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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
STORAGE EQUITIES, INC.
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(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[_] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2)
or Item 22(a)(2) of Schedule 14A.
[_] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[X] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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Notes:
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STORAGE EQUITIES, INC.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
NOVEMBER 13, 1995
A special meeting of shareholders of Storage Equities, Inc., a California
corporation ("SEI"), will be held at The Sheraton Grande, 333 South Figueroa
Street, Los Angeles, California on November 13, 1995, at 1:30 p.m. for the
following purposes:
1. To consider and vote upon an Agreement and Plan of Reorganization
dated as of June 30, 1995 described in the accompanying Proxy Statement
pursuant to which Public Storage Management, Inc. ("PSMI") would be
merged with and into SEI (the "Merger"). Upon completion of the Merger,
SEI would be self-advised and self-managed and would own substantially
all of the United States real estate interests of Public Storage, Inc.,
SEI's name would be changed to "Public Storage, Inc." and the outstanding
shares of PSMI capital stock would be converted into an aggregate of
30,000,000 shares of Common Stock and 7,000,000 shares of Class B Common
Stock of SEI, subject to adjustment;
2. To consider and vote upon an amendment to the articles of
incorporation of SEI to increase the number of shares of Common Stock
that SEI is authorized to issue from 60,000,000 to 200,000,000, a
portion of which will be issued in the Merger and authorize 7,000,000
shares of Class B Common Stock, all of which will be issued in the
Merger;
3. To consider and vote upon an amendment to the articles of
incorporation of SEI to establish an ownership limitation for SEI's
capital stock to assist in preserving SEI's status as a real estate
investment trust;
4. To consider and vote upon postponement or adjournment of the Special
Meeting if necessary to permit further solicitation of proxies if there
are not sufficient votes at the time of the Special Meeting to approve
the Merger; and
5. To transact such other business relating to the foregoing as may
properly come before the Special Meeting or any adjournment thereof.
Approval of the Merger is conditioned upon approval of all of the amendments
to the articles of incorporation, and approval of each of the amendments is
conditioned upon approval of the Merger.
The board of directors has determined that only holders of record of Common
Stock at the close of business on October 4, 1995 will be entitled to receive
notice of, and to vote at, the meeting or any adjournment of the meeting.
Please complete, date, sign and promptly mail the proxy in the stamped return
envelope included with these materials.
You are cordially invited to attend the meeting in person. If you do attend
and you have already signed and returned the proxy, the powers of the proxy
holders named in the proxy will be suspended if you desire to vote in person.
Therefore, whether or not you presently intend to attend the meeting in person,
you are urged to complete, date, sign and return the proxy.
By Order of the Board of Directors
SARAH HASS, Secretary
Glendale, California
October 11, 1995
<PAGE>
STORAGE EQUITIES, INC.
PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS
November 13, 1995
This Proxy Statement is being furnished to holders of shares of Common Stock,
par value $.10 per share (the "Common Stock"), of Storage Equities, Inc. ("SEI")
and relates to a meeting of the shareholders of SEI (the "Special Meeting")
called to approve the proposed merger of Public Storage Management, Inc.
("PSMI") with and into SEI (the "Merger") pursuant to the Agreement and Plan of
Reorganization dated as of June 30, 1995 attached as Appendix A to this Proxy
Statement (the "Merger Agreement"). Prior to the Merger, substantially all of
the United States real estate interests of Public Storage, Inc. ("PSI"),
together with subsidiaries of PSI that serve as SEI's adviser and commercial
property manager, will be combined with PSMI, SEI's mini-warehouse property
manager. Upon completion of the Merger, SEI would be self-advised and self-
managed and would own substantially all of PSI's United States real estate
interests, SEI's name would be changed to "Public Storage, Inc.," and the
outstanding capital stock of PSMI would be converted into an aggregate of
30,000,000 shares of Common Stock and 7,000,000 shares of Class B Common Stock
of SEI, par value $.10 per share (the "Class B Common Stock"), subject to
adjustment.
At the Special Meeting, holders of Common Stock will also be asked to approve
certain proposed amendments (the "Amendments") to SEI's articles of
incorporation (the "SEI Articles of Incorporation") related to the Merger and to
the preservation of SEI's status as a real estate investment trust ("REIT"),
including amendments to (1) increase the number of shares of Common Stock that
SEI is authorized to issue from 60,000,000 to 200,000,000, a portion of which
will be issued in the Merger and authorize 7,000,000 shares of Class B Common
Stock, all of which will be issued in the Merger (the "Recapitalization") and
(2) establish an ownership limitation for SEI's capital stock to assist in
preserving SEI's status as a REIT. Approval of the Merger is conditioned upon
approval of all of the Amendments and approval of each of the Amendments is
conditioned upon approval of the Merger. Holders of SEI preferred stock are not
entitled to vote on the Merger or the Amendments. The proposals to approve the
Merger and the Amendments are referred to together as the "Proposals." Holders
of Common Stock and PSMI capital stock are referred to herein as the "SEI
Shareholders" and the "PSMI Shareholders," respectively.
THE MERGER AND THE AMENDMENTS INVOLVE CERTAIN RISK FACTORS THAT SHOULD BE
CONSIDERED BY THE SEI SHAREHOLDERS, INCLUDING A SHIFT IN CONTROL OF SEI FROM ITS
PUBLIC SHAREHOLDERS TO B. WAYNE HUGHES AND HIS FAMILY AND CERTAIN TAX RISKS,
INCLUDING ADDITIONAL RISKS AS TO SEI'S QUALIFICATION AS A REIT. MR. HUGHES IS
CURRENTLY THE PRINCIPAL SHAREHOLDER AND CHIEF EXECUTIVE OFFICER OF SEI AND THE
OWNER OF PSI.
This Proxy Statement is first being mailed on behalf of the SEI board of
directors (the "Board of Directors") on or about October 13, 1995 to SEI
Shareholders of record at the close of business on October 4, 1995 (the "Record
Date").
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS
OTHER THAN THOSE CONTAINED HEREIN AND, IF GIVEN OR MADE, SUCH INFORMATION MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY SEI.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
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SUMMARY................................................................. 1
THE SPECIAL MEETING..................................................... 14
Matters to be Considered at the Special Meeting...................... 14
Record Date; Voting at the Meeting................................... 14
Proxies.............................................................. 15
CAPITALIZATION.......................................................... 16
RISK FACTORS............................................................ 17
Control and Influence by the Hughes Family........................... 17
Ownership Limitation................................................. 17
Non-Arm's Length Transactions........................................ 17
Valuation of Assets.................................................. 17
No Independent Valuation of Operating Companies...................... 18
Assets Excluded from the Merger...................................... 18
Liabilities with Respect to Acquired General Partner Interests....... 18
Potential Cancellation of Third Party Management Contracts
and Loss of Revenue................................................ 18
Changes in Nature of Investment...................................... 18
Possible Treatment of the Merger as a Taxable Event.................. 19
Increased Risk of Violation of Gross Income Requirements............. 19
Increased Risk of Violation of Ownership Requirements................ 19
Elimination of Any Accumulated Earnings and Profits.................. 20
Consequences of Failure to Qualify as a REIT......................... 20
Corporate Level Tax on Sale of Certain Built-in Gain Assets.......... 20
Possible Competition with PSI in Canada.............................. 21
Conflicts of Interest................................................ 21
Qualifications to Fairness Opinion................................... 22
Shares Eligible for Future Sale...................................... 23
PROPOSAL ONE - THE MERGER............................................... 24
General.............................................................. 24
Background of the Merger............................................. 24
Reasons for the Merger -- Special Committee Recommendation........... 33
Recommendation of the Board of Directors............................. 35
Alternatives to the Merger........................................... 36
Terms of the Merger.................................................. 37
Indemnification of PSI Directors and Officers........................ 41
Valuation Opinion of Arthur Andersen................................. 41
Fairness Opinion..................................................... 48
Valuation of Class B Common Stock.................................... 52
Appraisals of Wholly-Owned Properties................................ 53
Certain Relationships and Related Party Transactions................. 54
Accounting Treatment................................................. 56
Certain Federal Income Tax Considerations............................ 56
Regulatory Matters................................................... 56
Expenses and Fees.................................................... 56
Rights of Dissenting Shareholders.................................... 57
PROPOSAL TWO - AMENDMENT TO SEI ARTICLES OF INCORPORATION -
RECAPITALIZATION..................................................... 58
PROPOSAL THREE - AMENDMENT TO SEI ARTICLES OF INCORPORATION -
OWNERSHIP LIMITATION................................................. 60
STORAGE EQUITIES, INC................................................... 61
PUBLIC STORAGE MANAGEMENT, INC.......................................... 61
General.............................................................. 61
</TABLE>
-i-
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<TABLE>
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Current Relationship with SEI........................................ 62
Property Management Services......................................... 62
Partnership Interests................................................ 62
REIT Investments..................................................... 63
Tabular Information on PSI's Interests in Partnerships and REITs..... 64
Wholly Owned Properties.............................................. 69
Promissory Notes Secured by Trust Deeds.............................. 69
Wayne Hughes' Direct Investments in Certain Partnerships and REITs... 69
Excluded Assets...................................................... 69
Borrowings........................................................... 70
SELECTED FINANCIAL INFORMATION.......................................... 71
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................ 75
SEI Historical....................................................... 75
Operating Companies and Real Estate Interests........................ 86
Underlying Properties................................................ 93
SEI Pro Forma........................................................ 98
FEDERAL INCOME TAX CONSIDERATIONS....................................... 105
General.............................................................. 105
Tax Treatment of the Merger.......................................... 105
Consequences of the Merger on SEI's Qualification as a REIT.......... 107
Tax Treatment of SEI................................................. 112
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......... 115
SHARES ELIGIBLE FOR FUTURE SALE......................................... 119
INDEPENDENT PUBLIC ACCOUNTANTS.......................................... 119
SHAREHOLDER PROPOSALS................................................... 120
OTHER MATTERS........................................................... 120
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE......................... 120
HISTORICAL AND PRO FORMA FINANCIAL STATEMENTS........................... F-1
</TABLE>
Appendix A - Agreement and Plan of Reorganization by and among PSI, PSMI
and SEI dated as of June 30, 1995
Appendix B - Valuation Report by Arthur Andersen LLP dated June 21, 1995
Appendix C - Opinion of Robertson, Stephens & Company, L.P. dated August
27, 1995.
Appendix D - Chapter 13 of the California Corporation Law Concerning
Dissenters' Rights
Appendix E - 1 - Proposed Amendment to SEI's Articles of Incorporation -
Recapitalization
Appendix E - 2 - Proposed Amendment to SEI's Articles of Incorporation -
Ownership Limitation
-ii-
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SUMMARY
The following is a summary of certain information in this Proxy Statement and
its Appendices. Reference is made to, and this summary is qualified by, the
more detailed information appearing, or incorporated by reference, in this Proxy
Statement and its Appendices. Unless otherwise defined, capitalized terms used
in this summary have the meanings set forth elsewhere in this Proxy Statement.
SEI Shareholders are urged to read this Proxy Statement and the Appendices in
their entirety.
The term "Operating Companies" is used herein to refer collectively to PSMI,
Public Storage Commercial Properties Group, Inc. ("PSCP") and Public Storage
Advisers, Inc. (the "Adviser"), which are subsidiaries of PSI. The term "Real
Estate Interests" is used to refer to substantially all of PSI's United States
real estate interests (other than its interest in SEI). The term "Wayne Hughes"
is used herein to refer to B. Wayne Hughes, individually, and the term "Hughes
Family" is used herein to refer to Wayne Hughes and members of his family,
collectively. The term PSI includes its subsidiaries, as the context requires.
Prior to the Merger, the Real Estate Interests, PSCP and the Adviser will be
combined with PSMI (the "Restructure").
THE COMPANIES BEING MERGED
SEI SEI is a REIT organized in 1980 that has invested
primarily in existing self-service facilities offering
storage space for personal and business use ("mini-
warehouses"). At June 30, 1995, SEI had equity interests
(through direct ownership, as well as general and limited
partnership interests) in 489 facilities, consisting of
470 mini-warehouses and 19 business parks. SEI is
currently advised by, and its facilities are operated by,
the Operating Companies, and all of SEI's executive
officers and certain directors are affiliated with the
Operating Companies. SEI's facilities are operated under
the "Public Storage" name. On the Record Date, there were
outstanding 42,064,283 shares of Common Stock (exclusive
of 3,872,054 shares issuable upon conversion of SEI's
convertible preferred stock and 678,667 shares subject to
options) and eight series of preferred stock (aggregate
liquidation preference of $366,350,000). The Common Stock
is traded on the New York Stock Exchange ("NYSE"), and on
October 10, 1995, the closing price was $19. See "Storage
Equities, Inc." and "Incorporation of Certain Documents
by Reference."
PSMI PSMI is currently SEI's mini-warehouse property manager.
Prior to the Merger, PSCP (SEI's commercial property
manager), the Adviser (SEI's adviser), and the Real
Estate Interests (which have been owned by PSI, the
corporate parent of the Operating Companies) will be
combined with PSMI. At June 30, 1995, PSMI and PSCP
managed 1,074 mini-warehouses and 45 business parks in
the United States under the "Public Storage" name,
including SEI's facilities. The Real Estate Interests
being acquired by SEI in the Merger consist of PSI's
direct or indirect ownership interests in 511 mini-
warehouses and 15 business parks managed by PSMI and PSCP
and all-inclusive deeds of trust secured by ten mini-
warehouses. SEI has indirect ownership interests in 175
of the properties underlying the Real Estate Interests.
See "Public Storage Management, Inc."
THE SPECIAL MEETING
DATE, PLACE AND TIME The Special Meeting of SEI Shareholders is scheduled to
be held at 1:30 p.m. on November 13, 1995, at The
Sheraton Grande, Los Angeles, California.
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PURPOSE To consider and vote upon the Proposals, pursuant to
which PSMI will be merged with and into SEI, the SEI
Articles of Incorporation will be amended, the
Recapitalization will occur and related transactions will
take place. See "Proposal One - The Merger," and
"Proposal Two - Amendment to SEI Articles of
Incorporation - Recapitalization" and "Proposal Three -
Amendment to SEI Articles of Incorporation - Ownership
Limitation."
RECORD DATE October 4, 1995.
QUORUM AND VOTE
REQUIRED The approval of each of the Proposals requires the
affirmative vote of the holders of a majority of the
outstanding shares of Common Stock. For purposes of
satisfying this vote requirement, failure to vote,
abstentions from voting and broker non-votes on any
Proposal will have the effect of votes against such
Proposal. SEI has imposed as an additional condition to
the Merger that it be approved by a majority of the
shares of Common Stock held by shareholders other than
PSI and its affiliates, including the Hughes Family (the
"Public Shareholders"), voting at the Special Meeting.
For purposes of satisfying this additional vote
requirement with respect to the Merger, failure to vote,
abstentions from voting and broker non-votes will have no
effect. A majority of the shares of Common Stock
outstanding, represented in person or by proxy, will
constitute a quorum for the transaction of business at
the Special Meeting. Abstentions and broker non-votes
will be treated as shares that are present and entitled
to vote for the purpose of determining a quorum.
Provided that each of the Proposals is approved by the
holders of a majority of the outstanding shares of Common
Stock, the Merger may be approved by less than a majority
of the outstanding shares of Common Stock held by the
Public Shareholders. Approval of postponement or
adjournment of the Special Meeting requires the
affirmative vote of a majority of the shares of the
Common Stock voting at the Special Meeting. As of the
Record Date, there were 42,064,283 shares of Common Stock
outstanding, approximately 32,470,000 of which were held
by the Public Shareholders. See "The Special Meeting."
THE PROPOSALS
THE MERGER Prior to the Merger, PSCP, the Adviser and the Real
Estate Interests will be combined with PSMI, with the
Hughes Family acquiring a direct 5% equity interest in
PSCP and in a merchandise company, and certain assets
currently owned by PSI will be distributed to the Hughes
Family and will not be acquired by SEI. Upon
consummation of the Merger, (i) PSMI will be merged into
SEI, which will be the surviving corporation, (ii) SEI's
name will be changed to "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
adjustment. See "Proposal One - The Merger," "Proposal
Two - Amendment to SEI Articles of Incorporation -
Recapitalization", "Proposal Three - Amendment to SEI
Articles of Incorporation - Ownership Limitation" and
"Public Storage Management, Inc. - Excluded Assets."
Approval of the Merger by SEI Shareholders is a condition
to adoption of the Amendments.
CONSIDERATION TO BE
PAID BY SEI The aggregate consideration to be paid by SEI
(including SEI's share of estimated expenses of $2.0
million) is estimated at $630.8 million
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(measured as of the day prior to the date the Merger
Agreement was executed), consisting of the following:
. 30,000,000 shares of Common Stock, subject to post-
Closing adjustments referred to below, with a market
value of $482.6 million (based on $16.088 per share,
the average closing price of the Common Stock on the
NYSE for the 30 consecutive trading days ending on June
29, 1995, the day prior to the date the Merger
Agreement was executed). On October 10, 1995, the
closing price was $19.
. 7,000,000 shares of Class B Common Stock with an
estimated value of $73.5 million, based on a third-
party valuation of $10.50 per share. See "Proposal One
- The Merger - Valuation of Class B Common Stock."
. Assumption of (i) $68.0 million of PSMI debt
(exclusive of debt under PSI's line of credit that will
result in an adjustment to the shares of Common Stock
issued in the Merger) and (ii) aggregate consolidated
property debt of $4.7 million.
Substantially all of the consideration to be paid in
the Merger will be received by the Hughes Family.
It is estimated that, assuming a Closing on November
30, 1995, post-Closing adjustments will result in a
reduction in the number of shares of Common Stock issued
in the Merger by 1,400,000 shares (without taking into
account the shares that will be issued to replace shares
owned by PSMI at the Closing Date) and assumption by SEI
of additional debt of approximately $45.0 million. Post-
closing adjustments will not result in an increase in the
number of shares of Common Stock issued in the Merger.
However, the Company will issue 5,743,502 shares to
replace a like number of shares of Common Stock already
owned by PSMI at the Closing Date and which will be
cancelled in the Merger. See "Proposal One - The Merger
- Terms of the Merger - Adjustment to Share
Consideration."
ASSETS TO BE ACQUIRED
BY SEI IN THE MERGER Following the Merger, SEI will own the assets of 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 (which do not represent controlling
interests) in 47 limited partnerships owning an aggregate
of 286 mini-warehouses and one commercial property,
(5) shares of common stock in 16 REITs (which do not
represent majority interests) owning, exclusive of SEI's
facilities, an aggregate of 219 mini-warehouses and 13
commercial properties, (6) property management contracts,
exclusive of facilities owned by SEI at June 30, 1995,
for 604 mini-warehouses and, through ownership of a 95%
economic interest in PSCP, 26 commercial properties (563
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
in mini-warehouses operated by PSMI (the "Lock/Box
Company"). The Hughes Family will have a 5% economic
interest (and 100% of the voting stock) in PSCP and the
Lock/Box Company. Following the Merger, SEI will be
self-advised and self-managed. SEI will also have a
three-year option to acquire, for Common Stock, Wayne
Hughes' direct interests (which do not
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represent controlling interests) in the partnerships and
REITs described in clauses (4) and (5) above at a price
based on a post-Closing valuation by Arthur Andersen LLP
("Arthur Andersen"), estimated at approximately $50
million. See "Proposal One - The Merger - Alternatives to
the Merger" and "Public Storage Management, Inc. -- Wayne
Hughes' Direct Investments in Certain Partnerships and
REITs."
A special committee of independent directors of SEI
(the "Special Committee") determined that the assets to
be acquired by SEI in the Merger must be acquired for
consideration that would not result in dilution to SEI's
funds from operations ("FFO") per share of Common Stock.
There has been no contractual allocation of the
consideration to be paid by SEI in the Merger among the
assets to be acquired. For financial reporting purposes,
however, the consideration has been allocated among the
assets as follows:
. Real Estate Interests (exclusive of the wholly owned
properties and all-inclusive deeds of trust) - $365.0
million based on a valuation by Arthur Andersen
("Arthur Andersen") (the "Arthur Andersen Valuation" or
the "Valuation"). See "Proposal One - The Merger -
Valuation Opinion of Arthur Andersen."
. Seven wholly owned properties - $19.4 million (net of
mortgage debt of $0.5 million) based on separate
appraisals by other parties. See "Proposal One - The
Merger - Appraisals of Wholly-Owned Properties."
. All-inclusive deeds of trust - $3.8 million (net of
underlying debt of $4.2 million) based on their
aggregate principal balance.
. Operating Companies, "Public Storage" name and other
intangibles - $237.9 million, representing the balance
of the consideration to be paid by SEI in the Merger.
RECOMMENDATION OF SPECIAL
COMMITTEE AND BOARD
OF DIRECTORS The Special Committee determined the Merger to be fair to
and in the best interests of SEI and the Public
Shareholders, unanimously approved the Merger and
recommends a vote for approval of the Merger. The
determinations and recommendations of the Special
Committee were adopted by the Board of Directors. The
recommendations of the Special Committee are based upon a
number of factors discussed in this Proxy Statement. See
"Proposal One - The Merger - Reasons for the Merger -
Special Committee Recommendation." The Special Committee
and the Board of Directors also both recommend approval
of the Amendments.
RISK FACTORS The Merger and the Amendments involve certain risk
factors that should be considered by the SEI
Shareholders, including the following:
. Shift in Control. The Merger will result in a shift
in control of SEI from the Public Shareholders to the
Hughes Family, as a result of its ownership of
approximately 53% of the voting stock of SEI after the
Merger (57% assuming conversion of the Class B Common
Stock). Consequently, the ability of the Public
Shareholders to determine matters submitted to a
shareholder vote will be eliminated.
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. Ownership Limitation. After the Amendments, the
Public Shareholders will be further limited in their
ability to change control of SEI due to restrictions in
the SEI Articles of Incorporation limiting beneficial
ownership to no more than (a) 2.0% of the outstanding
shares of all common stock of SEI and (b) 9.9% of the
outstanding shares of each class or series of shares of
preferred stock of SEI.
. Non-Arm's Length Transactions. Although the terms of
the Merger were determined by negotiations between PSI
and the Special Committee, there can be no assurance
that the terms of the Merger represent the best terms
that could have been obtained.
. Valuation of Assets. There can be no assurance that,
if the Real Estate Interests were sold, they would be
sold at their values as set forth in the Arthur
Andersen Valuation and the appraisals. The Arthur
Andersen Valuation does not cover the Operating
Companies, PSI's wholly owned properties, all-inclusive
deeds of trust, the PSI name or any other intangibles.
. Change in Nature of Investment. The Merger will alter
significantly the nature of the entity in which SEI
Shareholders have invested.
. Tax Risks-Additional Risks to Continued REIT
Qualification. The Merger will involve certain tax
risks, including additional risks as to SEI's continued
qualification as a REIT resulting from a substantial
increase in SEI's nonqualifying income. For any
taxable year that SEI fails to qualify as a REIT and
certain relief provisions do not apply, SEI would be
taxed at the regular corporate rates on all of its
taxable income, whether or not it makes any
distributions to its shareholders. Those taxes would
reduce the amount of cash available to SEI for
distribution to its shareholders or for reinvestment by
SEI. As a result, failure of SEI to qualify during any
taxable year as a REIT would have a material adverse
effect upon SEI and its shareholders.
. Benefits to Hughes Family. As described below, the
Merger, if consummated, will result in significant
benefits to the Hughes Family, including control of
SEI, relief from general partner liability and
increased liquidity. In the Merger, SEI will issue
30,000,000 shares of Common Stock, subject to
adjustment, with a market value of $482.6 million
(measured as of the day prior to the date the Merger
Agreement was executed) and 7,000,000 shares of Class B
Common Stock with an estimated value of $73.5 million.
Substantially all of the consideration to be paid in
the Merger will be received by the Hughes Family. In
addition, SEI has an option to acquire, for Common
Stock, Wayne Hughes' direct interests in certain
partnerships and REITs. The total value of these
direct interests is estimated at approximately $50.0
million at the closing of the Merger (the "Closing").
. Conflicts of Interest of Certain Persons. Currently,
the Hughes Family controls the Operating Companies
through ownership of PSI, and Wayne Hughes is SEI's
chief executive officer and Chairman of the Board of
Directors. In addition, SEI's other executive officers
are executive officers of PSI. PSI and its affiliates
(including the Hughes Family) have significant
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relationships with SEI and own approximately 23% of the
outstanding Common Stock. The Hughes Family, PSI and
their affiliates have informed SEI that they intend to
vote all of their shares of Common Stock for the
Proposals. See "Risk Factors - Conflicts of Interest."
BENEFITS OF THE MERGER
TO SEI AND THE PUBLIC
SHAREHOLDERS The Board of Directors believes that the Merger, if
consummated, should result in the following benefits to
SEI and the Public Shareholders:
. Through the acquisition of the Operating Companies,
SEI will become a fully-integrated, self-advised and
self-managed commercial real estate company with
expertise in development, construction, acquisition,
operation and leasing services. "See Proposal One - The
Merger - Alternatives to the Merger."
. SEI will own and operate more mini-warehouse space
than any competitor.
. The Merger will increase SEI's capital base and, as a
self-advised and self-managed REIT, should make SEI
more attractive to institutional and other investors.
. Upon consummation of the Merger, SEI's credit rating
is expected to improve, reducing SEI's costs of capital
and enhancing its ability to raise capital.
. SEI will acquire the "Public Storage" name and
goodwill associated with that name in the United
States.
. SEI will be able to expand its property holdings
without a proportionate increase in advisory and
property management fees, which would have resulted had
its current advisory contract and management agreements
remained in effect.
. Existing conflicts of interest between SEI and its
executive officers and directors who are also
affiliated with the Operating Companies and who own the
Real Estate Interests should be reduced. The Real
Estate Interests represent interests in properties that
compete with SEI's properties.
There can be no assurance, however, that these
benefits will be realized. See "Proposal One - The
Merger."
VALUATION OPINION OF
ARTHUR ANDERSEN Arthur Andersen, which was jointly engaged by the Special
Committee and PSI, valued the Real Estate Interests
(other than the wholly owned properties and the all-
inclusive deeds of trust) for purposes of the Merger.
The full text of the Valuation contains a description of
the methodology and analysis of Arthur Andersen and is
attached as Appendix B to this Proxy Statement and should
be read in its entirety. The Valuation reflects
traditional financial valuation methodology, utilizing
the income approach, the market approach and the adjusted
book value approach. The results of these approaches
were weighed and correlated to arrive at a value
conclusion, as of December 31, 1994, of $365.0 million.
The Valuation reflects Arthur Andersen's opinion as of
such date in the context of information
6
<PAGE>
available, and under market and economic conditions
present, at that date. The Valuation, prepared in
conformity with the Uniform Standards of Professional
Appraisal Practice, is subject to certain assumptions and
limiting conditions described in Appendix B. Arthur
Andersen will also value the Real Estate Interests
acquired between December 31, 1994 and the closing of the
Merger (the "Closing"). See "Proposal One - The Merger -
Valuation Opinion of Arthur Andersen."
OPINION OF FINANCIAL
ADVISER Robertson, Stephens & Company, L.P. ("Robertson,
Stephens") has delivered its written opinion, dated
August 27, 1995 (the "Fairness Opinion"), to the Special
Committee and the Board of Directors to the effect that,
as of the date of its opinion, the consideration to be
paid by SEI in the Merger is fair to the Public
Shareholders of SEI from a financial point of view. In
rendering the Fairness Opinion, Robertson, Stephens
conducted (i) a relative contribution analysis; (ii) a
comparison with selected publicly traded REITs; (iii) a
comparison of selected transactions deemed comparable;
(iv) a discounted cash flow analysis, both of PSMI and
SEI, after giving effect to the Restructure, and
separately of certain of the entities to be included in
the Restructure; (v) a pro forma merger analysis; and
(vi) certain other analyses deemed appropriate. A copy
of the written Fairness Opinion, which sets forth the
assumptions made, matters considered and limits of its
review, is attached as Appendix C to this Proxy Statement
and should be read in its entirety. See "Proposal One -
The Merger - Fairness Opinion."
THE AMENDMENTS In connection with the Merger, the Board of Directors is
proposing the Amendments to (a) increase the number of
shares of Common Stock that SEI is authorized to issue
from 60,000,000 to 200,000,000, a portion of which will
be issued in the Merger and authorize 7,000,000 shares of
Class B Common Stock, all of which will be issued in the
Merger, and (b) establish an ownership limitation for
SEI's capital stock to assist in preserving SEI's REIT
status, which will further limit the ability of the
Public Shareholders to change control of SEI. Approval
of all of the Amendments by the SEI Shareholders is a
condition to consummation of the Merger.
1) The rights and preferences of SEI's existing
Common Stock will not change, but the number of
authorized shares will increase from 60,000,000 to
200,000,000. The proposed increase in the number of
shares exceeds the increase necessary to complete the
Merger. The excess would be available for underwritten
offerings, mergers (with affiliated and unaffiliated
parties), acquisitions (including pursuant to an option
agreement with Wayne Hughes) and general corporate
purposes. No further shareholder approval would be
solicited for any future issuances of authorized shares,
unless required by the rules of the NYSE or applicable
provisions of California law.
2) The Class B Common Stock will (i) not participate
in distributions until the later to occur of FFO per
Common Share as defined below, aggregating $1.80 during
any period of four consecutive calendar quarters, or four
years after the Closing; thereafter, the Class B Common
Stock will participate in distributions (other than
liquidating distributions), at the rate of 97% of the per
share distributions on the Common Stock, provided that
cumulative distributions of at least $.22 per quarter per
share have been paid on the Common Stock, (ii) not
participate in liquidating distributions, (iii) not be
entitled to vote
7
<PAGE>
(except as expressly required by California law) and (iv)
automatically convert into Common Stock, on a share for
share basis, upon the later to occur of FFO per Common
Share aggregating $3.00 during any period of four
consecutive calendar quarters or seven years after the
Closing. For more information on the calculation of FFO,
see note (4) to "- Summary Financial Information".
For these purposes:
1) FFO has the meaning set forth in note (4) to "-
Summary Financial Information."
2) FFO per Common Share means FFO less preferred
stock dividends (other than dividends on convertible
preferred stock) divided by the outstanding weighted
average shares of Common Stock assuming conversion of all
outstanding convertible securities and the Class B Common
Stock.
For these purposes, Pre-Merger (Pro forma) FFO per
share of Common Stock (as defined by SEI) was $1.57 and
$0.83 for the year ended December 31, 1994 and six months
ended June 30, 1995, respectively. Post-Merger (Pro
forma) FFO per share of Common Stock (as defined by SEI)
was $1.58 and $0.84 for the year ended December 31, 1994
and six months ended June 30, 1995, respectively. FFO
per share of Common Stock was computed assuming
conversion of the Class B Common Stock and without giving
effect to the additional earnings required to allow such
conversion. Distributions per share of Common Stock were
$0.22 per quarter for both Pre-Merger and Post-Merger
purposes.
SEI currently has no agreements for the issuance of
additional shares of Common Stock (other than in the
Merger). Nevertheless, SEI is likely to pursue a variety
of transactions that may involve such an issuance and
expects that such transactions may occur from time to
time during the next year. Since September 1994, SEI has
merged with three affiliated REITs that own mini-
warehouses and business parks developed by PSI and has
also issued convertible preferred stock in connection
with the acquisition of property interests, and it is
expected that SEI will issue securities in other similar
transactions. See "Proposal Two - Amendment to SEI
Articles of Incorporation - Recapitalization,"
"Management's Discussion and Analysis of Financial
Condition and Results of Operations - SEI Historical -
Liquidity and Capital Resources" and "Public Storage
Management, Inc. - REIT Investments."
8
<PAGE>
BENEFITS OF THE
MERGER TO
HUGHES FAMILY The Merger, if consummated, will result in the following
principal benefits to the Hughes Family:
. Control of SEI. In the Merger, the Hughes
Family will be transferring to SEI both the
Operating Companies and the Real Estate Interests.
Upon completion of the Merger and adoption of the
Amendments (without taking into account any post-
Closing adjustment), the Hughes Family's ownership
interest in SEI will increase from approximately 21%
of the Common Stock to approximately 53% (57% of the
Common Stock assuming conversion of all Class B
Common Stock). As a result, the Hughes Family will
obtain voting control of SEI. (The Hughes Family,
however, will own less than 50% of the total capital
stock of SEI because they own an insignificant
portion of SEI's outstanding preferred stock.) The
Hughes Family's control over SEI will be further
increased by an amendment to the SEI Articles of
Incorporation limiting beneficial ownership by any
SEI Shareholder, unless such limitations are waived
by the Board of Directors, of more than (A) 2.0% of
the outstanding shares of all common stock of SEI,
and (B) 9.9% of the outstanding shares of each class
or series of shares of preferred stock of SEI.
These ownership limitations do not apply to shares
of SEI capital stock in excess of such amounts held
by a shareholder (including the Hughes Family) at
the time of the Merger (after giving effect to the
Merger), but they would preclude such a shareholder
from acquiring additional shares of SEI capital
stock. The Special Committee and the Board of
Directors have determined that these ownership
limitations are necessary in order to assist in
preserving SEI's REIT status in view of the Hughes
Family's substantial ownership interest in SEI after
the Merger. See "Federal Income Tax Considerations
- Tax Treatment of SEI."
. Relief from General Partner Liability. As a
result of the transfer of the Real Estate Interests
to SEI in the Merger, PSI (which is controlled by
the Hughes Family) will be released from, and SEI
will assume, general partner liability with respect
to certain limited partnerships ("PSI limited
partnerships"). Wayne Hughes will continue as the
individual general partner of those PSI limited
partnerships as to which he is currently a general
partner.
. Increased Liquidity. Currently, no public
trading market exists for shares of the Operating
Companies or for the Real Estate Interests.
Consequently, the Hughes Family's investment is
relatively illiquid. Upon completion of the Merger
(without taking into account any post-Closing
adjustment), the Hughes Family will own
approximately 53% of the Common Stock (57% assuming
conversion of Class B Common Stock into Common
Stock) in a large publicly traded company resulting
in improved liquidity of the interests held by the
Hughes Family. PSI, which owns the Operating
Companies, was organized by Wayne Hughes and another
individual in 1972 with a combined initial
investment of $50,000. The aggregate consideration
to be paid by SEI in the Merger is estimated at
$630.8 million (measured as of the
9
<PAGE>
day prior to the date the Merger Agreement was
executed). The market price of the Common Stock to
be issued in the Merger fluctuates.
. Liability for Debt. By virtue of the Merger
and as the successor to PSMI, SEI will assume and
become liable pursuant to the Merger for (1)
aggregate full-recourse indebtedness of
approximately $68.0 million of PSMI (exclusive of
indebtedness under PSI's line of credit that will
result in an adjustment to the shares of Common
Stock issued in the Merger), (2) aggregate
consolidated property indebtedness relating to seven
wholly owned properties of $0.5 million and (3)
aggregate indebtedness relating to the all-inclusive
deeds of trust of $4.2 million. See "Proposal One -
The Merger - Terms of the Merger - Restrictions on
Transfer of Shares" and "Risk Factors - Conflicts of
Interest - Substantial Benefits to Hughes Family."
CONDITIONS OF THE
MERGER; TERMINATION The consummation of the Merger is conditioned upon the
approval of the Amendments and the fulfillment or waiver
of certain other conditions set forth in the Merger
Agreement. The Merger Agreement may be terminated by
either SEI or PSMI if the Merger does not occur on or
prior to March 31, 1996. See "Proposal One - The Merger
-- Terms of the Merger -- Conditions to Consummation of
the Merger" and "-- Amendments and Termination."
CLOSING DATE If the Merger is approved by the requisite vote of SEI
Shareholders and the other conditions to the Merger are
satisfied or waived, it is expected that the Merger will
be consummated on or prior to November 30, 1995 (the
"Closing Date").
CERTAIN FEDERAL
INCOME TAX
CONSEQUENCES The Merger is intended to qualify as a reorganization
under Section 368(a) of the Internal Revenue Code (the
"Code"). As such, no gain or loss generally will be
recognized by either the SEI Shareholders (except with
respect to cash received by SEI Shareholders perfecting
Dissenters' Rights) or SEI on the deemed acquisition of
the assets of PSMI in exchange for shares of stock of SEI
in connection with the Merger (assuming the tax basis of
PSMI's assets exceeds the liabilities assumed in the
Merger). See "Federal Income Tax Considerations -- Tax
Treatment of the Merger -- Dissenters' Rights." The
Merger may impact on SEI's ability to continue to qualify
as a REIT, whether or not the Merger qualifies as a
reorganization under the Code. See "Risk Factors --
Increased Risk of Violation of Gross Income
Requirements," "-- Elimination of Any Accumulated
Earnings and Profits," and "-- Increased Risk of
Violation of Ownership Requirements" and "Federal Income
Tax Considerations--Consequences of the Merger on SEI's
Qualification as a REIT."
ACCOUNTING TREATMENT The Merger will be treated as a purchase for accounting
purposes.
DISSENTERS' RIGHTS Pursuant to Chapter 13 of the Corporations Code of the
State of California (the "California Code"), SEI
Shareholders may be entitled to require SEI to purchase
their shares for cash at their fair market value as of
the day before the first announcement of the terms of the
Merger, excluding any appreciation or depreciation in
consequence of the Merger ("Dissenters Rights") if
demands for payment are filed
10
<PAGE>
with respect to 5% or more of the outstanding shares of
Common Stock ("Dissenting Shares"). The obligation of
PSMI to effect the Merger is subject to the condition,
which may be waived by PSMI, that holders of less than 5%
of SEI's Common Stock exercise their Dissenters' Rights.
A dissenting shareholder who wishes to require SEI to
purchase his or her shares of Common Stock must:
(1) vote against the Merger any or all of the
shares of Common Stock entitled to be voted (shares of
Common Stock not voted are not considered to be voted
against the Merger for purposes of this requirement and
will not be counted toward the 5% minimum for Dissenters'
Rights to exist); provided that if a SEI Shareholder
votes part of the shares entitled to be voted in favor of
the Merger, and fails to specify the number of shares
voted, it is conclusively presumed under California law
that such shareholder's approving vote is with respect to
all shares entitled to be voted;
(2) make written demand upon SEI or its transfer
agent, which is received not later than the date of the
Special Meeting, setting forth the number of shares of
Common Stock demanded to be purchased by SEI and a
statement as to claimed fair market value of such shares
at June 29, 1995; and
(3) submit for endorsement, within 30 days after
the date on which the notice of approval of the Merger by
SEI Shareholders is mailed to such shareholders, to SEI
or its transfer agent the certificates representing any
shares in regard to which demand for purchase is being
made, or to be exchanged for certificates of appropriate
denominations so endorsed, with a statement that the
shares are Dissenting Shares.
The provisions of Chapter 13 are technical in nature and
complex. SEI Shareholders desiring to exercise appraisal
rights and to obtain appraisal of the fair value of their
shares should consult counsel, since the failure to
comply strictly with the provisions of Chapter 13 may
result in a waiver or forfeiture of their appraisal
rights. A copy of Chapter 13 of the California Code is
attached hereto as Appendix D. See "Proposal One - The
Merger - Rights of Dissenting Shareholders." (The
exercise of Dissenters' Rights with respect to a
significant number of SEI shares may make it more
difficult for SEI to continue to satisfy the stock
ownership requirements for qualification as a REIT.)
11
<PAGE>
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AND MINI-WAREHOUSE
AND FACILITIES UNDER MANAGEMENT DATA)
<TABLE>
<CAPTION>
Six Months Ended June 30, 1995 Year Ended December 31, 1994
-------------------------------------------------- ----------------------------------------------
SEI SEI SEI SEI
SEI Pre-Merger Post-Merger SEI Pre-Merger Post-Merger
(Historical) (Pro forma)(1) (Pro forma)(2) (Historical) (Pro forma)(1) (Pro forma)(2)
------------- -------------- -------------- ------------ -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA
Total revenues........... $ 91,110 $ 111,537 $ 128,547 $ 147,196 $ 217,220 $ 248,441
Depreciation and
amortization............ 16,926 20,747 25,750 28,274 40,971 51,022
Interest expense......... 3,214 5,188 7,877 6,893 10,743 16,350
Net income............... 29,751 36,063 51,554 42,118 68,682 96,621
PER SHARE OF COMMON STOCK:
Net income(8)............ $ 0.50 $ 0.48 $ 0.50 $ 1.05 $ 0.90 $ 0.91
Distributions paid....... 0.44 0.44 0.44 0.85 0.85 0.85
Weighted average shares
of Common Stock......... 32,708 42,108 72,108 24,077 41,845 71,845
BALANCE SHEET DATA (AS
OF JUNE 30, 1995):
Total assets............. $1,116,857 $1,154,885 $1,786,794
Total debt............... 58,497 103,213 175,919
Shareholders' equity..... 892,664 892,664 1,448,804
OTHER DATA:
Net cash flows provided
by operating activities. $ 50,325 $ 60,380 $ 80,606 $ 79,180 $ 116,368 $ 154,991
Net cash flows used in
investing activities.... (101,568) (102,558) (102,476) (169,590) (364,942) (366,694)
Net cash flows provided
by financing activities. 120,851 105,321 89,369 100,029 267,222 241,749
EBITDA(3)................ 44,432 56,847 90,669 63,036 109,542 174,366
FFO(as defined by
SEI)(4)................. 41,218 51,659 82,792 56,143 98,799 158,016
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30, 1995 Year Ended December 31, 1994
-------------------------------------------- --------------------------------------------
Real Real SEI
SEI Estate SEI SEI Estate Post-
(Pro forma)(1) Interests Post-Merger (Pro forma)(1) Interests Merger
-------------- --------- ----------- --------------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
MINI-WAREHOUSE DATA (5):
Mini-warehouse net square
footage at end of period
(000's).................. 29,134 29,650 58,784 29,134 29,650 58,784
Number of mini-warehouses
at end of period......... 503 511 1,014 503 511 1,014
Weighted average
occupancy of the Same
Store mini-warehouses
for the period(6)........ 89.3% 89.6% 89.5% 90.3% 88.9% 89.4%
Weighted average
mini-warehouse realized
monthly rent per
occupied square foot
for Same Store
mini-warehouses for the
period(6)................ $ 0.60 $ 0.73 $ 0.69 $ 0.59 $ 0.71 $ 0.67
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
June 30, 1995 December 31, 1994
------------- -----------------
<S> <C> <C>
FACILITIES UNDER
MANAGEMENT (7):
Gross revenues (000's)........... $253,466 $486,766
Number of facilities at
end of period.................. 1,119 1,112
Square footage at end of
period (000's)................. 68,039 67,454
</TABLE>
See footnotes on succeeding page.
12
<PAGE>
_________________
(1) SEI Pre-Merger (Pro forma) gives effect to the issuance and investment of
approximately $500 million of additional capital since January 1, 1994
through the issuance of preferred and Common Stock in public offerings and
the issuance of Common Stock in connection with the mergers of Public
Storage Properties VI, VII and VIII, Inc., as if such transactions were
completed at the beginning of 1994. See "Pro Forma Consolidated Financial
Statements" and "Selected Financial Information."
(2) The SEI Post-Merger (Pro forma) financial information also gives effect to
the proposed Merger between SEI and PSMI. See "Pro Forma Consolidated
Financial Statements" and "Selected Financial Information."
(3) EBITDA means net income before (i) gains (or losses) on early
extinguishment of debt, (ii) minority interest in income, (iii) gain/loss
on disposition of real estate, (iv) taxes based on income, (v) interest
expense, (vi) 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 (vii) less EBITDA
attributable to minority interests.
(4) FFO, as defined by SEI, means net income (loss) (computed in accordance
with GAAP) before (i) gain (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, including property management agreements and goodwill), and (ii)
less FFO attributable to minority interest. FFO is a supplemental
performance measure for equity REITs as defined by the National Association
of Real Estate Investment Trusts, Inc. ("NAREIT"). The NAREIT definition
does not specifically address the treatment of minority interest in the
determination of FFO or the treatment of the amortization of property
management agreements and goodwill. In the case of SEI, FFO represents
amounts attributable to its shareholders after deducting amounts
attributable to the minority interests and before deductions for the
amortization of property management agreements and goodwill. FFO, as
defined by SEI, is presented because many industry analysts consider FFO,
as defined by SEI, to be one measure of the performance of SEI and it is
used in establishing the terms of the Class B Common Stock. FFO does not
take into consideration scheduled principal payments on debt, capital
improvements, distributions and other obligations of SEI. Accordingly, FFO
is not a substitute for SEI's cash flow or net income as a measure of SEI's
liquidity or operating performance or ability to pay distributions.
(5) Reflects information regarding underlying properties in which SEI or PSI
(in the case of the Real Estate Interests) has an interest, not SEI's or
PSI's proportionate interest in such properties.
(6) Same Store mini-warehouses, with respect to SEI, represents 246 mini-
warehouse facilities, consisting of approximately 14.5 million net rentable
square feet, in which SEI has had an ownership interest since 1992. With
respect to the Real Estate Interests, Same Store mini-warehouses represents
511 mini-warehouse facilities consisting of approximately 29.7 million net
rentable square feet. In addition to the mini-warehouse properties, SEI
has an interest in 19 commercial properties (2.3 million rentable square
feet) and the Real Estate Interests include interests in 15 commercial
properties (1.9 million rentable square feet).
(7) Reflects information regarding properties managed by PSMI and PSCP,
including SEI's facilities.
(8) The Class B Common Stock is (i) not entitled to participate in
distributions until the later to occur of 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 distributions) 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 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
reaching $3.00 per share for any period of four consecutive quarters 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.
13
<PAGE>
THE SPECIAL MEETING
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
At the Special Meeting, SEI Shareholders will: (1) consider and vote upon the
Merger, (2) consider and vote upon the Amendments, (3) consider and vote upon
postponement or adjournment of the Special Meeting if necessary to permit
further solicitation of proxies and (4) transact such other business relating
thereto as may properly come before the Special Meeting. Approval of the Merger
is conditioned upon approval of all of the Amendments, and approval of each of
the Amendments is conditioned upon approval of the Merger.
Both the Special Committee and the Board of Directors have determined the
Merger to be fair to and in the best interests of the Public Shareholders, have
unanimously approved the Merger and recommend a vote for approval of the Merger.
The Special Committee and the Board of Directors also recommend approval of the
Amendments.
RECORD DATE; VOTING AT THE MEETING
On the Record Date, October 4, 1995, there were 42,064,283 shares of Common
Stock outstanding. Each holder of record of Common Stock on the Record Date is
entitled to cast one vote per share of Common Stock, exercisable in person or by
properly executed proxy, upon each matter properly submitted for the vote of the
shareholders at the Special Meeting. A majority of the shares of Common Stock
outstanding, represented in person or by proxy, will constitute a quorum for the
transaction of business at the Special Meeting. Abstentions and broker non-
votes will be treated as shares that are present and entitled to vote for the
purpose of determining a quorum.
The approval of each of the Proposals requires the affirmative vote of the
holders of a majority of the outstanding shares of Common Stock. For purposes
of satisfying this vote requirement, failure to vote, abstentions from voting
and broker non-votes on any Proposal will have the effect of votes against such
Proposal. SEI has imposed as an additional condition to the Merger that it be
approved by a majority of the shares of Common Stock held by the Public
Shareholders voting at the Special Meeting. For purposes of satisfying this
additional vote requirement with respect to the Merger, failure to vote,
abstentions from voting and broker non-votes will have no effect. Provided that
each of the Proposals is approved by the holders of a majority of the
outstanding shares of Common Stock, the Merger may be approved by less than a
majority of the outstanding shares of Common Stock held by the Public
Shareholders.
Approval of postponement or adjournment of the Special Meeting requires the
affirmative vote of a majority of the shares of the Common Stock voting at the
Special Meeting. For purposes of satisfying this vote requirement, failure to
vote, an abstention from voting and a broker non-vote will have the effect of
votes against postponement or adjournment. If shareholders approve this item,
the Special Meeting could be postponed or adjourned in order to permit further
solicitation of proxies if there are not sufficient votes at the time of the
Special Meeting to approve the Merger.
As of the Record Date, PSI and its affiliates (including the Hughes Family)
beneficially owned 9,593,025 shares of Common Stock (excluding shares subject to
options and shares issuable upon conversion of convertible preferred stock),
representing approximately 23% of the shares of Common Stock outstanding on the
Record Date, and have indicated that they intend to vote their shares of Common
Stock in favor of the Proposals at the Special Meeting. It is anticipated that
the shares of Common Stock beneficially owned and entitled to be voted by
directors of SEI who are not affiliated with PSI also will be voted in favor of
the Proposals. As of the Record Date, directors of SEI who are not affiliated
with PSI beneficially owned 674,953 shares of Common Stock (excluding shares
subject to options), representing approximately 2% of the shares of Common Stock
outstanding on the Record Date.
14
<PAGE>
PROXIES
Shares of Common Stock represented by properly executed proxies received at or
prior to the Special Meeting that have not been revoked will be voted at the
Special Meeting in accordance with the instructions contained therein. Shares
of Common Stock represented by properly executed proxies for which no
instruction is given will be voted "FOR" approval of the Proposals. SEI
Shareholders are requested to complete, sign, date and promptly return the
enclosed proxy card in the postage pre-paid envelope provided for this purpose
to ensure that their shares are voted. A shareholder may revoke a proxy by
submitting at any time prior to the Special Meeting a later-dated proxy with
respect to the same shares, by delivering a written notice of revocation to the
Secretary of SEI at any time prior to such Special Meeting or by attending the
Special Meeting and voting in person. Mere attendance at the Special Meeting
will not in and of itself revoke a proxy.
If the Special Meeting is postponed or adjourned for any reason, including
further solicitation of proxies, at any subsequent reconvening of the Special
Meeting all proxies will be voted in the same manner as such proxies would have
been voted at the original convening of the Special Meeting (except for any
proxies that have theretofore effectively been revoked or withdrawn).
SEI and PSMI will bear the cost of soliciting proxies from the SEI
Shareholders. In addition to solicitation by mail, certain directors, officers
and regular employees of SEI may solicit the return of proxies by telephone,
telegraph, personal interview or otherwise. SEI and PSMI may also reimburse
brokerage firms and other persons representing the beneficial owners of Common
Stock for reasonable expenses in forwarding proxy solicitation materials to such
beneficial owners. Shareholder Communications Corporation may be retained to
assist SEI in solicitation of proxies at an estimated cost of $10,000.
15
<PAGE>
CAPITALIZATION
The table below sets forth as of June 30, 1995, the historical consolidated
capitalization of SEI, and the consolidated capitalization of SEI (i) as
adjusted to give effect to certain transactions ("Pre-Merger") and (ii) as
further adjusted to give effect to the proposed Merger between SEI and PSMI
("Post-Merger"). The Post-Merger (Pro forma) data does not give effect to post-
Closing adjustments. See "Pro Forma Consolidated Financial Statements" and
"Selected Financial Information."
<TABLE>
<CAPTION>
At June 30, 1995
---------------------------------------------------------------
SEI SEI
SEI Pre-Merger Post-Merger
Historical (Pro forma) (Pro forma)
-------------- -------------- -------------
(Dollars in thousands)
<S> <C> <C> <C>
Total debt:
Line of credit with banks........... $ - $ - $ -
Senior notes(1)..................... - - 68,000
Mortgage notes payable.............. 58,497 103,213 107,919
---------- ---------- ----------
Total debt........................ 58,497 103,213 175,919
Minority interest..................... 131,536 124,848 124,848
Shareholders' equity:
Preferred Stock, $.01 par value,
50,000,000 shares authorized:
Senior Preferred Stock,
11,106,000 shares issued and
outstanding..................... 277,650 277,650 277,650
Convertible Preferred Stock,
2,300,000 shares issued
and outstanding................. 57,500 57,500 57,500
Common Stock, $.10 par value,
60,000,000 shares authorized
(2): 42,042,616 shares
issued and outstanding
(42,042,616 and 72,042,616
issued and outstanding,
Pre-Merger and Post-Merger,
respectively)..................... 4,205 4,205 7,205
Class B Common Stock, $.10 par
value, no shares authorized or
issued and outstanding
(2) (7,000,000 issued and
outstanding, Post-Merger)......... - - 700
Paid in capital....................... 561,985 561,985 1,114,425
Cumulative net income................. 202,236 202,236 202,236
Cumulative distributions paid......... (210,912) (210,912) (210,912)
---------- ---------- ----------
Total shareholders' equity............ 892,664 892,664 1,448,804
---------- ---------- ----------
Total capitalization............ $1,082,697 $1,120,725 $1,749,571
========== ========== ==========
</TABLE>
- ---------------
(1) The assumption of this note by SEI is subject to the lender's consent.
(2) SEI currently has one class of Common Stock outstanding. In connection
with the Merger, the SEI Articles of Incorporation will be amended to: (i)
increase the number of authorized shares of Common Stock from 60,000,000 to
200,000,000, and (ii) authorize 7,000,000 shares of Class B Common Stock.
16
<PAGE>
RISK FACTORS
The Merger and the Amendments involve certain risk factors, including the
following, that may adversely affect SEI's Public Shareholders and should be
carefully considered before voting on the Merger and the Amendments:
CONTROL AND INFLUENCE BY THE HUGHES FAMILY
The Merger will result in a shift in control of SEI from the Public
Shareholders to the Hughes Family. Currently, the Public Shareholders
(including directors of SEI who are not affiliated with PSI) own approximately
77% of the Common Stock, the Hughes Family owns approximately 21% and other
affiliates of PSI own approximately 2%. Following the consummation of the
Merger upon the terms set forth in the Merger Agreement (without taking into
account any post-Closing adjustment), the Public Shareholders of SEI will own
approximately 46% of the outstanding Common Stock (42% assuming conversion of
the Class B Common Stock), the Hughes Family will own approximately 53% of the
outstanding Common Stock (approximately 57% assuming conversion of the Class B
Common Stock) and other affiliates of PSI will own approximately 1% of the
outstanding Common Stock. Consequently, the ability of the Public Shareholders
to determine matters submitted to a vote of the shareholders, including the
election of directors, amendment of the Articles of Incorporation, dissolution
and the approval of extraordinary transactions such as the Merger, will be
eliminated.
OWNERSHIP LIMITATION
After the Amendments, holders of SEI capital stock will be further limited in
their ability to change control of SEI due to restrictions in the SEI Articles
of Incorporation on beneficial ownership. Unless such limitations are waived by
the Board of Directors, no SEI Shareholder may own more than (A) 2.0% of the
outstanding shares of all common stock of SEI, and (B) 9.9% of the outstanding
shares of each class or series of shares of preferred stock of SEI. The SEI
Articles of Incorporation provide, however, that no person shall be deemed to
exceed the ownership limit solely by reason of the beneficial ownership of
shares of any class of stock to the extent that such shares of stock were
beneficially owned by such person on the Closing Date (after giving effect to
the Merger), which would include the Common Stock owned by the Hughes Family.
The principal purpose of the foregoing limitations is to assist in preventing,
to the extent practicable, a concentration of ownership that might jeopardize
the ability of SEI to obtain the favorable tax benefits afforded a qualified
REIT. An incidental consequence of such provisions is to make a change of
control significantly more difficult (if not impossible) even if it would be
favorable to the interests of the Public Shareholders. Such provisions will
prevent future takeover attempts which the Board of Directors has not approved
even if a majority of the Public Shareholders deem it to be in their best
interests or in which the Public Shareholders may receive a premium for their
shares over the then market value.
NON-ARM'S LENGTH TRANSACTIONS
The terms of the Merger were determined by negotiations between PSI and the
Special Committee. Nevertheless, there can be no assurance that the terms of
the Merger represent the best terms that could have been obtained or that
actions to enforce the Merger Agreement will be timely or effectively taken.
Any such failure could result in loss to SEI. In connection with the
structuring of the Merger, SEI will engage in transactions with certain of its
shareholders, officers, directors and their affiliates, which have not, or may
be considered to have not, occurred at arm's-length. See "Proposal One - The
Merger -- Background of the Merger" and "-- Certain Relationships and Related
Party Transactions."
VALUATION OF ASSETS
In connection with the Merger, the Real Estate Interests (exclusive of the
wholly owned properties and all-inclusive deeds of trust) were valued in the
Arthur Andersen Valuation at $365.0 million. The Valuation, prepared in
conformity with the Uniform Standards of Professional Appraisal Practice, is
subject to certain assumptions and limiting conditions described in Appendix B.
The seven wholly owned properties were separately valued in appraisals by other
parties at a total of $19.4 million (net of mortgage debt). The Valuation and
the appraisals,
17
<PAGE>
however, are opinions as of the dates specified and are subject to certain
assumptions and may not represent the true worth or realizable value of the Real
Estate Interests. There can be no assurance that if the Real Estate Interests
were sold, they would be sold at their values as set forth in the Valuation or
the appraisals. In the Valuation, consistent with standard valuation practice,
Arthur Andersen assumed that the REITs and partnerships in which PSI is invested
will stay in place for the indeterminate future. If these REITs and partnerships
were liquidated early, the value of the Real Estate Interests may be diminished.
See "Proposal One - The Merger -- Valuation Opinion of Arthur Andersen" and "-
Appraisal of Wholly-Owned Properties" and " Public Storage Management, Inc. --
Partnership Interests" and "-- REIT Investments."
NO INDEPENDENT VALUATION OF OPERATING COMPANIES
The Valuation does not cover the Operating Companies, PSI's wholly owned
properties (which were separately valued in appraisals by other parties), the
all-inclusive deeds of trust, the PSI name, or any other intangibles. There has
been no independent valuation of the Operating Companies, although the Fairness
Opinion delivered by Robertson Stephens was prepared in large part on the basis
of quantitative valuation analysis for the enterprise as a whole on a going
concern basis. There can be no assurance what the value of these assets would
be if they were sold to an unaffiliated party.
ASSETS EXCLUDED FROM THE MERGER
Although SEI is succeeding to substantially all of the properties and
operations of PSI and its affiliates, the stock of the corporations engaged in
PSI's Canadian operations and tenant reinsurance business, and miscellaneous
assets not related to the Real Estate Interests or the Operating Companies will
not be included in the assets transferred pursuant to the Merger. The stock of
the corporations engaged in PSI's Canadian operations and in the tenant
reinsurance business will be distributed prior to the Merger in a spin-off
intended to qualify as tax-free under Section 355 of the Code to the Hughes
Family and the miscellaneous assets will be otherwise transferred to the Hughes
Family or to third parties. Consequently, SEI will not benefit from the future
appreciation and revenue derived from these assets. See "Public Storage
Management, Inc. - Excluded Assets." In addition, SEI will own substantially
all of the economic interests in the Lock/Box Company, PS Clearing Co., Inc.
("PSCC") and PSCP, but it will not control those entities. See "--Conflicts of
Interest."
LIABILITIES WITH RESPECT TO ACQUIRED GENERAL PARTNER INTERESTS
Upon succeeding to substantially all of the properties and operations of PSI,
there may be certain liabilities and associated costs suffered by SEI in its
capacity as general partner of former PSI limited partnerships arising out of
facts and circumstances in existence prior to the Closing, and SEI will have
general partner liability for post-Closing activities of these partnerships.
Subject to certain limitations, Wayne Hughes has agreed to indemnify SEI for
pre-Closing activities and the Class B Common Stock will be placed in escrow to
support such indemnification. See "Proposal One - The Merger-Terms of the
Merger-Indemnification."
POTENTIAL CANCELLATION OF THIRD PARTY MANAGEMENT
CONTRACTS AND LOSS OF REVENUE
As a result of the Merger, SEI will become the property manager of
approximately 70 properties owned by parties which have contracted with PSMI and
PSCP to provide property management services and in which SEI will have no
equity interest. These agreements may generally be terminated by the property
owner upon 60 days notice, with or without cause. There can be no assurance
that these agreements will not be terminated or that SEI will continue to
realize revenues from such agreements at levels comparable to those realized by
PSMI and PSCP. See "Public Storage Management, Inc. -- Property Management
Services."
CHANGES IN NATURE OF INVESTMENT
The Merger will alter significantly the nature of the entity in which SEI
Shareholders have invested. Instead of holding interests in an entity that
engages solely in the ownership of and investment in mini-warehouses, and to a
lesser extent, business parks, SEI Shareholders will hold after the Merger
interests in a self-advised and self-managed real estate company specializing in
all aspects of the mini-warehouse industry, including
18
<PAGE>
providing property management services. As a result, an SEI Shareholder's
investment in SEI will be subject to the additional benefits and additional
risks resulting from this increased scope of operations.
POSSIBLE TREATMENT OF THE MERGER AS A TAXABLE EVENT
In connection with the Merger, Hogan & Hartson L.L.P. ("Hogan & Hartson"),
counsel to SEI, has delivered an opinion that for federal income tax purposes
under current law, the Merger will be treated as a reorganization within the
meaning of Section 368(a) of the Code. This opinion is based on certain
representations made by SEI, PSMI and the PSMI Shareholders and on certain
assumptions. Furthermore, this opinion is not binding on the IRS. Therefore,
the IRS may contest the qualification of the Merger as a reorganization under
Section 368(a) of the Code. If such a contest were successful, the Merger would
be a taxable transaction and PSMI would recognize gain in an amount equal to the
excess of the fair market value of the Common Stock and the Class B Common Stock
issued in the Merger over the adjusted basis of the assets transferred to SEI.
As the successor to PSMI, SEI would be primarily liable for this resulting tax
liability. In addition, the Merger may impact SEI's ability to continue to
qualify as a REIT, whether or not the Merger qualifies as a reorganization under
the Code. See "--Increase in Nonqualifying Income," "--Elimination of Any
Accumulated Earnings and Profits," "--Increased Risk of Violation of Ownership
Requirements," and "Federal Income Tax Considerations -- Consequences of the
Merger on SEI's Qualification as a REIT." Subject to certain limitations, Wayne
Hughes has agreed to indemnify SEI for tax liabilities of PSI, PSMI and the
other Operating Companies, including any tax liabilities arising directly or
indirectly as a result of the Merger or related transactions. See "Proposal One
- - The Merger -Terms of the Merger - Indemnification" and "Federal Income Tax
Considerations -- Tax Treatment of the Merger."
INCREASED RISK OF VIOLATION OF GROSS INCOME REQUIREMENTS
After the Merger, SEI will assume and perform property management services for
properties in which the Company has no or only a partial interest. Some or all
of the gross income received from these services will not be treated as income
qualifying for certain REIT gross income tests applicable to SEI. In 1995 and
future years, if SEI's nonqualifying income were to exceed 5% of its total gross
income, the REIT status of SEI may terminate for that year and future years
unless SEI meets certain "reasonable cause" standards. Even if it meets such
standards, however, SEI would be subject to a 100% excise tax on any excess
nonqualifying net income.
If there were no change in SEI's current revenues through acquisitions or
otherwise and no other action by SEI to reduce its nonqualifying income, SEI
estimates that it would not satisfy the 95% gross income test for 1996 because
its nonqualifying income would represent approximately 7% of its total gross
income for 1996. For a discussion of SEI's plans to reduce nonqualifying income
in 1996 and subsequent years, see "Federal Income Tax Considerations --
Consequences of the Merger on SEI's Qualification as a REIT -- Nonqualifying
Income."
