Exhibit 99.1
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The unaudited pro forma condensed consolidated financial statements were prepared to reflect the proposed merger of Shurgard into a subsidiary of Public Storage pursuant to which Public Storage would issue to Shurgard shareholders 0.82 of a share of Public Storage common stock in exchange for each Shurgard common share they own. The merger will be accounted for using the purchase method as prescribed by Statement of Financial Accounting Standards No. 141, “Business Combinations,” with intangible assets, if any, to be recorded in accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.” The allocation of the purchase price reflected in the pro forma condensed consolidated balance sheet is preliminary and is subject to change. We can give no assurance that when the audit with respect to such allocation of purchase price is completed the financial information will not change or that any change will not be material.
The unaudited pro forma condensed consolidated balance sheet at December 31, 2005 has been prepared to reflect the merger, as if the merger occurred on December 31, 2005. The unaudited pro forma condensed consolidated statement of income for the year ended December 31, 2005 has been prepared assuming the merger occurred on January 1, 2005. The adjustments made to the pro forma condensed consolidated balance sheet have been made to reflect the financing of the merger and the allocation of the purchase price and other costs of the merger to the tangible and intangible assets acquired. The adjustments made to the pro forma condensed consolidated statement of income have been made to reflect the estimated impact on interest income and interest expense as a result of financing the merger, the impact of eliminating certain duplicate administrative costs that will be eliminated as a result of the merger, the impact on depreciation and amortization expense of increasing the carrying values of the real estate assets and intangible assets acquired, as well as to reclassify certain items in Shurgard’s historical balances in order to conform to Public Storage’s presentation.
The pro forma adjustments are based on available information and on certain assumptions as set forth in the notes to the pro forma condensed consolidated financial statements that we believe are reasonable in the circumstances. The pro forma condensed consolidated financial statements and accompanying notes should be read in conjunction with the historical financial statements of Public Storage and Shurgard, which are included in their respective Annual Report on Form 10-K for the year ended December 31, 2005 filed with the Securities and Exchange Commission (the “Commission”). You can find these reports at the Commission’s website at http://www.sec.gov.
The following pro forma condensed consolidated financial statements do not purport to represent what Public Storage’s results of operations would actually have been if the merger had in fact occurred as of January 1, 2005 or to project Public Storage’s results of operations for any future date or period. We cannot assure you that the assumptions used in the preparation of the pro forma condensed consolidated financial information will prove to be correct.
As a result of the merger, Public Storage believes that there will be certain cost efficiencies due to the economies of scale of having a larger number of facilities in certain markets after the merger is consummated. Public Storage expects such cost efficiencies in telephone directory advertising, property insurance, and payroll cost with respect to supervisory personnel. In addition, some of Shurgard’s facilities will be subject to property tax reappraisal resulting in increases to property tax expense. Public Storage is evaluating the potential cost savings and increase in property taxes; however, it is not able to quantify the amount of such savings or costs at this time. Accordingly, no adjustments have been made to the pro forma condensed consolidated statement of income to reflect expected cost savings or increases to property taxes.
