<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
Current Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) JUNE 30, 1995
-----------------------------
STORAGE EQUITIES, INC.
----------------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 1-8389 95-3551121
---------- ------ ----------
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification Number)
600 NORTH BRAND BLVD., GLENDALE, CALIFORNIA 91203-1241
------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 244-8080
----------------
N/A
---
(Former name or former address, if changed since last report)
1
<PAGE>
ITEM 5. OTHER EVENTS.
------------
a. Proposed Merger and Restructure
-------------------------------
Storage Equities, Inc. (the "Company") has entered into an Agreement and
Plan of Reorganization by and among Public Storage, Inc., Public Storage
Management, Inc. and the Company, dated as of June 30, 1995 (the "Agreement and
Plan of Reorganization"). The Agreement and Plan of Reorganization and the
related Agreement of Merger are filed as Exhibit 2 hereto and are incorporated
herein by this reference.
2
<PAGE>
b. Historical and Pro Forma Financial Statements
---------------------------------------------
<TABLE>
<CAPTION>
Pages
-----
<S> <C>
Operating Companies to be Acquired
- ----------------------------------
Report of independent auditors 4
Combined Statements of Assets, Liabilities and Deficit at December 31, 1994,
1993 and March 31, 1995 5
For the years ended December 31, 1994, 1993, 1992 and the
three months ended March 31, 1995 and 1994:
Combined Statements of Operations 6
Combined Statements of Cash Flows 7
Notes to Financial Statements 8
Real Estate Interests to be Acquired
- ------------------------------------
Report of independent auditors 12
Combined Summaries of Historical Information Relating to Real
Estate Interests to be Acquired for the years ended
December 31, 1994, 1993, 1992 and three months ended
March 31, 1995 13
Notes to Combined Summaries of Historical Information relating to Real Estate
Interests to be Acquired 14
Pro Forma Consolidated Financial Statements 16
</TABLE>
3
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Stockholder
Public Storage, Inc.
We have audited the accompanying combined statements of assets, liabilities and
deficit of the property management and advisory businesses of Public Storage,
Inc. (Operating Companies to be Acquired) as of December 31, 1994 and 1993 and
the related combined statements of operations and cash flows for each of the
three years in the period ended December 31, 1994. These financial statements
are the responsibility of management. 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.
The accompanying financial statements of the Operating Companies to be Acquired
were prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in a Form 8-K of Storage
Equities, Inc.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Operating Companies to be
Acquired at December 31, 1994 and 1993, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1994, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Los Angeles, California
July 10, 1995
4
<PAGE>
OPERATING COMPANIES TO BE ACQUIRED
COMBINED STATEMENTS OF ASSETS, LIABILITIES AND DEFICIT
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
AS OF AS OF DECEMBER 31,
MARCH 31, 1995 1994 1993
-------------- -------- --------
(unaudited)
<S> <C> <C> <C>
Assets:
Cash (substantially restricted) $ 1,975 $ 1,388 $ 1,498
Receivables from affiliates 2,747 3,033 2,751
Other assets 156 202 559
-------- -------- --------
Total assets $ 4,878 $ 4,623 $ 4,808
======== ======== ========
Liabilities
Accounts payable $ 515 $ 1,167 $ 1,281
Interest payable 1,775 527 561
Senior Secured Notes due 2003 70,156 70,141 74,481
-------- -------- --------
Total liabilities 72,446 71,835 76,323
-------- -------- --------
Deficit (67,568) (67,212) (71,515)
-------- -------- --------
Total liabilities and deficit $ 4,878 $ 4,623 $ 4,808
======== ======== ========
</TABLE>
See Accompanying notes.
5
<PAGE>
OPERATING COMPANIES TO BE ACQUIRED
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1995 YEARS ENDED DECEMBER 31,
-------------------- -------------------------------
1995 1994 1994 1993 1992
--------- -------- --------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues
Facility management fees,
primarily from affiliates $7,313 $6,809 $28,356 $26,012 $24,162
Advisory fee from affiliate 1,610 1,119 4,983 3,619 2,612
Merchandise operations 446 389 1,872 1,564 1,263
Interest income 39 31 199 2 31
------ ------ ------- ------- -------
Total revenues 9,408 8,348 35,410 31,197 28,068
------ ------ ------- ------- -------
Expenses
Cost of managing facilities 1,127 1,174 5,431 5,615 5,839
Cost of advisory services and
administrative expenses 1,003 725 1,850 1,410 975
Cost of merchandise 208 192 866 800 689
Interest expense 1,263 1,342 5,255 567 7,181
------ ------ ------- ------- -------
Total expenses 3,601 3,433 13,402 8,392 14,684
------ ------ ------- ------- -------
Excess of revenues over expenses
before extraordinary item 5,807 4,915 22,008 22,805 13,384
Extraordinary items
Gain on retirement of debt - - - 14,440 3,311
------ ------ ------- ------- -------
Excess of revenues over expenses $5,807 $4,915 $22,008 $37,245 $16,695
====== ====== ======= ======= =======
</TABLE>
See Accompanying notes.
6
<PAGE>
OPERATING COMPANIES TO BE ACQUIRED
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1995 YEARS ENDED DECEMBER 31,
---------------------- --------------------------------
1995 1994 1994 1993 1992
--------- --------- ---------- ---------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Excess of revenues over expenses $ 5,807 $ 4,915 $ 22,008 $ 37,245 $ 16,695
Adjustments to reconcile excess of
revenues over expenses to net
cash provided by operating
activities:
Depreciation and amortization 17 37 522 71 1,495
Gain on retirement of debt - - - (14,440) (3,311)
Changes in working capital
components 926 956 (435) 8 (386)
------- ------- -------- -------- --------
Total adjustments 943 993 87 (14,361) (2,202)
------- ------- -------- -------- --------
Net cash provided by
operating activities 6,750 5,908 22,095 22,884 14,493
------- ------- -------- -------- --------
Cash flows from financing activities:
Repurchase of debt - - - (42,905) (6,143)
Issuance of Senior Secured Notes,
net of issuance costs - - - 74,475 -
Principal payments on Senior - - (4,500) - -
Secured Notes
Net distributions to affiliates (6,163) (2,963) (17,705) (53,277) (8,082)
------- ------- -------- -------- --------
Net cash used in financing
activities (6,163) (2,963) (22,205) (21,707) (14,225)
------- ------- -------- -------- --------
Net increase (decrease) in cash 587 2,945 (110) 1,177 268
Cash at beginning of period
(including restricted cash) 1,388 1,498 1,498 321 53
------- ------- -------- -------- --------
Cash at end of period (including
restricted cash) $ 1,975 $ 4,443 $ 1,388 $ 1,498 $ 321
======= ======= ======== ======== ========
Supplemental disclosure:
Interest paid $ - $ - $ 5,129 $ 1,168 $ 5,962
======= ======= ======== ======== ========
Restricted cash $ 1,267 $ 2,563 $ - $ 1,111 $ -
======= ======= ======== ======== ========
</TABLE>
See Accompanying notes.
7
<PAGE>
OPERATING COMPANIES TO BE ACQUIRED
NOTES TO COMBINED FINANCIAL STATEMENTS
A. Basis of Presentation
The financial statements include the property management operations of
Public Storage Management, Inc. ("PSMI") and Public Storage Commercial
Properties Group, Inc. ("PSCP"), the advisory business of Public Storage
Adviser, Inc. ("Adviser") and merchandise sales operations of PSMI
(collectively "Operating Companies"). PSMI, PSCP and Adviser are
subsidiaries of Public Storage, Inc. ("PSI"). Under an Agreement and Plan
of Reorganization dated June 30, 1995, the Operating Companies, along with
real estate assets owned by PSI (other than its interest in Storage
Equities, Inc.) ("Real Estate Interests"), would be acquired by Storage
Equities, Inc. ("SEI"), a California corporation organized as a real estate
investment trust (the "Merger").
The accompanying financial statements have been prepared from the books and
records of the Operating Companies and present the assets, liabilities and
deficit of the Operating Companies as of December 31, 1994 and 1993 and
March 31, 1995, and the related revenues and expenses for the years ended
December 31, 1994, 1993, 1992 and the three months ended March 31, 1995 and
1994. Accordingly, these statements do not purport to represent the
financial position or results of operations of PSI or any of its
subsidiaries. The Combined Statements of Operations may not necessarily be
indicative of the revenues and expenses that would have resulted had the
Operating Companies operated as a stand-alone entity. Information
subsequent to December 31, 1994 is unaudited.
PSMI operated and managed, at March 31, 1995, pursuant to property
management agreements, 1,074 self-storage mini-warehouses, including 1,014
facilities owned by SEI, PSI or entities affiliated with PSI. It operated
all of the United States mini-warehouses operating under the "Public
Storage" name and all of those in which SEI has an interest.
PSCP operated and managed, at March 31, 1995, pursuant to property
management agreements, 45 commercial office buildings and light industrial
business parks, including 35 facilities owned by SEI, PSI or entities
affiliated with PSI, which operate under the Public Storage name in the
United States and all commercial facilities in which SEI has an interest.
The Adviser acts, pursuant to an advisory contract, as an investment
advisor to SEI. It advises SEI with respect to its investments and
administers the daily corporate operations of SEI for an advisory fee (see
Advisory Contract) and pays the salaries and expenses of the executive
officers, the acquisition staff of SEI and other corporate overhead,
including rent.
PSMI sells merchandise (primarily locks and boxes) to customers and tenants
at substantially all of the mini-warehouse facilities managed by PSMI.
These products are ancillary to renting storage space and are provided as a
convenience to the tenants.
B. Summary of Significant Accounting Policies
1. Method of Accounting. The financial statements are prepared in
accordance with generally accepted accounting principles.
2. Cash and cash equivalents. Cash and cash equivalents consist of
demand deposits and cash investments which are highly liquid
investments with a maturity of three months or less. Cash is invested
in commercial paper and US Government securities.
3. Depreciation and amortization. Depreciation expense represents
depreciation on equipment and is provided on a straight-line basis
over the estimated useful life of three years. Amortization expense
represents amortization of debt issuance costs and is provided on the
effective interest method over the life of the debt.
8
<PAGE>
4. Allocated costs. Included in the accompanying Statements of
Operations are allocations of expenses for corporate overhead incurred
by the Operating Companies. As the Operating Companies have not
historically operated independent of PSI, the expenses include
allocations made by PSI to the Operating Companies. In management's
opinion, the allocation methodology provides a reasonable allocation
of the costs that were incurred by the Operating Companies.
5. Income taxes. The financial statements exclude the effects of income
taxes since they reflect a partial presentation (after allocated
costs).
6. Deficit. Deficit represents the excess of assets over liabilities and
reflects the effect of net distributions, capital transactions, and
loans between the Operating Companies and affiliated companies.
C. Long-term Debt
During 1992 and 1993, debt of PSMI was extinguished through a series of
purchases from unaffiliated note holders, resulting in "extraordinary"
gains from retirement of debt of $3.3 million and $14.4 million in 1992 and
1993, respectively.
In November 1993, PSMI issued $75 million in Senior Secured Notes due 2003
("Notes"). The Notes bear interest at 7.08%, with interest and principal
payments due semi-annually. The Notes are collateralized by cash flow
rights from the property management agreements for mini-warehouses and
other assets of PSI, including trademarks and marketable and non-marketable
securities of affiliates. The Notes have various restrictive covenants on
dividends, investments and additional indebtedness. As required by the
Notes, cash is segregated between the amount which must be invested
pursuant to the terms of the Notes (restricted cash) and an amount which
may be used to declare dividends or invested without restriction.
Restricted funds of $1.1 million and $1.3 million are included in cash as
of December 31, 1993 and March 31, 1995, respectively. In addition, the
Notes contain various financial covenants. PSMI is in compliance with all
covenants.
As of December 31, 1994, the scheduled principal payments of the Notes were
as follows:
<TABLE>
<S> <C>
1995 $ 5,000,000
1996 5,750,000
1997 6,500,000
1998 7,250,000
1999 8,000,000
Thereafter 38,000,000
-----------
$70,500,000
===========
</TABLE>
D. Management Agreements
The property management agreements generally provide for compensation equal
to six percent of the gross revenues of the mini-warehouse facilities
managed, and five percent of the gross revenues of the commercial
facilities managed. Management fees of $26,835,000, $24,554,000,
$22,656,000, $6,934,000 and $6,443,000 were earned on properties in which
PSI and SEI have an interest for the years ended December 31, 1994, 1993,
1992 and for the three months ended March 31, 1995 and 1994, respectively.
The management agreements, except as noted below, are cancelable by either
party upon sixty days notice.
For the property management fees, under the supervision of the property
owners, PSMI and PSCP coordinate rental policies, rent collections,
marketing activities, the purchase of equipment and supplies, maintenance
activity, and the selection and engagement of vendors, suppliers and
independent contractors. PSMI and PSCP assist and advise the property
owners in establishing policies for the hire, discharge and supervision of
employees for the operation of their facilities, including resident
managers, assistant managers, relief managers and billing and maintenance
personnel.
9
<PAGE>
For the duration of the management agreements, PSMI grants to the property
owners a non-exclusive license to use two PSI service marks and related
designs, including the "Public Storage" name. Upon termination of the
management agreement, the property owner would no longer have the right to
use the service marks and related designs, except as described below.
In February 1995, the management agreements of sixteen companies (including
SEI) were amended to revise the termination provision. The management
agreements, as amended, provide that the agreements with respect to
properties directly owned by the sixteen companies will expire seven years
from the date modified, provided that on each anniversary of such
modification, it shall be automatically extended for one year (thereby
maintaining a seven year term) unless either party notifies the other that
the agreement is not being extended. With respect to properties in which
SEI has an interest, but are not wholly-owned by SEI, the management
agreements may be terminated upon sixty days notice by SEI and upon seven
years notice by the Operating Companies. The management agreements of the
sixteen companies may also be terminated by either party for cause, but if
terminated by the property owner, for cause, the property owner will retain
the rights to use the PSI service marks until the scheduled expiration
date.
Regardless of the termination provisions, all management agreements with
PSI affiliated entities are subject to termination upon the sale of the
facilities.
E. Advisory Contract
Pursuant to an advisory contract, the Adviser, for an advisory fee, directs
SEI, under the supervision of SEI's Board of Directors, with respect to its
investments and daily corporate operations. The contract provides for the
monthly payment of advisory fees equal to the sum of (i) 12.75% of SEI's
adjusted income (as defined, and after reduction for SEI's share of capital
improvements) per share of SEI common stock on the first 14,989,454 shares
outstanding and (ii) 6% of adjusted income per share on common shares in
excess of 14,989,454 of SEI common stock. The advisory contract provides
that, in computing the advisory fee, adjusted income will be reduced by
dividends paid on all SEI preferred stock and that the Adviser will also
receive an amount equal to 6% of such dividends.
The Adviser is not entitled to its advisory fee with respect to services
rendered during any quarter in which full cumulative dividends on SEI's
senior preferred stock have not been paid or declared and funds therefor
set aside for payment.
The Adviser is also entitled to a disposition fee equal to 20% of the total
net realized gain (as defined) from the disposition of SEI's investments.
Payment of the disposition fees is subject to limitations based on SEI's
distributions.
The advisory contract may be terminated at any time by either party upon
sixty days written notice. Except under certain conditions, upon
termination, the Adviser generally will be entitled to receive (i) an
amount equal to the accrued and unpaid portion of the disposition fee, (ii)
an amount equal to 20% of the total net unrealized gain (as defined), less
20% of unrealized losses (as defined) and (iii) an amount equal to 15% of
adjusted income (as defined) from October 1, 1991 to the date of
termination minus the advisory fee paid from October 1, 1991 to the date of
termination.
The Adviser pays the salaries and expenses of the executive officers, the
acquisition staff of SEI and other corporate overhead, including rent.
10
<PAGE>
F. Contingencies
PSI and PSMI have entered into various operating leases including a lease
for the facilities utilized by personnel of the Operating Companies. Rent
of $748,000, $725,000, $777,000, $188,000 and $213,000 is included in the
Statements of Operations for the years ended December 31, 1994, 1993, and
1992 and the three months ended March 31, 1995 and 1994, respectively,
related to these leases.
Minimum lease payments due under these leases as of December 31, 1994 are:
<TABLE>
<CAPTION>
<S> <C>
1995 $841,000
1996 397,000
1997 129,000
1998 107,000
1999 5,000
</TABLE>
In connection with the management of mini-warehouses, funds relating to
property tax impounds were held on behalf of non-affiliates and affiliates
in the approximate amounts of $913,000 and $1,000,000, respectively, at
December 31, 1994 and $891,000 and $1,183,000, respectively, at December
31, 1993. The impounds are not reflected in the accompanying Statement of
Assets, Liabilities and Deficit.
The Operating Companies are involved in various legal proceedings arising
from the normal course of business. In the opinion of management, the
ultimate outcome of these proceedings will not have a material effect on
the Operating Companies' financial position or results of operations.
11
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Stockholder
Public Storage, Inc.
We have audited the accompanying combined summaries of historical information
relating to real estate interests to be acquired (the "Combined Summaries") for
each of the three years in the period ended December 31, 1994. The Combined
Summaries are the responsibility of management. Our responsibility is to
express an opinion on the Combined Summaries 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 Combined Summaries are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the Combined Summaries. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall Combined Summaries presentation.
We believe that our audits provide a reasonable basis for our opinion.
The accompanying Combined Summaries were prepared for the purpose of complying
with rule 3-14 of Regulation S-X of the Securities and Exchange Commission for
inclusion in a Form 8-K of Storage Equities, Inc.
In our opinion, the Combined Summaries present fairly the operating revenues and
specified expenses of the real estate interests to be acquired for each of the
three years in the period ended December 31, 1994, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Los Angeles, California
July 10, 1995
12
<PAGE>
COMBINED SUMMARIES OF HISTORICAL INFORMATION RELATING TO
REAL ESTATE INTERESTS TO BE ACQUIRED
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEARS ENDED DECEMBER 31,
MARCH 31, 1995 --------------------------------
(UNAUDITED) 1994 1993 1992
--------------- --------- --------- --------
<S> <C> <C> <C> <C>
Operating revenues:
Rental revenues $62,006 $244,165 $221,938 $198,917
Interest income 801 3,719 4,602 5,986
------- -------- -------- --------
62,807 247,884 226,540 204,903
------- -------- -------- --------
Specified expenses:
Cost of operations 19,092 75,566 73,111 70,801
Management fees paid to affiliates 3,681 14,592 13,226 11,825
Depreciation 10,389 41,982 42,808 43,556
General and administrative 1,631 5,904 6,135 7,830
Interest expenses 2,558 9,981 10,860 11,038
------- -------- -------- --------
37,351 148,025 146,140 145,050
------- -------- -------- --------
Excess of operating revenues over
specified expenses:
After depreciation expense $25,456 $ 99,859 $ 80,400 $ 59,853
======= ======== ======== ========
Before depreciation expense
(funds from operations)
(unaudited) $35,845 $141,841 $123,208 $103,409
======= ======== ======== ========
Earnings before interest, taxes,
depreciation and amortization
(EBITDA) (unaudited) $38,403 $151,822 $134,068 $114,447
======= ======== ======== ========
REAL ESTATE INTERESTS BEING ACQUIRED:
Excess of operating revenues
over specified expenses:
After depreciation expense $ 6,053 $ 23,697 $ 18,773 $ 14,283
======= ======== ======== ========
Before depreciation expense
(funds from operations) (unaudited) $ 8,427 $ 33,196 $ 28,609 $ 24,317
======= ======== ======== ========
Earnings before interest, taxes,
depreciation and amortization (EBITDA)
(unaudited) $ 9,128 $ 35,890 $ 31,570 $ 27,435
======= ======== ======== ========
</TABLE>
See Accompanying notes.
13
<PAGE>
NOTES TO COMBINED SUMMARIES OF HISTORICAL INFORMATION
RELATING TO REAL ESTATE INTERESTS TO BE ACQUIRED
A. Background and Basis for Combination
The accompanying Combined Summaries of Historical Information Relating to
Real Estate Interests to be Acquired (the "Combined Summaries") include the
results of operations for the years ended December 31, 1994, 1993, and 1992
and the three months ended March 31, 1995 for the real estate assets in
which Storage Equities, Inc. ("SEI") proposes to acquire an interest ("Real
Estate Interests").
Under an Agreement and Plan of Reorganization dated June 30, 1995, the Real
Estate Interests, along with the Operating Companies of Public Storage,
Inc. (PSI), would be acquired by SEI.
B. Real Estate Interests
SEI is acquiring Real Estate Interests comprised of Real Estate Equity
Interests and ten notes receivable. Real Estate Equity Interests include
equity ownership in sixty-three REITs and partnerships which own 511 mini-
warehouse and 15 commercial facilities, all operated under the "Public
Storage" name.
Specifically, the Real Estate Equity Interests consists of:
. Class A, B, C and D shares of finite life REITs. These shares represent
between 15% and 30% of the economic interest in each entity;
. General and limited partner interests, on average, representing
approximately 25% of the economic interest in each entity; and
. Seven properties, consisting of six mini-warehouses and one business
park in which a 100% fee interest is being acquired.
Depreciation expense represents depreciation on the assets of the Real
Estate Equity Interests in which an interest is being acquired and is
typically provided on a straight line basis over the estimated useful life
of twenty five years.
The sixty-three REITs and partnerships in which SEI is acquiring an
interest have the following assets, liabilities, owner's equity and income
for the years ended December 31, 1994, 1993 and 1992 and the three months
ended March 31, 1995:
<TABLE>
<CAPTION>
Three Months Years ended December 31,
Ended 3/31/95 ------------------------------------
(unaudited) 1994 1993 1992
--------------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Assets $1,261,091 $1,273,297 $1,312,289 $1,342,144
Liabilities 127,805 130,206 131,435 133,267
-----------------------------------------------------------
Owners' equity $1,133,286 $1,143,091 $1,180,854 $1,208,877
-----------------------------------------------------------
Net income $ 24,940 $ 97,774 $ 78,635 $ 58,022
===========================================================
Earnings before interest taxes,
depreciation and amortization (EBITDA)
(unaudited) $ 37,675 $ 148,896 $ 131,380 $ 111,589
===========================================================
</TABLE>
14
<PAGE>
C. Mortgage loans
Included in the Real Estate Interests are ten notes receivable with an
aggregate carrying amount of $8,141,000 at December 31, 1994 and which are
secured by mini-warehouse facilities. Four of the notes are subject to
underlying mortgage debt. Interest income and interest expense are
included in the Combined Summaries with respect to the notes receivable and
underlying mortgage debt, respectively.
The notes receivable have interest rates ranging from 7.0% to 14.5%
(weighted average of 11.8%) and mature from 1995 to 2013. The underlying
mortgages have interest rates ranging from 7.1% to 9.9% (weighted average
of 7.5%) and are due from 1997 to 2000.
D. Debt
SEI will assume approximately $4,807,000 in debt consisting of underlying
debt related to four of the notes receivable and mortgage debt secured by
one facility. The debt bears interest at rates ranging from 7.1% to 9.9%.
The repayment of principal related to this debt at December 31, 1994 is due
as follows:
<TABLE>
<CAPTION>
<S> <C>
1995 $ 213,000
1996 231,000
1997 1,038,000
1998 2,633,000
1999 561,000
Thereafter 131,000
----------
$4,807,000
==========
</TABLE>
E. Environmental Matters
The majority of the Real Estate Equity Interests were developed or acquired
prior to the time it was customary to conduct environmental assessments.
However, subsequent to their development or acquisition, many of the
properties have had environmental assessments completed. These assessments
did not indicate the requirement for significant remediation or further
assessments.
15
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated financial statements were
prepared to reflect the Merger transaction between Storage Equities, Inc.
("SEI") and Public Storage Management, Inc. ("PSMI"). As a condition to closing
the Merger, the SEI Articles of Incorporation must be amended to increase the
number of authorized shares of, and reclassify, the outstanding SEI Common
Stock into Common Stock and Class B Common Stock. Prior to the Merger, PSCP, the
Adviser and Real Estate Interests will be combined into PSMI. Upon consummation
of the Merger, (i) PSMI will be merged with and into SEI, which will be the
surviving corporation, (ii) SEI will be renamed "Public Storage, Inc.," and
(iii) the capital stock of PSMI will be converted into an aggregate of
30,000,000 shares of Common Stock and 7,000,000 shares of Class B Common Stock,
subject to post closing adjustment.
Immediately following the Merger, SEI will own the Operating Companies and the
Real Estate Interests , which include (1) the "Public Storage" name, (2) seven
wholly owned properties, (3) all inclusive deeds of trust secured by ten mini-
warehouses, (4) general and limited partnership interests in 47 limited
partnerships owning an aggregate of 286 mini-warehouses and one commercial
property, (5) equity interests in 16 REITs which, exclusive of SEI's
facilities, own an aggregate of 219 mini-warehouses and 13 commercial
properties, (6) property management contracts, exclusive of SEI's facilities,
for 652 mini-warehouses and 29 commercial properties (611 of which collectively
are owned by entities affiliated with PSI), and (7) a 95% economic interest in
a merchandise company which currently sells locks and boxes to PSI's mini-
warehouse tenants and others.
In addition to adjustments to reflect the proposed Merger, pro forma
adjustments were made to reflect the following transactions:
ISSUANCE OF PREFERRED AND COMMON STOCK:
. On February 15, 1994, SEI issued 5,484,000 shares of Common Stock in
a public offering. The net offering proceeds were approximately $76.5
million, which combined with the use of cash reserves were used to
repay debt, acquire real estate facilities, acquire mortgage notes
receivable and acquire additional minority interests.
. On June 30, 1994, SEI issued 1,200,000 shares of Adjustable Rate
Cumulative Preferred Stock, Series C (the "Series C Preferred Stock").
The aggregate net offering proceeds of the offering ($28.9 million)
were used to retire bank borrowings (borrowings which were used
primarily to acquire real estate facilities and minority interests in
real estate partnerships).
. On September 1, 1994, SEI issued 1,200,000 shares of 9.5% Cumulative
Preferred Stock, Series D (the "Series D Preferred Stock"). The
aggregate net offering proceeds of the offering ($29.0 million) were
used to acquire real estate facilities and minority interests in real
estate partnerships.
. On November 25, 1994, SEI issued 2,500,000 shares of Common Stock in a
public offering. The offering provided net proceeds of approximately
$33.8 million, which were utilized to repay borrowings on SEI's credit
facilities (borrowings which were used to fund the acquisition of real
estate facilities, minority interests and the cash portion of the PSP
VIII merger, see below).
. On February 1, 1995, SEI issued 2,195,000 shares of 10% Cumulative
Preferred Stock, Series E (the "Series E Preferred Stock"). The
aggregate net offering proceeds of $52.9 million were used to acquire
real estate facilities, minority interests in real estate partnerships
and retire bank borrowings (borrowings which were used to acquire real
estate facilities).
. On May 3, 1995, SEI issued 2,300,000 shares of 9.75% Cumulative
Preferred Stock, Series F (the "Series F Preferred Stock"). The
aggregate net offering proceeds of $55.6 million were used to acquire
real estate facilities, minority interests in real estate partnerships
and retire bank borrowings (borrowings which were used to acquire real
estate facilities).
. On May 31, 1995, SEI issued 5,482,200 shares of Common Stock in a
public offering. The aggregate net offering proceeds of $82.0 million
were used to acquire real estate facilities.
16
<PAGE>
MERGERS:
. On September 30, 1994, SEI completed a merger transaction with Public
Storage Properties VIII, Inc. ("PSP VIII") whereby SEI acquired all of
the outstanding shares of PSP VIII's common stock for an aggregate cost
of $55,839,000, consisting of the issuance of 2,593,914 shares of SEI
Common Stock and $17,341,000 in cash.
