SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission File Number: 1-13820
Sovran Self Storage, Inc.
-------------------------
(Exact name of Registrant as specified in its charter)
Maryland 16-1194043
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5166 Main Street
Williamsville, NY 14221
-----------------------
(Address of principal executive offices)
(Zip code)
(716) 633-1850
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(Registrant's telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Securities Exchanges on which Registered
- ---------------------------- -----------------------------
Common Stock, $.01 Par Value New York Stock Exchange
Securities registered pursuant to section 12(g) of the Act:
None
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 [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 26, 1998, 12,330,963 shares of Common Stock,
$.01 par value per share were outstanding, and the aggregate
market value of the Common Stock held by non-affiliates was
approximately $364,534,093 (based on the closing price of the
Common Stock on the New York Stock Exchange on March 26, 1998).
Purpose of amendment: This 10-K/A is being filed to amend
Item 8 to include a paragraph in note 2 to the Company's
financial statements "Summary of Significant Accounting
Policies - Investment in Storage Facilities," which discloses the
Company's policy for assessing and measuring asset impairment,
and indicates that there has been no asset impairment under this
policy and, accordingly, this policy has had no impact on the
Company's financial position or results of operations.
- 2 -
Item 8. Financial Statements and Supplementary Data
Index to
Financial Statements
Consolidated Balance Sheets at December 31, 1997 and 1996. . . 4
Consolidated Statements of Operations of the Company
for the Years ended December 31, 1997 and 1996
and the period from June 26, 1995 to December 31, 1995
and the Company Predecessors for the period January 1,
1995 to June 25, 1995 . . . . . . . . . . . . . . . . . . 5
Combined Statement of Owners' Equity for the Company
Predecessors for the Period January 1, 1995 to
June 25, 1995 . . . . . . . . . . . . . . . . . . . . . . 6
Consolidated Statements of Shareholders' Equity of the
Company for the Years ended December 31, 1997 and
1996 and the period ended December 31, 1995 . . . . . . . 7
Consolidated Statements of Cash Flows of the Company
for the Years ended December 31, 1997 and 1996 and
the period from June 26, 1995 to December 31, 1995
and the Company Predecessors for the period January 1,
1995 to June 25, 1995 . . . . . . . . . . . . . . . . . . 8
Notes to Financial Statements December 31, 1997. . . . . . . . 11
Report of Independent Auditors . . . . . . . . . . . . . . . . 22
- 3 -
FINANCIAL STATEMENTS
Consolidated Balance Sheets - Sovran Self Storage, Inc.
December 31,
______________________________________________________________
(Dollars in thousands,
except share data) 1997 1996
Assets
Investment in storage facilities:
Land $ 71,391 $ 49,591
Building and equipment 261,645 171,120
_________________________________________________________________________
333,036 220,711
Less accumulated depreciation (11,639) (5,457)
_________________________________________________________________________
Investments in storage facilities,
net 321,397 215,254
Cash and cash equivalents 2,567 16,687
Accounts receivable 834 482
Prepaid expenses and other assets 2,275 2,992
_________________________________________________________________________
Total Assets $327,073 $235,415
_________________________________________________________________________
Liabilities
Line of credit $36,000 $ -
Accounts payable and accrued
liabilities 2,167 1,197
Deferred revenue 1,994 1,367
Accrued dividends 6,599 5,567
Mortgage payable 3,559 -
_________________________________________________________________________
Total Liabilities $50,319 $8,131
Minority interest 12,843 3,655
_________________________________________________________________________
Shareholders' Equity
Common stock $.01 par value,
100,000,00 shares authorized,
12,221,121 shares issued and
outstanding (10,706,671 at
December 31, 1996) 122 107
Preferred stock, 10,000,000 shares
authorized, none issued and
outstanding, 250,000 shares
designated as Series A
Junior Participating Preferred
Stock, $.01 par value - -
Additional paid-in capital 269,982 227,719
Unearned restricted stock (32) (39)
Dividends in excess of net income (6,161) (4,158)
_________________________________________________________________________
Total shareholder' equity $263,911 $223,629
_________________________________________________________________________
Total liabilities and
shareholders' equity $327,073 $235,415
_________________________________________________________________________
See notes to financial statements.
