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 September 30, 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 1-10709
-------
PUBLIC STORAGE PROPERTIES XI, INC.
----------------------------------
(Exact name of registrant as specified in its charter)
California 95-4300881
- ---------------------------------- --------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
701 Western Avenue
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
September 30, 1997:
1,819,937 shares of $.01 par value Series A shares
184,453 shares of $.01 par value Series B shares
522,618 shares of $.01 par value Series C shares
------------------------------------------------
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Condensed Balance Sheets at September 30, 1997
and December 31, 1996 2
Condensed Statements of Income for the three
and nine months ended September 30, 1997 and 1996 3
Condensed Statement of Shareholders' Equity for the
nine months ended September 30, 1997 4
Condensed Statements of Cash Flows for the
nine months ended September 30, 1997 and 1996 5
Notes to Condensed Financial Statements 6-7
Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-11
PART II. OTHER INFORMATION 12
PUBLIC STORAGE PROPERTIES XI, INC.
CONDENSED BALANCE SHEETS
September 30, December 31,
1997 1996
------------------- ------------------
(Unaudited)
ASSETS
------
Cash and cash equivalents $2,273,000 $1,290,000
Rent and other receivables 41,000 53,000
Prepaid expenses 359,000 142,000
Real estate facilities at cost:
Building, land improvements and equipment 26,895,000 26,526,000
Land 12,118,000 12,118,000
------------------- ------------------
39,013,000 38,644,000
Less accumulated depreciation (12,877,000) (12,000,000)
------------------- ------------------
26,136,000 26,644,000
------------------- ------------------
Total assets $28,809,000 $28,129,000
=================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Accounts payable $771,000 $633,000
Dividends payable 681,000 681,000
Advance payments from renters 187,000 198,000
Shareholders' equity:
Series A common, $.01 par value, 2,828,929 shares authorized,
1,819,937 shares issued and outstanding in 1997 and 1996 18,000 18,000
Convertible Series B common, $.01 par value,
184,453 shares authorized, issued and outstanding 2,000 2,000
Convertible Series C common, $.01 par value,
522,618 shares authorized, issued and outstanding 5,000 5,000
Paid-in-capital 32,421,000 32,421,000
Cumulative net income 28,567,000 25,971,000
Cumulative distributions (33,843,000) (31,800,000)
------------------- ------------------
Total shareholders' equity 27,170,000 26,617,000
------------------- ------------------
Total liabilities and shareholders' equity $28,809,000 $28,129,000
=================== =================
See accompanying notes.
2
PUBLIC STORAGE PROPERTIES XI, INC.
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------- ---------------------------------
1997 1996 1997 1996
-------------- --------------- --------------- ----------------
REVENUES:
Rental income $1,940,000 $1,849,000 $5,644,000 $5,401,000
Interest income 23,000 9,000 55,000 20,000
-------------- --------------- --------------- ----------------
1,963,000 1,858,000 5,699,000 5,421,000
-------------- --------------- --------------- ----------------
COSTS AND EXPENSES:
Cost of operations 564,000 573,000 1,733,000 1,746,000
Management fees paid to affiliates 113,000 100,000 329,000 288,000
Depreciation 308,000 296,000 877,000 848,000
Administrative 57,000 59,000 164,000 164,000
Interest expense - - - 3,000
-------------- --------------- --------------- ----------------
1,042,000 1,028,000 3,103,000 3,049,000
-------------- --------------- --------------- ----------------
NET INCOME $921,000 $830,000 $2,596,000 $2,372,000
============== =============== =============== ================
Earnings per share:
Primary - Series A $0.47 $0.42 $1.32 $1.19
============== =============== =============== ================
Fully diluted - Series A $0.37 $0.32 $1.03 $0.93
============== =============== =============== ================
Dividends declared per share:
Series A $0.34 $0.34 $1.02 $1.02
============== =============== =============== ================
Series B $0.34 $0.34 $1.02 $1.02
============== =============== =============== ================
Weighted average Common shares outstanding:
Primary - Series A 1,819,937 1,824,804 1,819,937 1,834,481
============== =============== =============== ================
Fully diluted - Series A 2,527,008 2,531,875 2,527,008 2,541,552
============== =============== =============== ================
See accompanying notes.