. On February 28, 1995, SEI completed a merger transaction with Public
Storage Properties VI, Inc. ("PSP VI") whereby SEI acquired all of the
outstanding shares of PSP VI's common stock for an aggregate cost of
$65,343,000, consisting of the issuance of 3,147,015 shares of SEI
Common Stock and $21,427,000 in cash.
. On June 30, 1995, SEI completed a merger transaction with Public
Storage Properties VII, Inc. ("PSP VII") whereby SEI acquired all of
the outstanding shares of PSP VII's common stock for an aggregate cost
of $72,128,000 consisting of the issuance of approximately 3,620,543
shares of SEI Common Stock and $14,426,000 in cash.
The pro forma consolidated balance sheet at March 31, 1995 has been prepared to
reflect (i) the issuance and utilization of the net offering proceeds of the
Preferred and Common Stock issued subsequent to March 31, 1995, (ii) the merger
transaction with PSP VII, and (iii) the proposed Merger with PSMI.
The pro forma consolidated statement of income for the three months ended March
31, 1995 has been prepared assuming (i) the issuance of Preferred and Common
Stock and the utilization of the proceeds therefrom, (ii) the merger
transactions with PSP VI and PSP VII, and (iii) the proposed Merger, as if all
such transactions were completed at the beginning of the period. The pro forma
consolidated statement of income for the year ended December 31, 1994 has been
prepared assuming (i) the issuance of the Preferred and Common Stock and the
utilization of the proceeds therefrom, (ii) the merger transactions with PSP
VIII, PSP VI and PSP VII, and (iii) the proposed Merger, as if all such
transactions were completed on January 1, 1994.
The pro forma consolidated statement of cash flows for the three months ended
March 31, 1995 and year ended December 31, 1994 have been prepared on the same
basis as the pro forma consolidated statement of income for the same period.
The pro forma adjustments are based upon available information and upon certain
assumptions as set forth in the notes to the pro forma consolidated financial
statements that SEI believes are reasonable in the circumstances. The pro forma
condensed consolidated financial statements and accompanying notes should be
read in conjunction with the historical consolidated financial statements of
SEI, the combined financial statements of the "Operating Companies," and the
combined summaries of historical information relating to the operating revenues
and specified expenses of "Real Estate Interests." The following pro forma
consolidated financial statements do not purport to represent what SEI's results
of operations would actually have been if the transactions in fact had occurred
at the beginning of the respective periods or to project SEI's results of
operations for any future date or period.
17
<PAGE>
INDEX TO PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Pages
-----
<S> <C>
. Pro forma consolidated balance sheet at March 31, 1995................ 19
. Pro forma consolidated statements of income:
. For the three months ended March 31, 1995.......................... 28
. For the year ended December 31, 1994............................... 29
. Pro forma consolidated statements of cash flows:
. For the three months ended March 31, 1995.......................... 40
. For the year ended December 31, 1994............................... 41
</TABLE>
18
<PAGE>
STORAGE EQUITIES, INC.
CONSOLIDATED PRO FORMA BALANCE SHEET
MARCH 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
SEI
---------------------------------------------------------------------------
Pro Forma Adjustments
-----------------------------------
Issuance of SEI
Preferred and PSP VII Pre-Merger
SEI (Historical) Common Stock(1) Merger(2) (Pro Forma)
---------------- --------------- ------------- -----------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 20,532,000 $ (2,362,000) $(18,596,000) $ (426,000)
Investments in real estate entities 9,570,000 - - 9,570,000
Real estate facilities, net of
accumulated depreciation 878,269,000 169,816,000 74,300,000 1,122,385,000
Mortgage loans receivable, primarily
from affiliates 20,545,000 (20,545,000) - -
Unallocated purchase cost - - - -
Intangible assets - - 1,277,000 1,277,000
Other assets 3,421,000 - 539,000 3,960,000
------------- ------------ ------------ --------------
Total assets $ 932,337,000 $146,909,000 $ 57,520,000 $1,136,766,000
============= ============ ============ ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Note payable to banks $ 35,000,000 $(35,000,000) $ - $ -
Senior Notes - - - -
Mortgage notes payable 52,119,000 56,160,000 - 108,279,000
------------- ------------ ------------ --------------
Total debt 87,119,000 21,160,000 - 108,279,000
Accrued and other liabilities 14,893,000 - 1,268,000 16,161,000
Minority interest 133,893,000 (12,000,000) - 121,893,000
Shareholder's equity:
Preferred Stock, $0.1 par value, 50,000,000
shares authorized:
Senior Preferred Stock 220,150,000 57,500,000 - 277,650,000
Convertible Preferred Stock 57,500,000 - - 57,500,000
Common stock, $.10 par value, 60,000,000
shares authorized 32,838,310 shares issued
and outstanding (78,941,053 pro forma
shares issued and outstanding)
Common Stock (71,941,053 issued and
outstanding) 3,284,000 548,000 362,000 4,194,000
Class B (7,000,000 issued and outstanding) - - - -
Paid-in capital 424,965,000 79,701,000 55,890,000 560,556,000
Cumulative net income 185,685,000 - - 185,685,000
Cumulative distribution paid (195,152,000) - - (195,152,000)
Deficit - - - -
------------- ------------ ------------ --------------
Total shareholders' equity 696,432,000 137,749,000 56,252,000 890,433,000
------------- ------------ ------------ --------------
Total liabilities and shareholders' equity $ 932,337,000 $146,909,000 $ 57,520,000 $1,136,766,000
============= ============ ============ ==============
Book Value per share of Common Stock $ 12.75 $ 13.24
============= ==============
<CAPTION>
Pro Forma Merger Adjustments
-----------------------------------
Operating SEI
Companies Post-Merger
(Historical) Purchase(3) Valuation(3) (Pro Forma)
---------------- --------------- ------------- -----------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 1,975,000 $ - $ - $ 1,549,000
Investments in real estate entities - - 365,000,000 374,570,000
Real estate facilities, net of
accumulated depreciation - - 19,943,000 1,142,328,000
Mortgage loans receivable, primarily
from affiliates - - 8,050,000 8,050,000
Unallocated purchase cost - 555,500,000 (555,500,000) -
Intangible assets - - 235,176,000 236,453,000
Other assets 2,903,000 - - 6,863,000
------------- ------------ ------------ --------------
Total assets $ 4,878,000 $555,500,000 $ 72,669,000 $1,769,813,000
============= ============ ============ ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Note payable to banks $ - $ - $ - $ -
Senior Notes 70,156,000 - 344,000 70,500,000
Mortgage notes payable - - 4,757,000 113,036,000
------------- ------------ ------------ --------------
Total debt 70,156,000 - 5,101,000 183,536,000
Accrued and other liabilities 2,290,000 2,000,000 - 20,451,000
Minority interest - - - 121,893,000
Shareholder's equity:
Preferred Stock, $0.1 par value, 50,000,000
shares authorized:
Senior Preferred Stock - - - 277,650,000
Convertible Preferred Stock - - - 57,500,000
Common stock, $.10 par value, 60,000,000
shares authorized 32,838,310 shares issued
and outstanding (78,941,053 pro forma
shares issued and outstanding)
Common Stock (71,941,053 issued and
outstanding) - 3,000,000 - 7,194,000
Class B (7,000,000 issued and outstanding) - 700,000 - 700,000
Paid-in capital - 549,800,000 - 1,110,356,000
Cumulative net income - - - 185,685,000
Cumulative distribution paid - - - (195,152,000)
Deficit (67,568,000) - 67,568,000 -
------------- ------------ ------------ --------------
Total shareholders' equity (67,568,000) 553,500,000 67,568,000 1,443,933,000
------------- ------------ ------------ --------------
Total liabilities and shareholders' equity $ 4,878,000 $555,500,000 $ 72,669,000 $1,769,813,000
============= ============ ============ ==============
Book Value per share of Common Stock $ 15.41
==============
</TABLE>
See Accompanying Notes to Pro Forma Consolidated Balance Sheet.
19
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
MARCH 31, 1995
(Unaudited)
1. Issuance of Preferred and Common Stock
--------------------------------------
Subsequent to March 31, 1995, SEI issued 2,300,000 shares ($25 stated value
per share) of its Series F Preferred Stock (May 3, 1995) and 5,482,200
shares (issued at $15.875 per share) of its Common stock (May 31, 1995).
The net offering proceeds and utilization of the proceeds therefrom is as
follows:
<TABLE>
<S> <C>
Net offering proceeds:
Series F Preferred Stock $ 55,689,000
Common Stock 82,060,000
------------
$137,749,000
============
Uses:
Cash portion of real estate facilities acquired or pending
acquisition (see below) $ 93,111,000
Repayment of bank borrowings 35,000,000
Acquisition of minority interests (see below) 12,000,000
Utilization of cash reserves (2,362,000)
------------
$137,749,000
============
</TABLE>
The following pro forma adjustments were made to reflect the above
transactions:
<TABLE>
<S> <C>
. Cash and cash equivalents were decreased to reflect the utilization
of cash reserves $ (2,362,000)
============
. Real estate facilities were increased to reflect the acquisition of
mini-warehouse facilities:
Cash portion of acquisition cost $ 93,111,000
Cancellation of mortgage notes receivable secured by
acquired mini-warehouses facilities 20,545,000
Assumption of mortgage notes payable secured by acquired
mini-warehouse facilities 56,160,000
------------
$169,816,000
============
</TABLE>
The pro forma adjustment to real estate facilities includes the pending
acquisition of real estate facilities with an aggregate cost of
approximately $111.8 million. SEI is currently in the process of seeking
the approval of the limited partners of several limited partnerships to
sell the partnerships' real estate facilities to SEI for cash, the
cancellation of mortgage debt owed to SEI and the assumption of mortgage
debt secured by the facilities. There is no assurance that such
transactions will be approved by the limited partners of each of the
partnerships and therefore consummated; however, SEI believes, based on
past experience, that the approval of the limited partners is probable.
20
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
MARCH 31, 1995
(Unaudited)
<TABLE>
<S> <C>
. Mortgage notes receivable were decreased to reflect
the cancellation of notes in connection with the
acquisition of mini-warehouse facilities securing
such notes $ (20,545,000)
=============
. Note payable to banks was decreased to reflect the
utilization of the net offering proceeds $ (35,000,000)
=============
. Mortgage notes payable were increased to
reflect the assumption of such notes in
connection with the acquisition of
mini-warehouse facilities $ 56,160,000
=============
. Minority interest was decreased to reflect the
pending acquisition of such interests $ (12,000,000)
=============
SEI has commenced a cash tender offer to acquire
limited partnership units in PS Partners VI, Ltd.,
a limited partnership in which SEI currently owns
significant interests in and whose accounts are
consolidated with SEI. SEI estimates that it
will acquire approximately $12 million of limited
partnership units in the partnership pursuant to
the cash tender offer. The acquisition of units
has the effect of reducing minority interest.
. Senior Preferred Stock has been increased to reflect
the issuance of 2,300,000 shares of Series F
Preferred Stock ($25 stated value) $ 57,500,000
=============
. Common stock has been increased to reflect the
issuance of 5,482,200 shares with a par value
of $.10 per share $ 548,000
=============
. Paid-in Capital has been increased to reflect (i)
the gross offering proceeds in excess of the stated
value of the Series F Preferred Stock and the par
value of the Common Stock and (ii) reduced for
offering costs and expenses $ 79,701,000
=============
</TABLE>
21
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
MARCH 31, 1995
(UNAUDITED)
2. PSP VII Merger (the "PSP VII Merger")
-------------------------------------
On June 14, 1995, the shareholders of SEI and PSP VII approved the merger
between each of the corporations. Pursuant to the PSP VII Merger, on June
30, 1995, PSP VII was merged with and into SEI, and the outstanding PSP VII
common stock (3,806,491 shares) were converted into an aggregate of
approximately (i) 3,620,543 shares of SEI Common and (ii) $14,426,000 in
cash.
The PSP VII Merger has been accounted for using the purchase method of
accounting and the total purchase cost has been allocated to the acquired net
assets; first to the tangible and identifiable intangible assets and
liabilities of PSP7 based upon their respective fair values, and the
remainder, if any, will be allocated to excess of purchase cost over book
value of assets acquired. The aggregate purchase cost to be paid to the
shareholders of PSP VII has been determined to be the sum of (1) the fair
market value of PSP VII's real estate assets, (2) the estimated book value of
PSP VII's non-real estate assets as of March 31, 1995 less (3) PSP VII's
estimated liabilities as of March 31, 1995, including an estimated adjustment
for potential environmental matters. In addition, concurrent with the PSP VII
Merger, PSP VII's outstanding Series D common stock was repurchased and
retired. The aggregate purchase cost and its preliminary allocation to the
historical assets and liabilities is as follows:
<TABLE>
<CAPTION>
Pro forma
PSP VII Pro forma adjustments to reflect PSP VII
Historical ---------------------------------- Merger
3/31/95 Purchase (a) Merger (a) Adjustments
------------ --------------- -------------- ------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 1,103,000 $(19,699,000) $ - $(18,596,000)
Investment in real estate entities - 72,128,000 (72,128,000) -
Real estate facilities, at cost: 38,151,000 - 36,149,000 74,300,000
Unallocated excess purchase cost
over net assets acquired - - 1,277,000 1,277,000
Other assets 539,000 - - 539,000
------------ ------------ ------------ ------------
Total assets $ 39,793,000 $ 52,429,000 $(34,702,000) $ 57,520,000
============ ============ ============ ============
Accrued and other liabilities $ 2,334,000 $ (1,066,000) $ - $ 1,268,000
Shareholders' equity:
Common stock 38,000 362,000 (38,000) 362,000
Paid-in capital 49,827,000 53,133,000 (47,070,000) 55,890,000
Cumulative net income 55,566,000 - (55,566,000) -
Cumulative distributions paid (67,972,000) - 67,972,000 -
------------ ------------ ------------ ------------
Total shareholders' equity 37,459,000 53,495,000 (34,702,000) 56,252,000
------------ ------------ ------------ ------------
Total liabilities and
shareholders' equity $ 39,793,000 $ 52,429,000 $(34,702,000) $ 57,520,000
============ ============ ============ ============
</TABLE>
22
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
MARCH 31, 1995
(UNAUDITED)
<TABLE>
<S> <C>
Note (a):
---------
Purchase cost, including related fees (see related adjustments below):
Acquisition of 3,806,491 shares of PSP VII Common Stock:
Fair value of real estate facilities acquired (based upon appraised values) $74,300,000
Estimated fair value of other assets at March 31, 1995 539,000
Cash balance at March 31, 1995 1,103,000
Estimated fair value of liabilities at March 31, 1995 (2,334,000)
-----------
Estimated fair value of net assets acquired 73,608,000
Less: Repurchase and retirement of PSP VII's Series D common stock (2,757,000)
Add: Estimated net increase in PSP VII's net current assets
projected as of June 30, 1995 1,277,000
-----------
$72,128,000
===========
Preliminary allocation of purchase cost:
Net assets acquired at historical amounts $37,459,000
Repurchase and retirement of PSP VII's Series D common stock (2,757,000)
-----------
Adjusted net assets acquired at historical amounts 34,702,000
Adjustments to reflect the fair value of the real estate
facilities acquired 36,149,000
Unallocated excess purchase cost over net assets acquired 1,277,000
-----------
$72,128,000
===========
</TABLE>
The purchase cost consisted of the payment of cash ($14,426,000) and the
issuance of SEI Common Stock ($57,702,000, as determined using a closing price
of $15.9375 per share of SEI Common Stock). The unallocated excess purchase cost
over the net assets acquired will ultimately be allocated to the fair value of
PSP VII's current assets and liabilities as of the completion of the PSP VII
Merger, although no material differences are expected.
Pro forma "Purchase" Adjustments:
- ---------------------------------
The following pro forma adjustments have been made assuming the PSP VII
Merger is consummated as of March 31, 1995:
<TABLE>
<S> <C>
. Cash and cash equivalents has been decreased
to reflect:
The cash portion of the purchase price $(14,426,000)
Fees and expense expected to be incurred by SEI (1,450,000)
Repurchase and retirement of PSP VII's Series D
common stock (2,757,000)
Payment of accrued distributions as of
March 31, 1995 (1,066,000)
------------
Net reduction to cash and cash equivalents $(19,699,000)
============
</TABLE>
23
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
MARCH 31, 1995
(UNAUDITED)
<TABLE>
<S> <C>
. Investment in real estate entities has been
increased to reflect the aggregate purchase
cost of the PSP VII Merger $ 72,128,000
============
. Shareholders' equity has been increased to reflect
the issuance of Common Stock in connection with
the PSP VII Merger:
Common Stock (issuance of approximately 3,620,543
shares of SEI Common Stock, par value of $.10 per share) $ 362,000
Paid in capital 57,340,000
------------
Equity portion of purchase cost 57,702,000
Additional adjustment to "Paid in capital" to reflect:
Repurchase and retirement of PSP VII's Series D
common stock (2,757,000)
Estimated fees and expenses of issuing Common Stock (1,450,000)
------------
Total adjustment to shareholders' equity $ 53,495,000
============
. Accrued and other liabilities has been reduced
to reflect the pro forma payment of PSP VII's
distributions which were accrued as of March
31, 1995 $ (1,066,000)
============
Pro forma "Merger" Adjustments:
- -----------------------------
. Investment in real estate entities has been
decreased to reflect the allocation of the
aggregate purchase cost $(72,128,000)
============
. Real estate facilities have been increased to
reflect the difference between the fair value
and historical carrying cost of the facilities $ 36,149,000
============
. Excess purchase cost over net assets acquired
has been increased to reflect projected June
30, 1995 net current assets $ 1,277,000
============
</TABLE>
24
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
MARCH 31, 1995
(UNAUDITED)
<TABLE>
<S> <C>
. Shareholders' equity has been decreased to reflect
the following:
Elimination of PSP VII's historical equity:
Common Stock $ (38,000)
Paid in capital (49,827,000)
Cumulative net income (55,566,000)
Cumulative distributions paid 67,972,000
------------
Total historical equity (37,459,000)
Additional adjustment to "Paid in capital" to reflect:
Repurchase and retirement of PSP VII's Series D
common stock 2,757,000
------------
Total adjustment to shareholders' equity $(34,702,000)
============
</TABLE>
3. Merger Pro Forma Adjustments
----------------------------
The Merger will be accounted for using the purchase method of accounting and
the total purchase cost will be allocated to the acquired net assets; first
to the tangible and identifiable intangible assets and liabilities acquired
based upon their respective fair values, and the remainder will be allocated
to the excess of purchase cost over fair value of assets acquired. Upon
completion of the Merger, the outstanding shares of PSMI capital stock will
be converted into an aggregate of 30,000,000 shares of Common Stock and
7,000,000 shares of Class B Common Stock, subject to adjustment, and SEI
will be renamed "Public Storage, Inc."
Immediately following the Merger, SEI will own the Operating Companies and
the Real Estate Interests, which include (1) the "Public Storage" name, (2)
seven wholly owned properties, (3) all inclusive deeds of trust secured by
ten mini-warehouses, (4) general and limited partnership interests in 47
limited partnerships owning an aggregate of 286 mini-warehouses and one
commercial property, (5) equity interests in 16 REITs which, exclusive of
SEI's facilities, own an aggregate of 219 mini-warehouses and 13 commercial
properties, (6) property management contracts, exclusive of SEI's
facilities, for 652 mini-warehouses and 29 commercial properties (611 of
which collectively are owned by entities affiliated with PSI), and (7) a 95%
economic interest in a merchandise company which currently sells locks and
boxes to PSI's mini-warehouse tenants and others. See "Public Storage
Management, Inc."
25
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
MARCH 31, 1995
(UNAUDITED)
SEI has determined the purchase cost of the Merger to be equal to the fair value
of the securities issued combined with direct costs of the Merger. The fair
value of the Common Stock is based on current closing market prices on the New
York Stock Exchange. The fair value of the Class B Common Stock (which is not
publicly traded) is based an independent appraisal. The aggregate purchase cost
and its preliminary allocation to the historical assets and liabilities is as
follows:
<TABLE>
<S> <C>
Purchase cost:
- --------------
Issuance of 30,000,000 shares of Common Stock (at $16.00 per share) $ 480,000,000
Issuance of 7,000,000 shares of Class B Common Stock (at $10.50 per share) 73,500,000
Estimated direct costs and expenses of the Merger 2,000,000
-------------
$ 555,500,000
=============
Preliminary allocation of purchase cost:
- ----------------------------------------
Intangible assets attributable to the "Operating Companies" $ 235,176,000
Fair value of net assets acquired from the "Operating Companies"
Cash 1,975,000
Other assets 2,903,000
Secured note payable (face amount of note at March 31, 1995) (70,500,000)
Accrued and other liabilities (2,290,000)
-------------
Total fair value of net assets of the "Operating Companies" 167,264,000
-------------
Fair value of real estate investments (including general and
limited partnership interests and equity interests in REITs) 365,000,000
Fair value of fee simple interest in seven properties 19,943,000
Fair value of mortgage debt secured by properties acquired (548,000)
Fair value of all-inclusive trust deeds:
Mortgage notes receivable 8,050,000
Mortgage notes payable (4,209,000)
-------------
Total fair value of the net assets of the "Real Estate Interests" 388,236,000
-------------
$ 555,500,000
=============
</TABLE>
The following pro forma adjustments have been made to reflect the Merger as of
March 31, 1995:
<TABLE>
<S> <C>
Pro forma "Purchase" adjustments:
- ---------------------------------
. Unallocated purchase cost has been increased to reflect the aggregate
purchase cost $ 555,500,000
=============
. Accrued and other liabilities has been increased for the estimated costs
and expenses of the Merger $ 2,000,000
=============
</TABLE>
26
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
MARCH 31, 1995
(UNAUDITED)
<TABLE>
<S> <C>
. Shareholders' equity has been increased to reflect:
Issuance of 30,000,000 shares of Common Stock
($.10 par value per share) $ 3,000,000
=============
Issuance of 7,000,000 shares of Class B Common Stock
($.10 par value per share) $ 700,000
=============
Paid-in capital has been increased to reflect the value of
issued shares of Common Stock and Class B Common Stock
in excess of par value (30,000,000 shares of Common
Stock at $16.00 per share and 7,000,000 shares of Class B
Common Stock at $10.50 per share less aggregate par
value of $3,700,000) $ 549,800,000
=============
Pro forma "Merger" adjustments:
- -------------------------------
. Investments in real estate entities has been increased to
reflect the fair value of real estate investments
acquired in the Merger $ 365,000,000
=============
. Real estate facilities has been increased to reflect the
fair value of the seven properties to be acquired
in the Merger $ 19,943,000
=============
. Mortgage loans receivable has been increased to
reflect the fair value of the all-inclusive trust deeds
to be acquired in the Merger $ 8,050,000
=============
. Unallocated purchase cost has been decreased to
reflect the allocation of the purchase cost $(555,500,000)
=============
. Intangible assets have been increased to reflect
intangible assets relating to the "Operating Companies" $ 235,176,000
=============
. Secured notes has been adjusted by an amount to
reflect the face amount of the secured note at
March 31, 1995 $ 344,000
=============
. Mortgage notes payable has been increased to
reflect the mortgage notes secured by all-inclusive
trust deeds and properties to be acquired in the Merger $ 4,757,000
=============
. Deficit has been eliminated to reflect the acquisition of
the net assets of the "Operating Companies" $ 67,568,000
=============
</TABLE>
27
<PAGE>
STORAGE EQUITIES, INC.
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
SEI PSMI
-------------------------------------------------------------------- -----------------
PRO FORMA ADJUSTMENTS
------------------------------
ISSUANCE
OF PREFERRED SEI OPERATING
SEI & COMMON REIT PRE-MERGER COMPANIES
(HISTORICAL) STOCK(1) MERGERS(2) (PRO FORMA) (HISTORICAL)
------------ ------------- ---------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Rental Income $ 41,974,000 $6,900,000 $5,086,000 $53,960,000 $ -
Facility management fees - - - - 7,313,000
Advisory fee income - - - - 1,610,000
Merchandise operations - - - - 446,000
Equity in earnings of real
estate entities - - - - -
Interest and other Income 1,224,000 (576,000) 16,000 664,000 39,000
------------ ---------- ---------- ----------- ----------------
43,198,000 6,324,000 5,102,000 54,624,000 9,408,000
------------ ---------- ---------- ----------- ----------------
EXPENSES:
Cost of operations 15,807,000 2,229,000 2,058,000 20,094,000 -
Cost of managing facilities - - - - 1,127,000
Cost of merchandise - - - - 208,000
Depreciation and
amortization 8,147,000 1,317,000 784,000 10,248,000 -
General and administrative 1,091,000 - 105,000 1,196,000 1,003,000
Advisory fee 1,610,000 240,000 112,000 1,962,000 -
Interest expense 1,520,000 29,000 820,000 2,369,000 1,263,000
------------ ---------- ---------- ----------- ----------------
28,175,000 3,815,000 3,879,000 35,869,000 3,601,000
------------ ---------- ---------- ----------- ----------------
Income before minority
interest in income and
gain on disposition of
real estate 15,023,000 2,509,000 1,223,000 18,755,000 5,807,000
Minority interest in income (1,823,000) 122,000 - (1,701,000) -
------------ ---------- ---------- ----------- ----------------
13,200,000 2,631,000 1,223,000 17,054,000 5,807,000
Taxes based on income - - - - -
------------ ---------- ---------- ----------- ----------------
Net Income $ 13,200,000 $2,631,000 $1,223,000 $17,054,000 $ 5,807,000
============ ========== ========== =========== ================
Net income allocable to
preferred shareholders $ 5,976,000 $1,860,000 $ - $ 7,836,000 $ -
Net income allocable to
Class B Shareholders - - - - -
Net income allocable to
Common Stock shareholders 7,224,000 771,000 1,223,000 9,218,000 5,807,000
------------ ---------- ---------- ----------- ----------------
Net Income $ 13,200,000 $2,631,000 $1,223,000 $17,054,000 $ 5,807,000
============ ========== ========== =========== ================
PER SHARE OF COMMON STOCK:
Net Income $0.24(3) $0.22(3)
============ ===========
Weighted Average Shares 30,566,839(3) 42,016,474(3)
============ ===========
RATIO OF EARNINGS TO
COMBINED FIXED CHARGES
AND PREFERRED STOCK
DIVIDENDS(7) 2.10 2.00
============ ===========
<CAPTION>
PSMI
----------------------------------------------------
COMBINED
REAL ESTATE PSMI PRO FORMA SEI
INTERESTS PRO FORMA OPERATIONS MERGER POST-MERGER
(HISTORICAL)(4) ADJUSTMENTS(4) (PRO FORMA) ADJUSTMENTS(5) (PRO FORMA)
--------------- -------------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C>
REVENUES:
Rental Income $ - $ 806,000 $ 806,000 $ - $54,766,000
Facility management fees - 56,000 7,369,000 (3,194,000) 4,175,000
Advisory fee income - 352,000 1,962,000 (1,962,000) -
Merchandise operations - - 446,000 - 446,000
Equity in earnings of real
estate entities 6,053,000 (516,000) 5,537,000 (3,054,000) 2,483,000
Interest and other Income - 231,000 270,000 - 934,000
--------------- ------------ ----------- -------------- -----------
6,053,000 929,000 16,390,000 (8,210,000) 62,804,000
--------------- ------------ ----------- -------------- -----------
EXPENSES:
Cost of operations - 309,000 309,000 (3,194,000) 17,209,000
Cost of managing facilities - - 1,127,000 - 1,127,000
Cost of merchandise - - 208,000 - 208,000
Depreciation and
amortization - 121,000 121,000 1,470,000 11,839,000
General and administrative - (126,000) 877,000 - 2,073,000
Advisory fee - - - (1,962,000) -
Interest expense - 91,000 1,354,000 - 3,723,000
--------------- ------------ ----------- -------------- -----------
- 395,000 3,996,000 (3,686,000) 36,179,000
--------------- ------------ ----------- -------------- -----------
Income before minority
interest in income and
gain on disposition of
real estate 6,053,000 534,000 12,394,000 (4,524,000) 26,625,000
Minority interest in income - - - - (1,701,000)
--------------- ------------ ----------- -------------- -----------
6,053,000 534,000 12,394,000 (4,524,000) 24,924,000
Taxes based on income - (95,000) (95,000) - (95,000)
--------------- ------------ ----------- -------------- -----------
Net Income $ 6,053,000 $ 439,000 $12,299,000 $ (4,524,000) $24,829,000
=============== ============ =========== ============== ===========
Net income allocable to
preferred shareholders $ - $ - $ - $ - $ 7,836,000
Net income allocable to
Class B Shareholders - - - - -
Net income allocable to
Common Stock shareholders 6,053,000 439,000 12,299,000 (4,524,000) 16,993,000
=============== ============ =========== ============== ===========
Net Income $ 6,053,000 $ 439,000 $12,299,000 $ (4,524,000) $24,829,000
=============== ============ =========== ============== ===========
PER SHARE OF COMMON STOCK:
Net Income $0.24(6)
===========
Weighted Average Shares 72,016,474(6)
===========
RATIO OF EARNINGS TO
COMBINED FIXED CHARGES
AND PREFERRED STOCK
DIVIDENDS(7) 2.56
===========
</TABLE>
See Accompanying Notes to Pro Forma Consolidated Statements of Income.