1
PUBLIC STORAGE, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
December 31, 2005
(Unaudited)
(Amounts in thousands, except per share data)
Pro Forma Merger Adjustments | ||||||||||||||||||||
Public Storage | Shurgard | Purchase | Valuation | Public Storage Post-Merger | ||||||||||||||||
(Historical) | (Historical) | (Note 2) | (Note 3) | (Pro Forma) | ||||||||||||||||
ASSETS | ||||||||||||||||||||
Cash and cash equivalents | $ | 493,501 | $ | 39,778 | $ | (510,810 | ) | $ | — | $ | 22,469 | |||||||||
Operating real estate facilities, net of accumulated depreciation | 4,430,356 | 2,692,087 | — | 2,285,818 | 9,408,261 | |||||||||||||||
Construction in process | 54,472 | 67,073 | — | — | 121,545 | |||||||||||||||
Properties held for sale | — | 6,774 | — | — | 6,774 | |||||||||||||||
Restricted cash | — | 4,972 | — | — | 4,972 | |||||||||||||||
Investment in real estate entities | 328,555 | — | — | — | 328,555 | |||||||||||||||
Goodwill | 78,204 | 27,440 | — | (27,440 | ) | 78,204 | ||||||||||||||
Intangible assets, net | 98,081 | — | — | 384,716 | 482,797 | |||||||||||||||
Other assets | 69,317 | 119,248 | — | (41,148 | ) | 147,417 | ||||||||||||||
Unallocated Purchase price | — | — | 3,260,953 | (3,260,953 | ) | — | ||||||||||||||
Total assets | $ | 5,552,486 | $ | 2,957,372 | $ | 2,750,143 | $ | (659,007 | ) | $ | 10,600,994 | |||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||||||
Lines of credit | $ | — | $ | 583,500 | $ | (383,500 | ) | $ | — | $ | 200,000 | |||||||||
Notes payable | 113,950 | 1,275,720 | — | 16,445 | 1,406,115 | |||||||||||||||
Debt to joint venture partner | 35,697 | — | — | — | 35,697 | |||||||||||||||
Preferred stock called for redemption | 172,500 | — | — | — | 172,500 | |||||||||||||||
Accrued and other liabilities | 159,360 | 181,435 | — | (11,350 | ) | 329,445 | ||||||||||||||
Total liabilities | 481,507 | 2,040,655 | (383,500 | ) | 5,095 | 2,143,757 | ||||||||||||||
Minority interest—preferred | 225,000 | — | — | — | 225,000 | |||||||||||||||
Minority interest—other | 28,970 | 116,365 | — | — | 145,335 | |||||||||||||||
Shareholders’ equity: | ||||||||||||||||||||
Preferred stock | 2,498,400 | 131,183 | (136,250 | ) | 5,067 | 2,498,400 | ||||||||||||||
Common stock | 12,809 | 47 | 4,089 | (47 | ) | 16,898 | ||||||||||||||
Equity stock | — | — | — | — | — | |||||||||||||||
Additional paid in capital | 2,430,671 | 1,142,288 | 3,265,804 | (1,142,288 | ) | 5,696,475 | ||||||||||||||
Cumulative net income | 3,189,266 | — | — | — | 3,189,266 | |||||||||||||||
Accumulated deficit | (459,586 | ) | — | 459,586 | — | |||||||||||||||
Accumulated other comprehensive loss | — | (13,580 | ) | — | 13,580 | — | ||||||||||||||
Cumulative distributions paid | (3,314,137 | ) | — | — | — | (3,314,137 | ) | |||||||||||||
Total shareholders’ equity | 4,817,009 | 800,352 | 3,133,643 | (664,102 | ) | 8,086,902 | ||||||||||||||
Total liabilities and shareholders’ equity | $ | 5,552,486 | $ | 2,957,372 | $ | 2,750,143 | $ | (659,007 | ) | $ | 10,600,994 | |||||||||
Book value per common share (Note 4) | $ | 16.43 | $ | 14.12 | $ | 31.80 | ||||||||||||||
Common shares outstanding (Note 4) | 128,090 | 47,042 | 168,979 | |||||||||||||||||
See Accompanying Notes to Pro Forma Condensed Consolidated Balance Sheet
2
PUBLIC STORAGE, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
December 31, 2005
(Unaudited)
1.PRO FORMA MERGER ADJUSTMENTS:
The merger will be accounted for using the purchase method of accounting. The total purchase price will be allocated to the acquired assets and liabilities based upon their respective estimated fair values. Pursuant to the merger, Shurgard would be merged into a subsidiary of Public Storage, and Public Storage would issue to Shurgard shareholders 0.82 of a share of Public Storage common stock in exchange for each Shurgard common share that they own. In connection with the merger, all outstanding Shurgard stock options will become immediately vested as of the close of the merger and approximately 21,190 restricted stock units will be issued to employees, of which 25% will vest immediately after the close of the merger. The remaining 75% will vest ratably after the effective time of the merger on each of the first five anniversaries of the closing date of the merger if the holder of such Public Storage restricted stock units continues to be employed by Public Storage or its subsidiaries on the applicable vesting date.
In connection with the merger, Shurgard’s line of credit will be repaid and all of its preferred stock will be redeemed at liquidation value plus any accrued and unpaid distributions. Public Storage expects to fund these activities with cash on-hand, borrowings on its $200 million line of credit or other forms of capital including, but not limited to, the proceeds from exercise of Shurgard stock options, the proceeds from the issuance of additional preferred stock, borrowings from the expansion of Public Storage’s existing line of credit, and short-term bridge financing.