INCREASED RISK OF VIOLATION OF OWNERSHIP REQUIREMENTS
For SEI to qualify as a REIT under the Code, no more than 50% in value of its
outstanding stock may be owned, directly or constructively under the applicable
attribution rules of the Code, by five or fewer individuals (as defined in the
Code to include certain entities) during the last half of a taxable year. The
Hughes Family currently owns approximately 14% of the value of the outstanding
capital stock of SEI. Following the Merger, the value of the outstanding SEI
capital stock held by the Hughes Family is expected to be approximately 43%
(based upon the market price at October 10, 1995 of the Common Stock and SEI's
preferred stock, a 35% discount on the Class B Common Stock and a post-Closing
reduction in the number of shares issued in the Merger of 1,400,000).
Accordingly, no four individuals other than the Hughes Family may own directly
or constructively, in the aggregate, more than 7% of the value of outstanding
capital stock of SEI. In order to assist SEI in meeting these ownership
restrictions, upon stockholder approval of the Amendments, the SEI Articles of
Incorporation will prohibit the actual or constructive ownership of more than
2.0% of the outstanding shares of all common stock of SEI and more than 9.9% of
the outstanding shares of each class or series of shares of preferred stock of
SEI. (As amended, the SEI Articles of Incorporation will provide, however, that
no person will be deemed to exceed this ownership limitation solely by reason of
the beneficial ownership of shares of any class of stock to the extent that such
shares of stock were beneficially owned by such person on the Closing Date,
after giving effect to the Merger.) However, even with these ownership
limitations, there still could be a violation of the ownership restrictions if
four individuals unrelated to the Hughes Family were to own the maximum amount
of capital stock permitted under the
19
<PAGE>
SEI Articles of Incorporation. Therefore, to further assist SEI in meeting the
ownership restrictions, Wayne Hughes (and other members of the Hughes Family)
will enter into an agreement with SEI for the benefit of SEI and certain
designated charitable beneficiaries restricting the Hughes Family's acquisition
of additional shares of SEI capital stock and providing that if, at any time,
for any reason, more than 50% in value of SEI's outstanding stock otherwise
would be considered owned by five or fewer individuals, then a number of shares
of Common Stock owned by Wayne Hughes necessary to prevent such violation will
automatically and irrevocably be transferred to a designated charitable
beneficiary. The provisions in the Amendments and the agreement that Wayne
Hughes will enter into are modeled after certain arrangements which the IRS has
ruled in private letter rulings will preclude a REIT from being considered to
violate the ownership restrictions so long as such arrangements are enforceable
as a matter of state law and the REIT seeks to enforce them as and when
necessary. There can be no assurance, however, that the IRS might not seek to
take a different position with respect to SEI (a private letter ruling is
legally binding only with respect to the taxpayer to whom it was issued) or
contend that SEI failed to enforce these various arrangements and, hence, there
can be no absolute assurance that these arrangements will necessarily preserve
SEI's REIT status. No private letter ruling is being sought by SEI from the IRS
on the effect of these arrangements.
ELIMINATION OF ANY ACCUMULATED EARNINGS AND PROFITS
The accumulated earnings and profits, if any, of PSI, PSMI and the other
Operating Companies will carry over to SEI in the Merger. To retain its REIT
status, SEI will have to distribute all of these acquired PSMI earnings and
profits, if any, on or before December 31, 1995. Accordingly, SEI will be
required to accurately determine the amount of acquired PSMI accumulated
earnings and profits and to increase its distributions to its shareholders in
1995 if necessary to eliminate these earnings and profits. As a condition to
the Merger, PSMI and PSI will provide to SEI a study of the PSI, PSMI and the
other Operating Companies' earnings and profits that shows, taking into account
projected income of PSI, PSMI and the other Operating Companies to and including
the time of the Merger and distributions to the PSMI and/or PSI shareholders to
be made at or prior to the time of the Merger, that PSMI will have no
consolidated current or accumulated earnings and profits at the time of the
Merger. Neither SEI nor PSMI will obtain an opinion of counsel or outside
accountants to the effect that there are no accumulated or current earnings and
profits at the time or as a result of the Merger. If the IRS were subsequently
to determine that such earnings and profits existed at the time of the Merger
and SEI failed to distribute such current or accumulated earnings and profits by
December 31, 1995, SEI may lose its REIT qualification for the year of the
Merger and, perhaps, for subsequent years. See "Federal Income Tax
Considerations -- Consequences of the Merger on SEI's Qualification as a REIT --
Elimination of any Accumulated Earnings and Profits Attributable to Non-REIT
Years."
CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT
For any taxable year that SEI fails to qualify as a REIT and the relief
provisions do not apply, SEI would be taxed at the regular corporate rates on
all of its taxable income, whether or not it makes any distributions to its
shareholders. Those taxes would reduce the amount of cash available to SEI for
distribution to its shareholders or for reinvestment. As a result, failure of
SEI to qualify during any taxable year as a REIT could have a material adverse
effect upon SEI and its shareholders.
CORPORATE LEVEL TAX ON SALE OF CERTAIN BUILT-IN GAIN ASSETS
SEI will be subject to a corporate level tax if it disposes of any of the
assets acquired from PSMI in the Merger at any time during the 10-year period
beginning on the Closing Date (the "Restriction Period"). This tax would be
imposed at the top regular corporate rate (currently 35%) in effect at the time
of the disposition on the excess of (i) the lesser of (a) the fair market value
on the Closing Date of the assets disposed of and (b) the selling price of such
assets over (ii) SEI's adjusted basis on the Closing Date in such assets (such
excess being referred to as the "Built-in Gain"). SEI currently does not intend
to dispose of any of the assets acquired in the Merger during the Restriction
Period, but there can be no assurance that one or more such dispositions will
not occur. SEI plans to make certain tax elections. If SEI does not make such
elections, PSMI would be taxed on the "Built-in Gain" in its assets at the
Closing Date at regular corporate tax rates (even though the Merger qualifies as
a reorganization) and SEI, as the successor to PSMI in the Merger, would succeed
to the liability for that tax. See "Federal Income Tax Considerations -- Tax
Treatment of the Merger -- Built-in Gain Rules."
20
<PAGE>
POSSIBLE COMPETITION WITH PSI IN CANADA
Prior to the Merger, PSI's Canadian operations will be distributed to the
Hughes Family in a spin-off. If SEI expanded into Canada, it would compete with
entities controlled by the Hughes Family which would continue to operate mini-
warehouses under the "Public Storage" name. See "Public Storage Management,
Inc. - Excluded Assets."
CONFLICTS OF INTEREST
SUBSTANTIAL BENEFITS TO HUGHES FAMILY
Control of SEI. Upon completion of the Merger and adoption of the
--------------
Amendments (without taking into account any post-Closing adjustment), the Hughes
Family's ownership interest in SEI will increase from approximately 21% of the
Common Stock to approximately 53% (57% assuming conversion of all Class B Common
Stock). As a result, the Hughes Family will obtain control of SEI. The Hughes
Family's control over SEI will be further increased by a proposed amendment to
the SEI Articles of Incorporation which, if adopted, would limit any SEI
Shareholder's beneficial ownership, unless such limitations are waived by the
Board of Directors, of more than (A) 2.0% of the outstanding shares of all
common stock of SEI, and (B) 9.9% of the outstanding shares of each class or
series of shares of preferred stock of SEI. Under the amendment, the SEI
Articles of Incorporation will provide that no person shall be deemed to exceed
the ownership limit solely by reason of the beneficial ownership of shares of
any class of stock to the extent that such shares were beneficially owned by
such person (including the Hughes Family) on the Closing Date (after giving
effect to the Merger). This ownership limitation is proposed in order to assist
in preserving SEI's REIT status in view of the Hughes Family's substantial
ownership interest in SEI after the Merger. See "Federal Income Tax
Considerations-Tax Treatment of SEI."
Relief from General Partner Liability. As a result of the transfer of
-------------------------------------
the Real Estate Interests in the Merger, PSI (which is controlled by the Hughes
Family) will be released from, and as its successor SEI will assume, general
partner liability with respect to the PSI limited partnerships. Wayne Hughes,
however, will continue as the individual general partner of those PSI limited
partnerships as to which he is currently a general partner.
Increased Liquidity. Currently, no public trading market exists for
-------------------
shares of the Operating Companies or for the Real Estate Interests.
Consequently, the Hughes Family's investment in PSI is relatively illiquid.
Upon completion of the Merger (without taking into account any post-Closing
adjustment), the Hughes Family will own approximately 53% of the Common Stock
(57% assuming conversion of Class B Common Stock into Common Stock) in a large
publicly held company resulting in improved liquidity of the interests held by
the Hughes Family. See "Proposal One - The Merger - Terms of the Merger -
Restrictions on Transfer of Shares."
Liability for Debt. SEI, as PSMI's successor, will assume and become
------------------
liable pursuant to the Merger for (1) aggregate full-recourse indebtedness of
approximately $68.0 million of PSMI (exclusive of indebtedness under PSI's line
of credit that will result in an adjustment to the shares of Common Stock issued
in the Merger), (2) aggregate consolidated property indebtedness relating to
three of the seven wholly owned properties of $0.5 million and (3) aggregate
indebtedness relating to the all-inclusive deeds of trust of $4.2 million.
OPTION AGREEMENT WITH HUGHES. Wayne Hughes will grant SEI an option to
acquire his direct investments in certain partnerships and REITs in which PSI
has an interest. The total value of these interests is estimated at
approximately $50.0 million at Closing. See "Public Storage Management, Inc. -
Wayne Hughes' Direct Investments in Certain Partnerships and REITs."
ISSUANCE OF COMMON STOCK TO EXECUTIVE OFFICERS. In the Merger, SEI will issue
shares of Common Stock to PSMI Shareholders who are or will become executive
officers of SEI as follows: Ronald L. Havner, Jr., senior vice president and
chief financial officer (40,000 shares) and David Goldberg, senior vice
president and general counsel (40,000 shares).
TENANT REINSURANCE. A subsidiary of PSI, which, after the Merger, will be
owned by the Hughes Family, will continue to reinsure policies insuring against
losses to goods stored by tenants in the mini-warehouses
21
<PAGE>
operated by SEI. SEI believes that the availability of insurance reduces its
potential liability to tenants for losses to their goods from theft or
destruction. This corporation will continue to receive the premiums and bear the
risks associated with the insurance. SEI will have a right of first refusal to
acquire the stock or assets of this corporation if the Hughes Family or the
corporation agree to sell them, but SEI will have no interest in its operations
and no right to acquire the stock or assets of the corporation in the absence of
a decision to sell. If the reinsurance business were owned directly by SEI, the
insurance premiums would be nonqualifying income to SEI. See "Public Storage
Management, Inc. -- Excluded Assets" and "Federal Income Tax Considerations --
Consequences of the Merger on SEI's Qualification as a REIT - Nonqualifying
Income." In addition, SEI would be precluded from exercising its right of first
refusal with respect to the stock of the reinsurance corporation if such
exercise would cause SEI to violate any of the requirements for qualification as
a REIT under the Code. See "Federal Income Tax Considerations -- Tax Treatment
of SEI -- Technical Requirements for Taxation as a REIT."
CANADIAN OPERATIONS. After the Merger, the Hughes Family will continue to own
and operate mini-warehouses in Canada. SEI will have a right of first refusal
to acquire the stock or assets of the corporation engaged in these operations if
the Hughes Family or the corporation agree to sell them, but SEI will have no
interest in its operations and no right to acquire the stock or assets in the
absence of a decision to sell.
PSCP. PSCP, a subsidiary of PSI, currently manages commercial properties for
SEI and others. Because certain of the revenues generated by PSCP would be
nonqualifying income to SEI, prior to the Merger, the common stock of PSCP held
by PSI will be converted into nonvoting preferred stock (representing 95% of the
equity) and the voting common stock of PSCP (representing 5% of the equity) will
be issued to the Hughes Family. The Hughes Family, therefore, will be able to
continue to control the operations of PSCP directly following the Merger by
reason of their ownership of its voting stock.
MERCHANDISE COMPANY. PSMI currently sells locks, boxes and tape to tenants to
use in securing their rented spaces and moving their goods. Because the
revenues received from the sale of these items would be nonqualifying income to
SEI, PSMI will transfer prior to the Merger this lock and box business to the
Lock/Box Company. In the Merger, SEI will acquire the nonvoting preferred stock
of Lock/Box Company (representing 95% of the equity). The voting common stock
of the Lock/Box Company (representing 5% of the equity) will be issued to the
Hughes Family, who will be able to control the operations of the Lock/Box
Company by reason of their ownership of its voting stock.
COST ALLOCATION AND ADMINISTRATIVE SERVICES. PSMI and PSCP currently perform
centralized administrative services for SEI and other mini-warehouse and
business park property owners, including accounting and finance, auditing,
employee relations, management information systems, legal, office services,
marketing, administration, and property management training. In addition, to
take advantage of economies of scale, PSMI and PSCP purchase many supplies and
services for the benefit of multiple property owners, and then allocate the
costs of such supplies and services to the benefited property owners and employ
and administer the payroll for employees required for the operation of the mini-
warehouse and business park properties. To handle effectively these cost
sharing arrangements involving the expenses and payroll of many different mini-
warehouse and business park properties and owners, PSMI and PSCP have
implemented a systematic cost allocation process. PSCC will be formed to serve
as a cooperative cost allocation and administrative services clearinghouse that
will perform the above described functions for the mini-warehouse and business
park properties and owners following the Merger. Immediately prior to the
Merger, PSMI will transfer to PSCC the obligation to perform the cost allocation
and administrative functions, as well as the personnel and assets required to
perform such functions. After the Merger, the voting common stock of PSCC will
be owned by SEI and approximately 30 other owners of mini-warehouse and business
park properties for which PSCC will perform these services. SEI will own less
than 10% of the voting stock of PSCC, with the result that SEI will not control
the operations and activities of PSCC.
QUALIFICATIONS TO FAIRNESS OPINION
The Fairness Opinion is qualified by certain factors, is subject to certain
assumptions, qualifications and limitations, and reflects the business,
economic, market and other conditions as they existed and could be evaluated by
Robertson, Stephens on the date of its opinion.
22
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of Common Stock in the public market could
adversely affect prevailing market prices. Upon completion of the Merger, there
will be 72,064,283 shares of Common Stock and 7,000,000 shares of Class B Common
Stock outstanding, assuming no post-Closing adjustment. Of these shares,
42,064,283 shares of Common Stock outstanding prior to the Merger will be
tradeable without restriction (except as to affiliates of SEI) or further
registration under the Securities Act of 1933, as amended (the "Securities
Act"). The remaining 30,000,000 shares of Common Stock and 7,000,000 shares of
Class B Common Stock will be issued in the Merger without registration under the
Securities Act in reliance on an exemption from registration and are "restricted
securities" within the meaning of Rule 144 adopted under the Act (the
"Restricted Shares"). The beneficial owners of 15,500,000 of the Restricted
Shares (including all of the Class B Common Stock) have agreed not to offer,
sell or otherwise dispose (except for gifts and pledges) of any of their shares
for a period of three years following the Closing Date, in the case of the
Common Stock, or for seven years following the Closing Date, in the case of the
Class B Common Stock. Upon expiration of such periods, each will be entitled to
sell his or her shares in the public market subject to Rule 144, which contains
certain public information, volume, holding period and manner of sale
requirements. The remaining approximately 21,500,000 Restricted Shares will be
available for sale in the public market pursuant to Rule 144, subject to the
foregoing requirements that include, as the Rule is currently in effect, a two-
year holding period. Sales of substantial amounts of such Common Stock in the
public market after the Merger could adversely affect the market price of the
Common Stock.
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PROPOSAL ONE - THE MERGER
GENERAL
The term "Operating Companies" is used herein to refer collectively to PSMI,
Public Storage Commercial Properties Group, Inc. ("PSCP") and Public Storage
Advisers, Inc. (the "Adviser"), which are subsidiaries of PSI. The term "Real
Estate Interests" is used to refer to substantially all of PSI's United States
real estate interests (other than its interest in SEI). The term "Wayne Hughes"
is used herein to refer to B. Wayne Hughes, individually, and the term "Hughes
Family" is used herein to refer to Wayne Hughes and members of his family,
collectively. The term PSI includes its subsidiaries, as the context requires.
Prior to the Merger, the Real Estate Interests, PSCP and the Adviser will be
combined with PSMI (the "Restructure"). The description of the Merger Agreement
set forth below does not purport to be complete and is qualified by reference to
the Merger Agreement, a copy of which is attached as Appendix A to this Proxy
Statement.
Prior to the Merger, the Real Estate Interests, PSCP and the Adviser will be
combined with PSMI, with the Hughes Family acquiring a direct 5% equity interest
in PSCP and in the Lock/Box Company, and certain assets currently owned by PSI
will be distributed to the Hughes Family and will not be acquired by SEI.
Pursuant to the terms and conditions of the Merger Agreement, PSMI will then be
merged into SEI and the separate corporate existence of PSMI will cease. SEI
will be the surviving corporation, its name will be changed to "Public Storage,
Inc." and it will continue to be governed by the laws of the State of
California. See "--Terms of the Merger."
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. The Merger
will be effective upon the filing with the California Secretary of State of an
Agreement of Merger substantially in the form attached to the Merger Agreement
(the "Effective Time").
BACKGROUND OF THE MERGER
Corporate History. In 1980, SEI was organized as a REIT by affiliates of PSI
for the primary purpose of investing in existing mini-warehouses. As was
customary for REITs at the time, SEI engaged affiliates of PSI to administer its
day-to-day operations (the Adviser) and to operate its properties (PSMI).
SEI was active in capital raising activities from 1983-1985. For almost seven
years thereafter it did not actively participate in the capital markets. In
October 1992, SEI reentered the capital markets with the public issuance of its
first series of non-convertible senior preferred stock ($45.6 million), the
proceeds of which were used to retire debt and make additional investments in
mini-warehouses. In connection with the offering, SEI sought an investment
grade rating of the securities from the two principal rating agencies. After
presentations by management and a review of SEI's operating history and
financial structure, the securities were rated investment grade by one of the
rating agencies and one level below investment grade by the other rating agency.
Among the positive factors cited by the rating agencies were the strength of the
"Public Storage" franchise, the historically strong operating performance of the
facilities, the relatively low "break-even" occupancy rates of SEI's mini-
warehouses, a well capitalized balance sheet with low leverage, and strong
geographic diversification of the properties. Among the areas of concern cited
by the agencies were SEI's complex corporate structure (including its joint
ownership of a large number of facilities with a group of public limited
partnerships organized by PSI), SEI's status as an externally advised and
externally managed REIT, and the potential for conflicting business
relationships. Some persons in the investment community involved with REITs
believe that, notwithstanding the fiduciary duties of outside advisers, advisers
that are paid in whole or in part based on a REIT's total assets, gross revenues
or capital raised may seek to grow the REIT without due regard to its
profitability.
From March 1993 to May 1995, SEI publicly issued five additional series of
non-convertible preferred stock (aggregate $232 million) and a series of
convertible preferred stock ($57 million). In connection with the rating of
these subsequent series of preferred stock, the rating agencies continued to
cite the conflicts of interest between PSI and SEI and SEI's relationship with
an outside investment adviser and property manager as among the factors that
precluded an upgrade in ratings. During the course of SEI's offerings of
preferred stock, it was advised by underwriters that a ratings upgrade would
permit SEI to issue more preferred stock and at a lower
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dividend rate. In meetings and discussions held during January 1995,
representatives of the two leading rating agencies expressly advised SEI that,
regardless of improvements in its financial condition, SEI should not expect
improvements in its current rating unless it became self-advised and self-
managed and reduced conflicts of interest.
From February 1994 to June 1995, SEI issued Common Stock in underwritten
offerings (aggregate approximately $200 million). During the course of SEI's
offerings and in subsequent discussions, underwriters, securities analysts and
prospective institutional investors advised SEI that its capital raising
activities would be significantly facilitated if SEI were self-advised and self-
managed and reduced the conflicts of interest, similar to most other REITs that
successfully raised capital during the last several years.
Board Actions. From time to time, SEI has considered becoming self-advised
and self-managed. On October 19, 1994, during a discussion of SEI's proposed
public offering of Common Stock at a regularly scheduled meeting of the Board of
Directors, one of the independent directors requested an explanation for the low
trading price of the Common Stock as a multiple of its FFO per Common Share
compared with another REIT in the mini-warehouse industry. SEI's officers (who
are affiliated with PSI) responded that the other REIT was self-advised and
self-managed. In response to an inquiry from another independent director,
SEI's officers discussed certain potential benefits of becoming self-advised and
self-managed, such as a potential higher trading price of Common Stock, as well
as certain impediments to becoming self-advised and self-managed such as the
limitation on non-qualifying income, i.e., fees from managing properties not
wholly owned by SEI that SEI could earn consistent with its REIT status.
On December 12, 1994, as part of a regularly scheduled meeting, the Board of
Directors appointed Berry Holmes, William Baker and Uri P. Harkham, all
independent directors, as members of the Special Committee to consider SEI
becoming self-advised and self-managed.
During a regularly scheduled meeting of the Board of Directors on February 21,
1995, which was attended by a representative of Kindel & Andersen, counsel to
the Special Committee, officers of SEI and PSI and in-house counsel, the Board
of Directors accepted the resignation of Mr. Harkham from the Special Committee
due to time constraints resulting from his other business activities and
appointed another independent director, Robert Abernethy, to the Special
Committee. At that meeting the officers of SEI described a proposed transaction
designed to reduce conflicts of interest in which SEI would be combined with the
Operating Companies and the Real Estate Interests, SEI would become self-advised
and self-managed and the name of the surviving entity would be changed to
"Public Storage, Inc." The officers of SEI explained that the acquisition of
the Operating Companies, without the acquisition of the Real Estate Interests,
might not sufficiently reduce the conflicts of interest between SEI and PSI
because the Real Estate Interests represent interests in properties that compete
with SEI's properties. The transaction would not include PSI's Canadian
operations for tax reasons or PSI's tenant reinsurance business because of REIT
qualification requirements. During the discussion, an officer of SEI noted the
lower trading price of the Common Stock as a multiple of SEI's cash flow
compared with another REIT in the mini-warehouse industry. In response to an
inquiry from an independent director, the SEI officer indicated that the
disparity was due to the other REIT being self-advised and self-managed and
having a higher level of institutional ownership, and another SEI officer
indicated that he believed that the two factors were interrelated. The Board
discussed generally certain benefits and risks to SEI of the consolidation and
the size, general terms, timing and public announcement of such a transaction.
The Board authorized the Special Committee to engage a financial advisor to
explore further a transaction with PSI and discussed the valuation of PSI's
assets. A PSI officer indicated that PSI proposed to engage Arthur Andersen or
another firm to value PSI's interests in partnerships and REITs. See "-
Alternatives to the Merger."
On February 24, 1995, a meeting of the Special Committee was held with Mr.
Holmes as Chairman. In attendance were Dann V. Angeloff, an independent
director, and a representative of Kindel & Andersen, counsel to the Special
Committee. Also present during the first portion of the meeting were Wayne
Hughes and officers of SEI and PSI and in-house counsel. The SEI officers first
described in general terms a proposed consolidation between SEI and PSI,
including the reasons for the consolidation and a summary of the present
structure of the Operating Companies. Also discussed were the effects of
environmental matters on the Real Estate Interests, the reasons for exclusion of
the Canadian operations and of the tenant reinsurance business from the proposed
consolidation and limitations on activities of Mr. Hughes after the transaction.
The Special Committee was advised that the structure of the consolidation would
be a series of mergers ultimately with SEI as the survivor. A
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PSI officer indicated that valuations would be sought for the Real Estate
Interests, and possible approaches to the valuation of the Operating Companies
and the Real Estate Interests were discussed. A PSI officer described the
information available to the Special Committee and its advisors. At this point,
the SEI and PSI officers left the meeting and the Special Committee discussed
the engagement of an investment banking firm and its function. Names of
investment banking firms were suggested, and Mr. Holmes was requested to arrange
for interviews of the firms by the Special Committee.
On March 6 and 7, 1995, the Special Committee, represented by Messrs. Holmes
and Abernethy, together with counsel to the Special Committee, interviewed
representatives of Robertson, Stephens and three other nationally recognized
investment banking firms with a view to selecting a firm to act as financial
advisor and render an opinion as to the fairness of a potential transaction.
Also present for the first part of each interview at the request of the chairman
of the Special Committee were Harvey Lenkin and Ronald L. Havner, Jr., who are
officers of both SEI and PSI. The Special Committee requested that each of
these firms submit written proposals.
On March 13, 1995, SEI issued a press release announcing that the Special
Committee formed to consider a combination of SEI with the Operating Companies
and the Real Estate Interests was in the process of selecting a financial
advisor. On March 14, 1995, Messrs. Holmes and Abernethy, together with counsel
to the Special Committee, met to review and discuss proposals submitted by each
of the four investment banking firms interviewed. Mr. Angeloff was also present
at this meeting.
On March 20, 1995, Mr. Holmes and representatives of PSI and SEI met with
representatives of Arthur Andersen. First, the representatives of PSI and SEI
briefly described the proposed transaction. Then the representatives discussed
Arthur Andersen's experience and qualifications to value PSI's assets, as well
as a joint engagement of Arthur Andersen by SEI and PSI. The representatives of
Arthur Andersen confirmed to Mr. Holmes that Arthur Andersen was independent
with respect to PSI, SEI and their affiliates.
On March 20 and 22, 1995, the Special Committee, together with its counsel,
met to finalize the selection of a financial advisor. Messrs. Angeloff and
Harkham were also present on March 20th. After deliberation concerning the
firms' interviews and proposals, and considering, among other matters, the
recent experience of the firms interviewed in transactions involving other
REITs, the familiarity of Robertson, Stephens with the mini-warehouse industry
based on recent research reports prepared by the firm, the interested or
disinterested nature of the firms interviewed and the fees and expenses quoted
by the firms interviewed, the Special Committee selected Robertson, Stephens to
provide financial advisory services to the Special Committee in connection with
the proposed Merger. The Special Committee also decided to retain Arthur
Andersen jointly with PSI to render the Valuation and to pay one-half of its
fees and expenses.
On March 30, 1995, Messrs. Holmes and Abernethy, together with counsel to the
Special Committee, met with representatives of Arthur Andersen and Robertson,
Stephens. Also present were officers of PSI and SEI and in-house counsel. The
representatives of Arthur Andersen described generally the methodology to be
used in valuing the Real Estate Interests. The representatives of Robertson,
Stephens outlined the fairness opinion process, their understanding of the
structure of PSI, the valuation methodologies to be employed and their view that
the capital markets would expect any transaction not to be dilutive to FFO per
share of Common Stock. The timing of the Arthur Andersen Valuation and the
Fairness Opinion was discussed.
During a regularly scheduled meeting of the Board of Directors on April 13,
1995, which was attended by officers of SEI and PSI and in-house counsel, a
summary analysis was distributed by the PSI officers which estimated the
December 31, 1994 value of certain of the Real Estate Interests at $472.6
million. The summary did not include an estimate of the value of the Operating
Companies, PSI's wholly owned properties and the all-inclusive deeds of trust
and also excluded certain other PSI Real Estate Interests. The summary
reflected the estimated value of the Real Estate Interests utilizing a 10-year
discounted cash flow model. The principal assumptions in the cash flow model
were distribution of all available cash flow, growth inflators of 6% for mini-
warehouses and 5% for business parks and sale of the properties at the end of
the tenth year using a capitalization rate of 9.5%. The cash flows attributable
to the Real Estate Interests were then discounted at 9.5% to arrive at the
valuation of $472.6 million. The Board of Directors was informed that the
summary was being delivered to Arthur Andersen and, with the consent of the
Special Committee, to Robertson, Stephens. Then there was a brief discussion of
the methodology used by PSI in preparing the estimate.
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On April 24, 1995, Mr. Holmes, together with officers of PSI and SEI and in-
house counsel, held a telephone conference with a representative of Robertson,
Stephens. The status of the Valuation was discussed as well as a proposed
update of the Valuation as of the Closing Date.
On April 25, 1995, Mr. Holmes, together with officers of PSI and SEI, met with
representatives of Arthur Andersen. First, the representatives of Arthur
Andersen described the status of their engagement and the results of their
preliminary analysis. Then, there was a discussion of alternative approaches
and methodologies of valuation and the preliminary assumptions to Arthur
Andersen's Valuation. It was determined to continue the meeting at a later
date.
On May 8, 1995, Mr. Holmes, together with officers of PSI and SEI and
Robertson, Stephens, met again with representatives of Arthur Andersen. First,
the representatives of Arthur Andersen were advised that the Valuation should
not include real estate investments directly held by Wayne Hughes. These
investments would not be acquired by SEI at this time because the issuance of
additional Common Stock to Mr. Hughes could cause SEI to violate the ownership
requirements applicable to REITs, jeopardizing SEI's REIT status. See "Federal
Income Tax Considerations - Consequences of the Merger on SEI's Qualification as
a REIT-Violation of Ownership Requirements." Then there was a continued
discussion of the preliminary assumptions to Arthur Andersen's Valuation. There
was no resolution of this discussion.
During a regularly scheduled meeting of the Board of Directors on May 9, 1995,
which was attended by officers of SEI and PSI and in-house counsel, Mr. Holmes
reported on his meetings with representatives of Arthur Andersen and Robertson,
Stephens and the estimated timing of the transaction.
On May 22, 1995, the Special Committee, together with its counsel, met with
representatives of Arthur Andersen. Also present at the meeting were Mr.
Angeloff, representatives of Robertson, Stephens and, for a portion of the
meeting, in-house counsel and Wayne Hughes. The representatives of Arthur
Andersen provided the Special Committee with an overview of its conclusions as
to the value of the Real Estate Interests and summarized the procedures and
methodology employed. They described and compared the application of the three
traditional methodologies -- the adjusted book value, income and market
approaches. The assumptions underlying the valuation approaches and the
processes to reach a determination of value under each approach were outlined.
The Arthur Andersen representatives discussed with the Special Committee the
method by which they arrived at their projections, growth rates, discount rates
and capitalization rates. In addition, they described how they computed the PSI
ownership percentage of the present value that relates to the specific real
estate investments owned by PSI which are proposed to be acquired. The Special
Committee was informed of Arthur Andersen's conclusions as to value through
application of the three approaches and the conclusion that the aggregate value
of the Real Estate Interests considered was $365 million. This Valuation did
not include the Operating Companies, PSI's wholly owned properties, all-
inclusive deeds of trust, the PSI name, or any other intangibles. The method of
updating the Valuation between the valuation date of December 31, 1994 and the
Closing Date was discussed with the suggestion that a formula be developed so
that a mathematical calculation could be made for a post-Closing adjustment.
The method of reducing the conflicts in respect of Wayne Hughes' direct
investments in partnerships and REITs was also discussed with the suggestion
that Mr. Hughes grant an option to SEI to acquire these investments.
On May 24, 1995, the Special Committee, together with Mr. Havner, the chief
financial officer of both SEI and PSI, held a telephone conference. The Special
Committee discussed the reasonableness of certain of the assumptions in the
Valuation and Mr. Havner described generally the proposed terms of the capital
stock to be issued in the Merger. After the discussion, the members of the
Special Committee advised Mr. Havner that they were satisfied with the
assumptions and methodologies used in the Valuation.
On May 25, 1995, PSI delivered to the Special Committee and to Robertson,
Stephens a preliminary analysis prepared by PSI estimating that, based on a
valuation of the Real Estate Interests and the Operating Companies as of
December 31, 1994, 43,792,059 shares of Common Stock (excluding approximately
3,200,000 shares owned by PSMI before the Merger) should be issued in the Merger
reflecting an aggregate consideration (including $68 million of debt) of
approximately $768.7 million. The PSI valuation reflected (i) the Arthur
Andersen Valuation of $365.0 million for the Real Estate Interests divided by an
assumed trading price of $16 per share of Common Stock (based on the market
price of $15.875 at the time), (ii) the Operating Companies'
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valuation derived by taking their 1994 pro forma FFO of $27.7 million (assuming
adjustments for non-recurring items and for new properties acquired in 1994 and
1995 and reduced by the interest on the $68 million of senior secured notes due
2003) divided by SEI's 1994 fully-diluted pre- Merger pro forma FFO per Common
Share of $1.38 after capital expenditures (FFO allocable to Common Stock of
$67.6 million less capital expenditures of $9.8 million divided by 41.8 million
shares of Common Stock), and (iii) the appraised value of seven wholly owned
properties and value of the notes receivable divided by an assumed trading price
of $16 per share of Common Stock. See "Management's Discussion and Analysis -
SEI Pro Forma - Liquidity and Capital Resources."
On June 5, 1995, Mr. Holmes met with representatives of PSI and Robertson,
Stephens to discuss the Valuation and the proposed capital structure. The
structure included 19,577,000 shares of Common Stock and 22,022,000 shares of
four separate classes of subordinated Common Stock which would be convertible
into Common Stock upon the later of the passage of certain periods of time or
attaining specified levels of FFO per Common Share. During the discussion, the
representatives of Robertson, Stephens indicated that, based on their
preliminary assessment, the use by Arthur Andersen of the adjusted book value,
income and market approaches on value and the methodologies used by Arthur
Andersen in its analysis appeared to be appropriate. The complexity of the
proposed capital structure was then discussed.
During a regularly scheduled meeting of the Board of Directors on June 14,
1995, which was attended by officers of SEI and PSI and in-house counsel, Mr.
Holmes reported on the status of the Merger and the activities of the Special
Committee. He described the status of the Valuation by Arthur Andersen and
analysis by Robertson, Stephens. The Board discussed the timing of the Merger.
On June 16, 1995, Messrs. Holmes and Baker, together with counsel to the
Special Committee, met with representatives of Robertson, Stephens. Also
present were Messrs. Angeloff and Harkham and, during portions of the meeting,
officers of SEI and PSI and in-house counsel. One of the officers presented an
overview of the transaction, including the assets and companies included and
excluded. The group then discussed the procedure to be used for a post-Closing
adjustment to the purchase price, and the Special Committee approved the
engagement of Arthur Andersen to provide an updated valuation of the Real Estate
Interests as of the Closing Date. The officers of SEI and PSI and in-house
counsel then left the meeting, and the Robertson, Stephens representatives
commented as to the work that had been completed and the additional steps that
would be taken in connection with their analysis of the fairness of the
transaction from a financial point of view to the Public Shareholders. The
Robertson, Stephens representatives then summarized the conclusions set forth in
the Valuation by Arthur Andersen. They next commented on the current market
valuation of Common Stock. The Robertson, Stephens representatives described
the discounted cash flow analysis being conducted in connection with their
fairness analysis. See "Fairness Opinion - Discounted Cash Flow Analysis." The
group then discussed the valuation of the various components. The Robertson,
Stephens representatives reviewed the Arthur Andersen Valuation. They expressed
their view that the structure would be important in reaching their conclusion as
to fairness, and some time was spent in discussing the complex capital structure
that had been proposed by PSI on June 5th. At this point, the officers of SEI
and PSI joined the meeting. The officers pointed out that in response to
concerns regarding the multi-class structure, a new simplified capital structure
had been developed and was being proposed. This new proposed structure
consisted of 23,400,000 shares of Common Stock, 10,000,000 shares of a Class B
Common Stock (subject to increase to reflect dividends foregone on the Class B
Stock) and 5,000,000 shares of a Class C Common Stock. The Class B shares would
not be entitled to dividends and 50% of the shares would be automatically
convertible into Common Stock four years after the Merger and the balance six
years after the Merger. The Class C Common Stock would receive dividends only
to the extent the dividends on the Common Stock continued at the current
quarterly level of $.22 per share or more, and the Class C Common Stock would be
subordinated in liquidation and would automatically convert into Common Stock
upon the later of seven years after the Merger or the attainment of $3.00 of FFO
per Common Share.
On June 20, 1995, the Special Committee, together with its counsel, again met
with representatives of Robertson, Stephens. Also in attendance for a portion
of the meeting was Mr. Angeloff, and, for the first part of the meeting, in-
house counsel and an officer of SEI and PSI, who again summarized for the
Special Committee the Real Estate Interests and Operating Companies. He also
explained that certain assets were excluded because they generated nonqualifying
income for purposes of meeting the 95% gross income test for qualification as a
REIT. There was a discussion of options and other rights that might be secured
by SEI to acquire the excluded assets. He then explained the proposal for the
structure that was made at the June 16th meeting. It was pointed out that an
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additional 2,500,000 shares of Common Stock would be issuable, representing the
value of the dividends foregone on the Class B Common Stock. He went over the
rights of the classes of shares and the post-Closing adjustment that would be
based on updating the valuation of the Real Estate Interests. He also described
a proposed post-Closing adjustment that related to PSMI's net asset value at the
Closing Date. These post-Closing adjustments could result in the issuance of
additional shares of Common Stock based on the average market price for a
specified period preceding the Closing Date. At this point, the in-house
counsel, the SEI and PSI officer and Mr. Angeloff left the meeting, and the
Robertson, Stephens representatives reviewed with the Special Committee the
approach they had taken to valuation. After discussing the valuation of the
Real Estate Interests and Operating Companies, some time was devoted to
analyzing the new proposed capital structure and its effect on FFO per Common
Share. Toward the end of that meeting, the officers of PSI and SEI again joined
the meeting and discussed with Robertson, Stephens the effect of the new capital
structure on FFO per Common Share. See "Federal Income Tax Considerations -
Consequences of the Merger on SEI's Qualification as a REIT - Nonqualifying
Income."
On June 22, 1995, Mr. Holmes and counsel to the Special Committee met with in-
house counsel and negotiated the terms pertaining to certain issues ancillary to
the transaction, subject to approval of the Special Committee. Among the items
discussed were a lock-up of certain shares to be issued in the Merger, the terms
of a covenant not to compete for Mr. Hughes, an additional voting condition for
approval by the Public Shareholders, the absence of a condition related to
fluctuations in the market price for the SEI Common Stock, the provisions for
indemnification, an option and proxy with respect to Mr. Hughes' direct
interests in partnerships and REITs, a right of first refusal with respect to
sale by the Hughes Family of the insurance operations and employment contracts
for senior management.
On June 23, 1995, the Special Committee met by conference telephone with its
counsel and representatives of Robertson, Stephens. The first portion of the
meeting was devoted to Robertson, Stephens' preliminary analysis of the FFO per
Common Share, based on the capital structure proposed on June 16, 1995. The
Special Committee, its counsel and the Robertson, Stephens representatives
discussed certain ancillary issues, the terms of which had been negotiated on
June 22, 1995.
On June 27, 1995, the Special Committee, together with its counsel, met with
representatives of Robertson, Stephens. Also in attendance were Mr. Angeloff
and, for a portion of the meeting, officers of SEI and PSI and in-house counsel.
A new simplified capital structure was proposed, which consisted of 30,000,000
shares of Common Stock and 7,000,000 shares of a Class B Common Stock, the terms
of which, relating to subordination and conversion into Common Stock, would be
similar to the Class C Common Stock proposed on June 16th. The post-Closing
adjustments for the updated valuation of Real Estate Interests and PSMI's net
asset value would still exist. One of the officers discussed an analysis of the
FFO per Common Share on an historical and projected pro forma basis, with and
without the transaction. The analysis compared FFO per share of Common Stock
over a 10 year period under three different scenarios: (i) growth in capital
base (through the issuance of additional common and preferred equity) with the
Merger (under this scenario, the capital base was further adjusted to reflect
the issuance of the Common Stock and Class B Common Stock to be issued in the
Merger), (ii) growth in capital base without the Merger and (iii) no Merger and
no growth in capital base. For these purposes, capital base means total debt,
minority interest and shareholders' equity. Under all scenarios, the same
amount of dividends on a per share basis was used, which equated to the
distribution of an amount equal to all available cash flow (operating cash flows
less capital expenditures, principal payments on debt, distributions to minority
interest and distribution requirements to the preferred stock) as reflected in
the no Merger and no growth in capital base scenario. The analysis was further
broken down to reflect growth scenarios in property net operating income: (i)
4.5% rental income and operating expense growth rates and (ii) 2.00% rental
income and 3.00% operating expense growth rates. (See "- Fairness Opinion" for
a discussion of the basis for these rates.) Over a 10 year period, the growth
scenario, assuming the Merger, reflected consistently higher FFO per share than
the growth without the Merger scenario and consistently higher FFO per share
than the no growth/no Merger scenario. The Special Committee then met alone
with its counsel and the Robertson, Stephens representatives. The effect of the
new capital structure on the transaction and on FFO per Common Share was
reviewed with the Special Committee. At the conclusion of the presentation, the
Robertson, Stephens representatives expressed the preliminary view that, based
upon the review and analysis undertaken by them to date and assuming that there
are no material changes, Robertson, Stephens would likely be in a position to
issue an opinion as to the fairness, from a financial point of view, to the
Public Shareholders of the consideration to be issued in the Merger. The
Robertson, Stephens
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representatives pointed out, however, that Robertson, Stephens was not at this
point rendering any such opinion, and that its ability to render it in the
future depended upon, among other things, Robertson, Stephens' continuing
analysis, its receipt of additional information and the finalization of the
terms of the Merger. The Special Committee next discussed with its counsel and
the Robertson, Stephens representatives various ancillary issues. At the
conclusion of this discussion, the officers of PSI and SEI again joined the
meeting and these ancillary issues were discussed and tentative agreement was
reached, including the term of the option to purchase Mr. Hughes' interests in
partnerships and REITs, a right of first refusal on sale of the Canadian
operations, the provisions and term for indemnification and the absence of any
condition to the Merger specifically dealing with fluctuations in the market
price of the Common Stock.
On June 28, 1995, Mr. Holmes spoke with Mr. Hughes and informed him that there
still was some concern over the absence of a condition dealing with market price
fluctuations. In exchange for not imposing such a condition, Mr. Hughes agreed
to forego the post-Closing adjustment for an updated valuation of the Real
Estate Interests, other than to value new Real Estate Interests acquired by PSI
after December 31, 1994.
On June 29, 1995, Messrs. Holmes and Baker met with counsel to the Special
Committee, and were joined by telephone by Mr. Abernethy. The Special Committee
reviewed the various benefits of the transaction, certain of the risks the
transaction presented, and various alternatives that had been considered. At
the conclusion, the Special Committee voted unanimously to recommend to the
Board of Directors that the Merger and Recapitalization be approved, to express
the belief that the Merger is fair to and in the best interests of the Public
Shareholders and to recommend that the SEI Shareholders vote for the Merger and
the Amendments. See "-Alternatives to the Merger."
Following the June 29 meeting of the Special Committee, the Board of Directors
met to consider the Merger. The meeting was also attended by officers of SEI
and PSI, in-house counsel and counsel to the Special Committee. Mr. Holmes
described the terms of the Merger, the process followed by the Special
Committee, including its meetings with Robertson, Stephens and Arthur Andersen
and the negotiating process with PSI, the deliberations of the Special Committee
including consideration of both the potential benefits and the risks of the
Merger and the alternatives considered. Following the report of Mr. Holmes, Mr.
Havner described the post-Closing adjustments. Then the Board discussed the
post-Closing adjustments, the terms of the debt being assumed by SEI in the
Merger and the anticipated effect of the Merger on SEI's FFO per Common Share,
and Mr. Havner described the accounting treatment of the Merger. The members of
the Special Committee then reported the Special Committee's (i) recommendation
to the Board that the Merger be approved, (ii) belief that the Merger is fair
to, and in the best interests of, the Public Shareholders and (iii)
determination to recommend that SEI Shareholders vote for the Merger. Based on
the foregoing recommendations of the Special Committee, the Board of Directors
approved the Merger and the filing of preliminary proxy materials with the
Securities and Exchange Commission (the "Commission") and determined to
recommend that SEI Shareholders vote for the Merger. See "-- Reasons for the
Merger -- Special Committee Recommendation," "-- Terms of the Merger --
Adjustment to Share Consideration," "-- Alternatives to the Merger" and "Risk
Factors."
On June 30, 1995, SEI, PSI and PSMI signed the Merger Agreement, subject to
Board ratification and approval, and SEI publicly announced the general terms of
the Merger. On July 18, 1995, SEI filed preliminary proxy materials with the
Commission.
During a regularly scheduled meeting of the Board of Directors on July 24,
1995, which was attended by officers of SEI and PSI and in-house counsel, the
officers reported on the status and timing of the Merger.
On August 8, 1995, the Special Committee voted unanimously to recommend that
the Merger Agreement be ratified and approved and to approve the proposed
Amendments.
Following the August 8 meeting of the Special Committee, at a regularly
scheduled meeting of the Board of Directors, which was attended by officers of
SEI and in-house counsel, Mr. Holmes reported the Special Committee's
recommendation that the Merger Agreement be ratified and approved. Based on the
foregoing recommendation, the Board of Directors ratified and approved the
Merger Agreement. The Board also approved the Amendments. The Board discussed
the provisions in the Amendments and Mr. Hughes' agreement relating to the
ownership limitations.
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On August 24, 1995, a meeting of the Special Committee was held. Also
attending were counsel to the Special Committee, representatives of Robertson,
Stephens, Messrs. Angeloff and Harkham and, for a portion of the meeting,
officers of SEI and PSI and in-house counsel. The Special Committee was advised
of a change in structure whereby the stock of PSCP held by PSI would be
converted into nonvoting preferred stock (representing 95% of the equity) and
voting common stock (representing 5% of the equity). Following the Merger, SEI
would own the nonvoting preferred stock and the Hughes Family would own the
common stock. This change came about because of the nonqualifying character of
PSCP's revenues for purposes of meeting the 95% gross income test for
qualification as a REIT. The group discussed the effect of this change and its
materiality in terms of the entire transaction. Counsel to the Special
Committee next summarized the terms and status of the agreements that had been
drafted to deal with the ancillary issues, including the employment of Mr.
Hughes, his covenant not to compete, the option to acquire his partnership and
REIT interests, the escrow and indemnification agreement and the rights of first
refusal to acquire the reinsurance and Canadian operations. There was some
discussion concerning limitations on the lock-up of shares under the REIT
requirements and the quantification of maximum liability and value of the Class
B Common Stock under the indemnity and escrow arrangements. The Robertson,
Stephens representatives reviewed with the Special Committee the analysis
prepared to date in support of Robertson, Stephens' opinion as to the fairness
of the consideration to be paid. There was also a discussion as to the form of
the fairness opinion. The Special Committee was advised by a PSI and SEI
officer of the expectation as to the net effect of the post-closing adjustments
on the number of shares of Common Stock to be issued in the Merger.
On August 27, 1995, the Special Committee, together with its counsel, met with
representatives of Robertson, Stephens. Also present was Mr. Harkham. Counsel
to the Special Committee reviewed several matters concerning the indemnity and
escrow arrangements. The Robertson, Stephens representatives reviewed with the
Special Committee the form of opinion the firm was prepared to deliver, an
overview of the transaction, various opportunities and risks associated with the
transaction, a summary of its analysis of a range of valuations of SEI and PSI,
a summary of the historical trading price of SEI's Common Stock, the Arthur
Andersen Valuation of the Real Estate Interests, the relative contribution of
the parties and the pro forma effect of the Merger. At the conclusion, they
delivered an executed opinion of Robertson, Stephens to the effect that, based
upon and subject to considerations as stated in its letter, as of August 27,
1995, the consideration to be paid by SEI in the Merger was fair to the Public
Shareholders from a financial point of view. The Special Committee accepted the
Robertson, Stephens opinion and reaffirmed its recommendations.
In the Merger, SEI will issue 30,000,000 shares of Common Stock and 7,000,000
shares of Class B Common Stock (which are subordinated to the Common Stock and
are not entitled to distributions for a minimum of four years) compared with
PSI's original proposal that 43.8 million shares of Common Stock should be
issued (based on the Arthur Andersen Valuation of the Real Estate Interests and
PSI's estimate of the value of the Operating Companies). The final terms of the
Merger also reflect certain provisions the Board of Directors believe benefit
the SEI Shareholders: (i) an agreement by Wayne Hughes not to transfer certain
shares received in the Merger, (ii) a provision for indemnification of SEI by
Wayne Hughes, subject to limitations, (iii) an option to acquire Mr. Hughes'
interest in partnerships and REITs, (iv) a covenant not to compete from Mr.
Hughes, (v) rights of first refusal as to the tenant reinsurance business and
the Canadian operations, (vi) an additional voting condition for the Merger, and
(vii) that the Class B Common Stock is subordinated, pays no dividends for a
minimum of four years, is convertible only at the later of (a) seven years or
(b) the attainment of $3.00 FFO per Common Share, is illiquid and will be placed
in escrow. See "- Consideration to be Paid by SEI in the Merger," "- Assets to
be Acquired by SEI in the Merger" and "- Terms of the Merger."
Consideration to be Paid by SEI in the Merger. The aggregate consideration to
be paid by SEI (including SEI's share of estimated expenses of $2.0 million) is
estimated at $630.8 million (measured as of the day prior to the date the Merger
Agreement was executed), consisting of the following:
. 30,000,000 shares of Common Stock, subject to adjustment, with a market
value of $482.6 million (based on $16.088 per share, the average closing
price of the Common Stock on the NYSE for the 30 consecutive trading days
ending on June 29, 1995, the day prior to the date the Merger Agreement
was executed). On October 10, 1995, the closing price was $19.
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. 7,000,000 shares of Class B Common Stock with an estimated value of $73.5
million based on a third party valuation of $10.50 per share.
See "-Valuation of Class B Common Stock."
. Assumption of (i) $68.0 million of PSMI debt (exclusive of debt under
PSI's line of credit that will result in an adjustment to the shares of
Common Stock issued in the Merger) and (ii) aggregate consolidated
property debt of $4.7 million.
Substantially all of the consideration to be paid in the Merger will be
received by the Hughes Family.
It is estimated that, assuming a Closing on November 30, 1995, post-Closing
adjustments will result in a reduction in the number of shares of Common Stock
issued in the Merger of 1,400,000 (other than 5,743,502 shares that will be
issued to replace a like number of shares of Common Stock already owned by PSMI
at the Closing Date) and assumption by SEI of additional debt of approximately
$45 million. See "Proposal One - The Merger - Terms of the Merger - Adjustment
to Share Consideration."
Assets to be Acquired by SEI in the Merger. Immediately following the Merger,
SEI will own the Operating Companies and the Real Estate Interests, which
include:
. The "Public Storage" name.
. General and limited partnership interests (which do not represent
controlling interests) in 47 limited partnerships owning an aggregate of
286 mini-warehouses and one commercial property.
. Shares of common stock in 16 REITs (which do not represent majority
interests) owning, exclusive of SEI's facilities, an aggregate of 219
mini-warehouses and 13 commercial properties.
. Property management contracts, exclusive of SEI's facilities, for 604
mini-warehouses and, through ownership of a 95% economic interest in
PSCP, 26 commercial properties (563 of which collectively are owned by
entities affiliated with PSI).
. A 95% economic interest in the Lock/Box Company.
. Seven wholly owned properties (five mini-warehouses, one combination
mini-warehouse/business park and one small retail center).
. All-inclusive deeds of trust secured by ten mini-warehouses.
Following the Merger, SEI will be self-advised and self-managed. Wayne Hughes
will grant to SEI a three-year option to acquire for Common Stock certain
interests in limited partnerships and REITs directly owned by Mr. Hughes. See
"Public Storage Management, Inc. - Wayne Hughes' Direct Investments in Certain
Partnerships and REITs."
The Special Committee determined that the assets to be acquired by SEI in the
Merger must be acquired for consideration that would not result in dilution to
SEI's FFO per share of Common Stock. There has been no contractual allocation
of the aggregate consideration to be paid by SEI in the Merger (estimated at
$630.8 million, measured as of the day prior to the date the Merger Agreement
was executed) among the assets to be acquired. For financial reporting purposes,
however, the consideration has been allocated among the assets as follows:
. Real Estate Interests (exclusive of the wholly owned properties and all-
inclusive deeds of trust) - $365.0 million based on the Arthur
Andersen Valuation. See "-Valuation Opinion of Arthur Andersen."
. Seven wholly owned properties - $19.4 million (net of mortgage debt of
$0.5 million) based on separate appraisals by other parties. See
"-Appraisals of Wholly-Owned Properties."
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. All-inclusive deeds of trust - $3.8 million (net of underlying debt of
$4.2 million) based on their aggregate principal balance.
. Operating Companies, "Public Storage" name and other intangibles - $237.9
million, representing the balance of the consideration to be paid by SEI
in the Merger.
Restructure Transactions. Prior to the Merger, PSI and the Operating
Companies will engage in the following transactions for the purpose of combining
the Operating Companies and the Real Estate Interests into PSMI in order to
effectuate the Merger:
. The corporations engaged in PSI's Canadian operations and in the tenant
reinsurance business will be distributed, in a spin-off intended to
qualify as tax-free under Section 355 of the Code, to the Hughes Family,
and certain miscellaneous assets of PSI unrelated to the Operating
Companies or the Real Estate Interests will be distributed or sold to the
Hughes Family or to third parties.
. Certain inactive subsidiaries of PSI will be liquidated.
. The common stock of PSCP held by PSI will be converted into nonvoting
preferred stock (representing 95% of the equity), and voting common stock
of PSCP (representing 5% of the equity) will be issued to the Hughes
Family.
. PSI will be merged into its corporate parent, which will thereafter be
merged into PSMI. PSMI will own the business of the Operating Companies
(including ownership of the nonvoting preferred stock of PSCP
representing 95% of the equity) and the Real Estate Interests.
The Restructure will precede, and is not conditioned on, the consummation of the
Merger.
Related Transactions. Immediately preceding the Merger, the following
transactions are contemplated:
. PSMI will transfer the merchandise business to the Lock/Box Company in
exchange for nonvoting preferred stock of the newly formed corporation
(representing 95% of the equity). The voting common stock of the Lock/Box
Company (representing 5% of the equity) will be acquired by the Hughes
Family.
. PSMI will transfer the obligation to perform certain cost allocation and
administrative services for the mini-warehouse and business park
properties and for the entities that own such properties, as well as the
personnel and related assets to perform such services for SEI and the
other mini-warehouse and business park properties, to a newly formed
corporation, PS Clearing Co., Inc. ("PSCC"). After the Merger, the
voting common stock of PSCC will be held by SEI and the owners of the
other mini-warehouse and business park properties for which PSCC will
provide services. SEI, however, will own less than 10% of such voting
common stock.
REASONS FOR THE MERGER -- SPECIAL COMMITTEE RECOMMENDATION
The Special Committee has unanimously determined the Merger to be fair to and
in the best interests of the Public Shareholders and has recommended that the
Board of Directors approve the Merger. In reaching its conclusion to recommend
approval of the Merger, the Special Committee considered, without assigning
relative weights to, the following factors:
(i) Through the acquisition of the Operating Companies, SEI will become a
fully-integrated, self-advised and self-managed commercial real estate company
with expertise in development, construction, acquisition, operation and leasing
services. The Special Committee believes that, as a self-advised and self-
managed REIT with an active real estate business, instead of a more passive real
estate investor, SEI should be more attractive to institutional investors and
others and its credit rating should improve. As a result, SEI's cost of capital
should be reduced and its access to capital should be improved, thereby
facilitating its future growth. The Special Committee recognizes that the
change in the nature of the entity in which SEI Shareholders
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have invested will subject them to additional risks resulting from the increased
scope of SEI's operations. However, the Special Committee believes the
additional benefits outweigh the additional risks. The acquisition of the
Operating Companies, without the acquisition of the Real Estate Interests, might
(among other things) cause SEI to violate the REIT qualification requirements
applicable to SEI. See "- Alternatives to the Merger."
(ii) After the Merger, SEI will own and operate more mini-warehouse space
than any competitor. As the largest REIT in the mini-warehouse segment, the
Special Committee believes SEI's access to capital should be further enhanced.
(iii) The Merger will increase SEI's asset and capital base and
diversify its sources of revenue. While the Special Committee recognizes that
increased profitability does not necessarily result from increased size, the
Special Committee believes SEI's increased size should also further enhance its
access to capital and reduce its costs of capital.
(iv) Through the Merger, SEI will acquire the "Public Storage" name and
goodwill associated with that name in the United States. The Special Committee
believes that the "Public Storage" name is the best recognized name in the mini-
warehouse industry.
(v) After the Merger, SEI will be able to expand its property holdings
without a proportionate increase in advisory and property management fees, which
would have resulted had the current advisory contract and management agreements
with the Operating Companies remained in effect. As a result, the Special
Committee believes that the ability of SEI to acquire properties on terms
favorable to the SEI Shareholders should be enhanced because the growth in SEI's
FFO will be higher than if the advisory contract and management agreement had
remained in place. The Special Committee recognizes that SEI will need to
continue to compete with others in the acquisition of properties.
(vi) The Merger should reduce ongoing conflicts of interest between SEI
and its executive officers and directors who are also affiliated with the
Operating Companies. After the Merger, SEI will be self-advised and self-
managed, instead of advised and managed by the Operating Companies, affiliates
of Wayne Hughes, the chief executive officer of SEI. Furthermore, SEI will
acquire the Real Estate Interests, which are owned by an affiliate of Mr.
Hughes. The Real Estate Interests represent interests in properties that
compete with SEI's properties. Finally, Mr. Hughes' significant ownership
interest in SEI should more closely align his interests with those of the Public
Shareholders. In evaluating the fairness of the Merger, the Special Committee
considered the remaining ongoing conflicts of interest, particularly Mr. Hughes'
continued direct interest in certain partnerships and REITs. Robertson,
Stephens expressed the view that the capital markets would expect the Merger not
to be dilutive to SEI's FFO (as defined by SEI). Accordingly, the Special
Committee concluded that SEI's option to acquire these interests on terms that
would be non-dilutive to SEI's FFO per share (as defined by SEI) reduces this
conflict. See "Public Storage Management, Inc. - Wayne Hughes' Direct
Investments in Certain Partnerships and REITs."
(vii) Robertson, Stephens expressed the view that the capital markets
would expect the Merger not to be dilutive to SEI's FFO (as defined by SEI).
Accordingly, the Special Committee believes that the Merger should be non-
dilutive to SEI Shareholders in terms of FFO per share of Common Stock (as
defined by SEI). FFO per share of Common Stock for SEI (as defined by SEI)
(based on pro forma financial information that gives effect to certain
transactions as if they has occurred on January 1, 1994) is $1.57 for 1994 and
$0.83 for the six months ended June 30, 1995. After giving pro forma effect to
these transactions and the Merger as if they had occurred on January 1, 1994,
FFO per share of Common Stock (as defined by SEI) would be $1.72 for 1994 and
$0.91 for the six months ended June 30, 1995.
(viii) Part of the consideration to be paid by SEI in the Merger
consists of Class B Common Stock, which is subordinated to the Common Stock, is
contingent with respect to dividends and conversion into Common Stock and is
illiquid. The Class B Common Stock pays no dividends for a minimum of four
years. The Special Committee believes that these restrictions are evidence of,
and incentives for, Mr. Hughes' long term commitment to SEI. See "Proposal Two
- -- Amendments to SEI Articles of Incorporation - Recapitalization."
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(ix) The Merger is required to be approved by a majority of the shares of
Common Stock entitled to vote. In addition, SEI has imposed as another
condition to the Merger that it be approved by a majority of the shares of
Common Stock held by the Public Shareholders voting at the Special Meeting.
However, the Merger may be approved by less than a majority of the outstanding
shares held by the Public Shareholders.
(x) The indemnification escrow provided for in the Merger Agreement
should enable SEI to recover damages related to the Merger if certain events
occur. The right to indemnification is subject to certain limitations.
(xi) The written opinion of Robertson, Stephens that as of August 27,
1995 and based on various assumptions and considerations, the consideration to
be paid by SEI in the Merger is fair to the Public Shareholders from a financial
point of view. The opinion was accepted by the Special Committee.
(xii) Although there are significant conflicts of interest in connection
with the Merger resulting from Wayne Hughes' interest in all parties to the
Merger, SEI has taken steps (such as the creation of the Special Committee,
obtaining the Valuation from Arthur Andersen and the fairness opinion from
Robertson, Stephens) to mitigate the effects of such conflicts. The Special
Committee believes that these steps reduce the conflicts of interest because the
terms of the Merger reflect the input of third parties instead of input solely
from persons who will benefit from the Merger. See "Risk Factors -- Conflicts
of Interest." The Special Committee does not believe there has been any adverse
change in the value of the Real Estate Interests, since December 31, 1994, the
date of the Valuation.
(xiii) The Special Committee recognizes that the Merger presents
significant risks to SEI, as well as substantial benefits to the Hughes Family.
Among the risks are the additional risks as to SEI's continued qualification as
a REIT and the shift in control of SEI from the Public Shareholders to the
Hughes Family. The Special Committee believes that SEI has taken actions, such
as the amendment to the Articles of Incorporation to limit ownership of SEI,
Wayne Hughes' agreement with respect to ownership of Common Stock and the
agreement relating to the prepayment of management fees, to significantly reduce
the additional risks on SEI's continued qualification as a REIT. The Special
Committee believes that both the detriment to the Public Shareholders of the
shift in control of SEI to the Hughes Family and the risks related to SEI's
continued qualification as a REIT are outweighed by the benefit to the Public
Shareholders of the alignment of their interests with those of Wayne Hughes and
the other benefits of the Merger. The Special Committee believes that, in view
of Mr. Hughes' significant economic interest in SEI (and absence of significant
economic interests contrary to SEI), he will have an incentive to utilize his
control position in SEI to enhance shareholder value for the benefit of both his
family and the Public Shareholders. The "weighing" of the benefits and
detriments of the Merger involves subjective considerations that are not
susceptible to objective quantification. See "Risk Factors" and "Federal Income
Tax Considerations - Consequences of the Merger on SEI's Qualification as a
REIT".
Factors (iii), (v), (vii), (viii) and (xi) were considered in the Special
Committee's determination of the financial fairness of the Merger and all of the
factors were considered in the Special Committee's determination that the Merger
is in the best interests of the Public Shareholders.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors (three of the five independent directors of which are
members of the Special Committee), in its determination that the Merger is fair
to, and in the best interests of the Public Shareholders, reviewed and
considered (1) the analyses and conclusions of the Special Committee (which were
adopted by the Board as its own), (2) the negotiations with officers of PSI,
which resulted in (a) a decrease in the negotiated price below PSI's estimate of
the value of the Real Estate Interests and the Operating Companies and (b) the
inclusion in the Merger Agreement of certain provisions believed to be in the
best interests of the Public Shareholders and (3) the opinion of Robertson,
Stephens as to the fairness from a financial point of view to the Public
Shareholders of the consideration to be paid in the Merger. The Board adopted
the analyses, conclusions, determinations and recommendations of the Special
Committee and did not make an independent recommendation with respect to the
Merger. See "-- Background of the Merger" and "-- Reasons for the Merger -
Special Committee Recommendation."
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THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AND RECOMMENDS THAT
THE SEI SHAREHOLDERS VOTE "FOR" APPROVAL OF THE MERGER.
ALTERNATIVES TO THE MERGER
In evaluating the Merger, the Special Committee considered and discussed with
Robertson, Stephens alternatives to the Merger. In this regard, the Special
Committee considered (1) the continued operation of SEI with the services of the
Operating Companies being provided under the existing agreements, (2) the
replacement of the Operating Companies with other external service providers,
(3) the termination of the Operating Companies and the direct employment by SEI
of management employees and (4) whether SEI should acquire only the Operating
Companies without the Real Estate Interests.
The Special Committee believes that continuing to operate SEI with the
services of the Operating Companies, which would not result in SEI becoming a
self-advised and self-managed REIT, would not resolve the existing conflicts of
interest between SEI and PSI and its affiliates. As indicated under "-- Reasons
for the Merger -- Special Committee Recommendation," the existing contractual
arrangements likely preclude an increase in SEI's credit ratings and the
resulting improved access to capital, and some persons in the investment
community involved with REITs believe that service providers paid in whole or in
part based on a REIT's gross revenues and capital invested have an incentive to
seek to grow the REIT without due regard for its profitability. Furthermore,
the Special Committee believes that, as SEI continues to expand its asset and
capital base, the fees paid to the Operating Companies would increase. Based on
the foregoing, the Special Committee did not believe that continuing to operate
SEI under the existing agreements with the Operating Companies was better for
SEI and the Public Shareholders than the Merger.