3
Public Storage Properties XI, 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 1,819,937 $18,000 184,453 $2,000 522,618 $5,000
Net income
Cash distributions declared:
$1.02 per share - Series A
$1.02 per share - Series B
----------- --------- --------- -------- -------- --------
Balances at September 30, 1997 1,819,937 $18,000 184,453 $2,000 522,618 $5,000
=========== ========= ========= ======== ======== ========
Cumulative Total
Paid-in net Cumulative shareholders'
capital income distributions equity
----------- ------------- ------------- -------------
Balances at December 31, 1996 $32,421,000 $25,971,000 ($31,800,000) $26,617,000
Net income 2,596,000 2,596,000
Cash distributions declared:
$1.02 per share - Series A (1,854,000) (1,854,000)
$1.02 per share - Series B (189,000) (189,000)
----------- ------------- ------------- -------------
Balances at September 30, 1997 $32,421,000 $28,567,000 ($33,843,000) $27,170,000
=========== ============= ============= =============
See accompanying notes.
4
PUBLIC STORAGE PROPERTIES XI, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
------------------------------------------
1997 1996
------------------- --------------------
(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $2,596,000 $2,372,000
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 877,000 848,000
Decrease (increase) in rent and other receivables 12,000 (16,000)
Increase in prepaid expenses (217,000) (18,000)
Amortization of prepaid management fees - 205,000
Increase (decrease) in accounts payable 138,000 (45,000)
Decrease in advance payments from renters (11,000) (28,000)
------------------- --------------------
Total adjustments 799,000 946,000
------------------- --------------------
Net cash provided by operating activities 3,395,000 3,318,000
------------------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to real estate facilities (369,000) (311,000)
------------------- --------------------
Net cash used in investing activities (369,000) (311,000)
------------------- --------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions paid to shareholders (2,043,000) (2,068,000)
Borrowing on credit facility - 250,000
Repayment of borrowing on credit facility - (250,000)
Purchase of Company Series A common stock - (685,000)
------------------- --------------------
Net cash used in financing activities (2,043,000) (2,753,000)
------------------- --------------------
Net increase in cash and cash equivalents 983,000 254,000
Cash and cash equivalents at the beginning of the period 1,290,000 746,000
------------------- --------------------
Cash and cash equivalents at the end of the period $2,273,000 $1,000,000
=================== ====================
See accompanying notes.
5
PUBLIC STORAGE PROPERTIES XI, 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
September 30, 1997 and December 31, 1996, the results of its operations for
the three and nine months ended September 30, 1997 and 1996 and its cash
flows for the nine months then ended.
3. The results of operations for the three and nine months ended September 30,
1997 are not necessarily indicative of the results expected for the full
year.
4. Certain prior year amounts have been reclassified in order to conform with
current year presentation.
5. The Company has an unsecured revolving credit facility with a bank for
borrowings up to $3,000,000 for working capital purposes and to repurchase
the Company's stock. Outstanding borrowings on the credit facility, at the
Company's option, bear interest at either the bank's prime rate plus .25%
or the bank's LIBOR rate plus 2.25%. Interest is payable monthly. On
December 31, 1999, all unpaid principal and accrued interest is due and
payable. At September 30, 1997 and for the nine months then ended, there
was no outstanding balance on the credit facility.
6. On August 2, 1997, the Company agreed to merge with American Office Park
Properties, Inc. ("AOPP") Upon the merger of AOPP into the Company, each of
the 1,819,937 outstanding shares of the Company's common stock Series A
(other than shares held by holder of the Company's common stock series A
("Series A Shareholders") who have properly exercised dissenters' rights
under California law) would continue to be owned by the Series A
Shareholders or converted into the right to receive cash as follows: (i)
with respect to up to 20% of the outstanding common stock series A of the
Company, $20.50 in cash and (ii) the balance of the outstanding common
stock Series A of the Company would continue to be owned by the Series A
Shareholders. In the merger, (i) each share of the Company's common stock
series B and each share of the Company's common stock series C would be
6
converted into .8641 shares of the Company's common stock series A (or up
to 20% in cash) and (ii) each share of AOPP's capital stock would be
converted into 1.18 shares of the Company's common stock series A (or up to
20% in cash). At September 30, 1997, there were 3,523,500 outstanding share
of AOPP Common Stock. Based on the outstanding shares of AOPP Common Stock
at September 30, 1997, (i) approximately 4,727,000 shares of the Company's
common stock series A would be issued in the merger (assuming no cash
election) with an additional 7,206,000 shares reserved for issuance upon
conversion of partnership interest of AOPP's consolidated partnership into
the Company's common stock series A and (ii) after the merger, the
ownership of the Company by public shareholders will be reduced from
approximately 63% to 26% while that of Public Storage, Inc. will increase
from 37% to 74% (assuming no cash election and no conversion of partnership
interests). Concurrently with the merger, the Company will exchange 13 mini
warehouses for 11 commercial properties owned by Public Storage, Inc. The
merger is conditioned on, among other requirements, the Company's receipt
of a fairness opinion from a financial advisor and approval by the
Company's shareholders. Until the merger is completed, the Company has
agreed that it will not declare or pay distributions on its capital stock
or make any other distribution of assets to its shareholders other than
regular dividends at a quarterly rate not in excess of $.34 per share.