- 4 -
Sovran Self Storage, Inc. (the Company) and Sovran Capital, Inc. and Sovran
Partnerships (the Predecessors to the Company)
Consolidated Statements of Operations of the Company and Combined
Statements of Operations of the Predecessors
Company Predecessors
___________________________________ ____________
Year Ended Year Ended For Period For Period
Dollars in thousands, December 31, December 31, 6/26/95 to 1/1/95 to
except per share data) 1997 1996 12/31/95 6/25/95
_________________________________________________________________________
Revenues:
Rental income $ 48,584 $ 32,946 $12,557 $9,260
Interest and other income 770 651 385 272
_________________________________________________________________________
Total revenues 49,354 33,597 12,942 9,532
_________________________________________________________________________
Expenses:
Property operations and
maintenance 9,708 6,662 2,533 2,061
Real estate taxes 3,955 2,464 861 708
General and administrative 2,757 2,282 974 1,574
Interest 2,166 1,924 131 3,268
Depreciation and
amortization 7,005 4,583 1,699 1,610
_________________________________________________________________________
Total expenses 25,591 17,915 6,198 9,221
_________________________________________________________________________
Income before minority
interest 23,763 15,682 6,744 311
Minority interest 644 23 - -
_________________________________________________________________________
Net income $ 23,119 $ 15,659 $ 6,744 $ 311
_________________________________________________________________________
Earnings per share -
basic $ 1.97 $ 1.88 $ 0.91 -
_________________________________________________________________________
Earnings per share -
diluted $ 1.96 $ 1.87 $ 0.91 -
_________________________________________________________________________
Dividends declared
per share $ 2.12 $ 2.05 $ 1.04 -
_________________________________________________________________________
(See notes to financial statements.)
- 5 -
Sovran Capital, Inc. and Sovran Partnerships (the Predecessors to the Company)
Combined Statement of Owners' Equity
Common Additional Accumulated Dividend
Stock Common Paid-in Owners' Treasury in Excess of Total
(Dollars in thousands) Shares Stock Capital Equity Stock Net Income Equity
________________________________________________________________________________________________________________
Balance January 1, 1995 400 - - $ 13,794 $(75) - $ 13,719
Cash distributions - - - (1,779) - - (1,779)
Cash contributions - - - 965 - - 965
Net income - - - 311 - - 311
________________________________________________________________________________________________________________
Balance June 25, 1995 400 $ - $ - $ 13,291 $(75) $ - $13,216
________________________________________________________________________________________________________________
- 6 -
Sovran Self Storage Inc. (the Company)
Consolidated Statements of Shareholders' Equity
Common Additional Unearned Dividend
Stock Common Paid in Restricted in Excess of Total
(Dollars in thousands) Shares Stock Capital Stock Net Income Equity
_______________________________________________________________________________________________________________
Balance June 26, 1995 - $ - $ - $ - $ - $ -
Issuance of common stock -
initial public offering 5,890,000 59 124,273 - - 124,332
Issuance of common stock -
private placement 422,171 4 10,128 - - 10,132
Issuance of over-allotment shares 750,000 7 16,035 - - 16,042
Issuance of shares to principal
shareholders in exchange for
their interest in Sovran
Capital, Inc. 480,000 5 291 - - 296
Net Income - - - - 6,744 6,744
Dividends - - - - (7,806) (7,806)
______________________________________________________________________________________________________________
Balance December 31, 1995 7,542,171 $75 $150,727 $ - $(1,062) $149,740
Issuance of common stock 3,162,500 32 76,941 - - 76,973
Issuance of restricted stock 2,000 - 51 (51) - -
Earned portion of restricted stock - - - 12 - 12
Net income - - - - 15,659 15,659
Dividends - - - - (18,755) (18,755)
______________________________________________________________________________________________________________
Balance December 31, 1996 10,706,671 $107 $227,719 $(39) $(4,158) $223,629
Issuance of common stock 1,500,000 15 41,929 - - 41,944
Exercise of stock options 14,250 - 328 - - 328
Issuance of restricted stock 200 - 6 (6) - -
Earned portion of restricted stock - - - 13 - 13
Net income - - - - 23,119 23,119
Dividends - - - - (25,122) (25,122)
______________________________________________________________________________________________________________
Balance December 31, 1997 12,221,121 $122 $269,982 $(32) $(6,161) $263,911
______________________________________________________________________________________________________________
(See notes to financial statements.)