The Special Committee also considered the alternative of replacing the
Operating Companies with other external service providers. The Special
Committee believes that this alternative, which would not result in SEI becoming
a self-advised and self-managed REIT, would likely result in new conflicts of
interest between SEI and the new external service providers, assuming their
compensation followed the typical arrangements involving outside service
providers, and would not enhance SEI's credit ratings and access to capital.
Moreover, this alternative would result in SEI (i) losing the use of the "Public
Storage" name, which the Special Committee believes is the most-recognized name
in the mini-warehouse industry, (ii) losing the expertise and experience of
Wayne Hughes and the executive officers of SEI, who are also executive officers
of, and compensated by, the Operating Companies and (iii) incurring transition
expense and risk of non-performance by new service providers. The Special
Committee believes SEI's current executive officers have been principally
responsible for the success of SEI and are particularly important to its
business objectives, including becoming a self-advised and self-managed
commercial real estate company with "in-house" expertise in development,
construction, acquisition, operation and leasing services. The five senior
executive officers of the Operating Companies are responsible for the
acquisition of more than 350 mini-warehouses, the development of more than 650
mini-warehouses and the operation of more than 1,000 mini-warehouses during
their average 16 years of experience with the Operating Companies. Finally,
neither party can terminate the management agreement for SEI's wholly owned
properties, other than for cause, until 2002, and SEI would be required to pay
the Adviser a termination fee upon termination by SEI (or non-renewal) of the
Advisory Contract. Based on the foregoing, the Special Committee did not pursue
this alternative.
The Special Committee also considered the alternative of SEI terminating the
Operating Companies and directly employing management employees to operate SEI.
This alternative, like the engagement of other external service providers, would
(i) result in the loss of both the "Public Storage" name and the expertise and
experience of Mr. Hughes and the other executive officers of SEI and (ii) be
precluded by the existing management agreement and involve a significant
termination payment under the existing advisory contract. Based on the
foregoing, the Special Committee did not pursue this alternative.
The Special Committee also considered whether SEI should acquire only the
Operating Companies without the Real Estate Interests. The Special Committee
determined that the acquisition of the Operating Companies without the Real
Estate Interests might not sufficiently reduce the conflicts of interest between
SEI and PSI because the Real Estate Interests represent an interest in
properties that compete with SEI's properties. Furthermore, acquisition of the
Operating Companies, without the acquisition of the Real Estate Interests, might
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cause SEI to violate the REIT qualification requirements applicable to SEI.
Under the REIT qualification rules, SEI must derive at least 95% of its total
gross income from income related to real property and certain other items.
Income from the Real Estate Interests would qualify as income related to real
property, while fees generated by the Operating Companies from the management of
properties owned by entities other than SEI would not qualify under the 95%
test. Accordingly, acquisition of the Real Estate Interests increases SEI's
total gross income, thereby reducing the percentage of nonqualifying income that
would be generated by the Operating Companies. Based on the foregoing, the
Special Committee concluded that acquiring both the Operating Companies and the
Real Estate Interests would better serve the interests of SEI and the Public
Shareholders than acquiring the Operating Companies alone. See "Federal Income
Tax Considerations - Consequences of the Merger on SEI's Qualification as a REIT
- - Nonqualifying Income."
TERMS OF THE MERGER
Merger. Subject to the terms and conditions of the Merger Agreement, PSMI
will be merged with and into SEI, on the Closing Date. The separate corporate
existence of PSMI will cease, and the internal corporate affairs of SEI will
continue to be governed by the laws of the State of California. See "-
Consideration to be Paid by SEI in the Merger" and - "Assets to be Acquired by
SEI in the Merger" for a discussion of the estimated value of the consideration
to be paid by SEI in the Merger and the estimated value of the assets to be
acquired by SEI in the Merger.
Articles of Incorporation and Bylaws. The Merger Agreement provides that the
SEI Articles of Incorporation and the SEI bylaws (the "Bylaws") as amended will
be the articles of incorporation and bylaws of the surviving corporation.
Officers and Directors. No change in the members of the Board of Directors
will result from the Merger. Each director of SEI prior to the Merger will
continue to serve after the Merger until his successor has been duly elected or
appointed and qualified or until his earlier death, resignation or removal. For
information on SEI's executive officers after the Merger, see "-- Certain
Relationships and Related Party Transactions - Compensation to Executive
Officers." Each executive officer will continue to serve after the Merger until
a successor has been duly appointed and qualified or until his or her earlier
death, resignation or removal.
Conversion of PSMI Stock into SEI Stock. 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
(the "Share Consideration"), subject to adjustment.
Adjustment to Share Consideration. The Merger Agreement provides that the
Share Consideration will be adjusted for any stock split, business combination,
stock dividend, or change on or to the Common Stock prior to the Effective Time.
The Share Consideration will also be subject to post-Closing adjustments as
follows:
. SEI will issue a number of additional shares of Common Stock determined by the
value of Real Estate Interests acquired by PSI since December 31, 1994 as
established by Arthur Andersen (the additional shares will equal the value of
such additional Real Estate Interests divided by the price of the Common Stock
at the Closing Date). The additional shares are estimated to be approximately
1.1 million shares. The additional shares will not exceed 2.5 million shares.
. The number of shares of Common Stock issued in the Merger will be decreased to
reflect the change in PSMI's net assets at the Closing Date, as reported on by
Ernst & Young LLP. The change in PSMI's net assets means the difference
between (a) the book value of the combined assets (other than Real Estate
Interests and Common Stock already owned by PSMI), determined on an accrual
basis as of the Closing Date, and (b) the negative amount of $64.5 million,
which represents the book value of the net assets, determined on an accrual
basis, at December 31, 1994 (except for the $68 million of Senior Notes which
is as of June 30, 1995). This change in net assets is estimated to result in
an adjustment of a negative 2.5 million shares. The additional shares will
not result in a positive adjustment.
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. SEI will issue 5,743,502 shares of Common Stock to replace a like number of
shares already owned by PSMI at the Closing Date and which will be cancelled
in the Merger, as confirmed by Ernst & Young LLP.
It is estimated that, assuming a Closing on November 30, 1995, the post-
Closing adjustments will result in (i) an issuance of 5,743,502 shares to
replace a like number of shares of Common Stock already owned by PSMI at the
Closing Date, which will be cancelled in the Merger, (ii) a reduction in the
number of shares of 1.4 million in respect to additional Real Estate Interests
and of PSMI's change in net assets at the Closing Date and (iii) the assumption
by SEI of additional debt estimated at $45 million.
Recapitalization. As a condition to Closing of the Merger, the SEI Articles
of Incorporation must be amended to increase the number of authorized shares of
Common Stock and to create the Class B Common Stock. See "Proposal Two -
Amendments to SEI Articles of Incorporation - Recapitalization."
Indemnification. Pursuant to the Merger Agreement, all of the Class B Common
Stock (the "Indemnification Shares") will be deposited in escrow to be held and
administered in accordance with the terms and conditions of an indemnification
escrow agreement. SEI will be entitled to indemnification from Wayne Hughes,
subject to certain exceptions and thresholds, for losses incurred as a result of
(i) any breach of representation or warranty made by PSI or PSMI in the Merger
Agreement, (ii) any breach by PSI or PSMI of any covenant or agreement contained
in the Merger Agreement, (iii) liabilities and associated costs that may arise
with respect to PSI's general partnership interests to the extent any such
liability or expense arises out of facts or circumstances in existence prior to
Closing, or (iv) any liability for taxes assessed against SEI as successor to
PSMI and the other Operating Companies, including (but not limited to) taxes
resulting from an adverse determination by applicable taxing authorities
relating to the spin-off of certain assets of PSI that are not part of the
Merger. The indemnification escrow will remain in place and claims may be made
for three years from the Closing. Following this three-year period,
Indemnification Shares not required to reimburse SEI for any damages from an
identifiable claim, or which are not pending determination as an indemnification
claim, will be returned to the PSMI Shareholders. Notwithstanding the
foregoing, SEI will be entitled to indemnification with respect to any liability
for taxes assessed against SEI as successor to PSMI and the other Operating
Companies through the expiration of the applicable statute of limitations under
the Code and with respect to title defects and general partner liabilities for
five years. However, such right of indemnification will be limited to the
recovery of damages in the amount of the Indemnification Shares. The
satisfaction of any claims for indemnification will be made by (i) delivery of
that number of Indemnification Shares at a value calculated by dividing the
dollar amount of any damages by the then market value of the Common Stock after
applying a 34.375% discount (based on a third party valuation of the Class B
Common Stock) and reducing such discount by 1/84th for each calendar month that
has elapsed from the Closing Date, (ii) delivery of that number of shares of
Common Stock with a then-market value equal to any damages or (iii) payment of
cash equal to any damages.
Notwithstanding the escrow of the Indemnification Shares, distributions on
those shares will be paid by SEI directly to the PSMI Shareholders. Any
securities received by the escrow agent in respect of any Indemnification Shares
held in escrow as a result of a stock split or combination of Class B Common
Stock, payment of a stock dividend or other stock distribution in or on Class B
Common Stock, or change of Class B Common Stock into any other securities
pursuant to or as part of a business combination or otherwise, will be held by
the escrow agent as, and will be included within the definition of,
Indemnification Shares.
SEI believes that the incurrence of losses which would result in a significant
reduction of the number of Indemnification Shares to be issued to PSMI
Shareholders upon the expiration of the escrow period to be remote.
Accordingly, the entire value of the Indemnification Shares will be included as
part of the cost of the Merger at the Closing rather than recording the value of
the Indemnification Shares as part of the cost of the Merger at the termination
of the escrow period.
Representations and Warranties. The Merger Agreement includes various
customary representations and warranties of the parties thereto. In this
regard, PSI and PSMI represent and warrant as to, among other things: (i)
corporate organization, standing and power, (ii) approval of the Merger
Agreement by each of PSI's and PSMI's shareholders and boards of directors;
(iii) capitalization; (iv) pending or threatened litigation; (v) the Merger
Agreement's noncontravention of any agreement, law or charter or bylaw provision
and the absence of the need
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(except as specified) for governmental or third-party consents to the Merger;
(vi) the terms, existence, operations, liabilities and compliance with
applicable laws of employee plans, and certain other matters relating to the
Employee Retirement Income Security Act of 1974, as amended; (vii) payment of
taxes; (viii) ownership of and rights to use certain intellectual property; (ix)
financial statements; (x) current and accumulated earnings and profits for tax
purposes; (xi) the conduct of business in the ordinary and usual course and the
absence of any material adverse change in financial condition, business, results
of operations, properties, assets, liabilities or prospects; (xii) certain
contracts and leases; (xiii) certain matters with respect to compliance with
environmental laws and regulations; (xiv) certain transactions with affiliates;
and (xv) the accuracy of certain information regarding PSI and PSMI in this
Proxy Statement.
The Merger Agreement also includes representations and warranties of SEI as
to, among other things: (i) corporate organization, standing and power; (ii)
approvals by the Board of Directors and the authorization of the Merger
Agreement; (iii) capitalization; (iv) the authorization of the increase in the
number of shares of Common Stock and Class B Common Stock to be issued pursuant
to the Merger Agreement; (v) pending or threatened litigation; (vi) the Merger
Agreement's noncontravention of any agreement, law or charter or bylaw provision
and the absence of the need (except as specified) for governmental or third-
party consents to the Merger; (vii) financial statements and filings with the
Commission; and (viii) the accuracy of the information regarding SEI in this
Proxy Statement.
Effective Time of the Merger. Promptly following the satisfaction or waiver
(where permissible) of the conditions to the Merger, the Merger will be
consummated and become effective on the date and at the time at which the
Agreement of Merger together with the requisite officers' certificates of SEI
and PSMI and the Amendments are duly filed with the Secretary of State of
California which shall occur on the Closing Date or as soon as practicable
thereafter. See "-- Conditions to Consummation of the Merger."
Conditions to Consummation of the Merger
Conditions to Each Party's Obligations to Effect the Merger. The
-----------------------------------------------------------
respective obligations of SEI and PSMI to effect the Merger are subject to
certain conditions, including the following: (i) the Merger, the Amendments,
and other transactions contemplated by the Merger Agreement will have been duly
approved by the requisite holders of Common Stock; including a majority of the
outstanding shares of Common Stock entitled to vote at the Special Meeting and a
majority of the shares of Common Stock held by Public Shareholders voting at the
Special Meeting; (ii) the waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), will have expired or been
terminated and any other governmental filings will have been made; and (iii)
subject to certain exceptions, there will not be in effect any judgment, writ,
order, injunction or decree of any court or governmental body enjoining or
otherwise preventing consummation of the transactions contemplated by the Merger
Agreement nor will there be pending or threatened by any governmental body or
other person any suit, action or proceeding seeking to restrain or restrict the
consummation of the Merger or seeking damages in connection therewith.
Conditions to the Obligation of PSMI. In addition to the foregoing
------------------------------------
conditions, the obligation of PSMI to effect the Merger is further subject to
satisfaction or waiver of the following conditions, among others: (i) the
representations and warranties of SEI contained in the Merger Agreement will be
true and correct in all material respects as of the Closing Date; (ii) SEI will
have performed all agreements required to be performed by it under the Merger
Agreement on or prior to the Closing Date; (iii) from the date of the Merger
Agreement through the Closing Date, there will not have occurred any change in
the financial condition, business or operations of SEI and its subsidiaries,
taken as a whole, that would have or would be reasonably likely to have a
material adverse effect on SEI's business, properties, operations, condition
(financial or other) or prospects; (iv) any sums due and owing the Operating
Companies as a result of previous management services and advisory agreements
will have been paid and (v) holders of less than 5% of the outstanding Common
Stock will have exercised dissenters' rights.
Conditions to the Obligation of SEI. In addition to the foregoing
-----------------------------------
conditions, the obligation of SEI to effect the Merger is further subject to
satisfaction or waiver of the following conditions, among others: (i) the
representations and warranties of PSI and PSMI contained in the Merger Agreement
will be true and correct in all material respects as of the Closing Date; (ii)
PSI and PSMI will have performed all agreements required to be performed by them
under the Merger Agreement on or prior to the Closing Date; (iii) SEI will have
received the
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opinion of Hogan & Hartson (a) that the Merger will be treated for federal
income tax purposes as a reorganization within the meaning of Section 368(a) of
the Code, and (b) that SEI will continue to qualify as a REIT under Sections 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
following the Merger 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 (see "Federal Income Tax Considerations--Consequences of Merger on SEI's
Qualification as a REIT--Elimination of Any Accumulated Earnings and Profits
Attributable to Non-REIT Years") (no opinion as to the matters described in (A)
or (B) will be sought); (iv) SEI will have received from David Goldberg an
opinion, dated the Closing Date, as to various matters; (v) from the date of the
Merger Agreement through the Closing Date, there will not have occurred any
change in the financial condition, business or operations of the Operating
Companies, taken as a whole, that would have or would be reasonably likely to
have a material adverse effect on their financial condition, business or
operations; (vi) no holders of the PSMI shares outstanding immediately prior to
the Closing Date will have exercised dissenters' rights; (vii) all consents
necessary to transfer certain intellectual property rights to SEI will have been
obtained; (viii) SEI will have received a study prepared by PSI and PSMI of the
current and accumulated earnings and profits of PSI, PSMI and the other
Operating Companies and an analysis of other tax matters; (ix) SEI will have
received a fairness opinion from Robertson, Stephens; (x) Wayne Hughes will have
entered into (A) an option agreement and irrevocable proxy relating to certain
real estate interests directly owned by him, (B) a covenant not to compete, (C)
an employment agreement, and (D) an agreement with SEI restricting his
acquisition of additional shares of SEI capital stock and generally providing
that if SEI at any time otherwise would fail to meet the REIT ownership
restrictions, then Mr. Hughes automatically and irrevocably transfers to a
designated charitable beneficiary a number of shares of SEI capital stock owned
by him sufficient to permit SEI to continue to satisfy the REIT ownership
restrictions; (xi) the PSMI Shareholders will have granted SEI a right of first
refusal with respect to the tenant reinsurance business and PSI's Canadian
operations and will have entered into an agreement as to certain matters; (xii)
SEI and the Special Committee will be satisfied as to certain matters including
the Restructure, debt and environmental exposure; and (xiii) SEI shall have
received an analysis prepared by SEI and PSMI demonstrating that SEI's expected
stock ownership immediately following the Merger will comply with the
requirement in the Code 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 its taxable years. See "-- Non-Competition Agreement," "-- Employment
Agreement" and "Public Storage Management, Inc.-Wayne Hughes Direct Investments
in Certain Partnerships and REITs."
Amendments and Termination. The parties to the Merger Agreement may not
amend, change, supplement, waive or otherwise modify the Merger Agreement except
by an instrument in writing signed by the party against whom enforcement is
sought.
The Merger 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, PSI and PSMI or by
mutual action of their respective boards of directors.
The Merger Agreement may be terminated and the Merger may be abandoned by
action of the board of directors of PSI or SEI if (i) the Merger has not been
completed by March 31, 1996, (ii) the SEI Shareholders fail to approve the
Merger at the Special Meeting or (iii) a court or governmental, regulatory or
administrative agency or commission issues an order, decree or ruling or takes
any other action permanently restraining, enjoining or otherwise prohibiting the
transactions contemplated by the Merger Agreement and that order, decree, ruling
or other action becomes final and non-appealable, provided that, the party
seeking to terminate the Merger Agreement pursuant to this clause (iii) must use
all reasonable efforts to remove that order, decree, ruling or injunction; and
provided, in the case of a termination pursuant to clause (i) above, the
terminating party cannot deliberately delay the Merger.
In the event of termination of the Merger Agreement and abandonment of the
Merger, no party (or any of its directors or officers) will have any liability
or further obligation to any other party to the Merger Agreement, except that
the parties remain liable for breaches of the Merger Agreement.
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Voting Agreements. PSI and its affiliates, including the Hughes Family, have
agreed to vote all of their respective shares of Common Stock in favor of the
Merger and the Amendments. As of June 30, 1995, PSI and its affiliates owned an
aggregate of approximately 23% of the outstanding Common Stock.
Conduct of Business Pending the Merger. PSI and PSMI have agreed that, except
as contemplated by the Merger Agreement, during the period from the date of the
Merger Agreement to the Effective Time, the Operating Companies will pursue
their business in the ordinary course, with no less diligence and effort than
would be applied in the absence of the Merger Agreement. PSI and PSMI have also
agreed, on terms expressly set forth in the Merger Agreement, that the Operating
Companies will seek to preserve intact their current business organization, keep
available the services of their current officers and employees and preserve
their relationships with customers, suppliers and others having business
dealings with them, with the objective that their good will and ongoing
businesses shall be unimpaired at the Effective Time. PSI and PSMI have also
agreed that, except as contemplated by the Merger Agreement, and unless SEI
agrees in writing the Operating Companies will not, among other things, (i)
enter into transactions or take actions that would, among other things, change
their capitalization, (ii) make distributions to their shareholders, (iii)
change existing employee benefits or agreements, (iv) effect any business
combination or corporate reorganization or restructuring, (v) amend their
articles of incorporation or bylaws, or (vi) establish or amend a material
agreement.
Agreement on Distributions. SEI has agreed that, until the Class B Common
Stock has converted into Common Stock, SEI will not reduce distributions to
holders of Common Stock below the level of distributions in effect at the
Effective Time unless (i) such reduction is required by California law or (ii)
there has been a material adverse change in SEI's operations, as determined by
the Board of Directors in its reasonable discretion.
Non-Competition Agreement. In connection with the Merger, Wayne Hughes will
agree not to compete with SEI in the mini-warehouse business in the United
States for a period of seven years from the Closing Date. This agreement will
not cover other types of properties, including business parks.
Restrictions on Transfer of Shares. In connection with the Merger, the PSMI
Shareholders have agreed not to transfer either (i) for a period of seven years,
the Class B Common Stock or (ii) for a period of three years, 8,500,000 shares
of Common Stock, subject, in each case, to certain limited exceptions, including
pledges and charitable gifts. The federal securities laws also impose certain
restrictions on the transferability of the securities issued in the Merger. The
PSMI Shareholders have advised SEI that they have no present intention to sell
any of the Common Stock received in the Merger. See "Shares Eligible for Future
Sale."
Employment Agreement. In connection with the Merger, the Special Committee
requested that Wayne Hughes enter into an employment agreement with SEI
providing for annual compensation of $60,000 and a five-year term. The
agreement will require Wayne Hughes to devote a substantial portion of his time
to the affairs of SEI. The agreement will define the phrase "a substantial
portion" to mean all of the time required to perform the services necessary and
appropriate for the conduct of SEI's business. Wayne Hughes will continue to
devote time to his other business activities.
INDEMNIFICATION OF PSI DIRECTORS AND OFFICERS
Under the Merger Agreement, SEI has agreed to keep in effect provisions in the
SEI Articles of Incorporation and Bylaws providing for limitation of director
liability and indemnification of directors, officers, employees and agents at
least to the extent such persons are entitled thereto under the PSMI Articles of
Incorporation and Bylaws as of the date of the Merger Agreement, subject to
California law. In addition, these provisions will not be amended, repealed or
otherwise modified in any manner that would adversely affect the rights 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 the Merger Agreement), unless modification is
required by law.
VALUATION OPINION OF ARTHUR ANDERSEN
Arthur Andersen was jointly retained by the Special Committee and PSI to
value, in the aggregate, PSI's interests in 47 partnerships, the series A, B, C,
and D shares in 15 publicly-traded REITs and the advisory contract
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with Storage Properties, Inc., a publicly traded REIT (defined collectively as
the "PSI real estate investments"). As used elsewhere within this document, the
term "Real Estate Interests" includes the PSI real estate investments valued by
Arthur Andersen combined with the wholly owned properties and all-inclusive
deeds of trust. Arthur Andersen valued the PSI real estate investments, as of
December 31, 1994, at $365 million. The letter report from Arthur Andersen,
which specifies the interests subject to valuation, the scope and limitations of
the analysis, as well as the final value conclusion, is set forth in Appendix B
to this Proxy Statement and should be read in its entirety. Certain material
assumptions, qualifications and limitations to the Valuation are set forth
below. The summary set forth below does not purport to be a complete description
of the analyses used by Arthur Andersen in concluding the estimate of value.
Arriving at an aggregate valuation of a large number of real estate interests is
a complex analytical process not necessarily susceptible to partial analysis or
amenable to summary description.
Except for certain assumptions which the Special Committee and PSI advised
Arthur Andersen that it would be reasonable to make, the Special Committee and
PSI imposed no conditions or limitations on the scope of Arthur Andersen's
investigation with respect to the methods and procedures to be followed in
preparing the Valuation. SEI and PSI have agreed to indemnify Arthur Andersen
against certain liabilities that may arise out of its engagement to perform the
Valuation.
Qualifications and Experience of Arthur Andersen. Arthur Andersen is the
largest real estate consulting and financial valuation services provider in the
world. Arthur Andersen has over 60 valuation professionals in the Los Angeles
office alone, and over 275 professionals in the United States. Arthur Andersen
includes professionals with specific industry experience in real estate
appraisal, real estate consulting, valuation, capital markets, corporate real
estate, and cost segregation, among others.
Arthur Andersen's professionals are qualified and experienced in valuing all
types of real estate, including office, industrial, mini-warehouse, shopping
centers, multifamily residential, and special purpose properties of various
types. Arthur Andersen is also experienced in valuing partial interests,
closely held capital stock, partnership interests, business enterprises,
intangible assets, debt, options, and warrants.
Arthur Andersen's experience and structure allow it to incorporate a full
interdisciplinary team approach to complex valuations. In the Valuation, Arthur
Andersen utilized professionals specializing in real estate appraisal and
consulting, capital markets, and financial valuation. These individuals include
qualifications ranging from state certified appraisers to Chartered Financial
Analysts.
Summary of Materials Considered. In the course of the analysis of the PSI
real estate investments, Arthur Andersen received various information from PSI
relating to the entities and properties. The more significant items considered
included: partnership agreements and REIT organizational documents, historic
financial information for each partnership and REIT, summarized debt terms,
summarized historical operating data for each individual property owned by the
partnerships and REITs, analyses prepared by PSI of its real estate investments,
and certain property-specific reports and narrative analysis of competitors.
Specifically, the historical financial information reviewed for each partnership
and REIT includes annual reports containing audited financial statements for
five years or since inception for those in existence for less than five years
and property-level operating statistics containing revenues, occupancy and
expense data for three years.
In addition, Arthur Andersen conducted independent research and analyses.
Within these areas, information was obtained from third party sources regarding
market and economic indicators pertinent to the valuation analyses as well as
key pricing and trend information used by industry analysts and those active in,
and familiar with, similar transactions. The market and economic indicators, as
well as key pricing and trend information, considered include capitalization
rates, discount rates, cash flow multiples, interest rates and growth rates.
Specifically, the sources for the market-based information were (i) Value Line,
Standard & Poors and Muller Publications, (ii) Industry Analyst's Research
Reports, (iii) Federal Reserve Statistics, (iv) Realty Stock Review, (v)
Industry-trade publications, (vi) third party appraisal and fairness reports for
transactions involving SEI and (vii) Alcar/Merrill Lynch - Expected Market
Return Statistics.
The Valuation was predicated upon a market valuation of the interests and
shares, assuming the interests and shares would be sold as a group of assets on
an all-cash basis. Accordingly, the Valuation concludes one value
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for aggregate general partnership interests and the series A, B, C, and D shares
in all 63 entities. Arthur Andersen has not concluded or otherwise provided a
value for any individual partnership, REIT, property, or partial interest.
Summary of Methodology and Analyses. The first step in the valuation process
was to analyze the income and expenses at the property level, as well as at the
level of each partnership and REIT. This comprised a review and testing of the
income and expenses in order to understand the overall status of the properties
as a group and to assess the likelihood for future changes. The result of this
analysis was a current year estimate of income for the partnerships and REITs as
well as to provide the starting point for certain forward-looking analyses
within the Valuation.
Property-Level Analyses. In order to understand the partnerships and REITs,
analyses were performed on 543 of the underlying properties. The historic
operations at the property level were reviewed and various sorts and
stratifications were prepared to identify groups of properties exhibiting
occupancy and expense traits varying significantly from the overall population.
This process resulted in a generally consistent and supportable basis for
analyzing the operations at the property level. Arthur Andersen initially
developed a base year of occupancy, revenues, expenses and net operating income
("NOI") at the property level. This process started with actual year-end 1994
operating results as a basis, and based upon a review of the property-level
exceptions, changes were made as appropriate. This review allowed key operating
criteria for a current year to be "stabilized" and then to stratify the
properties into groups for further analytical purposes. The 33 property
groupings were based upon a review of the recent operating, occupancy, and
income characteristics of the individual properties and were clustered based on
expected similarity in occupancy, income and anticipated trends in operations
through achievement of stabilized income. The number of properties within the
groups ranged from a low of one to a high of 44, averaging 16 to 17 properties
per group. For forward-looking analyses, the stratified property groupings
allowed application of varied occupancy and growth rates in the first three
years of anticipated operations. These growth rates varied by property groups
for 1995, 1996, and 1997 to reflect perceived attributes of property groups as
well as overall market conditions. The income growth rates per group for 1995
ranged from 4.0% to 7.0%. For 1996, the growth rates ranged from 4.0% to 6.0%,
and for 1997, the rates ranged from 4.0% to 5.0%. The growth rates in the first
three years were based upon a review of the dynamics of each property grouping,
considering the recent history as well as the likelihood of achieving stabilized
occupancy in the short term. The short term growth rates considered the
historic record of price increases at or near the achievement of stabilized
occupancy as well as the short term industry-wide supply and demand patterns.
The overall stabilized property occupancies ranged from 40% to 93%. Extending
beyond the first three years, stabilized growth for income and expenses was
assumed at 4.0% per year, which was deemed appropriate based upon an analysis of
the subject properties' historical performance. The review of historical growth
rates for income showed an increasing trend, with the average growth rate for
all properties managed by PSMI and PSCP being 4.45% over the period extending
from 1990 through 1994. It should be noted that the growth rate includes
incremental growth attributed to increased occupancy versus rental rate
increases. The historic growth for expenses has been at or near 3.0% since
1988, and has generally tracked inflation. The conclusion of stabilized growth
at 4.0% for both income and expenses considered the historic trends in
inflation, pricing considering excess supply, anticipated future supply and
demand relationships, and the existence of variable expenses, as demonstrated by
management fees.
The resulting property-level income and expense estimates were then aggregated
for each entity. Other non-operating income and expenses, comprised of
recurring capital expenditures and financing costs, were deducted to estimate
the funds available for distribution ("FAD") at the entity level, totaling
$140.8 million in the aggregate. PSI's share of these anticipated cash flows
was then calculated based on PSI's estimated 19.1% interest and summarized into
a combined estimate of FAD. See "- Market Approach" for the basis for PSI's
estimated interest.
Income Approach. The income approach measures the value of an asset by the
present value of its future economic benefits. These benefits can include
earnings, cost savings and proceeds from its disposition. When applied to
equity interests in businesses, value indications are developed by discounting
expected cash flows to their present value at a rate of return that incorporates
the risk-free rate for the use of funds, the expected rate of inflation and
risks associated with the particular investment. The discount rate selected is
generally based on rates of return available from alternative investments of
similar type and quality as of the valuation date.
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The income approach reflects the combined future funds available for
distribution attributable to PSI's interests in various partnerships and REITs.
This anticipated income stream, along with a residual value, was then discounted
back to December 31, 1994 at a discount rate of 11%. Since the PSI real estate
investments were valued in the aggregate, the discount rate was developed for
the cost of equity utilizing standard financial valuation methodology based on
the Capital Asset Pricing Model ("CAPM") and Arbitrage Pricing Theory ("APT").
The CAPM equation develops equity return requirements based on risk-free rates
to which an equity risk premium is added to reflect the additional return an
investor would expect on an investment in the equity being considered. The CAPM
equation is as follows:
E(R) = Rf + ( B * Rm)
where:
E(R) is the required return on equity
Rf is the risk-free rate
B is Beta, a measure of the riskiness (volatility of returns) of a
stock
Rm is a risk premium for publicly traded equity securities
To develop a cost of equity using CAPM, four different approaches were
utilized to develop the equity risk premium (the difference between the expected
return on the market and the risk-free rate), using risk-free rates of return
based on short-term and long-term Treasury securities matched with historical
data for total stock returns (Ibbotson data) and forward expected market returns
(Alcar/Merrill Lynch data).
The short-term risk-free rate of 5.56% used was based on the 3-month treasury
bill rate as of December 30, 1994. The long-term risk-free rate of 7.83% used
was based on the 30-year treasury constant maturities as of December 30, 1994.
The equity risk premium (Rm) was calculated using the four CAPM approaches as
follows:
Historical
a) - Short-term expected equity risk premium based on Ibbotson
historical large company total stock returns 14.16%
less the short-term 3-month T-bill rate (5.56%)
Indicated equity risk premium (Rm): 8.60%
b) - Long-term expected equity risk premium based on Ibbotson
historical large company total stock returns 15.03%
less the long-term 30-year T-bond rate (7.83%)
Indicated equity risk premium (Rm): 7.20%
Forward
c) - Forward expected market return 12.00%
(as of December 30, 1994 based on Alcar/Merrill Lynch
& Federal Reserve Statistics)
less the short-term 3-month T-bill rate (5.56%)
Indicated equity risk premium (Rm): 6.44%
d) - Forward expected market return 12.00%
(as of December 30, 1994 based on Alcar/Merrill Lynch
& Federal Reserve Statistics)
less the long-term 30-year T-bond rate (7.83%)
Indicated equity risk premium (Rm): 4.17%
To adjust for industry-specific risk, Beta was estimated and applied to the
equity risk premium. Beta is a measure of the systematic risk of a security and
the tendency of the security to respond to price changes of the securities
market as a whole. An estimate of Beta was somewhat difficult to obtain for the
self-storage REIT industry. Of the four companies currently publicly-traded in
the industry, three recently went public in 1994.
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Research companies that calculate Beta, such as Standard & Poors, Value Line,
and Muller, generally require more than one year of trading information to
properly regress pricing information to the market. As such, meaningful Betas
for three of the four companies in the industry were unavailable.
To expand the universe of industry-representative Betas, Arthur Andersen
analyzed the economics and pricing statistics of additional REIT industry
segments which are considered to be most similar to self-storage REITs,
including light industrial REITs. Apartment and office REITs are also somewhat
comparable based on economic variables and market perception of value.
Several companies found in Value Line and Standard & Poors were excluded from
the analysis. Companies were included in the analysis if they had published
Betas and could easily be classified as self-storage, apartment, or
industrial/office REITs with the majority of revenues derived from these
sources. Companies not classified as such, or companies which derive a majority
of revenues from other sources (e.g. shopping centers), and companies with Betas
outside a normal distribution for the industry were excluded from the analysis.
Betas were reviewed for several groups of industry-representative REITs:
a) CAPM was run based on reported Betas developed for the office/industrial
and apartment segments of the REIT industry. Average betas for ten REITS
used in Arthur Andersen's analysis (Berkshire Realty Co., Inc.; BRE
Properties, Inc.; Merry Land & Investments Co, Inc.; MGI Properties;
Pennsylvania REIT; Property Trust of America; Security Capital Pacific
Trust; United Dominion Realty Trust, Inc.; Washington REIT; and Wellsford
Residential Property Trust), ranged from 0.26 to 0.93, with a total average
beta of 0.54.
b) Given that Beta is calculated for only one self-storage REIT (SEI), CAPM
was also run considering only this Beta, using the average of the S&P and
the Muller Beta estimates, which was 0.48.
c) CAPM was tested based on a Beta derived from New Plan Realty Trust, a
company classified as a shopping center REIT. While shopping center REITs
are generally not comparable to self-storage REITs, this company would be
the most comparable to SEI based on size ($1.1 billion market
capitalization) and diversification of its portfolio. Value Line indicates
that New Plan Realty's shares trade at a higher multiple and slight premium
versus other shopping center REITs due to financial flexibility, safety and
track record of earnings growth. CAPM was also run using the average of
the Value Line and Muller Beta estimates for New Plan Realty Trust, which
was 0.78.
Arthur Andersen's analysis used a beta of 0.60 based on the aggregate average
beta from the above analyses.
APT theory is an alternative method of regressing company-specific price
movement to movement of the total market. The cost of equity analysis produces
similar results to CAPM and appears almost identical if the number of companies
used as representative of the industry becomes very large. The same industry
segments were used in running the APT analysis as were used running the CAPM
analysis. The results demonstrated that APT analysis generally indicates a
higher cost of equity than CAPM for all but the apartment REITs.
PSI's indicated cost of equity using these approaches ranged from 9.4% to
12.1%. The discount rate used by Arthur Andersen was developed based on the
cost of equity analysis. Arthur Andersen used a discount rate of 11.0% in
calculating a value indication using the income approach based on correlating
the results of these analyses, with consideration to overall economic and market
factors. To check the conclusions of industry standard measures, several
industry reports on self-storage companies were considered and investment
banking research analysts specializing in the REIT industry were interviewed.
Questions were posed to them concerning the general approaches and methodology
that they typically employ in estimating discount rates and cost of equity for
REITs.
Property operations were considered through the anticipated "crossover" point
for all entities. This crossover point describes the point at which a given
partnership or REIT switches the general partner's or series C
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shareholder's participation in distributed cash to a higher level. In the
valuation analysis, this resulted in a total period of analysis of 15 years.
An aggregate residual value was calculated by applying a capitalization rate
to the FAD in the final year. This rate was based on a two-tiered analysis in
which a terminal overall rate was assessed based on market data collected on
various property and entity transactions, a review of industry surveys, and
interviews with knowledgeable industry professionals. Within this analysis,
capitalization rates from actual sales ranged from 9.88% to 12.99%, averaging
10.60%. Arthur Andersen also noted in its research that overall rates had been
exhibiting a notable downward trend in the past 12 to 24 months. Based on this
analysis, a property level residual capitalization rate of 10.25% was concluded.
The second portion of the analysis served to estimate an adjustment based upon
the benefit of diversification in a large portfolio and the lower risk
attributed with FAD versus property-level net operating income. After
considering this analysis, a portfolio residual capitalization rate of 9.5% was
concluded and a residual value of $727.2 million was calculated based on PSI's
FAD of $69.1 million in the residual year.
Based on a discount rate of 11.0%, a long-term growth rate of 4.0% and a
residual capitalization rate of 9.5%, the indicated total present value of all
income streams plus the residual value developed by the income approach was $383
million.
Market Approach. The market approach incorporates the use of industry cash
flow multiples and yields for application to variations of the subject's income
statement and balance sheet. When applied to the valuation of equity interests,
consideration is given to the financial condition and operating performance of
the interests being appraised relative to those of publicly traded companies
operating in the same or similar lines of business, potentially subject to
corresponding economic, environmental and political factors and considered to be
reasonable investment alternatives.
The industry benchmarks considered in this approach include an FFO multiple,
FAD multiple, and dividend yields, which were then applied to the 1995 aggregate
portfolio FFO, FAD and dividend. The selected multiples were based on an
analysis of pricing multiples, expressed on a marketable minority interest
basis, for four publicly traded self-storage REITs (Shurgard Storage Centers,
SEI, Storage Trust Realty, and Storage USA). Of the four companies currently
publicly-traded in the industry, three recently went public in 1994. In order
to expand the universe of market multiples, Arthur Andersen conducted a market
multiple analysis for these companies using data contained in fiscal 1994
financial reports. The data reflected considerable variance and inconsistency,
largely due to the limited availability of historical public pricing
information. Arthur Andersen also reviewed research reports prepared by
investment bank research analysts specializing in the industry. Similar to the
analyses conducted in the income approach, Arthur Andersen analyzed the
economics and pricing statistics of additional REIT industry segments which are
considered to be most similar to self-storage REITs, including light industrial,
apartment and office REITs. The group of public companies was substantially the
same as the group considered in the income approach, with the inclusion or
exclusion of companies based on availability of market data. Arthur Andersen
obtained financial data for 42 light industrial/office, apartment and self-
storage REITS from the Realty Stock Review, a widely accepted source of
information for the REIT market, which provides market statistics that were used
to develop the market approach. Based on this research, FFO multiples ranged
from 8.7 to 17.5 and dividend yields ranged from 5.5% to 9.8% for the expanded
group of REITS. Arthur Andersen also reviewed industry research reports for the
four public self-storage REITS prepared by investment bank research analysts,
and FFO multiples ranged from 8.2 to 11.9, FAD multiples ranged from 9.2 to
12.4, and dividend yields ranged from 5.8% to 9.0%.
To develop indications of value using the market approach, Arthur Andersen
applied an FFO multiple of 10.3, an FAD multiple of 10.8 and a dividend yield of
7.8% to PSI's 1995 aggregate anticipated results developed in the income
approach. Once value indications for the aggregate portfolio equity were
calculated, PSI's percentage ownership was derived by applying PSI's estimated
ownership in the aggregate portfolio. The percentage ownership was estimated
using the results derived in the income approach. The value of the aggregate
portfolio was estimated based on a discounted cash flow analysis using the cash
flows developed in the income approach without consideration of the partnership
ownership percentages. The PSI value from the income approach was divided into
the total value of the aggregate portfolio, to compute PSI's estimated 19.1%
interest in the portfolio.
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Based on the FFO, FAD, and dividend yield analyses, value indications were
developed ranging from $290 million to $300 million.
Adjusted Book Value Approach. The adjusted book value approach, when applied
to the valuation of equity interests in businesses, is based on the net
aggregate fair market value of the entity's underlying assets. The technique
entails a restatement of the balance sheet of the enterprise substituting the
market value of its assets and liabilities for their book values. The resulting
equity is reflective of a 100% ownership interest in the business. This
approach is frequently used in valuing holding companies or capital intensive
firms.
For this approach, Arthur Andersen focused on valuing the real estate assets
by approximating a traditional real estate approach to value, making adjustments
to account for the benefits of acquiring this portfolio of self-storage
facilities rather than an individual property. The remaining assets and
liabilities were relatively insignificant and were taken at book value from
financial statements provided by PSI.
To estimate the market value of the real estate, a present value analysis of
the NOI was calculated and a residual value was added, drawing upon the same
income analyses and overall valuation framework developed in the income
approach. Unlike the FAD calculation, the property net cash flow does not
account for entity level revenues and expenses. More specifically, the property
net cash flow is defined as net operating income, less capital expenditures and
general and administrative expenses attributed to the property.
The residual value was estimated by capitalizing the final years' NOI with a
market-based capitalization rate. Both the capitalization rate and discount
rate were based upon the previously-noted transactional data and surveys. The
concluded rates were consistent with findings in the marketplace for individual
and small portfolios of mini warehouse facilities of this quality, giving
credence to the benefits associated with portfolio diversification. Based on
this analysis, a residual capitalization rate of 10.25% and a discount rate of
12.0% were concluded. Applying the capitalization rate of the residual year's
NOI of $292.2 million results in a total residual value of $2.85 billion.
Discounting all annual cash flows and the residual value over the 15-year
analysis period resulted in a gross value for the real estate assets of $1.98
billion.
The implied equity from this analysis was developed by aggregating the total
assets and deducting the current and long term liabilities. The resulting total
equity was multiplied by PSI's estimated ownership percentage in the portfolio
to arrive at a value indication of $364 million based on the adjusted book value
approach.
Conclusion. The values indicated from the income approach, market approach
and the adjusted book value approach were correlated and reconciled to arrive at
a final value conclusion. Primary emphasis was given to the adjusted balance
sheet approach, the approach which was deemed to be most appropriate. The
resulting conclusion of the aggregate market value of PSI's real estate
investments was estimated to be $365 million as of December 31, 1994.
Assumptions, Limitations and Qualification of the Valuation. The Valuation
reflects Arthur Andersen's opinion of the aggregate market value of PSI's real
estate investments, as of December 31, 1994, in the context of information
available, and under market and economic conditions present, at that date.
Events occurring after December 31, 1994 and before the closing of the Merger
could affect the value of PSI's real estate investments.
Arthur Andersen's Valuation, prepared in conformity with the Uniform Standards
of Professional Appraisal Practice, is subject to certain assumptions and
limiting conditions. Reference is made to Arthur Andersen's letter report, set
forth in Appendix B to this Proxy Statement, for a complete listing of the
assumptions and limiting conditions.
As further detailed in Appendix B, the Valuation is premised on an all-cash
sale of the interests valued and no adjustment was considered for the use of SEI
Class B Common Stock in the proposed transaction. In addition, Arthur Andersen
did not conduct any soil analyses, geological studies or environmental
assessments. Arthur Andersen indicated that it has no knowledge of the
existence of hazardous materials on, or in, the subject property; however, it is
not qualified to detect such substances. The Valuation is predicated on the
assumption that
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there is no such material on, in, or near the properties that would cause a loss
in value to the overall interest appraised.
Compensation and Material Relations. For preparing the Valuation and related
services in connection with the Merger, Arthur Andersen is being paid a fee of
$550,000 and an additional $175,000 to value Wayne Hughes' direct investments in
certain partnerships and REITs and to value additional real estate investments
acquired by PSI in 1995. In addition, Arthur Andersen will be reimbursed for
certain out-of-pocket expenses, reasonably incurred, up to a maximum of $50,000
and will be indemnified against certain potential liabilities, including certain
potential liabilities under the federal securities laws. The fee was negotiated
with Arthur Andersen. Payment of the fee is not contingent upon completion of
the Merger. Arthur Andersen has performed various unrelated services for PSI,
SEI and related entities. These services include appraisal assignments
concerning 67 mini-warehouse properties, reviews of third-party appraisals of
two mini-warehouse properties, and a fairness opinion to PSI regarding the
transfer of cash flow interests in 12 mini-warehouse properties to SEI. In
addition, Arthur Andersen has performed various tax services including tax
return preparation for 18 publicly traded REITs, federal and state tax
consulting, property tax and other general consultation assistance.
FAIRNESS OPINION
The SEI Special Committee retained Robertson, Stephens to evaluate the
fairness to the Public Shareholders from a financial point of view of the
consideration to be paid in the Merger.
Robertson, Stephens delivered to the Special Committee its written opinion
dated August 27, 1995 to the effect that, as of such date and based on the
matters described therein, the consideration to be paid in the Merger was fair
to the Public Shareholders from a financial point of view. Robertson, Stephens
did not recommend to SEI that any specific consideration would constitute the
appropriate consideration to be paid in the Merger. Robertson, Stephens'
opinion to the Special Committee addresses only the fairness from a financial
point of view of the consideration to be paid in the Merger, and does not
constitute a recommendation to any shareholder as to how such shareholder should
vote at the Special Meeting. The complete text of the opinion dated August 27,
1995 is attached hereto as Appendix C and the summary of the opinion set forth
below is qualified in its entirety by reference to such opinion. Shareholders
of SEI are urged to read such opinion carefully and in its entirety for a
description of the procedures followed, the factors considered and the
assumptions made by Robertson, Stephens.
In connection with the preparation of its opinion dated August 27, 1995,
Robertson, Stephens, among other things: (i) reviewed financial information
relating to SEI and PSMI (assuming the Restructure) and the Real Estate
Interests furnished to it by the respective companies; (ii) reviewed certain
financial models provided by PSI and SEI management; (iii) reviewed the
Valuation prepared by Arthur Andersen; (iv) reviewed publicly available
information; (v) held discussions with management of SEI and PSI concerning the
businesses, operations and prospects of the respective companies, independently
and combined; (vi) reviewed the Merger Agreement and the preliminary proxy
statement as initially filed with the Commission; (vii) reviewed the advisory
agreements and management agreements between SEI and the Operating Companies;
(viii) reviewed the share price and trading history of SEI's Common Stock; (ix)
reviewed the contribution by each company to pro forma revenue, net operating
income, net income, cash from operations and FFO; (x) reviewed the valuations of
publicly traded companies which it deemed comparable to PSMI (after giving
effect to the Restructure) and SEI; (xi) compared the financial terms of the
Merger with other transactions which it deemed relevant; (xii) prepared
discounted cash flow analyses of SEI, PSMI and the Real Estate Interests; (xiii)
analyzed the combined FFO per Common Share of the combined company; and (xiv)
made such other studies and inquiries, and reviewed such other data, as it
deemed relevant. All references to PSMI in the following description of the
Fairness Opinion and Robertson Stephens' analysis refer to PSMI after giving
effect to the Restructure.
The following paragraphs summarize the significant quantitative analyses
performed by Robertson, Stephens in arriving at its opinion presented to the
Special Committee. The information presented below is based on the financial
condition of SEI and PSMI on December 31, 1994 and June 30, 1995, and share
price information through the close of the market on August 25, 1995.
In conducting its analysis, Robertson, Stephens utilized certain projected
operating and financial information (including, among other things, rental
income, total revenue, NOI and FFO) for PSMI, SEI and the
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pro forma combined entity. These projections were based on financial models (the
"Models") provided by management of SEI and PSI, which incorporated numerous
assumptions with respect to industry performance, general business and economic
conditions and other matters, many of which are beyond PSMI's and SEI's control.
With respect to industry performance, general business and economic conditions,
the assumptions reflected modest increases in inflation and economic activity.
In particular, the Models assumed that, in the absence of external growth,
rental income would increase by a range of from 2.0% to 4.5% per year, and
expenses would increase by a range of from 3% to 4.5% per year, from 1995
through 2005 for both SEI and PSMI, and that year-to-year revenue growth would
be approximately 4.5% per year for SEI and would range between 5.3% and 6.6% for
PSMI. The 4.5% annual growth rate in revenues and expenses was derived from
certain growth rates used by Arthur Andersen in preparing the Valuation. The 2%
revenue growth rate and 3% expense growth rate were based on an extrapolation of
trends in square foot rental rates and expense rates over the period from 1988
to 1994, and assumed no increases in occupancy rates. Arthur Andersen had
calculated that, during this historical period, for the properties in which PSI
had an interest throughout the period and that had been operating for a minimum
of three years (348 properties), rental rates had increased at a compound annual
rate of approximately 2%, occupancy rates had increased at a compound annual
rate of .75%, and expenses (excluding management fees) increased at a compound
annual rate of approximately 3%. Robertson, Stephens noted that the historical
rental and occupancy growth rates reflected over-capacity in the relevant
markets, which currently do not appear to exhibit the same level of over-
capacity. Robertson, Stephens did not quantify these trends in market capacity.
Relative Contribution Analysis. Robertson, Stephens compared the contribution
of SEI and PSMI to projected combined revenues, net operating income, net
income, cash from operations and FFO for 1995 and 1996, based on the Models and
assuming no external growth and 4.5% growth in revenues and expenses.
Robertson, Stephens noted that PSMI is projected to contribute approximately
26.2% of combined revenues, approximately 40.0% of combined net operating
income, approximately 28.2% of combined cash from operations, approximately
44.7% of combined net income and approximately 54.2% of combined FFO in 1995,
and, in 1996, approximately 24.3% of combined revenues, 37.2% of combined net
operating income, 42.3% of combined net income, 26.8% of combined cash from
operations, and 50.4% of combined FFO. Robertson, Stephens compared these
projected contribution percentages with the approximately 46.8% ownership
(including the Class B Common Stock) that the PSMI Shareholders would have in
the combined company. Robertson, Stephens considered this analysis relevant to
the fairness from a financial point of view of the consideration to be paid in
the Merger because, to the extent that the percentage ownership of the PSMI
Shareholders in the combined company exceeds the projected contribution by PSMI
to the combined operating results, the proportionate return to the SEI
Shareholders' return would adversely affect the fairness of the consideration to
be paid. Conversely, to the extent that the proportionate ownership of the PSMI
Shareholders following the Merger was lower than the anticipated contribution of
PSMI to the combined operating results, the transaction could be expected to
improve per share results of operations. This would generally support a
conclusion that the transaction is fair. Robertson, Stephens noted that it
considered the relative FFO contribution to be the most relevant of the
contribution statistics in part because of the equity markets' reliance upon
that measure in analyzing REIT performance, and further noted that an assumption
of external growth would increase the contribution of PSMI to pro forma FFO. As
a result, Robertson, Stephens considered the relative contribution analysis to
support its opinion.
Comparable Company Analysis. Robertson, Stephens compared certain financial
data and multiples of financial parameters accorded certain other publicly
traded REITs. Financial data compared included total capitalization, revenues,
operating income, FFO, historical FFO growth rate and projected FFO growth rate
based on analysts' estimates, in the case of the comparable companies, and based
on the Models, and assuming 4.5% revenue and expense growth and no external
growth, in the case of SEI and PSMI. Multiples compared included total
capitalization to net operating income and equity capitalization to FFO.
Companies compared to SEI and PSMI included Shurgard Storage Centers, Inc.,
Storage Trust, Sovran Self-Storage and Storage U.S.A., each of which is a self-
managed REIT. Robertson, Stephens compared the market value of each such
company, as determined by the closing price recorded for each company's common
stock on August 25, 1995, with each company's FFO. Robertson, Stephens'
calculations resulted in the following ranges of multiples for these companies,
SEI and PSMI: a range of equity capitalization to projected 1995 FFO of 10.1x
to 12.3x (with SEI at 10.6x and PSMI (based on the assumed valuation discussed
below of $614.5 million, exclusive of debt) at 8.0x); a range of equity
capitalization to projected 1996 FFO of 9.2x to 10.9x (with SEI at 8.7x and PSMI
(based on the assumed valuation of $614.5 million) at 7.5x); a range of total
capitalization to projected 1995 net operating income of 12.3x to 14.5x (with
SEI at 10.6x and PSMI (based on the assumed valuation of $614.5 million) at
8.2x)
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and a range of total capitalization to projected 1996 net operating income of
9.3x to 13.5x (with SEI at 7.3x and PSMI (based on the assumed valuation of
$614.5 million) at 7.9x). No specific portion of these multiples for the
comparable companies was allocated by Robertson, Stephens to their self-managed
status, and no adjustment to any multiples or values was made as a result of
their self-managed status in view of the fact that SEI would be self-managed
following the Merger. Robertson, Stephens recognized that a self-managed
structure would generally have a positive impact on these multiples and values.
The multiples for PSMI were calculated assuming an equity capitalization of
$614.5 million, which was based on a value of $17.625 per share of Common Stock
(the closing price on August 25, 1995), and $12.25 per share of Class B Common
Stock (reflecting a 30% discount for the reduced liquidity of the Class B Common
Stock and the fact that the holders of the Class B Common Stock would not be
entitled to receive dividends for a specified period).
Based on equity capitalization to projected 1995 FFO multiples averaging 11.0
for the comparable group of companies, SEI's implied equity value per share
would be $18.33 and PSMI's implied aggregate equity value per share would be
$848.9 million. Based on equity capitalization to projected 1996 FFO multiples
averaging 9.9x for the comparable group of companies, SEI's implied equity value
per share would be $20.05 and PSMI's implied aggregate equity value would be
$809.5 million.
None of the companies utilized in the above analysis for comparative purposes
is, of course, identical to SEI or PSMI. Accordingly, a complete analysis of
the results of the foregoing calculations cannot be limited to a quantitative
review of such results and involves complex considerations and judgments
concerning differences in financial and operating characteristics of the
comparable companies and other factors that could affect the value of the
comparable companies as well as that of SEI or PSMI. In addition, the multiples
of capitalization to estimated and projected revenues and FFO are based on
projections prepared, in the case of the comparable companies, by research
analysts using only publicly available information and, in the case of SEI and
PSMI, using the Models provided by management. Accordingly, such estimated
projections may or may not prove to be accurate.
Comparable Transaction Analysis. Robertson, Stephens also analyzed publicly
available financial information for 10 selected acquisition and merger
transactions between REITs. In examining these transactions, Robertson,
Stephens analyzed certain financial parameters of the acquired company relative
to the consideration offered. Mergers between REITs compared included the
acquisition of Commonwealth Equity Trust USA by California Real Estate
Investment Trust (which was not consummated), the acquisition of Wetterau
Properties Inc. by Supervalu Inc., the acquisition of MSA Realty Corp. by Simon
Property Group, the acquisition of Health Equity Properties, Inc. by Omega
Healthcare Investors, Inc., the acquisitions of Public Storage Properties VI,
Inc., Public Storage Properties VII, Inc., and Public Storage Properties VIII,
Inc. by SEI, the acquisition of Holly Residential Properties by Wellsford
Residential Property Trust, the acquisition of Forsyth Properties, Inc. by
Highwoods Properties, Inc., the acquisition of McArthur Glen Realty by Horizon
Outlet Centers and the acquisition of America First REIT by Mid-American
Apartment REIT. For each, Robertson, Stephens analyzed the multiple of
consideration offered to latest reported twelve months ("LTM") FFO. Based on
consideration offered to LTM FFO multiples in these transactions averaging 18.2,
PSMI's implied aggregate equity value would be $1.397 billion. Robertson,
Stephens also reviewed certain recent acquisitions by REITs of advisory
companies. These included the acquisition by Bradley Real Estate Trust of RM
Bradley & Co., Inc., the acquisition by CRIIMI MAE of the mortgage subdivision
of C.R.I. Inc., the acquisition by Shurgard Storage Centers of Shurgard Inc.,
and the acquisition by Health Care REIT of First Toledo Advisory Company.
Discounted Cash Flow Analysis. Robertson, Stephens also performed discounted
cash flow analyses (i.e., an analysis of the present value of the projected cash
flows for the periods and at the discount rates indicated) for both SEI and PSMI
based upon projections of SEI's and PSMI's respective cash flow from operations
for the years 1995 through 2005, inclusive, using discount rates ranging from
11% to 13% and alternative capitalization rates ranging from 9% to 11% and
terminal value multiples applied to 2005, estimated FFO and net operating income
ranging from 9x to 13x. The cash flow projections were derived from two
alternative versions of the Model, each of which assumed no external growth (one
assuming a 4.5% average annual growth rate in revenues and expenses and one
assuming 2% annual growth in revenues and 3% annual growth in expenses). These
calculations indicated, at an assumed 2% revenue and 3% expense growth rate, an
implied aggregate equity value ranging from $728.2 million to $987.0 million for
SEI and ranging from $462.3 million to $606.3 million for PSMI and at an assumed
4.5% revenue and expense growth rate indicated an implied equity value for SEI
ranging from $943.5 million to $1.298 billion and for PSMI ranging from $609.4
million to $805.1 million. The range of equity values
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for PSMI was compared to an assumed aggregate value of the Common Stock and
Class B Common Stock to be issued in the Merger of approximately $614.5 million.
This assumed aggregate value was based on a value of $17.625 per share of Common
Stock (the closing price on August 25, 1995) and $12.25 per share of Class B
Common Stock (the assumed value of the Common Stock on August 25, 1995,
discounted by 30% to reflect the reduced liquidity of the Class B Common Stock
and the fact that the holders of the Class B Common Stock would not be entitled
to receive dividends for a specified period).
Component Discounted Cash Flow Analysis. Robertson, Stephens also performed a
discounted cash flow analysis of the Real Estate Interests, PSMI, PSCP, the
Adviser and the Lock/Box Company, individually, based upon projections derived
from four alternative versions of the Models, two of which assumed no external
growth (one assuming a 4.5% average annual growth rate in revenues and expenses
and one assuming 2% annual growth in revenues and 3% annual growth in expenses),
and two of which assumed certain growth through acquisitions (one assuming a
4.5% average annual growth rate in revenues and expenses and one assuming 2%
annual growth in revenues and 3% annual growth in expenses). Based upon
projections of the cash provided by operations (or, in the case of the Real
Estate Interests, cash distributions) for each of the years 1995 through 2005,
inclusive, using alternative discount rates ranging from 11% to 13% and
alternative capitalization rates ranging from 9% to 11% and terminal value
multiples applied to 2005 FFO ranging from 9x to 13x, the sum of the valuations
for each produced by this analysis indicated, with an assumption of no external
growth, an implied aggregate value of PSMI (including assumed debt) ranging from
$530.3 million to $873.1 million, and an implied aggregate equity value of PSMI
ranging from $462.3 million to $805.1 million, and with an assumption of
external growth, an implied aggregate value (including assumed debt) of PSMI
ranging from $683.9 million to $1.079 billion and an implied aggregate equity
value of PSMI ranging from $615.9 million to $1.031 billion. The PSMI range of
valuations included a range of valuations for the Real Estate Interests of from
$225.2 million to $377.6 million. The range of valuations for PSMI was compared
to an assumed aggregate value of the Common Stock and Class B Stock to be issued
in the Merger of approximately $614.5 million, calculated as described above
under "- Discounted Cash Flow Analysis."
Pro Forma Merger Analysis. Robertson, Stephens compared the anticipated FFO
per share (i) for SEI without giving effect to the Merger and assuming no
external growth, (ii) for SEI without giving effect to the Merger and assuming
external growth, (iii) for SEI and PSMI on a pro forma basis after giving effect
to the Merger and assuming no external growth and (iv) for SEI and PSMI on a pro
forma basis after giving effect to the Merger and assuming external growth.
Each scenario was based on two alternative versions of the Model, one assuming
4.5% revenue and expense growth and one assuming 2% revenue growth and 3%
expense growth. Robertson, Stephens observed that, under all of these
scenarios, the transaction could be expected to be accretive to FFO per share in
each year for 1995 through 1999.
The preparation of fairness opinions involves various determinations as to the
most appropriate and relevant quantitative and qualitative methods of financial
analyses and the application of those methods to the particular circumstances
and, therefore, such opinions are not readily susceptible to summary
description. Accordingly, Robertson, Stephens believes its analyses must be
considered as a whole, and that considering any portion of such analyses or any
portion of the factors considered, without considering all analyses and current
factors, could create a misleading or incomplete view of the process underlying
its opinions. In its analyses, Robertson, Stephens made numerous assumptions
with respect to industry performance, general business and other conditions and
matters, many of which are beyond the control of SEI and PSMI. Any estimates
contained in these analyses are not necessarily indicative of actual values or
predictive of future results of values, which may be significantly more or less
favorable than as set forth therein. In addition, analyses relating to the
value of businesses do not purport to be appraisals or to reflect the prices at
which businesses actually may be sold.
In arriving at its opinion, Robertson, Stephens did not independently verify
any of the foregoing information and relied on all such information being
complete and accurate in all material respects. Furthermore, Robertson,
Stephens did not obtain any independent appraisal of the properties or assets of
SEI or PSMI. While Robertson Stephens reviewed the Valuation by Arthur
Andersen, it did not rely on the Valuation in arriving at its opinion. In
addition, Robertson, Stephens has assumed (i) the Merger will be treated for
federal income tax purposes as a reorganization within the meaning of Section
368(a) of the Code and (ii) SEI will continue to qualify as a REIT under Section
856 through 860 of the Code following the Merger. With respect to the financial
Models of SEI and PSMI which Robertson, Stephens reviewed, Robertson, Stephens
assumed that they were reasonably
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prepared in good faith and incorporated assumptions that the management of SEI
and PSI considered reasonable and relied on such Models and assumptions in
analyzing their respective future financial performance. Robertson, Stephens
noted, among other things, that its opinion is necessarily based upon market,
economic and other conditions existing as of the date of the opinion, and
information available to Robertson, Stephens as of the date thereof.
The Special Committee engaged Robertson, Stephens at its March 22, 1995
meeting by means of an engagement letter dated March 23, 1995 (the "Engagement
Letter"). Such letter provides that for its services, Robertson, Stephens was
paid a fee of $600,000 by SEI, $300,000 of which was paid upon execution of the
Engagement Letter and the remainder of which was paid at the time Robertson,
Stephens delivered its opinion. SEI also agreed to reimburse Robertson,
Stephens for certain expenses and to indemnify Robertson, Stephens against
certain losses in connection with the performance of its services. The
Engagement Letter included a consent to disclosure of the Fairness Opinion and
the analyses of Robertson, Stephens in this Proxy Statement.
Robertson, Stephens is a nationally recognized investment banking firm. As
part of its investment banking business, Robertson, Stephens is frequently
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, secondary distributions of
securities, private placements and other purposes.
VALUATION OF CLASS B COMMON STOCK
The Special Committee and PSI engaged Houlihan Lokey Howard & Zukin, Inc.
("Houlihan Lokey") to value the Class B Common Stock. In analyzing the Class B
Common Stock, Houlihan Lokey considered the market price of the Common Stock and
adjusted the price of the Common Stock to reflect the relative economic
differences between the Common Stock and the Class B Common Stock.
In its review of the price of the Common Stock, Houlihan Lokey analyzed the
current price and evaluated that price in relation to the value derived from the
Models and on the values of other publicly traded REITs. See "- Fairness
Opinion" for a description of the assumptions used in the Models.
In conducting its analysis, Houlihan Lokey considered the projected operating
and financial information for SEI and the pro forma combined entity as provided
by management. Houlihan Lokey used the Models to analyze the equity value of
SEI based on the present value of future cash flows.