The purchase price of the net assets to be acquired pursuant to the merger will be equal to the fair value of the Public Storage common stock to be issued combined with the direct costs associated with the merger. In determining the fair value of the Public Storage common stock to be issued in the merger a share price of $79.97 has been used in these pro forma financial statements. This fair value was based on the average closing price of a share of Public Storage common stock on the New York Stock Exchange for the period between the five business days before and the five business days after the announcement of the merger (March 7, 2006) where closing prices varied from between a high of $82.98 and a low of $77.17 per common share.
Direct costs related to the merger are estimated at approximately $90.0 million, consisting of (i) estimated financial advisory, legal, accounting, and filing fees, costs of issuing the Public Storage common stock in the merger, and other miscellaneous expenses totaling approximately $58.0 million, and (ii) estimated severance payments and retention bonuses, that we expect not to be contingent on future employment after the effective time of the merger, of approximately $32.0 million.
3
PUBLIC STORAGE, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET—(Continued)
December 31, 2005
(Unaudited)
The following reflects the preliminary determination of purchase price, and the allocation of the purchase price to the net assets acquired:
Amounts in thousands, except share price and conversion ratio | ||||
PURCHASE PRICE: | ||||
Outstanding Shurgard common shares at December 31, 2005 | 47,042 | |||
Outstanding Shurgard stock options at December 31, 2005 | 2,818 | |||
Restricted stock units issued to employees of Shurgard at the completion of the merger that become immediately vested | 5 | |||
49,865 | ||||
Conversion ratio into Public Storage common stock | 0.82 | |||
Pro forma Public Storage common shares to be issued | 40,889 | |||
Fair value of Public Storage common stock | $ | 79.97 | ||
Aggregate fair value of Public Storage common stock | $ | 3,269,893 | ||
Less aggregate exercise price of stock options at December 31, 2005 | (98,940 | ) | ||
Estimated direct costs of the merger | 90,000 | |||
Total Purchase Price | $ | 3,260,953 | ||
PRELIMINARY ALLOCATION OF PURCHASE PRICE: | ||||
Cash and cash equivalents | $ | 39,778 | ||
Operating real estate facilities | 4,977,905 | |||
Construction in process | 67,073 | |||
Properties held for sale | 6,774 | |||
Restricted cash | 4,972 | |||
Intangible assets | 384,716 | |||
Other assets | 78,100 | |||
Accrued and other liabilities | (170,085 | ) | ||
Lines of credit | (583,500 | ) | ||
Notes payable | (1,292,165 | ) | ||
Minority interest | (116,365 | ) | ||
Preferred stock | (136,250 | ) | ||
Total allocated Purchase Price to net assets acquired | $ | 3,260,953 | ||
4
PUBLIC STORAGE, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET—(Continued)
December 31, 2005
(Unaudited)
2.PRO FORMA PURCHASE PRICE ADJUSTMENTS:
The following pro forma adjustments have been made to reflect the above Purchase Price of the merger as of December 31, 2005:
(Amounts in thousands) | ||||
Cash and cash equivalents have been reduced to reflect: | ||||
• Repayment of outstanding borrowings under Shurgard’s line of credit as of December 31, 2005 | $ | (583,500 | ) | |
• Redemption of Shurgard’s preferred stock as of December 31, 2005 | (136,250 | ) | ||
• Estimated direct costs and expenses of the merger | (90,000 | ) | ||
• Exercise price of Shurgard stock options | 98,940 | |||
• Borrowings on Public Storage’s line of credit | 200,000 | |||
$ | (510,810 | ) | ||
Line of credit has been decreased to reflect: | ||||
• Repayment of outstanding borrowings under Shurgard’s line of credit as of December 31, 2005 | $ | (583,500 | ) | |
• Borrowings under PSA’s line of credit to fund cash requirements of merger | 200,000 | |||
$ | (383,500 | ) | ||
Preferred stock has been decreased to reflect the redemption of Shurgard’s outstanding preferred stock at liquidation value | $ | (136,250 | ) | |
Common stock has been increased to reflect the issuance of 40.9 million shares of Public Storage common stock with a par value of $0.10 per share | $ | 4,089 | ||
Paid-in capital has been increased to reflect the issuance of common stock at fair value | $ | 3,265,804 | ||