28
<PAGE>
STORAGE EQUITIES, INC.
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
SEI PSMI
----------------------------------------------------------------------- --------------
PRO FORMA ADJUSTMENTS
-------------------------------
ISSUANCE
OF PREFERRED SEI OPERATING
SEI & COMMON REIT PRE-MERGER COMPANIES
(HISTORICAL) STOCK(1) MERGERS(2) (PRO FORMA) (HISTORICAL)
------------- ------------- ----------- ------------- --------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Rental Income $141,845,000 $41,989,000 $30,672,000 $214,506,000 $ -
Facility management fees - - - - 28,356,000
Advisory fee income - - - - 4,983,000
Merchandise operations - - - - 1,872,000
Equity in earnings of real
estate entities - - - - -
Interest and other Income 5,351,000 (4,315,000) 218,000 1,254,000 199,000
------------ ----------- ----------- ------------ --------------
147,196,000 37,674,000 30,890,000 215,760,000 35,410,000
------------ ----------- ----------- ------------ --------------
EXPENSES:
Cost of operations 52,816,000 14,379,000 12,114,000 79,309,000 -
Cost of managing facilities - - - - 5,431,000
Cost of merchandise - - - - 866,000
Depreciation and
amortization 28,274,000 7,796,000 4,831,000 40,901,000 -
General and administrative 2,631,000 - 433,000 3,064,000 1,850,000
Advisory fee 4,983,000 1,781,000 650,000 7,414,000 -
Interest expense 6,893,000 (1,675,000) 5,525,000 10,743,000 5,255,000
------------ ----------- ----------- ------------ --------------
95,597,000 22,281,000 23,553,000 141,431,000 13,402,000
------------ ----------- ----------- ------------ --------------
Income before minority
interest in income and
gain on disposition of
real estate 51,599,000 15,393,000 7,337,000 74,329,000 22,008,000
Minority interest in income (9,481,000) 2,775,000 - (6,706,000) -
------------ ----------- ----------- ------------ --------------
42,118,000 18,168,000 7,337,000 67,623,000 22,008,000
Income taxes on
merchandise operations - - - - -
Gain on disposition of
real estate - - 203,000 203,000 -
------------ ----------- ----------- ------------ --------------
Net Income $ 42,118,000 $18,168,000 $ 7,540,000 $ 67,826,000 $ 22,008,000
============ =========== =========== ============ ==============
Net income allocable to
preferred shareholders $ 16,846,000 $14,360,000 $ - $ 31,206,000 $ -
Net income allocable to
Class B Shareholders - - - - -
Net income allocable to
Common Stock shareholders 25,272,000 3,808,000 7,540,000 36,620,000 22,008,000
------------ ----------- ----------- ------------ --------------
Net Income $ 42,118,000 $18,168,000 $ 7,540,000 $ 67,826,000 $ 22,008,000
============ =========== =========== ============ ==============
PER SHARE OF COMMON STOCK:
Net Income $1.05(3) $0.87(3)
============ ============
Weighted Average Shares 24,077,055(3) 41,947,615(3)
============ ============
RATIO OF EARNINGS TO
COMBINED FIXED CHARGES
AND PREFERRED STOCK
DIVIDENDS (7) 2.22 1.90
============ ============
<CAPTION>
PSMI
--------------------------------------------------
COMBINED
REAL ESTATE PSMI PRO FORMA SEI
INTERESTS PRO FORMA OPERATIONS MERGER POST-MERGER
(HISTORICAL)(4) ADJUSTMENTS(4) (PRO FORMA) ADJUSTMENTS(5) (PRO FORMA)
--------------- -------------- ------------ --------------- ------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Rental Income $ - $ 3,152,000 $ 3,152,000 $ - $217,658,000
Facility management fees - 576,000 28,932,000 (12,895,000) 16,037,000
Advisory fee income - 2,431,000 7,414,000 (7,414,000) -
Merchandise operations - - 1,872,000 - 1,872,000
Equity in earnings of real
estate entities 23,697,000 (2,085,000) 21,612,000 (12,217,000) 9,395,000
Interest and other Income - 797,000 996,000 - 2,250,000
--------------- ----------- ----------- --------------- ------------
23,697,000 4,871,000 63,978,000 (32,526,000) 247,212,000
--------------- ----------- ----------- --------------- ------------
EXPENSES:
Cost of operations - 1,023,000 1,023,000 (12,895,000) 67,437,000
Cost of managing facilities - (529,000) 4,902,000 - 4,902,000
Cost of merchandise - - 866,000 - 866,000
Depreciation and
amortization - 489,000 489,000 5,880,000 47,270,000
General and administrative - (255,000) 1,595,000 - 4,659,000
Advisory fee - - - (7,414,000) -
Interest expense - 352,000 5,607,000 - 16,350,000
--------------- ----------- ----------- --------------- ------------
- 1,080,000 14,482,000 (14,429,000) 141,484,000
--------------- ----------- ----------- --------------- ------------
Income before minority
interest in income and
gain on disposition of
real estate 23,697,000 3,791,000 49,496,000 (18,097,000) 105,728,000
Minority interest in income - - - - (6,706,000)
--------------- ----------- ----------- --------------- ------------
23,697,000 3,791,000 49,496,000 (18,097,000) 99,022,000
Income taxes on
merchandise operations - (402,000) (402,000) - (402,000)
Gain on disposition of
real estate - - - - 203,000
--------------- ----------- ----------- --------------- ------------
Net Income $ 23,697,000 $ 3,389,000 $49,094,000 $ (18,097,000) $ 98,823,000
=============== =========== =========== =============== ============
Net income allocable to
preferred shareholders $ - $ - $ - $ - $ 31,206,000
Net income allocable to
Class B Shareholders - - - - -
Net income allocable to
Common Stock shareholders 23,697,000 3,389,000 49,094,000 (18,097,000) 67,617,000
--------------- ----------- ----------- --------------- ------------
Net Income $ 23,697,000 $ 3,389,000 $49,094,000 $ (18,097,000) $ 98,823,000
=============== =========== =========== =============== ============
PER SHARE OF COMMON STOCK:
Net Income $0.94(6)
============
Weighted Average Shares 71,947,615(6)
============
RATIO OF EARNINGS TO
COMBINED FIXED CHARGES
AND PREFERRED STOCK
DIVIDENDS (7) 2.45
============
</TABLE>
See Accompanying Notes to Pro Forma Consolidated Statement of Income.
29
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND YEAR ENDED DECEMBER 31, 1994
(UNAUDITED)
1. Issuance of Preferred and Common Stock
--------------------------------------
During 1994 and 1995, SEI issued shares of both its Preferred and Common
Stock as follows:
. On February 15, 1994, SEI issued 5,484,000 shares of Common Stock in
a public offering. The net offering proceeds $76.5 million were used
to repay debt, to acquire real estate facilities, to acquire
mortgage notes receivable and to acquire additional minority
interests.
. On June 30, 1994, SEI issued 1,200,000 shares of Adjustable Rate
Cumulative Preferred Stock, Series C (the "Series C Preferred Stock").
The aggregate net offering proceeds of the offering ($28.9 million)
were used to retire bank borrowings (borrowings which were used
primarily to acquire real estate facilities and minority interests in
real estate partnerships).
. On September 1, 1994, SEI issued 1,200,000 shares of 9.5% Cumulative
Preferred Stock, Series D (the "Series D Preferred Stock"). The
aggregate net offering proceeds ($29.0 million) were used to acquire
real estate facilities and minority interests in real estate
partnerships.
. On November 25, 1994, SEI issued 2,500,000 shares of Common Stock
pursuant to a public offering. The aggregate offering proceeds ($33.8
million) were used to repay borrowings on SEI's credit facilities
(borrowings which were used to fund the acquisition of real estate
facilities, minority interests and the cash portion of the PSP VIII
merger, see Note 2 below).
. On February 1, 1995, SEI issued 2,195,000 shares of 10% Cumulative
Preferred Stock, Series E (the "Series E Preferred Stock"). The
aggregate net offering proceeds ($52.9 million) were used to acquire
real estate facilities, minority interests in real estate partnerships
and retire bank borrowings (borrowings which were used to acquire real
estate facilities).
. On May 3, 1995, SEI issued 2,300,000 shares of 9.75% Cumulative
Preferred Stock, Series F (the "Series F Preferred Stock"). The
aggregate net offering proceeds( $55.6 million) were used to repay
borrowings on SEI's credit facilities (borrowings which were used to
fund the acquisition of real estate facilities, minority interests
and the cash portion of the PSP VI merger).
. On May 31, 1995, SEI issued 5,482,200 shares of Common Stock pursuant
to a public offering. The aggregate net offering proceeds were $82.0
million, a portion of which has been utilized to repay borrowings on
SEI's credit facilities (borrowings which were used to fund the
acquisition of real estate facilities, and the cash portion of the
PSP VII merger). The remaining proceeds will be utilized to acquire
additional real estate facilities and minority interests. Currently
pending, are the acquisition of real estate facilities with an
aggregate acquisition cost of $111.8 million, consisting of the
cancellation of $14.4 million of mortgage notes receivable, the
assumption of $44.7 million of mortgage notes payable, and cash
totaling $52.7 million. In addition, SEI has commenced a cash tender
offer to acquire limited partnership units in one of the consolidated
PS Partnerships. SEI estimates that it will acquire approximately $12
million of units through the cash tender offer. The effect of these
pending acquisitions have been included in the following pro forma
adjustments.
The following pro forma adjustments have been made to the pro forma
consolidated statements of income to reflect the above uses (the acquisition
of real estate facilities, minority interests and the repayment of bank
borrowings) of the proceeds as if the transactions were completed as of
January 1, 1994:
30
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND YEAR ENDED DECEMBER 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS YEAR
ENDED ENDED
MARCH 31, 1995 DECEMBER 31, 1994
-------------- -----------------
<S> <C> <C>
. Rental income has been increased
to reflect the incremental
difference between the actual
rental income included in the $6,900,000 $41,989,000
historical statement of operations ========== ===========
and the pro forma rental income as
if the acquired real estate
facilities were in operation for a
full period
. Interest and other income has
been decreased to reflect SEI's
cancellation of mortgage notes
receivable, in connection with the
acquisition of the above
properties, from which SEI
recognized interest income during $ (576,000) $(4,315,000)
the year ended December 31, 1994. ========== ===========
A pro forma adjustment has been
made to eliminate such interest as
if the notes were canceled at the
beginning of the period (including
amortization of mortgage note
discounts totaling $40,000 in 1995
and $693,000 in 1994)
. Cost of operations has been
increased to reflect the
incremental difference between the
actual cost of operations included $2,229,000 $14,379,000
in the historical statement of ========== ===========
income and the pro forma cost of
operations as if the real estate
facilities were in operation for a
full period
. Depreciation has been increased
to reflect the incremental
difference between the actual
depreciation expense included in $1,317,000 $ 7,796,000
the historical statements of ========== ===========
income and the pro forma
depreciation expense as if the
real estate facilities were in
operation for a full period
</TABLE>
31
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND YEAR ENDED DECEMBER 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS YEAR
ENDED ENDED
MARCH 31, 1995 DECEMBER 31, 1994
-------------- -----------------
<S> <C> <C>
. Interest expense has been
increased (decreased) to reflect
the following:
Interest expense was decreased to
eliminate the historical interest
expense related to the pay down $ (293,000) $(1,097,000)
of the debt through the use of
net offering proceeds
Mortgage notes payable were
assumed in connection with the
acquisition of the real estate
facilities. An adjustment was 1,129,000 4,801,000
made to reflect the interest
expense as if the notes were
assumed at the beginning of the
period.
SEI typically uses its bank line
of credit to fund the cash
portion of real estate
acquisitions and subsequently
repays the borrowings with the
net proceeds of equity offerings.
In Note 2 below, a pro forma
adjustment has been made to
reflect the interest expense
relating the REIT Mergers,
assuming that SEI borrowed on its
bank line of credit to fund the
cash portion of such mergers thus
reflecting the pro forma cost of
capital to finance the mergers.
Accordingly, a pro forma
adjustment has been made to
offset that interest expense to
reflect the repayment of bank
borrowings with the net proceeds
of the above Preferred and Common
Stock offerings. (807,000) (5,379,000)
---------- -----------
Net increase (decrease) in
interest expense $ 29,000 $(1,675,000)
========== ===========
. Minority interest in income has
been decreased due to the
acquisition of such minority $ 122,000 $ 2,775,000
interests by SEI ========== ===========
. Advisory fees have been
increased to reflect the effect of
the above adjustments $ 240,000 $ 1,781,000
========== ===========
</TABLE>
32
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND YEAR ENDED DECEMBER 31, 1994
(UNAUDITED)
2. REIT Mergers
------------
During 1994 and 1995, SEI completed merger transactions with PSP VIII
(September 30, 1994), PSP VI (February 28, 1995), and PSP VII (June 30,
1995) (collectively the "PSP REITs"). The following pro forma adjustments
have been made assuming the merger transactions with the PSP REITs were
completed at the beginning of the year ended December 31, 1994:
<TABLE>
<CAPTION>
THREE MONTHS YEAR
ENDED ENDED
MARCH 31, 1995 DECEMBER 31, 1994
-------------- -----------------
<S> <C> <C>
. A pro forma adjustment has been made to reflect the
PSP REITs historical rental income $5,086,000 $30,672,000
========== ===========
. A pro forma adjustment has been made to reflect the
PSP REITs historical interest and other income $ 16,000 $ 218,000
========== ===========
. A pro forma adjustment has been made to reflect the
PSP REITs historical cost of operations $2,058,000 $12,114,000
========== ===========
. Depreciation and amortization was adjusted as follows:
A pro forma adjustment has been made to
reflect the PSP REITs historical depreciation $ 689,000 $ 3,960,000
As a result of the REIT Mergers, the
real estate facilities were recorded
by SEI at their fair values (which
were in excess of the historical
carrying value at the PSP REITs). As
a result, a pro forma adjustment has
been made to reflect the incremental
increase in depreciation expense based
upon the allocation of the purchase
cost to buildings (straight-line over
25 years). 82,000 820,000
A pro forma adjustment has been made to
reflect the amortization of the
intangible assets ($1,277,000 - See
Note 2 to the Pro Forma Consolidated
Balance Sheet) (straight-line over 25
years). 13,000 51,000
---------- -----------
$784,000 $4,831,000
========== ===========
</TABLE>
33
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND YEAR ENDED DECEMBER 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS YEAR
ENDED ENDED
MARCH 31, 1995 DECEMBER 31, 1994
-------------- -----------------
<S> <C> <C>
. General and administrative expense
was adjusted as follows:
A pro forma adjustment
has been made to reflect
the PSP REITs historical
general and administrative
expenses $133,000 $ 633,000
A pro forma adjustment has been
made to reduce certain general
and administrative expenses
which SEI has determined would
be eliminated as a result of
the mergers. Such expenses
include the elimination of PSP
REITs board of directors fees,
stock exchange listing fees,
audit and tax fees and certain
administrative expenses which
will no longer be applicable. (28,000) (200,000)
-------- ----------
$105,000 $ 433,000
======== ==========
. Interest expense has been increased
as follows:
For the pro forma, additional
borrowings on SEI's bank lines of
credit to consummate the merger
transactions has been assumed. The
pro forma interest expense was
determined based on an interest rate
of 9.50%. (see adjustment to interest
expense included in Note 1):
PSP VIII ($20.7 million borrowings
outstanding from January 1, 1994
through September 30, 1994) $ - $1,472,000
PSP VI ($21.4 million borrowings
outstanding from January 1, 1994
through February 28, 1995) 339,000 2,036,000
PSP VII ($19.7 million borrowings
outstanding from January 1, 1994
through March 31, 1995) 468,000 1,871,000
-------- ----------
subtotal 807,000 5,379,000
Historical interest expense of the
PSP REITs 13,000 146,000
-------- ----------
Total adjustment to interest
expense $820,000 $5,525,000
======== ==========
. A pro forma adjustment has been made
to reflect the historical gain on the
disposition of real estate of the PSP
REITs $ - $ 203,000
======== ==========
. A pro forma adjustment has been made
to the advisory fee to reflect the
above adjustments combined with the
effects of the operations of the PSP
REITs and the issuance of additional
shares of SEI's Common Stock $112,000 $ 650,000
======== ==========
</TABLE>
34
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND YEAR ENDED DECEMBER 31, 1994
(UNAUDITED)
3. Net income per Common Share has been computed as follows:
--------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS YEAR
ENDED ENDED
MARCH 31, 1995 DECEMBER 31, 1994
-------------- -----------------
<S> <C> <C>
Historical net income $13,200,000 $ 42,118,000
Less: Historical preferred
stock dividends (5,976,000) (16,846,000)
----------- ------------
Income applicable to common
shareholders $ 7,224,000 $ 25,272,000
=========== ============
Historical weighted average
common shares 30,566,839 24,077,055
=========== ============
Historical net income per
common share $ 0.24 $ 1.05
=========== ============
Pro forma net income $17,054,000 $ 67,826,000
Less: Pro forma preferred
stock dividends (1) (7,836,000) (31,206,000)
----------- ------------
Income applicable to common
shareholders $ 9,218,000 $ 36,620,000
=========== ============
Pro forma weighted average
common shares (2) 42,016,474 41,947,615
=========== ============
Pro forma net income per
common share $ 0.22 $ 0.87
=========== ============
</TABLE>
(1) As adjusted to give effect to the issuance of the Series C, Series D,
Series E, and Series F Preferred Stock as if such stock were outstanding at
the beginning of the period. The dividend rate on the Series C Preferred
Stock is adjustable quarterly and is equal to the highest of the three
separate indices as published by the Federal Reserve Board, multiplied by
110%. However, the dividend rate will not be less than 6.75% per annum nor
greater than 10.75% per annum. At the date of issuance, the dividend rate
was equal to 8.15% per annum, which rate was used in the determination of
pro forma dividends applicable to the Series C Preferred Stock for the year
ended December 31, 1994. If the dividend rate used was 10.75% per annum,
the pro forma Preferred Stock dividends would have been approximately
$156,000 higher for the three months ended March 31, 1995 ($780,000 higher
for the year ended December 31, 1994). Accordingly, income applicable to
common shareholders would have been reduced by a like amount or
approximately $.03 per common for the year ended December 31, 1994 (none
for the three months ended March 31, 1995).
(2) As adjusted to give effect to the issuance of additional shares of SEI's
Common Stock in connection with the acquisition of additional investments
in real estate entities, the public offering of Common Stock during 1994
and 1995, and Common Stock issued in connection with the PSP REIT mergers.
35
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND YEAR ENDED DECEMBER 31, 1994
(UNAUDITED)
4. Pro forma adjustments to the historical "Operating Companies" and "Real
-----------------------------------------------------------------------
Estate Interests":
------------------
The historical operations of the "Real Estate Interests" included in the pro
forma financial statements represents PSMI's equity interest in the combined
operations of such assets (based on the equity method of accounting) as
derived from the "Combined Summaries of Historical Information Relating to
Operating Revenues and Specified Expenses - Real Estate Interests."
Included in these Combined Summaries financial statements are (i) the
operating results of the seven real estate facilities in which SEI will be
acquiring a fee simple interest pursuant to the Merger and (ii) all-
inclusive trust deeds. The following pro forma adjustments have been made to
reflect the operating results (i.e. rental income and operating expenses)
and the related interest income and expense with respect to the all-
inclusive trust deeds and mortgage notes payable, the net amounts of which
are included in "Equity in earnings of real estate entities" in the column
titled "Real Estate Interests":
<TABLE>
<CAPTION>
THREE MONTHS YEAR
ENDED ENDED
MARCH 31, 1995 DECEMBER 31, 1994
-------------- -----------------
<S> <C> <C>
. A pro forma adjustment has been made
to reflect the historical rental income $ 806,000 $ 3,152,000
========= ===========
. A pro forma adjustment has been made
to reflect the historical interest
income related to the acquired
all-inclusive trust deeds (mortgage
notes receivable) $ 231,000 $ 797,000
========= ===========
. A pro forma adjustment has been made
to reflect the historical cost of
operations $ 309,000 $ 1,023,000
========= ===========
. A pro forma adjustment has been made
to reflect the historical depreciation
and amortization $ 121,000 $ 489,000
========= ===========
. A pro forma adjustment has been made
to interest expense to reflect:
the historical interest expense
related to the mortgage notes payable
secured by the real estate facilities
(which will be assumed by SEI
pursuant to the Merger) $ 11,000 $ 31,000
the historical interest expense
related to the mortgage notes payable
secured by all-inclusive trust deeds 80,000 321,000
--------- -----------
Total adjustment to interest
expense $ 91,000 $ 352,000
========= ===========
. A pro forma adjustment has been made
to adjust the historical Equity in
earnings of real estate entities to
eliminate the net property operations
included in the "Real Estate
Interests" for the above property
operating adjustments $(516,000) $(2,085,000)
========= ===========
</TABLE>
36
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND YEAR ENDED DECEMBER 31, 1994
(UNAUDITED)
In addition, the following pro forma adjustments have been made to reflect
(i) additional Facility management fees and Advisory fee income as a result
of pro forma adjustments made to the SEI historical financial statements
which have a corresponding effect on the "Operating Companies," (ii) to
eliminate certain non-recurring costs and expenses included in the
"Operating Companies," and (iii) to record estimated income taxes based on
income with respect to the merchandise operations (also included in the
"Operating Companies").
<TABLE>
<CAPTION>
THREE MONTHS YEAR
ENDED ENDED
MARCH 31, 1995 DECEMBER 31, 1994
-------------- -----------------
<S> <C> <C>
. A pro forma adjustment has made to
Facility management fees to reflect
the incremental increase in management
fees from properties (only for
properties which were not previously
managed by PSMI) acquired by SEI
during 1995 and 1994 $ 56,000 $ 576,000
========= ==========
. A pro forma adjustment has been made
to the Advisory fee income to reflect
the adjustments (Notes 1 and 2) to
SEI's advisory fee expense in
connection with the issuance of
Preferred and Common Stock , the REIT
Mergers, and SEI's increased operating
income $ 352,000 $2,431,000
========= ==========
. A pro forma adjustment has been made
to Cost of managing facilities to
eliminate certain non-recurring costs
and expenses $ - $ (529,000)
========= ==========
. A pro forma adjustment has been made
to General and administrative expense
to eliminate certain non-recurring
costs and expenses $(126,000) $ (255,000)
========= ==========
. A pro forma adjustment has been made
record estimated income tax expense
from the merchandise operations (using
a tax rate of 40%) $ (95,000) $ (402,000)
========= ==========
5. Pro forma Merger adjustments:
----------------------------
<CAPTION>
THREE MONTHS YEAR
ENDED ENDED
MARCH 31, 1995 DECEMBER 31, 1994
-------------- -----------------
<S> <C> <C>
. The "Operating Companies"
have included in Facility
management fee income fees
paid by SEI for the
management of its real
estate facilities
(likewise, SEI has
included such fees as part
of Cost of operations). As
a result of the Merger,
this facility management
fee income and operating
expense will no longer
occur. Accordingly, pro
forma adjustments have been
made to decrease both
Facility management fees
and cost of operations to
eliminate these property
management fees:
Facility management fee
income $(3,194,000) $(12,895,000)
=========== ============
Cost of operations $(3,194,000) $(12,895,000)
=========== ============
</TABLE>
37
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND YEAR ENDED DECEMBER 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR
THREE MONTHS ENDED
ENDED DECEMBER 31,
MARCH 31, 1995 1994
-------------- ------------
<S> <C> <C>
. As a result of the
Merger, Advisory fee income
and expense will no longer
occur. Accordingly, a pro
forma adjustment has been
made to each:
Advisory fee income $(1,962,000) $ (7,414,000)
=========== ============
Advisory fee (expense) (1,962,000) $ (7,414,000)
=========== ============
. Included in the "Real Estate
Interests" are general and limited
partnership interests in limited
partnerships and equity interests
in REITs. These interests will be
accounted for under the equity method.
The aggregate fair value of these
interests ($365 million) is in excess
of the amount of the underlying
historical equity in net assets of
the investees by approximately
$305 million. SEI attributes this
difference to the fair values of the
underlying real estate properties and
has allocated the difference to
buildings. A pro forma adjustment
has been made to "Equity in earnings
of real estate entities" to reflect
additional depreciation expense
related to the allocated difference
to buildings (straight-line over a 25
year life) as if the investees were
consolidated entities. $ (3,054,000) $(12,217,000)
============ ============
. A pro forma adjustment
has been made to increase
depreciation and
amortization to reflect the
amortization of the
Intangible assets ($235.2
million) over a 40 year
life. See Note 3 to the
Pro Forma Consolidated
Balance Sheet. $ 1,470,000 $ 5,880,000
=========== ============
</TABLE>
38
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND YEAR ENDED DECEMBER 31, 1994
(UNAUDITED)
6. Pro forma net income per share of Common Stock has been computed as
-------------------------------------------------------------------
follows:
-------
<TABLE>
<CAPTION>
THREE MONTHS YEAR
ENDED ENDED
MARCH 31, 1995 DECEMBER 31, 1994
-------------- -----------------
<S> <C> <C>
Pro forma net income $24,829,000 $ 98,823,000
Less: Pro forma preferred
stock dividends (7,836,000) (31,206,000)
----------- ------------
Income allocable to common
shareholders 16,993,000 67,617,000
Less: Pro forma income
allocable to Class B
shareholders (1) - -
----------- ------------
Income allocable to Common
Stock shareholders $16,993,000 $ 67,617,000
=========== ============
Pro forma weighted average
Common Stock common shares
(2) 72,016,474 71,947,615
=========== ============
Pro forma net income per
share of Common Stock $ 0.24 $ .94
=========== ============
</TABLE>
(1) The Class B Common Stock is (i) not entitled to participate in
distributions until the later to occur of funds from operations
("FFO") per Common Share reaching $1.80 (during any period of four
consecutive quarters) or the expiration of four years after the
Closing; thereafter, the Class B Common Stock will participate in
distributions (other than liquidating distribution) at the rate of 97%
of the per share distributions on the Common Stock provided that
cumulative distributions at the rate of at least $.22 per quarter per
share have been paid on the Common Stock, (ii) not entitled to
liquidating distributions, (iii) not be entitled to vote (except as
expressly required by California law) and (iv) automatically
convertible into Common Stock, on a share for share basis, upon the
later to occur of FFO per Common Share reaches $3.00 per share or the
expiration of seven years after the Closing. The inclusion of the
Class B Common Stock in the determination of earnings per share has
been determined to be anti-dilutive (after giving effect to the pro
forma additional income required to satisfy the above contingencies,
and accordingly, the conversion of Class B Common Stock into Common
Stock has not been assumed).