Houlihan Lokey also compared SEI's financial data and stock price multiple of
financial parameters to 12 publicly traded REITs not related to PSI (BRE
Properties Inc., United Dominion Realty Trust, Inc., Southwestern Properties
Trust, Wellsford Residential Properties, Property Trust of America, MGI
Properties, Berkshire Realty Company, Inc., Merry Land and Investment Co., Inc.,
Eastgroup Properties, Copley Properties Inc., Shurgard Storage Centers, Inc. and
Storage USA, Inc.) and to 11 publicly traded REITs related to PSI (Public
Storage Properties IX, Inc. Public Storage Properties X, Inc., Public Storage
Properties XI, Inc., Public Storage Properties XII, Inc., Public Storage
Properties XIV, Inc., Public Storage Properties XV, Inc., Public Storage
Properties XVI, Inc., Public Storage Properties XVII, Inc., Public Storage
Properties XVIII, Inc., Public Storage Properties XIX, Inc., and Public Storage
Properties XX, Inc.). Multiples compared included equity capitalization to FFO,
equity capitalization to dividends, equity capitalization to earnings and equity
capitalization to cash flow.
The Class B Common Stock has certain terms that reduce its value in relation
to the Common Stock. The Class B Common Stock will (i) not participate in
distributions until the later to occur of FFO per Common Share aggregating $1.80
during any period of four consecutive calendar quarters or four years after the
Closing; thereafter, the Class B Common Stock will participate in distributions
(other than liquidating distributions) at the rate of 97% of the per share
distributions on the Common Stock, provided that cumulative distributions of at
least $.22 per quarter per share have been paid on the Common Stock, (ii) not
participate in liquidating distributions, (iii) not be entitled to vote (except
as expressly required by California law), (iv) only convert into Common Stock
upon the later to occur of FFO per Common Share aggregating $3.00 during any
period of four consecutive calendar quarters or seven years after the Closing
and (v) not be publicly tradeable and will be placed in escrow for a period of
time.
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Houlihan Lokey analyzed the Models and performed various sensitivity analyses
to ascertain, among other things, the timing, magnitude and likelihood of the
Class B Common Stock receiving dividends and measured the dividend
"differential" between the two classes of common stock. Houlihan Lokey
determined that the dividend "differential" was in the range of approximately
$4.00 to $4.90 per share. The other restrictions described above represented a
further discount of approximately 10% from the price of the Common Stock, based
on (i) studies of equity securities which have marketability restrictions, (ii)
studies of equity securities in companies with both voting and nonvoting common
stock and (iii) Houlihan Lokey's experience in valuing securities with various
restrictions.
Based upon its analysis, it is the opinion of Houlihan, Lokey that, as of June
29, 1995, the day prior to the date the Merger Agreement was executed, the fair
market value of the Class B Common Stock was $10.50 per share based on the
average closing price of the Common Stock for the 30 consecutive trading days
ending on June 29, 1995 of $16.09 per share.
Houlihan Lokey's opinion is based on business, economic, market and other
conditions as they exist and could be evaluated as of the date of its opinion,
July 20, 1995.
As compensation for its services, Houlihan Lokey is being paid a fee of
$50,000. Payment of the fee of Houlihan Lokey is not dependent upon completion
of the Merger. Houlihan Lokey has rendered consulting services to SEI and PSI
and its affiliates and may be engaged in the future.
APPRAISALS OF WHOLLY-OWNED PROPERTIES
PSI engaged Charles R. Wilson & Associates, Inc. ("Wilson"), an MAI appraiser,
to prepare limited appraisals on the seven wholly owned properties being
acquired by SEI in the Merger (the "Properties"). In appraisals dated between
January 1995 and May 1995, Wilson indicated that, based on the assumptions
contained in the appraisals, the aggregate market value of the Properties (net
of mortgage debt), as of dates between January 1995 and April 1995, was $19.9
million. The valuation utilized the sales comparison approach based on 1994
sales of mini-warehouses throughout the United States and an income approach.
The greater consideration was given to the income capitalization approach, with
secondary weight being given to the sales comparison approach.
The income approach utilized both direct capitalization and discounted cash
flow analyses. Income and expense growth rates were based on projection
parameters currently being used by property investors as well as upon local,
regional and historical trends. Growth rates for income and expenses generally
ranged from 2.0% to 3.5% depending upon property and local market conditions.
Wilson used a terminal capitalization rate ranging from 10.5% to 10.75% to
capitalize each property's 11th year net income into a residual value at the end
of the holding period, assuming normal costs of disposing of the Properties.
The 10-year cash flows were then discounted to present value using discount
rates ranging from 11.5% to 13.25%, again depending upon local market and
property conditions.
Based on the valuation methodology described above, Wilson assigned a market
value of $19.9 million (net of mortgage debt) to the Properties. The resulting
effective applied capitalization rate averaged approximately 10.4% for the
Properties based on reported property operations during the 12 months ended
December 31, 1994.
In preparing the appraisals, Wilson did not conduct any soil analyses,
geological studies or environmental assessments.
Wilson is being paid a fee of $17,500 for preparation of the appraisals.
Payment is not dependent upon completion of the Merger. As one of the nation's
leading appraisers of mini-warehouses, since 1976, Wilson has continuously
prepared appraisals for SEI and PSI and its affiliates, and is expected to
continue to prepare appraisals for them.
SEI Shareholders should recognize that appraisals are opinions as of the date
specified, are subject to certain assumptions and that the appraised value of
the Properties may not represent their true worth or realizable value. There
can be no assurance that if the Properties were sold, they would be sold at the
appraised values.
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Hughes Family Relationships with PSI and SEI. The Hughes Family controls PSI
through ownership of PSI, and Wayne Hughes is SEI's chief executive officer and
chairman of the Board of Directors. PSI and its affiliates (including the
Hughes Family) own approximately 23% of the Common Stock and have informed SEI
that they intend to vote all of their shares for the Proposals.
Advisory Contract. Since SEI's organization, the Adviser, a subsidiary of
PSI, has administered the day-to-day investment operations of SEI and has
advised and consulted with the Board of Directors in connection with the
acquisition and disposition of investments. The Board of Directors has the duty
of overall supervision of SEI's operations.
Effective September 30, 1991, SEI entered into an Amended and Restated
Advisory Contract (the "Advisory Contract") with the Adviser which was approved
by the unanimous vote of the directors who were not affiliated with the Adviser.
This 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 a reduction for
SEI's share of capital improvements) per share of Common Stock multiplied by the
number of shares of Common Stock outstanding at September 30, 1991 (14,989,454
shares) and (ii) 6% of adjusted income per share multiplied by the number of
shares of Common Stock in excess of 14,989,454 shares. Effective May 14, 1992,
the Advisory Contract was amended to provide that, in computing the advisory
fee, adjusted income will be reduced by dividends paid on all preferred stock
and that the Adviser will also receive an amount equal to 6% of any such
dividends. In addition to the advisory fee, under the Advisory Contract the
Adviser is paid a disposition fee of 20% of the total realized gain (as defined)
from the sale of SEI's assets, subject to certain limitations. During 1994 and
the six months ended June 30, 1995, SEI paid the Adviser $4,983,000 and
$3,426,000 respectively, under the Advisory Contract.
The Advisory Contract may be terminated (i) at any time by either party upon
60 days' written notice, with or without cause, or (ii) by SEI upon written
notice upon the occurrence of certain events. The Advisory Contract may be
renewed annually with the approval of the independent directors of SEI and, in
certain circumstances, can be assigned by either SEI or the Adviser. Upon (i)
termination of the Advisory Contract, other than under certain circumstances, or
(ii) expiration of the Advisory Contract due to SEI's refusal to agree to an
extension of the Advisory Contract on the same terms, the Adviser will be
entitled to receive payments as follows: (a) an amount equal to the accrued and
unpaid portion of the disposition fee, less 20% of any total unrealized loss (as
defined) as of the date of termination; (b) an amount equal to 20% of the total
unrealized gain (as defined); and (c) an amount equal to 15% of adjusted income
from October 1, 1991 to the date of termination minus the advisory fee paid from
October 1, 1991 to the date of termination.
Management Agreement. Since SEI's organization, PSMI, which was organized in
1973, has provided property management services to SEI under a Management
Agreement between SEI and PSMI dated as of November 18, 1980 (as amended, the
"Management Agreement," which term includes the assignment relating to such
agreement referenced in the following sentence). In 1987, PSMI assigned its
rights to manage commercial properties to PSCP, which was organized in 1987.
PSMI continues to manage mini-warehouses under the Management Agreement.
Pursuant to the Management Agreement, PSMI or PSCP manage substantially all of
the assets in which SEI has invested.
Under the supervision of SEI, PSMI and PSCP coordinate rental policies, rent
collections, marketing activity, 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 SEI in establishing
policies for the hire, discharge and supervision of employees for the operation
of SEI's facilities, including resident managers, assistant managers, relief
managers, and billing and maintenance personnel. Some or all of these employees
may be employed on a part-time basis and may also be employed by PSI,
partnerships organized by PSI or other persons or entities owning facilities
managed by PSMI or PSCP.
For as long as the Management Agreement is in effect, PSMI has granted SEI a
non-exclusive license to use two PSI service marks and related designs,
including the "Public Storage" name, in conjunction with rental and operation of
facilities managed pursuant to the Management Agreement. Upon termination of
the Management Agreement, SEI would no longer have the right to use the service
marks and related designs except as described
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below. Management believes that the loss of the right to use the service marks
and related designs could have a material adverse effect on SEI's business.
The Management Agreement as amended in February 1995 (approved by the Board of
Directors in August 1994) provides that (i) as to facilities directly owned by
SEI, the Management Agreement will expire in February 2002, provided that in
February of each year it is automatically extended for one year unless either
party notifies the other that the Management Agreement is not being extended, in
which case it expires, as to such facilities, on the first anniversary of its
then scheduled expiration date; and (ii) as to facilities in which SEI has an
interest, but not directly owned by SEI, the Management Agreement may be
terminated as to such facilities, upon 60 days' written notice by SEI and upon
seven years' notice by PSMI or PSCP, as the case may be. The Management
Agreement may also be terminated at any time by either party for cause, but if
terminated for cause by SEI, SEI retains the right to use the service marks and
related designs until the then scheduled expiration date, if applicable, or
otherwise a date seven years after such termination.
Under the Management Agreements, PSMI and PSCP are paid 6% and 5%,
respectively, of gross revenues of the properties managed by them. During 1994
and the six months ended June 30, 1995, SEI paid PSMI and PSCP collectively
$8,355,000 and $5,205,000, respectively, under the Management Agreement.
Common Executive Officers and Directors. SEI's executive officers and certain
directors are also executive officers of PSI. The following table lists each
current executive officer and director of SEI and his respective current
position with SEI and PSI:
<TABLE>
<CAPTION>
Position with Position with
Name SEI PSI
- ----------------------- ----------------------- ----------------------
<S> <C> <C>
B. Wayne Hughes Chairman of the Board President, Chief
and Chief Executive Executive Officer and
Officer Director
Harvey Lenkin President and Director Vice President and
Director
Ronald L. Havner, Jr. Vice President and Same
Chief Financial
Officer
Obren B. Gerich Vice President Vice President and
Director
Hugh W. Horne Vice President Vice President and
Director
Robert J. Abernethy Director --
Dann V. Angeloff Director --
William C. Baker Director --
Uri P. Harkham Director --
Berry Holmes Director --
Michael M. Sachs Director --
</TABLE>
Compensation to Executive Officers. Following the Merger, SEI will pay annual
compensation of its executive officers as follows: chief executive officer --
Wayne Hughes ($60,000); president -- Harvey Lenkin ($225,000); senior vice-
president and chief financial officer -- Ronald L. Havner, Jr. ($185,000);
senior vice president -- Hugh W. Horne ($150,000); senior vice-president --
Marvin M. Lotz ($199,000); senior vice president -- Mary Jayne Howard
($165,000); and senior vice-president and general counsel -- David Goldberg
($100,000). In addition to these minimum annual salaries, the executive
officers receive discretionary bonuses and discretionary awards under SEI's
stock option plan. Prior to the Merger, these salaries and bonuses were paid by
the Operating Companies.
Issuance of Common Stock to Executive Officers. In the Merger, SEI will issue
shares of Common Stock to PSMI Shareholders who are or will become executive
officers of SEI as follows: Ronald L. Havner, Jr., senior vice president and
chief financial officer (40,000 shares) and David Goldberg, senior vice
president and general counsel (40,000 shares).
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ACCOUNTING TREATMENT
The Merger will be accounted for using the purchase method under GAAP for
accounting and financial reporting purposes.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The Merger is intended to qualify as a reorganization under Section 368(a) of
the Code, in which case no gain or loss generally will be recognized by the SEI
Shareholders (except with respect to cash received by an SEI Shareholder
perfecting Dissenters' Rights) or SEI on the deemed acquisition of the assets of
PSMI in exchange for shares of SEI capital stock in connection with the Merger
(assuming the tax basis of PSMI's assets exceeds the liabilities assumed in the
Merger). In connection with the Merger, Hogan & Hartson, counsel to SEI, will
deliver an opinion that for federal income tax purposes under current law, the
Merger will be treated as a reorganization within the meaning of Section 368(a)
of the Code. Such opinion will be based upon certain assumptions as well as
representations received from SEI, PSMI, and the PSMI Shareholders. No rulings
have been requested from the Internal Revenue Service with respect to the
federal income tax treatment of the Merger. In addition, the Merger may impact
on SEI's ability to continue to qualify as a REIT, whether or not the Merger
qualifies as a reorganization under the Code. See "Federal Income Tax
Considerations -- Tax Treatment of the Merger" for a discussion of the material
federal income tax considerations to SEI and SEI's Shareholders resulting from
the Merger and see "Federal Income Tax Considerations--Consequences of the
Merger on SEI's Qualification as a REIT" for a discussion of the Merger and its
potential impact on SEI's ability to qualify as a REIT.
REGULATORY MATTERS
Certain aspects of the Merger are subject to the expiration or termination of
the applicable waiting period under the HSR Act and may require notifications
to, and filings with, certain securities and other authorities in certain
states, including jurisdictions where SEI and PSI currently operate.
Under the HSR Act and the rules promulgated thereunder by the Federal Trade
Commission (the "FTC"), the Merger may not be consummated until notifications
have been given and certain information has been furnished to the FTC and the
Antitrust Division of the Department of Justice (the "Antitrust Division") and
the applicable waiting period has expired or been terminated. SEI and Wayne
Hughes filed notification and report forms under the HSR Act with the FTC and
the Antitrust Division on September 15, 1995. Unless it is extended, the
waiting period for these filings will terminate on October 15, 1995. At any
time before or after consummation of the Merger, the FTC or the Antitrust
Division could take such action under the antitrust laws as it deems necessary
or desirable in the public interest, including seeking to enjoin the Merger. At
any time before or after the Effective Time, and notwithstanding that the
waiting period under the HSR Act has expired, any state could take such action
under the antitrust laws as it deems necessary or desirable in the public
interest. Such action could include seeking to enjoin the Merger. Private
parties may also seek to take legal action under the antitrust laws under
certain circumstances.
Based on information available to them, SEI and PSI believe that the Merger
can be effected in compliance with applicable federal and state antitrust laws.
However, there can be no assurance that a challenge to consummation of the
Merger on antitrust grounds will not be made or that, if such a challenge were
made, SEI and PSMI would prevail or would not be required to accept certain
conditions in order to consummate the Merger.
EXPENSES AND FEES
SEI will pay the fee of Robertson, Stephens and the fee of counsel to the
Special Committee. The other expenses of the transaction, including the fees
and expenses of attorneys, accountants, or other intermediaries or persons
engaged by SEI and PSI, incurred in connection with the Merger Agreement and the
compensation of Arthur Andersen will be paid equally by SEI and PSI. If one or
more of PSI, PSMI, their officers, directors or affiliates (the "Litigation
Parties") are involuntarily made party to any suit, action or proceeding
commenced by any governmental body or by any SEI Shareholder or other person
seeking to restrain, restrict or impede the consummation of the Merger or
seeking damages or other relief in connection therewith, SEI will, under certain
circumstances, defend, indemnify and hold all such Litigation Parties harmless
from all costs, expenses, losses and
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liabilities incurred in connection with any such suit, action or proceeding,
including, without limitation, advancement of all legal and other costs
associated with the defense thereof and all liabilities incurred by way of
settlement or final judgment or decree. In the event the Merger Agreement is
terminated or for any reason the Merger is abandoned, the PSMI Shareholders will
be obligated to reimburse SEI for any such payments made to, or on behalf of,
the Litigation Parties.
RIGHTS OF DISSENTING SHAREHOLDERS
Pursuant to Chapter 13 of the California General Corporation Law ("Chapter
13"), a holder of shares of Common Stock may, in some instances, be entitled to
require SEI to purchase his or her shares for cash at their fair market value as
of the day before the first announcement of the terms of the Merger, excluding
any appreciation or depreciation in consequence of the Merger ("Dissenter's
Rights"). The general terms of the Merger were first announced on June 30,
1995. The following is a brief summary of the procedures to be followed by a
SEI Shareholder in order to perfect his or her right, if any, to payments under
Chapter 13 and is qualified in its entirety by reference to the text of Chapter
13 attached to this Proxy Statement as Appendix D, to which reference is hereby
made for a definitive statement of the rights of dissenting shareholders (the
"Dissenting Shareholders") and the procedures to be followed. Any reference to
"Dissenting Shareholder" herein means the recordholder of Dissenting Shares and
includes a transferee of record.
Shares of Common Stock will qualify as Dissenting Shares only if demands for
payment are filed with respect to 5% or more of the outstanding shares of Common
Stock. This 5% requirement is applicable because the Common Stock is listed on
the NYSE, a national securities exchange certified by the California
Commissioner of Corporations, as provided in Section 1300(b)(1) of Chapter 13.
The obligation of PSMI to effect the Merger is subject to the condition, which
may be waived by PSMI, that holders of less than 5% of SEI's Common Stock
exercise their Dissenter's Rights. (The exercise of Dissenters' Rights with
respect to a significant number of SEI shares may make it difficult for SEI to
continue to satisfy the stock ownership requirements for qualification as a
REIT.)
A Dissenting Shareholder who wishes to require SEI to purchase his or her
shares of Common Stock must:
(1) vote against the Merger any or all of the shares of Common Stock
entitled to be voted (shares of Common Stock not voted are not considered to
be voted against the Merger for purposes of this requirement and will not be
counted toward the 5% minimum for Dissenters' Rights to exist); provided that
if a SEI Shareholder votes part of the shares entitled to be voted in favor of
the Merger, and fails to specify the number of shares voted, it is
conclusively presumed under California law that such shareholder's approving
vote is with respect to all shares entitled to be voted;
(2) make written demand upon SEI or its transfer agent at the addresses
listed below, which is received not later than the date of the meeting of SEI
Shareholders, setting forth the number of shares of Common Stock demanded to
be purchased by SEI and a statement as to claimed fair market value of such
shares at June 29, 1995; and
(3) submit for endorsement, within 30 days after the date on which the
notice of approval of the Merger by SEI Shareholders described below is mailed
to such shareholders, to SEI or its transfer agent at the addresses listed
below the certificates representing any shares in regard to which demand for
purchase is being made, or to be exchanged for certificates of appropriate
denominations so endorsed, with a statement that the shares are Dissenting
Shares.
The statement of fair market value in clause (2) above will constitute an
offer by the Dissenting Shareholder to sell his or her shares at a price equal
to such fair market value. Neither a vote against approval of the Merger nor
the giving of a proxy directing a negative vote will be sufficient to constitute
the demand described in clause (2) above. A proxy which fails to include
instructions with respect to approval of the Merger will be voted in favor of
the Merger. Accordingly, shares covered by such a proxy will not be Dissenting
Shares. In addition, a vote in favor of the Merger, or a failure to vote at
all, will nullify any previously filed written demand for payment.
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If the holders of 5% or more of the outstanding shares of Common Stock have
made demands for payment on or prior to the date of the Special Meeting and have
voted against the Merger at the Special Meeting, within 10 days after the date
of the approval of the Merger, SEI will mail to each Dissenting Shareholder who
holds Common Stock a notice of such approval together with a statement of the
price determined by SEI to represent the fair market value of Dissenting Shares,
a copy of certain sections of Chapter 13, and a brief description of the
procedure to be followed if the shareholder desires to exercise Dissenter's
Rights. The statement of price will constitute an offer by SEI to purchase at
the price stated therein any Dissenting Shares.
If SEI and the Dissenting Shareholder agree that any shares of Common Stock
are Dissenting Shares and agree upon the price of the shares, the Dissenting
Shareholder will be entitled to the agreed price plus interest thereon at the
legal rate on judgments from the date of such agreement. Subject to the
provisions of the California General Corporation Law, payment of the fair market
value of the Dissenting Shares will be made within 30 days after such agreement
or within 30 days after any statutory or contractual conditions to the Merger
are satisfied, whichever is later. If SEI denies that the shares are Dissenting
Shares or if SEI and the Dissenting Shareholder fail to agree upon the fair
market value of the shares, then the Dissenting Shareholder, within six months
after the date on which notice of approval of the Merger by the Shareholders of
SEI is mailed to such shareholder, and not thereafter, may file a complaint in
the Superior Court of Los Angeles County, California, requiring the court to
determine whether the shares are Dissenting Shares, or the fair market value of
the Dissenting Shares, or both, or may intervene in any pending action for the
appraisal of any shares of Common Stock. The court will direct payment of the
appraised value of the shares, together with interest thereon at the legal rate
on judgments from the date on which the judgment was entered, by SEI to the
shareholder upon the surrender of the certificates representing such shares to
SEI. The costs of the proceeding shall be apportioned as the court considers
equitable, but if the appraisal exceeds the price offered by SEI, SEI shall pay
the costs, and if the appraisal is more than 125% of the price offered by SEI,
SEI may be required to pay attorneys' and other fees and interest at the legal
rate on judgments from the date the shareholder complied with Sections 1300-1302
of Chapter 13.
A Dissenting Shareholder may not withdraw demand for purchase of Dissenting
Shares without SEI's consent. Written demands for payment and submissions for
endorsement with respect to Common Stock must be addressed to Storage Equities,
Inc., 600 North Brand Boulevard, Suite 300, Glendale, California 91203-1241,
attention: Investor Services Department or to SEI's transfer agent, The First
National Bank of Boston, Shareholder Services Division, P.O. Box 1439, Boston,
Massachusetts 02105-1439.
A SEI Shareholder receiving cash upon the exercise of Dissenter's Rights may
recognize gain or loss for income tax purposes. See "Federal Income Tax
Considerations."
The provisions of Chapter 13 are technical in nature and complex. SEI
Shareholders desiring to exercise Dissenter's Rights and to obtain appraisal of
the fair value of their shares should consult counsel, since the failure to
comply strictly with the provisions of Chapter 13 may result in a waiver or
forfeiture of their Dissenter's Rights.
SEI Shareholders are entitled, upon written demand, to inspect and copy the
record of SEI Shareholders at any time during usual business hours to
communicate with other SEI Shareholders with respect to the Merger.
PROPOSAL TWO - AMENDMENT TO SEI ARTICLES OF INCORPORATION - RECAPITALIZATION
In connection with the Merger, SEI is proposing two amendments to the SEI
Articles of Incorporation. The Merger is conditioned on approval of the
Amendments, and adoption of the Amendments is conditioned on approval of the
Merger. The approval of the Amendments requires the affirmative vote of the
holders of a majority of the shares of Common Stock entitled to vote. If the
Amendments and the Merger are approved by the SEI Shareholders, the Amendments
will become effective by the Closing Date.
The SEI Articles of Incorporation currently provide that SEI is authorized to
issue only two classes of shares designated respectively "Preferred Stock"
(50,000,000 shares) and "Common Stock" (60,000,000 shares). The Board of
Directors has unanimously approved and recommends the adoption by the SEI
Shareholders of the following amendment to the SEI Articles of Incorporation,
which will, on the Closing Date, (a) increase the number of shares of Common
Stock from 60,000,000 to 200,000,000, a portion of which will be issued in the
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Merger and (b) authorize 7,000,000 shares of Class B Common Stock, all of which
will be issued in the Merger. The Recapitalization is necessary to consummate
the Merger. The summary set forth below does not purport to be a complete
description of the amendment. SEI Shareholders should review the entire text of
the proposed amendment relating to the Recapitalization which is attached as
Appendix E-1.
Common Stock. Holders of Common Stock will continue to be entitled to receive
distributions on the Common Stock when, as and if declared by the Board of
Directors, out of funds legally available therefor. Payment and declaration of
distributions on the Common Stock and repurchases of the Common Stock by SEI
will be subject to certain restrictions if SEI fails to pay dividends on
outstanding preferred stock. Upon any liquidation, dissolution or winding up of
SEI and after payment or provision for payment of the debts and other
liabilities of SEI and the preferential amounts owing with respect to any
outstanding preferred stock, holders of the Common Stock will be entitled to
receive the remaining liquidation proceeds. Holders of the Common Stock will
continue to have no preemptive rights, which means they will have no right to
acquire any additional shares of Common Stock that may be issued by SEI at a
subsequent date.
Each outstanding share of Common Stock will entitle the holder to one vote on
all matters presented to shareholders for a vote, with the exception that
shareholders will have cumulative voting rights with respect to the election of
the Board of Directors, in accordance with California law. Cumulative voting
entitles each SEI Shareholder to cast as many votes as there are directors to be
elected multiplied by the number of shares registered in his or her name. A SEI
Shareholder may cumulate the votes for directors by casting all of the votes for
one candidate or by distributing the votes among as many candidates as the SEI
Shareholder chooses. All outstanding shares of Common Stock are, and the Common
Stock issued in the Merger will be, fully paid and non-assessable. The Board of
Directors may prohibit the transfer, or effect redemptions of, the Common Stock
to aid SEI in maintaining its qualification as a REIT. In addition, the SEI
Articles of Incorporation are proposed to be amended in connection with the
Merger to impose certain specific limitations on the acquisition, transfer,
and/or ownership of SEI's capital stock to assist in preserving SEI's REIT
status. See "Proposal Three - Amendment to SEI Articles of Incorporation --
Ownership Limitation."
The proposed increase in the number of shares of Common Stock from 60,000,000
to 200,000,000 exceeds the increase necessary to complete the Merger. Of the
60,000,000 presently authorized shares, 42,064,283 are outstanding as of the
----------
Record Date, 3,872,054 shares are reserved for issuance upon conversion of
outstanding convertible securities and 1,500,667 shares are reserved for
issuance under SEI's stock option plans (including 678,667 shares currently
subject to options). A total of 37,000,000 additional shares would be necessary
to complete the Merger (including 7,000,000 shares reserved for issuance upon
conversion of the Class B Common Stock), assuming no post-Closing adjustment.
The balance of the available shares (approximately 115,600,000 shares,
assuming no post-Closing adjustment) would be available for underwritten
offerings, mergers (with affiliated and unaffiliated parties), acquisitions
(including pursuant to an option agreement with Wayne Hughes) and other
corporate purposes. SEI currently has no agreements for the issuance of
additional shares of Common Stock (other than in the Merger). Nevertheless, SEI
is likely to pursue a variety of transactions that may involve such an issuance
and expects that such transactions may occur from time to time during the next
year. Since September 1994, SEI has merged with three affiliated REITs that own
mini-warehouses and business parks developed by PSI and has also issued
convertible preferred stock in connection with the acquisition of property
interests, and it is expected that SEI will issue securities in other similar
transactions. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - SEI Historical - Liquidity and Capital Resources"
and "Public Storage Management, Inc. - REIT Investments." No further
shareholder approval would be solicited for any future issuances of authorized
shares, unless required by the rules of the NYSE or applicable provisions of
California law. The Board of Directors believes that it is in the best
interests of SEI to have the SEI Shareholders authorize the increase at this
time in order to have sufficient shares available for issuance at the discretion
of, and on terms set by, the Board of Directors to avoid the delay and expense
that would be involved in holding a special meeting of SEI Shareholders to vote
on the authorization of new shares at a later time when prompt action may be
required.
Class B Common Stock. The Class B Common Stock will (i) not participate in
distributions until the later to occur of FFO per Common Share (as defined by
SEI) aggregating $1.80 during any period of four consecutive calendar quarters,
or four years after the Closing; thereafter, the Class B Common Stock will
participate in
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distributions (other than liquidating distributions) at the rate
of 97% of the per share distributions of the Common Stock, provided that
cumulative distributions at the rate of $.22 per quarter per share have been
paid on the Common Stock, (ii) not participate in liquidating distributions,
(iii) not be entitled to vote (except as expressly required by California law)
and (iv) automatically convert into Common Stock upon the later to occur of FFO
per Common Share (as defined by SEI) aggregating $3.00 during any period of four
consecutive calendar quarters or seven years after the Closing.
For these purposes:
1) FFO has the meaning set forth in note (4) to "Summary - Summary
Financial Information."
2) FFO per Common Share means FFO less preferred stock dividends (other
than dividends on convertible preferred stock) divided by the number of
outstanding weighted average shares of Common Stock, assuming conversion of
all outstanding convertible securities and the Class B Common Stock.
PROPOSAL THREE - AMENDMENT TO SEI ARTICLES OF INCORPORATION
- OWNERSHIP LIMITATION
The Board of Directors has unanimously approved and recommends the adoption by
the SEI Shareholders of an amendment to the SEI Articles of Incorporation, which
will provide that no holder of SEI capital stock may own more than a certain
specified percentage of outstanding SEI capital stock in order to preserve SEI's
REIT status. The summary set forth below does not purport to be a complete
description of the amendment. SEI Shareholders should review the entire text of
the proposed amendment relating to the ownership limitation which is attached as
Appendix E-2.
For SEI to qualify as a REIT under the Code, no more than 50% in value of its
outstanding shares of capital stock may be owned, directly or constructively
under the applicable attribution rules of the Code, by five or fewer individuals
(as defined in the Code to include certain entities) during the last half of a
taxable year. In order to maintain its qualification as a REIT, SEI proposes to
amend the SEI Articles of Incorporation to provide certain restrictions on the
shares of capital stock that any shareholder may own.
The SEI Articles of Incorporation will be amended to provide that, subject to
certain exceptions, no holder may own, or be deemed to own by virtue of the
attribution provisions of the Code, more than (A) 2.0% of the outstanding shares
of all common stock of SEI, and (B) 9.9% of the outstanding shares of each class
or series of shares of preferred stock of SEI. The SEI Articles of
Incorporation provide, however, that no person shall be deemed to exceed the
ownership limit solely by reason of the beneficial ownership of shares of any
class of stock to the extent that such shares of stock were beneficially owned
by such person (including the Hughes Family) on the Closing Date (after giving
effect to the Merger). Thus, this limitation will not affect the ownership of
the Common Stock acquired by the Hughes Family in the Merger. This ownership
limitation is necessary in order to assist in preserving SEI's REIT status in
view of the Hughes Family's substantial ownership interest in SEI after the
Merger. See "Federal Income Tax Considerations--Tax Treatment of SEI."
The Board of Directors, in its sole and absolute discretion, may grant an
exception to the ownership limits to any person so requesting, so long as (A)
the Board of Directors has determined that, after giving effect to (x) an
acquisition by such person of beneficial ownership (within the meaning of the
Code) of the maximum amount of capital stock of SEI permitted as a result of the
exception to be granted and (y) assuming that the four other persons who would
be treated as "individuals" for the purposes of Section 542(a)(2) of the Code
and who would beneficially own the largest amounts of stock of SEI (determined
by value) beneficially own the maximum amount of capital stock of SEI permitted
under the ownership limits (or any waivers of the ownership limits granted with
respect to such persons), SEI would not be "closely held" within the meaning of
Section 856(h) of the Code and would not otherwise fail to qualify as a REIT,
and (B) such person provides to the Board of Directors such representations and
undertakings as the Board of Directors may require. Notwithstanding any of the
foregoing ownership limits, no holder may own or acquire, either directly,
indirectly or constructively under the applicable
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attribution rules of the Code, any shares of any class of SEI's capital stock if
such ownership or acquisition (i) would cause more than 50% in value of SEI's
outstanding capital stock to be owned, either directly or constructively, under
the applicable attribution rules of the Code, by five or fewer individuals (as
defined in the Code to include certain tax-exempt entities, other than, in
general, qualified domestic pension funds), (ii) would result in the Company's
stock being beneficially owned by less than 100 persons (determined without
reference to any rules of attribution), or (iii) would otherwise result in SEI's
failing to qualify as a REIT.
The amended SEI Articles of Incorporation will provide that if after the
Closing Date of the Merger, any holder of SEI capital stock purports to transfer
shares to a person or there is a change in the capital structure of SEI and
either the transfer or the change in capital structure would result in SEI
failing to qualify as a REIT, or such transfer or the change in capital
structure would cause the transferee to hold shares in excess of the applicable
ownership limit, then the stock being transferred (or in the case of an event
other than a transfer, the stock beneficially owned) which would cause one or
more of the restrictions on ownership or transfer to be violated shall be
automatically transferred to a trust for the benefit of a designated charitable
beneficiary. The purported transferee of such shares shall have no right to
receive dividends or other distributions with respect to such shares and shall
have no right to vote such shares. Any dividends or other distributions paid to
such purported transferee prior to the discovery by SEI that the shares have
been transferred to a trust shall be paid to the trustee of the trust for the
benefit of the charitable beneficiary upon demand. The trustee of the trust
will have all rights to dividends with respect to shares of stock held in trust,
which rights will be exercised for the exclusive benefit of the charitable
beneficiary. Any dividends or distributions paid over to the trustee will be
held in trust for the charitable beneficiary. The trustee shall designate a
transferee of such stock so long as such shares of stock would not violate the
restrictions on ownership or transfer in the SEI Articles of Incorporation in
the hands of such designated transferee. Upon the sale of such shares, the
purported transferee shall receive the lesser of (A)(i) the price per share such
purported transferee paid for the stock in the purported transfer that resulted
in the transfer of the shares to the trust, or (ii) if the transfer or other
event that resulted in the transfer of the shares of the trust was not a
transaction in which the purported transferee gave full value for such shares, a
price per share equal to the market price on the date of the purported transfer
or other event that resulted in the transfer of the shares to the trust and (B)
the price per share received by the trustee from the sale or other disposition
of the shares held in the trust.
STORAGE EQUITIES, INC.
SEI was organized in 1980. It has invested primarily in existing mini-
warehouses. At June 30, 1995, SEI had equity interests (through direct
ownership, as well as general and limited partnership interests) in 489
facilities, consisting of 470 mini-warehouses and 19 business parks. Its
facilities are operated under the "Public Storage" name. SEI is currently
advised by, and its facilities are operated by, the Operating Companies, and
SEI's officers, executive officers and certain directors are affiliated with the
Operating Companies. SEI's operations are under the general supervision of its
Board of Directors. At the Record Date, there were 42,064,283 outstanding
shares of Common Stock (exclusive of 3,872,054 shares issuable upon conversion
of SEI's convertible preferred stock and 678,667 shares subject to options) and
eight series of preferred stock (aggregate liquidation preference of
$366,350,000). The Common Stock is traded on the NYSE, and on October 10, 1995,
the closing price was $19. SEI's principal executive offices are located at 600
North Brand Boulevard, Glendale, California 91203-1241. Its telephone number is
(818) 244-8080.
PUBLIC STORAGE MANAGEMENT, INC.
GENERAL
PSMI is currently SEI's mini-warehouse property manager. Prior to the Merger,
PSCP (SEI's commercial property manager), the Adviser (SEI's adviser) and the
Real Estate Interests will be combined with PSMI. At June 30, 1995, PSMI and
PSCP managed 1,074 mini-warehouses and 45 business parks in the United States
under the "Public Storage" name, including SEI's facilities. The Real Estate
Interests being acquired by SEI in the Merger consist of PSI's direct or
indirect ownership interests in 511 mini-warehouses and 15 business parks
managed by PSMI and PSCP, seven wholly owned properties, and all-inclusive deeds
of trust secured by ten mini-warehouses.
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SEI has indirect ownership interests in 175 of the properties underlying the
Real Estate Interests. PSMI's principal executive offices are located at 600
North Brand Boulevard, Glendale, California 91203-1241. Its telephone number is
(818) 244-8080.
CURRENT RELATIONSHIP WITH SEI
SEI is currently advised by, and its facilities are operated by, the Operating
Companies. The Operating Companies and SEI's executive officers and certain
directors are subject to various conflicts of interest arising out of their
relationships with entities that own and operate mini-warehouses. PSI and its
affiliates (including the Hughes Family) currently own approximately 23% of the
outstanding Common Stock. See "Risk Factors - Conflicts of Interest."
PROPERTY MANAGEMENT SERVICES
As of June 30, 1995, PSMI and PSCP operated in the United States 1,074 mini-
warehouses and 45 commercial facilities, containing 62.9 million square feet of
rentable mini-warehouse space and 5.2 million square feet of rentable commercial
space. PSI had direct or indirect ownership interests in 1,014 of these mini-
warehouses and 35 of the commercial facilities, including 470 mini-warehouses
and 19 business parks in which SEI had an ownership interest.
Under the management agreements for these properties, PSMI and PSCP are
generally paid 6% and 5%, respectively, of the revenues of the mini-warehouses
and business parks they manage.
PARTNERSHIP INTERESTS
As of September 30, 1995, PSI is a general partner of 23 institutional
partnerships that own 199 properties, 18 partnerships with foreign investors
that own 36 properties and six other partnerships that own 52 properties. PSI
also owns limited partnership interests in six of these partnerships,
representing from 1% to 36% of the limited partnership interests in these
partnerships. As of September 30, 1995, Wayne Hughes is a general partner in 45
of these 47 partnerships and also owns limited partnership interests in four of
them, representing from 11% to 30% of the limited partnership interests in these
partnerships There is a third general partner unaffiliated with PSI or Mr.
Hughes in 17 of the 18 partnerships with foreign investors. Upon the Merger,
SEI will replace PSI as a general partner in these partnerships and Wayne Hughes
(and the third general partner) will continue as general partners in those
partnerships as to which they are currently general partners. Originally, PSI
and Mr. Hughes generally owned 80% and 20%, respectively, of the general partner
interest in these partnerships. See "- Wayne Hughes' Direct Investments in
Certain Partnerships and REITs."
The principal characteristics of these 47 partnerships include the following:
. Low overall leverage. 41 of these partnerships that own 235 properties
are debt-free. Five of the remaining six partnerships financed their
properties to make special distributions to their partners.
. Geographic diversification. The facilities are geographically
diversified, being located in over 30 different states.
. New construction. All of the facilities were built by PSI, with over
two-thirds of them constructed in 1988 or later.
Institutional partnerships. Under the partnership agreements for the
institutional partnerships, the general partners are generally entitled to 8% of
"cash flow from operations" (as defined in the partnership agreements) until
distributions to the limited partners from all sources equal 100% of their
investment ("cross-over"); after cross-over, the general partners are entitled
to 25% of cash flow from operations and of sale and financing proceeds. The
partnership agreements define cash flow from operations as cash funds provided
from operations of the partnerships, without deduction for depreciation, but
after deducting cash funds used to pay or establish a reserve for all other
expenses, debt payments, capital improvements and replacements. The general
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<PAGE>
partners are also entitled to 1% of the limited partnership interest in respect
of their capital investment. As a result of the sharing arrangements between
the general partners and the limited partners, the amount that the general
partners would receive upon liquidation of an institutional partnership
increases with each quarterly distribution to the limited partners and, on a
GAAP basis, results in the general partners earning into the partnership's net
assets by an amount equal to at least 25% of the partnership's net income.
Partnerships with foreign investors. Under the partnership agreements for the
partnerships with foreign investors, the general partners are generally entitled
to 8% of "cash flow from operations" until distributions to the limited partners
equal 105% to 115% of their investment ("cross-over"); after cross-over, the
general partners are entitled to 28% of cash flow from operations (including 3%
to a third general partner unaffiliated with PSI). Limited partners generally
receive all of the sale and financing proceeds until such proceeds from a
property equal 105% to 115% of the investment in the property; the general
partners are entitled to receive the next sale or financing proceeds from that
property up to an amount equal to 40% of the sale or financing proceeds
previously distributed to limited partners from that property; and any
additional sale or financing proceeds generated by the same property are
distributed 72% to the limited partners and 28% to the general partners
(including 3% to the third general partner). The general partners are also
entitled to 1% of the limited partnership interest in respect of their capital
investment.
Other partnerships. The sharing arrangements between the general and limited
partners in five of the six other partnerships are the same as in the
institutional partnerships. In the sixth partnership (PS Carolinas Balanced
Fund), the general partners are entitled to a partnership management fee of 8%
of cash flow from operations until payments to investors (consisting of both
limited partners and noteholders) equal 100% of their collective investment
("cross-over"); after cross-over, the general partners are entitled to a
partnership management fee of 8% of sale proceeds. After principal and accrued
interest has been paid to the noteholders, the general partners are entitled to
an additional 17% of cash flow from operations and sales proceeds.
Additional information on these partnerships is included under "--Tabular
Information on PSI's Interests in Partnerships and REITs."
REIT INVESTMENTS
PSI and Wayne Hughes own shares of common stock in 16 REITs that own 232
properties, 15 of which were organized by PSI in 1990-91 to succeed to the
business of PSI-sponsored limited partnerships. In the Merger, SEI will acquire
PSI's shares of common stock in these 16 REITs.
Like the partnerships described above, the principal characteristics of these
16 REITs include the following:
. Low overall leverage. At June 30, 1995, these REITs had total assets of
$572 million compared with $12 million of working capital loans.
. Geographic diversification. The facilities are geographically
diversified, being located in over 30 different states.
. New construction. Approximately 75% of the facilities were built by PSI
and have an average age of nine years.
The capital structure of 12 of the 16 REITs (Public Storage Properties IX - XX
and PS Business Parks, Inc.) consists of series A, B and C shares. The series A
shares are generally analogous to the limited partnership interest, and the
series B and C shares are analogous to the general partnership interest, in the
predecessor partnerships.
The series B shares (representing 8% of the original outstanding shares) of
each of these 12 REITs do not participate in distributions of sale or financing
proceeds, but participate in distributions of cash flow from operations on the
same basis as the series A shares. The series C shares do not participate in
any distributions. The series B and C shares (representing together 25% of the
original outstanding shares) of a REIT convert
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automatically into series A shares on a share-for-share basis when (A) the sum
of (1) all cumulative distributions from all sources paid with respect to the
series A shares (including liquidating distributions) and (2) the cumulative
distributions from all sources to limited partners of such REIT's predecessor
partnership equals (B) the product of $20 (the pro rata original investment in
the REITs) multiplied by the number of then-outstanding series A shares in such
REIT.
The capital structure of three of these REITs (Partners Preferred Yield, Inc.,
Partners Preferred Yield II, Inc. and Partners Preferred Yield III, Inc.)
consists of series A, B, C and D shares. The series A shares are generally
analogous to the limited partnership interest, and the series B, C and D shares
are analogous to the general partnership interest, in the predecessor
partnerships.
The series A shares of each of these three REITs are entitled to all
distributions of cash flow from operations and sale or financing proceeds until
"Participation," which occurs when "Investor Distributions" (as defined below)
equal "Remaining Investors' Capital" (as defined below) minus 50% of the limited
partners' investment in such REIT. After Participation, the series A shares
participate ratably with the series B shares (representing 10% of the original
series A and B shares) in distributions of cash flow from operations, and the
series A shares continue to be entitled to all distributions of sale or
financing proceeds. The series B and C shares (representing together 25% of the
original series A, B and C shares) convert automatically into series A shares on
a share-for-share basis upon "Conversion," which occurs when Investor
Distributions equal Remaining Investors' Capital. In addition, upon Conversion,
the series D shares (representing 3% of the original outstanding shares) begin
to participate in distributions of sale or financing proceeds. "Investor
Distributions" means the sum of (1) all cumulative distributions from all
sources paid with respect to the series A shares distributed to the limited
partners (including liquidating distributions) and (2) the cumulative
distributions from all sources from such REIT's predecessor partnership with
respect to its limited partners' investment. "Remaining Investors' Capital"
means the product of (1) $20 (the pro rata investment in the REITs) multiplied
by (2) the number of the then-outstanding series A shares issued to the limited
partners in such REIT's predecessor partnership.
As a result of the capital structure of 15 of these REITs, the amount holders
of series B, C and D shares receive upon liquidation of a REIT increases with
each quarterly distribution to the holders of the series A shares and, on a GAAP
basis, results in the holders of the series B, C and D shares earning into the
REIT's net assets by an amount equal to at least 25% of a REIT's net income.
The series A shares of each of the 16 REITs are traded on the American Stock
Exchange ("AMEX"). Additional information on these REITs is included below
under "--Tabular Information on PSI's Interests in Partnerships and REITs."
TABULAR INFORMATION ON PSI'S INTERESTS IN PARTNERSHIPS AND REITS
The following tables set forth certain information relating to the
partnerships and REITs in which PSI has an interest:
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PARTNERSHIPS AND REITS IN WHICH PSI HAS AN INTEREST
- ---------------------------------------------------
<TABLE>
<CAPTION>
As of December 31, 1994
-------------------------------------------------------------------------
For 1994
Number of -----------------------
Year States Monthly
Properties in which Number of Weighted Realized
Developed/ Number of Facilities Net Rentable Rentable Average Rent per
Acquired Properties are Located Square Feet Units Occupancy Sq. Ft.
------------- ------------ -------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Institutional Partnerships(1)
- -----------------------------
Public Storage Institutional
Fund(2) 1986 - 1989 28 14 1,689,000 16,825 91.4% $0.69
Public Storage Institutional
Fund II(2) 1987 - 1991 35 14 2,146,000 21,251 88.3% 0.71
Public Storage Institutional
Fund III(2) 1988 - 1991 31 16 1,939,000 20,724 84.5% 0.74
Public Storage Institutional
Fund IV(2) 1990 - 1992 24 9 1,152,000 12,982 86.9% 0.81
Connecticut Storage Fund(2) 1989 - 1991 13 6 769,000 8,814 85.9% 0.84
Diversified Storage Fund(2) 1986 - 1991 28 12 1,688,000 17,522 85.6% 0.72
Diversified Storage Fund
II(2) 1990 - 1991 8 7 430,000 4,950 88.6% 0.74
Diversified Storage Venture
Fund(2)(3) - - - - - - -
Metropublic Storage Fund(2) 1988 - 1991 13 8 854,000 8,814 84.8% 0.71
Arlington Storage Fund
Ltd.(2) 1988 - 1989 3 2 235,000 2,459 89.5% 0.93
WPS Ltd.(2) 1987 - 1988 4 2 343,000 3,318 90.9% 0.71
Public Storage Mid-Atlantic,
Ltd.(2) 1986 1 1 63,000 549 95.9% 0.75
Public Storage Mid-Atlantic
II, Ltd.(2) 1987 1 1 51,000 521 94.1% 0.84
PS Mini Warehouse
Fund I - X(4) 1989 - 1994 10 1 555,000 6,482 87.3% 0.71
--- ---------- ------- ----- -----
Subtotal 199 11,914,000 125,211 87.3% 0.74
--- ---------- ------- ----- -----
Partnerships with Foreign
Investors(1)
- -----------------------------
Public Storage German Fund
II, Ltd.(2) 1981 - 1982 2 2 107,000 916 95.6% 0.49
Public Storage Euro Fund
III, Ltd.(2) 1982 3 3 142,000 1,224 93.1% 0.55
Public Storage Euro
Partnership IV, Ltd.(2) 1982 - 1983 4 4 231,000 1,888 86.8% 0.67
Public Storage Euro
Partnership V, Ltd.(2) 1982 - 1983 2 2 119,000 1,097 90.8% 0.49
Public Storage Euro
Partnership VI, Ltd.(2) 1983 - 1984 6 6 351,000 3,018 93.6% 0.73
Public Storage Euro
Partnership VII, Ltd.(2) 1984 3 3 139,000 1,218 93.8% 0.85
Public Storage Euro
Partnership VIII, Ltd.(2) 1984 - 1985 4 4 271,000 2,192 88.8% 0.62
Public Storage Euro
Partnership IX, Ltd.(2) 1985 2 2 122,000 1,031 95.5% 0.88
Public Storage Euro
Partnership X, Ltd.(2) 1985 - 1986 2 2 89,000 832 93.0% 0.82
Public Storage Euro
Partnership XI, Ltd.(2) 1986 - 1987 3 3 180,000 1,588 92.7% 0.68
Public Storage Euro
Partnership XII, Ltd.(2) 1988 2 2 129,000 1,283 93.0% 0.80
Public Storage Euro
Partnership XIII, Ltd.(2) 1988 1 1 58,000 511 93.1% 0.80
Public Storage Benelux
Partnership I, Ltd.(2) 1984 1 1 46,000 351 96.0% 0.42
Public Storage Benelux
Partnership II, Ltd.(2)(5) 1986 - - - - - -
Public Storage Benelux
Partnership III, Ltd.(2)(5) 1986 - - - - - -
Public Storage Benelux
Partnership IV, Ltd.(2)(5) 1987 - - - - - -
Public Storage Benelux
Partnership V, Ltd.(2)(5) 1988 - - - - - -
Public Storage Alameda,
Ltd.(2) 85 1 1 75,000 794 91.4% 0.86
--- ---------- ------- ----- -----
Subtotal 36 2,059,000 17,943 92.0% 0.69
--- ---------- ------- ----- -----
</TABLE>
- ---------------------------------
See footnotes on succeeding page.
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<TABLE>
<CAPTION>
As of December 31, 1994
-------------------------------------------------------------------------
For 1994
Number of -----------------------
Year States Monthly
Properties in which Number of Weighted Realized
Developed/ Number of Facilities Net Rentable Rentable Average Rent per
Acquired Properties are Located Square Feet Units Occupancy Sq. Ft.
------------- ------------ -------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Other Partnerships(1)
- -----------------------------
Public Storage Partners, Ltd. 1977 3 1 125,000 1,548 88.8% 1.06
Public Storage Partners II,
Ltd. 1977 - 1978 4 1 253,000 2,508 80.0% 0.91
Public Storage Properties,
Ltd. (2) 1978 - 1979 9 1 507,000 4,486 86.9% 0.68
Public Storage Properties
IV, Ltd. (2) 1978 - 1979 17 2 880,000 8,339 85.8% 0.74
Public Storage Properties V,
Ltd. (2) 1979 - 1980 15 3 755,000 6,830 88.4% 0.75
PS Carolinas Balanced Fund,
Ltd. (2) 1984 - 1985 4 1 194,000 1,682 95.5% 0.63
--- ---------- ------- ----- -----
Subtotal 52 2,714,000 25,393 87.0% 0.80
--- ---------- ------- ----- -----
Total partnerships 287 16,687,000 168,547 87.8% $0.74
=== ========== ======= ===== =====
</TABLE>
- ---------------------------------
See footnotes on succeeding page.
66
<PAGE>
<TABLE>
<CAPTION>
As of December 31, 1994
-------------------------------------------------------------------------
For 1994
Number of -----------------------
Year States Monthly
Properties in which Number of Weighted Realized
Developed/ Number of Facilities Net Rentable Rentable Average Rent per
Acquired Properties are Located Square Feet Units Occupancy Sq. Ft.
------------- ------------ -------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
REITs
- -----------------------------
Public Storage Properties
IX, Inc. 1983 - 1985 15 6 953,000 7,280 91.9% $0.67
Public Storage Properties X,
Inc. 1984 - 1985 17 9 921,000 7,663 92.7% 0.66
Public Storage Properties
XI, Inc. 1984 - 1986 14 7 930,000 6,469 93.0% 0.64
Public Storage Properties
XII, Inc. 1984 - 1985 13 6 847,000 7,115 90.2% 0.72
Public Storage Properties
XIV, Inc. 1985 - 1986 14 7 901,000 6,986 93.3% 0.81
Public Storage Properties
XV, Inc. 1985 - 1988 19 10 1,087,000 10,195 89.6% 0.63
Public Storage Properties
XVI, Inc. 1986 - 1988 22 9 1,435,000 12,092 88.7% 0.65
Public Storage Properties
XVII, Inc. 1986 - 1989 19 11 1,347,000 10,617 88.3% 0.73
Public Storage Properties
XVIII, Inc. 1987 - 1988 19 9 1,212,000 10,680 85.7% 0.85
Public Storage Properties
XIX, Inc. 1988 - 1990 14 7 990,000 7,882 88.0% 0.74
Public Storage Properties
XX, Inc. 1989 - 1991 7 5 400,000 4,036 90.8% 0.63
PS Business Parks, Inc. 1984 1 1 173,000 118 98.8% 0.84
Partners Preferred Yield,
Inc. 1988 - 1989 19 10 1,254,000 11,806 92.2% 0.67
Partners Preferred Yield II,
Inc. 1988 - 1990 24 10 1,398,000 15,288 89.5% 0.68
Partners Preferred Yield
III, Inc./(6)/ 1989 - 1990 8 7 596,000 5,902 94.8% 0.73
Storage Properties, Inc.
/(7)/ 1989 - 1990 7 6 371,000 2,967 90.0% 0.66
--- ---------- ------- ----- -----
Total REITS 232 14,815,000 127,096 90.4% $0.70
--- ---------- ------- ----- -----
Totals - REITs and
Partnerships 519 31,502,000 295,643 89.0% $0.72
=== ========== ======= ===== =====
</TABLE>
- ---------------------------------
(1) Upon completion of the Merger, SEI will become a general partner in each of
these partnerships. As of September 30, 1995, PSI also owned the following
percentage of limited partnerships interest in the following partnerships:
Public Storage Institutional Fund - 1.4%; Public Storage Partners, Ltd. -
30.7%; Public Storage Partners II, Ltd. - 32.1% (including limited
partnership interests tendered but not yet acquired); Public Storage
Properties, Ltd. - 6.5%; Public Storage Properties IV, Ltd. - 30.4%; and
Public Storage Properties V, Ltd. - 35.9%.
(2) Wayne Hughes is a general partner of these partnerships and will continue
to be a general partner of these partnerships after the Merger. As of
September 30, 1995, Wayne Hughes also owned the following percentages of
limited partnership interest in the following partnerships (which will be
subject to the option in favor of SEI): Public Storage Partners, Ltd. -
15.0%; Public Storage Properties, Ltd. - 30.0%; Public Storage Properties
IV, Ltd. - 14.7%; Public Storage Properties V, Ltd. - 11.0%; and Public
Storage Partners II, Ltd.- 5.5% (limited partnership interests tendered but
not yet acquired).
(3) Properties owned jointly with Public Storage Institutional Fund IV.
(4) Consists of ten separate partnerships each of which owns one property.
(5) Has an interest in properties owned by Public Storage Euro Partnership X -
XIII.
(6) Owns one additional property jointly with Storage Properties, Inc.
(7) Includes one property acquired in 1994 after initial acquisition/
development of properties.
67
<PAGE>
<TABLE>
<CAPTION>
As of September 30, 1995
----------------------------------------------
Percent of Shares Owned by PSI, to be Percent of Shares Owned by Wayne Hughes,
REITs Acquired by SEI in Merger(1) to be Subject to Option in Favor of SEI(1)
- ----- ---------------------------------------------- ---------------------------------------------
A B C D Total A B C D Total
----- ----- ----- ----- -------- ----- ----- ----- ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Public Storage Properties
IX, Inc. 23% N/A N/A N/A 23% 6% N/A N/A N/A 6%
Public Storage Properties X,
Inc. -- 80% 80% N/A 24%(2) -- 20% 20% N/A 6%(2)
Public Storage Properties
XI, Inc. 8% 80% 80% N/A 28%(2) (3) 20% 20% N/A 6%(2)
Public Storage Properties
XII, Inc. -- 62% 64% N/A 18%(2) (3) 20% 20% N/A 6%(2)
Public Storage Properties
XIV, Inc. 6% 74% 94% N/A 29%(2) (3) -- -- N/A (3)
Public Storage Properties
XV, Inc. 7% 40% 63% N/A 22%(2) (3) -- -- N/A (3)
Public Storage Properties
XVI, Inc. 2% 65% 66% N/A 20%(2) (3) 20% 20% N/A 6%(2)
Public Storage Properties
XVII, Inc. 4% 91% 92% N/A 31%(2) (3) -- -- N/A (3)
Public Storage Properties
XVIII, Inc. (3) 100% 100% N/A 31%(2) -- -- -- N/A --
Public Storage Properties
XIX, Inc. 9% 80% 100% N/A 31%(2) (3) -- -- N/A (3)
Public Storage Properties
XX, Inc. 1% 80% 80% N/A 23%(2) (3) 20% 20% N/A 6%(2)
PS Business Parks, Inc. 31% N/A N/A N/A 31% -- -- -- N/A --
Partners Preferred Yield,
Inc. 8% 80% 80% 80% 23%(2) -- 20% 20% 20% 4%(2)
Partners Preferred Yield II,
Inc. 9% 80% 80% 80% 23%(2) -- 20% 20% 20% 4%(2)
Partners Preferred Yield
III, Inc. 4% 80% 80% 80% 19%(2) (3) 20% 20% 20% 4%(2)
</TABLE>
- -----------------------------
(1) Capital letters "A", "B", "C" and "D" denote series A, B, C and D shares,
respectively. Percentages are based on shares owned as of September 30,
1995 in relation to the total shares outstanding by series (and in the
"Total" columns, in relation to the total combined shares outstanding of
all the series).
(2) Includes series A shares, series B shares and series C shares (and series
D shares, if applicable).
(3) Less than 1%.
68
<PAGE>
WHOLLY OWNED PROPERTIES
In the Merger, SEI will acquire PSI's seven wholly owned properties. These
properties consist of five mini-warehouses, one combination mini-
warehouse/business park facility and one small retail center, containing an
aggregate of approximately 352,000 net rentable square feet of mini-warehouse
space in 3,400 units and 48,000 net rentable square feet of commercial space.
These properties were developed between 1985 and 1989. Weighted average
occupancy levels for the mini-warehouse and commercial space were approximately
90.2% and 89.6%, respectively, in 1994. Monthly realized rent per square foot
the mini-warehouse and commercial space averaged approximately $0.71 and $0.86,
respectively, in 1994.
PROMISSORY NOTES SECURED BY TRUST DEEDS
PSI owns non-recourse notes executed by the owners of, and secured by all-
inclusive deeds of trust on, ten mini-warehouses; as of June 30, 1995, the
outstanding balance of these notes aggregated approximately $8.0 million. PSI
is the obligor under notes secured by deeds of trust on five of the ten mini-
warehouses on which it holds non-recourse notes; as of June 30, 1995, the
outstanding principal balance of these notes aggregated $5.5 million (prior to
the Merger, it is expected that this debt will be reduced to $4.2 million).
WAYNE HUGHES' DIRECT INVESTMENTS IN CERTAIN PARTNERSHIPS AND REITS
Wayne Hughes directly owns general and limited partner interests and common
stock in the same partnerships and REITs that are owned by PSI. SEI is not
acquiring these interests in the Merger because the issuance to Mr. Hughes of
SEI capital stock in respect of these interests, in addition to the Common Stock
and Class B Common Stock to be issued in the Merger, could jeopardize SEI's
status as a REIT. See "Federal Income Tax Considerations - Tax Treatment of
SEI." Mr. Hughes will grant SEI a three-year option, effective upon the Closing
Date of the Merger, to acquire his interests in these partnerships and REITs at
a price based on their value as of the Closing Date, as determined by Arthur
Andersen, for SEI Common Stock valued at the higher of (i) $16 per share or (ii)
a stock price necessary to cause the acquisition to be non-dilutive based on
SEI's FFO per Common Share for the four consecutive quarters preceding the
acquisition. The total value of these interests is estimated at approximately
$50.0 million. SEI currently expects to exercise this option at such time as
the issuance of additional capital stock to Mr. Hughes would not be expected to
jeopardize its REIT status. However, SEI is under no obligation to exercise the
option at any time (even if exercise would not adversely affect SEI's REIT
status), and the decision as to whether and when to exercise this option shall
be made by a majority of the SEI directors, other than Mr. Hughes and other
officers of SEI. Approval of the Merger by the SEI Shareholders will constitute
approval for the issuance of Common Stock to Mr. Hughes for these interests, and
no further shareholder approval will be sought. Wayne Hughes will also grant
SEI an irrevocable proxy to vote his shares in the 16 REITs (not including SEI)
during the option period.
EXCLUDED ASSETS
Prior to the Merger certain assets currently owned by PSI will be distributed
to the Hughes Family and will not be acquired by SEI. See "Risk Factors -
Conflicts of Interest."
Tenant reinsurance. A subsidiary of PSI, which, after the Merger, will be
owned by the Hughes Family, will continue to reinsure policies against losses to
goods stored in the mini-warehouses operated by SEI. SEI will have a right of
first refusal to acquire, with certain exceptions, shares or assets of this
corporation, if the Hughes Family or such corporation agree to sell them, but
SEI will have no interest in its operations. Any acquisition of this corporation
by SEI will be subject to compliance with the REIT qualification requirements.
In addition, SEI would be precluded from exercising its right of first refusal
with respect to the stock of the reinsurance corporation if such exercise would
cause SEI to violate any of the requirements for qualification as a REIT under
the Code. See "Federal Income Tax Considerations -- Tax Treatment of SEI --
Technical Requirements for Taxation as a REIT."
Canadian operations. As of June 30, 1995, PSI subsidiaries operated 34 mini-
warehouses in Canada and had equity interests in all of them. After the Merger,
the corporation conducting these operations will be owned by
69
<PAGE>
the Hughes Family and SEI will have no interest in such corporation, which will
continue to be licensed to use the "Public Storage" name in Canada. SEI will
have a right of first refusal to acquire, with certain exceptions, shares or
assets of such corporation if they are sold, but SEI will have no interest in
its operations. In addition, SEI would be precluded from exercising its right of
first refusal with respect to the stock of the corporation conducting the
Canadian operations if such exercise would cause SEI to violate any of the
requirements for qualification as a REIT under the Code. See "Federal Income Tax
Considerations -- Tax Treatment of SEI -- Technical Requirements for Taxation as
a REIT."
BORROWINGS
As of June 30, 1995, PSI had an aggregate of approximately $9.3 million of
mortgage financing secured by three of the seven properties to be acquired by
SEI in the Merger. The mortgage financing is due at various dates between 1996
and 1999 and bears interest at rates ranging from 7.7% to 11.0% per year. It is
expected that two of these notes aggregating $8.8 million at June 30, 1995,
which mature in February 1996 will be paid off prior to the Merger. It is
expected that the remaining mortgage financing will be assumed by SEI in
connection with the Merger. See " - Wholly Owned Properties."
As of June 30, 1995, PSI was the obligor of approximately $5.5 million under
notes secured by mini-warehouses on which PSI holds non-recourse notes. It is
expected that one of these notes of $1.3 million at June 30, 1995 which matures
February 1996 will be paid off prior to the Merger. SEI will succeed to PSI's
obligations in respect of the balance of these notes in the Merger. See " -
Promissory Notes Secured by Trust Deeds."
PSI has a $45 million credit facility with a commercial bank, which is
expected to be increased to $65 million. The facility bears interest, at PSI's
option, either at the prime rate plus 1/4% or LIBOR plus 2% and is secured by
marketable securities, general partner interests and capital stock of PSI's
subsidiaries. It is expected that, at the time of the Merger, at least $45
million will be outstanding under the credit facility and that this indebtedness
will be assumed by SEI and repaid following the Merger. The Share Consideration
will be reduced by the amount of outstanding indebtedness under the credit
facility.
As of June 30, 1995, PSMI had an aggregate of approximately $68 million
outstanding indebtedness owed to a group of insurance companies. The financing
is due in 2003, bears interest at 7.08% per year, provides for semi-annual
payments of principal and interest and is secured by the rights to cash flow
under the management agreements. It is expected that this financing will be
assumed by SEI in the Merger.