- 7 -
Sovran Self Storage, Inc. (the Company) and Sovran Capital, Inc. and Sovran Partnerships (the
Predecessors to the Company)
Consolidated Statements of Cash Flows of the Company and Combined Statements of Cash Flows of the
Predecessors
Company Predecessors
______________________________________________________ _________________
Year Ended Year Ended For Period For Period
(Dollars in thousands) December 31, 1997 December 31, 1996 6/26/95 to 12/31/95 1/1/95 to 6/25/95
_________________________________________________________________________________ _________________
Operating Activities
Net income $23,119 $15,659 $6,744 $311
Adjustments to reconcile
net income to net
cash provided by
operating activities:
Depreciation and
amortization 7,005 4,583 1,699 1,610
Minority interest 644 23 - -
Restricted stock earned 13 12 - -
Changes in assets and
liabilities:
Account receivable (162) (145) (40) (46)
Prepaid expenses and other
assets (283) (182) 37 (849)
Accounts payable and other
liabilities 894 157 (1,225) 891
Deferred revenue (71) 45 (27) 86
_________________________________________________________________________________ ________________
Net cash provided by
operating activities $31,159 $20,152 $7,188 $2,003
_________________________________________________________________________________ ________________
Investing Activities
Additions to storage
facilities (98,970) (57,160) (156,780) (3,478)
Other assets 205 (1,986) (1,185) -
Restricted cash - - - 138
_________________________________________________________________________________ ________________
- 8 -
Net cash used in investing
activities $(98,765) $(59,146) $(157,965) $(3,340)
_________________________________________________________________________________ ________________
Financing Activities
Net proceeds from sale
of common stock 42,273 76,973 150,506 -
Proceeds from (payments
on) line of credit 36,000 (5,000) 5,000 -
Dividends paid (24,090) (16,997) (3,997) -
Minority interest
distributions (697) (27) - -
Proceeds from issuance
of mortgages - - - 2,821
Mortgage principal
payments - - - (1,500)
Capital contributions - - - 965
Cash distributions - - - (1,779)
_________________________________________________________________________________ _________________
Net cash provided by financing
activities $53,486 $54,949 $151,509 $507
_________________________________________________________________________________ _________________
Net (decrease) increase
in cash (14,120) 15,955 732 (830)
Cash at beginning
of period 16,687 732 - 1,045
_________________________________________________________________________________ _________________
Cash at end of period $2,567 $16,687 $732 $215
_________________________________________________________________________________ _________________
Supplemental cash flow
information
Cash paid for interest $2,238 $1,842 $234 $3,268
_________________________________________________________________________________ _________________
(See notes to financial statements.)
- 9 -
Sovran Self Storage, Inc. (the Company) and Sovran Capital, Inc. and Sovran
Partnerships (the Predecessors to the Company)
Consolidated Statements of Cash Flows of the Company and Combined
Statements of Cash Flows of the Predecessors
Supplemental cash-flow information for the years ended December 31, 1997,
and 1996.
(Dollars in thousands)
___________________________________________________________________________
1997 1996
_____________________
Storage facilities acquired through the issuance
of minority interest in the operating partnership $9,240 $3,659
Storage facilities acquired through assumption of
mortgage 3,559 -
Fair value of net liabilities assumed on the
acquisition of storage facilities 4,144 434
___________________________________________________________________________
Dividends declared but unpaid at December 31, 1997,
1996 and 1995 were $6,599, $5,567 and $3,809, respectively.
Supplemental cash-flow information for the period June 26,1995 to
December 31, 1995
(Dollars in thousands)
___________________________________________________________________________
Cash paid for partnership interest $42,865
Cash paid for acquisition properties 45,121
Cash paid to retire partnership mortgages 67,602
Prepayment penalties and closing costs 860
Cash paid for building improvements 332
___________________________________________________________________________
Cash paid for storage facilities per statement of cash flows $156,780
Fair value of net liabilities assumed of the partnerships
and Sovran Capital, Inc. 2,681
___________________________________________________________________________
Investment in storage facilities per financial statements $159,461
___________________________________________________________________________
(See notes to financial statements.)
