Exhibit 99.1
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
On March 6, 2006, Public Storage, Inc. ("Public Storage") entered into an
Agreement and Plan of Merger, by and among Shurgard Storage Centers, Inc.
("Shurgard"), Public Storage, and a subsidiary of Public Storage. The merger was
completed on August 22, 2006. Under the terms of the merger agreement, each
outstanding share of common stock of Shurgard was exchanged for 0.82 shares of
Public Storage common stock, and each outstanding Shurgard stock option was
converted into 0.82 options exercisable for shares of Public Storage common
stock.
The unaudited pro forma condensed consolidated financial statements were
prepared to reflect this transaction. The merger is 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 June 30,
2006 has been prepared to reflect the merger, as if the merger occurred on June
30, 2006. The unaudited pro forma condensed consolidated statements of income
for the year ended December 31, 2005 and the six months ended June 30, 2006 have
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 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 statements of income have been made to reflect the
estimated impact on income allocated to minority interest, income allocated to
preferred shareholders, 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, the impact of reduced interest income reflecting
the utilization of cash on hand to fund the merger, 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 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,
which are included in its Annual Report on Form 10-K for the year ended December
31, 2005 and Quarterly Report on Form 10-Q for the quarter ended June 30, 2006
filed with the Securities and Exchange Commission (the "Commission"), and those
of Shurgard, which are included on its financial statements for the year ended
December 31, 2005 on its Form 8-K dated May 23, 2006 as well as its Quarterly
Report on Form 10-Q for the quarter ended June 30, 2006. 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.
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
June 30, 2006
(Unaudited)
Pro Forma Adjustments
--------------------------------------------
Stock Merger
Option ---------------------------- Public Storage
Public Storage Shurgard Exercises Purchase Valuation Post-Merger
-------------- -------------- ------------ ------------- -------------- --------------
(Historical) (Historical) (Note 1) (Note 3) (Note 4) (Pro Forma)
ASSETS
Cash and cash equivalents $ 983,630 $ 40,938 $74,426 $ (886,396) $ - $ 212,598
Operating real estate
facilities, net of
accumulated depreciation 4,552,766 2,797,425 - - 2,273,950 9,624,141
Construction in process 19,695 77,396 - - - 97,091
Properties held for sale - 3,893 - - - 3,893
Restricted cash - 3,236 - - - 3,236
Investment in real estate
entities 303,884 - - - - 303,884
Goodwill 174,634 27,440 - (27,440) 174,634
Intangible assets, net - - - - 384,716 384,716
Other assets 65,527 132,038 - - (41,743) 155,822
Unallocated Purchase price - - - 3,239,071 (3,239,071) -
-------------- -------------- ------------ ------------- -------------- --------------
Total assets $ 6,100,136 $ 3,082,366 $74,426 $ 2,352,675 $ (649,588) $10,960,015
============== ============== ============ ============= ============== ==============
LIABILITIES AND SHAREHOLDERS'
EQUITY
Lines of credit $ - $ 626,700 - $ (626,700) $ - $ -
Notes payable 105,053 1,355,320 - (67,000) 15,315 1,406,688
Debt to joint venture partner 35,784 -- - - - 35,784
Accrued and other liabilities 171,773 153,874 - - (360) 325,287
-------------- -------------- ------------ ------------- -------------- --------------
Total liabilities 312,610 2,135,894 - (693,700) 14,955 1,769,759
Minority interest--preferred 325,000 - - - - 325,000
Minority interest--other 33,223 145,679 - - - 178,902
Shareholders' equity:
Preferred stock 3,120,900 131,183 - (136,250) 5,067 3,120,900
Common stock 12,821 47 175 3,890 (47) 16,886
Equity stock -- - - - - -
Paid in capital 2,415,673 1,156,916 74,251 3,178,735 (1,156,916) 5,668,659
Cumulative net income 3,432,344 - - - 3,432,344
Accumulated deficit - (501,327) - - 501,327 -
Accumulated other
comprehensive income - 13,974 - - (13,974) -
Cumulative
distributions paid (3,552,435) - - - - (3,552,435)
-------------- -------------- ------------ ------------- -------------- --------------
Total shareholders'
equity 5,429,303 800,793 74,426 3,046,375 (664,543) 8,686,354
============== ============== ============ ============= ============== ==============
Total liabilities and
shareholders' equity $ 6,100,136 $ 3,082,366 74,426 $ 2,352,675 $ (649,588) $ 10,960,015
============== ============== ============ ============= ============== ==============
Book value per common share
(Note 5) $ 16.33 $ 14.01 $ 31.69
============== ============== ==============
Common shares outstanding
(Note 5) 128,211 47,435 168,855
============== ============== ==============
See Accompanying Notes to Pro Forma Condensed Consolidated Balance Sheet.