5
PUBLIC STORAGE, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET—(Continued)
December 31, 2005
(Unaudited)
3.PRO FORMA VALUATION ADJUSTMENTS:
The following pro forma adjustments have been made to reflect the preliminary allocation of the Purchase price to the net assets acquired as of December 31, 2005:
(Amounts in thousands) | ||||
Operating real estate facilities has been increased to reflect the fair value of the real estate facilities to be acquired in the merger (purchase price allocation of $4,977,905 less Shurgard’s historical net book value of $2,692,087) | $ | 2,285,818 | ||
Goodwill has been reduced to eliminate Shurgard’s historical balance | $ | (27,440 | ) | |
Intangible assets has been increased to reflect the estimated value of Shurgard’s existing customer base | $ | 384,716 | ||
Other assets has been reduced to reflect no allocation of the Purchase price associated with Shurgard’s historical unamortized financing costs and other miscellaneous assets | $ | (41,148 | ) | |
Notes payable has been increased to adjust Shurgard’s historical balances to estimated fair value | $ | 16,445 | ||
Accrued and other liabilities has been reduced to eliminate accrued expenses incurred by Shurgard with respect to the exploration of strategic alternatives | $ | (11,350 | ) | |
Preferred stock has been increased to reflect Shurgard’s historical carrying amounts at liquidation value | $ | 5,067 | ||
Shurgard’s historical equity has been eliminated as follows: | ||||
Common stock | $ | (47 | ) | |
Paid-in-capital | $ | (1,142,288 | ) | |
Accumulated deficit | $ | 459,586 | ||
Accumulated other comprehensive loss | $ | 13,580 | ||
4.BOOK VALUE PER SHARE OF COMMON STOCK
Book value per common share has been determined by dividing total shareholders’ equity less the liquidation value of Preferred Stock and the Public Storage Equity Stock, Series A by the outstanding common shares. The following summarizes the pro forma common shares outstanding:
Public Storage’s historical common shares outstanding at December 31, 2005 | 128,090 | |
Pro forma Public Storage common shares to be issued to shareholders of Shurgard (see Note 1 above) | 40,889 | |
Pro Forma Public Storage common shares outstanding | 168,979 | |
6
PUBLIC STORAGE, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
For the year Ended December 31, 2005
(Unaudited)
(Amounts in thousands, except per share data)
Public Storage, Inc. | Shurgard Storage Centers, Inc. | Pro forma Reclassifications (Note 1) | Pro forma Merger Adjustments (Note 2) | Public Storage, Inc. | ||||||||||||||||
Historical | Historical | Pro Forma | ||||||||||||||||||
Revenues: | ||||||||||||||||||||
Rental income: | ||||||||||||||||||||
Self-storage facilities | $ | 952,284 | $ | — | $ | 453,286 | $ | — | $ | 1,405,570 | ||||||||||
Commercial and containerized storage | 28,057 | — | — | — | 28,057 | |||||||||||||||
Storage centers operations | — | 478,292 | (478,292 | ) | — | — | ||||||||||||||
Ancillary operations | 64,173 | — | 27,336 | — | 91,509 | |||||||||||||||
Interest and other income | 16,447 | 4,922 | 1,416 | (14,050 | ) | 8,735 | ||||||||||||||
1,060,961 | 483,214 | 3,746 | (14,050 | ) | 1,533,871 | |||||||||||||||
Expenses: | ||||||||||||||||||||
Cost of operations: | ||||||||||||||||||||
Self-storage facilities | 320,919 | — | 222,994 | — | 543,913 | |||||||||||||||
Commercial and containerized storage | 17,334 | — | — | — | 17,334 | |||||||||||||||
Ancillary operations | 40,378 | — | 9,663 | — | 50,041 | |||||||||||||||
Operating | — | 232,657 | (232,657 | ) | — | — | ||||||||||||||
Real estate development | — | 10,042 | — | — | 10,042 | |||||||||||||||
Depreciation and amortization | 196,397 | 95,670 | — | 327,279 | 619,346 | |||||||||||||||
Impairment and abandoned project expense | — | 3,354 | — | (3,354 | ) | — | ||||||||||||||
General and administrative | 21,115 | 35,318 | — | (26,142 | ) | 30,291 | ||||||||||||||
Interest expense | 8,216 | — | 105,584 | (24,076 | ) | 89,724 | ||||||||||||||
604,359 | 377,041 | 105,584 | 273,707 | 1,360,691 | ||||||||||||||||
Other Income (Expense): | ||||||||||||||||||||
Costs related to takeover proposal and exploration of strategic alternatives | — | (13,775 | ) | — | 13,775 | — | ||||||||||||||
Interest expense | — | (105,584 | ) | 105,584 | — | — | ||||||||||||||
