UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the period ended March 31, 1997 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to ---------------- ---------------- Commission File Number 1-10851 ------- PUBLIC STORAGE PROPERTIES XVI, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) California 95-4300886 - ---------------------------------------- ------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 701 Western Ave. Glendale, California 91201-2397 - ---------------------------------------- ------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (818) 244-8080 ------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of shares outstanding of the Company's classes of common stock as of March 31, 1997: 2,962,348 shares of $.01 par value Series A shares 324,989 shares of $.01 par value Series B shares 920,802 shares of $.01 par value Series C shares -------------------------------------------------- INDEX Page ---- PART I. FINANCIAL INFORMATION Condensed Balance Sheets at March 31, 1997 and December 31, 1996 2 Condensed Statements of Income for the three months ended March 31, 1997 and 1996 3 Condensed Statement of Shareholders' Equity for the three months ended March 31, 1997 4 Condensed Statements of Cash Flows for the three months ended March 31, 1997 and 1996 5 Notes to Condensed Financial Statements 6-7 Management's Discussion and Analysis of Financial Condition and Results of Operations 8-9 PART II. OTHER INFORMATION 10-11 PUBLIC STORAGE PROPERTIES XVI, INC. CONDENSED BALANCE SHEETS March 31, December 31, 1997 1996 ------------------ --------------- (Unaudited) ASSETS ------ Cash and cash equivalents $2,069,000 $2,312,000 Rent and other receivables 55,000 80,000 Prepaid expenses 139,000 167,000 Real estate facilities at cost: Building, land improvements and equipment 42,535,000 42,313,000 Land 25,404,000 24,912,000 ----------------- ---------------- 67,939,000 67,225,000 Less accumulated depreciation (18,554,000) (18,121,000) ----------------- ---------------- 49,385,000 49,104,000 ----------------- ---------------- Total assets $51,648,000 $51,663,000 ================= ================ LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Accounts payable $1,522,000 $902,000 Dividends payable 888,000 1,940,000 Advance payments from renters 327,000 311,000 Shareholders' equity: Series A common, $.01 par value, 4,983,165 shares authorized, 2,962,348 shares issued and outstanding in 1997 and 1996 29,000 29,000 Convertible Series B common, $.01 par value, 324,989 shares authorized, issued and outstanding 3,000 3,000 Convertible Series C common, $.01 par value, 920,802 shares authorized, issued and outstanding 9,000 9,000 Paid-in-capital 54,408,000 54,408,000 Cumulative net income 30,341,000 29,052,000 Cumulative distributions (35,879,000) (34,991,000) ----------------- ---------------- Total shareholders' equity 48,911,000 48,510,000 ----------------- ---------------- Total liabilities and shareholders' equity $51,648,000 $51,663,000 ================= ================ See accompanying notes. 2 PUBLIC STORAGE PROPERTIES XVI, INC. CONDENSED STATEMENTS OF INCOME (UNAUDITED) Three Months Ended March 31, ------------------------------------ 1997 1996 --------------- ----------------- REVENUES: Rental income $2,847,000 $2,647,000 Interest income 17,000 9,000 --------------- ----------------- 2,864,000 2,656,000 --------------- ----------------- COSTS AND EXPENSES: Cost of operations 899,000 806,000 Management fees paid to affiliates 167,000 138,000 Depreciation 433,000 434,000 Administrative 76,000 80,000 --------------- ----------------- 1,575,000 1,458,000 --------------- ----------------- NET INCOME $1,289,000 $1,198,000 =============== ================= Primary earnings per share - Series A $0.41 $0.36 =============== ================= Fully diluted earnings per share - Series A $0.31 $0.28 =============== ================= Dividends declared per share: Series A $0.27 $0.27 =============== ================= Series B $0.27 $0.27 =============== ================= Weighted average Common shares outstanding: Primary - Series A 2,962,348 3,049,281 =============== ================= Fully diluted - Series A 4,208,139 4,295,072 =============== ================= See accompanying notes. 3 Public Storage Properties XVI, Inc. Condensed Statement of Shareholders' Equity (Unaudited) Convertible Convertible Series A Series B Series C Shares Amount Shares Amount Shares Amount ------------- ------------- ------------- ------------- ------------- ------------- Balances at December 31, 1996 2,962,348 $29,000 324,989 $3,000 920,802 $9,000 Net income Cash distributions declared: $.27 per share - Series A $.27 per share - Series B ------------- ------------- ------------- ------------- ------------- ------------- Balances at March 31, 1997 2,962,348 $29,000 324,989 $3,000 920,802 $9,000 ============= ============= ============= ============= ============= ============= Public Storage Properties XVI, Inc. Condensed Statement of Shareholders' Equity (Unaudited) Cumulative Total Paid-in net Cumulative shareholders' capital income distributions equity ------------ ------------- --------------- --------------- Balances at December 31, 1996 $54,408,000 $29,052,000 ($34,991,000) $48,510,000 Net income 1,289,000 1,289,000 Cash distributions declared: $.27 per share - Series A (800,000) (800,000) $.27 per share - Series B (88,000) (88,000) ------------ ------------- --------------- --------------- Balances at March 31, 1997 $54,408,000 $30,341,000 ($35,879,000) $48,911,000 ============ ============= =============== =============== See accompanying notes. 