2
PUBLIC STORAGE, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
June 30, 2006
(Unaudited)
1. STOCK OPTIONS EXERCISES
At June 30, 2006, Shurgard had approximately 2,439,196 stock options
outstanding. All outstanding Shurgard stock options were immediately vested as
of the close of the merger, and holders received 0.82 options exercisable for
shares of Public Storage common stock for each Shurgard option owned,
representing approximately 2,000,141 Public Storage stock options. Following the
merger, terminated employees exercised approximately 1,747,000 of these stock
options, and Public Storage received aggregate proceeds upon exercise of
$74,426,000. Accordingly, the following pro forma adjustments have been recorded
to reflect these option exercises:
Amounts in
thousands
------------
Cash and cash equivalents has been increased to reflect the net proceeds $74,426
============
Common stock has been increased to reflect the par value of the 1,747,000 common
shares that were issued $ 175
============
Paid in capital has been increased to reflect the remaining net proceeds in
excess of par value $74,251
============
2. PRO FORMA MERGER ADJUSTMENTS:
The merger was accounted for using the purchase method of accounting. The
total purchase price has been allocated on a preliminary basis, subject to
further evaluation, to the acquired assets and liabilities based upon their
respective estimated fair values. Pursuant to the merger, Shurgard was merged
into a subsidiary of Public Storage, and Public Storage issued to Shurgard
shareholders 0.82 of a share of Public Storage common stock in exchange for each
Shurgard common share that they owned. In connection with the merger, all
outstanding Shurgard stock options were immediately vested as of the close of
the merger. Holders of Shurgard's stock options each received options
exercisable for shares of Public Storage common stock on a basis of 0.82 of a
Public Storage option for each Shurgard option owned.
In connection with the merger, Shurgard's line of credit was repaid and all
of its preferred stock was redeemed at liquidation value plus any accrued and
unpaid distributions. In addition, Public Storage repaid certain outstanding
notes payable of Shurgard totaling $67.0 million as of June 30, 2006. Public
Storage funded these activities with cash on-hand.
The purchase price of the net assets was equal to the fair value of the
Public Storage common stock issued combined with the direct costs associated
with the merger. In determining the fair value of the Public Storage common
stock issued in the merger a share price of $79.97, less estimated cost of
issuing such shares, has been used in these pro forma financial statements. The
$79.97 per common share 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 between a
high of $82.98 and a low of $77.17 per common share.
Direct costs related to the merger paid at the merger date or shortly
thereafter were approximately $56.4 million: consisting of (i) financial
advisory, legal, accounting, and other miscellaneous expenses totaling
approximately $37.4 million, and (ii) severance payments to Shurgard management
based on contractual change of control provisions of approximately $19.0
million; such severance payments relate specifically to management who were
terminated on or immediately following the consummation of the merger.