Loss on derivatives, net | — | (2,122 | ) | — | — | (2,122 | ) | |||||||||||||
Foreign exchange loss | — | (9,665 | ) | — | — | (9,665 | ) | |||||||||||||
Interest income and other | — | 3,746 | (3,746 | ) | — | — | ||||||||||||||
Other expense, net | — | (127,400 | ) | 101,838 | 13,775 | (11,787 | ) | |||||||||||||
Income (loss) from continuing operations before the following items | 456,602 | (21,227 | ) | — | (273,982 | ) | 161,393 | |||||||||||||
Equity in earnings of real estate entities | 24,883 | 60 | — | — | 24,943 | |||||||||||||||
Casualty loss | (1,917 | ) | — | — | — | (1,917 | ) | |||||||||||||
Gain on disposition of real estate and real estate investments | 3,099 | — | — | — | 3,099 | |||||||||||||||
Minority interest in income (loss) | (32,651 | ) | 20,936 | — | — | (11,715 | ) | |||||||||||||
Income tax expense | — | (636 | ) | — | — | (636 | ) | |||||||||||||
Income (loss) from continuing operations | $ | 450,016 | $ | (867 | ) | $ | — | $ | (273,982 | ) | $ | 175,167 | ||||||||
Earnings (loss) per common share from continuing operations (Note 3): | ||||||||||||||||||||
Basic | $ | 1.93 | $ | (0.28 | ) | $ | (0.16 | ) | ||||||||||||
Diluted | $ | 1.92 | $ | (0.28 | ) | $ | (0.16 | ) | ||||||||||||
Weighted average shares outstanding (Note 3): | ||||||||||||||||||||
Basic | 128,159 | 46,660 | (6,022 | ) | 168,797 | |||||||||||||||
Diluted | 128,819 | 46,660 | (6,682 | ) | 168,797 |
See Accompanying Notes to Pro-Forma Condensed Consolidated Statements of Income.
7
PUBLIC STORAGE, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
For the year Ended December 31, 2005
(Unaudited)
1.PRO FORMA RECLASSIFICATION ADJUSTMENTS:
Reclassification adjustments have been made to certain Shurgard’s historical amounts to conform to Public Storage’s presentation as follows:
(Amounts in thousands) | ||||
“Rental income: Self-storage facilities” has been increased to reflect rental income reclassified from “Storage center operations” | $ | 453,286 | ||
“Storage center operations” has been decreased to reflect : | ||||
• Rental income reclassified to “Rental income: Self-storage facilities” | $ | (453,286 | ) | |
• Income from tenant reinsurance activities has been reclassified to “Revenues: Ancillary operations” | (8,105 | ) | ||
• Retail sales and truck rental income reclassified to “Ancillary operations” | (16,901 | ) | ||
$ | (478,292 | ) | ||
“Ancillary operations” has been increased to reflect : | ||||
• Retail sales and truck rental income included in “Storage center operations” | $ | 16,901 | ||
• Income from tenant reinsurance activities included in “Revenues: Storage center operations” | 8,105 | |||
• Income from tenant reinsurance activities included in “Interest and other income” | 2,330 | |||
$ | 27,336 | |||
“Interest and other income” has been increased to reflect: | ||||
• Income from tenant reinsurance activities reclassified to “Ancillary operations” | $ | (2,330 | ) | |
• Reclassification of Shurgard’s interest and other income included under the caption “Other Income (Expense)” to “Interest and other income” under the caption “Revenues” | 3,746 | |||
$ | 1,416 | |||
“Cost of operations: Self-storage facilities” has been increased to reflect cost of operations included in “Expenses: Operating” | $ | 222,994 | ||
“Cost of operations: Ancillary operations” has been increased to reflect cost of operations with respect to retail sales, rental trucks, and tenant reinsurance included in “Expenses: Operating” | $ | 9,663 | ||
“Expenses: Operating” has been decreased to reflect : | ||||
• Cost of operations reclassified to “Cost of operations: Self-storage facilities” | $ | (222,994 | ) | |
• Retail sales, rental truck and tenant reinsurance expenses reclassified to “Cost of Operations: Ancillary operations” | (9,663 | ) | ||
$ | (232,657 | ) | ||
“Expenses: Interest expense” has been increased to reflect the reclassification of Shurgard’s historical interest expense included “Other Income (Expense): Interest expense” | $ | 105,584 | ||
“Other Income (Expense): Interest expense” has been decreased to reflect the reclassification of Shurgard’s historical interest expense to “Expenses: Interest expense” | $ | 105,584 | ||
8
PUBLIC STORAGE, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME—(Continued)
For the year Ended December 31, 2005
