in PS Partners, Ltd., acquiring 15,767 units at $400 per unit.
ITEM 8.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -------------------------------------------
The financial statements of the Company at December 31, 1994 and December 31, 1993 and for each of the three years in the period ended December 31, 1994 and the report of Ernst & Young LLP, Independent Auditors, thereon and the related financial statement schedules, are included elsewhere herein. Reference is made to the Index to Financial Statements and Schedules in Item 14.
ITEM 9.

ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ---------------------------------------------------- Not applicable.
PART III --------
ITEM 10.



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT --------------------------------------------------
Incorporated by reference herein is the information required by this item, which is to be included in an amendment on Form 10-K/A to the Form 10- K filed within 120 days of the end of the Company's 1994 fiscal year.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION ----------------------
Incorporated by reference herein is the information required by this item, which is to be included in an amendment on Form 10-K/A to the Form 10- K filed within 120 days of the end of the Company's 1994 fiscal year.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT --------------------------------------------------------------
Incorporated by reference herein is the information required by this item, which is to be included in an amendment on Form 10-K/A to the Form 10- K filed within 120 days of the end of the Company's 1994 fiscal year.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ----------------------------------------------
Incorporated by reference herein is the information required by this item, which is to be included in an amendment on Form 10-K/A to the Form 10- K filed within 120 days of the end of the Company's 1994 fiscal year.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K ---------------------------------------------------------------
(a) 1. Financial Statements The financial statements listed in the accompanying Index to Financial Statements and Schedules hereof are filed as part of this report.
2. Financial Statement Schedules The financial statements schedules listed in the accompanying Index to Financial Statements and Schedules are filed as part of this report.
3. Exhibits See Index to Exhibits contained herein.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated November 16, 1994, pursuant to Item 5, which filed certain exhibits relating to the Company's public offering of 2,500,000 shares of common stock.
(c) Exhibits: See Index to Exhibits contained herein.
STORAGE EQUITIES, INC. INDEX TO EXHIBITS (Items 14(a)(3) and 14(c))
2.1 Agreement and Plan of Reorganization between Registrant and Public Storage Properties VIII, Inc. dated as of April 14, 1994. Filed with Registrant's Registration Statement No. 33-54557 and incorporated herein by reference.
2.2 Agreement and Plan of Reorganization between Registrant and Public Storage Properties VI, Inc. dated as of September 26, 1994. Filed with Registrant's Registration Statement No. 33-56925 and incorporated herein by reference.
3.1 Restated Articles of Incorporation. Filed with Registrant's Registration Statement No. 33-54557 and incorporated herein by reference.
3.2 Certificate of Determination for the Series A Preferred Stock. Filed with Registrant's Registration Statement No. 33-54557 and incorporated herein by reference.
3.3 Certificate of Determination for the Series B Preferred Stock. Filed with Registrant's Registration Statement No. 33-54557 and incorporated herein by reference.
3.4 Amendment to Certificate of Determination for the Series B Preferred Stock. Filed with Registrant's Registration Statement No. 33-56925 and incorporated herein by reference.
3.5 Certificate of Determination for the Convertible Preferred Stock. Filed with Registrant's Registration Statement No. 33-54557 and incorporated herein by reference.
3.6 Certificate of Determination for the Adjustable Rate Preferred Stock. Filed with Registrant's Registration Statement No. 33-54557 and incorporated herein by reference.
3.7 Certificate of Determination for the Series D Preferred Stock. Filed with Registrant's Form 8-A/A Registration Statement relating to the Series D Preferred Stock and incorporated herein by reference.
3.8 Certificate of Determination for the Series E Preferred Stock. Filed with Registrant's Form 8-A/A Registration Statement relating to the Series E Preferred Stock and incorporated herein by reference.
3.9 Revised Bylaws. Filed with Registrant's Registration Statement No. 33-30340 and incorporated herein by reference.
10.1 Amended and Restated Advisory Contract between Registrant and Public Storage Advisers, Inc. dated as of September 30, 1991. Filed with Registrant's Current Report on Form 8-K dated October 2, 1991 and incorporated herein by reference.
10.2 First Amendment to Amended and Restated Advisory Contract between Registrant and Public Storage Advisers, Inc. dated as of October 1, 1991. Filed with Registrant's Registration Statement No. 33-43750 and incorporated herein by reference.
10.3 Second Amendment to Amended and Restated Advisory Contract between Registrant and Public Storage Advisers, Inc. dated as of May 14, 1992. Filed with Registrant's Current Report on Form 8-K dated May 14, 1992 and incorporated herein by reference.
10.4 Third Amendment to Amended and Restated Advisory Contract between Registrant and Public Storage Advisers, Inc. dated as of February 25, 1993. Filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992 and incorporated herein by reference.
10.5 Fourth Amendment to Amended and Restated Advisory Contract between Registrant and Public Storage Advisers, Inc. dated as of June 7, 1994. Filed with Registrant's Current Report on Form 8-K dated June 23, 1994 and incorporated herein by reference.
10.6 Fifth Amendment to Amended and Restated Advisory Contract between Registrant and Public Storage Advisers, Inc. dated as of August 9, 1994. Filed with Registrant's Current Report on Form 8-K dated August 24, 1994 and incorporated herein by reference.
10.7 Sixth Amendment to Amended and Restated Advisory Contract between Registrant and Public Storage Advisers, Inc. dated as of January 12, 1995. Filed with Registrant's Current Report on Form 8-K dated January 24, 1995 and incorporated herein reference.