- 10 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Sovran Self Storage, Inc. - December 31, 1997
1. ORGANIZATION
Sovran Self Storage, Inc. (the "Company"), a self-administered and
self-managed real estate investment trust (a REIT), was formed on April 19,
1995 to own and operate self-storage facilities throughout the United
States. On June 26, 1995, the Company commenced operations effective with
the completion of its initial public offering of 5,890,000 shares (the
Offering). Contemporaneously with the closing of the Offering, Sovran Self
Storage, Inc. acquired, in a transaction accounted for as a purchase,
sixty-two self-storage facilities (the Original Properties) which had been
owned and managed by Sovran Capital, Inc. and the Sovran Partnerships
(Predecessors to the Company). Purchase accounting was applied to the
acquisition of the Original Properties to the extent cash was paid to
purchase 100% of the limited-partnership interests in the Sovran
Partnerships, prepay outstanding mortgages at the time of acquisition and
for related transaction costs. Additionally, the Company acquired on that
date twelve self-storage properties from unaffiliated third parties. The
Company has since purchased a total of eighty-one (forty-four in 1997,
twenty-nine in 1996 and eight in 1995) self storage properties from
unaffiliated third parties, increasing the total number of self-storage
properties owned at December 31, 1997 to 155 properties, most of which are
in the eastern United States and Texas.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The Company was formed on April 19, 1995, and
commenced operations effective with the completion of the Offering on June
25, 1995. Accordingly, the Company's results of operations are presented
from June 26, 1995, the date following the completion of the Offering and
the establishment of REIT status, through December 31, 1997.
All of the Company's assets are owned by, and all its operations are
conducted through, Sovran Acquisition Limited Partnership (the
Partnership). Sovran Holdings, Inc., a wholly-owned subsidiary of the
Company (the Subsidiary), is the sole general partner; and the Company is a
limited partner of the Partnership, and thereby controls the operations of
the Operating Partnership holding a 96.5% ownership interest therein as of
December 31, 1997. The remaining ownership interests in the Operating
Partnership (the "Units") are held by certain former owners of assets
acquired by the Operating Partnership subsequent to the Offerings. The
consolidated financial statements of the Company include the accounts of
the Company, the Partnership, and the wholly-owned Subsidiary. All
intercompany transactions and balances have been eliminated.
The combined statements of operations for the period ended June 25,
1995 reflect the assets, liabilities and results of operations of the
Sovran Capital, Inc. and the Sovran Partnerships (the Predecessors). Such
financial statement has been presented on a combined basis, because the
entities were the subject of the business combination described in Note 1.
All intercompany transactions and balances have been eliminated.
Cash and Cash Equivalents: The Company considers all highly liquid debt
instruments purchased with maturity of three months or less to be cash
equivalents.
- 11 -
Revenue Recognition: Rental income is recorded when earned. Rental income
received prior to the start of the rental period is included in deferred
revenue.
Interest and Other Income: Other income consists primarily of interest
income, sales of storage-related merchandise (locks and packing supplies)
and commissions from truck rentals.
Investment in Storage Facilities: Storage facilities are recorded at cost.
Depreciation is computed using the straight line method over estimated
useful lives of forty years for buildings and improvements, and five to
twenty years for furniture, fixtures and equipment. Expenditures for
significant renovations or improvements which extend the useful life of
assets are capitalized. Repair and maintenance costs are expensed as
incurred.
Whenever events or changes in circumstances indicate that the basis of the
Company's property may not be recoverable, the Company's policy is to
assess whether or not there has been any impairment of value. Impairment
is evaluated based upon comparing the sum of the expected undiscounted
future cash flows to the carrying value of the property; on a property by
property basis. If the sum of the cash flows is less than the carrying
amount, an impairment loss is recognized for the amount by which the
carrying amount of the asset exceeds the fair value of the asset. At
December 31, 1997 and 1996, no assets had been determined to be impaired
under this policy and, accordingly, this policy has had no impact on the
Company's financial position or results of operations.
Prepaid Expenses and Other Assets: Included in prepaid expenses and other
assets are prepaid expenses and intangible assets. The intangible assets at
December 31, 1997, consist primarily of loan acquisition costs of
approximately $1,155, net of accumulated amortization of approximately
$771; organizational costs of approximately $63, net of accumulated
amortization of approximately $29; and covenants not to compete of $785,
net of accumulated amortization of $350. Loan acquisition costs are
amortized over the terms of the related debt; organization costs are
amortized over five years; and the covenants are amortized over the
contract periods. Amortization expense was $794 and $620 for the periods
ended December 31, 1997 and 1996, respectively.