(Unaudited)
(Amounts in thousands) | ||||
“Other Income (Expense): Interest income and other” has been decreased to reflect the reclassification of Shurgard’s historical amounts to “Revenues: Interest and other income” | $ | (3,746 | ) | |
2.PRO FORMA MERGER ADJUSTMENTS:
In connection with the merger, borrowings under Shurgard’s line of credit will be repaid, Shurgard’s outstanding preferred stock will be redeemed at liquidation value plus any accrued and unpaid distributions, and we expect to incur merger related costs of approximately $90.0 million. Public Storage expects to fund these capital requirements with cash on-hand, borrowings on its $200 million line of credit or other forms of capital including, but not limited to, the proceeds from the issuance of additional preferred stock, expansion of the existing line of credit, and short-term bridge financing.
Pro forma adjustments have been made to reflect the following financing assumptions with respect to the merger:
(Amounts in thousands) | |||
Sources of funds: | |||
Borrowings under Public Storage’s existing line of credit | $ | 200,000 | |
Average available cash on-hand during 2005 | 415,072 | ||
Estimated proceeds from the exercise of Shurgard stock options | 98,925 | ||
$ | 713,997 | ||
Uses of funds: | |||
Repay average outstanding borrowings under Shurgard’s line of credit during 2005 | $ | 487,747 | |
Redeem Shurgard’s outstanding preferred stock | 136,250 | ||
Merger related costs | 90,000 | ||
$ | 713,997 | ||
The following pro forma adjustments have been recorded to reflect the impact of the above related merger financing:
An adjustment has been made to eliminate interest income earned on average invested Public Storage cash balances of $415.1 million. Such balance is assumed to have been used to fund cash needs of the merger. For purpose of determining historical interest income, an average rate per annum of 3.39% was used, representing Public Storage’s average investment rates | $ | (14,050 | ) | |
9
PUBLIC STORAGE, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME—(Continued)
For the year Ended December 31, 2005
(Unaudited)
(Amounts in thousands) | ||||
Interest expense was reduced to reflect: | ||||
• Elimination of historical interest expense with respect to Shurgard’s line of credit which is assumed to have been repaid at the beginning of the year | $ | (22,832 | ) | |
• Interest expense with respect to pro forma borrowings of $200.0 million under Public Storage’s line of credit using Public Storage’s current borrowing rates of approximately 5.61% per annum | 11,220 | |||
Public Storage’s line of credit bears interest at a variable rate equal to LIBOR plus 0.45%. If LIBOR were to increase by .125%, interest expense would increase by $250,000 per annum (a .125% reduction in LIBOR would result in a reduction to interest expense of $250,000). | ||||
• Elimination of Shurgard’s historical amortization of debt issuance costs | (8,336 | ) | ||
• Amortization of the pro forma loan premium resulting from recording Shurgard debt at fair value in connection with the purchase price allocation | (4,128 | ) | ||
$ | (24,076 | ) | ||
Pro forma adjustments have been made to depreciation and amortization expense to: | ||||
• Eliminate Shurgard’s historical depreciation and amortization expense | $ | (95,670 | ) | |
• Record depreciation expense based on the purchase price allocated to real estate facilities. Depreciation was calculated based on an expected useful life of 25 years assuming approximately 80% of the fair value allocated to Shurgard’s real estate facilities was allocated to buildings and 20% allocated to land. This allocation is based on Shurgard’s existing portfolio and is subject to change based on final evaluations and completion of the merger. | 159,293 | |||
• Record amortization of intangible assets based on the purchase price allocated to the existing customer base in place. Amortization was computed based upon the increased net operating income to be received assuming the current tenant base is in place, as compared to the net operating income that would be achieved were the facilities acquired with no tenant base in place. Future amortization will decline substantially to approximately $77,301 in the second year following the merger, $17,728 in the third year following the merger, and an aggregate of $26,031 in ensuing years. | 263,656 | |||