4 PUBLIC STORAGE PROPERTIES XVI, INC. CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) Three Months Ended March 31, -------------------------------------- 1997 1996 ------------------ ---------------- Cash flows from operating activities: Net income $1,289,000 $1,198,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 433,000 434,000 Decrease in rent and other receivables 25,000 5,000 Amortization of prepaid management fees - 118,000 Decrease in prepaid expenses 28,000 - Increase in accounts payable 620,000 22,000 Increase in advance payments from renters 16,000 11,000 ------------------ ---------------- Total adjustments 1,122,000 590,000 ------------------ ---------------- Net cash provided by operating activities 2,411,000 1,788,000 ------------------ ---------------- Cash flows from investing activities: Purchase of land for construction (492,000) - Additions to real estate facilities (222,000) (15,000) ------------------ ---------------- Net cash used in investing activities (714,000) (15,000) ------------------ ---------------- Cash flows from financing activities: Distributions paid to shareholders (1,940,000) (921,000) Purchase of Company Series A common stock - (786,000) ------------------ ---------------- Net cash used in financing activities (1,940,000) (1,707,000) ------------------ ---------------- Net (decrease) increase in cash and cash equivalents (243,000) 66,000 Cash and cash equivalents at the beginning of the period 2,312,000 1,440,000 ------------------ ---------------- Cash and cash equivalents at the end of the period $2,069,000 $1,506,000 ================== ================ See accompanying notes. 5 PUBLIC STORAGE PROPERTIES XVI, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) 1. The accompanying unaudited condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although management believes that the disclosures contained herein are adequate to make the information presented not misleading. These unaudited condensed financial statements should be read in conjunction with the financial statements and related notes appearing in the Company's Form 10-K for the year ended December 31, 1996. 2. In the opinion of management, the accompanying unaudited condensed financial statements reflect all adjustments, consisting of only normal accruals, necessary to present fairly the Company's financial position at March 31, 1997 and December 31, 1996, the results of its operations for the three months ended March 31, 1997 and 1996 and its cash flows for the three months then ended. 3. The results of operations for the three months ended March 31, 1997 are not necessarily indicative of the results expected for the full year. 4. The Company has an unsecured revolving credit facility with a bank for borrowings up to $5,000,000. Outstanding borrowings on the credit facility, at the Company's option, bear interest at either the bank's prime rate plus .25% or the bank's LIBOR rate plus 2.25%. Interest is payable monthly until maturity. On October 1, 2001, the remaining unpaid principal and interest is due and payable. At March 31, 1997 and for the three months then ended, there was no outstanding balance on the credit facility. In May 1997, the Company terminated its credit facility. 5. In March 1997, the Company purchased land for $492,000 in order to construct additional mini-warehouse space at its Lombard, Illinois facility. 6 6. In April 1997, the Company and Public Storage, Inc. ("PSI") agreed, subject to certain conditions, to merge. Upon the merger, each outstanding share of the Company's common stock series A (other than shares held by PSI or by holders of the Company's common stock series A ("Series A Shareholders") who have properly exercised dissenters' rights under California law ("Dissenting Shares")) will be converted into the right to receive cash, PSI common stock or a combination of the two, as follows: (i) with respect to a certain number of shares of the Company's common stock series A (not to exceed 20% of the outstanding common stock series A of the Company, less any Dissenting Shares), upon a Series A Shareholder's election, $20.76 in cash, subject to reduction as described below or (ii) that number (subject to rounding) of shares of PSI common stock determined by dividing $20.76, subject to reduction as described below, by the average of the per share closing prices on the New York Stock Exchange of PSI common stock during the 20 consecutive trading days ending on the fifth trading day prior to the special meeting of the Company's shareholders. The consideration paid by PSI to the Series A Shareholders in the merger will be reduced by the amount of cash distributions required to be paid to the Series A Shareholders by the Company prior to completion of the merger (estimated at $0.72 per share) in order to satisfy the Company's REIT distribution requirements ("Required REIT Distributions"). The consideration received by the Series A Shareholders in the merger, however, along with any Required REIT Distributions, will not be less than $20.76 per share of the Company's common stock series A, which amount represents the market value of the Company's real estate assets at March 17, 1997 (based on an independent appraisal) and interest of the Series A Shareholders in the estimated net asset value of its other assets at June 30, 1997. Additional distributions will be made to the Series A Shareholders to cause the Company's estimated net asset value allocable to the Series A Shareholders as of the date of the merger to be substantially equivalent