10.8 Amended Management Agreement between Registrant and Public Storage Management, Inc. dated as of February 21, 1995. Filed herewith.
10.9 Amended Management Agreement between Registrant and Public Storage Commercial Properties Group, Inc. dated as of February 21, 1995. Filed herewith.
10.10 Agreement on Investment Opportunities dated as of November 18, 1980 and Amendment to Agreement on Investment Opportunities dated as of September 12, 1986, each among Registrant, Public Storage, Inc., B. Wayne Hughes and Kenneth Q. Volk, Jr. Filed with Registrant's Registration Statement No. 33-30340 and incorporated herein by reference.
10.11 Amendment No. 2 to Agreement on Investment Opportunities among Registrant, Public Storage, Inc., B. Wayne Hughes and Kenneth Q. Volk, Jr., dated as of May 14, 1992. Filed with
Registrant's Current Report on Form 8-K dated May 14, 1992 and incorporated herein by reference.
10.12 Participation Agreement, dated as of September 14, 1982, among Registrant, PS Partners, Ltd., Public Storage, Inc., B. Wayne Hughes and Kenneth Q. Volk, Jr. Filed with Registrant's Current Report on Form 8-K dated September 14, 1982 and incorporated herein by reference.
10.13 Participation Agreement dated as of November 9, 1983, among Registrant, PS Partners II, Ltd., Public Storage, Inc., B. Wayne Hughes and Kenneth Q. Volk, Jr. Filed with Registrant's Current Report on Form 8-K dated December 9, 1983 and incorporated herein by reference.
10.14 Participation Agreement dated as of May 11, 1984, among Registrant, PS Partners III, Ltd., Public Storage, Inc., B. Wayne Hughes and Kenneth Q. Volk, Jr. Filed with Registrant's Annual Report on Form 10-K for the year ended December 31, 1984 and incorporated herein by reference.
10.15 Participation Agreement dated as of December 26, 1984, among Registrant, PS Partners IV, Ltd., Public Storage, Inc., B. Wayne Hughes and Kenneth Q. Volk, Jr. Filed with Registrant's Annual Report on Form 10-K for the year ended December 31, 1984 and incorporated herein by reference.
10.16 Participation Agreement dated as of June 20, 1985, among Registrant, PS Partners V, Ltd., a California Limited Partnership, Public Storage, Inc., B. Wayne Hughes and Kenneth Q. Volk, Jr. Filed with Registrant's Current Report on Form 8-K dated April 18, 1985 and incorporated herein by reference.
10.17 Participation Agreement dated as of October 18, 1985, among Registrant, PS Partners VI, Ltd., a California Limited Partnership, Public Storage, Inc., B. Wayne Hughes and Kenneth Q. Volk, Jr. Filed with Registrant's Current Report on Form 8-K dated November 30, 1985 and incorporated herein by reference.
10.18 Participation Agreement dated as of April 2, 1986, among Registrant, PS Partners VII, Ltd., a California Limited Partnership, Public Storage, Inc., B. Wayne Hughes and Kenneth Q. Volk, Jr. Filed with Registrant's Current Report on Form 8-K dated August 20, 1986 and incorporated herein by reference.
10.19 Loan Agreement between Registrant and Aetna Life Insurance Company dated as of July 11, 1988. Filed with Registrant's Current Report on Form 8-K dated July 14, 1988 and incorporated herein by reference.
10.20 Amendment to Loan Agreement between Registrant and Aetna Life Insurance Company dated as of September 1, 1993. Filed with Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference.
10.21 Credit Agreement by and among Registrant, Wells Fargo Bank, National Association, as agent, and the financial institutions party thereto dated as of September 2, 1994 (the "Credit Agreement"). Filed with Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 1994 and incorporated herein by reference.
10.22 First Amendment to Credit Agreement dated as of December 22, 1994. Filed herewith.
* 10.23 Registrant's 1990 Stock Option Plan. Filed herewith.
* 10.24 Registrant's 1994 Stock Option Plan. Filed herewith.
11 Statement Re Computation of Earnings Per Share. Filed herewith.
12 Statement Re Computation of Ratio of Earnings to Fixed Charges. Filed herewith.
23 Consent of Independent Auditors. Filed herewith.
27 Financial data schedule. Filed herewith.
____________________
* Compensatory benefit plan.
SIGNATURES ----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
STORAGE EQUITIES, INC.
Date: March 24 , 1995 By: /s/ Harvey Lenkin ------------------------ ----------------------------------
Harvey Lenkin, President
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
STORAGE EQUITIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SCHEDULES
(Item 14 (a))
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 consolidated financial statements or notes thereto.
REPORT OF INDEPENDENT AUDITORS ------------------------------
The Board of Directors and Shareholders Storage Equities, Inc.
We have audited the accompanying consolidated balance sheets of Storage Equities, Inc. as of December 31, 1994 and 1993, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1994. Our audits also included the financial statement schedules listed in the Index at Item 14 (a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules 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 consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Storage Equities, Inc. at December 31, 1994 and 1993, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
ERNST & YOUNG L L P Los Angeles, California
February 7, 1995, except for Note 13 for which the date is March 13,1995.
STORAGE EQUITIES, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1994 AND 1993
See accompanying notes.
STORAGE EQUITIES, INC. CONSOLIDATED STATEMENTS OF INCOME FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1994
See accompanying notes.
STORAGE EQUITIES, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1994 (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
See accompanying notes.