(2) As adjusted to give effect to the issuance of 30,000,000 additional
shares of Common Stock in connection with the Merger.
7. For purposes of these computations, earnings consists of net income before
minority interest in income, loss on early extinguishment of debt and gain
on disposition of real estate plus fixed charges (other than preferred
stock dividends) and less the portion of minority interest in income for
those consolidated minority interests which had no fixed charges during
the period. Fixed charges and preferred stock dividends consist of
interest expense and the dividend requirements of SEI's Series A, Series
B, Series C, Series D, Series E, Series F and Convertible Preferred Stock.
39
<PAGE>
STORAGE EQUITIES, INC.
PRO FORMA CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
SEI PSMI
------------------------------------------------------------------ -------------
PRO FORMA ADJUSTMENTS
------------------------------
ISSUANCE
OF PREFERRED SEI OPERATING
SEI & COMMON REIT PRE-MERGER COMPANIES
(HISTORICAL) STOCK(1) MERGERS (2) (PRO FORMA) (HISTORICAL)
------------ ------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net Income $ 13,200,000 $ 2,631,000 $ 1,223,000 $ 17,054,000 $ 5,807,000
Depreciation and
amortization 8,107,000 1,357,000 784,000 10,248,000 17,000
Minority Interest in income 1,823,000 (122,000) - 1,701,000 -
Less: Equity in earnings
of real estate entities - - - - -
Distributions from real
estate entities - - - - -
Other (2,576,000) - (372,000) (2,948,000) 926,000
------------ ------------ ----------- ------------ -----------
Total adjustments 7,354,000 1,235,000 412,000 9,001,000 943,000
------------ ------------ ----------- ------------ -----------
Cash provided by operating
activities 20,554,000 3,866,000 1,635,000 26,055,000 6,750,000
------------ ------------ ----------- ------------ -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Principal payments on
mortgage notes receivable 284,000 (284,000) - - -
Acquisition of minority
interest (8,536,000) - - (8,536,000) -
Acquisition of real estate
facilities (33,662,000) - - (33,662,000) -
Construction in process (2,100,000) - - (2,100,000) -
Purchase cost of the
mergers (21,427,000) - - (21,427,000) -
Capital expenditures (1,058,000) (276,000) (84,000) (1,418,000) -
------------ ------------ ----------- ------------ -----------
Cash provided by (used in)
investing activities (66,499,000) (560,000) (84,000) (67,143,000) -
------------ ------------ ----------- ------------ -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Principal payments on bank
debt 9,553,000 (8,636,000) (917,000) - -
Proceeds from the issuance
of Common Stock 460,000 - - 460,000 -
Proceeds from the issuance
of Preferred Stock 52,888,000 - - 52,888,000 -
Principal payments on
mortgage debt (409,000) (204,000) - (613,000) -
Distributions to
shareholders (12,434,000) (3,066,000) (1,489,000) (16,989,000) -
Distributions to affiliates - - - - (6,163,000)
Distribution to minority
interests (4,596,000) 340,000 - (4,256,000) -
Reinvestment by minority
interests 864,000 (86,000) - 778,000 -
------------ ------------ ----------- ------------ -----------
Cash provided by (used in)
financing activities 46,326,000 (11,652,000) (2,406,000) 32,268,000 (6,163,000)
------------ ------------ ----------- ------------ -----------
Net increase (decrease) in
cash and cash equivalents 381,000 (8,346,000) (855,000) (8,820,000) 587,000
Cash and cash equivalents at
the beginning of the period 20,151,000 - 4,374,000 24,525,000 1,388,000
------------ ------------ ----------- ------------ -----------
Cash and cash equivalents
at the end of the period $ 20,532,000 $ (8,346,000) $ 3,519,000 $ 15,705,000 $ 1,975,000
============ ============ =========== ============ ===========
FUNDS FROM OPERATIONS(5) $ 18,534,000 $ 24,747,000
============ ============
<CAPTION>
PSMI
------------------------------------------------
COMBINED
REAL ESTATE PSMI PRO FORMA SEI
INTERESTS PRO FORMA OPERATIONS MERGER POST-MERGER
(HISTORICAL)(3) ADJUSTMENTS(3) (PRO FORMA) ADJUSTMENTS(4) (PRO-FORMA)
--------------- -------------- ----------- -------------- ------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net Income $ 6,053,000 $ 439,000 $12,299,000 $(4,524,000) $ 24,829,000
Depreciation and
amortization - 121,000 138,000 1,470,000 11,856,000
Minority Interest in income - - - - 1,701,000
Less: Equity in earnings
of real estate entities (6,053,000) 516,000 (5,537,000) 3,054,000 (2,483,000)
Distributions from real
estate entities 2,917,000 (637,000) 2,280,000 - 2,280,000
Other - - 926,000 - (2,022,000)
----------- --------- ----------- ----------- ------------
Total adjustments (3,136,000) - (2,193,000) 4,524,000 11,332,000
----------- --------- ----------- ----------- ------------
Cash provided by operating
activities 2,917,000 439,000 10,106,000 - 36,161,000
----------- --------- ----------- ----------- ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Principal payments on
mortgage notes receivable - 92,000 92,000 - 92,000
Acquisition of minority
interest - - - - (8,536,000)
Acquisition of real estate
facilities - - - - (33,662,000)
Construction in process - - - - (2,100,000)
Purchase cost of the
mergers - - - - (21,427,000)
Capital expenditures - (8,000) (8,000) - (1,426,000)
----------- --------- ----------- ----------- ------------
Cash provided by (used in)
investing activities - 84,000 84,000 - (67,059,000)
----------- --------- ----------- ----------- ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Principal payments on bank
debt - - - - -
Proceeds from the issuance
of Common Stock - - - - 460,000
Proceeds from the issuance
of Preferred Stock - - - - 52,888,000
Principal payments on
mortgage debt - (50,000) (50,000) - (663,000)
Distributions to
shareholders - - - (6,600,000) (23,589,000)
Distributions to affiliates - - (6,163,000) 6,163,000 -
Distribution to minority
interests - - - - (4,256,000)
Reinvestment by minority
interests - - - - 778,000
----------- --------- ----------- ----------- ------------
Cash provided by (used in)
financing activities - (50,000) (6,213,000) (437,000) 25,618,000
----------- --------- ----------- ----------- ------------
Net increase (decrease) in
cash and cash equivalents 2,917,000 473,000 3,977,000 (437,000) (5,280,000)
Cash and cash equivalents at
the beginning of the period - - 1,388,000 - 25,913,000
----------- --------- ----------- ----------- ------------
Cash and cash equivalents
at the end of the period $ 2,917,000 $ 473,000 $ 5,365,000 $ (437,000) $ 20,633,000
=========== ========= =========== =========== ============
FUNDS FROM OPERATIONS(5) $ 39,437,000
============
</TABLE>
See Accompanying Notes to Pro Forma Consolidated Statement of Cash Flows.
40
<PAGE>
STORAGE EQUITIES, INC.
PRO FORMA CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
SEI PSMI
--------------------------------------------------------------------- ------------
PRO FORMA ADJUSTMENTS
--------------------------------
ISSUANCE
OF PREFERRED SEI OPERATING
SEI & COMMON REIT PRE-MERGER COMPANIES
(HISTORICAL) STOCK(1) MERGERS(2) (PRO FORMA) (HISTORICAL)
------------- ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 42,118,000 $ 18,168,000 $ 7,540,000 $ 67,826,000 $ 22,008,000
Depreciation and
amortization 27,581,000 8,489,000 4,831,000 40,901,000 522,000
Minority interest in income 9,481,000 (2,775,000) - 6,706,000 -
Less: Equity interest
in earnings of real
estate entities - - - - -
Distributions from real
estate entities - - - - -
Gain on disposition of
real estate - - (203,000) (203,000) -
Other 3,654,000 - (1,069,000) 2,585,000 (435,000)
------------- ------------- ------------ ------------- ------------
Total adjustments 40,716,000 5,714,000 3,559,000 49,989,000 87,000
------------- ------------- ------------ ------------- ------------
Cash provided by operating
activities 82,834,000 23,882,000 11,099,000 117,815,000 22,095,000
------------- ------------- ------------ ------------- ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Principal payments on
mortgage notes receivable 6,785,000 (1,387,000) - 5,398,000 -
Investment in real estate
partnerships (78,000) - - (78,000) -
Acquisition of mortgage
notes receivable (4,020,000) - - (4,020,000) -
Acquisition of minority
interests (51,711,000) (20,007,000) - (71,718,000) -
Acquisition of real estate
facilities (93,026,000) (128,670,000) - (221,696,000) -
Proceeds from insurance
settlement 1,666,000 - 800,000 2,466,000 -
Purchase cost of the
mergers (20,972,000) - (41,127,000) (62,099,000) -
Capital expenditures (8,312,000) (1,602,000) (2,331,000) (12,245,000) -
------------- ------------- ------------ ------------- ------------
Cash provided by (used in)
investing activities (169,668,000) (151,666,000) (42,658,000) (363,992,000) -
------------- ------------- ------------ ------------- ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Principal payments on bank
debt (10,323,000) (25,447,000) 21,559,000 (14,211,000) -
Proceeds from the issuance
of Common Stock 110,280,000 82,060,000 - 192,340,000 -
Proceeds from the issuance
of Preferred Stock 57,899,000 108,635,000 - 166,534,000 -
Principal payments on
mortgage debt (8,233,000) (1,479,000) - (9,712,000) (4,500,000)
Distributions to
shareholders (38,095,000) (20,440,000) (7,386,000) (65,921,000) -
Distributions to affiliates - - - - (17,705,000)
Distribution to minority
interests (23,037,000) 6,059,000 - (16,978,000) -
Reinvestment by minority
interests 7,962,000 (2,077,000) - 5,885,000 -
------------- ------------- ------------ ------------- ------------
Cash provided by (used in)
financing activities 96,453,000 147,311,000 14,173,000 257,937,000 (22,205,000)
------------- ------------- ------------ ------------- ------------
Net increase (decrease) in
cash and cash equivalents 9,619,000 19,527,000 (17,386,000) 11,760,000 (110,000)
Cash and cash equivalents
at the beginning of the
year 10,532,000 - 4,687,000 15,219,000 1,498,000
------------- ------------- ------------ ------------- ------------
Cash and cash equivalents
at the end of the year $ 20,151,000 $ 19,527,000 $(12,699,000) $ 26,979,000 $ 1,388,000
============= ============= ============ ============= ============
FUNDS FROM OPERATIONS (5) $ 56,143,000 $ 98,252,000
============= =============
<CAPTION>
PSMI
--------------------------------------------------
COMBINED
REAL ESTATE PRO FORMA PSMI PRO FORMA SEI
INTERESTS ADJUSTMENTS OPERATIONS MERGER POST-MERGER
(HISTORICAL)(3) (3) (PRO FORMA) ADJUSTMENTS(4) (PRO FORMA)
--------------- ------------ ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 23,697,000 $ 3,389,000 $ 49,094,000 $(18,097,000) $ 98,823,000
Depreciation and
amortization - 127,000 649,000 5,880,000 47,430,000
Minority interest in income - - - - 6,706,000
Less: Equity interest
in earnings of real
estate entities (23,697,000) 2,085,000 (21,612,000) 12,217,000 (9,395,000)
Distributions from real
estate entities 12,602,000 (2,574,000) 10,028,000 - 10,028,000
Gain on disposition of
real estate - - - - (203,000)
Other - - (435,000) - 2,150,000
------------ ----------- ------------ ------------ -------------
Total adjustments (11,095,000) (362,000) (11,370,000) 18,097,000 56,716,000
------------ ----------- ------------ ------------ -------------
Cash provided by operating
activities 12,602,000 3,027,000 37,724,000 - 155,539,000
------------ ----------- ------------ ------------ -------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Principal payments on
mortgage notes receivable - 292,000 292,000 - 5,690,000
Investment in real estate
partnerships - - - - (78,000)
Acquisition of mortgage
notes receivable - - - - (4,020,000)
Acquisition of minority
interests - - - - (71,718,000)
Acquisition of real estate
facilities - - - - (221,696,000)
Proceeds from insurance
settlement - - - - 2,466,000
Purchase cost of the
mergers - - - (2,000,000) (64,099,000)
Capital expenditures - (44,000) (44,000) - (12,289,000)
------------ ----------- ------------ ------------ -------------
Cash provided by (used in)
investing activities - 248,000 248,000 (2,000,000) (365,744,000)
------------ ----------- ------------ ------------ -------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Principal payments on bank
debt - - - - (14,211,000)
Proceeds from the issuance
of Common Stock - - - - 192,340,000
Proceeds from the issuance
of Preferred Stock - - - - 166,534,000
Principal payments on
mortgage debt - (208,000) (4,708,000) - (14,420,000)
Distributions to
shareholders - - - (25,500,000) (91,421,000)
Distributions to affiliates - - (17,705,000) 17,705,000 -
Distribution to minority
interests - - - - (16,978,000)
Reinvestment by minority
interests - - - - 5,885,000
------------ ----------- ------------ ------------ -------------
Cash provided by (used in)
financing activities - (208,000) (22,413,000) (7,795,000) 227,729,000
------------ ----------- ------------ ------------ -------------
Net increase (decrease) in
cash and cash equivalents 12,602,000 3,067,000 15,559,000 (9,795,000) 17,524,000
------------ ----------- ------------ ------------ -------------
Cash and cash equivalents
at the beginning of the
year - - 1,498,000 - 16,717,000
------------ ----------- ------------ ------------ -------------
Cash and cash equivalents
at the end of the year $ 12,602,000 $ 3,067,000 $ 17,057,000 $ (9,795,000) $ 34,241,000
============ =========== ============ ============ =============
FUNDS FROM OPERATIONS (5) $ 157,005,000
=============
</TABLE>
See Accompanying Notes to Pro Forma Consolidated Statement of Cash Flows.
41
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND YEAR ENDED DECEMBER 31, 1994
(UNAUDITED)
1. Issuance of Preferred and Common Stock
--------------------------------------
During 1994 and 1995, SEI issued shares of both its Preferred and Common
Stock (See Note 1 to the Pro Forma Consolidated Statements of Income).
Pro forma adjustments have been made to the pro forma consolidated
statements of income to reflect the uses of the proceeds as if the
transactions were completed at the beginning of the year ended December 31,
1994. Similarly, the following pro forma adjustments were made to reflect
the effect on net cash provided by operating activities:
<TABLE>
<CAPTION>
THREE MONTHS YEAR
ENDED ENDED
MARCH 31, 1995 DECEMBER 31, 1994
-------------- -----------------
<S> <C> <C>
"Net income" was adjusted to reflect
the overall effect of the above
offerings and the use of the net
proceeds therefrom on the pro forma
consolidated net income $ 2,631,000 $ 18,168,000
=========== ============
"Depreciation and amortization" has
been increased to reflect the
incremental difference between the
actual depreciation expense included
in the historical statements of
operations and the pro forma
depreciation expense as if the
facilities were in operation for a
full period (including a pro forma
adjustment for the amortization of
mortgage note receivable discounts
totaling $40,000 and $693,000 in 1995
and 1994, respectively - See Note 1 to
the Pro Forma Consolidated Statements
of Income) $ 1,357,000 $ 8,489,000
=========== ============
"Minority interest in income" has been
adjusted to reflect similar
adjustments to the pro forma
consolidated statements of income $ (122,000) $ (2,775,000)
=========== =============
The following pro forma adjustments
have been made to cash flows from
investing and financing activities:
"Principal payments on mortgage notes
receivable" was decreased to reflect
the elimination of historical
payments relating to the canceled
mortgage notes (which were canceled
in connection with the acquisition
of real estate facilities) $ (284,000) $ (1,387,000)
=========== =============
"Acquisitions of minority interests
in real estate partnerships" was
increased to reflect the
acquisitions of such interests,
which occurred subsequent to the
period $ - $ (20,007,000)
=========== ==============
"Acquisitions of real estate
facilities" was increased to reflect
the acquisitions of real estate
facilities, which occurred
subsequent to the period $ - $ (128,670,000)
=========== ===============
"Capital improvements to real estate
facilities" was increased to reflect
the estimated additional capital
improvements which would have been
incurred during the period for the
acquired real estate facilities $ (276,000) $ (1,602,000)
=========== ==============
</TABLE>
42
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND YEAR ENDED DECEMBER 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS YEAR
ENDED ENDED
MARCH 31, 1995 DECEMBER 31, 1995
-------------- -----------------
<S> <C> <C>
"Net proceeds (pay downs) from note
payable to bank" has been adjusted
to reflect the pro forma use of the
offering proceeds to pay down the
historical borrowings on SEI's
credit facilities during the year
ended December 31, 1994 $ - $(25,447,000)
=========== ============
"Net proceeds from the issuance of
Common Stock" was increased to
reflect the net proceeds from the
issuance of Common Stock on May
31, 1995, which occurred
subsequent to the period $ - $ 82,060,000
=========== ============
"Net proceeds from the issuance of
preferred stock" was increased to
reflect the net proceeds from the
issuance of Series E and Series F
Preferred Stock, which occurred
subsequent to the period $ - $108,635,000
=========== ============
"Principal payments on bank debt
has been decreased to reflect
additional principal payments
with the use of the net proceeds
of the issuance of Preferred and
Common Stock $(8,636,000) $ -
=========== ============
"Principal payments on mortgage
notes payable" was increased to
reflect the payments which would
have been made during the period
with respect to the mortgage
notes payable which were assumed
in connection with the
acquisition of real estate
facilities $ (204,000) $ (1,479,000)
=========== ============
"Distributions paid to
shareholders" has been increased
to reflect the additional
distributions which would have
been paid to the holders of the
Common Stock, Series C, Series D,
Series E and Series F Preferred
Stock issued during 1994 and 1995,
as if the common and preferred
stock were outstanding for the
entire period $(3,066,000) $(20,440,000)
=========== ============
"Distributions from operations to
minority interest in real estate
partnerships" has been adjusted to
reflect the reduction in
distributions to minority
interests which would have
resulted in connection with the
acquisition of minority interests
by SEI, assuming SEI had completed
such acquisitions at the beginning
of the period $ 340,000 $ 6,059,000
=========== ============
"Reinvestment by minority interests
into real estate partnerships" has
been adjusted to reflect the
reduction which would have
resulted in connection with the
acquisition of minority interests
by SEI, assuming SEI had completed
such acquisitions at the beginning
of the period $ (86,000) $ (2,077,000)
=========== ============
</TABLE>
43
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND YEAR ENDED DECEMBER 31, 1994
(UNAUDITED)
2. REIT Mergers
------------
During 1994 and 1995, SEI completed merger transactions with PSP VIII
(September 30, 1994), PSP VI (February 28, 1995), and PSP VII (June 30,
1995) (collectively the "PSP REITs"). The following pro forma adjustments
have been made assuming the merger transactions with the PSP REITs were
completed at the beginning of the year ended December 31, 1994 to reflect
the effect on net cash provided by operating activities:
<TABLE>
<CAPTION>
THREE MONTHS YEAR
ENDED ENDED
MARCH 31, 1995 DECEMBER 31, 1994
-------------- -----------------
<S> <C> <C>
An adjustment has been made to reflect
the pro forma increase in net income
as a result of the PSP REIT merger
transaction $ 1,223,000 $ 7,540,000
=========== ============
An adjustment has been made to reflect
the pro forma increase in depreciation
as a result of the PSP REIT merger
transaction $ 784,000 $ 4,831,000
=========== ============
An adjustment has been made to reflect
the historical gain on disposition of
real estate of the PSP REITs $ - $ (203,000)
=========== ============
A pro forma adjustment has been made to
reflect the PSP REIT's historical net
change in other assets and liabilities
during the period $ (372,000) $ (1,069,000)
=========== ============
In addition, pro forma adjustments were
made to cash flows from investing and
financing activities as follows:
A pro forma adjustment has been made to
reflect PSP REIT's historical proceeds
from insurance settlements $ - $ 800,000
=========== ============
"Purchase cost of mergers" has been
adjusted to reflect the cash portion
of the purchase price, including costs
and expense ($21.4 million for PSP VI
and $19.7 million for PSP VII) $ - $(41,127,000)
=========== ============
A pro forma adjustment has been made to
reflect PSP REIT's historical capital
improvements $ (84,000) $ (2,331,000)
=========== ============
Net proceeds (pay downs) from note
payable to bank has been adjusted to
reflect:
. the historical activity of the
PSP REITs $ (917,000) $ -
. the pro forma borrowings to
consummate the REIT Mergers - 21,559,000
----------- ------------
$ (917,000) $ 21,559,000
=========== ============
</TABLE>
44
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND YEAR ENDED DECEMBER 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS YEAR
ENDED ENDED
MARCH 31, 1995 DECEMBER 31, 1994
-------------- -----------------
<S> <C> <C>
Distributions paid to shareholders has
been increased to reflect the pro
forma distributions which would have
been paid as a result of each of the
mergers (assuming the historical
distribution rate of $.22 and $.85 per
common share for the three months
ended March 31, 1995 and year ended
December 31, 1994):
. PSP VIII: 2,593,914 shares of
Common Stock for the period from
January 1, 1994 through
September 30, 1994 (date of
merger) $ - $ (1,634,000)
. PSP VI: 3,147,015 shares of
Common Stock for fiscal 1994 and
the first quarter of 1995 (692,000) (2,675,000)
. PSP VII: 3,620,543 shares of
Common Stock for fiscal 1994 and
the first quarter of 1995 (797,000) (3,077,000)
----------- ------------
$(1,489,000) $ (7,386,000)
=========== ============
</TABLE>
3. Pro forma adjustments to the historical "Operating Companies" and "Real
-----------------------------------------------------------------------
Estate Interests":
------------------
The following pro forma adjustments have been made to the Pro Forma
Consolidated Statements of Cash Flows corresponding to the adjustments made
to the respective Pro Forma Consolidated Statements of Income ( See Note 4
to the Pro Forma Consolidated Statements of Income).
<TABLE>
<CAPTION>
THREE MONTHS YEAR
ENDED ENDED
MARCH 31, 1995 DECEMBER 31, 1994
-------------- -----------------
<S> <C> <C>
An adjustment has been made to reflect
the pro forma increase in net income
as a result of the pro forma
adjustments to the Pro Forma
Consolidated Statements of Income $ 439,000 $ 3,389,000
========= ===========
An adjustment has been made to reflect
the pro forma increase in depreciation
and amortization $ 121,000 $ 127,000
========= ===========
An adjustment has been made to
eliminate the historical property and
all-inclusive trust deed operating
results included in equity in earnings
of real estate entities" included in
the "Real Estate Interests." See Note
4 to the Pro Forma Consolidated
Statements of Income. $ 516,000 $ 2,085,000
========= ===========
An adjustment has been made to
eliminate the historical property and
all-inclusive trust deeds cash flow
which is included in real estate
entities included in the "Real Estate
Interests." See Note 4 to the Pro
Forma Consolidated Statements of
Income. $(637,000) $(2,574,000)
========= ===========
</TABLE>
45
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND YEAR ENDED DECEMBER 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS YEAR
ENDED ENDED
MARCH 31, 1995 DECEMBER 31, 1994
-------------- -----------------
<S> <C> <C>
In addition, pro forma adjustments were
made to cash flows from investing and
financing activities as follows:
A pro forma adjustment has been made to
reflect the historical principal
payments on the mortgage notes
receivable secured by all-inclusive
deeds of trusts $ 92,000 $ 292,000
========= ===========
A pro forma adjustment has been made to
reflect historical capital
improvements on the seven properties
to be acquired in the Merger $ (8,000) $ (44,000)
========= ===========
A pro forma adjustment has been made to
reflect the historical principal
payments on the mortgage notes payable
secured by all-inclusive deeds of
trusts $ (50,000) $ (208,000)
========= ===========
</TABLE>
4. Pro forma Merger adjustments:
-----------------------------
The following pro forma adjustments have been made to the Pro Forma
Consolidated Statements of Cash Flows corresponding to the adjustments made
to the respective Pro Forma Consolidated Statements of Income (See Note 5
to the Pro Forma Consolidated Statements of Income).
<TABLE>
<CAPTION>
THREE MONTHS YEAR
ENDED ENDED
MARCH 31, 1995 DECEMBER 31, 1994
-------------- -----------------
<S> <C> <C>
An adjustment has been made to reflect
the pro forma decrease in net income
as a result of the pro forma
adjustments to the Pro Forma
Consolidated Statements of Income $(4,524,000) $(18,097,000)
=========== ============
An adjustment has been made to reflect
the pro forma increase in depreciation
and amortization $ 1,470,000 $ 5,880,000
=========== ============
An adjustment has been made to adjust
historical depreciation included in
the "Equity in earnings of real estate
entities" included in the "Real Estate
Interests" to reflect the depreciation
of the difference between the fair
value of the acquired interests and
the underlying carrying value on each
of the investees books $ 3,054,000 $ 12,217,000
=========== ============
</TABLE>
46
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND YEAR ENDED DECEMBER 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS YEAR
ENDED ENDED
MARCH 31, 1995 DECEMBER 31, 1994
-------------- -----------------
<S> <C> <C>
In addition, pro forma adjustments were
made to cash flows from investing and
financing activities as follows:
A pro forma adjustment has been made to
Purchase cost of mergers to reflect
the cash portion of the Merger (direct
costs and expense of the Merger) $ - $ (2,000,000)
=========== ============
A pro forma adjustment has been made to
eliminate the historical Distributions
to affiliates included in the
"Operating Companies" $ 6,163,000 $ 17,705,000
=========== ============
A pro forma adjustment has been made to
reflect the distributions to the
shares of Common Stock to be issued
pursuant to the Merger (distributions
are based on historical distributions
per share of Common Stock at $.22 per
share for the first quarter of 1995
and $.85 per share for fiscal 1994). $(6,600,000) $(25,500,000)
=========== ============
</TABLE>
5. Funds from operations:
----------------------
Funds from operations ("FFO") means net income (loss) (computed in
accordance with general accepted accounting principles ("GAAP")) before
(i) loss on early extinguishment of debt (ii) minority interest in income
and (iii) gain/loss on disposition of real estate, adjusted as follows:
(i) plus depreciation and amortization (including SEI's pro-rata share of
depreciation and amortization of unconsolidated equity interests and
amortization of assets acquired in the Merger), and (ii) less FFO
attributable to minority interests. FFO is a supplemental performance
measure for equity REITs used by industry analysts. FFO does not take into
consideration principal payments on debt, capital improvements,
distributions and other obligations of SEI. Accordingly, FFO is not a
substitute for SEI's net cash provided by operating activities or net income
as a measure of SEI's liquidity or operating performance.
47
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
---------------------------------
c. Exhibits.
--------
2. Agreement and Plan of Reorganization by and among Public Storage,
Inc., Public Storage Management, Inc. and Storage Equities, Inc.
dated as of June 30, 1995 (the "Agreement and Plan of
Reorganization"), and form of Agreement of Merger between Storage
Equities, Inc. and Public Storage Management, Inc. (Exhibit A to
the Agreement and Plan of Reorganization).
23. Consent of Ernst & Young LLP.
48
<PAGE>
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 hereunto duly authorized.
STORAGE EQUITIES, INC.
Date: July 19, 1995 By: /s/ Harvey Lenkin
------------------------ -----------------------------
Harvey Lenkin
President
49
<PAGE>
EXHIBIT 2
AGREEMENT AND PLAN
OF REORGANIZATION
BY AND AMONG
PUBLIC STORAGE, INC.,
PUBLIC STORAGE MANAGEMENT, INC.