70
<PAGE>
SELECTED FINANCIAL INFORMATION
The following selected historical financial information relating to each of
the three years in the period ended December 31, 1994 has been derived from the
audited financial statements of SEI for the periods indicated. The selected
financial information for the six months ended June 30, 1995 and 1994 have been
derived from unaudited financial statements of SEI for those periods. The data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this Proxy
Statement and the financial statements included in the documents incorporated by
reference.
SEI HISTORICAL FINANCIAL INFORMATION
------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------------ -------------------------------------
1995 1994 1994 1993 1992
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues:
Rental income.............................. $ 88,068 $ 65,247 $ 141,845 $ 109,203 $ 95,886
Interest and other income.................. 3,042 3,293 5,351 5,477 1,562
---------- --------- --------- ---------- -----------
91,110 68,540 147,196 114,680 97,448
---------- --------- --------- ---------- -----------
Expenses:
Cost of operations......................... 32,342 24,688 52,816 42,116 38,348
Depreciation............................... 16,926 13,541 28,274 24,998 22,405
General and administrative................. 1,736 1,380 2,631 2,541 2,629
Advisory fee............................... 3,426 2,356 4,983 3,619 2,612
Interest expense........................... 3,214 2,844 6,893 6,079 9,834
---------- --------- --------- ---------- -----------
57,644 44,809 95,597 79,353 75,828
---------- --------- --------- ---------- -----------
Income before minority interest and gain on
disposition or real estate.................... 33,466 23,731 51,599 35,327 21,620
Minority interest in income.................... (3,715) (4,791) (9,481) (7,291) (6,895)
---------- --------- --------- ---------- -----------
Income before gain on disposition of real
estate......................................... 29,751 18,940 42,118 28,036 14,725
Gain on disposition of real estate.............. - - - - 398
---------- --------- --------- ---------- -----------
Net income...................................... $ 29,751 $ 18,940 $ 42,118 $ 28,036 $ 15,123
========== ========= ========= ========== ===========
Net income allocable to Common Stock(1)......... $ 16,443 $ 11,642 $ 25,272 $ 17,148 $ 14,311
Net income per share of Common Stock............ 0.50 0.52 1.05 0.98 0.90
Distributions paid per share of Common Stock.... 0.44 0.42 0.85 0.84 0.84
Weighted average shares of Common Stock
outstanding.................................... 32,708 22,437 24,077 17,558 15,981
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets.................................... $1,116,857 $ 722,686 $ 820,309 $ 666,133 $ 537,724
Total debt...................................... 58,497 49,651 77,235 84,076 69,478
Shareholders' equity............................ 829,664 485,424 587,786 376,066 253,669
OTHER DATA:
Net cash provided by operating activities....... $ 50,325 $ 36,484 $ 79,180 $ 59,477 $ 44,025
Net cash used in investing activities........... (101,568) (76,630) (169,590) (137,429) (21,010)
Net cash provided by (used in) financing
activities..................................... 120,851 41,626 100,029 80,100 (21,070)
EBITDA(2)....................................... 44,432 27,525 63,036 41,909 30,967
FFO(as defined by SEI)(3)....................... 41,218 24,681 56,143 35,830 21,133
Preferred stock dividends....................... 13,308 7,298 16,846 10,888 812
</TABLE>
See footnotes on succeeding page.
71
<PAGE>
COMBINED HISTORICAL FINANCIAL INFORMATION OF OPERATING COMPANIES
----------------------------------------------------------------
AND REAL ESTATE INTERESTS
-------------------------
The following selected historical financial information relating to each of
the three years in the period ended December 31, 1994 (except for balance sheet
data at December 31, 1992) have been derived from the audited combined financial
statements of the Operating Companies and Real Estate Interests. The
information for the six months ended June 30, 1995 and the same period in 1994
have been derived from unaudited combined financial statements of the Operating
Companies and Real Estate Interests. The data should be read in conjunction
with the "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the financial statements included elsewhere in this
Proxy Statement.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
--------------------- ---------------------------------
1995 1994 1994 1993 1992
-------- --------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues:
Facility management fees, primarily
from affiliates...................... $ 13,156 $ 12,103 $ 25,224 $ 23,105 $ 21,416
Equity in earnings of real estate
entities............................. 13,074 11,516 24,555 19,742 15,026
Advisory fees from affiliate........... 3,426 2,356 4,983 3,619 2,612
Merchandise operations................. 1,013 907 1,872 1,564 1,263
Rental revenues........................ 1,637 1,545 3,152 2,884 2,867
Interest income........................ 459 464 996 792 847
-------- -------- -------- -------- --------
Total revenues...................... 32,765 28,891 60,782 51,706 44,031
-------- -------- -------- -------- --------
Expenses:
Cost of managing facilities............ 2,527 2,561 4,909 5,544 5,839
Cost of advisory services and
administrative expenses.............. 1,090 817 1,850 1,410 975
Cost of merchandise.................... 501 435 866 800 689
Rental expense......................... 450 413 834 813 653
Depreciation........................... 302 523 1,011 556 476
Interest expense....................... 2,689 2,844 5,607 1,005 7,732
-------- -------- -------- -------- --------
Total expenses...................... 7,559 7,593 15,077 10,128 16,364
-------- -------- -------- -------- --------
Income before extraordinary item......... 25,206 21,298 45,705 41,578 27,667
Extraordinary item:
gain on retirement of debt............. -- - -- 14,440 3,311
-------- -------- -------- -------- --------
Net income............................... $ 25,206 $ 21,298 $ 45,705 $ 56,018 $ 30,978
======== ======== ======== ======== ========
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets............................. $104,165 $ 96,387 $ 99,038 $ 88,376 $ 78,447
Total debt............................... 72,377 77,222 74,948 79,496 62,545
Equity................................... 30,725 17,991 22,396 7,038 13,758
OTHER DATA:
Net cash provided by operating
activities............................. $ 18,575 $ 16,586 $ 35,808 $ 31,132 $ 23,871
Net cash provided by investing
activities............................. 143 122 248 287 186
Net cash used in financing
activities............................. (19,478) (12,749) (35,055) (31,353) (23,789)
</TABLE>
See footnotes on succeeding page.
72
<PAGE>
COMBINED HISTORICAL FINANCIAL INFORMATION OF THE UNDERLYING PROPERTIES
----------------------------------------------------------------------
The following selected historical financial information relating to each of
the three years in the period ended December 31, 1994 have been derived from
audited financial statements of the properties underlying the Real Estate
Interests (the "Underlying Properties.") The information for the six months
ended June 30, 1995 and the same period in 1994 have been derived from unaudited
financial statements of the Underlying Properties. The data should be read in
conjunction with the financial statements included elsewhere in this Proxy
Statement.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
-------------------- -----------------------------------
1995 1994 1994 1993 1992
--------- -------- -------- --------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues:
Rental income........................... $126,230 $118,899 $244,165 $221,938 $198,917
Interest income......................... 1,424 1,823 3,719 4,602 5,986
-------- -------- -------- -------- --------
Total revenues..................... 127,654 120,722 247,884 226,540 204,903
-------- -------- -------- -------- --------
Expenses:
Cost of operations...................... 38,211 37,450 75,566 73,111 70,801
Management fees paid to affiliates...... 7,472 7,181 14,592 13,226 11,825
Depreciation............................ 21,052 21,031 41,982 42,808 43,556
General and administrative.............. 2,748 2,759 5,904 6,135 7,830
Interest expense........................ 5,088 5,023 9,981 10,860 11,038
-------- -------- -------- -------- --------
Total expenses..................... 74,571 73,444 148,025 146,140 145,050
-------- -------- -------- -------- --------
Net income.............................. $ 53,083 $ 47,278 $ 99,859 $ 80,400 $ 59,853
======== ======== ======== ======== ========
</TABLE>
See footnotes on succeeding page.
73
<PAGE>
COMPARATIVE SEI HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
--------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended June 30, 1995 Year Ended December 31, 1994
---------------------------------------------- ------------------------------------------
SEI SEI SEI SEI
SEI Pre-Merger Post Merger SEI Pre-Merger Post Merger
(Historical) (Pro Forma)(4) (Pro Forma)(5) (Historical) (Pro Forma)(4) (Pro Forma)(5)
------------ -------------- -------------- ------------ -------------- --------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues:
Rental income..................... $ 88,068 $ 109,075 $ 110,712 $ 141,845 $ 215,218 $ 218,370
Facility management fees.......... - - 6,936 - - 12,863
Merchandise operations............ - - 1,013 - - 1,872
Equity in earnings of real estate
entities......................... - 383 7,348 - 748 13,086
Interest and other income......... 3,042 2,079 2,538 5,351 1,254 2,250
--------- --------- --------- --------- --------- ---------
91,110 111,537 128,547 147,196 217,220 248,441
--------- --------- --------- --------- --------- ---------
Expenses:
Cost of operations................ 32,342 40,048 34,191 52,816 79,569 67,466
Cost of managing facilities....... - - 2,357 - - 4,742
Cost of merchandise............... - - 501 - - 866
Depreciation...................... 16,926 20,747 25,750 28,274 40,971 51,022
General and administrative........ 1,736 1,885 2,747 2,631 3,064 4,659
Advisory fee...................... 3,426 4,036 - 4,983 7,476 -
Interest expense.................. 3,214 5,188 7,877 6,893 10,743 16,350
--------- --------- --------- --------- --------- ---------
57,644 71,904 73,423 95,597 141,823 145,105
--------- --------- --------- --------- --------- ---------
Income before minority interest
and gain on disposition or
real estate...................... 33,466 39,633 55,124 51,599 75,397 103,336
Minority interest in income........ (3,715) (3,570) (3,570) (9,481) (6,918) (6,918)
--------- --------- --------- --------- --------- ---------
Income before gain on disposition
of real estate.................... 29,751 36,063 51,554 42,118 68,479 96,418
Gain on disposition of real
estate............................ - - - - 203 203
--------- --------- --------- --------- --------- ---------
Net income......................... $ 29,751 $ 36,063 $ 51,554 $ 42,118 $ 68,682 $ 96,621
========= ========= ========= ========= ========= =========
Net income allocable to
Common Stock(1)................... $ 16,443 $ 20,413 $ 35,904 $ 25,272 $ 37,476 $ 65,415
Net income per share of
Common Stock...................... 0.50 0.48 0.50 1.05 0.90 0.91
Distributions paid per share
of Common Stock................... 0.44 0.44 0.44 0.85 0.85 0.85
Weighted average shares of
Common Stock outstanding.......... 32,708 42,108 72,108 24,077 41,845 71,845
OTHER DATA:
Net cash provided by
operating activities.............. $ 49,474 $ 60,380 $ 80,606 $ 79,180 $ 116,368 $ 154,991
Net cash used in
investing activities.............. (101,568) (102,558) (102,476) (169,590) (364,942) (366,694)
Net cash provided by
financing activities.............. 121,702 105,321 89,369 100,029 267,222 241,749
EBITDA(2).......................... 44,432 56,847 90,669 63,036 109,542 174,366
FFO (as defined by SEI)(3)......... 41,218 51,659 82,792 56,143 98,799 158,016
Preferred stock dividends.......... 13,308 15,650 15,650 16,846 31,206 31,206
</TABLE>
- ---------------------
(1) Net income allocable to Common Stock is equal to net income less preferred
stock dividends.
(2) EBITDA means net income before (i) gains (or losses) on early extinguishment
of debt, (ii) minority interest in income, (iii) gain/loss on disposition of
real estate, (iv) taxes based on income, (v) interest expense, (vi)
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 (vii) less EBITDA
attributable to minority interests.
(3) See note (4) to "Summary - Summary Financial Information" for SEI's
definition of FFO.
(4) As adjusted to give effect to (i) the issuance of common and preferred stock
during 1995 and 1994, and the use of the net proceeds therefrom, and (ii)
the mergers with Public Storage Properties VI, VII, and VIII, Inc., as if
such transactions were completed at the beginning of 1994. See "Pro Forma
Consolidated Financial Statements."
(5) As further adjusted to give effect to the proposed Merger transaction, as if
the transaction were completed at the beginning of 1994. See "Pro Forma
Consolidated Financial Statements."
74
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEI HISTORICAL
The following discussion and analysis should be read in conjunction with
the consolidated financial statements of SEI appearing in SEI's Annual Report on
Form 10-K for the year ended December 31, 1994, as amended (the "1994 10-K"),
and Quarterly Report on Form 10-Q for the period ended June 30, 1995.
Results of Operations
Six months ended June 30, 1995 compared to the six months ended June 30,
------------------------------------------------------------------------
1994. Net income for the six months ended June 30, 1995 was $29,751,000
- -----
compared to $18,940,000 for the same period in 1994, representing an increase of
$10,811,000. Net income allocable to common shareholders increased to
$16,443,000 for the six months ended June 30, 1995 from $11,642,000 for the six
months ended June 30, 1994. The increase in net income and net income allocable
to common shareholders were primarily the result of improved property operations
for the Same Store facilities, the acquisition of additional real estate
facilities during 1995 and 1994, and the acquisition of additional partnership
interests during 1995 and 1994. Net income per common share was $.50 per share
(based on weighted average shares outstanding of 32,707,556) for the six months
ended June 30, 1995 compared to $.52 per share (based on weighted average shares
outstanding of 22,436,885) for the same period in 1994. The decrease in net
income per share was principally due to increased depreciation expense,
including depreciation allocable to limited partnership interests acquired by
SEI.
SEI generally analyzes the operating results of its real estate portfolio
in three different categories; (i) mini-warehouse facilities owned since
December 31, 1991 (referred to as "Same Store mini-warehouses"), consisting of
246 mini-warehouses, (ii) mini-warehouse facilities acquired subsequent to
December 31, 1991 (referred to as "Newly Acquired mini-warehouses"), consisting
of 208 mini-warehouses, and (iii) 19 business park facilities. SEI's revenues
are generated principally through the operation of its real estate facilities.
SEI's core business, however, is the operation of mini-warehouse facilities
which, during the six months ended June 30, 1995, represented approximately 90%
of SEI's property operations (based on 1995 rental income).
Rental income was $88,068,000 and $65,247,000 for the six months ended June
30, 1995 and 1994, respectively, representing an increase of $22,821,000 or 35%.
Cost of operations was $32,342,000 and $24,688,000 for the six months ended June
30, 1995 and 1994, respectively, representing an increase of $7,654,000 or 31%.
The following table illustrates rental income and cost of operations by
portfolio category:
<TABLE>
<CAPTION>
For the Six Months Ended
June 30, Net increase
---------------------------- -----------------
1995 1994 $$ %%
------------- ------------ -------- -------
(dollar amounts in 000's)
<S> <C> <C> <C> <C>
RENTAL INCOME:
- --------------
Mini-warehouses:
Same Store $46,575 $44,987 $ 1,588 4%
Newly Acquired 32,800 13,032 19,768 152%
Business Parks 8,693 7,228 1,465 20%
------- ------- ------- ----
Total rental income $88,068 $65,247 $22,821 35%
======= ======= ======= ====
COST OF OPERATIONS:
- -------------------
Mini-warehouses:
Same Store $16,789 $16,503 $ 286 2%
Newly Acquired 11,328 4,575 6,753 148%
Business Parks 4,225 3,610 615 17%
------- ------- ------- ----
Total cost of operations $32,342 $24,688 $ 7,654 31%
======= ======= ======= ====
</TABLE>
75
<PAGE>
The increase in Same Store mini-warehouse rental income is principally due
to increased average rental rates. Weighted average occupancy levels were 89%
for the Same Store mini-warehouses for each of the six months ended June 30,
1995 and 1994. Realized monthly rent per square foot for these facilities was
$.60 and $.58 for the six months ended June 30, 1995 and 1994, respectively.
The increases in rental income and cost of operations for the Newly
Acquired mini-warehouses reflect the acquisition of 85 and 71 mini-warehouses in
1995 and 1994, respectively. The increase in rental income is principally due to
increased weighted average occupancy levels combined with an increase in average
rental rates. Weighted average occupancy levels were 88% for these facilities
for the six months ended June 30, 1995 compared to 87% for the same period in
1994. Realized monthly rent per square foot for these facilities was $0.65 and
$0.63 for the six months ended June 30, 1995 and 1994, respectively.
Weighted average occupancy levels were 96% for the business park facilities
for the six months ended June 30, 1995 compared to 95% for the same period in
1994. The monthly average realized rent per square foot for the business park
facilities was $0.73 and $0.68 for the six months ended June 30 1995 and 1994,
respectively.
During the six months ended June 30, 1995, property net operating income
(rental income less cost of operations and depreciation expense) improved
compared to the same period in 1994. Rental income and cost of operations
increased for the six months ended June 30, 1995 compared to the same period in
1994 and depreciation expense increased by $3,451,000 from $13,453,000 for the
six months ended June 30, 1994 to $16,904,000 for the same period in 1995,
resulting in a net increase in property net operating income of $11,716,000 or
43%. Property net operating income prior to the reduction for depreciation
expense increased by $15,167,000 or 37% from $40,559,000 for the six months
ended June 30, 1994 to $55,726,000 for the same period in 1995.
Property net operating income for the Same Store mini-warehouses increased
by $785,000 or 4.0% from $19,758,000 for the six months ended June 30, 1994 to
$20,543,000 for the six months ended June 30, 1995. Property net operating
income prior to the reduction for depreciation expense for the Same Store mini-
warehouses increased by $1,302,000 or 4.6% from $28,484,000 for the six months
ended June 30, 1994 to $29,786,000 for the six months ended June 30, 1995.
Property operating expenses prior to the reduction for depreciation increased by
$286,000 or 2% from $16,503,000 for the six months ended June 30, 1994 to
$16,789,000 for the six months ended June 30, 1995.
The Newly Acquired mini-warehouses contributed approximately $16,364,000
and $6,420,000 of property net operating income for the six months ended June
30, 1995 and 1994, respectively ($21,472,000 and $8,457,000 of property net
operating income prior to the reduction for depreciation expense for the six
months ended June 30, 1995 and 1994, respectively). Property net operating
income for the Newly Acquired mini-warehouses which were owned throughout each
of the six months ended June 30, 1995 and 1994 (52 facilities) was $5,314,000
and $4,955,000 during the six months ended June 30, 1995 and 1994, respectively,
representing an increase of $359,000 or 7% ($6,997,000 and $6,542,000 of
property net operating income prior to the reduction for depreciation expense
for the six months ended June 30, 1995 and 1994, respectively, representing an
increase of $455,000 or 7%). Property operating expenses for these 52
facilities (prior to the reduction for depreciation) increased by $89,000 or
2.5% from $3,542,000 for the six months ended June 30, 1994 to $3,631,000 for
the six months ended June 30, 1995.
Property net operating income with respect to SEI's business park
operations increased by $987,000 from $928,000 for the six months ended June 30,
1994 to $1,915,000 for the same period in 1995. Property net operating income
prior to the reduction for depreciation expense with respect to SEI's business
park operations increased by $850,000 from $3,618,000 for the six months ended
June 30, 1994 to $4,468,000 for the same period in 1995. The acquisition of a
business park facility during the second quarter of 1994 contributed
approximately $469,000 to the increase in property net operating income.
Interest and other income decreased from $3,293,000 for the six months
ended June 30, 1994 to $3,042,000 for the same period in 1995 for a net decrease
of $251,000. The decrease is primarily attributable to the reduction in
interest income from mortgage notes receivable partially offset by increased
interest income on the cash balances. SEI cancelled approximately $8,466,000
and $24,441,000 of mortgage notes receivable during 1995 and 1994, respectively,
in connection with the acquisition of real estate facilities securing such
notes. As a result, interest income from the mortgage notes receivable
decreased from $2,641,000 to $1,120,000 for the six months ended June 30, 1994
and 1995, respectively, as the
76
<PAGE>
average outstanding mortgage notes receivable balance was significantly lower
($18,950,000) during the six months ended June 30, 1995 compared to the same
period in 1994 ($48,055,000). As of June 30, 1995, the mortgage notes bear
interest at stated rates ranging from 8.5% to 11.97% and effective interest
rates ranging from 10.0% to 14.8%.
On May 31, 1995, SEI completed a public offering of its common stock
raising net proceeds of approximately $82 million. Throughout the month of June
1995, the net proceeds remained invested in short-term interest bearing
securities (with weighted average yields of approximately 5.6% per annum). As a
result interest income from cash balances increased by approximately $691,000.
Depreciation and amortization expense was $16,926,000 and $13,541,000 for
the six months ended June 30, 1995 and 1994, respectively, representing an
increase of $3,385,000 which is due to the acquisition of additional properties
in 1994 and 1995. Net income allocable to the common shareholders includes net
depreciation and amortization expense of approximately $11,467,000 ($0.35 per
common share) and $5,741,000 ($0.26 per common share) for the six months ended
June 30, 1995 and 1994, respectively. This increase is due to increased
depreciation from the acquisition of real estate facilities combined with
increased allocations of depreciation from the consolidated PSP Partnerships to
SEI's shareholders. During 1994 and 1995, SEI acquired additional partnership
interests in the PSP Partnerships (see below) and as a result an increased
amount of depreciation expense from the existing real estate portfolio has been
allocated to SEI rather than to the minority interest.
General and administrative expense was $1,736,000 and $1,380,000 for the
six months ended June 30, 1995 and 1994, respectively, representing an increase
of $356,000. This increase is due to the growth in SEI's capital base combined
with certain costs incurred in connection with the acquisition of additional
real estate facilities.
"Minority interest in income" represents the income allocable to equity
(partnership) interests in the PSP Partnerships (whose accounts are consolidated
with SEI) which are not owned by SEI. The PSP Partnerships are a group of eight
public limited partnership in which SEI and Wayne Hughes are general partners,
seven of which own properties jointly with SEI. Since 1990, SEI has acquired
portions of these equity interests through its acquisition of limited and
general partnership interests in the PSP Partnerships. These acquisitions have
resulted in reductions to the "Minority interest in income" from what it would
otherwise have been in the absence of such acquisitions, and accordingly, have
increased SEI's share of the consolidated PSP Partnerships' income. See Table
below. In determining income allocable to the minority interest for the six
months ended June 30, 1995 and 1994 consolidated depreciation and amortization
expense of approximately $5,392,000 and $7,294,000, respectively, was allocated
to the minority interest. The decrease in depreciation allocated to the
minority interest was principally the result of the acquisition of limited
partnership units by SEI.
The acquisition of these partnership interests has provided SEI with
increased liquidity through cash distributions from the PSP Partnerships. From
January 1, 1995 through August 31, 1995, SEI acquired additional partnership
interests in the PSP Partnerships of approximately $17.0 million and has no
plans to acquire any significant additional interests in the PSP Partnerships
during the remainder of 1995. In the Merger, SEI will be acquiring the Real
Estate Interests, consisting principally of partnership interests in 47 real
estate partnerships and common stock in 16 REITs. In addition to the Real
Estate Interests, SEI intends from time to time to acquire additional interests
in the ownership entities of which the Real Estate Interests are a part, as well
as real estate assets from unaffiliated parties. During the third quarter of
1995, SEI acquired from an unaffiliated third party the limited partnership
interest in a real estate partnership (in the Merger, SEI would acquire PSI's
general partner interest in such partnership) for an aggregate cost of
approximately $30.0 million, consisting of the issuance of preferred stock of
SEI.
Advisory fees increased by $1,070,000 from $2,356,000 for the six months
ended June 30, 1994 to $3,426,000 for the same period in 1995. The advisory
fee, which is based on a contractual computation, increased as a result of
increased adjusted net income (as defined) per common share combined with the
issuance of additional preferred and common stock during 1994 and 1995.
Year ended December 31, 1994 compared to year ended December 31, 1993. Net
---------------------------------------------------------------------
income in 1994 was $42,118,000 compared to $28,036,000 in 1993, representing an
increase of $14,082,000. Net income per share of Common Stock was $1.05 per
share in 1994 compared to $.98 in 1993, representing an increase of $.07 per
share. In determining net income per common share, preferred stock dividends
($16,846,000 and $10,888,000 in 1994 and 1993, respectively) reduced income
allocable to the Common Stock. The increase was primarily the result of improved
property operations at SEI's
77
<PAGE>
Same Store mini-warehouses, the acquisition of additional real estate facilities
during 1994, 1993 and 1992, and the acquisition of additional partnership
interests.
Rental income increased $32,642,000, or 30%, from $109,203,000 in 1993 to
$141,845,000 in 1994 and cost of operations increased $10,700,000, or 25%, from
$42,116,000 in 1993 to $52,816,000 in 1994. The following table illustrates
rental income and cost of operations by portfolio category:
<TABLE>
<CAPTION>
For the Year Ended
December 31, Net increase
------------------------- --------------------
1994 1993 $$ %%
--------- ---------- --------- -------
(dollar amounts in 000's)
<S> <C> <C> <C> <C>
RENTAL INCOME:
--------------
Mini-warehouses:
Same Store $ 91,970 $ 86,778 $ 5,192 6%
Newly Acquired 35,027 9,059 25,968 287%
Business Parks 14,848 13,366 1,482 11%
-------- -------- ------- ----
Total rental income $141,845 $109,203 $32,642 30%
======== ======== ======= ====
COST OF OPERATIONS:
-------------------
Mini-warehouses:
Same Store $ 33,070 $ 31,512 $ 1,558 5%
Newly Acquired 12,196 3,247 8,949 276%
Business Parks 7,550 7,357 193 3%
-------- -------- ------- ----
Total cost of operations $ 52,816 $ 42,116 $10,700 25%
======== ======== ======= ====
</TABLE>
The increase in rental income for the Same Store mini-warehouses is
principally due to increased occupancy levels combined with an increase in
average rental rates. Weighted average occupancy levels were 90.3% for the Same
Store mini-warehouses for the year ended December 31, 1994 compared to 89.5% for
the same period in 1993. Realized monthly rent per square foot for these
facilities was $.59 and $.56 for the year ended December 31, 1994 and 1993,
respectively.
From January 1, 1992 through December 31, 1994, SEI acquired a total of 123
mini-warehouse facilities, 23 of which were acquired pursuant to a merger
transaction on September 30, 1994. As a result of these acquisitions, rental
income and cost of operations increased significantly in 1994 as compared to
1993 for the Newly Acquired mini-warehouses.
Rental income and cost of operations at the business park facilities
improved principally due to the acquisition of a business park facility located
in Monterey Park, California during 1994 combined with significant improvement
in operations at the Culver City, California business park. Weighted average
occupancy levels were 95.3% for the business park facilities for the year ended
December 31, 1994 compared to 93.1% for the same period in 1993.
Property net operating income improved in 1994 compared to 1993. Rental
income and cost of operations increased in 1994 compared to 1993, as discussed
above, and property depreciation expense increased $3,175,000 from $24,924,000
in 1993 to $28,099,000 in 1994, or 13%, resulting in a net increase in property
net operating income of $18,767,000, or 45%. Property net operating income
prior to the reduction of depreciation increased by $21,942,000, or 33%. These
increases were the result of improved property operations for the Same Store
mini-warehouses, the acquisition of a total of 123 additional mini-warehouse
facilities and one business park facility during 1994, 1993 and 1992, and
improved property operations at SEI's business park facilities.
Property net operating income for the Same Store mini-warehouses increased
by $2,583,000, or 6.7%, from $38,383,000 in 1993 to $40,966,000 in 1994.
Property net operating income prior to the reduction of depreciation for the
Same Store mini-warehouses increased by $3,634,000, or 6.6%, from $55,266,000 in
1993 to $58,900,000 in 1994. These increases continue the upward trend of
improved operations at these facilities over the past three years as property
net
78
<PAGE>
operating income prior to the reduction of depreciation increased by
approximately 9.7% in 1993, and 6.1% in 1992 compared to the respective prior
year.
During 1994 and 1993 the Newly Acquired mini-warehouses contributed
approximately $22,831,000 and $5,812,000 of property net operating income prior
to the reduction of depreciation, respectively.
Property net operating income with respect to SEI's business park
operations improved by $2,668,000 from a net operating loss of $429,000 in 1993
to net operating income of $2,239,000 in 1994. Property net operating income
prior to the reduction of depreciation with respect to SEI's business park
operations improved by $1,289,000 from $6,009,000 in 1993 to $7,298,000 in 1994.
These improvements are principally due to the improved performance of SEI's
business park facility located in Culver City, California, where property net
operating income increased by approximately $511,000 combined with the 1994
acquisition of a facility located in Monterey Park, California which provided
property net operating income of $710,000 in 1994.
Interest and other income decreased from $5,477,000 in 1993 to $5,351,000
in 1994. The decrease is primarily attributable to the cancellation of mortgage
notes receivable totaling $24,441,000 (face amount) during 1994 in connection
with the acquisition of the underlying real estate facilities securing the
mortgage notes.
Interest expense increased from $6,079,000 in 1993 to $6,893,000 in 1994,
representing an increase of $814,000. This increase is primarily attributable
to the overall increase in average debt outstanding in 1994 compared to 1993 as
a result of increased borrowings on its bank credit facilities in 1994 compared
to 1993. SEI principally uses its credit facilities to finance the acquisition
of real estate investments which are subsequently repaid with the net proceeds
from the sale of SEI's securities. The weighted average annual interest on the
credit facility and the mortgage notes outstanding at December 31, 1994 was
approximately 7.3% and 9.3%, respectively. Also during the third and fourth
quarters of 1994, SEI wrote-off $700,000 of debt issuance costs and $300,000 of
fees to establish the new bank credit facility.
Advisory fees increased by $1,364,000 from $3,619,000 in 1993 to $4,983,000
in 1994. The advisory fee, which is based on a contractual computation,
increased as a result of increased adjusted net income (as defined) per common
share combined with the issuance of additional common and preferred stock during
1994 and 1993.
Year ended December 31, 1993 compared to year ended December 31, 1992. Net
---------------------------------------------------------------------
income in 1993 was $28,036,000 compared to $15,123,000 in 1992, representing an
increase of $12,913,000. Net income per share of Common Stock was $.98 in 1993
compared to $.90 in 1992, representing an increase of $.08 per share. Net
income in 1992 included a gain on the partial condemnation by a governmental
authority of a mini-warehouse facility of $398,000 or $.02 per share of Common
Stock. In addition, in determining net income per common share, preferred stock
dividends ($10,888,000 and $812,100 in 1993 and 1992, respectively) reduced
income allocable to Common Stock.
Income before gain on disposition of real estate was $28,036,000 in 1993
compared to $14,725,000 in 1992, representing an increase of $13,311,000, or
90%. The increase was primarily the result of improved property operations for
properties owned throughout 1993 and 1992, the acquisition of additional real
estate facilities during 1993 and 1992, the acquisition of additional
partnership interests, increased interest income and reduced interest expense.
Rental income increased $13,317,000, or 14%, from $95,886,000 in 1992 to
$109,203,000 in 1993, cost of operations increased $3,768,000, or 10%, from
$38,348,000 in 1992 to $42,116,000 in 1993, and depreciation expense increased
$2,888,000 from $22,036,000 in 1992 to $24,924,000 in 1993, resulting in a net
increase in property operating income of $6,661,000, or 19%. The following
table illustrates rental income and cost of operations by portfolio category:
79
<PAGE>
<TABLE>
<CAPTION>
For the Year Ended Net increase
December 31, (decrease)
------------------------- ---------------------
1993 1992 $$ %%
--------- ---------- --------- --------
(dollar amounts in 000's)
<S> <C> <C> <C> <C>
RENTAL INCOME:
--------------
Mini-warehouses:
Same Store $ 86,778 $81,232 $ 5,546 7%
Newly Acquired 9,059 1,681 7,378 439%
Business Parks 13,366 12,973 393 3%
-------- ------- ------- ----
Total rental income $109,203 $95,886 $13,317 14%
======== ======= ======= ====
COST OF OPERATIONS:
-------------------
Mini-warehouses:
Same Store $ 31,512 $30,859 $ 653 2%
Newly Acquired 3,247 722 2,525 350%
Business Parks 7,357 6,767 590 9%
-------- ------- ------- ----
Total cost of operations $ 42,116 $38,348 $ 3,768 10%
======== ======= ======= ====
</TABLE>
The increase in rental income at both the Same Store mini-warehouses and
the business park facilities is principally due to increased occupancy levels.
Weighted average occupancy levels were 89.5% for the Same Store mini-warehouse
facilities and 93% for the business park facilities in 1993 compared to 86.8%
for the mini-warehouse facilities and 90% for the business park facilities in
1992. The significant increase in the Newly Acquired mini-warehouse rental
income and cost of operations was due to the acquisition of 41 mini-warehouses
in 1993 and 11 mini-warehouses in 1992.
Property net operating income prior to the reduction for depreciation
increased by $9,549,000, or 16.6%. These increases were the result of (i)
improved property operations at the Same Store mini-warehouses and (ii) the
acquisition of 11 additional mini-warehouses during 1992 (four of which were
acquired on December 30, 1992) and 41 additional mini-warehouse facilities
during 1993 (13 of which were acquired on December 30, 1993) partially offset by
reduced property operations at SEI's business park facilities.
Property net operating income for the Same Store mini-warehouses increased
by $4,535,000, or 13.4%, from $33,848,000 in 1992 to $38,383,000 in 1993.
Property net operating income prior to the reduction of depreciation expense for
the Same Store mini-warehouses increased by $4,893,000, or 9.7%, from
$50,373,000 in 1992 to $55,266,000 in 1993. These increases continue the upward
trend of improved operations at these facilities over the past three years as
net operating income prior to reduction for depreciation expense increased by
approximately 6.1% in 1992 compared to 1991 and 2.0% in 1991 compared to 1990.
These increases are principally due to increased occupancy levels combined with
a slight increase in average rental rates.
The real estate facilities which were acquired during 1993 and 1992
contributed approximately $4,209,000 and $635,000 of property net operating
income in 1993 and 1992, respectively ($5,812,000 and $959,000 of property net
operating income prior to the reduction for depreciation expense in 1993 and
1992, respectively).
Property net operating income with respect to SEI's business park
operations decreased by $1,448,000 from $1,019,000 in 1992 to a net operating
loss of $429,000 in 1993. Property net operating income prior to the reduction
of depreciation expense with respect to SEI's business park operations decreased
by $197,000, or 3.2%, from $6,206,000 in 1992 to $6,009,000 in 1993. These
decreases are principally due to the performance of SEI's business park facility
located in Culver City, California, where property net operating income
decreased by approximately $590,000 due to a decline in occupancy and increased
expenses. SEI's business park facility manager, PSCP, has been actively
marketing the facility and has improved occupancy and property operations at the
facility in 1994.
80
<PAGE>
Interest and other income increased from $1,562,000 in 1992 to $5,477,000
in 1993 for a net increase of $3,915,000. The increase is primarily
attributable to the acquisition of mortgage notes receivable totaling
$61,088,000 (face amount). The mortgage notes bear interest at stated rates
ranging from 6.125% to 11.97% and effective interest rates ranging from 10.00%
to 14.74%. The overall average outstanding mortgage notes receivable balance
for the year ended December 31, 1993 was approximately $54,453,000 generating an
overall average effective yield of 11.04%.
Interest expense decreased from $9,834,000 in 1992 to $6,079,000 in 1993
for a net decrease of $3,755,000. The decrease in interest expense is primarily
attributable to overall decreases in average debt outstanding as mortgage notes
payable were reduced by $19,141,000 during 1993 combined with reduced average
borrowings on SEI's credit facilities during 1993 as compared to 1992. The
weighted average interest on the mortgage notes outstanding at December 31, 1993
was approximately 10.0%.
<TABLE>
<CAPTION>
For the Six Months
Ended June 30, For the Year Ended December 31,
---------------------------- ------------------------------------------
1995 1994 1994 1993 1992
------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Combined net income of the
consolidated PSP Partnerships $ 9,163,000 $ 8,055,000 $17,150,000 $12,237,000 $ 9,722,000
SEI's share of net income of the
consolidated PSP Partnerships
resulting from partnership
interests acquired since 1990 (5,448,000) (3,264,000) (7,669,000) (4,946,000) (2,827,000)
----------- ----------- ----------- ----------- -----------
Remaining "Minority interest in
income" as reflected in the SEI's
consolidated financial statements $ 3,715,000 $ 4,791,000 $ 9,481,000 $ 7,291,000 $ 6,895,000
=========== =========== =========== =========== ===========
</TABLE>
Advisory fees increased by $1,007,000 from $2,612,000 in 1992 to $3,619,000
in 1993. The advisory fee, which is based on a contractual computation,
increased as a result of increased adjusted net income (as defined) per common
share combined with the issuance of additional preferred stock during 1993.
81
<PAGE>
Property Operating Trends
The following table illustrates property operating trends for the last
three years:
<TABLE>
<CAPTION>
Six Months
Ended June 30, Year Ended December 31,
---------------- -------------------------
1995 1994 1994 1993 1992
------- ------ ------ ------- ------
<S> <C> <C> <C> <C> <C>
Change in property net operating income
("NOI") over prior year for the Same
Store mini-warehouses:
After reductions for depreciation.......... 4.0% 10.1% 6.7% 13.4% 8.2%
Prior to reductions for depreciation....... 4.6% 8.3% 6.6% 9.7% 6.1%
Change in NOI over prior year for all
properties:
After reductions for depreciation.......... 43.2% 39.3% 44.5% 18.8% 7.3%
Prior to reductions for depreciation....... 37.4% 29.3% 32.7% 16.6% 5.3%
Weighted average occupancy levels for
the year for Same Store mini-warehouses(1).... 89.3% 89.3% 90.3% 89.5% 86.8%
Realized monthly rent per square foot
for Same Store mini-warehouses(1)(2).......... $ .60 $ .58 $ .59 $ .56 $ .55
Gross Profit Margin (loss): (3)
Mini-warehouse facilities.................. 46.5% 45.1% 46.5% 49.0% 42.2%
Business park facilities(4)................ 22.0% 12.8% 15.1% (3.3)% 7.8%
Overall for all facilities................. 44.1% 41.4% 43.0% 38.6% 37.0%
Pre-depreciation operating margin: (5)
Mini-warehouse facilities.................. 64.6% 63.7% 64.1% 63.5% 61.9%
Business park facilities(4)................ 51.4% 50.1% 49.1% 45.9% 47.8%
Overall for all facilities................. 63.3% 62.2% 62.8% 61.4% 60.0%
</TABLE>
- -------------
(1) Results for the six months ended June 30, 1995 are not necessarily
indicative of the results that may be expected for the year ended December
31, 1995. SEI experiences minor seasonal fluctuations in the occupancy
levels of mini-warehouses with occupancies and property performance
generally higher in the summer months than in the winter months.
(2) Realized rent per foot represents the actual revenue earned per occupied
square foot. Management believes this is a more relevant measure than the
posted rental rates, since posted rates can be discounted through the use of
promotions.
(3) Gross Profit Margin is computed by dividing NOI (rental income less cost of
operations and depreciation) by gross revenues.
(4) Decrease in Gross Profit Margin and pre-depreciation operating margin, in
1993, is principally due to the reductions in property operations at the
Culver City and Lakewood facilities as discussed above.
(5) Pre-depreciation operation margin is computed by dividing NOI prior to the
reduction of depreciation expense by gross revenues.
Trends in property operations are due to:
. Increasing occupancy levels due to the reduced construction from mid-
1980's levels and promotion of SEI's facilities.
. Increasing realized rents per square foot of mini-warehouse space due to
increased demand and reduced need for promotional discounting of mini-
warehouse space due to improved occupancy.
82
<PAGE>
. Increasing revenues due to increasing realized rents and occupancy
levels offset in part by modest increase in expenses (approximately 2%
for the first six months of 1995, 5% in 1994, 1% in 1993, and 3% in
1992 on Same Store mini-warehouses) including increases in payroll
offset by reductions in promotional expenditures.
Liquidity and Capital Resources
Capital Structure. SEI's financial profile is characterized by a low level
-----------------
of debt, increasing net income, increasing FFO and a conservative dividend
payout ratio with respect to the Common Stock. These attributes reflect
management's desire to "match" asset and liability maturities, to minimize
refinancing risks and to retain capital to take advantage of acquisition and
development opportunities and to provide financial flexibility.
Since 1992 SEI has taken a variety of steps to enhance its capital
structure, including:
. The public issuance of approximately $335 million of preferred stock.
The preferred stock does not require redemption or sinking fund payments
by SEI.
. The public issuance of approximately $197 million of Common Stock.
. The issuance of approximately $138.4 million of Common Stock in mergers
with Public Storage Properties VIII, Inc., Public Storage Properties
VI, Inc., and Public Storage Properties, VII, Inc.
. The retention of approximately $34.7 million of funds available for debt
payments or reinvestment.
As a result of these transactions, SEI's capitalization has increased.
Shareholders' equity increased from $188.1 million on December 31, 1991 to
$892.7 million on June 30, 1995. The increased equity combined with reductions
in total debt has resulted in an improvement in SEI's debt to equity ratio from
55.4% at December 31, 1991 to 6.6% at June 30, 1995. SEI's ratio of debt to
total assets also decreased from 19.0% at December 31, 1991 to 5.2% at June 30,
1995.
SEI does not believe it has any significant refinancing risks with respect
to its mortgage debt and nominal interest rate risks associated with its
variable rate mortgage debt which had a principal balance of $16.7 million at
June 30, 1995. SEI uses its bank credit facility primarily to fund acquisitions
and provide financial flexibility and liquidity. The $125 million unsecured
credit facility bears interest at LIBOR plus .75% to 1.50%, depending upon
interest coverage. At June 30, 1995, SEI had no borrowings under this facility.
SEI anticipates that its net cash provided by operating activities will
continue to be sufficient over at least the next 12 months to provide for
capital improvements, debt service requirements and distributions to
shareholders and minority interests. Net cash provided by operating activities
was $79.2 million, $59.5 million and $44.0 million for 1994, 1993 and 1992,
respectively ($49.5 million and $36.5 million for the six months ended June 30,
1995 and 1994, respectively).
Funds Available for Principal Payments and Investment. SEI believes that
-----------------------------------------------------
important measures of its performance as well as its liquidity are funds
available for principal payments and investment and funds provided by operating
activities.
83
<PAGE>
The following table summarizes SEI's ability to pay the minority interests'
distributions, its distributions to the preferred and Common Stock shareholders
and fund capital improvements to maintain the facilities through the use of
funds provided by operating activities. The remaining funds are available to
make both scheduled and optional principal payments on debt and for investment.
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
-------------------- --------------------------------
1995 1994 1994 1993 1992
--------- -------- -------- --------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Net income................................................ $ 29,751 $ 18,940 $ 42,118 $ 28,036 $ 15,123
Depreciation and amortization............................. 16,926 13,541 28,274 24,998 22,405
Minority interest in income............................... 3,715 4,791 9,481 7,291 6,895
Gain on disposition of real estate........................ - - - - (398)
Amortization of discounts on mortgage notes receivable... (67) (506) (693) (848) -
-------- -------- -------- -------- --------
Net cash provided by operating activities................. 50,325 36,766 79,180 59,477 44,025
Distributions from operations to minority interests...... (9,107) (12,085) (23,037) (23,647) (22,892)
-------- -------- -------- -------- --------
Cash from operations allocable to SEI's shareholders..... 41,218 24,681 56,143 35,830 21,133
Less: preferred stock dividends........................... (13,308) (7,298) (16,846) (10,888) (812)
-------- -------- -------- -------- --------
Cash from operations allocable to Common Stock............ 27,910 17,383 39,297 24,942 20,321
Capital improvements to maintain facilities:
Mini-warehouses..................................... (2,397) (1,468) (6,360) (3,520) (3,541)
Business parks...................................... (909) (830) (1,952) (2,915) (1,612)
Add back: minority interest share of capital
improvements to maintain facilities..................... 859 849 2,948 2,935 2,975
-------- -------- -------- -------- --------
Funds available for principal payments, distributions on
Common Stock and investment............................. 25,463 15,934 33,933 21,442 18,143
Cash distributions to Common Stock........................ (14,886) (9,931) (21,249) (14,728) (13,424)
-------- -------- -------- -------- --------
Funds available for principal payments and investment..... $ 10,577 $ 6,003 $ 12,684 $ 6,714 $ 4,719
======== ======== ======== ======== ========
</TABLE>
The increases in funds provided by operating activities and funds available
for principal payments and investment over the past three years is primarily due
to (i) increasing property net operating income at the Same Store mini-
warehouses, (ii) the acquisition of limited and general partnership interests in
the PSP Partnerships and (iii) the leverage created through the issuance of
preferred stock and the utilization of the net proceeds in real estate
investments which have provided net cash flows in excess of the preferred stock
dividend requirements. These factors have improved the cash flow position of
the Common Stock as FFO (as defined by SEI) allocable to the Common Stock
(equivalent to Cash from operations allocable to Common Stock in the above
table) has increased over the same period at a rate greater than the increase in
number of common shares. FFO, as defined by SEI, means net income (loss)
(computed in accordance with GAAP) before (i) gain (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, including property management agreements and goodwill), and (ii) less
FFO attributable to minority interest. FFO is a supplemental performance
measure for equity REITs as defined by the National Association of Real Estate
Investment Trusts, Inc. ("NAREIT"). The NAREIT definition does not specifically
address the treatment of minority interest in the determination of FFO or the
treatment of the amortization of property management agreements and goodwill.
In the case of SEI, FFO represents amounts attributable to its shareholders
after deducting amounts attributable to the minority interests and before
deductions for the amortization of property management agreements and goodwill.
FFO, as defined by SEI, is presented because many industry analysts consider
FFO, as defined by SEI, to be one measure of the performance of SEI and it is
used in establishing the terms of the Class B Common Stock. FFO does not take
into consideration scheduled principal payments on debt, capital improvements,
distributions and other obligations of SEI. Accordingly, FFO is not a
substitute for SEI's cash flow or net income as a measure of SEI's liquidity or
operating performance or ability to pay distributions.
84
<PAGE>
The significant increase in capital improvements in 1994 compared to 1993
for the mini-warehouse facilities is due to the acquisition of new facilities in
1994 and 1993 combined with approximately $800,000 of non-recurring expense to
upgrade certain facilities in Texas to provide for climate controlled storage
units.
FFO, as defined by SEI, (equivalent to Cash from operations allocable to
SEI's shareholders in the above table) increased to $56,143,000 for the year
ended December 31, 1994 compared to $35,830,000 in 1993 and $21,133,000 in 1992.
FFO, as defined by SEI, has increased to $41,218,000 for the six months ended
June 30, 1995 from $24,681,000 for the same period in 1994. FFO, as defined by
SEI, allocable to Common Stock increased to $39,297,000 for the year ended
December 31, 1994 compared to $24,942,000 in 1993 and $20,321,000 in 1992. FFO,
as defined by SEI, allocable to the Common Stock has increased to $27,910,000
for the six months ended June 30, 1995 compared to $17,383,000 for the same
period in 1994.
During 1995, SEI has budgeted approximately $8 million for capital
improvements ($2 million of which is directly attributable to the minority
interest in respect of its ownership interest) to maintain its facilities.
During 1994, SEI incurred capital improvements of approximately $8.3 million.
SEI believes that it is not subject to any significant refinancing risks.
Net cash used in investing activities increased from $21.0 million in 1992
to $137.4 million in 1993 to $169.6 million in 1994. This increase is
principally due to the acquisition of additional real estate facilities and
minority interests. Net cash provided by financing activities increased from
net cash uses of $21.1 million in 1992 to net cash provided of $80.1 million in
-------
1993 and $100.0 million in 1994. This increase is principally due to the
issuance of both common and preferred stock in 1993 and 1994 partially offset by
increased distributions to SEI's shareholders.
In March 1995, SEI acquired two parcels of land located in Atlanta, Georgia
on which SEI is currently developing mini-warehouse facilities. One facility
opened in late August 1995 and the other is scheduled to open in December 1995.
The estimated aggregate cost of these facilities is approximately $8.0 million.
SEI believes its geographically diverse portfolio has resulted in a
relatively stable and predictable investment portfolio with increasing overall
property performance over the past four years.
85
<PAGE>
OPERATING COMPANIES AND REAL ESTATE INTERESTS
The following discussion should be read in conjunction with the Combined
Financial Statements of the Operating Companies and Real Estate Interests and
notes thereto elsewhere in this Proxy Statement. The Combined Financial
Statements include the property management operations of PSMI and PSCP, the
advisory business of the Adviser and the merchandise operations of PSMI
(collectively, the "Operating Companies") and the real estate assets in which
SEI proposes to acquire an interest (the "Real Estate Interests").
Description of Businesses Included
PSMI operated and managed, pursuant to property management agreements,
1,074 self-storage mini-warehouses at June 30, 1995. PSCP operated and managed,
pursuant to management agreements, 45 commercial office buildings and light
industrial business parks at June 30, 1995. These facilities constitute all of
the United States mini-warehouses and business parks doing business under the
"Public Storage" name and all those in which SEI has an interest. The property
management agreements generally provide for compensation equal to 6%, in the
case of PSMI, of the gross revenues of the facilities managed, and 5%, in the
case of PSCP, of the gross revenues of the facilities managed. 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.
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. The advisory fee is
equal to (i) 12.75% of SEI's adjusted income (as defined, and after a reduction
for SEI's share of capital improvements) per share of Common Stock on the first
14,989,454 common shares, (ii) 6% of the adjusted income per share on common
shares in excess of 14,989,454, and (iii) 6% of all dividends paid on SEI
preferred stock. The Adviser pays the salaries and expenses of SEI's executive
officers, facility acquisition staff and rent.
Merchandise operations consists of the sale of locks and boxes to customers
and tenants at substantially all the mini-warehouse facilities managed by PSMI.
These products are ancillary to renting storage space. This activity is not
part of the rental activity of the mini-warehouse facilities.
The Real Estate Interests consist of partial equity interests in 63 REITs
and partnerships which own 511 mini-warehouses and 15 commercial facilities
(including seven properties in which a fee interest is being acquired), all
operated under the "Public Storage" name, and 10 mortgage notes receivable
secured by mini-warehouse facilities.
Results of Operations
As reflected in the table below, the operating segments and real estate
assets contained in the financial statements are profitable with consistent
overall growth. Each of the segments is dependent upon the growth and
profitability of the mini-warehouse and commercial facilities.
Facility management fees of $1.6 million, $1.5 million, $3.1 million, $2.9
million and $2.7 million for each of the six month periods ended June 30, 1995
and 1994 and for each of the three years in the period ended December 31, 1994
attributable to equity in earnings of real estate entities and the seven
properties in which a fee interest is being acquired have been eliminated in the
historical financial statements. To facilitate the discussion of operations,
the table and analysis below have been presented without this elimination.
86
<PAGE>
<TABLE>
<CAPTION>
Six months ended
June 30, Years ended December 31,
------------------- ------------------------------
1995 1994 1994 1993 1992
--------- ------- -------- --------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Revenues:
Facilities management fees, primarily
from affiliates:
Mini-warehouse facilities................. $13,768 $12,639 $26,383 $24,088 $22,218
Commercial facilities..................... 1,019 981 1,973 1,924 1,944
Equity in earnings of real estate entities. 11,541 10,092 21,612 17,008 12,452
Advisory fees from affiliate............... 3,426 2,356 4,983 3,619 2,612
Merchandise operations..................... 1,013 907 1,872 1,564 1,263
Rental revenues............................ 1,637 1,545 3,152 2,884 2,867
Interest income............................ 459 464 996 792 847
Eliminations............................... (98) (93) (189) (173) (172)
------- ------- ------- ------- -------
Total revenues............................. $32,765 $28,891 $60,782 $51,706 $44,031
======= ======= ======= ======= =======
Net income:
Net operating income of operating segments
- ------------------------------------------
Facilities management, primarily from
affiliates:
Mini-warehouse facilities................. $11,579 $10,088 $21,368 $18,947 $16,906
Commercial facilities..................... 626 692 1,557 1,450 1,417
Equity in earnings of real estate entities. 11,541 10,092 21,612 17,008 12,452
Advisory services.......................... 2,336 1,539 3,133 2,209 1,637
Merchandise operations..................... 512 472 1,006 764 574
Rental operations (unleveraged)............ 842 795 1,640 1,413 1,566
------- ------- ------- ------- -------
Net operating income....................... 27,436 23,678 50,316 41,791 34,552
Other income/expense
--------------------
Interest income............................ 459 464 996 792 847
Interest expense........................... (2,689) (2,844) (5,607) (1,005) (7,732)
Gain on retirement of debt................. -- -- -- 14,440 3,311
------- ------- ------- ------- -------
Net income................................. $25,206 $21,298 $45,705 $56,018 $30,978
======= ======= ======= ======= =======
</TABLE>
Six months ended June 30, 1995 compared to six months ended June 30, 1994:
-------------------------------------------------------------------------
Net income for the six months ended June 30, 1995 was $25,206,000 compared to
$21,298,000 for the same period in 1994, representing an increase of $3,908,000,
or 18%.
During the six months ended June 30, 1995, net income increased as revenues
increased 13% while expenses remained constant. Revenues for the six months
ended June 30, 1995 were $32,765,000 compared to $28,891,000 in 1994. This
increase of $3,874,000, or 13%, is primarily due to increases in equity in
earnings of real estate entities of $1,449,000, in mini-warehouse facility
management fees of $1,167,000 and in advisory fees of $1,070,000, resulting from
higher revenues from facilities, due principally to higher occupancies at mini-
warehouse facilities (89.1% in 1995 compared to 87.8% in 1994) and higher
monthly realized rental rates ($0.70 in 1995 compared to $0.67 in 1994). In
addition to improved property operations, advisory fees increased due to SEI's
acquisition of additional properties and larger capital base.
Cost and expenses remained stable between periods with increases in
advisory and administrative expenses offset by decreases in costs of managing
facilities and interest expense. Advisory and administrative expenses increased
due to the expansion of the acquisition staff due to increased property
acquisition and development activities at SEI. Cost of managing facilities
decreased due to a reduction of bonus expenses and depreciation charges offset
in part by the incurrence of non-recurring legal expenses. As a result, net
operating income (revenues less expenses before interest income and expense) was
$27,436,000 in 1995 compared to $23,678,000 in 1994, an increase of $3,758,000
or 16%. Changes in revenues and net income are discussed below.
87
<PAGE>
Year ended December 31, 1994 compared to year ended December 31, 1993: Net
---------------------------------------------------------------------
income for the year ended December 31, 1994 was $45,705,000 compared to
$56,018,000 for 1993. The decrease of $10,313,000 is primarily the result of
$14,440,000 in extraordinary gains from the retirement of debt in early 1993
which did not occur in 1994.
Revenues and net operating income improved in 1994, primarily as a result
of increased revenues associated with higher occupancies and rental rates at the
facilities, while expenses (before interest) grew modestly at 4%. Revenues for
1994 were $60,782,000 compared to $51,706,000 in 1993. This increase of
$9,076,000, or 18%, is primarily due to increases in equity in earnings of real
estate entities ($4,604,000), in mini-warehouse facility management fees
($2,344,000) and advisory fees ($1,364,000) resulting from higher revenues from
facilities, due principally to higher occupancies and monthly realized rental
rates at mini-warehouse facilities (89.0% compared to 86.6% and $0.68 per square
foot to $0.64 per square foot for 1994 and 1993, respectively). In addition to
improved property operations, advisory fees increased due to SEI's acquisition
of additional properties and issuance of additional capital.
Cost and expenses (before interest) were $9,470,000 in 1994 compared to
$9,123,000 in 1993, a $347,000 increase. This increase is attributable to an
increase in advisory services cost related from an expansion of the acquisition
staff due to increased property acquisition activities at SEI. Cost of
merchandise activities also increased reflecting costs associated with increased
sales. These costs were partially offset by a decline in costs of managing
facilities due to reductions in non-salary expenses. As a result, net operating
income was $50,316,000 in 1994 compared to $41,791,000 in 1993, an increase of
$8,525,000, or 20%, primarily related to the higher revenues and modest
increases in operating expenses. Changes in revenues and net income are
discussed below.
The Operating Companies issued $75 million of notes in late 1993. The
interest expense for 1994 was $5,607,000 (representing a full year of interest
expense) compared to $1,005,000 in 1993 (representing interest expense on debt
outstanding for one month on the $75 million of notes and interest on secured
debt for the year).
During 1992 and 1993, PSMI and PSI extinguished debt of PSMI through a
series of purchases from unaffiliated note holders. In November 1993, PSMI
issued $75 million in Senior Secured Notes due 2003. Due to the timing of the
debt retired and the subsequent issuance of new debt, interest expense in 1993
was significantly lower than in 1992 and in 1994 when debt was outstanding for
the entire year.
Year ended December 31, 1993 compared to year ended December 31, 1992: Net
---------------------------------------------------------------------
income for the year ended December 31, 1993 was $56,018,000 compared to
$30,978,000 for 1992. The increase of $25,040,000 results from improvement in
net operating income, gain on retirement of debt and lower interest expense.
Extraordinary gains related to the retirement of debt in early 1993 and 1992
were $14,440,000 and $3,311,000, respectively. In addition, as discussed above,
interest expense was $1,005,000 in 1993, compared to $7,732,000 in 1992. The
impact of the changes related to gains on debt and interest expense accounts for
$17,856,000 of the improvement in net income for 1993 compared to 1992.
Revenues and net operating income improved in 1993, primarily as a result
of increased revenues associated with higher occupancies and rental rates at the
mini-warehouse facilities. Revenues for the year of 1993 were $51,706,000
compared to $44,031,000 in 1992. This increase of $7,675,000 or 15% is
primarily due to increases in equity in earnings of real estate entities
($4,556,000), in mini-warehouse facility management fees ($1,850,000) and
advisory fees ($1,007,000) resulting from higher revenues from facilities, due
principally to higher occupancies and monthly realized rental rates at mini-
warehouse facilities (86.6% compared to 82.3% and $0.64 per square foot to $0.63
per square foot for 1993 and 1992, respectively). In addition to improved
property operations, advisory fees increased due to SEI's acquisition of
additional properties and issuance of additional capital.
Cost and expenses (before interest) were $9,123,000 in 1993 compared to
$8,632,000 in 1992, an increase of $491,000 or 6%. The increase is due to the
incurrence of non-recurring legal fees in 1993 associated with the advisory
services. This increase was partially offset by a decrease in cost of managing
facilities due to a favorable comparison to 1992 which includes $450,000 in non-
recurring expenses for computer consulting, professional services, donations and
third party management costs. Operating income was $41,791,000 in 1993 compared
to $34,552,000 in 1992, an increase of $7,239,000, or 21%. Changes in revenues
and net income are discussed below.
88
<PAGE>
The compound growth rates of revenues and net operating income for the
period 1992 through 1994 are as follows:
<TABLE>
<CAPTION>
Growth rates 1992-1994
-------------------------
1994 operating Net operating
Operating segment margin(1) Revenues income
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Facilities management, primarily from
affiliates:
Mini-warehouse facilities.................... 81% 9% 12%
Commercial facilities........................ 79% 1% 5%
Equity in earnings of real estate entities..... N/A 32% 32%
Advisory services.............................. 63% 38% 38%
Merchandise operations......................... 54% 22% 32%
Rental operations (unleveraged)................ 52% 5% 2%
</TABLE>
- ----------------
(1) Operating margin is defined as net operating income (revenues less related
cost of operations) divided by revenues for each operating segment.
Each of the above operating segments, except Merchandise operations, has
cost structures consisting primarily of fixed costs. As such, an increase in
revenues generally results in a corresponding increase in the operating income
of such segment.
Property Management. PSMI is the largest operator of mini-warehouses in
-------------------
the United States. All of the facilities operated by PSMI and PSCP are operated
under the "Public Storage" trademark which carries strong name recognition.
Operating income from property management services has consistently
increased resulting from increasing management fees while expenses have remained
relatively constant. The increase in management fees is the result of an
increase in the number of facilities under management and an increase in
property level revenues resulting from increased property occupancies and rental
rates.
The following table shows property information for mini-warehouse and
commercial facilities under management. Average management fees paid per
facility under management increased between 3% and 9% per year, resulting from
an increase in occupancies and rental rates of properties managed.
<TABLE>
<CAPTION>
Six months ended
June 30, Year ended December 31,
---------------------- -------------------------------
1995 1994 1994 1993 1992
-------- ---------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Mini-warehouse facilities
- -------------------------
Number of facilities under management
at end of period......................... 1,074 1,046 1,067 1,040 1,020
Square feet under management at end
of period (in millions).................. 62.9 61.6 62.3 60.2 60.1
Rental revenues (in millions).............. $ 233.7 $ 217.0 $ 447.2 $ 407.0 $ 377.9
Average per facility under management:
Rental revenues...................... $218,600 $207,500 $424,700 $395,600 $367,300
Management fees incurred............. $ 12,800 $ 12,100 $ 24,700 $ 23,200 $ 21,800
Weighted average occupancy........... 89.1% 87.8% 89.0% 86.6% 82.3%
Realized monthly rental rate
per sq. ft (1).................... $ 0.70 $ 0.67 $ 0.68 $ 0.64 $ 0.63
</TABLE>
89
<PAGE>
<TABLE>
<CAPTION>
Six months ended
June 30, Year ended December 31,
-------------------- --------------------------------
1995 1994 1994 1993 1992
--------- -------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
Commercial facilities (2)
- -------------------------
Number of facilities under management
at end of period....................... 78 78 78 78 80
Square feet under management at end
of period (in millions)................ 5.2 5.2 5.2 5.2 5.3
Rental revenues (in millions)............ $ 20.3 $ 20.0 $ 39.6 $ 38.1 $ 38.7
Average per facility under management:
Rental revenues.................... $260,300 $256,400 $507,100 $487,400 $484,100
Management fees incurred........... $ 13,000 $ 12,600 $ 25,300 $ 24,700 $ 24,300
Weighted average occupancy......... 94.4% 93.6% 94.0% 90.6% 85.2%
Realized monthly rental rate
per sq. ft (1)................... $ 0.69 $ 0.68 $ 0.68 $ 0.66 $ 0.72
</TABLE>
- --------------
(1) Realized rent per square foot represents the actual revenue earned per
occupied square foot. Management believes this is a more relevant measure
than posted rental rates, since posted rates can be discounted through the
use of promotions.
(2) Includes the commercial operations at mini-warehouse facilities (33
facilities at June 30, 1995).
Trends in property operations are due to:
. Increasing occupancy levels due to the decreased levels of new supply in
the industry, growth in demand and promotion of the facilities by PSMI
and PSCP.
. Increasing realized rents per square foot of mini-warehouse space due to
increased demand facilitating price increases and reduced promotional
discounting of mini-warehouse space.
The rental revenues of the facilities are typically higher in the second
and third quarters primarily because of the timing of rental rate increases and
because mini-warehouse facilities tend to experience greater occupancy during
the spring and summer months reflecting the moving patterns of individual users.
The facilities managed by the Operating Companies are located in or near
major metropolitan markets in 38 states. Geographic diversity reduces the
impact of regional economic downturns on the Operating Companies and provides a
greater degree of stability to management fees earned. No single facility
accounted for more than .5% of management fees earned in 1994.