STORAGE EQUITIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1994
STORAGE EQUITIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1994 CONTINUED
See accompanying notes.
STORAGE EQUITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1994
1. Description of the business ---------------------------
Storage Equities, Inc. (the "Company"), which was organized in 1980, is a California corporation that invests primarily in existing mini- warehouses which offer self storage spaces for lease, usually on a month-to- month basis, for personal and business use. The Company, to a lesser extent, has also invested in business park facilities containing commercial and industrial rental space.
At December 31, 1994, the Company had equity interests (through direct ownership, as well as general and limited partnership interests) in 402 properties located in 37 states, including 368 mini-warehouse facilities, 16 business parks and 18 combination mini-warehouse/business park facilities. All of these facilities are operated under the "Public Storage" name.
The Company has invested in 211 properties jointly through general partnerships (the "Joint Ventures") with PS Partners, Ltd. ("PSP-1"); PS Partners II, Ltd. ("PSP-2"); PS Partners III, Ltd. ("PSP-3"); PS Partners IV, Ltd. ("PSP-4"); PS Partners V, Ltd. ("PSP-5"); PS Partners VI, Ltd. ("PSP-6"); and PS Partners VII, Ltd. ("PSP-7"). In addition, the Company also owns limited partnership units and general partnership interests in each of the above partnerships including PS Partners VIII, Ltd. ("PSP-8"). These eight publicly-held partnerships (collectively the "PSP Partnerships") are affiliates of the Company.
2. Summary of significant accounting policies ------------------------------------------
Basis of presentation ---------------------
The consolidated financial statements include the accounts of the Company and the PSP Partnerships. The Company through its direct ownership interests in the Joint Ventures combined with its limited and general partnership interests owns a significant economic interest in each of the PSP Partnerships (Note 8). In addition, the Company is able to exercise significant control over the PSP Partnerships through its (i) position as a co-general partner, (ii) ownership of significant limited partnership interests and (iii) ability to compel the sale of the properties held in the Joint Ventures; such properties represent a significant majority of the PSP Partnerships' investment portfolio.
The Company's aggregate cost of its interests in the PSP Partnerships is less than the historical carrying amount of the underlying net assets of the PSP Partnerships represented by such interests. In consolidation, the difference between the Company's cost and the historical carrying value of the underlying properties has been allocated to the real estate facilities and is being amortized over the remaining lives of the real estate facilities (Note 4).
STORAGE EQUITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1994
2. Summary of significant accounting policies (Cont'd.) ----------------------------------------------------
Income taxes ------------
For all taxable years subsequent to 1980, the Company qualified as a real estate investment trust ("REIT"), as defined in Section 856 of the Internal Revenue Code. 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. The Company met the distribution requirements during 1994, 1993 and 1992, accordingly, no provision for income taxes has been made in the accompanying financial statements.
Allowance for possible losses -----------------------------
The Company has no allowance for possible losses relating to any of its real estate investments, including mortgage notes receivable. The need for such an allowance is evaluated by management by means of periodic reviews of its investment portfolio.
Cash and cash equivalents -------------------------
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. The carrying amounts reported in the balance sheet for these financial instruments approximate their fair values.
Depreciation ------------
Depreciation is computed using the straight-line method over the estimated useful lives of the buildings and improvements, which is generally between 5 and 25 years. Leasing commissions relating to the business park operations are expensed as incurred.
Under the terms of the joint venture agreements, depreciation with respect to the Joint Ventures, is allocated first to the PSP Partnerships to the extent of their original capital contribution then to the Company to the extent of its original capital contribution and thereafter pro rata based on ownership interests in each respective Joint Venture. Included in depreciation and amortization expense is $17,658,000, $18,596,000 and $16,996,000 of depreciation expense related the Joint Venture properties of which $553,000, $448,000 and $280,000 was allocated to the Company during 1994, 1993 and 1992, respectively. The cumulative amount of depreciation allocated to the PSP Partnerships and the Company with respect to the Joint Ventures totaled $149,268,000 and $1,645,000, respectively, at December 31, 1994 and $132,163,000 and $1,092,000, respectively, at December 31, 1993.
STORAGE EQUITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1994
2. Summary of significant accounting policies (Cont'd.) ----------------------------------------------------
Net income per common share ---------------------------
Net income per common share is computed using the weighted average common shares outstanding (adjusted for stock options). The preferred stocks issued during 1994, 1993 and 1992 (Note 10) were determined not to be common stock equivalents. In computing earnings per common share, preferred stock dividends totaling $16,846,000, $10,888,000, and $812,000 for the year ended December 31, 1994, 1993, and 1992, respectively, reduced income available to common stockholders. Fully diluted earnings per common are not presented, as the assumed conversion of the 8.25% Convertible Preferred Stock (Note 10) would be anti-dilutive.
Revenue recognition ------------------- Property rents are recognized as earned
Interest income on mortgage notes receivable is recognized using the effective rate of interest.
3. Acquisition of Public Storage Properties VIII, Inc. ("Properties 8") --------------------------------------------------------------------
On September 30, 1994, the Company completed a merger transaction (the "Merger") with Properties 8 whereby the Company acquired all the outstanding stock of Properties 8 in exchange for cash and common stock of the Company. As a result of the Merger, Properties 8 was merged with and into the Company as of September 30, 1994. Properties 8, a real estate investment trust and an affiliate of the Company's investment adviser, owned and operated 20 mini-warehouse facilities and three combination mini-warehouse/business park facilities prior to the Merger.