3
PUBLIC STORAGE, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
June 30, 2006
(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 June 30, 2006 47,435
Conversion ratio into Public Storage common stock 0.82
-----------------
Pro forma Public Storage common shares issued 38,897
Fair value of Public Storage common stock $ 79.97
-----------------
Aggregate fair value of Public Storage common stock $ 3,110,593
Less estimated issuance costs (736)
-----------------
Adjusted aggregate fair value of Public Storage common stock issued $ 3,109,857
Estimated intrinsic value (which approximates fair value) of Shurgard
outstanding stock options at June 30, 2006 72,768
Estimated direct costs of the merger 56,446
-----------------
Total Purchase Price $ 3,239,071
=================
PRELIMINARY ALLOCATION OF PURCHASE PRICE:
Cash and cash equivalents $ 40,938
Operating real estate facilities 5,071,375
Construction in process 77,396
Properties held for sale 3,893
Restricted cash 3,236
Intangible assets 384,716
Other assets 90,295
Accrued and other liabilities (153,514)
Lines of credit (626,700)
Notes payable (1,370,635)
Minority interest (145,679)
Preferred stock (136,250)
-----------------
Total allocated Purchase Price to net assets acquired $ 3,239,071
=================
4
PUBLIC STORAGE, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
June 30, 2006
(Unaudited)
3. PRO FORMA PURCHASE PRICE ADJUSTMENTS:
The following pro forma adjustments have been made to reflect the above
Purchase Price of the merger as of June 30, 2006: (Amounts in thousands)
Cash and cash equivalents have been reduced to reflect:
o Repayment of outstanding borrowings under Shurgard's line of credit
as of June 30, 2006 $ (626,700)
o Repay notes payable as of June 30, 2006 (67,000)
o Redemption of Shurgard's preferred stock as of June 30, 2006 (136,250)
o Estimated direct costs and expenses of the merger (56,446)
--------------
$ (886,396)
==============
Line of credit has been decreased to reflect the repayment of outstanding
borrowings under Shurgard's line of credit as of June 30, 2006 $ (626,700)
==============
Notes payable has been decreased to reflect the repayment of outstanding
borrowings of Shurgard as of June 30, 2006 $ (67,000)
==============
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 38.9 million shares
of Public Storage common stock with a par value of $0.10 per share $ 3,890
==============
Paid-in capital has been increased to reflect:
o the issuance of common stock at fair value in excess of par value $ 3,105,967
o the intrinsic value (which approximates fair value) of the Shurgard
stock options 72,768
--------------
$ 3,178,735
==============
5
PUBLIC STORAGE, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
June 30, 2006
(Unaudited)
4. 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
June 30, 2006:
(Amounts in
thousands)
Operating real estate facilities has been increased to reflect the fair value of --------------
the real estate facilities acquired in the merger (purchase price allocation
of $5,071,375,000 less Shurgard's historical net book value of
$2,797,425,000) $ 2,273,950
==============
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 $ (41,743)
==============
Notes payable has been increased to adjust Shurgard's historical balances to
estimated fair value $ 15,315
==============
Accrued and other liabilities has been reduced to eliminate accrued expenses
incurred by Shurgard with respect to the exploration of strategic
alternatives $ (360)
==============
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 $(1,156,916)
==============
Accumulated deficit $ 501,327
==============
Accumulated other comprehensive income $ (13,974)
==============
5. 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 the Preferred Stock and the
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 June 30, 2006 128,211
Public Storage common shares issued in connection with stock option exercises
(see Note 1 above) 1,747
Pro forma Public Storage common shares issued to shareholders of Shurgard
(see Note 2 above) 38,897
-------------
Pro forma Public Storage common shares outstanding 168,855
=============
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)
Pro forma
adjustments -
issuance of
preferred stock Pro forma
Shurgard and exercise of Pro forma Merger
Public Storage Storage stock options Reclassifications Adjustments Public Storage,
Inc. Centers, Inc. (Note 1) (Note 2) (Note 3) Inc.