AND
STORAGE EQUITIES, INC.
Dated as of June 30, 1995
Exhibits to this Agreement (except Exhibit A, Agreement of Merger, which is
filed herewith) have been omitted and will be furnished to the Securities and
Exchange Commission upon request.
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C>
1. DEFINITIONS........................................................... 1
2. THE MERGER; CLOSING................................................... 6
2.1. The Merger..................................................... 6
2.2. Closing........................................................ 6
2.3. Effective Time................................................. 6
3. EFFECT OF MERGER...................................................... 7
3.1. Articles of Incorporation...................................... 7
3.2. Bylaws......................................................... 7
3.3. Officers and Directors......................................... 7
4. CONVERSION OF SHARES; POST-CLOSING ADJUSTMENTS; ESCROW................ 7
4.1. Conversion of PSMI Shares...................................... 7
4.2. Post-Closing Adjustment........................................ 8
4.3. SEI Shares Unaffected.......................................... 9
4.4. Surrender of Certificates...................................... 9
4.5. Fractional Shares.............................................. 10
4.6. Transfer of Shares............................................. 10
4.7. Lost, Stolen or Destroyed Certificates......................... 10
4.8. Indemnification Shares; Claims Against the Escrow.............. 10
5. REPRESENTATIONS AND WARRANTIES OF PSI AND PSMI........................ 12
5.1. Organization and Related Matters............................... 12
5.2. Ownership Interests............................................ 12
5.3. Authority...................................................... 13
5.4. Capital Stock.................................................. 13
5.5. Litigation..................................................... 13
5.6. No Violation or Conflict....................................... 14
5.7. Compensation................................................... 14
5.8. Employee Benefit Plans......................................... 14
5.9. Labor Matters.................................................. 16
5.10. Taxes.......................................................... 16
5.11. Intellectual Property.......................................... 17
5.12. Financial Statements........................................... 18
5.13. Absence of Certain Changes or Events........................... 18
5.14. Books and Records.............................................. 18
5.15. Contracts and Leases... ....................................... 19
5.16. Title to Assets; Encumbrances. ................................ 19
5.17. Real Property.................................................. 19
5.18. Environmental Matters.......................................... 20
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C>
5.19. Affiliated Transactions....................................... 22
5.20. Brokers and Finders........................................... 22
5.21. Proxy Statement............................................... 22
5.22. Insurance..................................................... 23
5.23. Licenses; Compliance With Law................................. 23
5.24. Governmental Approvals........................................ 23
5.25. Disclosure.................................................... 24
6. REPRESENTATIONS AND WARRANTIES OF SEI................................. 24
6.1. Organization and Related Matters............................... 24
6.2. Authorization.................................................. 24
6.3. Capital Stock.................................................. 25
6.4. Litigation..................................................... 25
6.5. Compliance With Other Instruments, Etc......................... 25
6.6. Reports and Financial Statements............................... 26
6.7. Brokers and Finders............................................ 26
6.8. Proxy Statement................................................ 27
6.9. Disclosure..................................................... 27
7. ADDITIONAL COVENANTS AND AGREEMENTS................................... 27
7.1. Conduct of Business of PSI Entities............................ 27
7.2. Other Transactions............................................. 29
7.3. Meeting of Shareholders........................................ 30
7.4. Proxy Statement................................................ 30
7.5. Filings; Other Action.......................................... 30
7.6. Access to Information.......................................... 31
7.7. Tax Matters.................................................... 31
7.8. Restructure.................................................... 31
7.9. Management and Advisory Agreements............................. 31
7.10. Intellectual Property Rights................................... 32
7.11. Employees...................................................... 32
7.12. Tax-Free Exchange and REIT Status.............................. 32
7.13. Public Statements.............................................. 32
7.14. Notice of Certain Events....................................... 33
7.15. Director and Officer Indemnification........................... 33
7.16. Recapitalization............................................... 33
7.17. PSI/PSMI Disclosure Statement.................................. 33
7.18. Listing of SEI Shares.......................................... 34
7.19. Further Action................................................. 34
8. CONDITIONS............................................................ 34
8.1. Conditions to Each Party's Obligations......................... 34
8.2. Conditions to Obligations of PSMI to Effect the Merger......... 35
8.3. Conditions to Obligation of SEI to Effect the Merger........... 35
</TABLE>
-ii-
<PAGE>
<TABLE>
<S> <C>
9. TERMINATION........................................................... 38
9.1. Termination by Mutual Consent.................................. 38
9.2. Termination by Either SEI or PSMI.............................. 38
9.3. Effect of Termination and Abandonment.......................... 39
10. MISCELLANEOUS......................................................... 39
10.1. Expenses....................................................... 39
10.2. Notices, Etc................................................... 39
10.3. Survival....................................................... 40
10.4. Modification or Amendment...................................... 40
10.5. Waiver......................................................... 40
10.6. No Assignment.................................................. 41
10.7. Entire Agreement............................................... 41
10.8. Remedies Cumulative............................................ 41
10.9. Parties in Interest............................................ 41
10.10. Governing Law.................................................. 41
10.11. Name, Captions, Etc............................................ 41
10.12. Severability................................................... 42
10.13. Counterparts................................................... 42
10.14. Interpretation................................................. 42
10.15. Further Action................................................. 42
</TABLE>
EXHIBITS
- --------
Exhibit A - Merger Agreement
Exhibit B - PSI Entities
Exhibit C - Officers of Surviving Corporation
Exhibit D - Outline of Rights, Preferences, Privileges and Restrictions
of SEI Class B Shares
-iii-
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION (the "AGREEMENT"), dated as of June
30, 1995, by and among Storage Equities, Inc., a California corporation ("SEI"),
Public Storage, Inc., a California corporation ("PSI"), and Public Storage
Management, Inc., a California corporation ("PSMI").
RECITALS
A. The parties intend that the reorganization contemplated by this
Agreement (the "PLAN OF REORGANIZATION") qualify as a "reorganization" under the
provisions of Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as
amended.
B. Prior to implementation of the Plan of Reorganization, PSI and PSMI
contemplate a restructure of various of their affiliated corporations, including
a liquidation by merger of PSI with and into its parent, PSI Holdings, Inc.
("PSIH") followed by a merger of PSIH with and into PSMI, and SEI contemplates
amending its Articles of Incorporation to effect a recapitalization.
C. The Plan of Reorganization provides for the merger of PSMI with and
into SEI in accordance with the applicable provisions of the General Corporation
Law of California (the "GCLC") and an Agreement of Merger substantially in the
form attached hereto as Exhibit A (the "MERGER AGREEMENT").
---------
D. The Boards of Directors of SEI, PSI, and PSMI believe that it is in
the best interests of such corporations and their respective shareholders to
enter into and complete this Agreement and they each have approved this
Agreement and the transactions contemplated hereby.
NOW, THEREFORE, in consideration of the mutual representations,
warranties, and agreements set forth herein, the parties hereby agree as
follows:
1. DEFINITIONS
As used in this Agreement, the following terms shall have the respective
meanings set forth below:
"Acquisition Proposal": As defined in Section 7.2.
"Affiliate": As defined in Rule 12b-2 under the Exchange Act.
-1-
<PAGE>
"Authorization": Any consent, approval or authorization of, expiration
or termination of any waiting period requirement (including pursuant to the HSR
Act) by, or filing, notice, registration, qualification, declaration or
designation with, any Governmental Body.
"Benefit Arrangement": As defined in Section 5.8(a).
"Business Combination": As defined in Section 4.1(b).
"Certificates": As defined in Section 4.1(c).
"Closing": As defined in Section 2.2.
"Closing Date": The date on which the Closing occurs.
"Code": The Internal Revenue Code of 1986, as amended.
"Damages": means any provable or ascertainable loss, liability, damage,
cost, obligation or expense (including reasonable costs of investigation,
defense and prosecution of litigation and attorneys' fees) incurred by SEI.
"Effective Time": As defined in Section 2.3.
"Employee Plan": As defined in Section 5.8(a).
"Employees": As defined in Section 5.8(a).
"ERISA": The Employee Retirement Income Security Act of 1974, as
amended, and all regulations promulgated thereunder as in effect from time to
time.
"ERISA Affiliate": Any trade or business, whether or not incorporated,
that is now or has at any time in the past been treated as a single employer
with PSMI or any of its Affiliates under Section 414(b) or (c) of the Code and
the Treasury Regulations thereunder.
"Exchange": Either the NYSE or the national securities exchange (as
defined in Section 12(b) of the Exchange Act) or automated quotation system upon
which the SEI Common Shares are then listed for trading.
"Exchange Act": The Securities Exchange Act of 1934, as amended.
"Excluded Companies": Collectively, PS Insurance Company, Ltd., PSI
Securities Corp., Canadian Mini-Warehouse Management, Ltd., Canadian Mini-
Warehouse Properties, Ltd. and Canadian Diversified Storage.
"EY Report": As defined in Section 4.2(a).
-2-
<PAGE>
"Final Determination": (a) (i) A decision of the United States Tax
Court, which has become final and non-appealable, or (ii) a judgment, decree or
other order by another court or other tribunal with appropriate jurisdiction,
which has become final and non-appealable; (b) a final and binding settlement or
compromise with the Internal Revenue Service or another administrative agency
with appropriate jurisdiction, including, but not limited to, a closing
agreement under Section 7121 of the Code; (c) a deficiency assessment or other
determination which is not protested or appealed by the taxpayer within the
appropriate period for protest or appeal and which therefore has become final
and non-appealable; or (d) any final disposition by reason of the expiration of
all applicable statutes of limitations.
"Governmental Body": Any federal, state, municipal, political
subdivision or other governmental department, commission, board, bureau, agency,
authority or instrumentality, whether domestic or foreign.
"HSR Act": The Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended.
"Hughes": B. Wayne Hughes.
"Indemnification Escrow Agent": As defined in Section 4.8(a).
"Indemnification Escrow Agreement": As defined in Section 4.8(a).
"Indemnification Period": As defined in Section 4.8(b).
"Indemnification Shares": As defined in Section 4.8(a).
"Knowledge": The term "knowledge" or "best knowledge" and any
derivatives thereof when applied to any party to this Agreement shall refer to
the knowledge of a particular fact or matter which such party or any director,
officer or senior manager thereof has or could reasonably be expected to have,
discover or become aware of as a result of the conduct of the party's business
or the performance of his or her duties in the ordinary course, but no
information known by any other employee, or any attorney, accountant or other
representative of such party, shall be imputed to such party.
"Market Value": For purposes of this Agreement, the per-share value of
SEI Common Shares, which shall be the average of the SEI Common Shares daily
closing price on the Exchange for each of the thirty (30) trading days on which
SEI Common Shares were traded immediately preceding the determination date, for
purposes of the adjustment, if any, to the number of SEI Shares (as set forth in
Section 4.2(b)), or for purposes of calculating the amount of Indemnification
Shares, if any, to be withheld or delivered (as set forth in Section 4.8).
"Material Agreements": As defined in Section 5.15.
-3-
<PAGE>
"Merger": The merger of PSMI with and into SEI as contemplated by
Section 2.1.
"NYSE": The New York Stock Exchange, Inc.
"Original AA Report": As defined in Section 4.2(a).
"Partnership": As defined in Section 5.2.
"Permitted Liens": As defined in Section 5.16.
"Person": Any individual or corporation, company, partnership, trust,
incorporated or unincorporated association, joint venture or other entity of any
kind.
"Proxy Statement": As defined in Section 7.4.
"PSAI": Public Storage Advisers, Inc., a California corporation.
"PSCP": Public Storage Commercial Properties, Inc., a California
corporation.
"PSI Entities": Collectively, the entities that are listed on Exhibit B,
---------
all of which shall be merged with and into PSMI in the Restructure.
"PSI Entities Material Adverse Effect": As defined in Section 5.1.
"PSI Equity Adjustment": As defined in Section 4.2(a).
"PSI Intellectual Property Rights": Any intellectual property rights in
the United States of America or abroad, including patents, patent applications,
trademarks, trademark applications and registrations, service marks, service
mark applications and registrations, tradenames, tradename applications and
registrations, copyrights, copyright applications and registrations, licenses,
logos, corporate and partnership names and customer lists, proprietary
processes, formulae, inventions, trade secrets, know-how, development tools and
other proprietary rights used by any of the PSI Entities, pertaining to any
product, software, system or service manufactured, marketed, licensed,
sublicensed, used or sold by any PSI Entity in the conduct of its business or
used, employed or exploited in the development, license, sale, marketing,
distribution or maintenance thereof, and all documentation and media
constituting, describing or relating to the above, including, but not limited
to, manuals, memoranda, know-how, notebooks, software, records and disclosures.
"PSI/PSMI Disclosure Statement": The disclosure statement to be
delivered by PSMI to SEI pursuant to Section 7.17.
-4-
<PAGE>
"PSI Real Estate Investments": The real estate investments (consisting
of partnership interests and REIT stock) of the PSI Entities reflected in the
Original AA Report and the Updated AA Report.
"PSMI Common Shares": Common Stock, par value $.10 per share, of PSMI,
outstanding at the Effective Time.
"PSMI Shareholders": Collectively, B. Wayne Hughes, Tamara L. Hughes and
any other person who is a shareholder of PSMI immediately prior to the Effective
Time.
"Recapitalization": The recapitalization of SEI as described in Section
7.16.
"REIT": A real estate investment trust.
"Restructure": As defined in Section 7.8.
"SEC": The Securities and Exchange Commission.
"SEI Class B Shares": Shares of Class B Common Stock, $.10 par value per
share, of SEI to be created in the Recapitalization.
"SEI Common Shares": Shares of Common Stock, $.10 par value per share,
of SEI.
"SEI Material Adverse Effect": As defined in Section 6.1.
"SEI Preferred Shares": Shares of Preferred Stock, $.10 par value per
share, of SEI.
"SEI SEC Reports": As defined in Section 6.6.
"SEI Shares": Collectively, SEI Common Shares and SEI Class B Shares.
"SEI Shareholders Meeting": As defined in Section 7.3.
"Special Committee": The Special Committee of the Board of Directors of
SEI, appointed specifically for the purpose of considering the Merger and
related transactions.
"Surviving Corporation": SEI as the surviving corporation in the Merger.
"Tax" or "Taxes": Any federal, state, local or foreign income, profit,
transfer, excise, sales, capital stock, license, franchise, personal, ad
valorem, property, sales, use, gross receipts, payroll, employment, windfall
profits, environmental, social security, Medicare, occupation, customs,
unemployment, estimated, stamp, real property or other tax of any kind
-5-
<PAGE>
character or description whatsoever, including any charge, fee, levy, import
duty, license or assessment imposed by any Governmental Body, together with any
related liabilities, penalties, fines, additions to tax or interest, whether
disputed or not.
"Tax Return": Any tax return, information return, withholding tax
return, declaration of estimated tax, tax report, customs declaration, claim for
refund or information return or other documents (including without limitation
any related supporting schedules, statements or information) filed or required
to be filed with any Tax authority or Governmental Body in connection with the
determination, assessment or collection of any Taxes or the administration of
any laws, regulations or administrative requirements relating to any Taxes.
"Updated AA Report": As defined in Section 4.2(b).
"Valuation": As defined in Section 4.2(a).
2. THE MERGER; CLOSING
2.1. THE MERGER
At the Effective Time, (i) PSMI shall be merged with and into SEI in
accordance with the terms and conditions of this Agreement and the Merger
Agreement; (ii) the separate corporate existence of PSMI shall cease and SEI
shall be the surviving corporation and shall continue to be governed by the laws
of the State of California; and (iii) SEI's name shall be changed to "Public
Storage, Inc."
2.2. CLOSING
Subject to Article 9 hereof and the fulfillment or waiver of the
conditions set forth in Article 8, the closing of the transactions contemplated
by this Agreement (the "CLOSING") shall take place at (i) the offices of Heller,
Ehrman, White & McAuliffe, 601 South Figueroa Street, Los Angeles, California,
on the last day of the month following the SEI Shareholders Meeting, or (ii)
such other place and/or time and/or on such other date as SEI and PSMI may agree
or as may be necessary to permit the fulfillment or waiver of the conditions set
forth in Article 8.
2.3. EFFECTIVE TIME
At or before the Closing and after the SEI Shareholders Meeting, SEI
and PSMI shall execute and deliver the Merger Agreement, together with the
requisite Officers' Certificates, for filing with the California Secretary of
State in accordance with the GCLC. The Merger shall become effective on the date
and at the time (the "EFFECTIVE TIME") at which the Merger Agreement, together
with the requisite Officers' Certificates, are filed with the California
Secretary of State, which shall occur as soon as practicable after the Closing.
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3. EFFECT OF MERGER
3.1. ARTICLES OF INCORPORATION
The Articles of Incorporation of SEI, as amended by the Merger
Agreement at the Effective Time, shall continue to be the Articles of
Incorporation of the Surviving Corporation until duly amended in accordance with
the terms thereof and the GCLC.
3.2. BYLAWS
The Bylaws of SEI, as amended at the Effective Time, shall continue to
be the Bylaws of the Surviving Corporation until duly amended in accordance with
the terms thereof, the Articles of Incorporation of the Surviving Corporation
and the GCLC.
3.3. OFFICERS AND DIRECTORS
The directors of SEI at the Effective Time shall continue as directors
of the Surviving Corporation from and after the Effective Time. The persons
whose names are set forth on Exhibit C shall serve as the executive officers of
---------
the Surviving Corporation from and after the Effective Time, holding the
positions indicated opposite their respective names, until changed as provided
by the GCLC and the Articles of Incorporation and Bylaws of the Surviving
Corporation.
4. CONVERSION OF SHARES; POST-CLOSING ADJUSTMENTS; ESCROW
4.1. CONVERSION OF PSMI SHARES
(a) At the Effective Time, by virtue of the Merger and without any
action by holders thereof, the PSMI Shares shall be converted into the right to
receive 30,000,000 SEI Common Shares (subject to adjustment pursuant to Section
4.2) and 7,000,000 SEI Class B Shares. The SEI Shares shall be allocated among
the PSMI Shareholders in such proportions as they shall agree.
(b) If, prior to the Effective Time, SEI should split or combine the
SEI Common Shares, or pay a stock dividend or other stock distribution in SEI
Common Shares, or otherwise change the SEI Common Shares into, or exchange SEI
Common Shares for, any other securities (whether pursuant to or as part of a
merger, consolidation, acquisition of property or stock, separation,
reorganization or liquidation of SEI as a result of which the SEI Shareholders
receive cash, stock or other property in exchange for, or in connection with,
their SEI Shares (a "BUSINESS COMBINATION")), or make any other dividend or
distribution (other than cash) on the SEI Common Shares, then the number of SEI
Shares will be appropriately adjusted to reflect such split, combination,
dividend, distribution, Business Combination or change.
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(c) The PSMI Shares to be converted into SEI Shares pursuant to this
Section 4.1 shall cease to be outstanding, shall be cancelled and retired and
shall cease to exist, and each holder of a certificate or certificates
representing any such PSMI Shares (the "CERTIFICATES") shall thereafter cease to
have any rights with respect to such PSMI Shares, except the right to receive
for each of the PSMI Shares, upon the surrender of such Certificate in
accordance with Section 4.4, the SEI Shares specified above (subject to the
provisions of Section 4.8).
4.2. POST-CLOSING ADJUSTMENT
(a) For purposes of this Agreement and this Section 4.2 (i)
"VALUATION" shall mean the value of PSI Real Estate Investments, as valued by
Arthur Andersen & Co. LLP in its report dated June 13, 1995 (the "ORIGINAL AA
REPORT") or in the "Updated AA Report" (as defined in Section 4.2(b)(i)(A)) and
(ii) "PSI EQUITY ADJUSTMENT" shall mean the difference between (a) the book
value of the combined assets (other than the PSI Real Estate Investments, fee
interests in seven properties and SEI Common Shares) of the PSI Entities less
their liabilities, determined on an accrual basis as of the Closing Date, and
(b) the negative amount of $64,503,000, representing the book value of Notes
Receivable Secured by AITDS as of December 31, 1994, less (i) the book value of
Mortgage Notes Payable as of December 31, 1994, and less (ii) $68,000,000
principal amount of PSMI Senior Secured Notes Payable, all determined on an
accrual basis. The PSI Equity Adjustment and the number of SEI Common Shares
owned by the PSI Entities on the Closing Date will be reflected in a report by
Ernst & Young LLP ("EY REPORT").
(b) The number of SEI Common Shares issuable in the Merger shall be
subject to adjustment as follows:
(i) First, the number of SEI Common Shares issuable in the Merger
shall be adjusted as follows:
(A) Within 60 days following the Closing Date, SEI shall
cause Arthur Andersen & Co. LLP to deliver an updated report (the
"UPDATED AA REPORT") to the PSMI Shareholders and to SEI. The Updated
AA Report shall (i) be prepared in a manner consistent with the
methodology used in preparing the Original AA Report, and (ii) value
only the PSI Real Estate Investments in existence at the Closing Date
that were not in existence at December 31, 1994.
(B) SEI shall promptly issue a number of additional SEI
Common Shares obtained by dividing the amount of the valuation in the
Updated AA Report by the Market Value as of the Closing Date. Such
additional shares shall be allocated among the PSMI Shareholders in
such proportions as they shall agree.
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(ii) Second, following any adjustment to the number of SEI Common
Shares in Section 4.2(b)(i), the number of SEI Common Shares issuable
in the Merger shall be subject to further adjustment as follows:
(A) Within 60 days following the Closing Date, SEI shall
cause Ernst & Young LLP to deliver the EY Report to the PSMI
Shareholders and to SEI.
(B) If the EY Report reflects a PSI Equity Adjustment in an
amount less than zero, Hughes shall be required to return to SEI that
number of SEI Common Shares determined by dividing the amount of such
deficiency by the Market Value as of the Closing Date. If the EY
Report reflects a PSI Equity Adjustment in an amount greater than
zero, SEI shall promptly issue such number of additional SEI Common
Shares obtained by dividing the amount of such excess by the Market
Value as of the Closing Date. Such additional shares shall be
allocated among the PSMI Shareholders in such proportions as they
shall agree.
(iii) The amount of the valuation in the Updated AA Report under
Section 4.2(b)(i) shall be offset by the amount of any deficiency
under Section 4.2(b)(ii).
(iv) Third, following any adjustment to the number of SEI Common
Shares in Sections 4.2(b)(i) and 4.2(b)(ii), SEI shall promptly issue
a number of SEI Common Shares equal to the number of SEI Common Shares
reflected in the EY Report. Such additional shares shall be allocated
among the PSMI Shareholders in such proportions as they shall agree.
4.3. SEI SHARES UNAFFECTED
The Merger shall effect no change in any of the outstanding SEI Common
Shares or SEI Preferred Shares and no outstanding SEI Common Shares or SEI
Preferred Shares shall be converted or exchanged as a result of the Merger, and
no securities shall be issuable with respect thereto. Notwithstanding the
foregoing, any SEI Common Shares owned by any PSI Entity at the Effective Time
shall be cancelled and retired and SEI Common Shares shall be issuable therefor
as provided in Section 4.2(b)(iv).
4.4. SURRENDER OF CERTIFICATES
Subject to the provisions of Section 4.8, at the Closing, PSMI shall
cause each holder of PSMI Shares to surrender the Certificates representing the
PSMI shares to SEI and such holders shall be entitled to receive in exchange
therefor certificates representing the number and class of SEI Shares into which
such PSMI Shares shall be converted pursuant to Section 4.1.
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4.5. FRACTIONAL SHARES
Notwithstanding any other term or provision of this Agreement, no
fractional SEI Shares and no certificates or scrip therefor, or other evidence
of ownership thereof, will be issued in the Merger. In lieu of any such
fractional share interests, each holder of PSMI Shares who would otherwise be
entitled to such fractional share will, upon surrender of Certificates
representing such PSMI Shares, receive a whole SEI Share if such fractional
share to which such holder would otherwise have been entitled is .5 of an SEI
Share or more, and such fractional share shall be disregarded if it represents
less than .5 of an SEI Share.
4.6. TRANSFER OF SHARES
No transfers of PSMI Shares shall be made on the stock transfer books
of PSMI after the close of business on the day prior to the Closing.
4.7. LOST, STOLEN OR DESTROYED CERTIFICATES
If any Certificate shall have been lost, stolen or destroyed, upon the
making of an affidavit of that fact by the Person claiming such Certificate to
be lost, stolen or destroyed and, if required by the Surviving Corporation, the
posting by such Person of a bond in such reasonable amount as the Surviving
Corporation may direct as indemnity against any claim that may be made against
it with respect to such Certificate, the Surviving Corporation will issue in
exchange for such lost, stolen or destroyed Certificate SEI Shares deliverable
in respect thereof pursuant to this Agreement.
4.8. INDEMNIFICATION SHARES; CLAIMS AGAINST THE ESCROW
(a) At the Closing, the SEI Class B Shares (the "INDEMNIFICATION
SHARES") shall be deposited in escrow with Wells Fargo Bank, as escrow agent, or
such other party as may be agreed upon by the parties prior to Closing (the
"INDEMNIFICATION ESCROW AGENT"), to be held and administered in accordance with
the terms and conditions of an Indemnification Escrow Agreement (the
"INDEMNIFICATION ESCROW AGREEMENT"). The Indemnification Shares shall be
registered in the name of the PSMI Shareholders owning such shares and shall be
accompanied by stock powers endorsed in blank.
SEI shall be entitled to recover from the Indemnification Shares the
full dollar amount of any Damages that may be suffered by SEI by reason of (i)
any breach of representation or warranty made by PSI or PSMI in Article 5, (ii)
any breach by PSI or PSMI of any covenant or agreement on its part contained in
this Agreement, (iii) any liability or out-of-pocket expenses suffered by SEI in
its capacity as general partner of any of the Partnerships to the extent such
liability or expense arises out of facts or circumstances in existence prior to
the Closing Date or (iv) any liability for Taxes assessed against SEI (including
penalties and interest and including interest payable pursuant to Section
852(e)(3) of the Code) as successor to PSMI and the other PSI Entities
(irrespective of which party is primarily liable under the laws
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of the applicable Governmental Body) including liabilities resulting from a
determination by an applicable Governmental Body that the spin-off of any of the
Excluded Companies does not qualify under Section 355(a)(1) of the Code. No
claims for indemnification hereunder shall be made by SEI until Damages (arising
from a single claim or in the aggregate from multiple claims) equal or exceed
$100,000, in which case the full dollar amount of any Damages shall be
recoverable. Notwithstanding the foregoing, SEI shall not be entitled to
indemnification or to seek Damages for any liability with respect to which SEI
would have been obligated to indemnify any PSI Entity, if such liability had
arisen prior to the Effective Time.
(b) For purposes of this Section 4.8, the "INDEMNIFICATION PERIOD"
shall begin as of the Closing Date and shall continue through the third
anniversary thereof. Claims for Damages may only be made from the
Indemnification Shares. Nevertheless, any covenant, agreement, representation
or warranty in respect of which indemnity may be sought pursuant to this Section
4.8 shall survive the time at which it would otherwise terminate if written
notice of the inaccuracy or breach thereof specifying in reasonable detail the
Damages (including the amount thereof) giving rise to such right to indemnity,
shall have been delivered to the PSMI Shareholders prior to such time.