to $20.76 per share. Upon the merger, each share of the Company's common stock series B and common stock series C (other than shares held by PSI) would be converted into the right to receive $11.82 in PSI common stock (valued as in the case of the Company's common stock series A) plus (i) any additional distributions equal to the amount by which the Company's estimated net asset value allocable to the holders of the Company's common stock series B and C as of the date of the merger exceeds $11.82 per share and (ii) the estimated Required REIT Distributions payable to the holders of the Company's common stock series B of $0.72 per share. The common stock of the Company held by PSI will be canceled in the merger. The merger is conditioned on, among other requirements, approval by the Company's shareholders. It is expected that the merger will close in June or July of 1997. PSI is the Company's mini-warehouse operator and owns 39.4% of the total combined shares of the Company's common stock series A, B and C. 7 PUBLIC STORAGE PROPERTIES XVI, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is management's discussion and analysis of certain significant factors occurring during the periods presented in the accompanying Condensed Financial Statements. Results of Operations. - ---------------------- The Company's net income for the three months ended March 31, 1997 and 1996 was $1,289,000 and $1,198,000, respectively, representing an increase of $91,000 or 8%. This increase is primarily a result of an increase in property net operating income (rental income less cost of operations, management fees paid to affiliates and depreciation expense). Rental income for the three months ended March 31, 1997 and 1996 was $2,847,000 and $2,647,000, respectively, representing an increase of $200,000 or 8%. The Company's mini-warehouse operations contributed $161,000 to the increase in rental income due primarily to increased rental rates at a majority of the Company's facilities but primarily those located in California and Washington. The Company's business park operations also showed an increase in rental income generated primarily by the Company's San Diego, California facility due to an increase in rental rates. The Company's mini-warehouse operations had weighted average occupancy levels of 90% and 89% for the three month periods ended March 31, 1997 and 1996, respectively. The Company's business park operations had weighted average occupancy levels of 97% and 98% for the three month periods ended March 31, 1997 and 1996, respectively. Cost of operations (including management fees paid to affiliates and depreciation expense) for the three months ended March 31, 1997 and 1996 was $1,499,000 and $1,378,000, respectively, representing an increase of $121,000 or 9%. This increase is mainly attributable to increases in management fees, payroll and advertising costs. In 1995, the Company prepaid eight months of 1996 management fees on its mini-warehouse operations discounted at a 14% effective rate to compensate for early payment. As a result, management fee expense for the three months ended March 31, 1996 was $17,000 lower than it would have been under the customary, undiscounted fee structure. Liquidity and Capital Resources. - -------------------------------- Cash flows from operating activities ($2,411,000 for the three months ended March 31, 1997) and cash reserves were sufficient to meet all current obligations and distributions of the Company during the three months ended March 31, 1997. Management expects cash flows from operations will be sufficient to fund capital expenditures and quarterly distributions. The Company has an unsecured revolving credit facility with a bank for borrowings up to $5,000,000. Outstanding borrowings on the credit facility, at the Company's option, bear interest at either the bank's prime rate plus .25% or the bank's LIBOR rate plus 2.25%. Interest is payable monthly until maturity. On 8 October 1, 2001, the remaining unpaid principal and interest is due and payable. At March 31, 1997 and for the three months then ended, there was no outstanding balance on the credit facility. In May 1997, the Company terminated its credit facility. In March 1997, the Company purchased land for $492,000 in order to construct additional mini-warehouse space at its Lombard, Illinois facility. The Company's Board of Directors has authorized the Company to purchase up to 1,000,000 shares of Series A common stock. As of March 31, 1997, the Company had repurchased 775,026 shares of Series A common stock, none of which were purchased in the first quarter of 1997. The bylaws of the Company provide that, during 1998, unless shareholders have previously approved such a proposal, the shareholders will be presented with a proposal to approve or disapprove (a) the sale or financing of all or substantially all of the properties and (b) the distribution of the proceeds from such transaction and, in the case of a sale, the liquidation of the Company. The Company has elected and intends to continue to qualify as a real estate investment trust ("REIT") for Federal income tax purposes. As a REIT, the Company must meet, among other tests, sources of income, share ownership, and certain asset tests. The Company is not taxed on that portion of its taxable income which is distributed to its shareholders provided that at least 95% of its taxable income is so distributed to its shareholders prior to filing of the Company's tax return. The primary difference between book income and taxable income is depreciation expense. In 1996, the