--------------- -------------- --------------- ----------------- ------------ ----------------
Historical Historical Pro Forma
Revenues:
Rental income:
Self-storage facilities $ 952,284 $ -- $ -- $ 453,964 $ -- $ 1,406,248
Commercial and
containerized
storage 28,057 -- -- -- -- 28,057
Storage centers operations -- 478,970 -- (478,970) -- --
Ancillary operations 64,173 -- -- 27,336 -- 91,509
Interest and other income 16,447 4,922 -- 1,416 (9,512) 13,273
--------------- -------------- --------------- ----------------- ------------ ----------------
1,060,961 483,892 -- 3,746 (9,512) 1,539,087
--------------- -------------- --------------- ----------------- ------------ ----------------
Expenses:
Cost of operations:
Self-storage facilities 320,919 -- -- 223,343 -- 544,262
Commercial and
containerized
storage 17,334 -- -- -- -- 17,334
Ancillary operations 40,378 -- -- 9,663 -- 50,041
Operating -- 233,006 -- (233,006) -- --
Real estate development -- 10,042 -- -- -- 10,042
Depreciation and amortization 196,397 95,722 -- -- 330,218 622,337
Impairment and abandoned
project expense -- 3,354 -- -- -- 3,354
General and administrative 21,115 35,318 -- -- (22,742) 33,691
Interest expense 8,216 -- -- 105,584 (39,057) 74,743
--------------- -------------- --------------- ----------------- ------------ ----------------
604,359 377,442 -- 105,584 268,419 1,355,804
--------------- -------------- --------------- ----------------- ------------ ----------------
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 -- (25,562)
--------------- -------------- --------------- ----------------- ------------ ----------------
Income (loss) from
continuing operations
before the following items 456,602 (20,950) -- -- (277,931) 157,721
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 (7,250) -- -- (18,965)
Income tax expense -- (636) -- -- -- (636)
--------------- -------------- --------------- ----------------- ------------ ----------------
Income (loss) from
continuing operations $ 450,016 $ (590) $ (7,250) $ -- $ (277,931) $ 164,245
=============== ============== =============== ================= ============ ================
Earnings (loss) per common
share from continuing
operations (Note 4):
Basic $ 1.94 $ (0.27) $ (0.45)
Diluted $ 1.93 $ (0.27) $ (0.45)
Weighted average shares
outstanding (Note 4):
Basic 128,159 46,660 1,747 (8,399) 168,167
Diluted 128,819 46,660 1,747 (9,059) 168,167
See Accompanying Notes to Pro Forma Condensed
Consolidated Statements of Income.
7
PUBLIC STORAGE, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
For the Six Months Ended June 30, 2006
(Unaudited)
(Amounts in thousands, except per share data)
Pro forma adjustments
issuance of preferred
stock and Pro forma
Shurgard exercise of Pro forma Merger
Public Storage Storage stock options Reclassifications Adjustments Public Storage,
Inc. Centers, Inc. (Note 1) (Note 2) (Note 3) Inc.