$ | 327,279 | |||
Pro forma adjustments have been recorded to eliminate Shurgard’s historical impairment and abandoned project expense, which we assume would have been factored into the purchase price allocation by reducing the net book value of the related assets to a lower fair value. | $ | (3,354 | ) | |
Pro forma adjustments have been recorded to reduce general and administrative expenses for redundant expenses that we expect to eliminate as a result of the merger, such as personnel cost, audit fees and other costs of being a separate public company | $ | (26,142 | ) | |
Pro forma adjustment has been made to eliminate costs incurred by Shurgard with respect to takeover proposal and exploration of strategic alternatives resulting in the merger. | $ | (13,775 | ) | |
Public Storage believes that there will be certain cost efficiencies due to the economies of scale of having a larger number of facilities in certain markets after the merger is consummated. Public Storage expects cost efficiencies in telephone directory advertising, property insurance, and payroll cost with respect to supervisory personnel. In addition, some of Shurgard’s facilities will be subject to property tax reappraisal resulting in increases to property tax expense. Public Storage is evaluating the potential cost savings and increase in property
10
PUBLIC STORAGE, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME—(Continued)
For the year Ended December 31, 2005
(Unaudited)
taxes; however, it is not able to quantify the amount of such savings or costs at this time. Accordingly, no adjustments have been made to the pro forma condensed consolidated statement of income to reflect expected cost savings or increases to property taxes.
3.PRO FORMA EARNINGS PER COMMON SHARE:
For purposes of determining basic and diluted earnings per common share, income (loss) from continuing operations was allocated to preferred shareholders, Equity Stock, Series A shareholders and common shareholders as follows:
Public Storage, Inc. | Shurgard Storage Centers, Inc. | Pro forma Reclassifications (Note 1) | Pro forma Merger Adjustments (Note 2) | Public Storage, Inc. | ||||||||||||||
Historical | Historical | Pro Forma | ||||||||||||||||
(Amounts in thousands) | ||||||||||||||||||
Allocation of income (loss) from continuing operations: | ||||||||||||||||||
To preferred shareholders and other | $ | 180,555 | $ | 12,153 | $ | — | $ | (12,153 | ) | $ | 180,555 | |||||||
To equity stock, Series A shareholders | 21,443 | — | — | — | 21,443 | |||||||||||||
To common shareholders | 248,018 | (13,020 | ) | — | (261,829 | ) | (26,831 | ) | ||||||||||
Total income from continuing operations | $ | 450,016 | $ | (867 | ) | $ | — | $ | (273,982 | ) | $ | 175,167 | ||||||
In connection with the merger, Shurgard’s preferred stock would be redeemed and restricted shares would become fully vested. As a result, a pro forma merger adjustment was made to eliminate historical income allocated to such securities totaling $12,153,000.
Historical weighted average shares outstanding were reduced by 6,022,000 and 6,682,000 shares for purposes of determining earnings per common share on a basic and diluted basis, respectively. These reductions were determined as follows:
Basic | Diluted | |||||
(Amounts in thousands, except conversion ratio) | ||||||
Shurgard historical weighted average shares outstanding. | 46,660 | 46,660 | ||||
Impact from outstanding restricted stock awards not included in Shurgard’s historical weighted average shares due to antidilution | 75 | 75 | ||||
Outstanding Shurgard stock options at December 31, 2005 | 2,818 | 2,818 | ||||
Restricted stock units issued to employees of Shurgard at the completion of the merger | 5 | 21 | ||||
49,558 | 49,574 | |||||
Conversion ratio | 0.82 | 0.82 | ||||
Pro forma weighted average shares | 40,638 | 40,651 | ||||
Less historical Shurgard weighted average shares | (46,660 | ) | (46,660 | ) | ||
Less adjustment to eliminate the impact of outstanding stock options and restricted stock from diluted shares, because there is a loss allocable to common shareholders and as including these items would be anti-dilutive | — | (673 | ) | |||
Pro forma adjustment | (6,022 | ) | (6,682 | ) | ||
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