At the termination of the Indemnification Period, Indemnification
Shares not required to reimburse SEI for any Damages which constitute an
indemnifiable claim, or which are not pending determination as an
indemnification claim, shall be returned by the Indemnification Escrow Agent to
the PSMI Shareholders owning such shares and SEI's rights to indemnification
shall terminate except as otherwise expressly set forth herein. Notwithstanding
the foregoing, SEI shall be entitled to continuing indemnification from Hughes
with respect to (A) the matters set forth in (a)(iv) above or any breach of
representation or warranty made by PSI and PSMI in Section 5.10, which
indemnification obligation shall continue until the expiration of the applicable
statutory period of limitations under the Code, and (B) the matters set forth in
(a)(iii) above or any breach of representation or warranty made by PSI or PSMI
in Section 5.16, which indemnification obligation shall continue through the
fifth anniversary of the Closing Date. Such continuing right to indemnification
beyond the Indemnification Period (under either (A) or (B) hereof) shall be
limited to the recovery of Damages in the amount of the Indemnification Shares.
(c) Notwithstanding the escrow of the Indemnification Shares, any
dividends or other distributions declared and paid on such shares shall continue
to be paid by SEI to the PSMI Shareholders owning such shares. Any securities
received by the Indemnification Escrow Agent in respect of any Indemnification
Shares held in escrow as a result of a stock split or combination of SEI Class B
Shares, payment of a stock dividend or other stock distribution in or on SEI
Class B Shares, or change of SEI Class B Shares into any other securities
pursuant to or as part of a Business Combination or otherwise, shall be held by
the Indemnification Escrow Agent as, and shall be included within the definition
of Indemnification Shares. Indemnification procedures shall be as stipulated in
the Indemnification Escrow Agreement.
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(d) For purposes of this Section 4.8, the satisfaction of any Damages
owed hereunder shall be made (i) during the Indemnification Period by delivery
by the Indemnification Escrow Agent to SEI of that number of Indemnification
Shares calculated by dividing the dollar amount of any Damages by the then
Market Value of the SEI Common Shares after applying thereto the percentage
discount attributable to the SEI Class B Shares for purposes of determining the
aggregate purchase price and reducing such discount by 1/84th thereof for each
calendar month that has elapsed from the Closing Date, and (ii) after the
Indemnification Period by delivery by Hughes of (A) that number of
Indemnification Shares calculated in accordance with Section 4.8(d)(i), (B) that
number of SEI Common Shares with a Market Value equal to any Damages or (C) cash
in an amount equal to any Damages. Any Indemnification Shares returned to SEI
hereunder shall be treated, to the extent permitted by law, by the PSMI
Shareholders and SEI as a purchase price adjustment.
5. REPRESENTATIONS AND WARRANTIES OF PSI AND PSMI
Except as set forth on the PSI/PSMI Disclosure Statement, PSI and PSMI
hereby represent and warrant to SEI that as of the date hereof:
5.1. ORGANIZATION AND RELATED MATTERS
Each PSI Entity is a corporation duly incorporated, validly existing
and in good standing under the laws of the State of California and has all
requisite corporate power and authority to own, lease and operate its
properties, and to carry on its business as now conducted and proposed by such
PSI Entity to be conducted; and each of PSI and PSMI has all requisite corporate
power and authority to enter into this Agreement and to carry out the provisions
of this Agreement and consummate the transactions contemplated hereby. Each PSI
Entity is duly qualified and in good standing in each jurisdiction in which the
property owned, leased, managed or operated by it or the nature of the business
conducted by it makes such qualification necessary and where the failure to be
so qualified has or would be reasonably expected (so far as can be foreseen at
the time) to have a material adverse effect on the business, properties,
operations, condition (financial or other) or prospects of the PSI Entities,
considered as a single enterprise (a "PSI ENTITIES MATERIAL ADVERSE EFFECT").
True and correct copies of each PSI Entity's Articles of Incorporation and
Bylaws have been made available to SEI.
5.2. OWNERSHIP INTERESTS
The PSI/PSMI Disclosure Statement sets forth a true and complete list,
including the name and jurisdiction of organization, of each joint venture,
general partnership and limited partnership of which each PSI Entity is,
directly or indirectly, a partner (a "PARTNERSHIP") and of each corporation,
association, trust or other entity in which any PSI Entity holds, directly or
indirectly, any capital stock or other equity or ownership or proprietary
interest, and in each such case the nature and extent of its ownership or other
interest therein. The partnership agreements for each Partnership are listed in
the PSI/PSMI Disclosure Statement and true and correct copies have been made
available to SEI. Each PSI Entity owns the percentages of each
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class of equity interest of each Partnership as set forth in the PSI/PSMI
Disclosure Statement and its respective Partnership agreement, free and clear of
all restrictions, liens, security interests, charges, encumbrances and interests
of third parties. With respect to such Partnerships, each PSI Entity's rights
and interests as a partner as identified in the respective Partnership
agreements are unimpaired and in full force and effect. Each PSI Entity owns
the capital stock or other interest of each such corporation, association, trust
or other entity as set forth in the PSI/PSMI Disclosure Statement, free and
clear of all restrictions, liens, security interests, charges, encumbrances and
interests of third parties.
5.3. AUTHORITY
This Agreement and the consummation of the transactions contemplated
hereby (including the Restructure) have been approved by the Board of Directors
and all of the shareholders of each of PSI and PSMI and have been duly
authorized by all other necessary corporate action on the part of PSI and PSMI.
This Agreement has been duly executed and delivered by a duly authorized officer
of each of PSI and PSMI and constitutes a valid and binding agreement of each of
PSI and PSMI, enforceable against PSI and PSMI in accordance with its terms,
except as may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium and other similar laws of general application that may affect the
enforcement of creditors' rights generally and by general equitable principles.
5.4. CAPITAL STOCK
Following the Restructure and immediately prior to the Effective Time,
(i) the authorized and outstanding capital stock of PSMI will be as set forth in
the PSI/PSMI Disclosure Statement, (ii) all outstanding PSMI Shares will be duly
authorized, validly issued, fully paid and nonassessable, (iii) no class of
capital stock of PSMI will be entitled to preemptive or cumulative voting
rights, (iv) there will be no outstanding options, warrants, calls, rights,
commitments or any other agreements of any character to which PSMI is a party or
by which it may be bound, requiring it to issue, transfer, sell, purchase,
redeem or acquire any shares of capital stock or any securities or rights
convertible into, exchangeable for or evidencing the right to subscribe for or
acquire any shares of capital stock, and (v) no Person will have any right to
require PSMI to repurchase or otherwise acquire any of such Person's outstanding
securities.
5.5. LITIGATION
There are no actions, suits, investigations or proceedings
(adjudicatory, rulemaking or otherwise) pending or, to the knowledge of PSI or
PSMI, threatened against any PSI Entity (or any Employee Plan or Benefit
Arrangement), or any property (including intellectual property) of any PSI
Entity, in any court or before any arbitrator of any kind or before or by any
Governmental Body, except actions, suits, investigations or proceedings that, in
the aggregate, do not have and would not be reasonably expected (so far as can
be foreseen at the time) to have (a) a PSI Entities Material Adverse Effect or
(b) a material adverse effect on the ability of PSI and PSMI to perform their
obligations under this Agreement. No PSI
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Entity is subject to any judgment, decree, injunction, rule or order of any
court, Governmental Body or arbitrator which prohibits or restricts the
consummation of the transactions contemplated hereby or would reasonably be
expected to have (so far as can be foreseen at the time) a PSI Entities Material
Adverse Effect.
5.6. NO VIOLATION OR CONFLICT
No PSI Entity is in violation of any term of (a) its charter, bylaws
or other organizational documents, (b) any Material Agreement, (c) any
applicable law, ordinance, rule or regulation of any Governmental Body, or (d)
any applicable order, judgment or decree of any court, arbitrator or
Governmental Body, except, as to subsections (a) through (d) of this Section,
where such violation, individually or in the aggregate, does not have and would
not be reasonably expected (so far as can be foreseen at the time) to have a PSI
Entities Material Adverse Effect or a material adverse effect on the ability of
PSI and PSMI to perform their obligations under this Agreement. The execution,
delivery and performance of this Agreement by PSI and PSMI and of the
transactions contemplated hereby (including the Restructure) will not result in
any violation of or conflict with, constitute a default under, or require any
consent under any term of the charter or bylaws of PSI or PSMI or any Material
Agreement, instrument, permit, license, law, ordinance, rule, regulation, order,
judgment or decree to which any PSI Entity is a party or to which any of its
material assets are subject, or result in the creation of (or impose any
obligation on any PSI Entity to create) any mortgage, lien, charge, security
interest or other encumbrance upon any of the properties or assets of any PSI
Entity pursuant to any such term, except where such violation, conflict or
default, or the failure to obtain such consent or the creation of such
encumbrances, individually or in the aggregate, does not have and would not be
reasonably expected (so far as can be foreseen at the time) to have a PSI
Entities Material Adverse Effect or a material adverse effect on the ability of
PSI or PSMI to perform its obligations under this Agreement.
5.7. COMPENSATION
The PSI/PSMI Disclosure Statement includes a true and accurate
statement of the present and proposed annual salaries for officers of PSI
Entities who will become officers of the Surviving Corporation.
5.8. EMPLOYEE BENEFIT PLANS
(a) The PSI/PSMI Disclosure Statement sets forth a true and complete
list of all the following: (i) each "employee benefit plan," as such term is
defined in Section 3(3) of ERISA (each an "EMPLOYEE PLAN"), and (ii) each other
plan, program, policy, contract or arrangement providing for bonuses, pensions,
deferred pay, stock or stock-related awards, severance pay, salary continuation
or similar benefits, hospitalization, medical, dental or disability benefits,
life insurance or other employee benefits, or contract or agreement for
compensation to or for any current or former employees, agents, directors or
independent contractors of any PSI Entity ("EMPLOYEES") or any beneficiaries or
dependents of any Employee
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whether or not insured or funded, (A) pursuant to which any PSI Entity has any
liability or (B) constituting an employment or severance agreement or
arrangement with any officer or director of any PSI Entity (each, a "BENEFIT
ARRANGEMENT"). PSMI has made available to SEI with respect to each Employee
Plan and Benefit Arrangement: (i) a true and complete copy of all written
documents comprising such Employee Plan or Benefit Arrangement or, if there is
no such written document, an accurate and complete description of such Employee
Plan or Benefit Arrangement; (ii) the most recent Form 5500 or Form 5500-C
(including all schedules thereto), if applicable; (iii) the most recent
financial statements and actuarial reports, if any; (iv) the summary plan
description currently in effect and all material modifications thereof, if any;
and (v) the most recent Internal Revenue Service determination letter, if any.
All material contributions required to be made as of the date hereof to the
Employee Plans and Benefit Arrangements have been made or provided for. No PSI
Entity has contributed to, or has been required to contribute to, any
"multiemployer plan" (as defined in Sections 3(37) and 4001(a)(3) of ERISA). No
PSI Entity maintains or contributes to any plan or arrangement which provides or
has any liability to provide life insurance, medical or other employee welfare
benefits to any employee or former employee upon his or her retirement or
termination of employment and no PSI Entity has ever represented, promised or
contracted (whether in oral or written form) to any employee or former employee
that such benefits would be provided.
(b) Each Employee Plan and Benefit Arrangement has been established
and maintained in all material respects in accordance with its terms and in
material compliance with all applicable laws, including, but not limited to,
ERISA and the Code. No PSI Entity nor any of their current or former directors,
officers or employees, nor, to the knowledge of PSI and PSMI, any other
disqualified Person or party-in-interest with respect to any Employee Plan, has
engaged directly or indirectly in any "prohibited transaction," as such term is
defined in Section 4975 of the Code or Section 406 of ERISA.
(c) No PSI Entity has an Employee Plan that is subject to Title IV of
ERISA and no PSI Entity has had an ERISA Affiliate (other than another PSI
Entity) at any time since the earlier of its inception and September 2, 1974.
(d) Neither the execution or delivery of this Agreement nor the
consummation of the transactions contemplated hereby (either alone or together
with any additional or subsequent events) constitutes an event under any
Employee Plan, Benefit Arrangement or loan to, or individual agreement or
contract with, an Employee that may result in any payment (whether severance pay
or otherwise), restriction or limitation upon the assets of any Employee Plan or
Benefit Agreement, acceleration of payment or vesting, increase in benefits or
compensation, or require funding, with respect to any Employee, or the
forgiveness of any loan or other commitment of any Employees.
(e) All contributions required under applicable law or the terms of
any Employee Plan or other agreement relating to an Employee Plan to be paid by
any PSI Entity have been completely and timely made to each Employee Plan when
due, and each PSI Entity
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has established adequate reserves on its books to meet liabilities for
contributions accrued but that have not been made because they are not yet due
and payable.
(f) No amounts paid or payable by any PSI Entity to or with respect to
any Employee will fail to be deductible for federal income tax purposes by
reason of Section 280G of the Code.
(g) No Employees and no beneficiaries or dependents of Employees are
or may become entitled under any Employee Plan or Benefit Arrangement to post-
employment welfare benefits of any kind, including, without limitation, death or
medical benefits, other than coverage mandated by Section 4980B of the Code.
5.9. LABOR MATTERS
No PSI Entity is a party to, or bound by, any collective bargaining
agreement, contract or other agreement or understanding with a labor union or
labor organization. There is no unfair labor practice or labor arbitration
proceeding pending or, to the knowledge of PSMI or PSI, threatened against any
PSI Entity relating to its business. To the knowledge of PSMI and PSI, there
are no organizational efforts with respect to the formation of a collective
bargaining unit presently being made or threatened involving employees of any
PSI Entity.
5.10. TAXES
Each PSI Entity has (i) timely filed with each Governmental Body all
Tax Returns required to be filed by it, either separately or as a member of an
affiliated group, with respect to all applicable Taxes for all years and periods
(or portions thereof) for which any such Tax Returns were due and all such Tax
Returns are true, correct and complete in all respects and were prepared in the
manner required by applicable law, (ii) paid all Taxes due whether or not shown
on such Tax Returns or claimed to be due by any Governmental Body and (iii)
properly accrued on its respective financial statements all Taxes due for which
each such PSI Entity may be liable in its own right (including, without
limitation, by reason of being a member of an affiliated group) or as a
transferee of the assets of, or successor to, any corporation, person,
association, partnership, joint venture or other entity for periods subsequent
to the periods covered by such returns. There are no liens for Taxes on any
property or assets of any PSI Entity other than liens for current property taxes
not yet due. The Tax Returns of each PSI Entity are not being and have not been
examined by any Governmental Body for any past year or periods to and including
the calendar year December 31, 1994. No PSI Entity has been requested to, or
has, executed or filed with the IRS or any other Governmental Body any agreement
extending the statute of limitations period of any Taxes. For each PSI Entity,
the applicable federal statutes of limitations have closed for all taxable years
through 1987. No PSI Entity is a party to any pending action or any formal or
informal proceeding by any Governmental Body for a deficiency, assessment or
collection of Taxes, and no claim for any deficiency, assessment or collection
of Taxes has been asserted, or to its best knowledge
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threatened, against it, including claims by an authority in a jurisdiction where
it does not file Tax Returns that it is or may be subject to taxation in that
jurisdiction.
Each PSI Entity has withheld and paid all Taxes required to have been
withheld and paid in connection with amounts paid or owing to any employee,
independent contractor, creditor, shareholder or other third party. No PSI
Entity (i) has executed or filed a consent under Section 341(f) of the Code
concerning collapsible corporations or has been at any time, a "collapsible
corporation" as defined in Section 341(b) of the Code; (ii) is a party to any
agreement relating to the allocation of, sharing, payment of, or indemnity for,
Taxes; or (iii) has liability for Taxes of any Person under Section 1.1502-6 of
the Treasury Regulations (or any similar provision of state, local or foreign
law), including liability as a transferee or successor, by contract or
otherwise. Each PSI Entity has established (and until the Closing shall
continue to establish and maintain) on its books and records reserves that are
adequate for the payment of all Taxes not yet due and payable.
Any PSI Entity that is, or has been at any time, a "United States Real
Property Holding Corporation" within the meaning of Section 897(c)(2) of the
Code, qualifies or qualified as a "domestically-controlled REIT" within the
meaning of Section 897(h) of the Code. No other PSI Entities are, or have ever
been, "United States Real Property Holding Corporations" within the meaning of
Section 897(c)(2) of the Code.
No PSI Entity has made any payments, is obligated to make any
payments, or is a party to an agreement that could obligate it to make any
payments that will not be deductible under Section 280G of the Code. Each PSI
Entity has disclosed to the Internal Revenue Service all positions taken on its
federal income Tax Returns which could give rise to a substantial understatement
of Tax under Section 6662 of the Code.
Tax Returns required to be filed with respect to the short taxable
year of each PSI Entity, will, when filed, be true, correct and complete in all
respects.
5.11. INTELLECTUAL PROPERTY
(a) The PSI/PSMI Disclosure Statement sets forth a complete list of
the PSI Intellectual Property Rights registered or filed by each PSI Entity and
a list of all licenses, sublicenses and agreements to which any PSI Entity is a
party regarding PSI Intellectual Property Rights material to any PSI Entity's
business. To the knowledge of PSI and PSMI, the PSI Entities possess the right
to use all intellectual property rights, whether PSI Intellectual Property
Rights or other such rights, necessary for the conduct of their respective
businesses.
(b) To the knowledge of PSI and PSMI, no PSI Entity has infringed upon
or misappropriated any intellectual property rights of third parties, and no PSI
Entity has received any charge, complaint, claim or notice alleging any such
interference, infringement, misappropriation or violation. To the knowledge of
PSI and PSMI, no third party has interfered with, infringed upon,
misappropriated or otherwise come into conflict with any PSI Intellectual
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Property Rights except for any such interference, infringement, misappropriation
or violation which has not had, and is not likely to have, a PSI Entities
Material Adverse Effect.
(c) At the Closing, PSMI will have the exclusive right to transfer and
assign to SEI all of the PSI Intellectual Property Rights. None of such PSI
Intellectual Property Rights is subject to any liens, security interests,
charges, encumbrances or interests of third parties, or requires any consent,
approval or waiver to be transferred and assigned to SEI by way of the Merger.
5.12. FINANCIAL STATEMENTS
Each of PSI and PSMI has provided to SEI true and correct copies of
its (i) audited consolidated balance sheets as of December 31, 1992, 1993 and
1994, and related audited statements of income and cash flows for the fiscal
years then ended, and (ii) unaudited consolidated balance sheets as of March 31,
1995 and related unaudited statements of income and other statements for the
fiscal quarter then ended. Each of such balance sheets (including the related
notes) referred to in subsection (i) hereof presents fairly, in all material
respects, the consolidated financial position of each of PSI and PSMI and their
subsidiaries as of the respective dates thereof, and the other related
statements (including the related notes) included therein present fairly, in all
material respects, the results of their operations and their cash flows for the
respective periods or as of the respective dates set forth therein, all in
conformity with generally accepted accounting principles consistently applied
during the periods involved, except as otherwise noted in the auditor's report.
Each of such balance sheets referred to in subsection (ii) hereof presents
fairly, in all material respects, the assets, liabilities, and shareholders'
equity of PSI and PSMI and their subsidiaries as of the respective dates
thereof, and the other related statements included therein present fairly, in
all material respects, the results of their operations for the respective
periods or as of the respective dates set forth therein, all on a basis
consistent with prior periods.
5.13. ABSENCE OF CERTAIN CHANGES OR EVENTS
Except for the Restructure and as otherwise contemplated or as
permitted herein in Section 7.1 or elsewhere, during the period since March 31,
1995, (a) the business of each PSI Entity has been conducted only in the
ordinary course, (b) no PSI Entity has entered into any material transaction
other than in the ordinary course, and (c) there has not been any change in the
business, financial condition, results of operations, properties, assets,
liabilities or prospects of any PSI Entity which, in the aggregate, would have,
or would be reasonably likely to have, a PSI Entities Material Adverse Effect.
5.14. BOOKS AND RECORDS
(a) The books of account and other financial records of each PSI
Entity are in all material respects true, complete and correct, and accurately
reflect in all material respects the assets and liabilities of such PSI Entity.
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(b) The minute books and other records of each PSI Entity have been
made available to SEI, contain in all material respects accurate records of all
meetings and accurately reflect in all material respects all other corporate
action of the shareholders and directors and any committees of the Board of
Directors of each PSI Entity.
5.15. CONTRACTS AND LEASES
The PSI/PSMI Disclosure Statement contains an accurate and complete
listing of all material contracts, leases, agreements or understandings, whether
written or oral, of each PSI Entity (the "MATERIAL AGREEMENTS"). A contract,
lease, agreement or understanding is "material" if it involves (i) obligations
(contingent or otherwise) of, or payments to any PSI Entity in excess of
$100,000 per annum, (ii) partnership, management or advisory agreements in
excess of $100,000 per annum, or (iii) the license of any patent, copyright,
trade secret or other proprietary right (A) to any PSI Entity which is necessary
for that PSI Entity to carry on its business or (B) from any PSI Entity which
materially limits the ability of that PSI Entity to carry on its business. Each
Material Agreement is in full force and effect and (a) no PSI Entity nor, to the
knowledge of PSI and PSMI, any other party thereto has breached any of the above
in any material respect or is in material default thereunder, (b) no event has
occurred which, with the passage of time or the giving of notice, or both, would
constitute such a breach or default, (c) no claim of material default thereunder
has been asserted or threatened, and (d) no PSI Entity nor, to the best
knowledge of PSI and PSMI, any other party thereto is seeking the renegotiation
thereof or substitute performance thereunder.
5.16. TITLE TO ASSETS; ENCUMBRANCES
Except for properties and assets reflected in the unaudited
consolidated combined balance sheet as of March 31, 1995 or acquired since such
balance sheet date which have been sold or otherwise disposed of in the ordinary
course of business, each PSI Entity has good, valid and marketable title to (a)
all of its material properties and assets (real and personal, tangible and
intangible), and (b) all of the properties and assets purchased by each PSI
Entity since such balance sheet date in each case subject to no encumbrance,
lien, charge or other restriction of any kind or character, except for (i) liens
reflected in such balance sheet, (ii) liens consisting of zoning restrictions or
limitations on the use of real property or irregularities in title thereto which
do not materially detract from the value of, or impair the use of, such property
by any PSI Entity in the operation of its business, (iii) liens for current
taxes, assessments or governmental charges or levies on property not yet due and
delinquent and (iv) liens described in the PSI/PSMI Disclosure Statement (liens
of the type described in clauses (i), (ii) and (iii) above are hereinafter
sometimes referred to as "PERMITTED LIENS").
5.17. REAL PROPERTY
The PSI/PSMI Disclosure Statement contains an accurate and complete
list of all real property owned in whole or in part by the PSI Entities and
includes the name of the record title holder thereof and a list of all
indebtedness secured by a lien, mortgage or deed of trust
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thereon. Each PSI Entity has good and marketable title in fee simple to all the
real property owned by it free and clear of all encumbrances, liens, charges or
other restrictions of any kind or character, except for Permitted Liens. All of
the buildings, structures and appurtenances situated on the real property owned
in whole or in part by any PSI Entity are in good operating condition and in a
state of good maintenance and repair, are adequate and suitable for the purposes
for which they are presently being used and, with respect to each, the PSI
Entity has adequate rights of ingress and egress for operation of the business
of such PSI Entity in the ordinary course. None of such buildings, structures
or appurtenances (or any equipment therein), nor the operation or maintenance
thereof, to the knowledge of PSI and PSMI, violates any restrictive covenant or
any provision of federal, state or local law, ordinance, rule or regulation, or
encroaches on any property owned by others, except for such violations or
encroachments which do not have a PSI Entities Material Adverse Effect. No
condemnation proceeding is pending or threatened which would preclude or impair
the use of any such property by any PSI Entity for the purposes for which it is
currently used.
5.18. ENVIRONMENTAL MATTERS
(a) For purposes of this section, "HAZARDOUS MATERIALS" means any
wastes, substances, or materials, whether solids, liquids or gases, that are
deemed hazardous, toxic, pollutants, or contaminants, including but not limited
to substances defined as "hazardous wastes," "solid wastes," "hazardous
substances," "toxic substances," "radioactive materials," "infectious waste,"
"infectious substances," "regulated medical wastes" or other similar
designations in, or otherwise subject to regulation under, the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended by
the Superfund Amendments and Reauthorization Act of 1986, 42 U.S.C. (S) 9601 et
--
seq.; the Hazardous Materials Transportation Act, 49 U.S.C. (S) 1802 et seq.;
- --- ------
the Resource Conservation and Recovery Act, 42 U.S.C. (S) 9601 et seq.; the
------
Clean Water Act, 33 U.S.C. (S) 1251 et seq.; the Safe Drinking Water Act, 42
------
U.S.C. (S) 300f et seq.; the Clean Air Act, 42 U.S.C. (S) 7401 et seq.; or other
------ ------
applicable federal, state, or local laws, including any plans, rules,
regulations, orders, or ordinances adopted, or other criteria and guidelines
promulgated pursuant to the preceding laws or other similar laws, regulations,
rules, orders, or ordinances now or hereafter in effect relating to the
protection of human health and the environment (collectively "ENVIRONMENTAL
LAWS"). "Hazardous Materials" includes but is not limited to polychlorinated
biphenyls (PCBs), petroleum products (including without limitation, crude oil or
any faction thereof), asbestos, urea formaldehyde, and lead-based paints.
(b) PSI and PSMI have made available to SEI information relating to
the following items:
(i) the nature and quantities of any Hazardous Materials
generated, treated, stored, handled, transported, disposed of or released, to
the knowledge of PSI and PSMI, by any PSI Entity, together with a description of
the location of each such activity; and
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(ii) a summary of the nature of any Hazardous Materials that, to
the knowledge of PSI and PSMI, have been disposed of or found at any site or
facility owned (including leased) presently or at any previous time by any PSI
Entity or Partnership ("PSI SITE").
(c) PSI and PSMI hereby represent and warrant that, except as set
forth in the PSI/PSMI Disclosure Statement, to their knowledge:
(i) There are no pending or threatened actions, suits, claims,
legal proceedings or any other proceedings against any PSI Entity or Partnership
based on the Environmental Laws or otherwise arising from PSI's, PSMI's or a
Partnership's activities involving Hazardous Materials;
(ii) Except as disclosed pursuant to Section 5.18(b), there are no
conditions, facilities, procedures or any other facts or circumstances which
could reasonably be expected to give rise to claims, expenses, losses,
liabilities, or governmental action against any PSI Entity or Partnership in
connection with any Hazardous Materials present at or disposed of from a PSI
Site, including without limitation the following conditions arising out of,
resulting from, or attributable to, the assets, business, or operations of any
PSI Entity, Partnership or any predecessor in interest:
(A) the presence of any Hazardous Materials on a PSI Site or
the release or threatened release of any Hazardous Materials into the
environment from a PSI Site;
(B) the off-site disposal of Hazardous Materials originating
on or from any PSI Site or the business or operations of any PSI Entity or
Partnership;
(C) the release or threatened release of any Hazardous
Materials into any storm drain, sewer, septic system or publicly owned treatment
works;
(D) any failure to comply in all material respects with
federal, state or local requirements governing occupational safety and health,
or presence or release in the air and water supply systems of any PSI Site of
any substances that pose a hazard to human health or an impediment to working
conditions; or
(E) any facility operations, procedures or designs, which do
not conform in all material respects to the statutory or regulatory requirements
of any Environmental Laws.
(iii) Neither polychlorinated biphenyls nor asbestos-containing
materials are present on or in any PSI Site.
(iv) There are no wetlands present at any PSI Site.
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(v) No PSI Site contains any underground storage tanks, or
underground piping associated with tanks, used currently or in the past for the
management of Hazardous Materials.
(d) Each PSI Entity and Partnership has been duly issued, and
currently has and will maintain through the Closing Date, all permits, licenses,
certificates and approvals required under any Environmental Law.
5.19. AFFILIATED TRANSACTIONS
Set forth in the PSI/PSMI Disclosure Statement is a list of all
current material arrangements, agreements and contracts, written or oral,
entered into by any PSI Entity with any person who is an officer, director or
Affiliate of that PSI Entity (other than any other PSI Entity or SEI), any
relative of any of the foregoing or any entity of which any of the foregoing is
an Affiliate, other than those that will be terminated as a result of, or in
connection with, the Merger.