Minority Interest: The minority interest reflects the outside ownership
interest of the limited partners of the operating Partnership. Amounts
allocated to these interests are reflected as an expense in the income
statement and increases the minority interest in the balance sheet.
Distributions to these partners reduce this balance. At December 31, 1997,
minority interest ownership was 443,609 partnership units or 3.5%.
Income Taxes: The Company qualifies as a REIT under the Internal Revenue
Code of 1986, as amended, and will generally not be subject to corporate
income taxes to the extent it distributes at least 95% of its taxable
income to its shareholders and complies with certain other requirements.
Accordingly, no provision has been made for income taxes in the
accompanying financial statements.
Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
- 12 -
3. EARNINGS PER SHARE
In 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share." All prior period per share data
has been restated to conform with the provisions of this statement. The
following table sets forth the computation of basic and diluted earnings
per share.
- 13 -
Year Ended Year Ended For Period
(Dollars in thousands, December 31, 1997 December 31, 1996 6/26/95 to 12/31/95
except per share data)
_________________________________________________________________________________________
Numerator:
Net Income $ 23,119 $ 15,659 $ 6,744
_________________________________________________________________________________________
Denominator:
Denominator for basic
earnings per share -
weighted average shares 11,759 8,329 7,430
_________________________________________________________________________________________
Effect of Dilutive Securities:
Stock options 62 35 10
Denominator for diluted
earnings per share -
adjusted weighted - average
shares and assumed
conversion 11,821 8,364 7,440
_________________________________________________________________________________________
Basic Earnings per Share $ 1.97 $ 1.88 $ .91
_________________________________________________________________________________________
Diluted Earnings per Share $ 1.96 $ 1.87 $ .91
_________________________________________________________________________________________
- 14 -
4. INVESTMENT IN STORAGE FACILITIES
The following summarizes activity in storage facilities during the years
ended December 31, 1997 and December 31, 1996
(Dollars in Thousands) 1997 1996
___________________________________________________________________________
Cost:
Beginning balance $220,711 $159,461
Property acquisitions 106,926 58,626
Improvements and equipment additions 5,527 2,640
Dispositions (128) (16)
___________________________________________________________________________
Ending balance $333,036 $220,711
___________________________________________________________________________
Accumulated Depreciation:
Beginning balance $5,457 $1,497
Additions during the year 6,211 3,964
Dispositions (29) (4)
___________________________________________________________________________
Ending balance $ 11,639 $5,457
___________________________________________________________________________
5. LINE OF CREDIT
At December 31, 1997, the Company maintained a $75 million revolving-
credit facility of which $36 million was outstanding and secured by
specific storage facilities. At December 31, 1997, the Company had
identified and pledged properties sufficient to provide $75 million of such
borrowings. Interest on outstanding balances is payable monthly at 190
basis points above LIBOR. The commitment fee was $225,000 and there is a
facility fee attached to the line at the following rates: i) .25% if the
unused commitment (UC) is less than $30 million, or ii) .375% if UC is
greater than $30 million. At December 31, 1997, the Company was at the
.375% rate.
On February 20, 1998, the Company entered into a new $150 million
unsecured credit facility which replaces in its entirety the $75 million
revolving credit facility. The new facility matures February 2001 and
provides for funds at LIBOR plus 1.375%, a savings of 52.5 basis points
over the Company's old facility. As a result of the new credit facility, in
1998 the Company will record an extraordinary loss on the extinguishment of
debt of $ 312,000, representing the unamortized financing costs of the
revolving credit facility.
6. PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The following unaudited pro forma information shows the results of
operations as though the acquisitions of storage facilities in 1997 and
1996, and the common stock offerings in 1997 and 1996 had all occurred as
of the beginning of 1996.