The four states in which the largest concentration of facilities (mini-
warehouse and commercial facilities combined) are located and their operating
trends are as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE OCCUPANCIES
---------------------------------------------
At
June 30, Six months
1995 ended June 30, Year Ended December 31,
% of ---------------- --------------------------
Total 1995 1994 1994 1993 1992
--------- ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
California 30% 87.7% 85.5% 86.3% 84.5% 82.2%
Texas 12% 89.1% 88.3% 89.4% 88.2% 87.5%
Florida 7% 86.9% 88.6% 89.0% 87.6% 84.0%
Illinois 5% 91.7% 88.9% 90.8% 84.1% 74.0%
Other 46% 90.9% 90.1% 91.3% 88.9% 82.3%
---- ----- ----- ----- ----- -----
Total 100% 89.5% 88.3% 89.4% 87.1% 82.6%
==== ===== ===== ===== ===== =====
</TABLE>
90
<PAGE>
WEIGHTED AVERAGE REALIZED MONTHLY RENT
PER SQUARE FOOT (1)
----------------------------------------------
<TABLE>
<CAPTION>
At
June 30, Six months
1995 ended June 30, Year Ended December 31,
% of --------------- ------------------------
Total 1995 1994 1994 1993 1992
--------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
California 30% $0.81 $0.80 $0.81 $0.78 $0.79
Texas 12% 0.56 0.54 0.55 0.53 0.52
Florida 7% 0.66 0.65 0.66 0.58 0.58
Illinois 5% 0.67 0.64 0.65 0.62 0.62
Other 46% 0.66 0.63 0.62 0.60 0.56
---- ----- ----- ----- ----- -----
Total 100% $0.70 $0.67 $0.68 $0.64 $0.63
==== ===== ===== ===== ===== =====
</TABLE>
- ---------------
(1) Realized rent per square foot represents the actual revenue earned per
occupied square foot. Management believes this is a more relevant measure
than posted rental rates, since posted rates can be discounted through the
use of promotions.
Most of the facilities managed by PSMI and PSCP are owned by SEI or by
entities affiliated with PSI. Of the 1,119 facilities operated by PSMI and
PSCP, 70 are operated under management contracts with third parties who are not
affiliated with SEI or PSI. These 70 properties accounted for management fees
of $1,521,000, $1,458,000 and $1,506,000 in 1994, 1993 and 1992, respectively,
representing approximately 5% of all management fees earned in those periods.
Approximately 30% of the management fees from third-party contracts are earned
on 26 properties owned by a single owner. These 26 properties have been under
management since 1988.
Cost of managing facilities consists primarily of salaries and wages and
the related expenses of senior property management personnel as noted below:
<TABLE>
<CAPTION>
Six months ended
June 30, Year ended December 31,
------------------------- --------------------------
1995 1994 1994 1993 1992
----------- ----------- -------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
Salaries and wages......... $1,957 $2,147 $4,011 $4,127 $3,925
Other expenses............. 570 414 898 1,417 1,914
====== ====== ====== ====== ======
Total.................. $2,527 $2,561 $4,909 $5,544 $5,839
====== ====== ====== ====== ======
</TABLE>
Salaries and wages include base salaries and bonuses of property management
personnel. The base salaries have remained relatively constant except for an
increase of $227,000 in 1994 related to an increase in the number of regional
management personnel resulting from an increase in the number of properties
under management. This increase in base salary was offset by reduced bonus
expense in 1994 compared to 1993 of approximately $300,000.
Bonus expense included in salaries and wages reflects incentive bonuses
based on the achievement of specific goals. Included in salaries and wages for
the years ended December 31, 1994, 1993, 1992 and the six months ended June 30,
1995 and 1994 are bonuses of $804,000, $1,103,000, $816,000, $158,000 and
$364,000, respectively.
Other expenses have declined each year due to expense controls. Included in
other expenses for the year ended December 31, 1992 are non-recurring expenses
of approximately $450,000 for computer consulting, professional services,
donations and costs associated with the management of third-party properties.
The decrease in other expense from the six months ended June 30, 1995 is
partially the result of a $220,000 decrease in depreciation and amortization of
computer hardware and software costs as compared to 1994 levels partially offset
by non-recurring legal expenses in 1995 associated with the management of
commercial facilities.
Equity in Earnings of Real Estate Entities. Equity in earnings of real
------------------------------------------
estate entities reflects the proportionate income of 63 REITs and partnerships
in which SEI is acquiring an interest of generally 20% to 30%. The improvement
in equity in earnings reflects the improvement in the operations of the
properties owned by these entities. See "-Underlying Properties."
91
<PAGE>
Advisory Services. The Adviser's fees increased at a compound annual rate
-----------------
of 38% from 1992 through 1994. This reflects the improvement of SEI's cash flow
from operations and an increase in the capital base of SEI. The improvement in
SEI's cash flow from operations resulted from improved property operating
results. SEI's overall property operating trends have shown consistent
improvement with growth in net operating income prior to reductions for
depreciation over the same period in the prior year on same stores of 6.1%,
9.7%, 6.6% and 4.6% for the years 1992, 1993, 1994 and the six months ended
June 30, 1995, respectively.
In addition, since 1992, SEI has acquired additional assets with the
proceeds from the issuance of additional capital stock, primarily Common Stock
and preferred stock. This growth in SEI has resulted in increased advisory
fees. Specifically, between January 1, 1992 and June 30, 1995, SEI issued $335
million in preferred stock, $197 million in Common Stock, and an additional $138
million Common Stock in connection with mergers.
Cost of advisory services and administrative expenses consists of salaries
and expenses of SEI's executive officers and acquisition staff and corporate
expenses including rent. Cost of advisory services and administrative expenses
increased in 1993 due to the incurrence of non-recurring legal expenses and
increased in 1994 due to the expansion of the acquisition staff.
Merchandise Operations. Operating income from Merchandise Operations,
----------------------
which accounts for less than 4% of the 1994 operating income of the Operating
Companies, increased due to price increases, an increase in the number of
facilities at which merchandise is offered (from 900 at December 31, 1992 to 975
facilities at June 30, 1995) and the introduction of boxes to the product line
in 1993 (available at 206 facilities at June 30, 1995). Inventory of $75,000 is
included in other assets at June 30, 1995 relating to Merchandise Operations.
Liquidity and Capital Resources
The Operating Companies financial profile is characterized by $68.0 million
of fixed rate, fully amortizing debt and an increasing level of funds available
for principal payments, distributions and investment.
The Operating Companies have $68.0 million of notes outstanding as of
June 30, 1995. The notes bear interest at a fixed rate of 7.08% and are fully
amortizing through the year 2003. Assumption of the notes by SEI in the Merger
is subject to the lenders' consent. Principal payments for the next five years
and thereafter are as follows:
<TABLE>
<S> <C>
1995 (July-December)... $ 2,500,000
1996................... 5,750,000
1997................... 6,500,000
1998................... 7,250,000
1999................... 8,000,000
Thereafter............. 38,000,000
-----------
$68,000,000
===========
</TABLE>
Cash provided by operating activities was $23.9 million, $31.1 million,
$35.8 million and $18.6 million for the years of 1992, 1993 and 1994 and six
months ended June 30, 1995, respectively. These cash flows have been sufficient
to cover capital expenditures and debt service requirements.
Capital expenditures have been and are expected to continue to be
insignificant.
92
<PAGE>
UNDERLYING PROPERTIES
The following discussion should be read in conjunction with the Combined
Summaries of Historical Information relating to the Underlying Properties
("Combined Summaries") and notes thereto included elsewhere in this Proxy
Statement.
The Combined Summaries present the results of operations for the properties
underlying the Real Estate Interests. Specifically, the Underlying Properties
include:
. 505 mini-warehouses and 14 commercial facilities owned by 63 REITs and
limited partnerships, all operated under the "Public Storage" name.
. Seven properties consisting of six mini-warehouses and one commercial
property, wholly-owned by PSI.
. Ten notes receivable, secured by mini-warehouse facilities.
Results of Operations
Six months ended June 30, 1995 compared to the six months ended June 30,
------------------------------------------------------------------------
1994: The net income of the Underlying Properties for the six months ended June
- ----
30, 1995 was $53,083,000 compared to $47,278,000 for the same period in 1994,
representing an increase of 12%. The improved results reflect the general
improvement of the 526 mini-warehouse and commercial facilities, primarily due
to higher occupancies and rental rates of the mini-warehouses. Occupancies of
the mini-warehouse improved from 87.6% for the first six months of 1994 to 89.6%
in the first six months of 1995, and realized rental rates improved from $0.70
per square feet to $0.73 per square feet for the comparable periods.
Year ended December 31, 1994 compared to the year ended December 31, 1993:
-------------------------------------------------------------------------
The net income of the Underlying Properties for the year ended December 31, 1994
was $99,859,000 compared to $80,400,000 for 1993, representing an increase of
24%. During 1994, two mini-warehouses were opened by such ownership entities.
The improvement is also reflective of the general improvement of the 524 mini-
warehouse and commercial facilities operated in both 1994 and 1993 due to
improved occupancies and rental rates. Occupancies for the mini-warehouses
improved from 85.3% in 1993 to 88.9% in 1994 while realized rental rates
improved to $0.71 per square foot from $0.68 per square foot in 1993.
Year ended December 31, 1993 compared to the year ended December 31, 1992:
-------------------------------------------------------------------------
The net income of the Underlying Properties for the year ended December 31, 1993
was $80,400,000 compared to $59,853,000 for 1992, representing an increase of
34%. This improvement reflects the opening of one mini-warehouse in 1993 and
the general improvement of the mini-warehouse and commercial facilities.
Occupancies at the mini-warehouses improved to 85.3% from 79.1% in 1992.
Realized rental rates improved to $0.68 per square foot in 1993 from $0.65 per
square foot in 1992.
93
<PAGE>
The following table illustrates the operating trends of the mini-warehouse
and commercial facilities constituting the Underlying Properties for the last
three years and the six months ended June 30, 1995 and 1994:
<TABLE>
<CAPTION>
Six months ended
June 30, Years ended December 31,
------------------------ ----------------------------------
1995 1994 1994 1993 1992
---------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
MINI-WAREHOUSES
---------------
Number of facilities....................... 511 509 511 509 508
Weighted average occupancy for period...... 89.6% 87.6% 88.9% 85.3% 79.1%
Realized monthly rent per square foot...... $ 0.73 $ 0.70 $ 0.71 $ 0.68 $ 0.65
Rental revenues (in thousands)............. $117,779 $110,566 $227,647 $205,715 $183,576
Property net operating income
(in thousands)(2)......................... 75,985 69,686 145,315 127,407 108,277
Gross profit margin(3)..................... 64.5% 63.0% 63.8% 61.9% 59.0%
Capital expenditures to maintain
facilities (in thousands)................. $ 1,883 $ 1,534 $ 4,707 $ 4,543 $ 4,387
Rentable square feet (in millions)......... 29.7 29.6 29.7 29.6 29.5
COMMERCIAL FACILITIES(1)
------------------------
Number of facilities....................... 33 33 33 33 32
Weighted average occupancy for period...... 94.2% 92.9% 93.5% 91.3% 84.0%
Realized monthly rent per square foot...... $ 0.78 $ 0.78 $ 0.77 $ 0.79 $ 0.80
Rental revenues (in thousands)............. $ 8,451 $ 8,333 $ 16,518 $ 16,223 $ 15,341
Property net operating income
(in thousands)(2)......................... 4,562 4,582 8,692 8,194 8,014
Gross profit margin(3)..................... 54.0% 55.0% 52.6% 50.5% 52.2%
Capital expenditures to maintain
facilities (in thousands)................. $ 529 $ 697 $ 1,301 $ 1,241 $ 1,385
Rentable square feet (in millions)......... 1.9 1.9 1.9 1.9 1.9
</TABLE>
- ----------------
(1) Includes the commercial operations at 18 mini-warehouse facilities
(2) Property net operating income is rental revenues less costs of operations
before depreciation expense.
(3) Gross profit margin is computed by dividing property net operating income
by rental revenues.
94
<PAGE>
All the mini-warehouses have essentially the same operating, physical and
location characteristics. These characteristics include high average
occupancies compared to relatively low break-even occupancy requirements,
geographic diversity, concentration in major metropolitan cities, and increasing
realized rents and occupancies. Substantially all of these facilities were
developed by PSI and have an average age of 9.5 years.
Most facilities operate at consistently high occupancy levels, with over 80%
of the 526 facilities operating at 85% occupancy or better at June 30, 1995.
The following table reflects the occupancy distribution as of June 30, 1995:
OCCUPANCY DISTRIBUTION
AT JUNE 1995
[Bar chart appears here illustrating the occupancy distribution at June 1995]
<TABLE>
<CAPTION>
Occupancy Percentage No. of Facilities
-------------------- -----------------
<S> <C>
0% - 50% 1
50% - 55% 2
55% - 60% 1
60% - 65% 1
65% - 70% 11
70% - 75% 8
75% - 80% 21
80% - 85% 44
85% - 90% 115
90% - 95% 195
95% - 100% 127
</TABLE>
The facilities of the ownership entities are located in the major
metropolitan markets in 38 states. Geographic diversity reduces the impact from
regional economic downturns and provides a greater degree of stability to
revenues. The following table illustrates the geographic diversity of the
facilities at June 30, 1995 as measured by rentable square feet:
GEOGRAPHIC DIVERSITY OF REAL ESTATE INTERESTS
(based on rentable square feet at June 30, 1995)
[Pie chart appears here which illustrates by region the geographic diversity of
the facilities at June 30, 1995 based on rentable square feet]
<TABLE>
<S> <C>
South Western 27%
North Western 18%
North Eastern 18%
Mid Western 17%
South Central 10%
South Eastern 10%
</TABLE>
95
<PAGE>
The four states in which the largest concentration of facilities (mini-
warehouse and commercial facilities combined) are located and their operating
trends are as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE OCCUPANCIES
------------------------------------------------------------
At Six months
June 30, ended June 30, Year Ended December 31,
1995 ----------------------- -------------------------------
% of Total 1995 1994 1994 1993 1992
----------- --------- ----------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
California 32% 87.1% 84.2% 85.2% 82.8% 79.3%
Texas 9 88.8% 89.2% 90.1% 88.6% 88.7%
Illinois 8 91.7% 88.3% 90.7% 83.4% 71.7%
Florida 6 87.3% 89.8% 89.9% 87.0% 83.6%
Other 45 92.0% 90.1% 91.5% 87.6% 78.6%
--- ---- ---- ---- ---- ----
Total 100% 89.8% 87.9% 89.2% 85.7% 79.4%
=== ==== ==== ==== ==== ====
<CAPTION>
WEIGHTED AVERAGE REALIZED MONTHLY RENT PER SQUARE FOOT
------------------------------------------------------------
At Six months
June 30, ended June 30, Year Ended December 31,
1995 ----------------------- -------------------------------
% of Total 1995 1994 1994 1993 1992
----------- --------- ----------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
California 32% $0.81 $0.81 $0.81 $0.79 $0.79
Texas 9 0.63 0.62 0.62 0.61 0.58
Illinois 8 0.67 0.64 0.65 0.62 0.62
Florida 6 0.74 0.70 0.71 0.70 0.64
Other 45 0.71 0.67 0.67 0.64 0.59
--- ----- ----- ----- ----- -----
Total 100% $0.73 $0.71 $0.71 $0.69 $0.66
=== ===== ===== ===== ===== =====
</TABLE>
Trends in property operations are due to:
. increasing occupancy levels due to the decreased levels of new supply in
the industry and promotion of the facilities by PSMI and PSCP.
. increasing realized rents per square foot of mini-warehouse space due
to increased demand and reduced need for promotional discounting of
mini-warehouse space due to improved occupancy.
The rental revenues of the facilities are typically higher in the second and
third quarters primarily because of the timing of rental rate increases and
because mini-warehouse facilities tend to experience greater occupancy during
the spring and summer months reflecting the moving patterns of individual users.
The Underlying Properties encompass in excess of 295,000 rental spaces
throughout 38 states and 79 major metropolitan markets No single facility
generates more than .7% of revenues or has more than .6% of the rentable
square footage. No single tenant occupies more than .1% of the rentable
square footage or accounts for more than .1% of the revenue.
Liquidity and Capital Resources. The Underlying Properties are characterized
by low leverage and an increasing level of funds available for principal
payments, distributions and investments.
96
<PAGE>
The REITs and partnerships in which SEI is acquiring an interest have
relatively low overall debt, with 54 of the 63 entities owning 426 of the 526
properties having no debt. As of December 31, 1994, nine of the entities
have debt totaling $94 million which matures through 2002.
Debt maturities for the next five years and thereafter are as follows:
<TABLE>
<S> <C>
1995.......... $11,036,000
1996.......... 4,543,000
1997.......... 4,352,000
1998.......... 28,727,000
1999.......... 24,113,000
Thereafter.... 21,167,000
-----------
$93,938,000
===========
</TABLE>
Cash provided by operating activities for the Underlying Properties are
$103.4 million, $123.2 million, $141.8 and $74.1 million for the years of
1992, 1993 and 1994 and six months ended June 30, 1995, respectively. These
cash flows have been sufficient to cover capital expenditures and debt
service requirements.
Capital expenditures to maintain the Underlying Properties were $6.1
million, $5.8 million and $5.8 million for the years ended December 31, 1994,
1993 and 1992, respectively, and $2.4 million and $2.2 million for the six
months ended June 30, 1995 and 1994, respectively.
In connection with the acquisition of the notes receivable and seven
properties (100% fee interest being acquired), SEI will assume approximately
$4,706,000 in debt consisting of underlying debt related to four of the notes
receivable and mortgage debt secured by one of the facilities. This debt
bears interest at rates ranging from 7.1% to 9.9% and with maturity dates
ranging through the year 2000. SEI believes the cash flow from the Real
Estate Interests will be sufficient to meet the repayment requirements of the
debt being assumed.
97
<PAGE>
SEI PRO FORMA
The following is a discussion of operations after giving effect to (i)
the issuance and investment of approximately $500 million of additional
capital through the issuance of preferred stock and Common Stock in public
offerings and the issuance of Common Stock in connection with the mergers of
Public Storage Properties VI, VII and VIII, Inc., and (ii) the proposed
merger of PSMI with and into SEI, including the acquisition of the Real
Estate Interests; all as if such transactions were completed at the beginning
of 1994. This discussion is based on the unaudited Pro-Forma Balance Sheet
as of June 30, 1995 and the Statements of Income for the six-month period
ended June 30, 1995 and the year ended December 31, 1994, included elsewhere
in this Proxy Statement. Upon completion of the Merger, including the
acquisition of the Real Estate Interests, SEI will be a fully integrated,
self-advised and self-managed REIT. SEI will acquire the "Public Storage"
name and trademark, operating systems, property management agreements on over
1,100 facilities and equity interest in over 500 geographically diversified
facilities.
Operating Results - SEI Historical compared to SEI Pre-Merger Pro Forma
Six months ended June 30, 1995. Pre-Merger pro forma net income for the
------------------------------
six months ended June 30, 1995 was $36,063,000 compared to the historical net
income of $29,751,000, representing an increase of $6,312,000. Pro forma net
income allocable to the Common Stock increased to $20,413,000 for the six
months ended June 30, 1995 compared to historical net income allocable to the
Common Stock shareholders of $16,443,000 for the same period, representing an
increase of $3,970,000. The increases in net income and net income allocable
to the Common Stock were the result of (i) the additional issuances of equity
securities during 1995, and the use of the proceeds therefrom to acquire
additional real estate assets, and (ii) the merger transactions with Public
Storage Properties VI, Inc. (completed February 28, 1995) and Public Storage
Properties VII, Inc., (completed June 30, 1995), as if such transactions were
completed at the beginning of the period. Pre-Merger pro forma net income per
share of Common Stock was $.48 per share (based on weighted average shares
outstanding of 42,108,048) for the six months ended June 30, 1995 compared to
the historical net income per share of Common Stock of $.50 (based on
weighted average shares of Common Stock outstanding of 32,707,556) for the
same period. The decrease in net income per share of Common Stock is
principally due to additional depreciation expense as a result of the
acquisition of additional real estate facilities combined with additional
preferred stock dividends.
During 1995, SEI issued in public offerings shares of its Series E
Preferred Stock (February 1, 1995, net proceeds of $52.9 million), Series F
Preferred Stock (May 3, 1995, net proceeds of $55.5 million) and Common Stock
(May 31, 1995, net proceeds of $82.0 million). The aggregate net proceeds
have been used to fund the cash portion of the acquisition cost of real
estate facilities, limited partnership units in the PSP Partnerships and
mergers.
During the first six months of 1995, SEI acquired 88 real estate
facilities (including 61 real estate facilities acquired in connection with
the mergers of Public Storage Properties VI, Inc. and Public Storage
Properties VII, Inc.). Since June 30, 1995, SEI acquired an additional 23
real estate facilities and is currently in the process of acquiring an
additional 13 real estate facilities. Rental income, cost of operations and
depreciation expense all increased compared to the respective historical
amounts due to the operating results of real estate facilities acquired
during 1995 (including those real estate facilities which SEI is currently in
the process of acquiring). These transactions increased SEI's capitalization
by approximately $250 million and resulted in an increase in its wholly-owned
property portfolio from 143 to 267.
The consideration for the above real estate facilities included
cancellation of mortgage notes receivable, assumption of mortgage debt and
cash. As a result, interest income decreased related to the cancelled
mortgage notes receivable and interest expense increased to reflect
additional interest expense on the assumed mortgage debt.
Year Ended December 31, 1994. Pre-Merger pro forma net income for the
----------------------------
year ended December 31, 1994 was $68,682,000 compared to the historical net
income of $42,118,000, representing an increase of $26,564,000. Pre-Merger
pro forma net income allocable to the Common Stock increased to $37,476,000
for the year ended December 31, 1994 compared to historical net income
allocable to Common Stock of $25,272,000 for the same period, representing an
increase of $12,204,000. The increases in net income and net income
allocable to the Common Stock were the result of (i) the additional issuances
of equity capital during 1994 and 1995, and the use
98
<PAGE>
of the proceeds therefrom to acquire additional real estate assets, and (ii)
the merger transactions with Public Storage Properties VI, Inc., Public
Storage Properties VII, Inc. and Public Storage Properties VIII, Inc. Pre-
Merger pro forma net income per share of Common Stock was $.90 per share
(based on weighted average shares outstanding of 41,844,644) for the year
ended December 31, 1994 compared to the historical net income per share of
$1.05 (based on weighted average shares of Common Stock outstanding of
24,077,055) for the same period. The decrease in net income per share of
Common Stock is principally due to additional depreciation expense as a
result of the acquisition of additional real estate facilities, combined with
additional preferred stock dividends.
In addition to the public offering of equity securities during 1995, SEI
issued in public offerings during 1994 shares of its Series C Preferred Stock
(June 30, 1994, net proceeds of $28.9 million), Series D Preferred Stock
(September 1, 1994, net proceeds of $29.0 million) and Common Stock (February
15, 1994 and November 25, 1994, aggregate net proceeds of $110.3 million).
The aggregate net proceeds have been used to fund the cash portion of the
acquisition cost of real estate facilities, limited partnership units in the
PSP Partnerships and mergers with Public Storage Properties VI, VII and VIII.
These transactions increased SEI's capitalization by approximately $500
million and resulted in an increase in its wholly owned property portfolio
from 71 to 267.
During 1994, SEI acquired 71 mini-warehouse facilities and one business
park facility (including 23 facilities acquired in the merger with Public
Storage Properties VIII, Inc.). Rental income, cost of operations and
depreciation expense all increased compared to the respective historical
amounts due to the operating results of real estate facilities acquired
during 1994 and 1995 (including those real estate facilities which SEI is
currently in the process of acquiring).
The consideration for these real estate facilities included cancellation
of mortgage notes receivable, assumption of mortgage debt and cash. As a
result, interest income decreased related to the cancelled mortgage notes
receivable and interest expense increased to reflect additional interest
expense on the assumed mortgage debt.
Throughout 1994 and 1995, pursuant to cash tender offers, SEI acquired
limited partnership units in each of the PSP Partnerships. These acquisitions
have resulted in reductions to the "Minority interest in income" from what it
would otherwise have been in the absence of such acquisitions, and
accordingly, have increased SEI's share of the consolidated PSP Partnerships'
income. As a result of these acquisitions, minority interest in income
decreased from $9,481,000 to $6,918,000.
Operating Results - SEI Pre-Merger Pro Forma compared to Post-Merger
Pro Forma
Upon consummation of the Merger, (i) PSMI will be merged 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 adjustment.
Immediately following the Merger, SEI will become self managed and self
advised, and 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 604 mini-warehouses
and, through a 95% economic interest in PSCP, 26 commercial properties (563
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 mini-warehouse tenants and others. See "Public Storage
Management, Inc."
99
<PAGE>
Six months ended June 30, 1995. Post-Merger pro forma net income for
------------------------------
the six months ended June 30, 1995 was $51,554,000 compared to the Pre-Merger
pro forma net income of $36,063,000, representing an increase of $15,491,000
or 43%. Post-Merger pro forma net income allocable to Common Stock increased
to $35,904,000 for the six months ended June 30, 1995 compared to the Pre-
Merger pro forma net income allocable to Common Stock of $20,413,000 for the
same period or an increase of 76%. Post-Merger pro forma net income per
share of Common Stock was $.50 per share or 4% higher (based on weighted
average shares outstanding of 72,108,048) for the six months ended June 30,
1995 compared to the Pre-Merger pro forma net income per share of $.48 (based
on weighted average shares outstanding of 42,108,048) for the same period.
The lower increase in per share income of 4% compared to the 76% increase in
net income allocable to the Common Stock is due to the significant increase
(71%) in the number of shares of Common Stock issued in the Merger.
The Post-Merger pro forma net income increased as a result of (i)
property operations of the seven wholly owned properties, (ii) interest
income and expense related to the all-inclusive deeds of trust, (iii) equity
in earnings of limited partnerships and REITs, (iv) facility management fees
and operating expenses relating to the property management contracts, (v) the
elimination of the advisory fee as a result of becoming self advised offset
in part by additional administrative costs, reflecting primarily executive
compensation and rent previously paid for by the Adviser and (vi) operating
results of the Lock/Box Company.
Year ended December 31, 1994. Post-Merger pro forma net income for the
----------------------------
year ended December 31, 1994 was $96,621,000 compared to the Pre-Merger pro
forma net income of $68,682,000, representing an increase of $27,939,000 or
41%. Post-Merger pro forma net income allocable to Common Stock increased to
$65,415,000 for the year ended December 31, 1994 compared to the Pre-Merger
pro forma net income allocable to Common Stock of $37,476,000 for the same
period, an increase of 75%. Post-Merger pro forma net income per share of
Common Stock was $.91 per share or 1% higher (based on weighted average
shares outstanding of 75,844,644) for the year ended December 31, 1994
compared to the Pre-Merger pro forma net income per share of $.90 (based on
weighted average shares outstanding of 41,844,644) for the same period. The
lower increase in per share income of 1% compared to 75% increase in net
income allocable to Common Stock is due to the significant increase in the
number of shares to be issued in the Merger.
Similar to the six months ended June 30, 1995, Post-Merger pro forma net
income increased as a result of (i) property operations of the seven wholly
owned properties, (ii) interest income and expense related to the all-
inclusive deeds of trust, (iii) equity in earnings of real estate entities
with respect to the acquired partnership and equity interests in limited
partnerships and REITs, respectively, (iv) facility management fees and
operating expenses relating to the property management contracts, (v) the
elimination of the advisory fee as a result of becoming self-advised, offset
in part by additional administrative costs, reflecting primarily executive
compensation and rent previously paid for by the Adviser, and (vi) operating
results of the Lock/Box Company.
100
<PAGE>
Liquidity and Capital Resources
Capital Structure. The following table summarizes SEI's capital
-----------------
structure on an historical and pro forma (pre- and post-Merger) basis at June
30, 1995 (before taking into account any post-Closing adjustments):
<TABLE>
<CAPTION>
At
June 30, 1995
-----------------------------------------
SEI SEI
SEI Pre-Merger Post-Merger
(Historical) (Pro Forma) (Pro Forma)
------------ ----------- ------------
(In thousands, except per share data)
<S> <C> <C> <C>
Line of credit with banks..................... $ - $ - $ -
Senior notes.................................. - - 68,000
Mortgage notes payable........................ 58,497 103,213 107,919
---------- ---------- ----------
Total debt................................ 58,497 103,213 175,919
Minority interest............................. 131,536 124,848 124,848
Shareholders' equity:
Senior Preferred Stock...................... 277,650 277,650 277,650
Convertible Preferred Stock................. 57,500 57,500 57,500
Common Stock................................ 557,514 557,514 1,112,954
Class B Common Stock........................ - - 700
---------- ---------- ----------
Total shareholders' equity.................. 892,664 892,664 1,448,804
---------- ---------- ----------
Total capitalization.......................... $1,082,697 $1,120,725 $1,749,571
========== ========== ==========
</TABLE>
Comparison of Historical vs. Post-Merger Pro Forma Capitalization.
-----------------------------------------------------------------
. Total shareholders' equity will increase by approximately $556.1
million or 62%, which will be directly attributable to the Common
Stock issued in the Merger.
. Total debt will increase from the historical amount of $58.5 million
at June 30, 1995 to $175.9 million. The increase in debt is
principally the result of (i) mortgage debt ($44.7 million) either
assumed or estimated to be assumed in connection with property
acquisitions subsequent to June 30, 1995 combined with the assumption
of (ii) senior notes payable ($68.0 million) to be assumed in
connection with the Merger and (iii) mortgage debt of $4.7 million in
connection with the Merger.
. Preferred stock as a percentage of total shareholders' equity will
decrease from approximately 31% (historical) at June 30, 1995 to
approximately 19% on a Post-Merger pro forma basis at June 30, 1995.
. SEI's debt to equity ratio will increase from 7% (historical) to 12%
(Post-Merger), however, its ratio of earnings to fixed charges
(interest expense and preferred stock dividends) improves from 2.22
for 1994 to 2.48 on a Post-Merger pro forma basis for the same
period due to the overall reduction in leverage (debt and preferred
stock to total capitalization) from 36% to a Post-Merger pro-forma
of 29% of total capitalization.
Funds available for principal payments and investment. SEI anticipates
-----------------------------------------------------
that funds provided by operating activities will continue to be sufficient
over at least the next 12 months to provide for capital improvements, debt
service requirements and distributions to shareholders.
The following table summarizes SEI's ability to pay the minority
interests' distributions, its distributions to the preferred and Common Stock
shareholders and fund capital improvements to maintain the facilities through
101
<PAGE>
the use of funds provided by operating activities. The remaining funds are
available to make both scheduled and optional principal payments on debt, pay
distributions on Common Stock and for investment.
<TABLE>
<CAPTION>
Six Months Ended June 30, 1995 Year Ended December 31, 1994
-------------------------------------------- ---------------------------------------------
SEI SEI SEI SEI
SEI Pre-Merger Post-Merger SEI Pre-Merger Post-Merger
(Historical) (Pro Forma) (Pro Forma) (Historical) (Pro Forma) (Pro Forma)
------------ ------------- -------------- ------------ ------------- --------------
(amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net income...................... $ 29,751 $ 36,063 $ 51,554 $ 42,118 $ 68,682 $ 96,621
Depreciation and amortization... 16,926 20,747 21,049 28,274 40,971 41,620
Amortization of management
contracts and goodwill........ - - 4,701 - - 9,402
Depreciation from unconsolidated
real estate entities.......... - - 10,639 - - 21,227
Minority interest in income..... 3,715 3,570 3,570 9,481 6,918 6,918
Less: Gain on disposition
of real estate................ - - - - (203) (203)
Amortization of discounts
on mortgage notes receivable.. (67) - - (693) - -
-------- -------- -------- -------- --------- --------
Net cash provided by
operating activities.......... 50,325 60,380 91,513 79,180 116,368 175,585
Distributions from operations
to minority interests......... (9,107) (8,721) (8,721) (23,037) (17,569) (17,569)
-------- -------- -------- -------- --------- --------
Cash from operations allocable
to SEI's shareholders......... 41,218 51,659 82,792 56,143 98,799 158,016
Less: preferred stock dividends. (13,308) (15,650) (15,650) (16,846) (31,206) (31,206)
-------- -------- -------- -------- --------- --------
Cash from operations
allocable to Common Stock..... 27,910 36,009 67,142 39,297 67,593 126,810
Capital improvements to maintain
- --------------------------------
facilities:
----------
Mini-warehouses............. (2,397) (3,076) (3,084) (6,360) (10,322) (10,366)
Business parks.............. (909) (909) (909) (1,952) (1,952) (1,952)
Add back: minority interest
share of capital improvements
to maintain facilities........ 859 800 800 2,948 2,455 2,455
-------- -------- -------- -------- --------- --------
Funds available for principal
payments, distributions on
Common Stock and investment... 25,463 32,824 63,949 33,933 57,774 116,947
Cash distributions on
Common Stock.................. (14,886) (18,332) (31,532) (21,249) (34,628) (60,128)
-------- -------- -------- -------- --------- --------
Funds available for principal
payments and investment....... $ 10,577 $ 14,492 $ 32,417 $ 12,684 $ 23,146 $ 56,819
======== ======== ======== ======== ========= ========
</TABLE>
For the six months ended June 30, 1995, Post-Merger pro forma FFO, as
defined by SEI in note (4) to "Summary - Summary Financial Information",
(equivalent to Cash from operations allocable to SEI's shareholders in the
above table) was $82,792,000 compared to the Pre-Merger FFO of $51,659,000,
representing an increase of $31,133,000. Post-Merger pro forma FFO, as
defined by SEI, allocable to Common Stock (after deducting preferred stock
dividends) was $67,142,000 compared to the Pre-Merger pro forma amount of
$36,009,000 for the six months ended June 30, 1995. Post-Merger pro forma
weighted average shares of Common Stock outstanding during the period was
72,108,048 compared to Pre-Merger pro forma weighted average shares of Common
Stock of 42,108,048. Historically, SEI's FFO, as defined by SEI, allocable
to Common Stock (equivalent to Cash from operations allocable to Common Stock
in the above table) was $27,910,000 for the six months ended June 30, 1995
(32,707,556 weighted average shares of Common Stock outstanding).
For the year ended December 31, 1994, Post-Merger pro forma FFO, as
defined by SEI, was $158,016,000 compared to the Pre-Merger pro forma FFO of
$98,799,000, representing an increase of $59,217,000. Post-Merger pro forma
FFO, as defined by SEI, allocable to Common Stock (after deducting preferred
stock dividends) was $126,810,000 compared to the Pre-Merger pro forma amount
of $67,593,000 for the year ended December 31, 1994. Post-Merger pro forma
weighted average shares of Common Stock outstanding during the period was
71,844,644 compared to Pre-Merger weighted average shares of Common Stock
outstanding of 41,844,644. Historically, SEI's FFO, as defined by SEI,
allocable to Common Stock was $39,297,000 for the year ended December, 31,
1994 (24,077,055 weighted average shares of Common Stock outstanding).
On a historical basis, for the six months ended June 30,1995 and the
year ended December 31, 1994, SEI retained $10.6 million and $12.7 million,
respectively, of funds to make principal payments on debt and additional
investments. On a Post-Merger pro forma basis for the six months ended June
30, 1995 and the year ended December 31, 1994, SEI would have retained $32.4
million and $56.8 million, respectively, to make principal payments on debt
and additional investments. After considering distributions paid to other
investors related to the
102
<PAGE>
Real Estate Interests, SEI would have retained $23.5 million and $40.1
million on a Post Merger pro forma basis for the six months ended June 30,
1995 and the year ended December 31, 1994, respectively.
SEI will be accounting for the Real Estate Interests using the equity
method of accounting, and accordingly, earnings will be recognized based upon
SEI's interest in each of the partnerships and REITs. The interest for a
period is based upon SEI's share of the increase or decrease in the net
assets of the entities. Provisions of these partnerships and REITs, however,
provide for the payment of preferred cash distributions to other investors
(until certain specified amounts have been paid) without regard to the pro
rata interest of all investors in current earnings. As a result, actual cash
distributions to be paid to SEI for a period of time will be less than SEI's
FFO, as defined, from these entities. On a pro forma basis, FFO, as defined
by SEI, distributable to SEI during 1994 and the six months ended June 30,
1995 would have been approximately $16.7 million and $8.9 million,
respectively, less than FFO. Preferred cash distributions paid to other
investors during each period have the effect of increasing SEI's economic
interest in each of the respective entities and reducing the amount of future
preference payments which must be paid to other investors before cash
distributions will be shared on a pro rata basis with respect to each
investor's actual interest. The aggregate future preference payments to
other investors is approximately $130 million and is expected to be paid over
approximately 15 years, with approximately 50% of the amount being paid over
the next 3.5 years.
SEI's Post-Merger pro forma debt at June 30, 1995 is estimated to be
$175,919,000. Approximate principal maturities are as follows:
<TABLE>
<S> <C>
1995 (July 1995 - December 1995)............. $ 1,341,000
1996......................................... 15,913,000
1997......................................... 11,109,000
1998......................................... 11,476,000
1999......................................... 23,948,000
Thereafter................................... 112,132,000
------------
Total........................................ $175,919,000
============
</TABLE>
SEI's low leverage, substantially unencumbered asset base and its $125
million line of credit provide it with a significant degree of financial
flexibility (both historically and pro forma, post-Merger).
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<PAGE>
Distributions. SEI has a conservative distribution policy that is,
-------------
among other things, supported by FFO, as defined by SEI, allocable to Common
Stock and SEI's requirement to maintain its REIT status. SEI's conservative
distribution policy permits it, after funding its distributions and capital
improvements, to retain significant funds to make additional investments and
debt reductions. During 1992, 1993, 1994 and the first six months of 1995,
SEI distributed to Common Stock shareholders 94%, 86%, 84% and 91% of its net
income allocable to Common Stock, respectively. During 1992, 1993, 1994 and
the first six months of 1995, SEI distributed to Common Stock shareholders
66%, 59%, 54% and 53% of its FFO, as defined by SEI, allocable to Common
Stock, respectively, allowing it to retain approximately $35 million after
capital improvements and preferred stock dividend requirements. Historical
distributions to shareholders during 1994 and the first six months of 1995
were as follows:
<TABLE>
<CAPTION>
Six Months Ended June 30, Year Ended December 31,
1995 1994
----------------------------- -----------------------------
Distributions Total Distributions Total
Per Share Distributions Per Share Distributions
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Series A Preferred Stock........ $1.250 $ 2,282,000 $2.500 $ 4,563,000
Series B Preferred Stock........ 1.150 2,744,000 2.300 5,340,000
Series C Preferred Stock........ 1.066 1,279,000 1.042 1,250,000
Series D Preferred Stock........ 1.188 1,426,000 0.792 950,000
Series E Preferred Stock........ 1.042 2,286,000 - -
Series F Preferred Stock........ 0.400 919,000 - -
Convertible Preferred Stock..... 1.031 2,372,000 2.063 4,743,000
----------- -----------
13,308,000 16,846,000
Common Stock.................... 0.440 14,886,000 0.850 21,249,000
----------- -----------
$28,194,000 $38,095,000
=========== ===========
</TABLE>
Distributions on Common Stock for each period represented ordinary
income (none of the distributions represented capital gain or return of
capital) on both a GAAP and tax basis.
On a Post-Merger, pro forma basis, SEI's distributions to Common Stock
shareholders would have been approximately 47% of its FFO, as defined by SEI,
available to Common Stock shareholders for both the year ended December 31,
1994 and the six months ended June 30, 1995.
As a REIT, SEI is not taxed on that portion of its taxable income which
is distributed to its shareholders provided that at least 95% of its taxable
income in any year is so distributed prior to filing of SEI's tax return with
respect to such year. SEI has satisfied the REIT distribution requirement
since 1980. SEI has satisfied the REIT distribution requirement for 1992
($12.7 million), 1993 ($23.5 million) and 1994 ($36.3 million) by attributing
distributions in 1993, 1994 and 1995 to the prior year's taxable income. SEI
may be required, over each of the next several years, to attribute
distributions made after the close of the taxable year to the prior year, but
shareholders will be treated for federal income tax purposes as having
received such distributions in the taxable years in which they are actually
made.
As a result of the Merger, SEI's taxable income will increase
substantially. Further, as a result of: (i) the lack of distributions on the
Class B Common Stock for a minimum of four years and (ii) the taxable income-
related to PSMI (approximately $38 million in 1994) exceeding the
distributions on the Common Stock issued ($.88/share or $26.4 million/year),
SEI's aggregate distributions to holders of preferred stock and Common Stock
may have to increase.
Future Transactions. SEI intends to continue to expand its asset and
-------------------
capital base through the acquisition of real estate assets and interests in
real estate assets from unaffiliated parties and affiliates of PSI through
direct purchases, merger, tender offers or other transactions.
104
<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following discussion summarizes the material federal income tax
considerations resulting from the Merger that are generally applicable to SEI
and the SEI Shareholders. This discussion does not address the tax
considerations relevant to the PSMI Shareholders. The discussion is general
in nature and is not intended as a substitute for professional tax advice.
Accordingly, the discussion does not purport to be a complete analysis or
listing of all potential tax considerations relevant to a decision whether to
vote in favor of the Merger. The discussion does not address the tax
consequences that may be relevant to a particular SEI Shareholder or an SEI
Shareholder that is subject to special treatment under certain federal income
tax laws, such as dealers in securities, banks, insurance companies, tax-
exempt organizations and non-United States persons. Furthermore, the
discussion does not address any consequences arising under the laws of any
state, local or foreign jurisdiction.
Hogan & Hartson, counsel to SEI, has reviewed the following discussion
and is of the opinion that this discussion fairly summarizes the material
federal income tax considerations to an SEI Shareholder as a result of the
Merger. The discussion and such opinion are based on the Code, applicable
Treasury regulations promulgated thereunder, administrative rulings, court
decisions, IRS rulings, certain factual assumptions related to the ownership
and operation of SEI and PSMI and certain representations made by SEI, PSMI,
and the PSMI Shareholders. Except as discussed below, no rulings on the
federal, state or local tax considerations of the Merger or the operation of
SEI are expected to be received from the Internal Revenue Service ("IRS") or
from any other tax authority. There can be no assurance that the legal
authorities on which this discussion is based will not change, perhaps
retroactively, that the factual assumptions underlying this discussion will
be accurate, or that there will not be a change in the future in the
circumstances of PSMI and SEI that would affect this discussion. SEI
SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS CONCERNING THE
FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE MERGER TO THEM.
TAX TREATMENT OF THE MERGER
The following is a summary of the material federal income tax
consequences of the Merger to SEI and the SEI Shareholders. This discussion
does not address the tax consequences of the Merger to the PSMI Shareholders.
Since no ruling from the IRS will be sought with respect to any of the
federal income tax consequences of the Merger, there can be no assurance that
the IRS will agree with the conclusions set forth below. SEI has received an
opinion from Hogan & Hartson, counsel to SEI, that the Merger will be treated
for federal income tax purposes as a reorganization within the meaning of
Section 368(a) of the Code (a "Section 368(a) Reorganization"). Accordingly,
no gain or loss generally will be recognized by SEI or PSMI on the deemed
acquisition of the assets of PSMI in exchange for the SEI Stock (as defined
below) in connection with the Merger (assuming that SEI makes the election
described under "--Built-in Gain Rules" below and assuming the tax basis of
PSMI's assets exceeds the liabilities assumed in the Merger) or by the SEI
Shareholders (except with respect to cash received by an SEI Shareholder
perfecting Dissenters' Rights, see "Dissenters Rights" below). Hogan &
Hartson's opinion is based upon certain factual assumptions and
representations received from SEI, PSMI and the PSMI Shareholders. Of
particular importance are certain assumptions and representations relating to
the "continuity of interest" requirement discussed below. Hogan & Hartson's
opinion is subject to the limitations discussed below. Moreover, such
opinion is not binding on the IRS nor will it preclude the IRS from adopting
a contrary position. The discussion below assumes that the Merger will
qualify as a Section 368(a) Reorganization, based on such opinion.
To qualify as a Section 368(a) Reorganization, among other requirements,
the Merger must satisfy a "continuity of interest" requirement. To satisfy
this requirement, the PSMI Shareholders must not, pursuant to a plan or
intent existing at or prior to the Merger, dispose of or transfer so much of
either (i) their PSMI capital stock (the "PSMI Stock") in anticipation of the
Merger, or (ii) the Common Stock and Class B Common Stock (the "SEI Stock")
to be received in the Merger (collectively, the "Planned Dispositions"), such
that the PSMI Shareholders, as a group, would no longer have a significant
continuing interest in the PSMI business being conducted by SEI following the
Merger and the Planned Dispositions. The PSMI Shareholders generally will be
regarded as having a significant continuing interest so long as the SEI Stock
received in the Merger (after taking into account Planned Dispositions), in
the aggregate, represents a substantial portion of the entire consideration
received by the PSMI
105
<PAGE>
Shareholders in the Merger. For advance ruling purposes, the IRS considers an
interest equal to 50% or more of the fair market value of the outstanding
PSMI Stock held immediately before the Merger as a significant equity
interest. If the continuity of interest requirement is not satisfied, the
Merger will not be treated as a Section 368(a) Reorganization. In rendering
its opinion that the Merger will be treated as a reorganization under Section
368(a) of the Code, Hogan & Hartson has assumed that the "continuity of
interest" requirement will be satisfied. In making such assumption, Hogan &
Hartson has relied upon representations of the PSMI Shareholders that they
have no present plan or intention to dispose of the SEI Stock that they will
receive in the Merger. Management of SEI and PSMI is not aware of any plan on
the part of the holders of the PSMI Stock to dispose of their shares of SEI
Stock received in the Merger that would cause the "continuity of interest"
requirement not to be satisfied.
Dissenters' Rights. An SEI Shareholder who exercises Dissenters' Rights
with respect to a share of Common Stock and receives payment of such share in
cash generally will recognize gain or loss for federal income tax purposes,
measured by the difference between the holder's basis in such share and the
amount of cash received, provided that the payment is neither "essentially
equivalent to a dividend" within the meaning of Section 302 of the Code nor
has the effect of a distribution or a dividend within the meaning of Section
356(a)(2) of the Code (collectively, a "Dividend Equivalent Transaction"). A
sale of Common Stock pursuant to an exercise of Dissenters' Rights will
generally not be a Dividend Equivalent Transaction if, as a result of such
exercise, the shareholder exercising Dissenters' Rights owns no shares of SEI
capital stock (either actually or constructively within the meaning of
Section 318 of the Code). If, however, a shareholder's sale for cash of
Common Stock pursuant to an exercise of Dissenters' Rights is a Dividend
Equivalent Transaction, then such shareholder generally will recognize income
for federal income tax purposes in an amount up to the entire amount of cash
so received.
Failure of the Merger to Qualify as a Reorganization. If the IRS
successfully challenged the Section 368(a) Reorganization status of the
Merger (as a result of the failure of the "continuity of interest"
requirement or otherwise), PSMI would be deemed to have sold its assets to
SEI in a taxable transaction and would recognize gain or loss in an amount
equal to the difference between the fair market value of the SEI Stock
received in the Merger and the adjusted tax basis of the assets that it
transfers to SEI in the Merger. SEI would not directly recognize gain or
loss as a result of the failure of the Merger to qualify as a Section 368(a)
Reorganization. However, SEI would be primarily liable, as the successor to
PSMI, for the resulting tax liability imposed on PSMI as a result of the
Merger being a taxable transaction.
Indemnification Shares. Subject to certain limitations, all of the
Class B Common Stock issued to the PSMI Shareholders as consideration in the
Merger will be deposited into an escrow account on the Closing Date to allow
SEI to recover from the Indemnification Shares losses arising from certain
events. See "Proposal One - The Merger -- Terms of the Merger --
Indemnification." The issuance of the Indemnification Shares should not
adversely affect the Section 368(a) Reorganization treatment of the Merger.
Built-in Gain Rules. Under the "Built-in Gain Rules" of IRS Notice 88-
19, 1988-1 C.B. 486, SEI will be subject to a corporate level tax if it
disposes of any of the assets acquired from PSMI in the Merger at any time
during the 10-year period beginning on the Closing Date (the "Restriction
Period"). This tax would be imposed on SEI at the top regular corporate rate
(currently 35%) in effect at the time of the disposition on the excess of (i)
the lesser of (a) the fair market value on the Closing Date of the assets
disposed of and (b) the selling price of such assets over (ii) SEI's adjusted
basis on the Closing Date in such assets (such excess being referred to as
the "Built-in Gain"). SEI currently does not intend to dispose of any of the
assets acquired in the Merger during the Restriction Period, but there can be
no assurance that one or more such dispositions will not occur.
The discussion above with respect to the recognition of Built-in Gain
assumes that SEI will make a certain election pursuant to the Built-in Gain
Rules (or applicable future administrative rules or Treasury regulations) to
have the 10-year rule apply. SEI intends to make this election. If SEI does
not make this election, PSMI would be taxed on the Built-in Gain at the
Closing Date at regular corporate tax rates (even though the Merger qualifies
as a Section 368(a) Reorganization) and SEI, as the successor to PSMI in the
Merger, would succeed to the liability for that tax. That resulting tax
could have a significant adverse impact on SEI.
Liability for Other Taxes. SEI, as the successor to PSMI in the Merger,
will succeed to the liability of PSMI, PSI and the other Operating Companies
for income taxes attributable both to taxable periods ending on or
106
<PAGE>
prior to the time of the Merger and to transactions undertaken in
contemplation of the Merger or as part of the Restructure. In this regard,
the Merger (even though it qualifies as a Section 368(a) Reorganization)
and/or the Restructure may cause PSMI, PSI, or the other Operating Companies
to recognize substantial amounts of taxable gain not directly related to the
Merger that would be separate from and in addition to the gain that would
result on the deemed acquisition of the PSMI assets in exchange for SEI
capital stock if the Merger were not to qualify as a reorganization. Wayne
Hughes, however, has agreed to indemnify SEI for any such taxes that may be
assessed against it, as the successor in the Merger, with respect to the
activities, operations, or transactions undertaken by PSMI, PSI, and the
other Operating Companies prior to or in connection with the Merger. See
"Proposal One -- The Merger -- Terms of the Merger -- Indemnification" for a
description of this indemnification and the related limitations on it. See
also "-- Consequences of the Merger on SEI's Qualification as a REIT --
Elimination of any Accumulated Earnings and Profits Attributable to Non-REIT
Years."
CONSEQUENCES OF THE MERGER ON SEI'S QUALIFICATION AS A REIT
In light of the unique federal income tax requirements applicable to
REITs, the Merger could have adverse consequences on SEI's continued
qualification as a REIT, as discussed in greater detail below. Hogan &
Hartson is of the opinion that SEI will continue to qualify as a REIT
following the Merger so long as (A) SEI continues to meet the stock ownership
and gross income requirements applicable to REITs 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. See "Nonqualifying Income",
"Violation of Ownership Requirements," and "Elimination of Any Accumulated
Earnings and Profits Attributable to Non-REIT Years" below. Hogan & Hartson,
however, has not opined that SEI will continue to meet the stock ownership
and gross income requirements applicable to REITs following the Merger or
that PSMI will not have current or accumulated earnings and profits at the
time of the Merger, due to the numerous factual determinations and future
events that bear on those conclusions.
SEI's Assumption of Management Activities With Respect to SEI
Properties. Because of the unique federal income tax requirements
attributable to REITs, a number of federal income tax issues must be
addressed in connection with the Merger that are unique to SEI's status as a
REIT. One issue is whether SEI is permitted to perform property management
functions internally with respect to the mini-warehouse and business park
properties ("Properties") it owns. Generally, a REIT is permitted to perform
services with respect to properties it rents to tenants so long as such
services are usually and customarily rendered in connection with the rental
of space for occupancy only and are not considered to be "rendered to the
occupant." If a REIT performs services beyond this extent, the rental income
received for the use of its property will not qualify as "rental income" for
purposes of the REIT gross income tests. See "-- Tax Treatment of SEI --
Technical Requirements for Taxation as a REIT." Failure to satisfy these
tests would result in the disqualification of SEI as a REIT. See "-- Tax
Treatment of SEI -- Termination of REIT Election."
As a result of the Merger, SEI will "self-manage" the Properties it
owns. SEI received a private letter ruling from the IRS to the effect that,
should SEI acquire PSMI and assume and perform the management activities of
its Properties, such property management activities by SEI would not
adversely affect the characterization of SEI's rents from the Properties as
rents from real property. The ruling is based on SEI's description of those
management activities to be performed in connection with its own Properties,
including maintenance, repair, lease administration and accounting, and
security. The ruling also considers the ancillary activities to be directly
performed by the Lock/Box Company, such as the sale of inventory products
such as locks, boxes, and packing materials.
Nonqualifying Income. SEI must meet several annual gross income tests
to retain its REIT qualification. See "-- Tax Treatment of SEI -- Technical
Requirements for Taxation as a REIT." Under the 95% gross income test, SEI
must derive at least 95% of its total gross income from specified classes of
income related to real property, dividends, interest or gains from the sale
or other disposition of stock or other securities that do not constitute
"dealer property." Income related to real property includes: (i) proceeds
from the rental of mini-warehouse facilities; (ii) interest on obligations
secured by mortgages on real property; and (iii) gains from the sale or other
disposition of real property (other than real property held by SEI as a
dealer).
107
<PAGE>
If SEI fails to meet the 95% test during any taxable year, its REIT
status would terminate for that year and future years unless it qualifies for
the "good cause" exception. In order to qualify for the "good cause"
exception, SEI would have to satisfy each of the following: (i) it reported
the source and nature of each item of its gross income in its federal income
tax return for such year; (ii) the inclusion of any incorrect information in
its return is not due to fraud with intent to evade tax; and (iii) the
failure to meet such test is due to a reasonable cause and not to willful
neglect. In this regard, the Treasury regulations under Section 856 of the
Code indicate that not satisfying the 95% test will be considered a result of
reasonable cause and not willful neglect if the REIT exercises ordinary
business care and prudence in attempting to satisfy this requirement. The
Treasury regulations further state that positions taken in reliance on a
"reasoned written opinion" as to the characterization, for purposes of the
95% test, of the gross income to be derived from a transaction generally
constitutes "reasonable cause." SEI intends to conduct its operations and
affairs so that it meets the 95% test for each taxable year. SEI also
intends to operate so that, in the event it were to fail to meet the 95%
test, it would satisfy the "reasonable cause" requirement of the "good cause"
exception because it exercised ordinary business care and prudence in
attempting to satisfy the 95% test (including by receiving opinions of
counsel where appropriate). In this regard, SEI has obtained the opinion of
counsel described below with regard to the pre-payment of management fees.
There can be no assurance, however, that if SEI were unable to satisfy the
95% test, the IRS would necessarily agree that SEI had operated in a manner
that qualifies for the "good cause" exception. Because the determination of
whether SEI would qualify for the "good cause" exception in the event it were
not to meet the 95% test would depend upon the facts and circumstances at
that time, SEI has not sought an opinion of counsel on this issue.
Furthermore, even if SEI's REIT status were not terminated because of the
"good cause" exception, SEI still would be subject to an excise tax on any
excess nonqualifying income. Generally, if SEI fails the 95% test but still
retains its qualification as a REIT under the "good cause" exception, it
would be subject to a 100% excise tax on the amount of the excess
nonqualifying income multiplied by a fraction, the numerator of which would
be SEI's taxable income (computed without its distribution deduction) and the
denominator of which would be SEI's gross income from all sources. This
excise tax would have the general effect of causing SEI to pay all net
profits generated from this excess nonqualifying income to the IRS.
After the Merger, SEI will assume and perform property management
activities for the various partnerships and REITs in which SEI has an
interest that own Properties, as well as for various other entities that own
mini-warehouse properties and/or business parks. SEI will receive management
fees from such partnerships, REITs, and other owners in exchange for the
performance of such management activities. The gross income received by SEI
from these property management activities with respect to Properties owned by
other entities (including the REITs in which SEI has an ownership interest)
and advisory services rendered to such other entities will be treated as
income not qualifying under the 95% test ("Nonqualifying Income"). See
"Acquisition of Affiliated Partnership Interests in the Merger" below. If
there were no change in current revenues of SEI and PSMI that will be
combined in the Merger through acquisitions or otherwise and no other action
by SEI to reduce its nonqualifying income (for example, through the
prepayment of management fees described below), SEI estimates that it would
not satisfy the 95% gross income test for 1996 because its nonqualifying
income would represent approximately 7% of its total gross income for 1996.
However, the percentage of Nonqualifying Income may be reduced in a variety
of ways. First, SEI could reduce the actual dollar amount of its
Nonqualifying Income. Second, because the income tests are based on a
percentage of total gross income, increases in overall gross income that
result from increases in qualifying rents will reduce the percentage of
Nonqualifying Income. Pursuant to SEI's existing acquisition program,
additional assets may be acquired by it during 1995 and 1996 that would
generate additional qualifying income, thereby lowering the percentage of
total Nonqualifying Income recognized by it. Finally, to the extent that SEI
acquires properties following the Merger for which it assumed management
responsibilities in connection with the Merger, the management fees received
with respect to such properties would cease to be Nonqualifying Income.
Nevertheless, there can be no assurance that future acquisitions will be made
in amounts or at such times to permit SEI to satisfy these gross income
requirements. Moreover, increases in other Nonqualifying Income may
similarly affect these calculations.
If SEI determines at any time during the year that the receipt of third-
party management fees could adversely affect its ability to satisfy the 95%
test, it will notify the third-party property owners to which it provides
property management services and request that management fees be paid at
reduced rates for the remainder of the year. SEI will, to the extent
possible under existing tax guidelines, defer receipt of such fees to a
succeeding year in which recognition of the Nonqualifying Income does not
jeopardize its qualification as a REIT. If such deferral is not possible,
however, SEI would reduce the fees without condition or deferral. Although
this measure would
108
<PAGE>
reduce SEI's gross income (and correspondingly its net profits), it would
effectively reduce SEI's overall Nonqualifying Income and preserve its REIT
status. SEI anticipates that this measure will be taken only as necessary and
intends to pursue less costly alternatives when appropriate.
In addition, in order to reduce the amount of Nonqualifying Income,
after the Merger but before December 31, 1995, SEI expects to have certain
Properties pre-pay to SEI, all or a portion of the management fees that SEI
otherwise would be expected to receive for 1996 discounted to compensate for
early payment (payment estimated at approximately $4.0 million). Pre-payment
of management fees will reduce the percentage of Nonqualifying Income
received by SEI in taxable years subsequent to such prepayment. Hogan &
Hartson is of the opinion that it is more likely than not that the IRS would
respect the inclusion of the prepaid management fees in the gross income of
SEI when they are received. Hogan & Hartson's opinion is based on numerous
cases where courts have upheld the IRS's position that fees should be
included in income when they are received, rather than when the services to
which such fees relate are performed. The seminal trilogy of cases involving
this issue is Automobile Club of Michigan v. Comm'r, 353 U.S. 180 (1957),
-------------------------------
American Automobile Association v. Comm'r, 367 U.S. 687 (1961) and Schlude v.
----------------------------------- ----------
Comm'r, 372 U.S. 128 (1963) (collectively, the "Schlude trilogy"). In all
three cases in the Schlude trilogy, the IRS prevailed in arguing that the
taxpayer must include currently in income amounts paid for future services to
be rendered by the taxpayer. In light of the Schlude trilogy, taxpayers
generally have been unsuccessful in trying to persuade courts that accrual of
prepaid fees should be deferred until the services are actually provided.
There are, however, several exceptions, including Artnell v. Comm'r, 500 F.2d
-----------
981 (7th Cir. 1969) and Boise Cascade Corp. v. U.S., 530 F.2d 1367 (Ct. Cl.
---------------------------
1976), where courts, over the IRS's objections, have held that prepaid
amounts are not included in income in advance of performance. Because of
these contrary authorities, there can be no assurance that the IRS might not
assert that such management fees should be included in the gross income of
SEI as the related management services are provided, rather than being
included in the gross income of PSMI when they are received. If the IRS were
to successfully challenge the treatment of such management fees and the
inclusion of such fees in SEI's gross income resulted in SEI failing the 95%
test for a taxable year ending after the Merger, SEI's REIT status may
terminate for such year and future years unless it meets the "good cause"
exception described above. For years subsequent to 1996, assuming that there
were no changes in current revenues of SEI and PSMI that will be combined in
the Merger and assuming no acquisition or development of additional assets,
SEI estimates that it would not be able to satisfy the 95% gross income test
unless it were to take further steps to reduce management fees for those
years (for example by deferring the payment of those fees until later years
or by disposing of a portion of its management business, including possibly
to a taxable corporation in which SEI would own substantially all of the
economic interests but none of the voting stock).
Finally, SEI and the various other owners of mini-warehouses and
business parks for which SEI performs management activities (the "Owners")
will enter into an agreement (the "Administrative and Cost-Sharing
Agreement") with the PSCC pursuant to which the PSCC will provide to the
Owners and SEI certain administrative and cost-sharing services in connection
with the operation of the Properties and the performance of certain
administrative functions. Such services include the provisions of corporate
office space and certain equipment, personnel required for the operation and
maintenance of the properties, and corporate or partnership administration.
Each of the Owners and SEI will pay the PSCC directly for services rendered
by PSCC in connection with the Administrative and Cost Sharing Agreement.
That payment is separate from and in addition to the compensation paid to SEI
under the management agreement for the management of the Properties owned by
the Owners. SEI has received a private letter ruling from the IRS to the
effect that the reimbursements and other payments made to PSCC by the Owners
will not be treated as revenues of SEI for purposes of the 95% test (and the
estimate of SEI's prepayment of management fees set forth above was computed
assuming that result).
Violation of Ownership Requirements. For SEI to qualify as a REIT under
the Code, no more than 50% in value of its outstanding stock may be owned,
directly or constructively under the applicable attribution rules of the
Code, by five or fewer individuals (as defined in the Code to include certain
entities) during the last half of a taxable year. The Hughes Family
currently owns approximately 14% of the value of the outstanding capital
stock of SEI. Following the Merger, the value of the outstanding capital
stock held by the Hughes Family is expected to be approximately 43% (based
upon the market price at October 10, 1995 of the Common Stock and SEI's
preferred stock, a 35% discount on the Class B Common Stock and a post-
Closing reduction in the number of shares of Common Stock issued in the
Merger of 1,400,000). Accordingly, no four individuals other than the Hughes
Family may own directly or constructively, in the aggregate, more than 7% of
the value of outstanding stock of SEI. In order to assist SEI in meeting
these ownership restrictions, upon stockholder approval of the Amendments,
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the SEI Articles of Incorporation will prohibit the actual or constructive
ownership of more than 2.0% of the outstanding shares of all common stock of
SEI and more than 9.9% of the outstanding shares of each class or series of
shares of preferred stock of SEI. (As amended, the SEI Articles of
Incorporation will provide, however, that no person will be deemed to exceed
this ownership limitation solely by reason of the beneficial ownership of
shares of any class of stock to the extent that such shares of stock were
beneficially owned by such person on the Closing Date.) However, even with
these ownership limitations, there still could be a violation of the
ownership restrictions if four individuals unrelated to the Hughes Family
were to own the maximum amount of capital stock permitted under the SEI
Articles of Incorporation. Therefore, to further assist SEI in meeting the
ownership restrictions, Wayne Hughes (and other members of the Hughes Family)
will enter into an agreement with SEI for the benefit of SEI and certain
designated charitable beneficiaries restricting their acquisition of
additional shares of SEI capital stock and providing that if, at any time,
for any reason, more than 50% in value of SEI's outstanding stock otherwise
would be considered owned by five or fewer individuals, then a number of
shares of Common Stock of SEI owned by Wayne Hughes necessary to cure such
violation will automatically and irrevocably be transferred to a designated
charitable beneficiary. The provisions in the Amendments and the agreement
that Wayne Hughes will enter into are modeled after certain arrangements that
the IRS has ruled in private letter rulings will preclude a REIT from being
considered to violate the ownership restrictions so long as such arrangements
are enforceable as a matter of state law and the REIT seeks to enforce them
as and when necessary. There can be no assurance, however, that the IRS
might not seek to take a different position with respect to SEI (a private
letter ruling is legally binding only with respect to the taxpayer to whom it
was issued) or contend that SEI failed to enforce these various arrangements
and, hence, there can be no absolute assurance that these arrangements will
necessarily preserve SEI's REIT status. No private letter ruling is being
sought by SEI from the IRS on the effect of these arrangements.