5.20. BROKERS AND FINDERS
Neither PSI nor PSMI has entered into any contract, arrangement or
understanding with any person or firm which may result in the obligation of PSI
or PSMI or SEI to pay any finder's fees, brokerage or agent's commissions or
other like payments in connection with the negotiations leading to this
Agreement or the consummation of the transactions contemplated hereby. Except
for the fees and expenses paid or payable by SEI to Robertson Stephens & Company
LP, by SEI and PSI to Arthur Andersen & Co. LLP and by PSI to the appraisers of
the fee interests in the seven properties owned by it, neither PSI nor PSMI is
aware of any claim for payment of any investment banking fees, valuation or
appraisal fees, finder's fees, brokerage or agent's commissions or other
payments in connection with the negotiations leading to this Agreement or the
consummation of the transactions contemplated hereby.
5.21. PROXY STATEMENT
None of the information supplied or to be supplied by PSI or PSMI for
inclusion in the Proxy Statement will at the time of mailing the Proxy Statement
and at the time of the SEI Shareholders Meeting contain any untrue statement of
a material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. If at any time prior
to the Effective Time any event with respect to any PSI Entity or its officers
and directors shall occur that is required to be described in an amendment of,
or a supplement to, the Proxy Statement, PSMI shall notify SEI thereof by
reference to this Section 5.21 and cooperate with SEI in preparing and filing an
amendment or supplement with the SEC and, as required by law, disseminating to
the shareholders of SEI an amendment or supplement which accurately describes
such event or events in compliance with all provisions of applicable law.
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5.22. INSURANCE
The PSI/PSMI Disclosure Statement contains an accurate list of all
insurance policies of the PSI Entities, and each such insurance policy is in
full force and effect and issued by a reputable insurer. All premiums due with
respect to such policies have been paid, and no notice of premium increase,
cancellation or termination has been received with respect to any such policy.
Such policies (i) are sufficient for compliance with requirements of law and
with agreements to which the PSI Entities are parties, (ii) are valid,
outstanding and enforceable, (iii) provide insurance coverage for the assets and
operations of the PSI Entities to the extent and in the manner that PSMI
considers reasonable for companies engaged in business similar to that of the
PSI Entities, (iv) will remain in full force and effect through at least the
Closing Date and (v) will not be modified as a result of, or terminate or lapse
by reason of, the transactions contemplated by this Agreement. No PSI Entity
has been refused any insurance with respect to its assets or operations, nor has
its coverage been materially limited, by any insurance carrier to which it has
applied for any such insurance or with which it has carried insurance during the
last three years. The PSI Entities have reported all claims and occurrences to
the extent required by such insurance.
5.23. LICENSES; COMPLIANCE WITH LAW
Each PSI Entity has obtained from the appropriate Governmental Bodies
all approvals and licenses necessary for the conduct of its business and
operations as currently conducted, which approvals and licenses are valid and
remain in full force and effect, except where the failure to have obtained such
approvals or licenses or the failure of such licenses and approvals to be valid
and in full force and effect does not have and would not be reasonably expected
(so far as can be foreseen at the time) to have a PSI Entities Material Adverse
Effect. None of the PSI Entities has violated or failed to comply with any
statute, law, ordinance, regulation, rule, order or other legal requirement of
any Governmental Body, or any judgment, decree or order of any court, applicable
to its business or operations, except where any such violations or failures to
comply would not, individually or in the aggregate, have a PSI Material Adverse
Effect.
5.24. GOVERNMENTAL APPROVALS
Except for any filings that may be required by the HSR Act and the
filing of the Proxy Statement with the SEC pursuant to the Exchange Act, no
Authorization of or with any Governmental Body is necessary for the execution
and delivery of this Agreement by PSI or PSMI or the consummation by PSI or PSMI
of the transactions contemplated hereby (including the Restructure), other than
such Authorizations which, if not made or obtained, as the case may be, would
not, in the aggregate, have or reasonably be expected to have a PSI Entities
Material Adverse Effect.
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5.25. DISCLOSURE
The representations and warranties of PSI and PSMI contained in this
Agreement, in the PSI/PSMI Disclosure Statement, or in any written certificate
or related agreement furnished or to be furnished to SEI by any PSI Entity in
connection with the Closing pursuant to this Agreement do not contain any untrue
statement of a fact or omit to state any material fact necessary to make the
statements and information contained herein or therein, in light of the
circumstances in which they are made, not misleading.
6. REPRESENTATIONS AND WARRANTIES OF SEI
Except as set forth in the SEI SEC Reports, SEI hereby represents and
warrants to PSI and PSMI that, as of the date hereof:
6.1. ORGANIZATION AND RELATED MATTERS
SEI is a corporation duly incorporated, validly existing and in good
standing under the laws of the State of California and has all requisite
corporate power and authority to own, lease and operate its properties, to carry
on its business as now conducted and proposed by SEI to be conducted, to enter
into this Agreement and to carry out the provisions of this Agreement and
consummate the transactions contemplated hereby. SEI is duly qualified and in
good standing in each jurisdiction in which the property owned, leased or
operated by it or the nature of the business conducted by it makes such
qualification necessary and where the failure to be so qualified has or would be
reasonably expected (so far as can be foreseen at the time) to have a material
adverse effect on the business, properties, operations, condition (financial or
other) or prospects of SEI and its subsidiaries taken as a whole (a "SEI
MATERIAL ADVERSE EFFECT"). SEI has no direct or indirect equitable or
beneficial interest in any other corporation, except for qualifying REIT
subsidiaries.
6.2. AUTHORIZATION
This Agreement and the consummation of the transactions contemplated
hereby (including the Recapitalization) have been approved by the Board of
Directors of SEI, and have been duly authorized by all other necessary corporate
action on the part of SEI (except for the approval of SEI's shareholders
contemplated by Section 7.3). This Agreement has been duly executed and
delivered by a duly authorized officer of SEI and, subject to SEI shareholder
approval, constitutes a valid and binding agreement of SEI, enforceable against
SEI in accordance with its terms, except as may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium and other similar laws of
general application that may affect the enforcement of creditors' rights
generally and by general equitable principles.
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6.3. CAPITAL STOCK
The authorized capital stock of SEI consists solely of (i) 60,000,000
SEI Common Shares, approximately 42,045,000 of which are issued and outstanding
(and 700,334 and 3,872,054 of which were reserved for issuance under SEI's
employee stock option plans and for issuance upon conversion or redemption of
SEI's Convertible Preferred Stock, respectively), and (ii) 50,000,000 shares of
Preferred Stock ($.10 par value), 13,320,000 of which are issued and
outstanding, consisting of 1,825,000 shares of Series A Preferred Stock,
2,386,000 shares of Series B Preferred Stock, 2,300,000 shares of Convertible
Preferred Stock, 1,200,000 shares of Adjustable Rate Preferred Stock, 1,200,000
shares of Series D Preferred Stock, 2,195,000 shares of Series E Preferred Stock
and 2,300,000 shares of Series F Preferred Stock. All of the issued and
outstanding shares of Common Stock and Preferred Stock of SEI have been duly and
validly authorized and issued, and are fully paid and nonassessable. As a
result of the Recapitalization, the authorized capital stock of SEI will consist
solely of (i) 200,000,000 SEI Common Shares, (ii) 7,000,000 SEI Class B Shares,
and (iii) 50,000,000 shares of Preferred Stock ($.10 par value). Other than
options under SEI's employee stock option plans and SEI's Convertible Preferred
Stock and as provided in this Agreement, there are no options or agreements to
which SEI is a party or by which it is bound calling for or requiring the
issuance of any of SEI's capital stock.
The issuance of the SEI Shares in the Merger has been duly authorized,
and when issued and delivered as provided in Section 4, will be validly issued,
fully paid and nonassessable; and no shareholder of SEI has any preemptive right
of subscription or purchase in respect thereof. The issuance of the SEI Shares
in the Merger will be exempt from registration under the Securities Act and all
applicable state securities laws.
6.4. LITIGATION
There are no actions, suits, investigations or proceedings
(adjudicatory, rulemaking or otherwise) pending or, to the knowledge of SEI,
threatened against SEI, or any property (including intellectual property) of
SEI, in any court or before any arbitrator of any kind or before or by any
Governmental Body, except actions, suits, investigations or proceedings that, in
the aggregate, do not have and would not be reasonably expected (so far as can
be foreseen at the time) to have (a) a SEI Material Adverse Effect or (b) a
material adverse effect on the ability of SEI to perform its obligations under
this Agreement.
6.5. COMPLIANCE WITH OTHER INSTRUMENTS, ETC.
SEI is not in violation of any term of (a) its charter, bylaws or
other organizational documents, (b) any agreement or instrument related to
indebtedness for borrowed money or any other agreement to which it is a party or
by which it is bound, (c) any applicable law, ordinance, rule or regulation of
any Governmental Body, or (d) any applicable order, judgment or decree of any
court, arbitrator or Governmental Body, except, as to subsections (a) through
(d) of this Section, where such violation, individually or in the aggregate,
does not have
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and would not be reasonably expected (so far as can be foreseen at the time) to
have a SEI Material Adverse Effect or a material adverse effect on the ability
of SEI to perform its obligations under this Agreement. The execution, delivery
and performance of this Agreement by SEI will not result in any violation of or
conflict with, constitute a default under, require any consent under any term of
the charter, bylaws or other organizational documents of SEI or any agreement,
instrument, permit, license, law, ordinance, rule, regulation, order, judgment
or decree to which SEI is a party or to which SEI or any of its material assets
are subject, or result in the creation of (or impose any obligation on SEI to
create) any mortgage, lien, charge, security interest or other encumbrance upon
any of the properties or assets of SEI pursuant to any such term, except where
such violation, conflict or default, or the failure to obtain such consent or
the creation of such encumbrance, individually or in the aggregate, does not
have and would not be reasonably expected (so far as can be foreseen at the
time) to have (a) a SEI Material Adverse Effect or (b) a material adverse effect
on the ability of SEI to perform its obligations under this Agreement.
6.6. REPORTS AND FINANCIAL STATEMENTS
SEI has filed all reports required to be filed with the SEC since
March 31, 1994 (collectively, the "SEI SEC REPORTS"), and has previously
furnished or made available to PSI true and complete copies of all SEI SEC
Reports. None of the SEI SEC Reports, as of their respective dates (as amended
through the date hereof), contained any untrue statement of material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading. Each of the balance sheets (including the related notes)
included in the SEI SEC Reports presents fairly, in all material respects, the
consolidated financial position of SEI and its subsidiaries as of the respective
dates thereof, and the other related statements (including the related notes)
included therein present fairly, in all material respects, the results of
operations and cash flows of SEI and its subsidiaries for respective periods or
as of the respective dates set forth therein, all in conformity with generally
accepted accounting principles consistently applied during the periods involved,
except as otherwise noted therein and subject, in the case of the unaudited
interim financial statements, to normal year-end adjustments and any other
adjustments described therein. All the SEI SEC Reports, as of their respective
dates (as amended through the date hereof), complied in all material respects
with the requirements of the Exchange Act and the applicable rules and
regulations thereunder.
6.7. BROKERS AND FINDERS
Except for the fees and expenses paid or payable by SEI to Robertson
Stephens & Company LP, by SEI and PSI to Arthur Andersen & Co. LLP, and by PSI
to the appraisers of the fee interests in the seven properties owned by it, SEI
is not aware of any claim for payment of any investment banking fees, valuation
or appraisal fees, finder's fees, brokerage or agent's commissions or any other
payments in connection with the negotiations leading to this Agreement or the
consummation of the transactions contemplated hereby.
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6.8. PROXY STATEMENT
None of the information supplied or to be supplied by SEI for
inclusion or incorporation by reference in the Proxy Statement will at the time
of mailing the Proxy Statement and at the time of the SEI Shareholders Meeting,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. If at any time prior to the Effective Time any event with respect
to SEI, its officers and directors or any of its subsidiaries shall occur that
is required to be described in an amendment of, or a supplement to, the Proxy
Statement, SEI shall notify PSI and PSMI thereof by reference to this Section
6.8 and such event shall be so described, and an amendment or supplement shall
be promptly filed with the SEC and, as required by law, disseminated to the
shareholders of SEI, and such amendment or supplement shall comply with all
provisions of applicable law. The Proxy Statement will comply (with respect to
SEI) in all material respects with the requirements of the Exchange Act and the
applicable rules and regulations thereunder.
6.9. DISCLOSURE
The representations and warranties of SEI contained in this Agreement
or in any written certificate or related agreement furnished or to be furnished
to PSI and PSMI by SEI in connection with the Closing pursuant to this Agreement
do not contain any untrue statement of a material fact or omit to state any
material fact necessary to make the statements and information contained herein
or therein, in light of the circumstances in which they are made, not
misleading.
7. ADDITIONAL COVENANTS AND AGREEMENTS
7.1. CONDUCT OF BUSINESS OF PSI ENTITIES
Except as contemplated by this Agreement (including in connection with
the Restructure) or as set forth in the PSI/PSMI Disclosure Statement, during
the period from the date of this Agreement to the Effective Time, PSI and PSMI
will cause each PSI Entity to pursue its business in the ordinary course, with
no less diligence and effort than would be applied in the absence of this
Agreement; to seek to preserve intact its current business organization, keep
available the service of its current officers and employees and preserve its
relationships with customers, suppliers and others having business dealings with
it with the objective that its goodwill and ongoing business shall be unimpaired
at the Effective Time; and, to not, without the prior written consent of SEI:
(a) issue, deliver, sell, dispose of, pledge or otherwise encumber, or
authorize or propose the issuance, delivery, sale, disposition or pledge or
other encumbrances of (i) any additional shares of its capital stock of any
class, or any securities or rights convertible into, exchangeable for or
evidencing the right to subscribe for any shares of its capital stock, or any
rights, warrants, options, calls, commitments or any other agreements of any
character to
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purchase or acquire any shares of its capital stock or any securities or rights
convertible into, exchangeable for or evidencing the right to subscribe for any
shares of its capital stock, or (ii) any other securities in respect of, in lieu
of or in substitution for shares outstanding on the date hereof;
(b) redeem, purchase or otherwise acquire, or propose to redeem,
purchase or otherwise acquire, any of its outstanding securities;
(c) split, combine, subdivide or reclassify any shares of its capital
stock or declare, set aside for payment or pay any dividend, or make any other
actual, constructive or deemed distribution in respect of any shares of its
capital stock or otherwise make any payments to shareholders in their capacity
as such;
(d) adopt a plan of complete or partial liquidation, dissolution,
merger, consolidation, restructuring, recapitalization or other reorganization
(other than the Restructure and the Merger);
(e) make any acquisition, by means of merger, consolidation or
otherwise, of (i) any direct or indirect ownership interest in or assets
comprising any business enterprise or operation or (ii) except in the ordinary
course of business consistent with past practice, any other assets;
(f) adopt any amendments to its charter or bylaws;
(g) other than borrowings under existing credit facilities, or other
borrowing in the ordinary course, incur any indebtedness for borrowed money or
guarantee any such indebtedness or, except in the ordinary course of business
consistent with past practice, make any loans, advances or capital contributions
to, or investments in, any Partnership or other Person;
(h) engage in the conduct of any business the nature of which is
materially different than the business it is currently engaged in;
(i) enter into any contract, arrangement or understanding requiring
the purchase of equipment, materials, supplies or services over a period greater
than 12 months and for the expenditure of greater than $75,000 per year, which
is not cancelable without penalty on 30 days' or less notice, except in the
ordinary course of business consistent with past practice;
(j) authorize or enter into any agreement providing for property
management services to be provided by it to third party property owners on other
than customary terms;
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(k) authorize or enter into any agreement that would jeopardize the
qualification of SEI as a real estate investment trust pursuant to Section 856
of the Code if such agreement had been entered into by SEI;
(l) pledge, encumber, sell or dispose of assets of the PSI Entities,
except in the ordinary course of business consistent with past practice;
(m) modify or change in any material respect any existing Material
Agreement, except in the ordinary course of business consistent with past
practice; or
(n) authorize or announce an intention to do any of the foregoing, or
enter into any contract, agreement, commitment or arrangement to do any of the
foregoing.
7.2. OTHER TRANSACTIONS
Prior to the Effective Time, PSI and PSMI each agree (a) that neither
of them shall, and each of them shall direct and use its best efforts to cause
its respective officers, directors, employees, agents and representatives
(including any investment banker, attorney or accountant retained by it) not to
initiate, solicit or encourage, directly or indirectly, any inquiries or the
making or implementation of any proposal or offer (including, without
limitation, any proposal or offer to its shareholders or shareholders,
respectively) with respect to a merger, acquisition, tender offer, exchange
offer, consolidation or similar transaction involving, or any purchase of all or
any significant portion of the assets or any equity securities of, any PSI
Entity, other than the transactions contemplated by this Agreement (any such
proposal or offer being hereinafter referred to as an "ACQUISITION PROPOSAL") or
engage in any negotiation concerning, or provide any confidential information or
data to, or have any discussions with, any person relating to an Acquisition
Proposal, or otherwise facilitate any effort or attempt to make or implement an
Acquisition Proposal; (b) that it will immediately cease and cause to be
terminated any existing activities, discussions or negotiation with any parties
conducted heretofore with respect to any of the foregoing and each will take the
necessary steps to inform the individuals or entities referred to above of the
obligations undertaken in this Section 7.2; and (c) that it will notify SEI
immediately if any such inquiries or proposals are received by, any such
information is requested from, or any such negotiations or discussions are
sought to be initiated or continued with, it.
Prior to the Effective Time, SEI agrees that it will not, and it will
direct and use its best efforts to cause its officers, directors, employees,
agents and representatives (including any investment banker, attorney or
accountant retained by it) not to, initiate, solicit or encourage any inquiries
or the making of any proposal or offer with respect to the engagement of any
Person to manage its properties (other than PSMI or PSCP) or to act as advisor
for its operations (other than PSAI).
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7.3. MEETING OF SHAREHOLDERS
SEI will take all action necessary in accordance with applicable law
and SEI's Articles of Incorporation and Bylaws to convene a meeting of its
shareholders (the "SEI SHAREHOLDERS MEETING") as promptly as practicable to
consider and vote upon the approval of the Merger and the Recapitalization, it
being understood that the principal terms of the Merger must be approved by an
affirmative vote of (i) a majority of the outstanding SEI Shares entitled to
vote at the SEI Shareholders Meeting, and (ii) a majority of the SEI shares
voting at the SEI Shareholders Meeting not held by Wayne Hughes, PSI and their
Affiliates. Subject to the fiduciary duties of SEI's Board of Directors under
applicable law as advised by counsel, the Board of Directors of SEI shall
recommend and declare advisable such approval and SEI shall take all lawful
action to solicit, and use all reasonable efforts to obtain, such approval.
7.4. PROXY STATEMENT
SEI will, as promptly as practicable, prepare and file with the SEC a
proxy statement and a form of proxy, in connection with the vote of SEI's
shareholders with respect to the Merger and Recapitalization (such proxy
statement, together with any amendments thereof or supplements thereto, in each
case in the form or forms mailed to SEI's shareholders, is herein called the
"PROXY STATEMENT"). PSI and PSMI shall use their best efforts to obtain and
furnish to SEI the information required to be included in the Proxy Statement.
SEI will use all reasonable efforts to cause the Proxy Statement to be mailed to
shareholders of SEI at the earliest practicable date. If at any time prior to
the Effective Time any event relating to or affecting any PSI Entity or SEI
shall occur as a result of which it is necessary, in the opinion of counsel for
PSI and PSMI or of counsel for SEI, to supplement or amend the Proxy Statement
in order to make such document not misleading in light of the circumstances
existing at the time approval of the shareholders of SEI is sought, SEI
forthwith will prepare and file with the SEC an amendment or supplement to the
Proxy Statement so that such document, as so supplemented or amended, will not
contain any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements therein, in light of the
circumstances existing at such time, not misleading.
7.5. FILINGS; OTHER ACTION
PSI and PSMI and SEI shall: (a) to the extent required, promptly make
all filings and thereafter make any other required submissions under the HSR Act
with respect to the Merger; (b) use all reasonable efforts to cooperate with one
another to (i) determine which Authorizations are required to be made or
obtained prior to the Effective Time in connection with the execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby and (ii) timely make and seek all such Authorizations; (c) use all
reasonable efforts to obtain in writing any consents required from third parties
in form reasonably satisfactory to SEI and PSI and PSMI necessary to effectuate
the Merger and the Recapitalization; (d) use all reasonable efforts to promptly
take, or cause to be taken, all other actions and do, or cause to be done, all
other things necessary, proper or appropriate to satisfy
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the conditions set forth in Article 8 and to consummate and make effective the
transactions contemplated by this Agreement on the terms and conditions set
forth herein as soon as practicable (including seeking to remove promptly any
injunction or other legal barrier that may prevent such consummation); and (e)
not take any action which might reasonably be expected to impair the ability of
the parties to consummate the Merger and the Recapitalization at the earliest
possible time.
7.6. ACCESS TO INFORMATION
From the date hereof until the Effective Time, PSI and PSMI will cause
the PSI Entities to give SEI, its counsel, financial advisors, auditors and
other authorized representatives full access to the offices, properties, books
and records of the PSI Entities, will furnish to SEI, its counsel, financial
advisors, auditors and other authorized representatives such financial and
operating data and other information as such persons may reasonably request and
to instruct the PSI Entities' employees, counsel and financial advisors to
cooperate with SEI in its investigation of the business of the PSI Entities;
provided that no investigation pursuant to this Section shall affect any
representation or warranty given by PSI and PSMI to SEI hereunder.
7.7. TAX MATTERS
PSI and SEI agree to report the Merger on all Tax Returns and other
filings as a tax-free reorganization under Section 368(a)(1)(A) of the Code.
7.8. RESTRUCTURE
At or prior to the Effective Date, PSI and PSMI shall use all
reasonable efforts to consummate transactions (the "RESTRUCTURE") whereby (i)
the capital stock of the Excluded Companies will be distributed to one or more
of the PSMI Shareholders, or all of the stock or assets of the Excluded
Companies will be sold to one or more of the PSMI Shareholders or to one or more
third parties, (ii) PSI will be liquidated by merger into PSI Holdings, Inc. and
(iii) the PSI Entities (other than PSMI and PSI) will be merged with and into
PSMI or with and into another entity that is subsequently merged with and into
PSMI.
7.9. MANAGEMENT AND ADVISORY AGREEMENTS
Prior to the Closing, PSI and PSMI shall use all reasonable efforts to
cause the owners of all properties managed and of all partnerships and
corporations advised by any of the PSI Entities to consent to the management of
such properties and assumption of such advisory functions by the Surviving
Corporation to the extent required by the existing management and advisory
agreements relating thereto.
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7.10. INTELLECTUAL PROPERTY RIGHTS
Prior to the Closing, PSI and PSMI shall use all reasonable efforts to
obtain all assignments or other consents necessary to vest in SEI exclusive
ownership and full use and benefit with respect to the PSI Intellectual Property
Rights listed on the PSI/PSMI Disclosure Statement.
7.11. EMPLOYEES
SEI agrees to employ at the Effective Time all employees of the PSI
Entities who are employed on the Closing Date on terms consistent with such PSI
Entities' current employment practices and at comparable levels of compensation
and positions, except that other than as otherwise provided in this Agreement
such employment shall be at will and SEI shall be under no obligation to
continue to employ any of such individuals for more than thirty (30) days after
Closing. For purposes of this Section 7.11, the term "employees" shall mean all
current employees of the PSI Entities (including those on disability or leave of
absence, paid or unpaid).
7.12. TAX-FREE EXCHANGE AND REIT STATUS
From and after the date hereof and prior to the Effective Time, except
for the transactions contemplated or permitted herein, no PSI Entity or SEI
shall knowingly take any action that would be inconsistent with the
representations and warranties made by them herein, including, but not limited
to knowingly taking any action, or knowingly failing to take any action that is
known to cause disqualification of the Merger as a reorganization within the
meaning of Section 368(a)(1)(A) of the Code. Furthermore, from and after the
date hereof and prior to the Effective Time, except for the transactions
contemplated or permitted herein, each PSI Entity shall use its best efforts to
conduct its business and file Tax Returns in a manner that would not jeopardize
the qualification of SEI after the Effective Time as a REIT within the meaning
of Section 856 of the Code.
7.13. PUBLIC STATEMENTS
The parties shall consult with each other prior to issuing any press
release or any written public statement with respect to this Agreement or the
transactions contemplated hereby and shall not issue any such press release or
written public statement prior to review and approval by the other party, except
that prior review and approval shall not be required if, in the reasonable
judgment of the party seeking to issue such release or public statement, prior
review and approval would prevent the timely dissemination of such release or
announcement in violation of any applicable law, rule, regulation or policy of
the NYSE.
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7.14. NOTICE OF CERTAIN EVENTS
Each party hereto shall promptly notify the other party of (i) any
notice or other communication from any Person alleging that the consent of such
Person is or may be required in connection with the transactions contemplated by
this Agreement; (ii) any notice or other communication from any Governmental
Body in connection with the transactions contemplated by this Agreement; and
(iii) any actions, suits, claims, investigations or proceedings commenced or, to
its knowledge threatened against, relating to or involving or otherwise
affecting either party or any of its subsidiaries which, if pending on the date
of this Agreement, would have been required to have been disclosed in the
PSI/PSMI Disclosure Statement pursuant to Section 5.5 or in the SEI SEC Reports
pursuant to Section 6.4 or which relate to the consummation of the transactions
contemplated by this Agreement.
7.15. DIRECTOR AND OFFICER INDEMNIFICATION
From and after the Effective Date, SEI shall keep in effect provisions
in its Articles of Incorporation and Bylaws providing for limitation of director
liability and indemnification of directors, officers, employees and agents at
least to the extent that such persons are entitled thereto under the Articles of
Incorporation and Bylaws of PSMI on the date hereof, subject to California law,
which provisions shall not be amended, repealed or otherwise modified in any
manner that would adversely affect the rights thereunder of individuals who at
any time prior to the Effective Time were directors, officers, employees or
agents of PSMI in respect of actions or omissions occurring at or prior to the
Effective Time (including, without limitation, the transactions contemplated by
this Agreement), unless such modification is required by law.
7.16. RECAPITALIZATION
SEI agrees to include in the Proxy Statement a proposal to amend its
Articles of Incorporation to, among other things, increase its authorized
capital stock and effect a recapitalization such that the SEI Common Shares and
SEI Class B Shares are authorized in sufficient amounts to satisfy SEI's
obligation to issue the SEI Shares in the Merger (the "RECAPITALIZATION"), and
include a provision designed to protect against violation of the 5/50 Rule as
defined in Section 8.3(q). An outline of the rights, preferences, privileges
and restrictions of the SEI Class B Shares is attached hereto as Exhibit D.
---------
7.17. PSI/PSMI DISCLOSURE STATEMENT
PSI and PSMI agree to deliver to SEI the PSI/PSMI Disclosure Statement
within 30 days of the date of this Agreement.
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7.18. LISTING OF SEI SHARES
SEI will use its best efforts to cause the SEI Common Shares to be
listed for trading on the NYSE upon official notice of issuance.
7.19. FURTHER ACTION
Each party hereto shall, subject to the fulfillment or waiver at or
before the Effective Time of each of the conditions set forth herein, perform
such further acts and execute such documents as may reasonably be required to
effect the Merger, the Recapitalization and the Restructure.