--------------- -------------- --------------- ----------------- -------------- ----------------
Historical Historical Pro Forma
Revenues:
Rental income:
Self-storage facilities $ 513,910 $ -- $ -- $ 248,516 $ -- $ 762,426
Commercial and
containerized
storage 14,135 -- -- -- -- 14,135
Storage centers
operations -- 261,933 -- (261,933) -- --
Ancillary operations 33,543 -- -- 14,636 -- 48,179
Interest and other
income 15,122 1,931 -- (350) (6,764) 9,939
--------------- -------------- --------------- ----------------- -------------- ----------------
576,710 263,864 -- 869 (6,764) 834,679
--------------- -------------- --------------- ----------------- -------------- ----------------
Expenses:
Cost of operations:
Self-storage
facilities 177,160 -- -- 117,010 -- 294,170
Commercial and
containerized
storage 10,112 -- -- -- -- 10,112
Ancillary
operations 22,312 -- -- 5,594 -- 27,906
Operating -- 122,604 -- (122,604) -- --
Real estate development -- 3,615 -- -- -- 3,615
Depreciation and
amortization 98,675 52,265 -- -- 79,676 230,616
Impairment and
abandoned project
expense -- 800 -- -- -- 800
General and
administrative 13,754 14,471 -- -- (8,360) 19,865
Interest expense 3,429 -- -- 60,249 (25,946) 37,732
--------------- -------------- --------------- ----------------- -------------- ----------------
325,442 193,755 -- 60,249 45,370 624,816
--------------- -------------- --------------- ----------------- -------------- ----------------
Other Income (Expense):
Costs related to
proposed merger -- (2,828) -- -- -- (2,828)
Interest expense -- (60,249) -- 60,249 -- --
Gain on derivatives, net -- 1,109 -- -- -- 1,109
Foreign exchange gain -- 503 -- -- -- 503
Interest income and
other -- 869 -- (869) -- --
--------------- -------------- --------------- ----------------- -------------- ----------------
Other expense, net -- (60,596) -- 59,380 -- (1,216)
--------------- -------------- --------------- ----------------- -------------- ----------------
Income (loss) from
continuing
operations before
the following items 251,268 9,513 -- -- (52,134) 208,647
Equity in earnings of
real estate entities 6,590 -- -- -- -- 6,590
Minority interest in
(income) loss (15,887) 7,886 (2,578) -- -- (10,579)
Income tax expense -- (94) -- -- -- (94)
--------------- -------------- --------------- ----------------- -------------- -----------------
Income (loss) from
continuing operations $ 241,971 $ 17,305 $ (2,578) $ -- $ (52,134) $ 204,564
=============== ============== =============== ================= ============== =================
Earnings per common share from continuing operations (Note 4):
Basic $ 1.03 $ 0.23 $ 0.49
Diluted $ 1.03 $ 0.23 $ 0.48
Weighted average shares
outstanding (Note 4):
Basic 128,151 47,089 1,747 (8,476) 168,511
Diluted 129,037 48,232 891 (8,682) 169,478
See Accompanying Notes to Pro Forma Condensed
Consolidated Statements of Income.
8
PUBLIC STORAGE, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Year Ended December 31, 2005 and Six Months Ended June 30, 2006
(Unaudited)
9
1. PRO FORMA ADJUSTMENTS FOR THE ISSUANCE OF PREFERRED SECURITIES AND EXERCISE
OF STOCK OPTIONS:
On May 3, 2006, Public Storage issued shares of its 7.25% Cumulative
Preferred Stock, Series I, for gross proceeds of approximately $517.5 million
(net proceeds of approximately $501.6 million). In addition, on May 9, 2006, one
of Public Storage's consolidated subsidiaries issued partnership units of its
7.25% Cumulative Preferred Units, Series J, for gross proceeds of $100.0 million
(net proceeds also $100.0 million). The aggregate net proceeds from these
transactions were used to fund the cash requirements of the merger.
In connection with the merger, all outstanding Shurgard stock options were
immediately vested as of the close of the merger, and holders each received
options exercisable for shares of Public Storage common stock on a basis of 0.82
of a Public Storage option for each Shurgard option owned, representing
approximately 2,000,141 Public Storage stock options. Following the merger,
1,747,000 of these stock options were exercised, and the Company received
aggregate proceeds upon exercise of $74,426,000.
The following pro forma adjustment has been made to reflect the impact of
the issuance of the aforementioned issuance of preferred units:
Year ended Six months ended
December 31, 2005 June 30, 2006
------------------- ------------------
(Amounts in thousands)
"Minority interest in income" has been increased to
reflect the allocation of income with respect to
the 7.25% Cumulative Preferred Units, Series J
assuming such securities were outstanding as of the
beginning of 2005 $ (7,250) $ (2,578)
=================== ==================
See note 4, "Pro Forma Earnings per Common Share," for the pro forma
adjustments to reflect the additional allocation of income associated with the
issuance of the 7.25% Cumulative Preferred Stock, Series I and the impact on
weighted average shares outstanding of the aforementioned issuance of 1,747,000
Public Storage common shares upon the exercise of stock options.