7
PUBLIC STORAGE PROPERTIES XI, 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 nine months ended September 30, 1997 and
1996 was $2,596,000 and $2,372,000, respectively, representing an increase of
$224,000 or 9%. Net income for the three months ended September 30, 1997 and
1996 was $921,000 and $830,000, respectively, representing an increase of
$91,000 or 11%. These increases are primarily the result of increases in
property net operating income (rental income less cost of operations, management
fees paid to affiliates and depreciation expense).
Rental income for the nine months ended September 30, 1997 and 1996 was
$5,644,000 and $5,401,000, respectively, representing an increase of $243,000 or
4%. Rental income for the three months ended September 30, 1997 and 1996 was
$1,940,000 and $1,849,000, respectively, representing an increase of $91,000 or
5%. The Company's mini-warehouse operations contributed $191,000 and $66,000 to
the increase in rental income for the nine and three month periods ended
September 30, 1997, respectively, compared to the same periods in 1996 due to an
increase in rental rates. The Company's business park operations also
contributed to the increase in rental income for the nine and three month
periods ended September 30, 1997 compared to the same periods in 1996 due to
increases in rental rates.
The Company's mini-warehouse operations had weighted average occupancy
levels of 93% and 92% for the nine month periods ended September 30, 1997 and
1996, respectively. The Company's business park operations had weighted average
occupancy levels of 98% for both the nine month periods ended September 30, 1997
and 1996.
Cost of operations (including management fees paid to affiliates and
depreciation expense) for the nine months ended September 30, 1997 and 1996 was
$2,062,000 and $2,034,000, respectively, representing an increase of $28,000 or
1%. This increase is primarily due to an increase in management fees and
property taxes partially offset by decreases in snow removal costs and tenant
and legal claims costs. Snow removal costs were higher in 1996 than amounts
typically incurred due to higher than normal snow levels experienced at the
Company's mini-warehouse facilities located in the eastern states. Cost of
operations for the three months ended September 30, 1997 and 1996 was $677,000
and $673,000, respectively, representing an increase of $4,000 or 1%. This
increase is mainly the result of an increase in management fees partially offset
by a decrease in repairs and maintenance 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 nine months ended
September 30, 1996 was $26,000 lower than it would have been under the
customary, undiscounted fee structure.
8
During the nine months ended September 30, 1996, the Company incurred
$3,000 in interest expense on its line of credit facility. No such expense was
incurred during the same period in 1997 since the Company did not have any
borrowings against its credit facility.
LIQUIDITY AND CAPITAL RESOURCES.
- -------------------------------
The Company believes that net cash provided by operating activities and
funds from operations (FFO) are important measures of its performance. The
Company's financial profile has been characterized by increasing net cash
provided by operating activities and increasing FFO.
Net cash provided by operating activities for the nine months ended
September 30, 1997 was $3,395,000 compared to $3,318,000 for the same period in
the prior year.
The following table summarizes the Company's ability to make capital
improvements to maintain its facilities through the use of cash provided by
operating activities. The remaining cash flow is available to the Company to pay
distributions to shareholders and repurchase its stock.
Nine months ended September 30,
-------------------------------------
1997 1996
---------------- ------------------
Net income $2,596,000 $42,372,000
Depreciation 877,000 848,000
Change in working capital (78,000) 98,000
---------------- ------------------
Net cash provided by operating activities 3,395,000 3,318,000
Capital improvements to maintain facilities (369,000) (311,000)
---------------- ------------------
Funds available for distributions to shareholders and
repurchases of stock 3,026,000 3,007,000
Cash distributions to shareholders (2,043,000) (2,068,000)
---------------- ------------------
Excess funds available for principal payments, cash
distributions to shareholders and repurchase of stock $983,000 $939,000
================ ==================
Funds from operations (FFO) is defined by the Company, consistent with the
definition of FFO by the National Association of Real Estate Investment Trusts
(NARIET) as net income (loss), computed in accordance with generally accepted
accounting principles (GAAP), before depreciation and extraordinary or
non-recurring items. FFO is presented because the Company considers FFO to be a
useful measure of the operating performance of a REIT which, together with net
income and cash flows, provides investors with a basis to evaluate the operating
and cash flow performances of a REIT. FFO does not represent net income or cash
flows from operations as defined by GAAP. FFO does not take into consideration
scheduled principal payments on debt and capital improvements. Accordingly, FFO
is not necessarily a substitute for cash flow or net income as a measure of
liquidity or operating performance or ability to make acquisitions and capital
improvements or ability to pay distributions or debt principal payments. Also,
FFO as computed and disclosed by the Company may not be comparable to FFO
computed and disclosed by other REITs.