8. CONDITIONS
8.1. CONDITIONS TO EACH PARTY'S OBLIGATIONS
The respective obligations of each party to consummate the
transactions contemplated by this Agreement are subject to the fulfillment at or
prior to the Closing Date of each of the following conditions, which conditions
may not be waived:
(a) The Merger, this Agreement and the transactions contemplated
hereby (including the Recapitalization) shall have been duly approved by
the requisite holders of SEI capital stock in accordance with applicable
provisions of the GCLC, the Articles of Incorporation and Bylaws of SEI and
Section 7.3, and the Articles of Incorporation of SEI shall have been
amended to reflect the Recapitalization.
(b) All filings required to be made prior to the Effective Time with,
and all Authorizations required to be obtained prior to the Effective Time
from Governmental Bodies in connection with the execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby
(including the expiration of the waiting period requirements of the HSR
Act) shall have been made or obtained (as the case may be) without material
restrictions.
(c) There shall not be in effect any judgment, writ, order, injunction
or decree of any court of competent jurisdiction or Governmental Body
restraining, enjoining or otherwise preventing consummation of the
transactions contemplated by this Agreement or permitting such consummation
only subject to any condition or restriction unacceptable to either of SEI
or of PSI and PSMI, each in its reasonable judgment, nor shall there be
pending or threatened by any Governmental Body any suit, action or
proceeding, and there shall not be pending by any other Person any suit,
action or proceeding, seeking to restrain or restrict the consummation of
the Merger or other transactions contemplated by this Agreement or seeking
damages in connection therewith, which, in the reasonable judgment of
either SEI or of PSI and PSMI could have (a) a SEI Material Adverse Effect
or a PSI Entities Material Adverse Effect, respectively, or (b) a material
adverse effect
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on the ability of SEI or PSI or of PSMI, respectively, to perform its
obligations under this Agreement.
8.2. CONDITIONS TO OBLIGATIONS OF PSMI TO EFFECT THE MERGER
The obligation of PSMI to effect the Merger shall be subject to the
fulfillment at or prior to the Closing Date of the following conditions, unless
waived in writing by PSMI:
(a) SEI shall have performed its agreements contained in this
Agreement required to be performed on or prior to the Closing Date and the
representations and warranties of SEI contained in this Agreement shall be
true and correct in all material respects as of the Closing Date as if made
on the Closing Date (except for changes therein contemplated or permitted
by this Agreement), and PSMI shall have received a certificate of the
President of SEI, dated the Closing Date, certifying to such effect.
(b) From the date of this Agreement through the Effective Time,
there shall not have occurred any change in the financial condition,
business or operations of SEI that would have or would be reasonably likely
to have a SEI Material Adverse Effect.
(c) Any sums then due and owing to the PSI Entities by SEI as a
result of obligations arising out of (i) those certain Amended Management
Agreements dated as of February 21, 1995 between PSMI and SEI and between
PSCP and SEI and (ii) that certain Amended and Restated Advisory Agreement
dated as of September 30, 1991 between PSAI and SEI, shall have been paid.
(d) The holders of less than 5% of the outstanding SEI Shares
entitled to vote at the SEI Shareholders Meeting shall have exercised
dissenters rights under the GCLC.
8.3. CONDITIONS TO OBLIGATION OF SEI TO EFFECT THE MERGER
The obligations of SEI to effect the Merger shall be subject to the
fulfillment at or prior to the Closing Date of the following conditions, unless
waived in writing by SEI:
(a) PSI and PSMI shall have performed their agreements contained in
this Agreement required to be performed on or prior to the Closing Date and
the representations and warranties of PSI and PSMI contained in this
Agreement shall be true and correct in all material respects as of the
Closing Date as if made on the Closing Date (except for changes therein
contemplated or permitted by this Agreement), and SEI shall have received a
certificate of the President of PSMI, dated the Closing Date, certifying to
such effect.
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(b) SEI shall have received a legal opinion from Hogan & Hartson LLP,
in form and substance reasonably acceptable to the Special Committee, to
the effect (i) that the Merger will be treated for federal income tax
purposes as a reorganization within the meaning of Section 368(a) of the
Code (with the result that neither PSMI nor SEI will recognize gain for tax
purposes on the deemed transfer of the assets of PSMI to SEI in exchange
for the SEI stock issued to the PSMI Shareholders), and (ii) SEI will
continue to qualify as a REIT under Section 856 through 860 of the Code
following the Merger so long as (A) SEI continues to meet the stock
ownership and gross income requirements applicable to REITs (which the
management of SEI will represent will be the case) and (B) either PSMI at
the time of the Merger is not considered to have any current or accumulated
earnings and profits for tax purposes or SEI makes distributions prior to
the end of the calendar year in which the Merger occurs in an amount
sufficient to eliminate such earnings and profits.
(c) SEI shall have received from David Goldberg, Esq., a legal opinion
in form and substance reasonably acceptable to SEI and the Special
Committee covering such matters as they may shall reasonably request.
(d) From the date of this Agreement through the Effective Time, there
shall not have occurred any change in the financial condition, business or
operations of the PSI Entities, taken as a whole, that would have, or would
be reasonably likely to have, a PSI Entities Material Adverse Effect.
(e) No holders of the outstanding PSMI Shares shall have been entitled
to exercise dissenters' rights under applicable law.
(f) All assignments or other consents, if any, necessary to transfer
to the Surviving Corporation the PSI Intellectual Property Rights set forth
on the PSI/PSMI Disclosure Statement shall have been obtained.
(g) Hughes shall have executed and delivered to SEI an Option
Agreement (with an Irrevocable Proxy) providing SEI with a three-year
option to purchase for SEI Common Shares the interests owned by Hughes in
certain United States mini-warehouse partnerships and REITs, such Option
Agreement to be in form and substance acceptable to SEI and the Special
Committee.
(h) SEI shall have received from PSMI a study prepared by PSI and PSMI
of the consolidated earnings and profits of PSI, PSMI and the other PSI
Entities that shows, taking into account income of PSMI and its affiliated
corporations at the time of the Merger and distributions to PSMI and/or the
PSMI Shareholders to be made at or prior to the time of the Merger, that
PSMI will have no consolidated accumulated earnings and profits at the time
of the Merger.
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(i) SEI shall have received the PSI/PSMI Disclosure Statement and
shall not have reasonably objected to any disclosures set forth therein.
(j) The PSMI Shareholders shall have granted SEI a right of first
refusal with respect to PS Insurance Company, Ltd. and their interests in
the Canadian operations in form and substance acceptable to SEI and the
Special Committee.
(k) The SEI Common Shares to be issued pursuant to Section 4 shall
have been approved for listing on the NYSE upon official notice of
issuance.
(l) The Board of Directors of SEI and Special Committee shall have
received the opinion of Robertson, Stephens & Company LP in form and
substance satisfactory to them to the effect that the consideration in the
Merger is, from a financial point of view, fair to the public shareholders
of SEI, and such opinion shall not have been withdrawn or revoked.
(m) Each of the PSMI Shareholders and SEI shall have entered into a
Shareholder Agreement providing, among other things, for investment
representations, restrictions on transfer, general releases and handling
certain post-closing tax matters, in form and substance acceptable to SEI
and the Special Committee.
(n) Hughes and SEI shall have entered into an Indemnification Escrow
Agreement as provided in Section 4.8 in form and substance acceptable to
SEI and the Special Committee.
(o) Hughes and SEI shall have entered into an Employment Agreement for
a five-year term in form and substance acceptable to SEI and the Special
Committee.
(p) The Restructure shall have been consummated in a manner
satisfactory to SEI and the Special Committee.
(q) SEI and the Special Committee shall have received an analysis
prepared by PSI, PSMI and SEI, acceptable in form and substance to SEI and
the Special Committee, demonstrating that SEI's expected stock ownership
immediately following the Merger will comply with the Code requirement that
no more than 50% of the value of a REIT's outstanding shares may be owned,
directly or indirectly, actually or constructively, by five or fewer
individuals at any time during the last half of each of the REIT's taxable
years (the "5/50 RULE"), and SEI's Articles of Incorporation shall have
been amended, in a manner acceptable in form and substance to SEI and the
Special Committee, that is designed to protect against and prevent future
changes in ownership that might otherwise violate the 5/50 Rule.
(r) The terms and covenants of any indebtedness for which SEI shall
become obligated by virtue of the Merger shall be satisfactory to SEI.
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(s) Hughes shall have executed and delivered to SEI a Covenant Not to
Compete restricting his activities in the mini-warehouse business in the
United States for a seven-year period, in form and substance acceptable to
SEI and the Special Committee.
(t) SEI and the Special Committee shall be satisfied as to SEI's
overall exposure based on results of environmental audits of the real
properties owned by the PSI Entities and by the Partnerships and such other
factors as they shall deem appropriate.
(u) PSI or PSMI shall have obtained all consents, authorizations and
approvals in form acceptable to SEI of any and all Persons, including those
referenced in Section 7.9, required to be obtained prior to the Merger and
the consummation of the transactions contemplated by this Agreement and
required to be obtained in order that SEI may conduct the businesses of the
PSI Entities in the same manner and any without material restrictions
following the Closing.
9. TERMINATION
9.1. TERMINATION BY MUTUAL CONSENT
This Agreement may be terminated and the Merger may be abandoned at
any time prior to the Effective Time, before or after the approval by SEI
shareholders, either by the mutual written consent of SEI and PSMI or by
mutual action of their respective Boards of Directors.
9.2. TERMINATION BY EITHER SEI OR PSMI
This Agreement may be terminated and the Merger may be abandoned by
action of the Board of Directors of PSMI or SEI if (a) the Merger shall not
have been consummated by March 31, 1996, (b) the SEI Shareholders Meeting
duly shall have been convened and held and the approval of SEI's
shareholders required by Section 7.3 shall not have been obtained at such
meeting or at any adjournment thereof, or (c) a United States federal or
state court of competent jurisdiction or United States federal or state
governmental, regulatory or administrative agency or commission shall have
issued an order, decree or ruling or taken any other action permanently
restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement and such order, decree, ruling or other
action shall have become final and non-appealable, provided, that the party
seeking to terminate this Agreement pursuant to this clause (c) shall have
used all reasonable efforts to remove such order, decree, ruling or
injunction; and provided, in the case of a termination pursuant to clause
(a) above, that the terminating party shall not have breached in any
material respect its obligations under this Agreement in any manner that
shall have proximately contributed to the occurrence of the failure
referred to in said clause.
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9.3. EFFECT OF TERMINATION AND ABANDONMENT
In the event of termination of this Agreement and abandonment of the
Merger pursuant to this Article 9, no party hereto (or any of its directors
or officers) shall have any liability or further obligation to any other
party to this Agreement, except that nothing herein will relieve any party
from liability for any breach of this Agreement.
10. MISCELLANEOUS
10.1. EXPENSES
SEI shall pay the fees and expenses of Robertson, Stephens & Co. LP
and the fee of counsel to the Special Committee. The fees and expenses
other counsel incurred by any party in connection with this Agreement and
the transactions contemplated hereby, the fees and expenses of Arthur
Andersen & Co. LLP, the expenses relating to printing and distribution of
the Proxy Statement and the solicitation, and any filing fees under the HSR
Act and the Exchange Act shall be paid equally by SEI and by PSI or PSMI.
If the Merger is consummated, the fees and expenses to be paid by PSI shall
be deducted in computing the PSI Equity Adjustment under Section 4.2.
10.2. NOTICES, ETC.
All notices, requests, demands or other communications required by
or otherwise with respect to this Agreement shall be in writing and shall
be deemed to have been duly given to any party when delivered personally
(by courier service or otherwise), when delivered by facsimile and
confirmed by return facsimile, or two days after being mailed by first-
class mail, postage prepaid and return receipt requested in each case to
the applicable addresses set forth below:
If to PSI or PSMI: with a copy (which shall not
constitute notice) to:
Public Storage, Inc. Heller, Ehrman, White & McAuliffe
Public Storage Management, Inc. 601 S. Figueroa Street
Suite 300 Los Angeles, CA 90017
600 North Brand Boulevard Attention: A. Timothy Scott
Glendale, CA 91203-1241 Facsimile: (213) 614-1868
Attention: David Goldberg
Facsimile: (818) 247-3842
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If to SEI: with a copy (which shall not
constitute notice) to:
Storage Equities, Inc. Hogan & Hartson LLP
Suite 300 Columbia Square
600 North Brand Boulevard 555 Thirteenth Street, N.W.
Glendale, CA 92103-1241 Washington, DC 20004-1109
Attention: Harvey Lenkin Attention: David B.H. Martin, Jr.
Facsimile: (818) 247-3842 Facsimile: (202) 637-5910
and:
Kindel & Anderson
555 South Flower Street
Twenty-Ninth Floor
Los Angeles, CA 90017
Attention: Neal H. Brockmeyer
Facsimile: (213) 688-7564
or to such other address as such party shall have designated by notice so given
to each other party.
10.3. SURVIVAL
Subject to Section 4.8, the covenants, agreements, representations and
warranties of the parties hereto contained in this Agreement or in any
certificate or other writing delivered pursuant hereto or in connection herewith
shall survive the Closing.
10.4. MODIFICATION OR AMENDMENT
The parties may modify or amend this Agreement by a writing authorized
by their respective Boards of Directors and executed and delivered by officers
of the respective parties; provided, however, that after approval of this
Agreement by the shareholders of SEI, no amendment shall be made which changes
any of the principal terms of the Merger or this Agreement without the approval
of the shareholders of SEI.
10.5. WAIVER
At any time prior to the Effective Time, the parties may (a) extend
the time for the performance of any of the obligations or other acts of the
other parties hereto, (b) waive any inaccuracies in the representations and
warranties contained herein or in any document delivered pursuant hereto and (c)
waive compliance with any of the agreements or conditions contained herein. Any
agreement on the part of a party to any such extension or waiver shall be valid
if set forth in an instrument in writing signed on behalf of such party. The
failure of any party
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hereto to exercise any right, power or remedy provided under this Agreement or
otherwise available in respect hereof at law or in equity, or to insist upon
compliance by any other party of its obligations hereunder, and any custom or
practice of the parties at variance with the terms hereof, shall not constitute
a waiver by such party of its right to exercise any such or other right, power
or remedy or to demand such compliance.
10.6. NO ASSIGNMENT
This Agreement shall be binding upon and shall inure to the benefit of
and be enforceable by the parties and their respective successors and assigns;
provided that, except as otherwise expressly set forth in this Agreement,
neither the rights nor the obligations of any party may be assigned or delegated
without the prior written consent of the other party.
10.7. ENTIRE AGREEMENT
Except as otherwise provided herein, this Agreement embodies the
entire agreement and understanding between the parties relating to the subject
matter hereof and supersedes all prior agreements and understandings relating to
such subject matter. There are no representations, warranties or covenants by
the parties hereto relating to such matter other than those expressly set forth
in this Agreement (including the PSI/PSMI Disclosure Statement) and any writings
expressly required hereby.
10.8. REMEDIES CUMULATIVE
All rights, powers and remedies provided under this Agreement or
otherwise available in respect hereof at law or in equity shall be cumulative
and not alternative, and the exercise or beginning of the exercise of any
thereof by any party shall not preclude the simultaneous or later exercise of
any other such right, power or remedy by such party.
10.9. PARTIES IN INTEREST
This Agreement is not intended to be for the benefit of and shall not
be enforceable by any Person who or which is not a party.
10.10. GOVERNING LAW
This Agreement and all disputes hereunder shall be governed by and
construed and enforced in accordance with the internal laws of the State of
California, without regard to principles of conflict of laws.
10.11. NAME, CAPTIONS, ETC.
The name assigned to this Agreement and the section captions used
herein are for convenience of reference only and shall not affect the
interpretation or construction hereof.
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<PAGE>
Unless otherwise specified (a) the terms "hereof," "herein" and similar terms
refer to this Agreement as a whole and (b) references herein to Articles or
Sections refer to articles or sections of this Agreement.
10.12. SEVERABILITY
If any term of this Agreement or the application thereof to any party
or circumstance shall be held invalid or unenforceable to any extent, the
remainder of this Agreement and the application of such term to the other
parties or circumstances shall not be affected thereby and shall be enforced to
the greatest extent permitted by applicable law provided that in such event the
parties shall negotiate in good faith in an attempt to agree to another
provision (in lieu of the term or application held to be invalid or
unenforceable) that will be valid and enforceable and will carry out the
parties' intentions hereunder.
10.13. COUNTERPARTS
This Agreement may be executed in any number of counterparts, each of
which shall be deemed to be an original, but all of which together shall
constitute one instrument. Each counterpart may consist of a number of copies,
each signed by less than all, but together signed by all, the parties hereto.
10.14. INTERPRETATION
This Agreement has been negotiated by the parties and is to be
interpreted according to its fair meaning as if the parties had prepared it
together and not strictly for or against any party. Each of the capitalized
terms defined in this Agreement shall, for all purposes of this Agreement (and
whether defined in the plural and used in the singular, or vice versa), have the
respective meaning assigned to such term. References in this Agreement to
"parties" or a "party" refer to parties to this Agreement unless expressly
indicated otherwise. At each place in this Agreement where the context so
requires, the masculine, feminine or neuter gender includes the others and the
singular or plural number includes the other. "Including" means "including
without limitation."
10.15. FURTHER ACTION
If at any time after the Effective Time, the Surviving Corporation
shall determine that any assignments, transfers, deeds or other assurances are
necessary or desirable to vest, perfect or confirm, of record or otherwise, in
the Surviving Corporation, title to any property or rights of any PSI Entity,
the officers of either SEI or PSMI are fully authorized in the name of such PSI
Entity or otherwise to execute and deliver such documents and do all things
necessary and proper to vest, perfect or confirm title to such property or
rights in the Surviving Corporation.
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<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed and delivered by
the parties set forth below.
STORAGE EQUITIES, INC.,
a California corporation
By: /s/ Harvey Lenkin
------------------------------
Title: President
-------------------------
PUBLIC STORAGE, INC.,
a California corporation
By: /s/ B. Wayne Hughes
------------------------------
Title: President
-------------------------
PUBLIC STORAGE MANAGEMENT, INC.,
a California corporation
By: /s/ B. Wayne Hughes
------------------------------
Title: Director
-------------------------
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<PAGE>
Exhibit A
---------
AGREEMENT OF MERGER
THIS AGREEMENT OF MERGER ("Agreement") is entered into as of this ____
day of ______, 1995, by and between STORAGE EQUITIES, INC., a California
corporation ("SEI"), and PUBLIC STORAGE MANAGEMENT, INC., a California
corporation ("PSMI"), with reference to the following:
A. SEI was incorporated in 1980 under the laws of California, and on
the date hereof its authorized capital stock consists of (i) 200,000,000 shares
of Common Stock, $.10 par value (the "SEI Common Shares"), ___________ of which
are issued and outstanding, (ii) 7,000,000 shares of Class B Common Stock, $.10
par value, (the "SEI Class B Shares"), none of which are issued and outstanding,
and (iii) 50,000,000 shares of Preferred Stock ($.01 par value), 13,320,000 of
which are issued and outstanding (the "SEI Preferred Shares") (collectively, the
"SEI Shares").
B. PSMI was incorporated in 1972 under the laws of California, and
on the date hereof its authorized capital stock consists of ________ shares of
Common Stock, $.10 par value, ________ of which are issued and outstanding (the
"PSMI Shares").
C. SEI, PSMI and Public Storage, Inc. have entered into an Agreement
and Plan of Reorganization dated as of June 30, 1995 (the "Plan"), setting forth
certain representations, warranties, conditions and agreements pertaining to the
Merger (as defined below).
D. The Boards of Directors of SEI and PSMI have approved the Plan
and this Agreement of Merger, and the requisite shareholder approval has been
obtained.
NOW, THEREFORE, the parties agree as follows:
ARTICLE I
---------
1.1 THE MERGER. At the Effective Time (as defined below), PSMI
will be merged with and into SEI (the "Merger") and SEI will be the surviving
corporation. SEI and PSMI are sometimes collectively referred to herein as the
"Constituent Corporations" and SEI, as the surviving corporation of the Merger,
is sometimes referred to herein as the "Surviving Corporation."
1.2 EFFECTIVE TIME. The Merger shall become effective at the
time at which this Agreement, together with the requisite Officers' Certificates
of SEI and PSMI, are filed with the California Secretary of State (the
"Effective Time").
<PAGE>
1.3 EFFECT OF THE MERGER. At the Effective Time:
(a) The separate corporate existence of PSMI shall cease and the
Surviving Corporation shall thereupon succeed, without other transfer, to all
the rights and property of PSMI and shall be subject to all the debts and
liabilities of PSMI in the same manner as if the Surviving Corporation had
itself incurred them; all rights of creditors and all liens upon the property of
each of the Constituent Corporations shall be preserved unimpaired, provided
that such liens upon property of PSMI shall be limited to the property affected
thereby immediately prior to the Effective Time; and any action or proceeding
pending by or against PSMI may be prosecuted to judgment, which shall bind the
Surviving Corporation, or the Surviving Corporation may be proceeded against or
substituted in its place.
(b) The Articles of Incorporation of SEI, are amended in the
following respect at the Effective Time and thereafter as so amended shall
continue to be the Articles of Incorporation of the Surviving Corporation until
further amended in accordance with the terms thereof and as provided by law.
Article __ shall be amended to read as follows:
The name of this corporation is
Public Storage, Inc.
(c) The Bylaws of SEI, as amended by the Merger Agreement at the
Effective Time, shall continue to be the Bylaws of the Surviving Corporation
until duly amended in accordance with the terms thereof, the Articles of
Incorporation of the Surviving Corporation and as provided by law.
(d) The directors of SEI at the Effective Time shall continue as
directors of the Surviving Corporation from and after the Effective Time. The
persons whose names are set forth on Exhibit C to the Plan shall serve as the
---------
executive officers of the Surviving Corporation from and after the Effective
Time, holding the positions indicated opposite their respective names, until
changed as provided by law and the Articles of Incorporation and Bylaws of the
Surviving Corporation.
ARTICLE II
----------
2.1 CONVERSION OF PSMI SHARES.
(a) At the Effective Time, by virtue of the Merger and without
any action by holders thereof, the PSMI Shares shall be converted into the right
to receive 30,000,000 SEI Common Shares (subject to adjustment pursuant to
Section 4.2 of the Plan) and 7,000,000 SEI Class B Shares. The SEI Shares shall
be allocated among the PSMI shareholders in such proportions as they shall
agree.
2
<PAGE>
(b) If, prior to the Effective Time, SEI should split or combine
the SEI Common Shares, or pay a stock dividend or other stock distribution in
SEI Common Shares, or otherwise change the SEI Common Shares into, or exchange
SEI Common Shares for, any other securities (whether pursuant to or as part of a
merger, consolidation, acquisition of property or stock, separation,
reorganization or liquidation of SEI as a result of which the SEI Shareholders
receive cash, stock or other property in exchange for, or in connection with,
their SEI Shares (a "Business Combination")), or make any other dividend or
distribution (other than cash) on the SEI Common Shares, then the number of SEI
Shares will be appropriately adjusted to reflect such split, combination,
dividend, distribution, Business Combination or change.
(c) The PSMI Shares to be converted into SEI Shares pursuant to
this Section 2.1 shall cease to be outstanding, shall be cancelled and retired
and shall cease to exist, and each holder of a certificate or certificates
representing any such PSMI Shares (the "Certificates") shall thereafter cease to
have any rights with respect to such PSMI Shares, except the right to receive
for each of the PSMI Shares, upon the surrender of such Certificate in
accordance with Section 2.3, the SEI Shares specified above (subject to the
provisions of Section 4.8 of the Plan).
2.2 SEI SHARES UNAFFECTED. The Merger shall effect no change in
any of the outstanding SEI Common Shares or SEI Preferred Shares and no
outstanding SEI Common Shares or SEI Preferred Shares shall be converted or
exchanged as a result of the Merger, and no securities shall be issuable with
respect thereto. Notwithstanding the foregoing, any SEI Common Shares owned by
any PSI Entity at the Effective Time shall be cancelled and retired.
2.3 SURRENDER OF CERTIFICATES. Subject to the provisions of
Section 4.8 of the Plan, at the Closing (as defined in the Plan), PSMI shall
cause each holder of PSMI Shares to surrender the Certificates representing the
PSMI shares to SEI and such holders shall be entitled to receive in exchange
therefor certificates representing the number and class of SEI Shares into which
such PSMI Shares shall be converted pursuant to Section 2.1.
2.4 FRACTIONAL SHARES. Notwithstanding any other term or
provision of this Agreement, no fractional SEI Shares and no certificates or
scrip therefor, or other evidence of ownership thereof, will be issued in the
Merger. In lieu of any such fractional share interests, each holder of PSMI
Shares who would otherwise be entitled to such fractional share will, upon
surrender of the certificate representing such PSMI Shares, receive a whole SEI
Share if such fractional share to which such holder would otherwise have been
entitled is .5 of an SEI Share or more, and such fractional share shall be
disregarded if it represents less than .5 of an SEI Share.
2.5 TRANSFER OF SHARES. No transfers of PSMI Shares shall be
made on the stock transfer books of PSMI after the close of business on the day
prior to the Closing.
3
<PAGE>
ARTICLE III
-----------
3.1 HEADINGS. The descriptive headings contained in the
Sections of this Agreement are for convenience of reference only and shall not
affect in any way the meaning or interpretation of this Agreement.
3.2 PARTIES IN INTEREST. This Agreement, and the rights,
interests and obligations created by this Agreement, shall bind and inure to the
benefit of the parties and their respective successors and permitted assigns.
3.3 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
shall be considered one and the same agreement.
3.4 FURTHER ACTION. If at any time after the Effective Time,
the Surviving Corporation shall determine that any assignments, transfers, deeds
or other assurances are necessary or desirable to vest, perfect or confirm, of
record or otherwise, in the Surviving Corporation, title to any property or
rights of PSMI or its predecessors, the officers of either Constituent
Corporation are fully authorized in the name of PSMI or its predecessors or
otherwise to execute and deliver such documents and do all things necessary and
proper to vest, perfect or confirm title to such property or rights in the
Surviving Corporation.
3.5 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of California, without giving
effect to the principles of conflict of laws thereof.
3.6 ABANDONMENT OF MERGER. The Constituent Corporations have
the power to abandon the Merger by mutual written consent prior to the filing of
this Agreement with the California Secretary of State.
4
<PAGE>
IN WITNESS WHEREOF, the parties have entered into this Agreement as of
the date first above written.
STORAGE EQUITIES, INC.
By: _____________________________
Harvey Lenkin
President
By: _____________________________
Sarah Hass
Secretary
PUBLIC STORAGE MANAGEMENT, INC.
By: ______________________________
Harvey Lenkin
Chairman of the Board
By: _____________________________
Obren B. Gerich
Secretary
5
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STORAGE EQUITIES, INC.
EXHIBIT 23 - CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Prospectus of Storage Equities, Inc. (included in the Registration Statement on
Form S-3 (No. 33-54755) for the registration of shares of its preferred stock,
shares of its common stock and warrants for the purchase of its preferred stock
and common stock and to the incorporation by reference therein of our report
dated February 7, 1995, except for Note 13, for which the date is March 13, 1995
with respect to the consolidated financial statements and schedules of Storage
Equities, Inc. in its Annual Report on Form 10-K as amended by a Form 10-K/A
(Amendment No. 2) dated April 21, 1995 for the year ended December 31, 1994
filed with the Securities and Exchange Commission.
We also consent to the incorporation by reference of our report dated July
10, 1995 on the combined statements of assets, liabilities and deficit of the
property management and advisory businesses of Public Storage, Inc. as of
December 31, 1994 and 1993 and the related combined statements of operations and
cash flows for each of the three years in the period ended December 31, 1994,
and our report dated July 10, 1995 on the combined summaries of historical
information relating to real estate interests to be acquired for each of the
three years in the period ended December 31, 1994, in the Registration Statement
on Form S-3 (No. 33-54755) and related Prospectus.
ERNST & YOUNG LLP
Los Angeles, California
July 19, 1995