Company's Federal tax depreciation was $1,701,000. Supplemental Information. - ------------------------- Funds from operations (FFO) is defined by the Company, consistent with the definition of FFO by the National Association of Real Estate Investment Trusts (NAREIT), as net income (loss) (computed in accordance with generally accepted accounting principles) before depreciation and extraordinary or non-recurring items. FFO for the three months ended March 31, 1997 and 1996 was $1,722,000 and $1,632,000, respectively. FFO is presented because the Company, as well as many industry analysts, consider FFO to be one measure of the performance of the Company, ie, one that generally reflects changes in the Company's net operating income. FFO does not take into consideration scheduled principal payments on debt and capital improvements. Accordingly, FFO is not necessarily a substitute for the Company's cash flow or net income as a measure of the Company's liquidity or operating performance or ability to pay distributions. Furthermore, the NAREIT definition of FFO does not address the treatment of certain items and all REITs do not treat items the same way in computing FFO. Accordingly, comparisons of levels of FFO among REITs may not necessarily be meaningful. Proposed Merger. - ---------------- See footnote 6 to condensed financial statements for a discussion of a proposed merger. 9 PART II. OTHER INFORMATION ITEMS 1 through 4 are inapplicable. ITEM 5. Other Information ----------------- In April 1997, the Company and Public Storage, Inc. ("PSI") agreed, subject to certain conditions, to merge. Upon the merger, each outstanding share of the Company's common stock series A (other than shares held by PSI or by holders of the Company's common stock series A ("Series A Shareholders") who have properly exercised dissenters' rights under California law ("Dissenting Shares")) will be converted into the right to receive cash, PSI common stock or a combination of the two, as follows: (i) with respect to a certain number of shares of the Company's common stock series A (not to exceed 20% of the outstanding common stock series A of the Company, less any Dissenting Shares), upon a Series A Shareholder's election, $20.76 in cash, subject to reduction as described below or (ii) that number (subject to rounding) of shares of PSI common stock determined by dividing $20.76, subject to reduction as described below, by the average of the per share closing prices on the New York Stock Exchange of PSI common stock during the 20 consecutive trading days ending on the fifth trading day prior to the special meeting of the Company's shareholders. The consideration paid by PSI to the Series A Shareholders in the merger will be reduced by the amount of cash distributions required to be paid to the Series A Shareholders by the Company prior to completion of the merger (estimated at $0.72 per share) in order to satisfy the Company's REIT distribution requirements ("Required REIT Distributions"). The consideration received by the Series A Shareholders in the merger, however, along with any Required REIT Distributions, will not be less than $20.76 per share of the Company's common stock series A, which amount represents the market value of the Company's real estate assets at March 17, 1997 (based on an independent appraisal) and interest of the Series A Shareholders in the estimated net asset value of its other assets at June 30, 1997. Additional distributions will be made to the Series A Shareholders to cause the Company's estimated net asset value allocable to the Series A Shareholders as of the date of the merger to be substantially equivalent to $20.76 per share. Upon the merger, each share of the Company's common stock series B and common stock series C (other than shares held by PSI) would be converted into the right to receive $11.82 in PSI common stock (valued as in the case of the Company's common stock series A) plus (i) any additional distributions equal to the amount by which the Company's estimated net asset value allocable to the holders of the Company's common stock series B and C as of the date of the merger exceeds $11.82 per share and (ii) the estimated Required REIT Distributions payable to the holders of the Company's common stock series B of $0.72 per share. The common stock of the Company held by PSI will be canceled in the merger. The merger is conditioned on, among other requirements, approval by the Company's shareholders. It is expected that the merger will close in June or July of 1997. PSI is the Company's mini-warehouse operator and owns 39.4% of the total combined shares of the Company's common stock series A, B and C. 10 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. A) EXHIBITS: The following exhibits are included herein: (2) Agreement and Plan of Reorganization among the Company, Public Storage Properties XVII, Inc., Public Storage Properties XVIII, Inc., Public Storage Properties XIX, Inc. and PSI dated as of April 9, 1997. Filed with PSI's Schedule 13D (Amendment No. 9) relating to the beneficial ownership of securities issued by the Company and incorporated herein by reference. (27) Financial Data Schedule B) REPORTS ON FORM 8-K A Form 8-K dated April 9, 1997 was filed on April 10, 1997, which reported under Item 5 that the Company and PSI had agreed, subject to certain conditions, to merge. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DATED: May 14, 1997 PUBLIC STORAGE PROPERTIES XVI, INC. BY: /s/ David P. Singelyn --------------------- David P. Singelyn Vice President and Chief Financial Officer 11