2. PRO FORMA RECLASSIFICATION ADJUSTMENTS:
Reclassification adjustments have been made to certain Shurgard's
historical amounts to conform to Public Storage's presentation as follows:
Year ended Six months ended
December 31, 2005 June 30, 2006
------------------- ---------------------
(Amounts in thousands)
"Rental income: Self-storage facilities" has been increased to
reflect rental income reclassified from "Storage center
operations" $ 453,964 $ 248,516
=================== =====================
"Storage center operations" has been decreased to reflect :
o Rental income reclassified to "Rental income:
Self-storage facilities" $ (453,964) $ (248,516)
o Income from tenant reinsurance activities has been
reclassified to "Revenues: Ancillary operations" (8,105) (4,694)
o Retail sales and truck rental income reclassified to
"Revenues: Ancillary operations" (16,901) (8,723)
------------------- ---------------------
$ (478,970) $ (261,933)
=================== =====================
9
PUBLIC STORAGE, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Year Ended December 31, 2005 and Six Months Ended June 30, 2006
(Unaudited)
Year ended Six months ended
December 31, 2005 June 30, 2006
------------------- ----------------------
(Amounts in thousands)
"Revenues: Ancillary operations" has been increased to reflect :
o Retail sales and truck rental income included in
"Storage center operations" $ 16,901 $ 8,723
o Income from tenant reinsurance activities included in
"Revenues: Storage center operations" 8,105 4,694
o Income from tenant reinsurance activities included in
"Interest and other income" 2,330 1,219
------------------- ---------------------
$ 27,336 $ 14,636
=================== =====================
10
PUBLIC STORAGE, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Year Ended December 31, 2005 and Six Months Ended June 30, 2006
(Unaudited)
Year ended Six months
December 31, ended June 30,
2005 2006
------------------ -------------------
(Amounts in thousands)
--------------------------------------
"Interest and other income" has been increased (decreased) to reflect:
o Income from tenant reinsurance activities reclassified to
"Ancillary operations" $ (2,330) $ (1,219)
o Reclassification of Shurgard's interest and other income included
the caption "Other Income (Expense)" to "Interest and
under other income" under the caption "Revenues" 3,746 869
------------------ -------------------
$ 1,416 $ (350)
================= ===================
"Cost of operations: Self-storage facilities" has been increased to
reflect cost of operations included in "Expenses: Operating" $ 223,343 $ 117,010
================= ===================
"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 $ 5,594
================= ===================
"Expenses: Operating" has been decreased to reflect :
o Cost of operations reclassified to "Cost of operations:
Self-storage facilities" $ (223,343) $ (117,010)
o Retail sales, rental trucks, and tenant reinsurance reclassified
to "Cost of Operations: Ancillary operations" (9,663) (5,594)
----------------- -------------------
$ (233,006) $ (122,604)
================= ===================
"Expenses: Interest expense" has been increased to reflect the
reclassification of Shurgard's historical interest expense
included "Other Income (Expense): Interest expense" $ 105,584 $ 60,249
================= ===================
"Other Income (Expense): Interest expense" has been decreased to reflect
the reclassification of Shurgard's historical interest expense to
"Expenses: Interest expense" $ 105,584 $ 60,249
================= ===================
"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) $ (869)
================= ===================
11
PUBLIC STORAGE, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Year Ended December 31, 2005 and Six Months Ended June 30, 2006
(Unaudited)
3. PRO FORMA MERGER ADJUSTMENTS:
In connection with the merger, borrowings under Shurgard's line of credit
were repaid ($626.7 million), certain Shurgard borrowings under notes payable
were repaid ($67.0 million), Shurgard's outstanding preferred stock was redeemed
at liquidation value ($136.3 million), and we incurred merger related costs of
approximately $56.4 million. These capital requirements were funded with the
aforementioned issuances of our Series I Perpetual Preferred Stock, our Series J
Perpetual Preferred Units, and cash on-hand.