Elimination of Any Accumulated Earnings and Profits Attributable to Non-
REIT Years. A REIT is not allowed to have accumulated earnings and profits
attributable to non-REIT years. A REIT has until the close of its first
taxable year in which it has non-REIT earnings and profits to distribute any
such accumulated earnings and profits. In a corporate reorganization
qualifying as a tax free statutory merger, the acquired corporation's current
and accumulated earnings and profits are carried over to the surviving
corporation. Under recently finalized Treasury regulations, any earnings and
profits treated as having been acquired by a REIT through such a merger will
be treated as accumulated earnings and profits of a REIT attributable to non-
REIT years. Accordingly, the accumulated earnings and profits, if any, of
PSMI and its affiliated companies (including PSI) (including earnings and
profits resulting from transactions undertaken in contemplation of the Merger
or from the Merger itself) will carry over to SEI in the Merger and SEI will
be required to distribute those accumulated earnings and profits prior to the
close of 1995 (the year in which the Merger occurs). Failure to do so would
result in disqualification of SEI as a REIT (unless the "deficiency dividend"
procedures described below apply and SEI complies with those procedures).
The amount of the accumulated earnings and profits of PSMI acquired by
SEI will be based on the consolidated earnings and profits of PSMI (including
each of its predecessors) through and including the Closing Date
("Consolidated Accumulated Earnings"). As a condition to the Merger, SEI
will receive a study prepared by PSI and PSMI of the earnings and profits of
PSI, PSMI and the other Operating Companies that shows, taking into account
projected income of PSMI and its affiliated corporations to and including the
time of the Merger and distributions to the PSMI and/or PSI shareholders to
be made at or prior to the time of the Merger, that PSMI will have no
Consolidated Accumulated Earnings at the time of the Merger. Neither SEI nor
PSMI, however, will obtain an opinion of counsel or outside accountants to
the effect that there are no accumulated or current earnings and profits at
the time or as a result of the Merger. The calculation of the amount of
accumulated earnings and profits acquired by SEI in the Merger ("Acquired
Earnings") depends upon a number of factual and legal interpretations related
to the activities and operations of PSMI, PSI and their corporate affiliates
during their entire corporate existence and is subject to review and
challenge by the IRS. There can be no assurance that the IRS will not
examine the tax returns of PSMI, PSI and their affiliates for years prior to
and including the Merger and propose adjustments to increase their taxable
income. Because the earnings and profits study used to calculate the amount
of Acquired Earnings is based on these returns, such adjustments could
increase the amount of the Acquired Earnings. In this regard, the IRS can
consider all taxable years of PSMI, PSI, and their corporate affiliates as
open for review for purposes of determining earnings and profits.
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Although not free from doubt, it appears pursuant to the recently
finalized Treasury regulations that SEI may be able to use certain
"deficiency dividend" procedures to distribute any Acquired Earnings that
were subsequently determined to exist as a result of an IRS audit. In order
to use this "deficiency dividend" procedure, SEI would have to make an
additional dividend distribution to its shareholders (in addition to
distributions made for purposes of satisfying the normal REIT distribution
requirements), in the form of cash, notes, other property, or stock in a
taxable stock dividend, within 90 days of the IRS determination. In
addition, SEI would have to pay to the IRS an interest charge on 50% of the
Acquired Earnings that were not distributed prior to December 31, 1995, from
the date on which its 1995 tax return was due to the date the IRS
determination was made. The statute and Treasury regulations related to the
application of the "earnings and profits distribution" requirement to a REIT
that acquires a "non-REIT" in a reorganization and the availability of the
"deficiency dividend" procedure in those circumstances are not entirely
clear, and there can be no assurance that the IRS would not take the position
either that the "deficiency dividend" procedure is not available (in which
case, SEI would cease to qualify as a REIT effective for its taxable year in
which the Merger occurs) or, alternatively, that even if the procedure is
available, SEI cannot qualify as a REIT for the taxable year in which the
Merger occurs (but it could qualify as a REIT for subsequent years).
Acquisition of Affiliated Partnership Interests in the Merger. In the
Merger, SEI will acquire interests in various partnerships that own and
operate Properties. SEI, for purposes of satisfying its REIT asset and
income tests, will be treated as if it directly owns a proportionate share of
each of the assets of these partnerships. For these purposes, under current
Treasury regulations SEI's interest in each of the partnerships must be
determined in accordance with its "capital interest" in such partnership.
The character of the various assets in the hands of the partnership and the
items of gross income of the partnership will retain their same character in
the hands of SEI for these purposes. Accordingly, to the extent the
partnership receives real estate rentals and holds real property, a
proportionate share of such qualified income and assets will be treated as
qualified rental income and real estate assets of SEI for purposes of
determining its REIT qualification. It is expected that substantially all of
the properties of the partnerships will constitute real estate assets and
generate qualified rental income for these REIT qualification purposes.
The acquisition of these partnership interests in the Merger creates
several issues regarding SEI's satisfaction of the 95% gross income test.
First, SEI will earn property management fees from these partnerships.
Existing Treasury regulations do not address the treatment of management fees
derived by a REIT from a partnership in which the REIT holds a partnership
interest, but the IRS has issued a number of private letter rulings holding
that the portion of the management fee that corresponds to the REIT interest
in the partnership in effect is disregarded in applying the 95% gross income
test where the REIT holds a "substantial" interest in the partnership. SEI
expects to disregard the portion of management fees derived from partnerships
in which it is a partner that corresponds to its interest in these
partnerships in determining the amount of its Nonqualifying Income, and the
estimate of SEI's prepayment of management fees set forth above was computed
based upon this approach. There can be no assurance, however, that the IRS
would not take a contrary position with respect to SEI, either rejecting the
approach set forth in the private letter rulings mentioned above or
contending that SEI's situation is distinguishable from those addressed in
the private letter rulings (for example, because SEI does not have a
"substantial" interest in the partnerships).
Second, SEI will acquire interests in certain of these partnerships that
entitles SEI to a percentage of profits (either from operations, or upon a
sale, or both) in excess of the percentage of total capital originally
contributed to the partnership with respect to such interest. Existing
Treasury Regulations do not specifically address this situation, and it is
uncertain, based on existing authority, how SEI's "capital interest" in these
partnerships will be determined. This determination is relevant because it
affects both the percentage of the gross rental income of the partnership
that is considered gross rental income (or qualifying income) to SEI and the
percentage of the management fees paid to SEI that are disregarded in
determining SEI's Nonqualifying Income. For example, if SEI takes the
position that it has a 25% "capital interest" in a partnership (because it
would receive 25% of the partnership's assets upon a sale and liquidation)
but the IRS determines it only has a 1% "capital interest" (because the
original holder of SEI's interest only contributed 1% of the total capital
contributed to the partnership), SEI's share of the qualifying income from
the partnership would be reduced and the portion of the management fee from
the partnership that would be treated as Nonqualifying Income would be
increased, thereby adversely affecting SEI's ability to satisfy the 95% gross
income test. In determining its "capital interest" in the various
partnerships in which SEI acquires an interest in the Merger, SEI will
determine the percentage of the
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<PAGE>
partnership's assets that would be distributed to it if those assets were
sold and distributed among the partners in accordance with the applicable
provisions of the partnership agreements. There can be no assurance, however,
that the IRS will agree with this methodology and not contend that another,
perhaps less favorable, method must be used for purposes of determining SEI
"capital interests." If that were to occur, it could adversely affect SEI's
ability to satisfy the 95% gross income test following the Merger.
TAX TREATMENT OF SEI
If certain detailed conditions imposed by the Code and the related
Treasury regulations are met, an entity, such as SEI, that invests
principally in real estate and that otherwise would be taxed as a corporation
may elect to be treated as a REIT. The most important consequence to SEI of
being treated as a REIT for federal income tax purposes is that this enables
SEI to deduct dividend distributions to its shareholders, thus effectively
eliminating the "double taxation" (at the corporate and shareholder levels)
that typically results when a corporation earns income and distributes that
income to shareholders in the form of dividends.
SEI has made an election to be taxed as a REIT under Sections 856
through 860 of the Code, beginning with its fiscal year ending December 31,
1981. That election will continue in effect until it is revoked or
terminated. SEI believes that it has qualified during each of the fiscal
years for which an election has been in effect, and currently qualifies, as a
REIT, and SEI expects to continue to be taxed as a REIT for federal income
tax purposes. While SEI intends to operate so that it will continue to
qualify as a REIT, given the highly complex nature of the rules governing
REITs, the ongoing importance of factual determinations, and the possibility
of future changes in the circumstances of SEI, no assurance can be given by
SEI that SEI will so qualify for any particular year.
Technical Requirements for Taxation as a REIT. The following is a very
brief overview of certain of the technical requirements that SEI must meet on
an ongoing basis in order to continue to qualify as a REIT. This summary is
qualified in its entirety by the applicable Code provisions, Treasury
regulations and administrative and judicial interpretations thereof.
1. The capital stock must be widely-held and not more than 50% of the
value of the capital stock may be held by five or fewer individuals
(determined after giving effect to various ownership attribution rules). See
"-- Consequences of Merger on SEI's Qualification as a REIT -- Violation of
Ownership Requirements," above.
2. SEI's gross income must meet three income tests:
(a) at least 75% of the gross income must be derived from
specified real estate sources (including "rents from real
property" and, in certain circumstances, interest);
(b) at least 95% of the gross income must be from the real estate
sources includable in the 75% income test, and/or from
dividends, interest, or gains from the sale or disposition of
stock or securities not held for sale in the ordinary course
of business; and
(c) less than 30% of the gross income may be derived from the sale
of real estate assets held for less than four years, from the
sale of certain "dealer" property, or from the sale of stock
or securities held for less than one year.
Rents received by SEI will qualify as "rents from real property" in
satisfying the gross income requirements described above only if several
conditions are met. First, the amount of rent must not be based in whole or
in part on the income or profits of any person. However, an amount received
or accrued generally will not be excluded from the term "rents from real
property" solely by reason of being based on a fixed percentage or
percentages of receipts of sales. SEI anticipates that none of its gross
annual income will be attributable to rents that are based in whole or in
part on the income of any person (excluding rents based on a percentage of
receipts or sales, which, as described above, are permitted). Second, the
Code provides that rents received from a tenant will not qualify as "rents
from real property" if SEI, or an owner of 10% or more of SEI, directly or
constructively owns 10% or more of such tenant (a "Related Party Tenant").
SEI does not anticipate that it will receive income from
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<PAGE>
Related Party Tenants. Third, if rent attributable to personal property,
leased in connection with a lease of real property, is greater than 15% of
the total rent received under the lease, then the portion of rent
attributable to such personal property will not qualify as "rents from real
property." SEI does not anticipate deriving rent attributable to personal
property leased in connection with real property that exceeds 15% of the
total rents. Finally, for rents received to qualify as "rents from real
property," SEI generally must not operate or manage the property or furnish
or render services to tenants, other than through an "independent contractor"
which is adequately compensated and from whom SEI derives no revenue. The
"independent contractor" requirement, however, does not apply to the extent
the services provided by SEI are "usually or customarily rendered" in
connection with the rental of space for occupancy only and are not otherwise
considered "rendered to the occupant." Any services with respect to certain
Properties that SEI believes may not be provided by SEI directly without
jeopardizing the qualification of rent as "rents from real property" will be
performed by "independent contractors."
See "--Consequences of the Merger on SEI's Qualification as a REIT --
SEI's Assumption of Management Activities With Respect to SEI Properties,"
"-- Consequences of the Merger on SEI's Qualification as a REIT --
Nonqualifying Income," and "--Consequences of the Merger on SEI's
Qualification as a REIT -- Acquisition of Affiliated Partnership Interests in
the Merger" for a discussion of specific aspects of the Merger that may
impact upon SEI's ability to satisfy the 95% gross income test following the
Merger.
3. Generally, 75% of the value of SEI's total assets must be
represented by real estate, mortgages secured by real estate, cash, or
government securities (including its allocable share of real estate assets
held by any partnerships in which SEI owns an interest). Not more than 25%
of SEI's total assets may be represented by securities other than those in
the 75% asset class. Of the investments included in the 25% asset class, the
value of any one issuer's securities owned by SEI may not exceed 5% of the
value of the Company's total assets, and SEI may not own more than 10% of any
one issuer's outstanding voting securities. The 5% test generally must be
met for any quarter in which SEI acquires securities of an issuer. SEI
believes that it will satisfy these tests following the Merger. In this
regard, however, the 10% voting stock prohibition will preclude SEI from
controlling the operations of PSCP and the Lock/Box Company (in which SEI
will own 95% of the equity in the form of non-voting stock and the Hughes
Family will own 5% of the equity but 100% of the voting stock) or PSCC (in
which SEI will own a less than 10% equity interest) and may preclude SEI from
exercising its rights of first refusal with respect to the corporations
owning the Canadian operations and the reinsurance business.
4. SEI must distribute to its shareholders in each taxable year an
amount at least equal to 95% of SEI's "REIT Taxable Income" (which is
generally equivalent to net taxable ordinary income). Under certain
circumstances, SEI can rectify a failure to meet the 95% distribution test by
paying dividends after the close of a particular taxable year.
In years prior to 1990, SEI made distributions in excess of its REIT
Taxable Income. During 1990, SEI reduced its distribution to its
shareholders to permit SEI to make an optional reduction in short-term
borrowings (which previously had been used to fund distributions to its
shareholders). As a result, distributions paid by SEI in 1990 were less than
95% of SEI's REIT Taxable Income for 1990. SEI has satisfied the REIT
distribution requirements for 1990, 1991, 1992, 1993 and 1994 by attributing
distributions in 1991, 1992, 1993, 1994 and 1995 to the prior year's taxable
income. SEI may be required, over each of the next several years, to make
distributions after the close of a taxable year and to attribute those
distributions to the prior year, but shareholders will be treated for federal
income tax purposes as having received such distributions in the taxable
years in which they were actually made. The extent to which SEI will be
required to attribute distributions to the prior year will depend on SEI's
operating results and the level of distributions as determined by the Board
of Directors. Reliance on subsequent year distributions could cause SEI to
be subject to certain penalty taxes. In that regard, if SEI should fail to
distribute during each calendar year at least the sum of (i) 85% of its REIT
ordinary income for such calendar year, (ii) 95% of its REIT capital gain net
income for such calendar year, and (iii) any undistributed taxable income
from prior periods, SEI would be subject to a 4% excise tax on the excess of
such required distribution over the amounts actually distributed during such
calendar year (not taking into account distributions made in subsequent years
but attributed to such calendar year). SEI intends to comply with this 85%
distribution requirement in an effort to minimize any excise tax. Any
distributions required to be made by SEI in order to eliminate any
accumulated earnings and profits of PSMI would not be counted in determining
whether SEI satisfies the 95% distribution test and could adversely impact
upon SEI's ability to satisfy the 95% distribution test.
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See "--Consequences of the Merger on SEI's Qualification as a REIT--
Distributions of Accumulated Earnings and Profits Attributable to Non-REIT
Years."
For purposes of applying the income and asset tests mentioned above, a
REIT is considered to own a proportionate share of the assets of any
partnership in which it holds a partnership interest. See "--Consequences of
the Merger on SEI's Qualification as a REIT--Acquisition of Affiliated
Partnership Interests in the Merger".
Applicable Federal Income Tax. If SEI qualifies for taxation as a REIT,
it generally will not be subject to federal corporate income taxes on net
income that it distributes currently to shareholders. However, SEI will be
subject to federal income tax in the following circumstances. First, SEI
will be taxed at regular corporate rates on any undistributed REIT taxable
income, including undistributed net capital gains. Second, under certain
circumstances, SEI may be subject to the "alternative minimum tax" on its
items of tax preference. Third, if SEI has (i) net income from the sale or
other disposition of "foreclosure property" (which is, in general, property
acquired by foreclosure or otherwise on default of a lease or a loan secured
by the property) which is held primarily for sale to customers in the
ordinary course of business or (ii) other nonqualifying income from
foreclosure property, it will be subject to tax at the highest corporate rate
on such income. Fourth, if SEI has net income from prohibited transactions
(which are, in general, certain sales or other dispositions of property
(other than foreclosure property) held primarily for sale to customers in the
ordinary course of business), such income will be subject to a 100% tax.
Fifth, if SEI should fail to satisfy the 75% gross income test or the 95%
gross income test (as discussed above), and has nonetheless maintained its
qualification as a REIT because certain other requirements have been met, it
will be subject to a 100% tax on the net income attributable to the greater
of the amount by which SEI fails the 75% or 95% test. See "-- Tax Treatment
of the Merger -- Built-in Gain Rules" for a discussion of the special
corporate level tax that will apply if SEI sell or disposes of any of the
assets acquired in the Merger within 10 years following the Merger.
Failure to Qualify as a REIT. For any taxable year that SEI fails to
qualify as a REIT and the relief provisions do not apply, SEI would be taxed
at the regular corporate rates on all of its taxable income, whether or not
it makes any distribution to its shareholders. Those taxes would reduce the
amount of cash available to SEI for distributions to its shareholders or for
reinvestment. As a result, failure of SEI to qualify during any taxable year
as a REIT could have a material adverse effect upon SEI and its shareholders.
Termination of REIT Election. SEI's election to be treated as a REIT
will terminate automatically if SEI fails to meet the qualification
requirements described above. If a termination (or a voluntary revocation)
occurs, unless certain relief provisions apply, SEI will not be eligible to
elect REIT status again until the fifth taxable year that begins after the
first year for which SEI's election was terminated (or revoked). If SEI
loses its REIT status, but later qualifies and elects to be taxed as a REIT
again, SEI may face significant adverse tax consequences. Immediately prior
to the effectiveness of the election to return to REIT status, SEI would be
treated as if its disposed of all of its assets in a taxable transaction,
triggering taxable gain with respect to SEI's appreciated assets. (SEI
would, however, be permitted to elect an alternative treatment under which
the gains would be taken into account only as and when they actually are
recognized upon sales of the appreciated property occurring within the 10-
year period after return to REIT status. See "--Tax Treatment of the Merger-
-Built-In Gain Rules".) SEI would not receive the benefit of a dividends
paid deduction to reduce any such taxable gains. Thus, any such gains on
appreciated assets would be subject to double taxation, at the corporate as
well as the shareholder level.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth information as of October 4, 1995
concerning the beneficial ownership of Common Stock of each director of SEI
(including Wayne Hughes, the chief executive officer) and of all directors
and executive officers as a group:
<TABLE>
<CAPTION>
Shares of Common Stock:
Beneficially Owned (1)
Shares Subject to Options (2)
Shares Issuable Upon Conversion
of Convertible Preferred Stock (3)
----------------------------------------
Name Positions Number of Shares Percent
- ------------------ -------------------------------- ----------------------- -----------
<S> <C> <C> <C>
B. Wayne Hughes Chairman of the Board and 7,922,023 (1)(4) 18.8%
Chief Executive Officer
Harvey Lenkin President and Director 582,590 (1)(5) 1.4%
5,000 (2) *
------------ -----
4,040 (3) *
------------ -----
591,630 1.4%
Robert J. Abernethy Director 65,591 (1) 0.2%
20,833 (2) *
------------ -----
86,424 0.2%
Dann V. Angeloff Director 79,164 (1)(6) 0.2%
833 (2) *
------------ -----
79,997 0.2%
William C. Baker Director 10,000 (1) *
20,833 (2) *
------------ -----
30,833 *
Uri P. Harkham Director 475,116 (1)(7) 1.1%
10,833 (2) *
------------ -----
485,949 1.2%
Berry Holmes Director 5,100 (1)(8) *
15,833 (2) *
------------ -----
20,933 *
Michael M. Sachs Director 39,982 (1)(9) *
2,500 (2) *
------------ -----
42,482 0.1%
All Directors and Executive 9,350,086(1)(4)(5)(6) 22.2%
Officers as a Group (7)(8)(9)(10)
(11 persons) 125,497(2) 0.3%
15,570(3) *
------------ -----
9,491,153 22.5%
</TABLE>
- ---------------
* Less than 0.1%.
(1) Shares of Common Stock beneficially owned as of October 4, 1995. Except
as otherwise indicated and subject to applicable community property and
similar statutes, the persons listed as beneficial owners of the shares
have sole voting and investment power with respect to such shares.
(2) Represents vested portion, as of October 4, 1995, and portion of which
will be vested within 60 days of October 4, 1995, of shares of Common
Stock subject to options granted to the named individuals or the group
pursuant to SEI's 1990 Stock Option Plan and 1994 Stock Option Plan.
(3) Represents shares of Common Stock which can be acquired upon conversion
of the shares of 8.25% Convertible Preferred Stock which are beneficially
owned as of October 4, 1995 by the named individuals or the group.
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(4) Includes 1,358,742 shares held of record by the B.W. Hughes Living Trust
as to which Mr. Hughes has voting and investment power, 1,387 and 1,383
shares, respectively, held by custodians of IRAs for Mr. Hughes and Mrs.
Kathleen Hughes as to which each has investment power, 4,826 shares held
by Mrs. Hughes as to which she has investment power and 29,469 shares
held by Mrs. Hughes as custodian FBO Parker Hughes Trust dated 3/7/91.
Also includes (i) 4,930,863 shares held of record by PSI, (ii) 512,639
shares held of record by PSMI, (iii) 300,000 shares held of record by PS
Insurance Company, Ltd. ("PSIC"), (iv) 45,000 shares held of record by
Public Storage Partners, Ltd. ("Properties 1"), (v) 5,000 shares held of
record by Public Storage Partners II, Ltd. ("Properties 2"), (vi) 39,911
shares held of record by Public Storage Properties, Ltd. ("Properties
3"), (vii) 274,675 shares held of record by Public Storage Properties IV,
Ltd. ("Properties 4") and (viii) 418,128 shares held of record by Public
Storage Properties V, Ltd. ("Properties 5"). PSI is the general partner
of Properties 1 and Properties 2, PSI and Wayne Hughes are the general
partners of Properties 3, Properties 4, and Properties 5, and PSI is the
sole shareholder of PSIC and PSMI. Public Storage Holdings, Inc.
("PSIH") is the sole shareholder of PSI, and the stock ownership of PSIH
is controlled by Wayne Hughes and his daughter, Tamara L. Hughes.
(5) Includes 1,000 and 700 shares, respectively, held by custodians of IRAs
for Mr. Lenkin and Mrs. Lenkin as to which each has investment power, 300
shares held by Mrs. Lenkin and 500 shares held by Mrs. Lenkin as
custodian for a son. Also includes 540,000 shares held of record by the
Public Storage, Inc. Profit Sharing Plan and Trust (the "PSI Plan") as to
which Mr. Lenkin, as a member of the PSI Plan's Advisory Committee,
shares the power to direct voting and disposition and as to which Mr.
Lenkin expressly disclaims beneficial ownership.
(6) Includes 5,000 shares held by a custodian of an IRA for Mr. Angeloff,
2,000 shares held by Mr. Angeloff as trustee of Angeloff Children's Trust
and 70,164 shares held by Mr. Angeloff as trustee of Angeloff Family
Trust.
(7) Includes 76,400 shares held by Mr. Harkham as trustee of Jonathan Martin
Profit Sharing Plan, 371,179 shares held by Harkham Industries, Inc. (dba
Jonathan Martin, Inc.), a corporation wholly owned by Mr. Harkham, 5,300
shares held by Mr. Harkham as trustee of Uri Harkham Trust, 13,172 shares
held by Jonathan Martin, Inc. Employee Profit Sharing Plan, 650 and 690
shares, respectively, held by custodians of IRAs for Mr. Harkham and Mrs.
Harkham as to which each has investment power, and 1,525, 1,600, 1,500,
1,600 and 1,500 shares, respectively, held by Mr. Harkham as custodian
for five of his children.
(8) Shares held of record by Mr. and Mrs. Holmes, who share voting and
investment power.
(9) Includes 9,444 shares held of record by Michael M. Sachs Professional
Corporation Defined Benefit Pension Trust and 8,768 shares held of record
by Michael M. Sachs Self-Employed Retirement Trust as to which Mr. Sachs
has voting and investment power. Also includes 890 shares held by Mrs.
Sachs and 2,000 shares held by a custodian for an IRA for Mrs. Sachs as
to which Mrs. Sachs has investment power.
(10) Includes shares held of record or beneficially by members of the
immediate family of executive officers of SEI and shares held by
custodians of IRAs for the benefit of executive officers of SEI.
The following table sets forth information with respect to persons known
to SEI to be the beneficial owners of more than 5% of the outstanding shares
of Common Stock:
<TABLE>
<CAPTION>
Shares of Common Stock
Beneficially Owned
------------------------
Number
Name and Address of Shares Percent
- -------------------------------- ----------- ----------
<S> <C> <C>
Properties 1, Properties 2, ................... 8,846,437 21.0%
Properties 3, Properties 4,
Properties 5, PSMI,
PSI, B. Wayne Hughes,
B. Wayne Hughes, Jr., Parker Hughes
Trust No. 2, Tamara L. Hughes
600 North Brand Boulevard, Suite 300
Glendale, California 91203-1241
PSIC
41 Cedar Avenue
Hamilton, Bermuda (1)
FMR Corp. .................................... 5,052,555 12.0%
82 Devonshire Street
Boston, Massachusetts 02109 (2)
</TABLE>
- --------------
(1) This information is as of October 4, 1995. The reporting persons
listed above (the "SEI Reporting Persons") have filed a joint Schedule
13D, amended as of June 30, 1995. The number of shares of Common Stock
owned by the SEI Reporting Persons at October 4, 1995 includes 6,522
shares which can be acquired upon conversion of 3,875 shares of 8.25%
Convertible Preferred Stock which are beneficially owned by the SEI
Reporting Persons. Each of the SEI Reporting Persons disclaims the
existence of a group within the meaning of Section 13(d)(3) of the
Exchange Act. Wayne Hughes disclaims beneficial ownership of the
shares owned by B. Wayne Hughes, Jr., Parker Hughes Trust No. 2 and
Tamara L. Hughes (an aggregate of 924,414 shares or approximately 2.2%
as of October 4, 1995). Each of the other SEI Reporting Persons
disclaims beneficial ownership of the shares owned by any other SEI
Reporting Person.
(2) This information is as of September 28, 1995 and was obtained from FMR
Corp. As of September 28, 1995, FMR Corp. beneficially owned 5,052,555
shares of Common Stock. This number includes 4,797,200 shares
beneficially owned by Fidelity Management & Research Company, as a result
of its serving as investment adviser to various investment companies
registered under Section 8 of the Investment Company Act of 1940 and
certain other funds which are generally offered to limited groups of
investors; 255,255 shares beneficially owned by Fidelity Management Trust
Company, as a result of its serving as trustee or managing agent for
various private investment accounts, primarily employee benefit plans,
and as investment adviser to certain other funds which are generally
offered to limited groups of investors; and 100 shares beneficially owned
by Fidelity International Limited, as a result of its serving as
investment adviser to various non-U.S. investment companies. FMR Corp.
has sole voting power with respect to 211,155 shares and sole dispositive
power with respect to 5,052,455 shares. Fidelity International Limited
has sole voting and dispositive power with respect to the 100 shares it
beneficially owns.
116
<PAGE>
The following table presents certain information regarding the
beneficial ownership of Common Stock by the Hughes Family as of the Record
Date, and on a pro forma basis after the Merger. On the Record Date there
were 42,070,805 shares of Common Stock outstanding or deemed to be
outstanding (including 6,522 shares of Common Stock which can be acquired
upon conversion of convertible preferred stock beneficially owned by the
Hughes Family). After the Merger there are assumed to be 72,070,805 shares
of Common Stock outstanding (assuming no post-Closing adjustments and no
conversion of Class B Common Stock into Common Stock) and 79,070,805 shares
of Common Stock outstanding (assuming no post-Closing adjustments and
conversion of all Class B Common Stock into Common Stock):
<TABLE>
<S> <C> <C>
At October 4, 1995 After Merger After Merger
------------------------- ----------------------------- ---------------------------
Shares of Common Stock Shares of Common Stock
Beneficially Owned Assuming Beneficially Owned Assuming
No Conversion of Class B Conversion of Class B
Shares of Common Stock Common Stock into Common Stock into
Beneficially Owned Common Stock Common Stock
------------------------- ----------------------------- ---------------------------
Number Number Number
of Shares Percent of Shares Percent of Shares Percent
------------------------- ----------------------------- ---------------------------
8,846,437 21.0% 37,967,056(1) 52.7% 44,967,056(1) 56.9%
</TABLE>
--------------
(1) Does not take into account any post-Closing adjustments. Excludes an
aggregate of 782,714 shares held of record by Properties 1 Properties 2,
Properties 3, Properties 4 and Properties 5, which will not be deemed
beneficially owned by the Hughes Family after the Merger.
117
<PAGE>
The following tables set forth information as of October 4, 1995
concerning the remaining security ownership of each director of SEI
(including Wayne Hughes, the chief executive officer) and of all directors
and executive officers of SEI as a group:
<TABLE>
<CAPTION>
Shares of 8.25% Convertible Shares of 10% Cumulative
Preferred Stock, Preferred Stock, Series A
Beneficially Owned (1) Beneficially Owned (1)
----------------------------- -----------------------------
Number Number
of Shares Percent of Shares Percent
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
B. Wayne Hughes.................. -- -- -- --
Harvey Lenkin.................... 2,400 (1)(2) 0.1% -- --
Robert J. Abernethy.............. -- -- -- --
Dann V. Angeloff................. -- -- -- --
William C. Baker................. -- -- -- --
Uri P. Harkham................... -- -- -- --
Berry Holmes..................... -- -- -- --
Michael M. Sachs................. -- -- 1,000 (1)(4) *
All Directors and Executive...... 9,250 (1)(2)(3) 0.4% 2,460 (1)(3)(4) 0.1%
Officers as a Group
(11 persons)
<CAPTION>
Shares of 9.20% Cumulative Shares of Adjustable Rate Shares of 10% Cumulative
Preferred Stock, Cumulative Preferred Stock, Preferred Stock, Series E
Series B Beneficially Owned (1) Series C Beneficially Owned (1) Beneficially Owned (1)
------------------------------- ------------------------------- -------------------------
Number Number Number
of Shares Percent of Shares Percent of Shares Percent
------------------------------- ------------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
B. Wayne Hughes.............. -- -- -- -- -- --
Harvey Lenkin................ -- -- 40,000 (1)(5) 3.3% -- --
Robert J. Abernethy.......... -- -- -- -- -- --
Dann V. Angeloff............. -- -- -- -- -- --
William C. Baker............. -- -- -- -- -- --
Uri P. Harkham............... -- -- -- -- -- --
Berry Holmes................. -- -- -- -- -- --
Michael M. Sachs............. -- -- -- -- 1,000 (1)(4) *
All Directors and Executive
Officers as a Group........ 4,000 (1)(3) 0.2% 40,000 (1)(5) 3.3% 1,000 (1)(4) *
(11 persons)
</TABLE>
- --------------
* Less than 0.1%.
(1) Shares of SEI 8.25% Convertible Preferred Stock, 10% Cumulative Preferred
Stock, Series A, 9.20% Cumulative Preferred Stock, Series B, Adjustable
Rate Cumulative Preferred Stock, Series C or 10% Cumulative Preferred
Stock, Series E, as applicable, beneficially owned as of October 4, 1995.
Except as otherwise indicated and subject to applicable community
property and similar statutes, the persons listed as beneficial owners of
the shares have sole voting and investment power with respect to such
shares.
(2) Includes 100 shares held by Mrs. Lenkin and 300 shares held by Mrs.
Lenkin as custodian for a son.
(3) Includes shares held of record or beneficially by members of the
immediate family of executive officers of SEI and shares held by
custodians of IRAs for the benefit of executive officers of SEI.
(4) Shares held of record by Michael M. Sachs Professional Corporation
Defined Benefit Pension Trust as to which Mr. Sachs has voting and
investment power.
(5) Shares held of record by the PSI Plan as to which Mr. Lenkin, as a
member of the PSI Plan's Advisory Committee, shares the power to direct
voting and disposition and as to which Mr. Lenkin expressly disclaims
beneficial ownership.
118
<PAGE>
As of October 4, 1995, the directors and executive officers of SEI did
not own any shares of SEI's 9.50% Cumulative Preferred Stock, Series D, 9.75%
Cumulative Preferred Stock, Series F or Convertible Participating Preferred
Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of Common Stock in the public market
could adversely affect prevailing market prices. Upon completion of the
Merger, there will be 72,064,283 shares of Common Stock and 7,000,000 shares
of Class B Common Stock outstanding, assuming no post-Closing adjustment. Of
these shares, 42,064,283 shares of Common Stock outstanding prior to the
Merger will be tradeable without restriction (except as to affiliates of the
Company) or further registration under the Securities Act. The remaining
30,000,000 shares of Common Stock and 7,000,000 shares of Class B Common
Stock will be issued in the Merger without registration under the Securities
Act in reliance on an exemption from registration and are "restricted
securities" within the meaning of Rule 144 adopted under the Act (the
"Restricted Shares"). The beneficial owners of 15,500,000 of the Restricted
Shares (including all of the Class B Common Stock) have agreed not to offer,
sell or otherwise dispose (except for gifts and pledges) of any of their
shares for a period of three years following the Closing Date, in the case of
the Common Stock, or for seven years following the Closing Date, in the case
of the Class B Common Stock. Upon expiration of such periods, each will be
entitled to sell his or her shares in the public market subject to Rule 144.
The remaining approximately 21,500,000 Restricted Shares held by existing
shareholders will be available for sale in the public market pursuant to Rule
144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who (together with predecessor holders who were
not affiliates of SEI) has beneficially owned Restricted Shares for at least
two years would be entitled to sell within any three-month period the number
of shares that does not exceed the greater of (i) 1% of the then outstanding
shares of the Common Stock of the Company or (ii) the average weekly trading
volume of the Common Stock during the four calendar weeks preceding such
sale. Sales under Rule 144 are also subject to certain restrictions relating
to manner of sale, notice, and the availability of current public information
about SEI. Under Rule 144, however, a person who (together with predecessor
holders who were not affiliates of SEI) has held such shares for a minimum of
three years and who is not, and for three months prior to the sale of such
shares has not been, an affiliate of the Company is free to sell such shares
without regard to the volume, manner of sale, and other limitations contained
in Rule 144.
INDEPENDENT PUBLIC ACCOUNTANTS
The consolidated financial statements of SEI for the year ended
December 31, 1994 incorporated by reference in this Proxy Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
report with respect thereto. The combined financial statements of the
Operating Companies to be Acquired as of December 31, 1994 and 1993 and for
each of the three years in the period ended December 31, 1994 and 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 have also been audited by Ernst & Young LLP as set forth in
their reports included herein. Such consolidated and combined financial
statements are incorporated or included herein in reliance upon such reports
given upon the authority of such firm as experts in accounting and auditing.
Representatives of Ernst & Young LLP are expected to be present at the
Special Meeting to respond to questions from shareholders and to make a
statement if they so desire.
119
<PAGE>
SHAREHOLDER PROPOSALS
Any shareholder proposal intended to be considered for inclusion in the
proxy materials for presentation in the 1995 annual meeting of shareholders
was required to be received by the Secretary of SEI not later than July 5,
1995.
OTHER MATTERS
As of the date of this Proxy Statement, neither the Board of Directors
nor management knows of other matters which will be presented for
consideration at the Special Meeting. However, if any other business should
properly come before the Special Meeting, the persons named in the enclosed
proxy (or their substitutes) will have discretionary authority to take such
action as shall be in accordance with their best judgment.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, filed by SEI with the Commission pursuant to
Section 13 of the Securities Exchange Act of 1934 (the "Exchange Act") (File
No. 1-8389), are incorporated herein by reference: (i) the Annual Report on
Form 10-K for the year ended December 31, 1994, and as amended by Form 10-
K/As dated April 4, 1995 and April 21, 1995, (ii) the Quarterly Reports on
Form 10-Q for the quarters ended March 31, 1995 and June 30, 1995, (iii) the
Current Reports on Form 8-K dated January 24, 1995, April 25, 1995 and May
22, 1995 and the Current Report on Form 8-K, as amended by a Form 8-K/A, each
dated June 30, 1995 and (iv) the financial statements pursuant to Rule 3-14
of Regulation S-X included in the Current Report on Form 8-K dated June 7,
1994 and the Quarterly Report on Form 10-Q for the quarter ended September
30, 1994, as amended by a Form 10-Q/A dated December 15, 1994. The financial
statements included in Registration Statement No. 33-58893, filed by SEI with
the Commission pursuant to the Securities Act, are also incorporated herein
by reference.
All documents filed by SEI pursuant to Section 13(a), 13(c), 14 or 15(d)
of the Exchange Act subsequent to the date of this Proxy Statement and prior
to the date of the Special Meeting of the SEI Shareholders shall be deemed to
be incorporated by reference herein from the date of filing such documents.
Any statement contained herein or in a document incorporated or deemed
to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Proxy Statement to the extent that a
statement contained herein or in any subsequently filed document which also
is or is deemed to be incorporated by reference herein modifies or supersedes
such statement. Any such statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Proxy Statement.
Also incorporated by reference herein is the Merger Agreement, which is
attached as Appendix A to this Proxy Statement.
THIS PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT
PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS, EXCEPT THE EXHIBITS
TO SUCH DOCUMENTS (UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY
REFERENCE IN SUCH DOCUMENTS), ARE AVAILABLE ON REQUEST. REQUESTS FOR SUCH
COPIES SHOULD BE DIRECTED TO INVESTOR SERVICES DEPARTMENT, 600 NORTH BRAND
BOULEVARD, SUITE 300, GLENDALE, CALIFORNIA 91203-1241 OR BY TELEPHONE AT
(818) 244-8080. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY
REQUEST SHOULD BE MADE BY NOVEMBER 3, 1995.
120
<PAGE>
HISTORICAL AND PRO FORMA
FINANCIAL STATEMENTS
--------------------
<TABLE>
<CAPTION>
Page
References
----------
<S> <C>
Operating Companies and Real Estate Interests
- ---------------------------------------------
Report of independent auditors F-1
Combined Statements of Assets, Liabilities and Equity at December 31, 1994,
1993 and June 30, 1995 F-2
For the years ended December 31, 1994, 1993, 1992 and the
six months ended June 30, 1995 and 1994:
Combined Statements of Operations F-3
Combined Statements of Cash Flows F-4
Notes to Financial Statements F-5
Underlying Properties
- ---------------------
Report of independent auditors F-10
Combined Summaries of Historical Information Relating to the
Underlying Properties for the years ended December 31, 1994,
1993, 1992 and six months ended June 30, 1995 and 1994 F-11
Notes to Combined Summaries of Historical Information relating
to the Underlying Properties F-12
Pro Forma Consolidated Financial Statements PF-1
- -------------------------------------------
Pro Forma Consolidated Balance Sheet at June 30, 1995 PF-3
Pro Forma Consolidated Statements of Income:
For the six months ended June 30, 1995 PF-8
For the year ended December 31, 1994 PF-9
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Stockholder
Public Storage, Inc.
We have audited the accompanying combined statements of assets, liabilities and
equity of the property management and advisory businesses and real estate assets
of Public Storage, Inc. (Operating Companies and Real Estate Interests) 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 and Real Estate
Interests were prepared for the purpose of complying with the rules and
regulations of the Securities and Exchange Commission for inclusion in the Proxy
Statement 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 and
Real Estate Interests 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
October 6, 1995
F-1
<PAGE>
OPERATING COMPANIES AND REAL ESTATE INTERESTS
COMBINED STATEMENTS OF ASSETS, LIABILITIES AND EQUITY
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
AS OF -------------------
JUNE 30, 1995 1994 1993
------------- ------- -------
<S> <C> <C> <C>
(unaudited)
Assets:
Cash $ 628 $ 1,388 $ 387
Restricted cash 576 - 1,111
Receivables from affiliates 2,642 3,033 2,751
Notes receivable 7,987 8,141 8,433
Investments in real estate
entities 74,651 68,445 56,861
Real estate facilities:
Land 5,710 5,710 5,710
Buildings 14,337 14,326 14,282
-------- ------- -------
20,047 20,036 19,992
Accumulated depreciation (2,454) (2,207) (1,718)
-------- ------- -------
17,593 17,829 18,274
Other assets 88 202 559
-------- ------- -------
Total assets $104,165 $99,038 $88,376
======== ======= =======
Liabilities
Accounts payable $ 555 $ 1,167 $ 1,281
Interest payable 508 527 561
Secured notes payable 4,706 4,807 5,015
Senior Secured Notes due 2003
(net of $329, $359 and $519
of issuance costs at June
30, 1995, December 31, 1994
and 1993, respectively) 67,671 70,141 74,481
-------- ------- -------
Total liabilities 73,440 76,642 81,338
-------- ------- -------
Equity 30,725 22,396 7,038
-------- ------- -------
Total liabilities and equity $104,165 $99,038 $88,376
======== ======= =======
</TABLE>
See Accompanying notes.
F-2
<PAGE>
OPERATING COMPANIES AND REAL ESTATE INTERESTS
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30 YEARS ENDED DECEMBER 31,
------------------ -----------------------------
1995 1994 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenues (unaudited)
Facility management
fees, primarily from
affiliates $13,156 $12,103 $25,224 $23,105 $21,416
Equity in earnings of
real estate entities 13,074 11,516 24,555 19,742 15,026
Advisory fee from
affiliate 3,426 2,356 4,983 3,619 2,612
Merchandise operations 1,013 907 1,872 1,564 1,263
Rental revenues 1,637 1,545 3,152 2,884 2,867
Interest income 459 464 996 792 847
------- ------- ------- ------- -------
Total revenues 32,765 28,891 60,782 51,706 44,031
------- ------- ------- ------- -------
Expenses
Cost of managing
facilities 2,527 2,561 4,909 5,544 5,839
Cost of advisory
services and
administrative expenses 1,090 817 1,850 1,410 975
Cost of merchandise 501 435 866 800 689
Cost of rental operations 450 413 834 813 653
Depreciation 302 523 1,011 556 476
Interest expense 2,689 2,844 5,607 1,005 7,732
------- ------- ------- ------- -------
Total expenses 7,559 7,593 15,077 10,128 16,364
------- ------- ------- ------- -------
Income before
extraordinary item 25,206 21,298 45,705 41,578 27,667
Extraordinary item
Gain on retirement
of debt - - - 14,440 3,311
------- ------- ------- ------- -------
Net income $25,206 $21,298 $45,705 $56,018 $30,978
======= ======= ======= ======= =======
</TABLE>
See Accompanying notes.
F-3
<PAGE>
OPERATING COMPANIES AND REAL ESTATE INTERESTS
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30 YEARS ENDED DECEMBER 31,
-------------------- --------------------------------
1995 1994 1994 1993 1992
-------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 25,206 $ 21,298 $ 45,705 $ 56,018 $ 30,978
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 302 523 1,011 556 1,971
Less: Equity in earnings
of real estate entities (13,074) (11,516) (24,555) (19,742) (15,026)
Distributions from real estate
entities 6,868 6,237 12,971 9,843 9,645
Gain on retirement of debt - - - (14,440) (3,311)
Change in restricted cash (576) 103 1,111 (1,111) -
Other (151) (59) (435) 8 (386)
-------- -------- -------- -------- --------
Total adjustments (6,631) (4,712) (9,897) (24,886) (7,107)
-------- -------- -------- -------- --------
Net cash provided by
operating activities 18,575 16,586 35,808 31,132 23,871
-------- -------- -------- -------- --------
Cash flows from investing activities:
Payments received on notes
receivable 154 150 292 390 224
Capital expenditures (11) (28) (44) (103) (38)
-------- -------- -------- -------- --------
Net cash provided by investing
activities 143 122 248 287 186
-------- -------- -------- -------- --------
Cash flows from financing activities:
Principal payments on debt (2,601) (2,404) (4,708) (185) (137)
Repurchase of debt - - - (42,905) (6,143)
Issuance of Senior Secured Notes,
net of issuance costs - - - 74,475 -
Net distributions to affiliates (16,877) (10,345) (30,347) (62,738) (17,509)
-------- -------- -------- -------- --------
Net cash used in financing
activities (19,478) (12,749) (35,055) (31,353) (23,789)
-------- -------- -------- -------- --------
Net increase (decrease) in cash (760) 3,959 1,001 66 268
Cash at beginning of period 1,388 387 387 321 53
-------- -------- -------- -------- --------
Cash at end of period $ 628 $ 4,346 $ 1,388 $ 387 $ 321
======== ======== ======== ======== ========
Supplemental disclosure:
Interest paid $ 2,678 $ 2,746 $ 5,481 $ 1,606 $ 6,513
======== ======== ======== ======== ========
</TABLE>
See Accompanying notes.
F-4
<PAGE>
OPERATING COMPANIES AND REAL ESTATE INTERESTS
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") and the real estate assets in which
Storage Equities, Inc. ("SEI") proposes to acquire an interest ("Real
Estate Interests"). 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 the Real Estate
Interests, would be acquired by 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 the accounts related to the Real
Estate Interests and present the assets, liabilities and equity of the
Operating Companies and Real Estate Interests as of December 31, 1994 and
1993 and June 30, 1995, and the related revenues and expenses for the years
ended December 31, 1994, 1993, 1992 and the six months ended June 30, 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 and Real Estate Interests operated as a stand-alone
entity. Information subsequent to December 31, 1994 is unaudited.
PSMI operated and managed, at June 30, 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 June 30, 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.
Real Estate Interests consist of partial equity interests in 63 REITs and
partnerships, which own 505 mini-warehouses and 14 commercial facilities, a
fee interest in six mini-warehouses and one commercial facility, all
operated under the "Public Storage" name, and 10 mortgage notes receivable
secured by mini-warehouse facilities.
F-5
<PAGE>
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. Real estate facilities. Cost of land includes appraisal fees and
legal fees related to acquisition and closing costs. Buildings
reflect costs incurred to develop mini-warehouses and to a lesser
extent business park facilities. The mini-warehouse facilities
provide self-service storage spaces for lease, generally on a month-to
month basis, to the general public.
4. Depreciation and amortization. Depreciation expense represents
depreciation on real estate facilities and equipment and is provided
on a straight-line basis over the estimated useful life of twenty-five
years and three years, respectively. Amortization expense represents
amortization of debt issuance costs and is provided on the effective
interest method over the life of the debt.
5. Allocated costs. Included in the accompanying Statements of
Operations are allocations of expenses for corporate overhead,
including salaries of support personnel, facilities and other
expenses, incurred by the Operating Companies. The personnel and
facilities subject to these allocations support other entities
affiliated with PSI. In management's opinion, the allocation
methodology, which is based on the estimated utilization of such
services and costs, provides a reasonable allocation of the costs that
were incurred by the Operating Companies.
6. Income taxes. The financial statements exclude the effects of income
taxes since they reflect a partial presentation (after allocated
costs).
7. Equity. Equity 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. Notes Receivable
Notes receivable includes ten notes 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
Statements of Operations 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. Investments in Real Estate Entities
Investments in real estate entities consist generally of a 20% to 30%
interest in 63 affiliated REITs and partnerships which own 505 mini-
warehouses and 14 business parks, all operated under the "Public Storage"
name. These investments are accounted for using the equity method of
accounting, recognizing in income its proportionate share of the earnings
while correspondingly increasing the investment balance and accounting for
distributions as a reduction in the investment balance.
The impact of facility management fees paid by these unconsolidated
affiliated entities have been eliminated to the extent of PSI's investment
in each entity ($2.9 million and $1.5 million for the year ended December
31, 1994 and six months ended June 30, 1995, respectively).
F-6
<PAGE>
E. Secured Notes Payable
Secured Notes Payable ($4,807,000 as of December 31, 1994) consist 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:
1995 $ 213,000
1996 231,000
1997 1,038,000
1998 2,633,000
1999 561,000
Thereafter 131,000
----------
$4,807,000
==========
F. 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, $1.0 million and $0.6 million are
included in cash as of December 31, 1993, June 30, 1994 and 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:
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
===========
G. 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, $14,019,000 and $12,866,000 were earned on properties in which
PSI and SEI have an interest for the years ended December 31, 1994, 1993,
1992 and for the six months ended June 30, 1995 and 1994, respectively. The
management agreements, except as noted below, are cancelable by either
party upon sixty days notice.
F-7
<PAGE>
The impact of property management fees paid to PSI for properties which it
owns and by unconsolidated affiliated entities in which PSI has an interest
have been eliminated to the extent of PSI's investment ($3.1 million and
$1.6 million for the year ended December 31, 1994 and six months ended June
30, 1995, respectively).
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.
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.
H. 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
F-8
<PAGE>
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.
I. 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, $336,000 and $356,000 is included in the
Statements of Operations for the years ended December 31, 1994, 1993, and
1992 and the six months ended June 30, 1995 and 1994, respectively, related
to these leases.
Minimum lease payments due under these leases as of December 31, 1994 are:
1995 $841,000
1996 397,000
1997 129,000
1998 107,000
1999 5,000
In connection with the management of mini-warehouses, the Operating
Companies have established trust accounts to collect, from various property
owners, on a monthly basis, amounts for property tax payments. Payments of
the property tax bills which generally occur annually or semi-annually are
made from these accounts. Funds relating to these property tax impounds
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 Equity.
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, results of operations or its
liquidity.
F-9
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Stockholder
Public Storage, Inc.
We have audited the accompanying combined summaries of historical information
relating to the Underlying Properties (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 the rules and regulations of the Securities and Exchange Commission for
inclusion in the Proxy Statement of Storage Equities, Inc.
In our opinion, the Combined Summaries present fairly the combined revenues and
expenses of the Underlying Properties 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
October 6, 1995
F-10
<PAGE>
COMBINED SUMMARIES OF HISTORICAL INFORMATION RELATING TO THE
UNDERLYING PROPERTIES
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
-------------------- --------------------------------
1995 1994 1994 1993 1992
-------- -------- -------- -------- --------
(UNAUDITED)
--------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental revenues $126,230 $118,899 $244,165 $221,938 $198,917
Interest income 1,424 1,823 3,719 4,602 5,986
-------- -------- -------- -------- --------
127,654 120,722 247,884 226,540 204,903
-------- -------- -------- -------- --------
Expenses:
Cost of operations 38,211 37,450 75,566 73,111 70,801
Management fees paid to affiliates 7,472 7,181 14,592 13,226 11,825
Depreciation 21,052 21,031 41,982 42,808 43,556
General and administrative 2,748 2,759 5,904 6,135 7,830
Interest expense 5,088 5,023 9,981 10,860 11,038
-------- -------- -------- -------- --------
74,571 73,444 148,025 146,140 145,050
-------- -------- -------- -------- --------
Net income $ 53,083 $ 47,278 $ 99,859 $ 80,400 $ 59,853
======== ======== ======== ======== ========
</TABLE>
See Accompanying notes.
F-11
<PAGE>
NOTES TO COMBINED SUMMARIES OF HISTORICAL INFORMATION
RELATING TO THE UNDERLYING PROPERTIES
A. Background and Basis for Combination
The accompanying Combined Summaries of Historical Information Relating to
the Underlying Properties (the "Combined Summaries") include the results of
operations for the years ended December 31, 1994, 1993, and 1992 and the
six months ended June 30, 1995 for the real estate assets in which Storage
Equities, Inc. ("SEI") proposes to acquire an interest.
Under an Agreement and Plan of Reorganization dated June 30, 1995, an
interest in the Underlying Properties (the "Real Estate Interests"), along
with the Operating Companies of Public Storage, Inc. ("PSI"), would be
acquired by SEI.
B. Underlying Properties
The Underlying Properties consists of:
. 505 mini-warehouses and 14 commercial facilities owned by 63 REITs and
limited partnerships, all operated under the "Public Storage" name;
. Seven properties consisting of six mini-warehouses and one commercial
property, wholly-owned by PSI; and
. Ten notes receivable, as described in Note C.
Depreciation expense represents depreciation on the Underlying Properties
(other than the ten notes receivable) and is typically provided on a
straight line basis over the estimated useful life of twenty five years.
The sixty-three REITs and partnerships have the following assets,
liabilities and owner's equity at December 31, 1994, 1993 and 1992 and June
30, 1995:
<TABLE>
<CAPTION>
Six Months
Ended June Years ended December 31,
30, 1995 ------------------------------------
(unaudited) 1994 1993 1992
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
(dollars in thousands)
Assets $1,248,071 $1,273,297 $1,312,289 $1,342,144
Liabilities 138,288 130,206 131,435 133,267
--------------------------------------------------
Owners' equity $1,109,783 $1,143,091 $1,180,854 $1,208,877
==================================================
</TABLE>
F-12
<PAGE>
C. Mortgage loans
Included in the Underlying Properties 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
Debt of approximately $4,807,000 at of December 31, 1994 consist 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:
1995 $ 213,000
1996 231,000
1997 1,038,000
1998 2,633,000
1999 561,000
Thereafter 131,000
----------
$4,807,000
==========
E. Environmental Matters
The majority of the Underlying Properties 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.
F-13
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated financial statements were
prepared to reflect the Merger transaction between SEI and 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. See "Proposal Two
- -- Amendments to SEI Articles of Incorporation." Prior to the Merger, PSCP,
the Adviser and Real Estate Interests will be combined with 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 604 mini-warehouses and, through a 95% economic interest in PSCP, 26
commercial properties (563 of which collectively are owned by entities
affiliated with PSI), and (7) a 95% economic interest in the Lock Box Company.
See "Public Storage Management, Inc."
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 $55.5 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.
PF-1
<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 $70,064,000 consisting of the issuance of approximately 3,517,272
shares of SEI Common Stock and $14,007,000 in cash.
The pro forma consolidated balance sheet at June 30, 1995 has been prepared
to reflect (i) the issuance and utilization of the remaining net offering
proceeds of the Common Stock issued on May 31, 1995, and (ii) the proposed
Merger with PSMI.
The pro forma consolidated statement of income for the six months ended
June 30, 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 six months ended
June 30, 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 Real Estate Interests to be acquired. 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.
PF-2
<PAGE>
STORAGE EQUITIES, INC.
CONSOLIDATED PRO FORMA BALANCE SHEET
JUNE 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
SEI PRE-MERGER
---------------------------------------------------
PRO FORMA
ADJUSTMENTS
FOR THE SEI
SEI ISSUANCE OF PRE-MERGER
ASSETS (HISTORICAL) EQUITY (1) (PRO FORMA)
-------------- ------------ --------------
<S> <C> <C> <C>
Cash and cash equivalents $ 89,759,000 $ 84,673,000) $ 5,086,000
Investments in real
estate entities 13,923,000 6,692,000 20,615,000
Real estate facilities,
net of accumulated
depreciation 994,006,000 130,361,000 1,124,367,000
Mortgage loans
receivable, primarily
from affiliates 14,352,000 (14,352,000) -
Intangible assets - - -
Other assets 4,817,000 - 4,817,000
-------------- ------------ --------------
Total assets $1,116,857,000 $ 38,028,000 $1,154,885,000
============== ============ ==============
LIABILITIES AND
SHAREHOLDERS' EQUITY
Note payable to banks $ - $ - $ -
Senior Notes - - -
Mortgage notes payable 58,497,000 44,716,000 103,213,000
-------------- ------------ --------------
Total debt 58,497,000 44,716,000 103,213,000
Accrued and other liabilities 34,160,000 - 34,160,000
Minority interest 131,536,000 (6,688,000) 124,848,000
Shareholders' equity:
Preferred Stock, $.01 par
value, 50,000,000 shares
authorized:
Senior Preferred Stock 277,650,000 - 277,650,000
Convertible Preferred Stock 57,500,000 - 57,500,000
Common stock, $.10 par
value, 60,000,000
shares authorized
42,042,616 shares
issued and outstanding
(79,042,616 pro forma shares
issued and outstanding)
Common Stock (72,042,616
issued and outstanding) 4,205,000 - 4,205,000
Class B (7,000,000
issued and outstanding) - - -
Paid-in capital 561,985,000 - 561,985,000
Cumulative net income 202,236,000 - 202,236,000
Cumulative distribution paid (210,912,000) - (210,912,000)
Equity - - -
-------------- ------------ --------------
Total shareholders'
equity 892,664,000 - 892,664,000
-------------- ------------ --------------
Total liabilities
and shareholders'
equity $1,116,857,000 $ 38,028,000 $1,154,885,000
============== ============ ==============
<CAPTION>
COMBINED
OPERATING
COMPANIES AND
REAL ESTATE PRO FORMA SEI
INTERESTS MERGER POST-MERGER
ASSETS (HISTORICAL) ADJUSTMENTS (2) (PRO FORMA)
------------ --------------- --------------
<S> <C> <C> <C>
Cash and cash equivalents $ 1,204,000 $ - $ 6,290,000
Investments in real
estate entities 74,651,000 290,349,000 385,615,000
Real estate facilities,
net of accumulated
depreciation 17,593,000 2,350,000 1,144,310,000
Mortgage loans
receivable, primarily
from affiliates 7,987,000 - 7,987,000
Intangible assets - 235,045,000 235,045,000
Other assets 2,730,000 - 7,547,000
------------ ------------ --------------
Total assets $104,165,000 $527,744,000 $1,786,794,000
============ ============ ==============
LIABILITIES AND
SHAREHOLDERS' EQUITY
Note payable to banks $ - $ - $ -
Senior Notes 67,671,000 329,000 68,000,000
Mortgage notes payable 4,706,000 - 107,919,000
------------ ------------ --------------
Total debt 72,377,000 329,000 175,919,000
Accrued and other liabilities 1,063,000 2,000,000 37,223,000
Minority interest - - 124,848,000
Shareholders' equity:
Preferred Stock, $.01 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
42,042,616 shares
issued and outstanding
(79,042,616 pro forma shares
issued and outstanding)
Common Stock 72,042,616
issued and outstanding) - 3,000,000 7,205,000
Class B (7,000,000
issued and outstanding) - 700,000 700,000
Paid-in capital - 552,440,000 1,114,425,000
Cumulative net income - - 202,236,000
Cumulative distribution paid - - (210,912,000)
Equity 30,725,000 (30,725,000) -
------------ ------------ --------------
Total shareholders'
equity 30,725,000 525,415,000 1,448,804,000
------------ ------------ --------------
Total liabilities
and shareholders'
equity $104,165,000 $527,744,000 $1,786,794,000
============ ============ ==============
</TABLE>
See Accompanying Notes to Pro Forma Consolidated Balance Sheet.
PF-3
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1995
(UNAUDITED)
1. Issuance of Common Stock
------------------------
On May 31, 1995, SEI issued 5,482,200 shares of its Common Stock raising net
offering proceeds of approximately $82.0 million. As of June 30, 1995, SEI
had not utilized substantially all of the net offering proceeds; however,
utilization of the proceeds therefrom is expected as follows:
<TABLE>
<S> <C>
Net offering proceeds:
Common Stock.............................................. $ 82,068,000
Less: Utilization of net offering proceeds as of June
30, 1995............................................ (4,209,000)
------------
Remaining net offering proceeds at June 30, 1995........ $ 77,859,000
============
Uses:
Cash portion of real estate facilities pending acquisition
as of June 30, 1995 (see below).......................... $ 71,293,000
Acquisition of limited partnership units of unconsolidated
real estate entities (consisting of units in affiliated
partnerships which are not part of the Real Estate
Interests to be acquired)................................. 6,692,000
Acquisition of minority interests (see below).............. 6,688,000
Use of cash reserves....................................... (6,814,000)
------------
$ 77,859,000
============
</TABLE>
The following pro forma adjustments were made to reflect the above
transactions:
<TABLE>
<S> <C>
. Investment in real estate entities has been increased to
reflect the cost of the acquired limited partnership units
in ten partnerships affiliated with SEI (these acquisitions
were completed on August 31, 1995)........................... $ 6,692,000
. Real estate facilities were increased to reflect the
acquisition of mini-warehouse facilities
Cash portion of acquisition cost......................... $ 71,293,000
Cancellation of mortgage notes receivable secured
by acquired mini-warehouses facilities.................. 14,352,000
Assumption of mortgage notes payable secured by
acquired mini-warehouse facilities...................... 44,716,000
------------
$130,361,000
============
</TABLE>
The pro forma adjustment to real estate facilities includes the pending
acquisition of 11 mini-warehouse facilities and two business parks with an
aggregate cost of approximately $44.2 million which have not been completed
as of August 31, 1995. These real estate facilities are owned by six
limited partnerships and the general partner is currently in the process of
seeking the approval of the limited partners of the 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
PF-4
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1995
(UNAUDITED)
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.
. Mortgage notes receivable were decreased to reflect
the cancellation of notes in connection with the
acquisition of mini-warehouse facilities securing
such notes............................................. $(14,352,000)
============
. Mortgage notes payable were increased to reflect the
assumption of such notes in connection with the
acquisition of mini-warehouse facilities............... $ 44,716,000
=============
. Minority interest was decreased to reflect the
acquisition of such interests........................... $ (6,688,000)
=============
In July and August 1995, SEI completed cash tender offers 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. Pursuant to these tender offers, SEI acquired in
aggregate $6.7 million of limited partnership units in the partnership. The
acquisition of units has the effect of reducing minority interest.
2. 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."
SEI has determined the purchase cost of the net assets to be acquired in 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
the average closing market prices on the NYSE for the thirty consecutive
trading days prior to the date the Merger Agreement was executed (June 30,
1995). The fair value of the Class B Common Stock (which is not publicly
traded) is based on an independent appraisal. The aggregate purchase cost and
its preliminary allocation to the historical assets and liabilities is as
follows:
PF-5
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1995
(UNAUDITED)
<TABLE>
<S> <C>
Purchase cost (1):
- -------------------
Issuance of 30,000,000 shares of Common Stock (at $16.088 per share) (2)............................... $482,640,000
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
------------
$558,140,000
============
Preliminary allocation of purchase cost (3):
- --------------------------------------------
Intangible assets attributable to the Operating Companies (4).......................................... $235,045,000
Fair value of net assets acquired from the Operating Companies
Cash.............................................................................................. 1,204,000
Other assets...................................................................................... 2,730,000
Senior note payable (face amount of note at June 30, 1995)........................................ (68,000,000)
Accrued and other liabilities..................................................................... (1,063,000)
------------
Total fair value of net assets of the Operating Companies...................................... 169,916,000
------------
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............................................. (545,000)
Fair value of all-inclusive trust deeds:
Mortgage notes receivable........................................................................... 7,987,000
Mortgage notes payable.............................................................................. (4,161,000)
------------
Total fair value of the net assets of the Real Estate Interests to be acquired................. 388,224,000
------------
$558,140,000
============
</TABLE>
- -----------------
(1) See "Proposal One -- The Merger -- Terms of the Merger -- Adjustment to
Share Consideration."
(2) Pursuant to the terms of the Merger, the number of shares of Common
Stock and Class B Common Stock to be issued as consideration for the
Merger will not be subjected to market price fluctuations. In addition,
with respect to the determination of the value of consideration to be paid
for the acquisition, market fluctuations subsequent to the announcement
of the proposed Merger were not taken into consideration.