- 15 -
Year ended December 31,
______________________________
(Dollars in thousands, except share data) 1997 1996
_______________________________________________________________________
Total revenues $54,085 $51,455
_______________________________________________________________________
Total expenses (28,789) (27,175)
_______________________________________________________________________
Minority interest (885) (850)
_______________________________________________________________________
Net Income $ 24,411 $23,430
_______________________________________________________________________
Earnings per share - basic $ 2.00 $ 1.92
_______________________________________________________________________
Common shares used in basic earnings
per share calculation 12,221,121 12,221,121
_______________________________________________________________________
Such unaudited pro forma information is based upon the historical
consolidated statements of operations of the Company. It should be read in
conjunction with the financial statements of the Company and the
predecessors and notes thereto. In management's opinion, all adjustments
necessary to reflect the effects of these transactions have been made. This
unaudited pro forma statement does not purport to represent what the actual
results of operations of the Company would have been assuming such
transactions had been completed as set forth above, nor does it purport to
represent the results of operations for future periods.
7. STOCK OPTIONS
The Company continues to account for stock-based compensation using
the measurement prescribed by APB Opinion No. 25 which does not recognize
compensation expense because the exercise price of the stock options equals
the market price of the underlying stock on the date of grant. SFAS 123
requires companies that choose not to adopt the new fair value accounting
rules to disclose pro forma net income and earnings per share under the new
method.
The Company has established the 1995 Award and Option Plan (the Plan)
for the purpose of attracting and retaining the Company's executive
officers and other employees. The options vest ratably over four years, and
must be exercised within ten years from the date of grant. The exercise
price for qualified incentive stock options must be at least equal to the
fair market value at the date of grant. As of December 31, 1997, options
for 306,000 shares had been granted under the Plan. The total options
available under the plan is 400,000.
The Company also established the 1995 Outside Directors' Stock Option
Plan (the Non-employee Plan) for the purpose of attracting and retaining
the services of experienced and knowledgeable outside directors. The Non-
employee Plan provides for the annual granting of options to purchase 2,500
shares of common stock to each eligible director. Such options vest over a
one year period for initial awards and immediately upon subsequent grants.
- 16 -
The total shares reserved under the Non-employee Plan is 50,000. The
exercise price for options granted under the Non-employee Plan is equal to
fair market value at date of grant. As of December 31, 1997, options for
30,000 shares had been granted under the Non-employee Plan.
The Company has also issued 2,200 shares of restricted stock to
employees which vest over a four-year period. The fair value of the
restricted stock on the date of grant ranged from $25.38 to $29.19.
The fair value for these options was $2.30, which was estimated at the
date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1997: risk-free interest rate of 6%;
dividend yield of 7%, volatility factor of the expected market price of the
Company's common stock of .16.
The Black-Scholes options valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information for the year ended December 31, 1997
follows (in thousands, except for earnings per share information).
Pro forma net income $ 22,976
Pro forma earnings per share: Basic $ 1.96
Diluted $ 1.95
The pro forma effect on earnings for the years ended December 31, 1996 and
1995 was immaterial.
- 17 -
A summary of the Company's stock option activity and related information for the years ended
December 31 follows:
1997 1996 1995
________________________________________________________________________________
Weighted average Weighted average Weighted average
Options exercise price Options exercise price Options exercise price
____________________________________________________________________________________________________
Outstanding at
beginning of year: $293,500 $ 23.97 $268,000 $23.00 - $ -
Granted 34,000 29.93 28,000 25.92 274,000 23.00
Exercised (14,250) 23.00 - - - -
Forfeited (18,000) 24.53 (2,500) 23.00 (6,000) 23.00
____________________________________________________________________________________________________
Outstanding at end
of year 295,250 $ 25.36 293,500 $23.97 268,000 $ 23.00
____________________________________________________________________________________________________
Exercisable at end
of year 146,750 $ 25.12 82,000 $23.48 - -
____________________________________________________________________________________________________
Exercise prices for options outstanding as of December 31, 1997 ranged from $23.00 to $30.63. The
weighted average remaining contractual life of those options is 8.07 years.
- 18 -
8. RETIREMENT PLAN
Employees of the Company qualifying under certain age and service
requirements are eligible to be a participant in a 401(K) Plan which was
effective September 1, 1997. The Company contributes to the Plan at the
rate of 50% of the first 4% of gross wages. Total expense to the Company
was approximately $15,000 for the year ended December 31, 1997.