Pursuant to the Merger, the Company acquired all of the outstanding stock of Properties 8 for $21.21 per share. The aggregate cost of the Merger (including related costs and expenses) totaled $55,839,000 consisting of the issuance of 2,593,914 shares of the Company's common stock (with an aggregate value of $38,498,000) and $17,341,000 in cash. The Merger has been accounted for as a purchase, accordingly, allocations of the total acquisition cost to the net assets acquired were made based on the fair value of such assets and liabilities as of September 30, 1994. The fair market values of the assets acquired and liabilities assumed are summarized as follows:
3. Acquisition of Public Storage Properties VIII, Inc. ("Properties 8") -------------------------------------------------------------------- (Cont'd) --------
The historical operating results of Properties 8 prior to September 30, 1994 have not been included in the Company's historical operating results. Pro forma data (unaudited) for the year ended December 31, 1994 and 1993 as though the transaction had been effective at the beginning of each period follows:
The pro forma data does not purport to be indicative either of results of operations that would have occurred had the purchase been made at the beginning of each period or future results of operations of the Company. Certain pro forma adjustments were made to the combined historical amounts to reflect (i) expected reductions in general and administrative expenses, (ii) estimated increased interest expense from bank borrowings to finance the cash portion of the acquisition cost, (iii) estimated increase in depreciation and amortization expense, and (iv) estimated increased advisory fee expense.
4. Real estate facilities ------------------------- Activity in real estate facilities during 1994, 1993 and 1992 is as follows:
During 1994, the Company acquired 71 mini-warehouse facilities and one business park facility (including the real estate facilities acquired in the Merger) for an aggregate cost of $193,097,000, consisting of the issuance of preferred stock totaling $2,150,000, the cancellation of mortgage notes receivable totaling $24,441,000, the assumption of mortgage notes payable totaling $11,715,000 and cash. During 1993, the Company acquired 41 mini- warehouse facilities for an aggregate cost of $87,048,000, consisting of the issuance of 142,021 shares of common stock, the cancellation of mortgage notes receivable totaling $11,968,000, the assumption of mortgage notes payable totaling $6,461,000 and cash. During 1992, the Company acquired eleven mini-warehouse facilities for an aggregate cost of $23,874,000 consisting of the issuance of 377,834 shares of common stock, the cancellation of mortgage notes receivable totaling $11,694,000 and cash.
Several of the mini-warehouse facilities acquired during 1994, 1993 and 1992 were acquired from affiliates of the Company's Adviser. The aggregate acquisition cost of real estate facilities acquired from these affiliates was $119,211,000 (including the real estate facilities acquired in the Merger), $25,728,000 and $12,806,000 in 1994, 1993 and 1992, respectively. In addition, during 1994, 1993 and 1992, the Company
4. Real estate facilities (Cont'd.) --------------------------------
acquired real estate facilities from unrelated third parties subject to participation interests owned by affiliates of the Adviser. The aggregate acquisition cost of these facilities was $3,566,000, $25,698,000 and $6,695,000 in 1994, 1993 and 1992, respectively, of which $694,000 and $902,000 in 1993 and 1992, respectively, was paid to affiliates of the Adviser for the acquisition of the participation interests. At December 31, 1994, affiliates of the Company's Adviser continue to have a participation interest of up to 25% in 16 mini-warehouse facilities.
In 1994, a mini-warehouse was condemned by a governmental authority exercising its right of eminent domain. The Company received condemnation proceeds of approximately $1.9 million resulting in a gain of $224,000, all of which has been allocated to the minority interest pursuant to the Joint Venture agreements. In 1992, a mini-warehouse was partially condemned by a governmental authority exercising its right of eminent domain. The Company received condemnation proceeds totaling $1,524,000 resulting in a gain of $819,000. The Company's share of the gain totaled $398,000, net of related disposition fees of $108,000 due to the Company's Adviser. The remaining gain was allocated to the minority interest and is included in minority interest in income.
In 1992, a mini-warehouse facility located in Florida was completely destroyed by Hurricane Andrew. The facility was adequately insured with respect to business interruption and reconstruction of the facility. During 1993, a final settlement was reached with the insurer and insurance proceeds of approximately $1,292,000 (which approximated the net book value of the facility) were received. Due to economic conditions where the facility is located, the facility was not reconstructed. Accordingly, the net book value of the facility (including land cost of $345,000) was written-off during 1993 resulting in no gain or loss.
At December 31, 1994, the adjusted basis of real estate facilities for Federal income tax purposes was approximately $663 million net of accumulated depreciation of $284 million.
5. Mortgage notes receivable from affiliates -----------------------------------------
At December 31, 1994, mortgage notes receivable balance of $23,062,000 is net of related discounts totaling $945,000. The mortgage notes bear interest at stated rates ranging from 7.50% to 11.97% (effective interest rates ranging from 9.25% to 14.74%) and are secured by 12 mini-warehouse facilities.
Activity in mortgage notes receivable during 1994, 1993 and 1992 is as follows:
During 1994 and 1993, the Company acquired an aggregate of $4,020,000 (face amount) and $61,088,000 (face amount), respectively, of mortgage notes receivable from unaffiliated financial institutions. The mortgage notes acquired in 1994 were acquired at face amount while the mortgage notes acquired during 1993 were acquired for $56,325,000. At December 31, 1994, all of the mortgage loans are secured by mini-warehouse facilities owned by affiliates of the Company's Adviser.