The following pro forma adjustments have been recorded to reflect the
impact of the above related merger financing:
Year ended Six months ended
December 31, 2005 June 30, 2006
-------------------- -------------------
(Amounts in thousands)
Interest expense was reduced to reflect:
o Elimination of historical interest expense with respect to
Shurgard's line of credit which is assumed to have been repaid at
the beginning of 2005 $ (22,832) $ (17,572)
o Elimination of historical interest expense with respect to certain
of Shurgard's notes payable which is assumed to have been repaid at
the beginning of 2005 (4,064) (2,127)
o Elimination of Shurgard's historical amortization of debt issuance
costs (8,336) (4,342)
o Amortization of the pro forma loan premium resulting from recording
Shurgard debt at fair value in connection with the purchase price
allocation (3,825) (1,905)
-------------------- -------------------
$ (39,057) $ (25,946)
==================== ===================
A pro forma adjustment was made to reduce historical interest income earned to
reflect the pro forma use of cash on hand to finance the merger rather than
remaining in interest-bearing accounts $ (9,512) $ (6,764)
==================== ===================
12
PUBLIC STORAGE, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Year Ended December 31, 2005 and Six Months Ended June 30, 2006
(Unaudited)
Year ended Six months ended
December 31, June 30,
2005 2006
---------------- -------------------
(Amounts in thousands)
Pro forma adjustments have been made to depreciation and amortization expense
to:
o Eliminate Shurgard's historical depreciation and amortization
expense $ (95,722) $ (52,265)
o 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. 162,284 81,142
o Record amortization of intangible assets based on the purchase price
allocated to existing customer base in place. Amortization was
calculated 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 50,799
---------------- -------------------
$ 330,218 $ 79,676
================ ===================
Pro forma adjustments have been recorded to reduce general and administrative
expenses for expenses that we expect to eliminate as a result of the merger,
including $6,186,000 for the year ended December 31, 2005 and $4,197,000 for
the six months ended June 30, 2006 in salaries for those personnel that were
terminated on or immediately following the consummation of the merger;
$9,400,000 for the year ended December 31, 2005 and $2,125,000 for the six
months ended June 30, 2006 in duplicative audit fees and SOX compliance costs
that will be no longer incurred on a go-forward basis following the merger;
and $7,156,000 for the year ended December 31, 2005 and $2,038,000 for the
six months ended June 30, 2006 in other miscellaneous duplicative costs
associated with being a public company such as board of director costs and
investor services costs. $ (22,742) $ (8,360)
================ ===================
13
PUBLIC STORAGE, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Year Ended December 31, 2005 and Six Months Ended June 30, 2006
(Unaudited)
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.
4. PRO FORMA EARNINGS PER COMMON SHARE:
For purposes of determining earnings per common share on both basic and
diluted basis, income (loss) from continuing operations was allocated to
preferred shareholders, Equity Stock, Series A shareholders and common
shareholders as follows:
Pro forma
Issuance of Pro forma
Public Shurgard Preferred Pro forma Merger Public
Storage, Storage Centers, Securities Reclassification Adustments Storage,
Inc. Inc. (Note 1) (Note 2) (Note 3) Inc.