9. SHAREHOLDER RIGHTS PLAN
In November 1996, the Company adopted a Shareholder Rights Plan and
declared a dividend distribution of one Right for each outstanding share of
common stock. Under certain conditions, each Right may be exercised to
purchase one one-thousandth of a share of Series A Junior Participating
Preferred Stock at a purchase price of $75, subject to adjustment. The
Rights will be exercisable only if a person or group has acquired 10% or
more of the outstanding shares of common stock, or following the
commencement of a tender or exchange offer for 10% or more of such
outstanding shares of common stock. If a person or group acquires more than
10% of the then outstanding shares of common stock, each Right will entitle
its holder to receive, upon exercise, common stock having a value equal to
two times the exercise price of the Right. In addition, if the Company is
acquired in a merger or other business combination transaction, each Right
will entitle its holder to purchase that number of the acquiring Company's
common shares having a market value of twice the Right's exercise price.
The Company will be entitled to redeem the Rights at $.01 per Right at any
time prior to the earlier of the expiration of the Rights in November 2006
or the time that a person has acquired a 10% position. The Rights do not
have voting or dividend rights, and until they become exercisable, have no
dilutive effect on the Company's earnings.
As of December 31, 1997, the Company had entered into contracts for
the purchase of ten facilities. These facilities were acquired in January
and February, 1998 for a total cost of $34,145,000.
10. PREFERRED STOCK
The Company has authorized 10,000,000 shares of preferred stock, of
which 250,000 shares have been designated as Series A Junior Participating
Cumulative Preferred Stock with a $.01 par value. Upon issuance, the Series
A Junior Preferred Stock will have certain voting, dividend and liquidation
preferences over common stock, as described in the form 8-K filed
December 3, 1996.
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11. SUPPLEMENTARY QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of quarterly results of operations for the fiscal quarters since the
consummation of the offering on June 26, 1995 (dollars in thousands, except per share data)
1997 Quarter Ended
______________________________________________________
March 31 June 30 Sept. 30 Dec. 31
______________________________________________________
Revenue $10,732 $11,938 $13,320 $13,364
Net Income $ 4,871 $ 6,003 $ 6,359 $ 5,886
Net Income Per Common Share (Note 3):
Basic $ 0.46 $ 0.50 $ 0.52 $ 0.49
Diluted $ 0.46 $ 0.50 $ 0.52 $ 0.48
_____________________________________________________________________________________________
1996 Quarter Ended
______________________________________________________
March 31 June 30 Sept. 30 Dec. 31
______________________________________________________
Revenues $ 6,944 $ 7,960 $ 9,034 $ 9,659
Net Income $ 3,152 $ 3,610 $ 3,644 $ 5,253
Net Income Per Common Share (Note 3):
Basic $ 0.42 $ 0.48 $ 0.48 $ 0.50
Diluted $ 0.42 $ 0.48 $ 0.48 $ 0.49
_____________________________________________________________________________________________
1995 Quarter Ended
______________________________________________________
June 30* Sept. 30 Dec. 31
_______________________________________
Revenues $ 352 $ 6,343 $ 6,247
Net Income $ 164 $ 3,213 $ 3,367
Net Income Per Common Share (Note 3):
Basic and Diluted $ 0.02 $ 0.44 $ 0.45
____________________________________________________________________________________________
(*) Includes results for the period June 26, 1995 (Formation) to June 30, 1995.
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12. COMMITMENTS AND CONTINGENCIES
The Company's current practice is to conduct environmental
investigations in connection with property acquisitions. At this time, the
Company is not aware of any environmental contamination of any of its
facilities which individually or in the aggregate would be material to the
Company's overall business, financial condition, or results of operations.
As of December 31, 1997, the Company had entered into contracts for
the purchase of ten facilities. These facilities were acquired in January
and February, 1998 for a total cost of $34,145,000.
13. LEGAL PROCEEDINGS
A former business associate (Plaintiff) of certain officers and
directors of the Company, including Robert J. Attea, Kenneth F. Myszka,
David L. Rogers and Charles E. Lannon, filed a lawsuit against the Company
on June 13, 1995 in the United States District Court for the Northern
District of Ohio. The Plaintiff has since amended the complaint in the
lawsuit alleging breach of fiduciary duty, breach of contract, breach of
general partnership/joint venture arrangement, breach of duty of good
faith, fraud and deceit, and other causes of action including declaratory
judgement as to the Plaintiff's continuing interest in the Company. The
Plaintiff is seeking money damages in excess of $15 million, as well as
punitive damages and declaratory and injunctive relief (including the
imposition of a constructive trust on assets of the Company in which the
Plaintiff claims to have a continuing interest) and an accounting. The
amended complaint also added Messrs. Attea, Myszka, Rogers and Lannon as
additional defendants. The parties are currently involved in discovery. The
Company intends to vigorously defend the lawsuit. Messrs. Attea, Myszka,
Rogers and Lannon have agreed to indemnify the Company for cost and any
loss arising from the lawsuit. The Company believes that the actual amount
of the Plaintiff's recovery in this matter if any, would be within the
ability of these individuals to provide indemnification. The Company does
not believe that the lawsuit will have a material, adverse effect upon the
Company.