During 1994, 1993 and 1992, the Company canceled mortgage notes with a net carrying value of $24,441,000, $11,968,000 and $11,694,000, respectively, as part of the acquisition cost of the underlying real estate facilities securing the mortgage notes.
The Company believes that the carrying amounts for these financial instruments approximate their fair values at December 31, 1994.
6. Notes payable to banks ----------------------
The Company has a $115 million credit agreement (the "Credit Agreement"), as amended, with a group of banks which expires September 2, 1999 and is secured by the Company's investment interest in the Joint Ventures. The Credit Agreement provides for a $45 million three year revolving line of credit facility which may be extended, at the Company's option and with the consent of the banks, for two additional years. The Credit Agreement also provides for a separate $70 million five year declining revolver facility. The declining revolver facility provides for maximum borrowings of $70 million through September 2, 1997 at which time the available borrowings is reduced to $20 million. The declining revolver facility declines by $10 million each year thereafter until September 2, 1999 at which time the outstanding balance shall be due. Subject to certain limitations, the credit facilities are available for general working capital purposes and real estate related acquisitions.
Interest on outstanding borrowings on each of the revolving facilities is payable monthly. At the option of the Company, the rate of interest charged on borrowings is equal to (i) the London Interbank Offered Rate ("LIBOR") plus 1.25% or (ii) the higher of (a) the prime rate and (b) the Federal Funds Rate plus .5%. In addition, the Company is required to pay a quarterly commitment fee equal to .375% (per annum) of the unused portion of the revolving credit facilities.
At December 31, 1994, the Company had $25,447,000 outstanding under the Credit Agreement bearing interest at LIBOR plus 1.25% (7.30% at December 31, 1994).
Under covenants of the Credit Agreement, the Company is (i) required to maintain minimum net worth (as defined), (ii) required to maintain a ratio of total debt to net worth (as defined) not greater than .50 to 1.0, (iii) required to maintain certain cash flow and interest coverage ratios (as defined) of not less than 1.0 to 1.0 and 5.0 to 1.0, respectively, and (iv) limited in its ability to incur additional borrowings and acquire or sell assets. The Company was in compliance with the covenants of the Credit Agreement at December 31, 1994.
The Company believes that the recorded values of the notes payable to banks approximates the fair value at December 31, 1994.
STORAGE EQUITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1994
7. Mortgage notes payable ----------------------
Mortgage notes payable at December 31, 1994 and 1993 consist of the following:
The 10.55% mortgage notes are due to a life insurance company. During 1990 and 1989, a portion of the original debt borrowed from the life insurance company was assumed by an affiliated private limited partnership upon the sale of properties by the Company to the affiliate. At December 31, 1994, the debt that was assumed (principal balance of $9,323,000 at December 31, 1994) continued to be cross-collateralized by the Company's properties securing the mortgage notes above.
At December 31, 1994, variable rate mortgage notes include notes totaling $12,569,000 which provide for the payment of monthly interest at a rate equal to the one year LIBOR rate plus 1.5% (7.7% at December 31, 1994) adjusted annually with a minimum interest rate of 5% and a maximum interest rate of 10%. Monthly principal and interest payments are equal to .833% of the then outstanding principal balance with the remaining outstanding principal due September 30, 1999. The remaining $5,798,000 balance of variable rate mortgage debt at December 31, 1994 bears interest at rates ranging from the 11th District Cost of Funds plus 3.00% to 11th District Cost of Funds plus 3.75% adjusted monthly with maximum interest rates ranging from 12.50% to 13.625%. Principal and interest payments are payable monthly with final maturity dates between January and June 2004.
During 1994 and 1993, in connection with the acquisition of mini- warehouse facilities, the Company assumed mortgage notes payable totaling $11,715,000 and $6,461,000, respectively.
STORAGE EQUITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1994
7. Mortgage notes payable (Cont'd.) -------------------------------- Mortgage notes payable are secured by 28 of the Company's real estate facilities having an aggregate net book value of $88,939,000 at December 31, 1994.
The Company believes that the recorded values of its long-term variable rate mortgage loans approximate their fair value at December 31, 1994. The Company believes that it is not practicable to estimate the fair value of its long-term fixed rate debt at December 31, 1994 because there is no public market for such debt, and although interest rates at December 31, 1994 are lower than when such debt was incurred, the Company does not believe it could obtain financing currently on such favorable terms. This is in part due to the reduced sources of real estate financing resulting from a variety of factors, including the present condition of financial institutions.
At December 31, 1994, approximate principal maturities of mortgage notes payable are as follows:
Interest paid (including interest related to the notes payable to bank) during 1994, 1993 and 1992 was $5,940,000, $6,116,000 and $9,693,000, respectively.
8. Minority interest -----------------
The Company owns a significant economic interest in each of the PSP Partnerships through its ownership of the Joint Ventures, limited partnership units and general partnership interests in the PSP Partnerships. At December 31, 1994, the Company's ownership of limited partnership units in the PSP Partnerships ranged from 27% to 66%. In addition, the Company owns all of the general partnership interest and is a co-general partner in each of the PSP Partnerships. In consolidation, the Company eliminates its ownership interests in each of the PSP Partnerships (Note 2) and the remaining limited partnership interests which is not owned by the Company is reflected as minority interest.