------------- ----------------- -------------- ---------------- ------------- --------------
Historical Historical Pro Forma
(Amounts in thousands)
FOR THE YEAR ENDED
DECEMBER 31, 2005:
Allocation of income (loss)
from continuing operations:
To preferred
shareholders and
other $ 180,555 $ 12,153 $ 37,519 $ -- $ (12,153) $ 218,074
To equity stock, Series
A shareholders 21,443 -- -- -- -- 21,443
To common shareholders 248,018 (12,743) (44,769) -- (265,778) (75,272)
------------- ----------------- -------------- ---------------- ------------- --------------
Total income from continuing
operations $ 450,016 $ (590) $ (7,250) $ -- $ (277,931) $ 164,245
============= ================= ============== ================ ============== ==============
FOR THE SIX MONTHS ENDED
JUNE 30, 2006:
Allocation of income from
continuing operations:
To preferred
shareholders and
other $ 98,991 $ 6,072 $ 12,715 $ -- $ (6,072) $ 111,706
To equity stock, Series
A shareholders 10,712 -- -- -- -- 10,712
To common shareholders 132,268 11,233 (15,293) -- (46,062) 82,146
------------- ----------------- -------------- ---------------- ------------- --------------
Total income from continuing
operations $ 241,971 $ 17,305 $ (2,578) $ -- $ (52,134) $ 204,564
============= ================= ============== ================ ============== ==============
As indicated in Note 1, Public Storage issued approximately $517.5 million
of its 7.25% Cumulative Preferred Stock during the quarter ended June 30, 2006.
The net proceeds from this issuance were used to finance the cash requirements
of the merger. Pro forma merger adjustments totaling $37,519,000 and $12,715,000
have been made in the above table to allocate income from continuing operations
to such securities, to the extent they are not reflected in the period's
operating results, for the year ended December 31, 2005 and the six months ended
June 30, 2006, respectively. In connection with the merger, Shurgard's preferred
stock was redeemed. As a result, pro forma merger adjustments were made to
eliminate historical income allocated to such securities totaling $12,153,000
and $6,072,000 for the year ended December 31, 2005 and the six months ended
June 30, 2006 respectively.
14
PUBLIC STORAGE, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Year Ended December 31, 2005 and Six Months Ended June 30, 2006
(Unaudited)
Historical weighted average shares outstanding were for each of the periods
to reflect the exchange of Shurgard shares for Public Storage shares on the
basis of an 0.82 exchange ratio, as well as to reflect the exercise of stock
options described in Note 1 above. These adjustments are described as follows:
For the Year Ended For the Six Months
December 31, 2005 June 30, 2006
------------------------ -----------------------
Basic Diluted Basic Diluted
----------- ------------ ----------- -----------
(Amounts in thousands, except
conversion ratio)
Pro forma adjustments have been made to weighted average shares
outstanding due to the exercise of stock options:
Increase in common shares outstanding for shares exercised 1,747 1,747 1,747 1,747
Decrease in weighted average stock options outstanding included in
the historical reported amounts, because the stock options are
assumed to be exercised and no longer outstanding (no adjustment
is necessary for diluted shares for the year ended December 31,
2005 because no weighted average stock options were included in
Shurgard's weighted average shares) -- -- -- (856)
----------- ------------ ----------- -----------
Total pro forma adjustment for stock option exercise 1,747 1,747 1,747 891
=========== ============ =========== ===========
Pro forma adjustments have been made to weighted average shares
outstanding to reflect the conversion of Shurgard shares to
Public Storage shares, as follows:
Shurgard historical weighted average shares outstanding. 46,660 46,660 47,089 48,232
Conversion ratio 0.82 0.82 0.82 0.82
----------- ------------ ----------- -----------
Pro forma weighted average shares 38,261 38,261 38,613 39,550
Less historical Shurgard weighted average shares (46,660) (46,660) (47,089) (48,232)
Less adjustment to eliminate outstanding Public Storage stock options
and restricted stock from diluted shares, because there is a
pro-forma loss allocable to common shareholders for the year ended
December 31, 2005, and inclusion would be anti-dilutive -- (660) -- --
----------- ------------ ----------- -----------
Pro forma merger adjustment (8,399) (9,059) (8,476) (8,682)
=========== ============ =========== ===========
15