14. INTERNAL PROPERTY ACQUISITION COSTS
On March 19, 1998 the Financial Accounting Standards Board Emerging
Issues Task Force reached a consensus as to the accounting for internal
acquisition costs incurred in connection with real property. The Task
Force consensus indicates that internal costs related to the acquisition of
operating properties should be expensed as incurred. The Company has
previously capitalized such costs and will comply with the consensus
prospectively. The amount of such costs capitalized in 1997 and 1996 were
$728,000 and $755,000, respectively.
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Report of Independent Auditors
The Board of Directors and Shareholders
Sovran Self Storage, Inc.:
We have audited the accompanying consolidated balance sheets of Sovran
Self Storage, Inc. as of December 31, 1997 and 1996 and the related
consolidated statements of operations, shareholders' equity and cash flows
for the years ended December 31, 1997 and 1996 and the period from June 26,
1995 to December 31, 1995. We have also audited the combined statements of
operations, owners' equity and cash flows of Sovran Capital, Inc. and
Sovran Partnerships for the period from January 1, 1995 to June 25, 1995.
These financial statements are the responsibility of the management of
Sovran Self Storage, Inc. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Sovran Self Storage, Inc. as of December 31, 1997 and 1996, and
the consolidated results of its operations and its cash flows for the years
ended December 31, 1997 and 1996 and the period from June 25, 1995 through
December 31, 1995, and the combined results of operations and cash flows of
Sovran Capital, Inc. and Sovran Partnerships from January 1, 1995 to June
25, 1995 in conformity with generally accepted accounting principles.
Ernst & Young LLP
Buffalo, New York
January 29, 1998, except for Notes 5 & 14 for which
the date is March 24, 1998
- 22 -
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
3. Exhibit
23. Consent of Independent Auditors
- 23 -
Consent of Independent Auditors
We consent to the use of our report dated January 29, 1998 (except for
notes 5 and 14 for which the date is March 24, 1998), included in the
Annual Report on Form 10-K of Sovran Self Storage, Inc. for the year ended
December 31, 1997, with respect to the consolidated financial statements,
as amended, included in this Form 10-K/A.
We also consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 333-21679) pertaining to the 1995 Award and Option
Plan and the 1995 Directors' Stock Option Plan of Sovran Self Storage, Inc.
of our reports dated January 29, 1998 (except for notes 5 and 14 for which
the date is March 24, 1998) with respect to the consolidated financial
statements and schedules of Sovran Self Storage, Inc. included herein.
/s/ Ernst & Young LLP
Buffalo, New York
June 11, 1998
- 24 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this amended report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SOVRAN SELF STORAGE, INC.
June 15, 1998 By:/s/ David L. Rogers
David L. Rogers,
Chief Financial Officer,
Secretary, Chief Financial
Officer
Pursuant to the requirements of the Securities Exchange Act
of 1934, this amended report has been signed below by the
following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature Title Date
/s/Robert J. Attea Chairman of the June 15, 1998
Robert J. Attea Board of Directors,
Chief Executive
Officer and Director
(Principal Executive
Officer)
/s/Kenneth F. Myszka President, Chief June 15, 1998
Kenneth F. Myszka Operating Officer
and Director
/s/David L. Rogers Chief Financial June 15, 1998
David L. Rogers Officer (Principal
Financial and
Accounting Officer)
/s/John Burns Director June 15, 1998
John Burns
/s/Michael A. Elia Director June 15, 1998
Michael A. Elia
/s/Anthony P. Gammie Director June 15, 1998
Anthony P. Gammie
/s/Charles E. Lannon Director June 15, 1998
Charles E. Lannon