STORAGE EQUITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1994
8. Minority interest (Cont'd.) ---------------------------
Minority interest in income consists of such interest's share of the operating results of the Company relating to the consolidated operations of the PSP Partnerships. In determining income allocable to the minority interests for fiscal 1994, 1993 and 1992 consolidated depreciation and amortization expense of approximately $13,556,000, $16,357,000 and $16,310,000, respectively, was allocated to the minority interest. In addition, the 1994 and 1992 minority interest in income includes $224,000 and $313,000, respectively, of allocated gain in connection with the disposition of real estate (Note 4).
From 1980 through 1986, the Company invested in the Joint Ventures with the PSP Partnerships. Commencing in 1992, the Company began to acquire both limited partnership units and general partner interests in the PSP Partnerships. During 1994, 1993 and 1992, the Company acquired limited partnership units in the PSP Partnerships for an aggregate cost of $51,711,000, $594,000 and $17,987,000, respectively.
Since 1990,, the Company has purchased from an affiliate of Public Storage, Inc. ("PSI"), the general partner equity contribution and incentive interest in each PSP Partnership and in 1993 the Company was substituted as a co-general partner in each of the PSP Partnerships. The aggregate cost for these interests was approximately $20,583,000 consisting of the issuance of the Company's common stock and cash.. Under each of these partnership agreements, the general partners are entitled to 10% of the respective PSP Partnership's distributions of cash flow from operations (as defined).
PSI has an option to repurchase the general partners' right to incentive distributions with respect to PSP-1 through PSP-5 at the Company's adjusted cost (generally, the purchase price reduced by the payments from the respective PSP Partnership and increased by a yield factor) exercisable upon the termination of, or the failure to extend, the Advisory Contract (Note 9). PSI has guaranteed that, within ten years, the Company will receive distributions with respect to each of the general partner interests of at least the original acquisition cost. This guarantee terminates under certain circumstances, including the Company's termination of, or failure to extend, the Advisory Contract.
STORAGE EQUITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1994
9. Advisory and management contracts ---------------------------------
Advisory contract -----------------
Pursuant to an advisory contract, Public Storage Advisers, Inc. (the "Adviser"), an affiliate of the Company, advises the Company with respect to its investments and administers the daily corporate operations of the Company for an advisory fee. Effective September 30, 1991, the Company entered into an Amended and Restated Advisory Contract (the "Advisory Contract") with the Adviser. This contract, which amended the original advisory contract, provides for the monthly payment of advisory fees equal to the sum of (i) 12.75% of the Company's adjusted income (as defined, and after a reduction for the Company's share of capital improvements) per share of common stock based on common stock outstanding at September 30, 1991 (14,989,454 shares) and (ii) 6% of adjusted income per share on shares in excess of 14,989,454 shares of common stock. The Advisory Contract was further amended to provide that, in computing the advisory fee, adjusted income will be reduced by dividends paid on all preferred stock and that the Adviser will also receive an amount equal to 6% of any such dividends. Under the original advisory contract, advisory fees were equal to 15% of the Company's adjusted income (as defined, and without a reduction for the Company's share of capital improvements).
The Adviser will not be entitled to its advisory fee with respect to services rendered during any quarter in which full cumulative dividends payable on the Senior Preferred Stock (Note 10) have not been paid or declared and funds therefor set aside for payment.
Under the Advisory Contract, the Adviser is entitled to a disposition fee equal to 20% of the total realized gain (as defined) from the disposition of the Company's investments. Payment of the disposition fees is subject to limitations based on the Company's distributions. At December 31, 1994, and 1993 the disposition fees due to the Adviser of $108,000 is included in accrued and other liabilities.
The Advisory Contract may be terminated at any time by either party upon 60 days' written notice. Except under certain conditions, upon termination, the Adviser generally will be entitled to receive (i) an amount equal to the accrued and unpaid portion of the Disposition Fee, less 20% of any Total Unrealized Loss (as defined) as of the date of termination, (ii) an amount equal to 20% of the Total Unrealized Gain (as defined) as of the date of termination, less 20% of previously incurred Total Realized Loss (as defined) if not taken into account in computing previously earned Disposition Fees and (iii) an amount equal to 15% of Adjusted Income
STORAGE EQUITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1994
9. Advisory and management contracts (Cont'd.) ------------------------------------------- (as defined) from October 1, 1991 to the date of termination minus the advisory fee paid from October 1, 1991 to the date of termination.
Property management contracts -----------------------------
Public Storage Management, Inc. ("PSMI") and Public Storage Commercial Properties Group, Inc. ("PSCP"), also affiliates of the Company's Adviser, operate all of the Company's real property investments pursuant to a Management Agreement for a fee which is equal to 6% of the gross revenues of the mini-warehouse spaces managed and 5% of the gross revenues of the business park facilities operated. Management fees relating to the Company's real estate facilities, which are included in cost of operations, amounted to $8,355,000, $6,411,000 and $5,590,000 in 1994, 1993 and 1992, respectively. For as long as the Property Management Agreement is in effect, PSMI has granted the Company a non-exclusive license to use two PSI service marks and related designs, including the "Public Storage" name.
The Management Agreement as amended in February 1995 (approved by the Board of Directors in August 1994) provides that (i) as to properties directly owned by the Company, 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, as to such properties, on the first anniversary of its then scheduled expiration date; and (ii) as to properties in which the Company has an interest, but not directly owned by the Company, the Management Agreement may be terminated as to such properties, upon 60 days' written notice by the Company and upon seven years' notice by PSMI or PSCP, as the case may be. The Management Agreement may also be terminated at any time by either party for cause, but if terminated for cause by the Company, the Company retains the right 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.