9
Funds from operation for the Company is computed as follows:
Nine Months Ended September 30,
-------------------------------------
1997 1996
----------------- -----------------
Net income $2,596,000 $2,372,000
Depreciation 877,000 848,000
----------------- -----------------
Funds from Operations $3,473,000 $3,220,000
================= =================
The Company believes that its rental revenues and interest and other income
will sufficient in the future to meet the Company's operating expenses, capital
improvements and distributions to shareholders. The Company believes its
geographically diverse portfolio has resulted in a relatively stable and
predictable investment portfolio.
The Company has an unsecured revolving credit facility with a bank for
borrowings up to $3,000,000 for working capital purposes and to repurchase the
Company's stock. Outstanding borrowings on the credit facility, at the Company's
option, bear interest at either the bank's prime rate plus .25% or the bank's
LIBOR rate plus 2.25%. Interest is payable monthly. On December 31, 1999, all
unpaid principal and accrued interest is due and payable. At September 30, 1997
and for the nine months then ended, there was no outstanding balance on the
credit facility.
The Company's Board of Directors has authorized the Company to purchase up
to 400,000 shares of Series A common stock. As of September 30, 1997, the
Company had repurchased 301,275 shares of Series A common stock, none of which
were purchased in 1997.
The bylaws of the Company provide that, during 1997, 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 $1,229,000.
SUPPLEMENTAL INFORMATION.
- ------------------------
On August 2, 1997, the Company agreed to merge with American Office Park
Properties, Inc. ("AOPP") Upon the merger of AOPP into the Company, each of the
1,819,937 outstanding shares of the Company's common stock Series A (other than
shares held by holder of the Company's common stock series A ("Series A
Shareholders") who have properly exercised dissenters' rights under California
law) would continue to be owned by the Series A Shareholders or converted into
the right to receive cash as follows: (i) with respect to up to 20% of the
10
outstanding common stock series A of the Company, $20.50 in cash and (ii) the
balance of the outstanding common stock Series A of the Company would continue
to be owned by the Series A Shareholders. In the merger, (i) each share of the
Company's common stock series B and each share of the Company's common stock
series C would be converted into .8641 shares of the Company's common stock
series A (or up to 20% in cash) and (ii) each share of AOPP's capital stock
would be converted into 1.18 shares of the Company's common stock series A (or
up to 20% in cash). At September 30, 1997, there were 3,523,500 outstanding
shares of AOPP Common Stock. Based on the outstanding shares of AOPP Common
Stock at September 30, 1997, (i) approximately 4,727,000 shares of the Company's
common stock series A would be issued in the merger (assuming no cash election)
with an additional 7,206,000 shares reserved for issuance upon conversion of
partnership interest of AOPP's consolidated partnership into the Company's
common stock series A. After the merger, the ownership of the Company by public
shareholders will be reduced from approximately 63% to 26% while that of Public
Storage, Inc. will increase from 37% to 74% (assuming no cash election and no
conversion of partnership interests). Concurrently with the merger, the Company
will exchange 13 mini warehouses for 11 commercial properties owned by Public
Storage, Inc. The merger is conditioned on, among other requirements, the
Company's receipt of a fairness opinion from a financial advisor and approval by
the Company's shareholders. Until the merger is completed, the Company has
agreed that it will not declare or pay distributions on its capital stock or
make any other distribution of assets to its shareholders other than regular
dividends at a quarterly rate not in excess of $.34 per share.
11
PART II. OTHER INFORMATION
ITEMS 1 through 5 are inapplicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
--------------------------------
(A) EXHIBITS: The following exhibit is included herein:
(27) Financial Data Schedule
(B) REPORTS ON FORM 8-K
None
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: November 13, 1997
PUBLIC STORAGE PROPERTIES XI, INC.
BY: /s/ David P. Singelyn
---------------------
David P. Singelyn
Vice President and
Chief Financial Officer
12