STORAGE EQUITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1994
10. Shareholders' equity --------------------
Preferred Stock --------------------
At December 31, 1994, the Company had five series of Preferred Stock outstanding:
The dividend rate on the Series C Preferred Stock for the period from the date of issue (June 30, 1994) through September 30, 1994 was equal to 8.15% per annum and was 8.426% per annum for the fourth quarter of 1994. Thereafter, the dividend rate per annum will be adjusted quarterly and will be equal to the highest of one of three U.S. Treasury indices (Treasury Bill Rate, Ten Year Constant Maturity Rate, and Thirty Year Constant Maturity Rate) multiplied by 110%. However, the dividend rate for any dividend period will not be less than 6.75% per annum nor greater than 10.75% per annum. The dividend rate with respect to the first quarter of 1995 will be equal to 8.668% per annum.
The Series A, Series B, Series C, and Series D (collectively the "Senior Preferred Stock") have general preference rights with respect to liquidation and quarterly distributions. With respect to the payment of dividends and amounts upon liquidation, the Convertible Preferred Stock ranks junior to the Senior Preferred Stock and any other shares of preferred stock of the Company ranking on a parity with or senior to the Senior Preferred Stock. The Convertible Preferred Stock ranks senior to the common stock, any additional class of common stock and any series of preferred stock expressly made junior to the Convertible Preferred Stock.
STORAGE EQUITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1994
10. Shareholders' equity (Cont'd.) ------------------------------
Preferred Stock (Cont'd.) -------------------------
Holders of the Company's preferred stock, except under certain conditions, will not be entitled to vote on most matters. In the event of a cumulative arrearage equal to six quarterly dividends or failure to maintain a Debt Ratio (as defined) not to exceed 50%, holders of all outstanding series of preferred stock (voting as a single class without regard to series) will have the right to elect two additional members to serve on the Company's Board of Directors until events of default have been cured. At December 31, 1994, there were no dividends in arrears and the Debt Ratio was 13%.
Except under certain conditions relating to the Company's maintenance of its ability to qualify as a REIT, the Senior Preferred Stock and Convertible Preferred Stock are not redeemable prior to the following dates:
On or after the above respective dates, each of the series of Senior Preferred Stock will be redeemable at the option of the Company, in whole or in part, at $25 per share, plus accrued and unpaid dividends. On or after July 1, 1998, the Convertible Stock will be redeemable for shares of the Company's common stock at the option of the Company, in whole or in part, at a redemption price of 1.6835 shares of common stock for each share of Convertible Stock (subject to adjustment in certain circumstances), if for 20 trading days within any period of 30 consecutive trading days (including the last trading day of such period), the closing price of the common stock on its principal trading market exceeds $14.85 per share (subject to adjustment in certain circumstances). The Convertible Preferred Stock is not redeemable for cash.
The Convertible Preferred Stock is convertible at any time at the option of the holders of such stock into shares of the Company's common stock at a conversion rate of 1.6835 shares of common stock for each share of Convertible Preferred Stock, subject to adjustment in certain circumstances.
10. Shareholders' equity (Cont'd.) ------------------------------
Common stock ------------
During 1994, 1993 and 1992, the Company issued shares of its common stock as follows:
The 109,857 and 170,000 shares of common stock issued to affiliates in 1994 and 1993, respectively, were issued for cash. All the shares of common stock, with the exception of the shares issued in connection with the exercise of stock options, were issued at the prevailing market price at the time of issuance.
At December 31, 1994, the Company has 1,547,334 shares of common stock reserved in connection with the Company's stock options (Note 11) and 3,872,050 shares of common stock reserved for the conversion of the Convertible Preferred Stock.
Distributions -------------
For Federal income tax purposes, distributions declared by the Board of Directors (including distributions to the holders of preferred stock) in 1994, 1993 and 1992 were ordinary income.
STORAGE EQUITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1994
11. Stock options -------------
The Company has a 1990 Stock Option Plan (which was adopted by the Board of Directors in 1990 and approved by the shareholders in 1991) which provides for the grant of non-qualified stock options. The Company has a 1994 Stock Option Plan (which was adopted by the Board of Directors and approved by the shareholders in 1994) which provides for the grant of non- qualified options and incentive stock options. (the 1990 Stock Option Plan and the 1994 Stock Option Plan are collectively referred to as the "Plans"). Under the Plans, the Company has granted non-qualified options to certain directors, officers and key employees and service providers to purchase shares of the Company's common stock at a price equal to the fair market value of the common stock at the date of grant. Generally, options under the Plans vest over a three-year period from the date of grant at the rate of one-third per year and expire (i) under the 1990 Plan, five years after the date they became exercisable and (ii) under the 1994 Plan, ten years after the date of grant.
Information with respect to the Plans during 1994 and 1993 is as follows:
STORAGE EQUITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1994
12. Commitments and contingencies -----------------------------
The Company's current practice is to conduct environmental investigations in connection with property acquisitions. The Company is also in the process of conducting environmental investigations for those facilities which were acquired prior to the time that it was customary to conduct extensive environmental investigations in connection with the property acquisitions. Although there can be no assurance, the Company is not aware of any environmental contamination of any of its facilities which individually or in the aggregate would be material to the Company's overall business, financial condition, or results of operations.
13. Events subsequent to December 31, 1994 --------------------------------------
Issuance of Common and Preferred Stock --------------------------------------
In January 1995, the Company issued 515,739 shares of common stock ($7,239,700 market value) to an affiliate of the Company's Adviser to acquire the affiliate's participation interest in 12 real estate facilities (Note 4).
In connection with a public offering, in January 1995, the Company issued 2,195,000 shares of its 10% Cumulative Preferred Stock, Series E at $25.00 per share. The offering raised net proceeds totaling $53 million which has been used to repay the Company's bank borrowings under its Credit Agreement and acquire additional investments in real estate facilities.
Proposed Restructure
The Company has formed a special committee of independent directors which, in March 1995, selected Robertson, Stephens & Company, L.P., as financial advisor. The special committee was formed to consider a transaction in which the Company would be combined with substantially all of the United States real estate operations of PSI, and the Company would become self-advised and self-managed. Although no terms have been established, it is expected that the Company would issue shares of its common stock in the transaction. There is no agreement between the Company and PSI and no assurance that an agreement can be reached or that a transaction can be completed. Any such transaction would be subject, among other things, to prior approval of the Company's common shareholders and a fairness opinion from Robertson, Stephens & Company, L.P.
STORAGE EQUITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1994
13. Events subsequent to December 31, 1994 (Cont'd.) ------------------------------------------------
Proposed Restructure (Cont'd.)
PSI, organized in 1972, has been engaged, directly and through subsidiaries, in the acquisition, development, construction of mini- warehouses and, to a lesser extent, other commercial properties in the United States and Canada. PSMI, PSCP and the Adviser are subsidiaries of PSI. PSMI and PSCP operated approximately 1,150 facilities in the United States, including the Company's approximately 430 facilities, and PSI has direct or indirect ownership interests in approximately 1,060 facilities in the United States, including the Company's facilities.
Proposed Mergers ----------------
On February 28, 1995, the Company completed a merger transaction with Public Storage Properties VI, Inc. ("Properties 6") whereby the Company acquired all the outstanding stock of Properties 6 in exchange for cash and common stock of the Company. In the merger, Properties 6 was merged with and into the Company, and the outstanding Properties 6 common stock (2,716,223 shares) was converted into an aggregate of approximately (i) 3,148,000 shares of the Company's common stock (at the rate of 1.724 shares of the Company's common stock for each share of Properties 6 common stock and a value of $43,914,600) and (ii) $21,427,973 in cash (at the rate of $24.05 per share of Properties 6 common stock). Properties 6, a real estate investment trust and an affiliate of the Company's investment adviser, owned and operated 22 mini-warehouse facilities and one combination mini- warehouse/business park facilities prior to the merger.
On February 1, 1995, the Company and Public Storage Properties VII, Inc. ("Properties 7"), a publicly traded equity real estate investment trust and an affiliate of the Adviser agreed, subject to certain conditions, to merge. Upon the merger, each outstanding share of Properties 7 common stock would be converted, at the election of
STORAGE EQUITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1994
13. Events subsequent to December 31, 1994 (Cont'd.) ------------------------------------------------
Proposed Mergers (Cont'd.) --------------------------
election of the shareholders of Properties 7, into either shares of the Company's common stock with a market value of $18.95 or, with respect to up to 20% of the Properties 7 common stock, $18.95 in cash. Properties 7 has 3,806,491 outstanding shares of common stock and an estimated value of $72,133,000. The merger agreement is conditioned on, among other requirements, receipt of satisfactory fairness opinions by Properties 7 and the Company and approval by the shareholders of both Properties 7 and the Company. PSI and its affiliates have significant relationships with both Properties 7 and the Company, own approximately 28% of the Properties 7 common stock and have informed Properties 7 and the Company that they intend to vote their shares for the merger and intend to elect to convert their shares of Properties 7 into common shares of the Company. Properties 7 owns and operates 38 properties; 34 mini-warehouses and four business parks.
Tender offers -------------
In January 1995, the Company completed a cash tender offer for limited partnership units in PSP-8 acquiring 6,815 units at $260 per unit. In February 1995, the Company completed at cash tender offer for limited partnership units in PSP-1, acquiring 15,767 units at $400 per unit. These acquisition will have the effect of reducing minority interest.
STORAGE EQUITIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1994
14. Supplementary quarterly financial data (unaudited) --------------------------------------------------
STORAGE EQUITIES, INC. SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
STORAGE EQUITIES, INC. SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
STORAGE EQUITIES, INC. SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
STORAGE EQUITIES, INC. SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
STORAGE EQUITIES, INC. SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
STORAGE EQUITIES, INC. SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
STORAGE EQUITIES, INC. SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
STORAGE EQUITIES, INC. SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
STORAGE EQUITIES, INC. SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
STORAGE EQUITIES, INC. SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
STORAGE EQUITIES, INC. SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
STORAGE EQUITIES, INC. SCHEDULE IV--MORTGAGE LOANS ON REAL ESTATE At December 31, 1994
STORAGE EQUITIES, INC. SCHEDULE IV--MORTGAGE LOANS ON REAL ESTATE At December 31, 1994
(1) Secured by one mini-warehouse located in Maryland. (2) Secured by one mini-warehouse located in California. (3) Secured by one mini-warehouse located in Oregon. (4) Secured by three mini-warehouse located in California, Texas and Georgia. (5) Secured by two mini-warehouse located in Georgia. (6) Secured by one mini-warehouse located in Georgia. (7) Secured by one mini-warehouse located in California. (8) Secured by one mini-warehouse located in California. (9) Secured by one mini-warehouse located in California.
For a reconciliation of the activity on mortgage notes receivable for the years ended December 21, 1994, 1993 and 1992, see Note 5 to the Company's consolidated financial statements.