(3) See "Certain Considerations -- Valuation of Assets"
(4) Intangible assets consist of the following:
<TABLE>
<S> <C>
Management contracts........................................................................................... $165,000,000
Excess purchase cost over identifiable tangible and intangible assets.......................................... 70,045,000
------------
$235,045,000
============
</TABLE>
PF-6
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1995
(UNAUDITED)
The following pro forma adjustments have been made to reflect the Merger as of
June 30, 1995:
<TABLE>
<S> <C>
. 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:
Fair value of real estate investments................................................. $365,000,000
Less: historical carrying value....................................................... (74,651,000)
------------
Pro forma adjustment............................................................... $290,349,000
============
. Real estate facilities has been increased to reflect the fair value of the seven
properties to be acquired in the Merger:
Fair value of real estate facilities.................................................. $ 19,943,000
Less: historical carrying value........................................................ (17,593,000)
------------
Pro forma adjustment............................................................... $ 2,350,000
============
. Intangible assets have been increased to reflect intangible assets relating to the
Operating Companies....................................................................... $235,045,000
============
. Secured notes has been adjusted by an amount to reflect the face amount of the secured
note at June 30, 1995..................................................................... $ 329,000
============
. Accrued and other liabilities has been increased for the estimated costs and expenses of
the Merger................................................................................ $ 2,000,000
============
. Shareholders' equity has been increased to reflect the following:
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
$16.088 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)........................................................ $552,440,000
============
. Equity has been eliminated to reflect the acquisition of the net assets of the Operating
Companies and Real Estate Interests to be acquired........................................ $(30,725,000)
============
</TABLE>
PF-7
<PAGE>
STORAGE EQUITIES, INC.
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
SEI
---------------------------------------------------------------------
PRO FORMA ADJUSTMENTS
----------------------------
ISSUANCE
OF PREFERRED SEI
SEI & COMMON REIT PRE-MERGER
(HISTORICAL) STOCK(1) MERGERS (2) (PRO FORMA)
------------ ----------- ---------- ------------
REVENUES:
Rental Income $88,068,000 $12,542,000 $8,465,000 $109,075,000
Facility management fees - - - -
Advisory fee income - - - -
Merchandise operations - - - -
Equity in earnings of
real estate entities - 383,000 - 383,000
Interest and other
Income 3,042,000 (988,000) 25,000 2,079,000
----------- ----------- ---------- ------------
91,110,000 11,937,000 8,490,000 111,537,000
----------- ----------- ---------- ------------
EXPENSES:
Cost of operations 32,342,000 4,217,000 3,489,000 40,048,000
Cost of managing
facilities - - - -
Cost of merchandise - - - -
Depreciation and
amortization 16,926,000 2,567,000 1,254,000 20,747,000
General and
administrative 1,736,000 - 149,000 1,885,000
Advisory fee 3,426,000 397,000 213,000 4,036,000
Interest expense 3,214,000 957,000 1,017,000 5,188,000
----------- ---------- ---------- ------------
57,644,000 8,138,000 6,122,000 71,904,000
----------- ---------- ---------- ------------
Income before minority
interest in income and
gain on disposition of
real estate 33,466,000 3,799,000 2,368,000 39,633,000
Minority interest in
income (3,715,000) 145,000 - (3,570,000)
----------- ---------- ---------- ------------
Net Income $29,751,000 $3,944,000 $2,368,000 $ 36,063,000
=========== ========== ========== ============
Net income allocable to
preferred shareholders $13,308,000 $ 2,342,000 $ - $ 15,650,000
Net income allocable to
Class B Shareholders - - - -
Net income allocable to
Common Stock
shareholders 16,443,000 1,602,000 2,368,000 20,413,000
----------- ---------- ---------- ------------
Net Income $29,751,000 $3,944,000 $2,368,000 $ 36,063,000
=========== ========== ========== ============
PER SHARE OF COMMON
STOCK:
Net Income $0.50(3) $0.48(3)
=========== ============
Weighted Average Shares 32,707,556(3) 42,108,048(3)
=========== ============
<CAPTION>
PSMI
-------------------------------------------
COMBINED COMBINED
OPERATING OPERATION
COMPANIES AND COMPANIES AND
REAL ESTATE REAL ESTATE PRO FORMA SEI
INTERESTS PRO FORMA INTERESTS MERGER POST-MERGER
(HISTORICAL) ADJUSTMENTS(4) (PRO FORMA) ADJUSTMENTS(5) (PRO FORMA)
------------ -------------- ----------- --------------- ------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Rental Income $ 1,637,000 $ - $ 1,637,000 $ - $110,712,000
Facility management fees 13,156,000 87,000 13,243,000 (6,307,000) 6,936,000
Advisory fee income 3,426,000 610,000 4,036,000 (4,036,000) -
Merchandise operations 1,013,000 - 1,013,000 - 1,013,000
Equity in earnings of
real estate entities 13,074,000 - 13,074,000 (6,109,000) 7,348,000
Interest and other Income 459,000 - 459,000 - 2,538,000
----------- ---------- ----------- ------------ ------------
32,765,000 697,000 33,462,000 (16,452,000) 128,547,000
----------- ---------- ----------- ------------ ------------
EXPENSES:
Cost of operations 450,000 - 450,000 (6,307,000) 34,191,000
Cost of managing
facilities 2,527,000 (170,000) 2,357,000 - 2,357,000
Cost of merchandise 501,000 - 501,000 - 501,000
Depreciation and
amortization 302,000 - 302,000 4,701,000 25,750,000
General and
administrative 1,090,000 (228,000) 862,000 - 2,747,000
Advisory fee - - - (4,036,000) -
Interest expense 2,689,000 - 2,689,000 - 7,877,000
----------- ---------- ----------- ------------ ------------
7,559,000 (398,000) 7,161,000 (5,642,000) 73,423,000
----------- ---------- ----------- ------------ ------------
Income before minority
interest in income and
gain on disposition of
real estate 25,206,000 1,095,000 26,301,000 (10,810,000) 55,124,000
Minority interest in
income - - - - (3,570,000)
----------- ---------- ----------- ------------ ------------
Net Income $25,206,000 $1,095,000 $26,301,000 $(10,810,000) $ 51,554,000
=========== ========== =========== ============ ============
Net income allocable to
preferred shareholders $ - $ - $ - $ - $ 15,650,000
Net income allocable to
Class B Shareholders - - - - -
Net income allocable to
Common Stock
shareholders 25,206,000 1,095,000 26,301,000 (10,810,000) 35,904,000
----------- ---------- ----------- ------------ ------------
Net Income $25,206,000 $1,095,000 $26,301,000 $(10,810,000) $ 51,554,000
=========== ========== =========== ============ ============
PER SHARE OF COMMON
STOCK:
Net Income $0.50(6)
===========
Weighted Average Shares 72,108,048(6)
===========
</TABLE>
See Accompanying Notes to Pro Forma Consolidated Statements of Income.
PF-8
<PAGE>
STORAGE EQUITIES, INC.
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
SEI
-----------------------------------------------------------------------
PRO FORMA ADJUSTMENTS
-----------------------------
ISSUANCE
OF PREFERRED SEI
SEI & COMMON REIT PRE-MERGER
(HISTORICAL) STOCK(1) MERGERS (2) (PRO FORMA)
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
REVENUES:
Rental Income $141,845,000 $42,701,000 $30,672,000 $215,218,000
Facility management fees - - - -
Advisory fee income - - - -
Merchandise operations - - - -
Equity in earnings of
real estate entities - 748,000 - 748,000
Interest and other
Income 5,351,000 (4,315,000) 218,000 1,254,000
------------ ----------- ----------- ------------
147,196,000 39,134,000 30,890,000 217,220,000
------------ ----------- ----------- ------------
EXPENSES:
Cost of operations 52,816,000 14,639,000 12,114,000 79,569,000
Cost of managing
facilities - - - -
Cost of merchandise - - - -
Depreciation and
amortization 28,274,000 7,917,000 4,780,000 40,971,000
General and
administrative 2,631,000 - 433,000 3,064,000
Advisory fee 4,983,000 1,794,000 699,000 7,476,000
Interest expense 6,893,000 (1,135,000) 4,985,000 10,743,000
------------ ----------- ----------- ------------
95,597,000 23,215,000 23,011,000 141,823,000
------------ ----------- ----------- ------------
Income before minority
interest in income and
gain on disposition of
real estate 51,599,000 15,919,000 7,879,000 75,397,000
Minority interest in
income (9,481,000) 2,563,000 - (6,918,000)
------------ ----------- ---------- ------------
42,118,000 18,482,000 7,879,000 68,479,000
Gain on disposition of
real estate - - 203,000 203,000
------------ ----------- ----------- ------------
Net Income $ 42,118,000 $18,482,000 $ 8,082,000 $ 68,682,000
============ =========== =========== ============
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 4,122,000 8,082,000 37,476,000
------------ ----------- ----------- ------------
Net Income $ 42,118,000 $18,482,000 $ 8,082,000 $ 68,682,000
============ =========== =========== ============
PER SHARE OF COMMON
STOCK:
Net Income $1.05(3) $0.90(3)
============ ============
Weighted Average Shares 24,077,055(3) 41,844,644(3)
============ ============
<CAPTION>
PSMI
------------------------------------------------
COMBINED COMBINED
OPERATING OPERATING
COMPANIES AND COMPANIES AND
EQUITY EQUITY PRO FORMA SEI
INTERESTS PRO FORMA INTERESTS MERGER POST-MERGER
(HISTORICAL) ADJUSTMENTS(4) (PRO FORMA) ADJUSTMENTS(5) (PRO FORMA)
------------ -------------- ------------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Rental Income $ 3,152,000 $ - $ 3,152,000 $ - $218,370,000
Facility management fees 25,224,000 576,000 25,800,000 (12,937,000) 12,863,000
Advisory fee income 4,983,000 2,493,000 7,476,000 (7,476,000) -
Merchandise operations 1,872,000 - 1,872,000 - 1,872,000
Equity in earnings of
real estate entities 24,555,000 - 24,555,000 (12,217,000) 13,086,000
Interest and other
Income 996,000 - 996,000 - 2,250,000
----------- ---------- ----------- ------------ ------------
60,782,000 3,069,000 63,851,000 (32,630,000) 248,441,000
----------- ---------- ----------- ------------ ------------
EXPENSES:
Cost of operations 834,000 - 834,000 (12,937,000) 67,466,000
Cost of managing
facilities 4,909,000 (167,000) 4,742,000 - 4,742,000
Cost of merchandise 866,000 - 866,000 - 866,000
Depreciation and
amortization 1,011,000 (362,000) 649,000 9,402,000 51,022,000
General and
administrative 1,850,000 (255,000) 1,595,000 - 4,659,000
Advisory fee - - - (7,476,000) -
Interest expense 5,607,000 - 5,607,000 - 16,350,000
----------- ---------- ----------- ------------ ------------
15,077,000 (784,000) 14,293,000 (11,011,000) 145,105,000
----------- ---------- ----------- ------------ ------------
Income before minority
interest in income and
gain on disposition of
real estate 45,705,000 3,853,000 49,558,000 (21,619,000) 103,336,000
Minority interest in
income - - - - (6,918,000)
----------- ---------- ----------- ------------ ------------
45,705,000 3,853,000 49,558,000 (21,619,000) 96,418,000
Gain on disposition of
real estate - - - - 203,000
----------- ---------- ----------- ------------ ------------
Net Income $45,705,000 $3,853,000 $49,558,000 $(21,619,000) $ 96,621,000
=========== ========== =========== ============ ============
Net income allocable to
preferred shareholders $ - $ - $ - $ - $ 31,206,000
Net income allocable to
Class B Shareholders - - - - -
Net income allocable to
Common Stock
shareholders 45,705,000 3,853,000 49,558,000 (21,619,000) 65,415,000
----------- ---------- ----------- ------------ ------------
Net Income $45,705,000 $3,853,000 $49,558,000 $(21,619,000) $ 96,621,000
=========== ========== =========== ============ ============
PER SHARE OF COMMON
STOCK:
Net Income $0.91(6)
============
Weighted Average Shares 71,844,644(6)
============
</TABLE>
See Accompanying Notes to Pro Forma Consolidated Statement of Income.
PF-9
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 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 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 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 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 Series F Preferred
Stock. The aggregate net offering proceeds( $55.5 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 11 mini-warehouse
facilities and two business parks with an aggregate acquisition cost
of $44.2 million, consisting of the cancellation of $7.9 million of
mortgage notes receivable, the assumption of $11.9 million of
mortgage notes payable, and cash totaling $24.4 million.
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:
PF-10
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND YEAR ENDED DECEMBER 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED ENDED
JUNE 30, 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 historical
statement of operations and the
pro forma rental income as if
the acquired real estate
facilities were in operation for
a full period...................... $12,542,000 $42,701,000
=========== ===========
. Equity in earnings of real
estate entities has been
increased to reflect income with
respect to the acquisition of
limited partnership units in
affiliated unconsolidated
partnerships. Such acquisitions
occurred subsequent to June 30,
1995 and do not represent
limited partnership units in
either the PSP Partnership or
the partnerships included in the
Real Estate Interests.............. $ 383,000 $ 748,000
=========== ===========
. 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 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
$67,000 in 1995 and $693,000 in
1994).............................. $ (988,000) $(4,315,000)
=========== ===========
. Cost of operations has been
increased to reflect the
incremental difference between
the actual cost of operations
included 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..... $ 4,217,000 $14,639,000
=========== ===========
. Depreciation has been
increased to reflect the
incremental difference between
the actual depreciation expense
included in the historical
statements of income and the pro
forma depreciation expense as if
the real estate facilities were
in operation for a full period..... $ 2,567,000 $ 7,917,000
=========== ===========
</TABLE>
PF-11
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND YEAR ENDED DECEMBER 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED ENDED
JUNE 30, 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 of the debt through
the use of net offering
proceeds......................... $ (293,000) $(1,097,000)
Mortgage notes payable were
assumed in connection with the
acquisition of the real estate
facilities. An adjustment was
made to reflect the interest
expense as if the notes were
assumed at the beginning of the
period........................... 2,254,000 4,801,000
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 (see Note 2), 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....... (1,004,000) (4,839,000)
----------- -----------
Net increase (decrease) in
interest expense.............. $ 957,000 $(1,135,000)
=========== ===========
See pro forma schedule of
principal payments on page 97.
. Minority interest in income
has been decreased due to the
acquisition of such minority
interests by SEI................... $ 145,000 $ 2,563,000
=========== ===========
. Advisory fees have been
increased to reflect the effect
of the above adjustments........... $ 397,000 $ 1,794,000
=========== ===========
</TABLE>
PF-12
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND YEAR ENDED DECEMBER 31, 1994
(UNAUDITED)
2. REIT Mergers
------------
During 1994 and 1995, SEI completed merger transactions (collectively, the
"REIT Mergers") 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>
SIX MONTHS YEAR
ENDED ENDED
JUNE 30, 1995 DECEMBER 31, 1994
------------- -----------------
<S> <C> <C>
. A pro forma adjustment has
been made to reflect the PSP
REITs historical rental income.... $8,465,000 $30,672,000
========== ===========
. A pro forma adjustment has
been made to reflect the PSP
REITs historical interest and
other income...................... $ 25,000 $ 218,000
========== ===========
. A pro forma adjustment has
been made to reflect the PSP
REITs historical cost of
operations........................ $3,489,000 $12,114,000
========== ===========
. Depreciation and amortization
was adjusted as follows:
A pro forma adjustment has
been made to reflect the PSP
REITs historical depreciation.. $1,175,000 $ 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). 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).. 79,000 820,000
---------- -----------
$1,254,000 $ 4,780,000
========== ===========
</TABLE>
PF-13
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND YEAR ENDED DECEMBER 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED ENDED
JUNE 30, 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................................. $ 191,000 $ 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............. (42,000) (200,000)
---------- ----------
$ 149,000 $ 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 ($14.0 million borrowings
outstanding from January 1, 1994
through June 30, 1995)............... 665,000 1,331,000
---------- ----------
subtotal........................ 1,004,000 4,839,000
Historical interest expense of the PSP
REITs................................ 13,000 146,000
---------- ----------
Total adjustment to interest expense $1,017,000 $4,985,000
========== ==========
. 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............ $ 213,000 $ 699,000
========== ==========
</TABLE>
PF-14
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND YEAR ENDED DECEMBER 31, 1994
(UNAUDITED)
3. Net income per share of Common Stock has been computed as follows:
-----------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED ENDED
JUNE 30, 1995 DECEMBER 31, 1994
------------- -----------------
<S> <C> <C>
Historical net income................... $ 29,751,000 $ 42,118,000
Less: Historical preferred stock
dividends.............................. (13,308,000) (16,846,000)
------------ ------------
Income applicable to Common Stock
shareholders........................... $ 16,443,000 $ 25,272,000
============ ============
Historical weighted average shares
of Common Stock........................ 32,707,556 24,077,055
============ ============
Historical net income per share of
Common Stock........................... $ 0.50 $ 1.05
============ ============
Pro forma net income.................... $ 36,063,000 $ 68,682,000
Less: Pro forma preferred stock
dividends (1)......................... (15,650,000) (31,206,000)
------------ ------------
Income applicable to Common Stock
shareholders........................... $ 20,413,000 $ 37,476,000
============ ============
Pro forma weighted average shares of
Common Stock(2)........................ 42,108,048 41,844,644
============ ============
Pro forma net income per share of
Common Stock........................... $ 0.48 $ 0.90
============ ============
</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
$390,000 higher for the six months ended June 30, 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
$0.03 per common for the year ended December 31, 1994 ($0.01 for the six
months ended June 30, 1995).
(2) As adjusted to give effect to the issuance of additional shares of 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 REIT Mergers.
PF-15
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND YEAR ENDED DECEMBER 31, 1994
(UNAUDITED)
4. Pro forma adjustments to the historical combined income of the Operating
------------------------------------------------------------------------
Companies and Real Estate Interests:
------------------------------------
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 and (ii) to eliminate
certain non-recurring costs and expenses included in the Operating
Companies.
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED ENDED
JUNE 30, 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............ $ 87,000 $ 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...... $ 610,000 $2,493,000
========= ==========
. A pro forma adjustment has been
made to Cost of managing
facilities to eliminate certain
non-recurring costs and expenses $(170,000) $ (167,000)
========= ==========
. A pro forma adjustment has
been made to depreciation and
amortization to eliminate
certain non-recurring expenses
in connection with the write-off
of tenant improvements.......... $ $ (362,000)
========= ==========
. A pro forma adjustment has
been made to General and
administrative expense to
eliminate certain non-recurring
costs and expenses.............. $(228,000) $ (255,000)
========= ==========
</TABLE>
PF-16
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND YEAR ENDED DECEMBER 31, 1994
(UNAUDITED)
5. Pro forma Merger adjustments:
----------------------------
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED ENDED
JUNE 30, 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 (the
remaining facility management
fees represent principally fees
received from the management of
properties owned by affiliated
entities, which SEI will
acquire an interest in pursuant
to the acquisition of the Real
Estate Interests):
Facility management fee
income.......................... $(6,307,000) $(12,937,000)
=========== ============
Cost of operations.............. $(6,307,000) $(12,937,000)
=========== ============
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............. $(4,036,000) $ (7,476,000)
=========== ============
Advisory fee (expense).......... $(4,036,000) $ (7,476,000)
=========== ============
. 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.............. $(6,109,000) $(12,217,000)
=========== ============
</TABLE>
PF-17
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND YEAR ENDED DECEMBER 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
Year
Six Months Ended
Ended December 31,
June 30, 1995 1994
------------- ------------
<S> <C> <C>
. A pro forma adjustment has been made to increase depreciation and
amortization to reflect the amortization of intangible assets
acquired in connection with the Merger; management contracts
($165 million) and purchase price in excess of identifiable tangible
and intangible assets acquired ($70 million), each of which
are amortized over a 25 year period. See Note 2 to the Pro
Forma Consolidated Balance.......................................... $4,701,000 $9,402,000
========== ==========
</TABLE>
6. Pro forma net income per share of Common Stock has been computed as
-------------------------------------------------------------------
follows:
-------
<TABLE>
<CAPTION>
Year
Six Months Ended
Ended December 31,
June 30, 1995 1994
------------- -------------
<S> <C> <C>
Pro forma net income............................................ $ 51,554,000 $ 96,621,000
Less: Pro forma preferred stock dividends....................... (15,650,000) (31,206,000)
------------ ------------
Income allocable to common shareholders......................... 35,904,000 65,415,000
Less: Pro forma income allocable to Class B shareholders........ - -
------------ ------------
Income allocable to Common Stock shareholders................... $ 35,904,000 $ 65,415,000
============ ============
Pro forma weighted average shares of Common Stock (1)........... 72,108,048 71,844,644
============ ============
Pro forma net income per share of Common Stock.................. $ 0.50 $ .91
============ ============
</TABLE>
(1) 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.
PF-18
<PAGE>
Appendix A
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
<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
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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.
Subject to the limitations in this Section 4.8, SEI shall be entitled
to recover from Hughes personally the 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
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under the laws 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. 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. Claims for indemnification hereunder
(either during the Indemnification Period or thereafter) shall be limited to the
recovery of Damages in the amount of the Indemnification Shares, and 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.
(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. 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 Hughes 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.
(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.
(d) For purposes of this Section 4.8, the satisfaction of any Damages
owed hereunder shall be made by any of the following: (i) delivery to SEI by
the Indemnification
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Escrow Agent or by Hughes 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; (ii) delivery by Hughes of that number of SEI
Common Shares with a then Market Value equal to any Damages; or (iii) payment by
Hughes of cash in an amount equal to any Damages. Any Indemnification Shares or
SEI Common 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 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
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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 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
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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 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
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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 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.
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(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 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.
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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
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.
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(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.
(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
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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 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
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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
(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
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(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:
<TABLE>
<S> <C>
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
</TABLE>
-39-
<PAGE>
<TABLE>
<S> <C>
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
</TABLE>
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
-40-
<PAGE>
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.
-41-
<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.
-42-
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed and delivered by
the parties set forth below.
STORAGE EQUITIES, INC.,
a California corporation
By: Harvey Lenkin
-----------------------------
Title: President
----------------------
PUBLIC STORAGE, INC.,
a California corporation
By: B. Wayne Hughes
-----------------------------
Title: President
----------------------
PUBLIC STORAGE MANAGEMENT, INC.,
a California corporation
By: B. Wayne Hughes
-----------------------------
Title: Director
----------------------
-43-
<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 1973 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 I shall be
amended to read as follows:
The name of this corporation is
Public Storage, Inc.
(c) The Bylaws of SEI 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.
(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
2
<PAGE>
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 hereof, the SEI Shares specified above.
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
PSMI at the Effective Time shall be cancelled and retired.
2.3 SURRENDER OF CERTIFICATES. 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 hereof.
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
<PAGE>
APPENDIX B
ARTHUR
ANDERSEN
ARTHUR ANDERSEN & CO. SC
--------------------------
ARTHUR ANDERSEN LLP
--------------------------
633 West Fifth Street
Los Angeles, CA 90071-2008
213 614-6500
June 21, 1995
Public Storage, Inc.
600 North Brand Blvd., Suite 300
Glendale, California 91221
The Special Committee of the Board of Directors
Storage Equities, Inc.
600 North Brand Blvd., Suite 300
Glendale, California 91221
SUBJECT: VALUATION OF PUBLIC STORAGE, INC.'S (PSI) INTERESTS IN 47 PARTNERSHIPS,
THE CLASS A, B, C, AND D SHARES IN 15 PUBLICLY-TRADED REITS AND THE
ADVISORY AGREEMENT OF 1 PUBLICLY-TRADED REIT
Dear Sirs:
In this engagement, Arthur Andersen LLP has provided valuation services relating
to PSI's interests in 47 partnerships, the Class A, B, C, and D shares in 15
publicly-traded REITS and the advisory contract with Storage Properties, Inc.
(SPI), a publicly traded REIT. Enclosed as Attachment A is a list of the
partnerships and REITS which comprise the subject of this valuation assignment
(hereafter referred to as the "PSI Real Estate Interest").
We understand that the results of our valuation will be reviewed by the
financial advisor to the Special Committee as one consideration in rendering a
fairness opinion on the proposed combining of PSI with Storage Equities, Inc.
(SEI), including the acquisition of the PSI Real Estate Interest. It is also
understood that this valuation will be described, and likely be included in its
entirety, in SEC filings required in connection with the overall transaction in
which PSI will be combining its U.S. real estate operations with SEI, including
the acquisition of the PSI Real Estate Interest. These operations would include
the items referenced above which we have valued in the aggregate.
It is important to note that this letter summarizes the results of our
engagement. In this regard, we have prepared complete working paper files, of
which this letter is an integral part, documenting the work performed in this
engagement including our analyses and data collected in the process of preparing
our estimate of value.
Based on the analyses performed and the independent research we conducted as a
part of this process, we conclude that the aggregate market value of the PSI
Real Estate Interest, as of the December 31, 1994, is:
Three Hundred Sixty Five Million Dollars
$365,000,000
<PAGE>
ARTHUR
ANDERSEN
ARTHUR ANDERSEN & CO. SC
The Special Committee of the Board of Directors
Public Storage, Inc.
Storage Equities, Inc.
Page 2
June 21, 1995
Consistent with standard valuation practice, we have valued the PSI Real Estate
Interest as if the REITS, partnerships, and general partners stay in place for
the indeterminate future. Our conclusions are predicated upon a market
valuation of these interests, assuming the interests are sold as a group of
assets on an all cash basis. We have not concluded a value for any individual
partnership, REIT, property or partial interest.
As is customary practice, our work is subject to our Statement of Assumptions
and Limiting Conditions (a copy of which is included as Attachment B). Our
valuation has been made in conformity with, and is subject to the guidelines of
the Uniform Standards of Professional Appraisal Practice of the Appraisal
Foundation.
Our firm has performed, or is performing, other services for PSI, SEI and
certain affiliates, none of which relate directly to this transaction. The
primary nature of these other services comprises real estate appraisal and
federal and state tax return preparation and consulting.
Our fees will be paid by PSI and SEI and are not in any way contingent on the
consummation of the proposed transaction and will not be paid from the proceeds
from the sale or transfer of assets within the transaction.
The Statement of Assumptions and Limiting Conditions to which our conclusions
and report are subject is acceptable to all parties (a copy of our Statement of
Assumptions and Limiting Conditions is enclosed as Attachment B).
Very truly yours,
ARTHUR ANDERSEN LLP
/s/ ARTHUR ANDERSEN LLP
<PAGE>
Attachment A
<TABLE>
<CAPTION>
ADVISORY
PARTNERSHIPS (47) REITS (15) AGREEMENT (1)
NAME NAME NAME
- -------------------------------------------------------------------------------
<S> <C> <C>
Public Storage German Fund Public Storage Storage Properties,
II, Ltd. Properties IX, Inc. Inc.
Public Storage Euro Public Storage
Partnership III, Ltd. Properties X, Inc.
Public Storage Euro Public Storage
Partnership IV, Ltd. Properties XI, Inc.
Public Storage Euro Public Storage
Partnership V, Ltd. Properties XII, Inc.
Public Storage Euro Public Storage
Partnership VI, Ltd. Properties XIV, Inc.
Public Storage Euro Public Storage
Partnership VII, Ltd. Properties XV, Inc.
Public Storage Euro Public Storage
Partnership VIII, Ltd. Properties XVI, Inc.
Public Storage Euro Public Storage
Partnership IX, Ltd. Properties XVII, Inc.
Public Storage Euro Public Storage
Partnership X, Ltd. Properties XVIII, Inc.
Public Storage Euro Public Storage
Partnership XI, Ltd. Properties XIX, Inc.
Public Storage Euro Public Storage
Partnership XII, Ltd. Properties XX, Inc.
Public Storage Euro PS Business Park,
Partnership XIII, Ltd. Inc.
Public Storage Benelux Partners Preferred
Partners I, Ltd. Yield, Inc.
Public Storage Benelux Partners Preferred
Partners II, Ltd. Yield II, Inc.
Public Storage Benelux Partners Preferred
Partnership III, Ltd. Yield III, Inc.
Public Storage Benelux
Partnership IV, Ltd.
Public Storage Benelux
Partnership V, Ltd.
Public Storage Alameda, Ltd.
PS Mini Warehouse Fund
PS Mini Warehouse Fund II
PS Mini Warehouse Fund III
PS Mini Warehouse Fund IV
PS Mini Warehouse Fund V
PS Mini Warehouse Fund VI
PS Mini Warehouse Fund VII
PS Mini Warehouse Fund VIII
PS Mini Warehouse Fund IX
PS Mini Warehouse Fund X
Connecticut Storage Fund
Diversified Storage Fund
Diversified Storage Fund II
Metropublic Storage Fund
Public Storage Institutional
Fund
Public Storage Institutional
Fund II
Public Storage Institutional
Fund III
Arlington Storage Ltd.
Wisconsin Public Storage Ltd.
Public Storage Mid-Atlantic
Ltd.
Public Storage Mid Atlantic
II, Ltd.
Public Storage Institutional
Fund IV
Diversified Storage Venture
Fund
Public Storage Partners, Ltd.
Public Storage Partners II,
Ltd.
Public Storage Properties,
Ltd.
Public Storage Properties
IV, Ltd.
Public Storage Properties V,
Ltd.
PS Carolinas Balanced Fund,
Ltd.
</TABLE>
<PAGE>
Attachment B
STATEMENT OF ASSUMPTIONS AND LIMITING CONDITIONS
This valuation report is subject to the following assumptions and limiting
conditions:
1. Arthur Andersen LLP (Arthur Andersen) has been retained by Public
Storage, Inc. (PSI) and the Special Committee of the Board of
Directors of Storage Equities, Inc. (SEI) to render an opinion of
value as outlined in our engagement letter dated March 20, 1995 to PSI
and to the Special Committee of the Board of Directors of SEI. Arthur
Andersen has performed valuation services for PSI and the Special
Committee of the Board of Directors of SEI as described in our
engagement letter but will not act as either PSI's or SEI's agent or
investment advisor. Consequently, all decisions relating to the
acceptance or rejection of proposals or other matters relating to the
transaction, and the negotiation of such terms, shall be solely the
responsibility of PSI and the Special Committee of the Board of
Directors of SEI.
2. PSI was responsible for providing information relating to this
assignment for Arthur Andersen's review. The accuracy and
completeness of such information prepared and submitted by PSI, on
which Arthur Andersen will rely and which will form the basis of our
work and opinion, is solely the responsibility of PSI. During our
review, nothing came to our attention that would lead us to believe
that such information was inaccurate in any material respect.
3. Our engagement letter and this statement of Assumptions and Limiting
Conditions set forth the entire understanding between Arthur Andersen
and both PSI and the Special Committee of the Board of Directors of
SEI and supersede all prior agreements, arrangements and
communications, either oral or written, with respect to the subject
matter hereof. This agreement shall be governed and construed in
accordance with the internal laws of the State of California.
4. Our value conclusion presumes a sale of all general partnership
interests, Class A, B, C, and D REIT shares and advisory agreement of
SPI as a single transaction. Therefore, our value conclusion reflects
the aggregate value of all combined assets. This valuation does not
conclude or in any way provide a value for an individual partnership,
REIT, property, partial interest or combination thereof.
5. All approvals required for transfer of partnership interests and REIT
shares considered within the appraisal have been already obtained or
will be obtained in such a manner as to not delay closing of a
transaction.
6. The effective date of the valuation is December 31, 1994.
<PAGE>
Attachment B
7. This valuation assumes only two classes of ownership for the
partnerships: General Partner and Limited Partner. It is also assumed
that the REITS are structured such that only Class A, B, and C, and in
certain instances Class D, shares exist. The Class B, C, and D
shares are assumed to provide rights and cash flows generally
equivalent to the General Partner interests in the partnerships. The
Class A shares are assumed to provide rights and cash flows generally
equivalent to the Limited Partner interests in the partnerships.
8. This valuation assumes that all Limited Partners (and Class A
shareholders) invested at the same time within a given REIT,
partnership, or pool within a partnership and that no variance in
crossover points exists within such entities.
9. All operating assets considered herein are situated within the United
States of America and no foreign assets have been included.
10. The valuation is premised on an all-cash sale of the interests valued.
No adjustment has been considered for the use of Storage Equities,
Inc. restricted Class B stock in the proposed transaction.
11. No investigation has been made of, and no responsibility is assumed
for, the legal description of the properties considered within the
valuation analysis or legal matters, including title or encumbrances.
Title to the properties is assumed to be good and marketable unless
otherwise stated. The properties are assumed to be free and clear of
any liens, easements or encumbrances unless otherwise stated.
12. It is assumed that all required licenses, certificates of occupancy,
consents or other legislative or administrative authority from any
local, state, or national government or private entity or organization
have been or can readily be obtained or renewed for any use on which
the value estimate contained in this report is based.
13. Full compliance with all applicable federal, state and local zoning,
use, occupancy, environmental and similar laws and regulations is
assumed, unless otherwise stated.
14. No responsibility is taken for changes in market conditions and no
obligation is assumed to revise this report to reflect events or
conditions which occur subsequent to the appraisal date thereof.
15. The opinion of value is predicated on the financial structure
prevailing as of the date of this valuation.
16. Responsible ownership and competent property management are assumed.
<PAGE>
Attachment B
17. Areas and dimensions of the properties were obtained from sources
believed to be reliable. No independent surveys were conducted.
18. It is assumed that there are no hidden or unapparent conditions of the
properties, subsoils, or structures that render the overall interests
appraised herein more or less valuable. No responsibility is assumed
for such conditions or for arranging engineering studies that may be
required to discover them.
19. No soil analysis or geological studies were ordered or made in
conjunction with this report, nor was an investigation made of any
water, oil, gas, coal, or other subsurface mineral and use rights or
conditions.
20. Neither Arthur Andersen LLP nor any individual signing or associated
with this report shall be required by reason of this report to give
further consultation, provide testimony, or appear in court or other
legal proceedings unless specific arrangements have been made.
21. This report has been made only for the purpose stated and shall not be
used for any other purpose. Neither this report nor any portions
thereof (including, without limitation, any conclusions, the identity
of Arthur Andersen LLP or any individuals signing or associated with
this report, or the professional associations or organizations with
which they are affiliated) shall be disseminated to third parties by
any means without the prior written consent and approval of Arthur
Andersen LLP other than as provided for in this letter.
22. The date of value to which the opinion expressed in this report
applies is set forth in the opinion letter at the front of this
report. Our value opinion is based on the purchasing power of the
United States dollar as of that date.
23. Unless otherwise stated in this report, no hazardous materials, which
may or may not be present on or near the properties, was observed or
was otherwise made known to Arthur Andersen LLP nor any individual
signing or associated with this report. We have no knowledge of the
existence of such materials on, or in, the property; however, we are
not qualified to detect such substances. The presence of potentially
hazardous substances such as asbestos, urea-formaldehyde foam
insulation, or industrial wastes may affect the value of the property.
The value estimate herein is predicated on the assumption that there
is no such material on, in, or near the properties that would cause a
loss in value to the overall interest appraised. No responsibility is
assumed for any such conditions or for any expertise or engineering
knowledge required to discover them. Public Storage, Inc. and Storage
Equities, Inc. should retain an expert in this field if further
information is desired.
24. This valuation has been made in conformance with the Uniform Standards
of Professional Appraisal Practice of The Appraisal Foundation.
<PAGE>
APPENDIX C
ROBERTSON STEPHENS & COMPANY
555 CALIFORNIA STREET SAN FRANCISCO 94104 415-781-9700
INVESTMENT BANKERS MEMBER OF ALL MAJOR EXCHANGES
A CALIFORNIA LIMITED PARTNERSHIP
August 27, 1995
PRIVILEGED AND CONFIDENTIAL
Special Committee of the Board of Directors and
Board of Directors
Storage Equities, Inc.
600 North Brand Boulevard
Glendale, CA 91203
Gentlemen:
You have asked for our opinion with respect to the fairness to the public
shareholders of Storage Equities, Inc. ("SEI") from a financial point of view
and as of the date hereof, of the consideration to be paid by SEI in the merger
with Public Storage Management, Inc. ("PSMI"). Under the terms of that certain
Agreement and Plan of Reorganization, dated as of June 30, 1995, among SEI, PSMI
and Public Storage, Inc. ("PSI") (the "Agreement"), PSMI will merge with and
into SEI, PSMI will cease to exist as a corporation, the stockholders of PSMI
will become stockholders of SEI, and SEI will be the surviving entity and change
its name to "Public Storage, Inc." (the "Merger"). PSI and its affiliates are
prohibited under the Agreement from soliciting competing bids. The affirmative
vote of holders of (i) a majority of the outstanding common shares of SEI and
(ii) a majority of the common shares held by public shareholders of SEI voting
at the Special Meeting of shareholders is necessary for approval of the Merger.
Pursuant to the Agreement, the outstanding capital stock of PSMI will be
converted into an aggregate of 30 million shares of Common Stock of SEI and 7
million shares of Class B Common Stock of SEI, subject to certain adjustments.
SEI Common Stock and Class B Common Stock issued in the Merger will not be
registered under the Securities Act of 1933. The terms and conditions of the
Merger are set out more fully in the Agreement.
For purposes of this opinion we have, among other things: (i) reviewed financial
information relating to SEI and PSI furnished to us by both companies; (ii)
reviewed certain financial models provided by SEI and PSI management; (iii)
reviewed the valuation of PSI's real estate ownership interests prepared by
Arthur Andersen, LLP; (iv) reviewed publicly available information; (v) held
discussions with the management of SEI and PSI concerning the businesses,
operations and prospects of SEI and the various PSI entities involved in the
Merger, independently and combined; (vi) reviewed the Agreement and the form of
the preliminary Proxy Statement filed on July 18, 1995 by SEI with the
Securities and Exchange Commission; (vii) reviewed advisory agreements and
management agreements between SEI and PSI; (viii) reviewed the share price and
trading history of SEI's publicly traded securities; (ix) reviewed the
contribution by each company to pro forma combined revenue, net operating
income, net income, funds from operations and cash from operations; (x) reviewed
the valuations of publicly traded companies which we deemed comparable to SEI
and PSI; (xi)
<PAGE>
Storage Equities, Inc.
August 27, 1995
Page 2
compared the financial terms of the Merger with other transactions which we
deemed relevant; (xii) prepared discounted cash flow analyses of SEI and the
various PSI entities involved in the Merger; (xiii) analyzed the combined funds
from operations per share of the combined company; and (xiv) made such other
studies and inquiries, and reviewed such other data, as we deemed relevant.
In the course of this engagement, we have completed an investigation of both
companies. We have not, however, independently verified any of the foregoing
information and have relied on all such information being complete and accurate
in all material respects. Furthermore, we did not obtain any independent
appraisal of the properties or assets of PSI or SEI. In addition, we have
assumed (i) the Merger will be treated for federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Internal Revenue Code
of 1986, as amended (the "Code") and (ii) SEI will continue to qualify as a REIT
under section 856 through 860 of the Code following the Merger. With respect to
the various financial models of SEI and the PSI entities involved in the Merger,
we have assumed that such models were reasonably prepared in good faith and
incorporate a range of assumptions that management of SEI and PSI consider
reasonable, and we have relied upon such models and assumptions in analyzing the
future financial performance of both companies. While we believe that our
review, as described within, is an adequate basis for the opinion that we
express, this opinion is necessarily based upon market, economic, and other
conditions that exist and can be evaluated as of the date of this letter, and on
information available to us as of the date hereof.
It is understood that this letter is only for the information of the Special
Committee of the Board of Directors of SEI, as well as the Board of Directors of
SEI, and may not be used for any other purpose without our prior written
consent. Based upon and subject to the foregoing considerations, it is our
opinion, as investment bankers, that, as of the date hereof, the consideration
to be paid by SEI in the Merger is fair to the public shareholders of SEI from a
financial point of view.
Very truly yours,
ROBERTSON, STEPHENS & COMPANY, L.P.
By: Robertson, Stephens & Company, Inc.
/s/ EDWIN DAVID HETZ
---------------------------------------
Authorized Signatory
<PAGE>
APPENDIX D
GENERAL CORPORATION LAW OF CALIFORNIA
CHAPTER 13
DISSENTERS' RIGHTS
(S) 1300. RIGHT TO REQUIRE PURCHASE - "DISSENTING SHARES" AND "DISSENTING
SHAREHOLDER" DEFINED.
(a) If the approval of the outstanding shares (Section 152) of a
corporation is required for a reorganization under subdivisions (a) and (b) or
subdivision (a) or (f) of Section 1201, each shareholder of the corporation
entitled to vote on the transaction and each shareholder of a subsidiary
corporation in a short-form merger may, by complying with this chapter, require
the corporation in which the shareholder holds shares to purchase for cash at
their fair market value of the shares owned by the shareholder which are
dissenting shares as defined in subdivision (b). The fair market value shall be
determined as of the day before the first announcement of the terms of the
proposed reorganization or short-form merger, excluding any appreciation or
depreciation in consequence of the proposed action, but adjusted for any stock
split, reverse stock split or share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or short-
form merger either (A) listed on any national securities exchange certified
by the Commissioner of Corporations under subdivision (o) of Section 25100
or (B) listed on the list of OTC margin stocks issued by the Board of
Governors of the Federal Reserve System, and the notice of meeting of
shareholders to act upon the reorganization summarizes this section and
Sections 1301, 1302, 1303 and 1304; provided, however, that this provision
does not apply to any shares with respect to which there exists any
restriction on transfer imposed by the corporation or by any law or
regulation; and provided, further, that this provision does not apply to
any class of shares described in subparagraph (A) or (B) if demands for
payment are filed with respect to 5 percent or more of the outstanding
shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or, (B) if described in subparagraph (A) or
(B) of paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that subparagraph
(A) rather than subparagraph (B) of this paragraph applies in any case
where the approval required by Section 1201 is sought by written consent
rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the
corporation purchase at their fair market value, in accordance with Section
1301.
(4) Which the dissenting shareholder has submitted for endorsement,
in accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the record
holder of dissenting shares and includes a transferee of record.
(S) 1301. DEMAND FOR PURCHASE.
(a) If, in the case of a reorganization, any shareholders of a
corporation have a right under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, to require the
<PAGE>
corporation to purchase their shares for cash,-such corporation shall mail to
each such shareholder a notice of the approval of the reorganization by its
outstanding shares (Section 152) within 10 days after the date of such approval,
accompanied by a copy of Sections 1300, 1302, 1303, 1304 and this section, a
statement of the price determined by the corporation to represent the fair
market value of the dissenting shares, and a brief description of the procedure
to be followed if the shareholder desires to exercise the shareholder's right
under such sections. The statement of price constitutes an offer by the
corporation to purchase at the price stated any dissenting shares as defined in
subdivision (b) of Section 1300, unless they lose their status as dissenting
shares under Section 1309.
(b) Any shareholder who has a right to require the corporation to
purchase the shareholder's shares for cash under Section 1300, subject to
compliance with paragraphs (3) and (4) of subdivision (b) thereof, and who
desires the corporation to purchase such shares shall make written demand upon
the corporation for the purchase of such shares and payment to the shareholder
in cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of
record by the shareholder which the shareholder demands that the corporation
purchase and shall contain a statement of what such shareholder claims to be the
fair market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
(S) 1302. ENDORSEMENT OF SHARES.
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder, the shareholder shall submit to the corporation at
its principal office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's certificates representing
any shares which the shareholder demands that the corporation purchase, to be
stamped or endorsed with a statement that the shares are dissenting shares or to
be exchanged for certificates of appropriate denomination so stamped or endorsed
or (b) if the shares are uncertificated securities, written notice of the number
of shares which the shareholder demands that the corporation purchase. Upon
subsequent transfers of the dissenting shares on the books of the corporation,
the new certificates, initial transaction statement, and other written
statements issued thereafter, shall bear a like statement, together with the
name of the original dissenting holder of the shares.
(S) 1303. AGREED PRICE - TIME FOR PAYMENT.
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between the corporation and the holders
thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount thereof
has been agreed or within 30 days after any statutory or contractual conditions
to the reorganization are satisfied, whichever is later, and in the case of
certificated securities, subject to surrender of the certificates therefor,
unless provided otherwise by agreement.
(S) 1304. DISSENTER'S ACTION TO ENFORCE PAYMENT.
(a) If the corporation denies that the shares are dissenting shares, or
the corporation and the shareholder fail to agree upon the fair market value of
the shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after the date on which
notice of the approval by the outstanding shares (Section 152) or notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, but
not thereafter, may file a complaint in the superior court of the proper county
<PAGE>
praying the court to determine whether the shares are dissenting shares or the
fair market value of the dissenting shares or both or may intervene in any
action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be
joined as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If
the status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
(S) 1305. APPRAISERS' REPORT - PAYMENT COATS.
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed by
the court, the appraisers, or a majority of them, shall make and file a report
in the office of the clerk of the court. Thereupon, on the motion of any party,
the report shall be submitted to the court and considered on such evidence as
the court considers relevant. If the court finds the report reasonable, the
court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a
report within 10 days from the date of their appointment or within such further
time as may be allowed by the court or the report is not confirmed by the court,
the court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which any
dissenting shareholder who is a party, or who has intervened, is entitled to
require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of Section
1301).
(S) 1306. DISSENTING SHAREHOLDER'S STATUS AS CREDITOR.
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
(S) 1307. DIVIDENDS PAID AS CREDIT AGAINST PAYMENT.
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.
<PAGE>
(S) 1308. CONTINUING RIGHTS AND PRIVILEGES OF DISSENTING SHAREHOLDERS.
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A dissenting
shareholder may not withdraw a demand for payment unless the corporation
consents thereto.
(S) 1309. TERMINATION OF DISSENTING SHAREHOLDER STATUS.
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to require
the corporation to purchase their shares upon the happening of any of the
following:
(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter all
necessary expenses incurred in such proceedings and reasonable attorneys' fees.
(b) The shares are transferred prior to their submission for endorsement
in accordance with Section 1302 or are surrendered for conversion into shares of
another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice of
the approval by the outstanding shares or notice pursuant to subdivision (i) of
Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
(S) 1310. SUSPENSION OF PROCEEDINGS FOR PAYMENT PENDING LITIGATION.
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings under
Sections 1304 and 1305 shall be suspended until final determination of such
litigation.
(S) 1311. EXEMPT SHARES.
This chapter, except Section 1312, does not apply to classes of shares
whose terms and provisions specifically set forth the amount to be paid in
respect to such shares in the event of a reorganization or merger.
(S) 1312. ATTACKING VALIDITY OF REORGANIZATION OR MERGER.
(a) No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or short-
form merger, or to have the reorganization or short-form merger set aside or
rescinded, except in an action to test whether the number of shares required to
authorize or approve the reorganization have been legally voted in favor
thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form merger is entitled to payment in accordance with
those terms and provisions or, if the principal terms of the reorganization are
approved pursuant to subdivision (b) of Section 1202, is entitled to payment in
accordance with the terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-form
merger or to have the reorganization set aside or rescinded, the shareholder
shall not thereafter have any right to demand payment of cash for the
shareholder's shares pursuant to this chapter. The court in any action
<PAGE>
attacking the validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded shall not restrain or
enjoin the consummation of the transaction except upon 10-days prior notice to
the corporation and upon a determination by the court that clearly no other
remedy will adequately protect the complaining shareholder or the class of
shareholders of which such shareholder is a member.
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.
<PAGE>
Appendix E-1
PROPOSED AMENDMENT TO SEI'S
RESTATED ARTICLES OF INCORPORATION
Set forth are proposed amendments that would amend Article III of SEI's
Restated Articles of Incorporation. Article III of SEI's Restated Articles of
Incorporation would read in its entirety as follows:
III
(a) This corporation is authorized to issue only three classes of shares to
be designated respectively "Preferred Stock," "Common Stock" and "Class B Common
Stock" and referred to herein either as Preferred Stock or Preferred shares,
Common Stock or Common shares or Class B Common Stock or Class B Common shares.
The total number of shares which this corporation is authorized to issue is Two
Hundred Fifty-Seven Million (257,000,000); the number of Preferred shares shall
be Fifty Million (50,000,000) of the par value of One Cent ($.01) each, the
number of Common shares shall be Two Hundred Million (200,000,000) of the par
value of Ten Cents ($.10) each and the number of Class B Common shares shall be
Seven Million (7,000,000) of the par value of Ten Cents ($.10) each.
(b) The Preferred shares may be issued from time to time in one or more
series. The Board of Directors is authorized to fix the number of shares of any
series of Preferred shares and to determine the designation of any such series.
The Board of Directors is also authorized to determine or alter the rights
granted to or imposed upon any wholly unissued series of Preferred shares
including the dividend rights, dividend rate, conversion rights, voting rights,
rights and terms of redemption (including sinking fund provisions), the
redemption price or prices and the liquidation preference, and, within the
limits and restrictions stated in any resolution or resolutions of the Board of
Directors originally fixing the number of shares constituting any series, to
increase or decrease (but not below the number of shares then outstanding) the
number of shares of any such series subsequent to the issue of shares of that
series. In case the number of shares of any series shall be so decreased, the
shares constituting such decrease shall resume the status which they had prior
to the adoption of the resolution originally fixing the number of shares of such
series.
(c) (1) Subject to any preference with respect to the Preferred shares
and the provisions of this subparagraph (c)(1), the Common shares and the Class
B Common shares shall be entitled to distributions out of funds legally
available therefor, when, as and if declared by the Board of Directors. The
Class B Common shares shall not be entitled to participate in distributions
until the later to occur of (i) "funds from operations per Common Share" (as
defined below) aggregating $1.80 during any four consecutive calendar quarters
or (ii) ______________, 1999; thereafter, the Class B Common shares will
participate in distributions (other than liquidating distributions) at the rate
of 97% of the per share distributions on the Common shares, provided that
cumulative distributions from September 30, 1995 at the rate of at least $.22
per share per quarter (subject to appropriate adjustment for stock splits,
reverse stock splits and stock dividends) have been paid on the Common shares.
(2) In the event of any liquidation, dissolution or winding up of this
corporation, whether voluntary or involuntary, subject to any preference with
respect to the Preferred shares, the entire assets of this corporation available
for distribution to shareholders shall be distributed ratably among the Common
shares. The Class B Common shares shall not be entitled to any distributions in
respect of a liquidation, dissolution or winding up of this corporation.
(3) The Class B Common shares shall not have any voting powers either
general or special, except as required by law.
<PAGE>
(4) (i) The Class B Common shares shall automatically convert into
and become an equal number of Common shares upon the later to occur (A) funds
from operations per Common Share (as defined below) aggregating $3.00 during any
four consecutive calendar quarters or (B)_________, 2002.
(ii) As used above:
(A) Funds from operations ("FFO") means net income (loss)
(computed in accordance with generally accepted accounting
principles ("GAAP")) before (1) gain (loss) on early
extinguishment of debt, (2) minority interest in income and (3)
gain (loss) on disposition of real estate, adjusted as follows:
(1) plus depreciation and amortization (including this
corporation's pro rata share of depreciation and amortization of
unconsolidated equity interests and amortization of assets
acquired in the merger of Public Storage Management, Inc. into
this corporation) and (2) less FFO attributable to minority
interest.
(B) FFO per Common Share means FFO less preferred stock
dividends (other than dividends on convertible preferred stock)
divided by the number of outstanding weighted average shares of
Common Stock assuming conversion of all outstanding convertible
securities and the Class B Common shares).
(iii) If this corporation subdivides or combines it outstanding
shares of Common Stock into a greater or smaller number of shares, or sets a
record date for the purpose of entitling the holders of its Common Stock to
receive a dividend or other distribution payable in Common Stock, then in each
case, the then outstanding Class B Common Stock shall be treated equally and
shall, as appropriate, (A) be subdivided or combined in the same proportion as
the Common Stock is subdivided or combined or (B) receive the same proportionate
dividend or distribution payable, respectively, in shares of Class B Common
Stock as paid or issued with respect to the Common Stock.
(iv) This corporation shall at all times reserve and keep
available out of its authorized but unissued Common Stock the full number of
shares of Common Stock deliverable upon the conversion of all the then
outstanding Class B Common Stock and shall take all such action and obtain all
permits or orders that may be necessary to enable this corporation lawfully to
issue Common Stock upon the conversion of the Class B Common Stock.
2
<PAGE>
Appendix E-2
PROPOSED AMENDMENT TO SEI'S
RESTATED ARTICLES OF INCORPORATION
Set forth below is the proposed amendment to SEI's Restated Articles of
Incorporation that would add new Article IV thereto. Article IV of SEI's
Restated Articles of Incorporation would read in its entirety as follows:
IV
(a) OWNERSHIP LIMITATIONS
---------------------
(i) Except as provided in subparagraph (c) of this Article IV and the last
sentence of this subparagraph (a), no Person shall Acquire or Beneficially Own
shares of Common Stock or any series of Preferred Stock in excess of the
Ownership Limit set forth in this subparagraph (a)(i). In the case of Common
Stock, the Ownership Limit is 2.0% of the outstanding shares of each class of
Common Stock. Solely for purposes of this subparagraph (a)(i), the Common Stock
and the Class B Common Stock shall be treated as a single Class of Common Stock.
In the case of any series of Preferred Stock, the Ownership Limit is 9.9% of the
outstanding shares of such series of Preferred Stock.
The limitation set forth in this subparagraph (a)(i) of this Article IV(a)
shall apply only to an Acquisition or Transfer of Stock or other event with
respect to Stock occurring subsequent to the effective date of the merger of
Public Storage Management, Inc. with and into this corporation. In the event
that this corporation shall issue a new series or class of Common Stock and/or
Preferred Stock following such date, the Board of Directors shall have the power
and authority to impose such additional ownership limitations with respect to
such new series or class of Stock as it, in its reasonable judgment, determines
appropriate in order to facilitate this corporation's qualification as a REIT.
Any such ownership limitations shall be set forth in the "certificate of
determination" that sets forth the terms of such new series or class of Stock.
Notwithstanding anything to the contrary in this Article IV(a), no Person shall
be deemed to exceed the Ownership Limit set forth in this subparagraph (a)(i)
solely by reason of the Beneficial Ownership of shares of any class of Stock to
the extent such shares of Stock were Beneficially Owned by such Person on the
effective date of the merger of Public Storage Management, Inc. with and into
this corporation (but the Beneficial Ownership of any such shares of Stock shall
be taken into account in determining whether any subsequent Transfer,
Acquisition or other event violates this subparagraph (a)(i)).
(ii) Notwithstanding any other provisions contained in these Articles of
Incorporation, no Person shall Acquire or Beneficially Own shares of any class
of Stock of this corporation to the extent that, if effective, such Acquisition
or Beneficial Ownership would result in this corporation being "closely held"
within the meaning of Section 856(h) of the Code (without regard to whether the
purported Acquisition, Transfer or other event takes place during the second
half of a taxable year) or otherwise would result in this corporation failing to
qualify as a REIT.
(b) REMEDIES
--------
(i) If, notwithstanding the other provisions contained in this Article IV,
at any time after the effective date of the merger of Public Storage Management,
Inc. with and into this corporation, there is a purported Transfer, Acquisition,
change in the capital structure of this corporation or other event (including,
without limitation, a change in the relationship between two or more Persons
that causes the
<PAGE>
application of Section 544 of the Code, as modified by Section 856(h)), that, if
effective, would result in the violation of one or more of the restrictions on
ownership and transfer described in subparagraph (a) of the Article IV, then (1)
in the case of a Transfer or Acquisition, that number of shares of Stock
purported to be Transferred or Acquired that otherwise would cause such Person
to violate subparagraph (a) (rounded up to the next whole share) shall be
automatically transferred to a Trust for the benefit of a Charitable
Beneficiary, as described in subparagraph (i) of this Article IV, effective as
of the close of business on the day immediately prior to the date of such
purported Transfer or Acquisition, and such Person shall acquire no rights in
such shares of Stock; (2) in the case of any event other than a Transfer or
Acquisition (an "Beneficial Ownership Event"), that number of shares of Stock
that would be owned by Persons (the "Affected Persons") as a result of such
Beneficial Ownership Event that otherwise would violate subparagraph (a) of this
Article IV (rounded up to the next whole share) shall be automatically
transferred to a Trust for the benefit of a Charitable Beneficiary, as described
in subparagraph (i) of this Article IV, effective as of the close of business on
the day immediately prior to such Beneficial Ownership Event, and such Affected
Persons or Persons shall acquire no rights (or have no continuing rights) in
such shares of Stock; or (3) if the transfer to the Trust described in either
clause (1) or clause (2) hereof would not be effective for any reason to prevent
any Person from Beneficially Owning Stock in violations of subparagraph (a) of
this Article IV, then the Transfer, Acquisition, or other Beneficial Ownership
Event that would otherwise cause such Person to violate subparagraph (a) of this
Article IV shall be void ab initio.
(ii) Notwithstanding the other provisions hereof, any Transfer or
Acquisition of shares of Stock that, if effective, would result in the Stock
being beneficially owned by less than 100 persons (determined without reference
to any rules of attribution) shall be void ab initio, and the intended
transferee shall acquire no rights in such shares of Stock.
(iii) In addition to, and without limitation by, subparagraphs (b)(i)
and (b)(ii) above, if the Board of Directors or its designees shall at any time
determine in good faith that a Transfer, Acquisition or other event has taken
place in violation of subparagraph (a) of this Article IV or that a Person
intends to Acquire, has attempted to Acquire, or may Acquire direct ownership,
beneficial ownership (determined without reference to any rules of attribution)
or Beneficial Ownership of any Stock in violation of subparagraph (a) of this
Article IV, the Board of Directors or its designees shall take such action as it
deems advisable to refuse to give effect to or to prevent such Transfer or other
event, including, but not limited to, causing this corporation to refuse to give
effect to such Transfer or other event on the books of this corporation or
instituting proceedings to enjoin such Transfer or other event; provided,
--------
however, that any Transfer or Acquisition (or, in the case of events other than
- -------
a Transfer or Acquisition, ownership or Beneficial Ownership) in violation of
subparagraph (a) of this Article IV shall automatically result in the transfer
to the Trust described in subparagraph (b)(i), irrespective of any action (or
non-action) by the Board of Directors.
(iv) Nothing contained in this subparagraph (b) shall limit the authority
of the Board of Directors to take such other action as it deems necessary or
advisable to protect this corporation and the interests of its stockholders by
preservation of this corporation's status as a REIT.
(c) WAIVERS AND EXCEPTIONS
----------------------
(i) Subject to subparagraph (a)(ii) of this Article IV, the Board of
Directors, in its sole and absolute discretion, may grant to any Person who
makes a request therefor an exception to the Ownership Limit with respect to
either Common Stock or any series of Preferred Stock set forth in subparagraph
(a)(i), subject to the following conditions and limitations: (A) the Board of
Directors shall have determined that, after giving effect to (x) an acquisition
by such Person of Beneficial Ownership of the
2
<PAGE>
maximum amount of Common Stock and/or Preferred Stock permitted as a result of
the exception to be granted and (y) assuming that the four other Persons who
would be treated as "individuals" for purposes of Section 542(a)(2) for of the
Code and who would Beneficially Own the largest amounts of the Stock of this
corporation (determined by value) Beneficially Own the maximum amount of Common
Stock and Preferred Stock permitted under subparagraph (a) of this Article IV
(or if greater, any exception granted under this subparagraph (c)(i) to (or with
respect to) such Persons), this corporation would not be "closely held" within
the meaning of Section 856(h) of the Code (without regard to whether the
purported Acquisition, Transfer or other event takes place during the second
half of a taxable year) and would not otherwise fail to qualify as a REIT; and
(B) such Person provides to the Board of Directors such representations and
undertakings as the Board of Directors may, in its sole and absolute discretion,
require (including, without limitation, an agreement as to a reduced Ownership
Limit for such Person with respect to the Beneficial Ownership of one or more
other classes of Stock not subject to the exception), and such Person agrees
that any violation of such representations and undertakings or attempted
violation thereof will result in the application of the remedies set forth in
subparagraph (b)(i) with respect to shares of Stock held in excess of the
Ownership Limit with respect to such Person (determined without regard to the
exception granted such Person under this subparagraph (c)(i)). If a member of
the Board of Directors requests that the Board of Directors grant an exception
to the Ownership Limit with respect to such member or with respect to any other
Person if such Board member would be considered to be the Beneficial Owner of
shares of Stock owned by such Person, such member of the Board of Directors
shall not participate in the decision of the Board of Directors as to whether to
grant any such exception.
(ii) Subject to subparagraph (a)(ii) of this Article IV, in addition to
exceptions permitted under subparagraph (c)(i) above, the Board of Directors, in
its sole and absolute discretion, may exempt a Person from the Ownership Limit
if such Person is not an individual for purposes of Section 542(c)(2) of the
Code (determined taking into account Section 856(h)(3)(A) of the Code) and such
Person provides to the Board of Directors such representations and undertakings
as the Board of Directors may, in its sole and absolute discretion, require, and
such Person agrees that any violation of such representations and undertakings
or attempted violation thereof will result in the application of the remedies
set forth in subparagraph (b)(i) with respect to shares of Stock held in excess
of the Ownership Limit with respect to such Person (determined without regard to
the exemption granted under this subparagraph (c)(ii)).
(iii) Prior to granting any exception or exemption pursuant to
subparagraph (c)(i) or (c)(ii), the Board of Directors may require a ruling from
the IRS or an opinion of counsel, in either case in form and substance
satisfactory to the Board of Directors, in its sole and absolute discretion as
it may deem necessary or advisable in order to determine or ensure this
corporation's status as a REIT, provided, however, that obtaining a favorable
-------- -------
ruling or opinion shall not be required for the Board of Directors to grant an
exception hereunder.
(d) CERTAIN DEFINITIONS
-------------------
Unless the context otherwise requires, the terms defined in this paragraph
(d) shall have, for all purposes of this Article IV, the meaning specified
herein (with terms defined in the singular having comparable meanings when used
in the plural).
Acquire. The term "Acquire" shall mean the acquisition of Beneficial
-------
Ownership of shares of Stock by any means, including, without limitation, a
Transfer, the exercise of or right to exercise any rights under any option,
warrant, convertible security, pledge or other security interest or similar
right to acquire shares, but shall not include the acquisition of any such
rights unless, as a result, the acquiror would be considered a Beneficial Owner
(if the acquisition would have been effective), as defined below.
3
<PAGE>
The term "Acquisition" shall have the correlative meaning. Notwithstanding the
foregoing, the term "Acquire" shall not include the conversion of the Class B
Common Stock into Common Stock, which are treated as a single class of Common
Stock for purposes of subparagraph (a)(i) of this Article IV.
Beneficial Ownership. The term "Beneficial Ownership" shall mean ownership
--------------------
of Common Stock or Preferred Stock by a Person who is or would be treated as an
owner of such Stock either directly, indirectly or constructively through the
application of Section 544 of the Code, as modified by Section 856(h)(1)(B) of
the Code. The terms "Beneficial Owner," "Beneficially Owns," and "Beneficially
Owned" shall have correlative meanings.
Charitable Beneficiary. The term "Charitable Beneficiary" shall mean one
-----------------------
or more beneficiaries of the Trust as determined pursuant to subparagraph (i) of
this Article IV, each of which shall be an organization described in Sections
170(b)(1)(A), 170(c)(2) and 501(c)(3) of the Code.
Code. The term "Code" shall mean the Internal Revenue Code of 1986, as
----
amended from time to time.
IRS. The term "IRS" shall mean the United States Internal Revenue Service.
---
Market Price. The term "Market Price" shall mean, with respect to any
------------
class of Stock, the last reported sales price on the NYSE of shares of such
class of Stock on the day immediately preceding the relevant date, or if such
class of Stock is not then traded on the NYSE, the last reported sales price of
shares of such class of Stock on the day immediately preceding the relevant date
as reported on any exchange or quotation system or for which such class of Stock
may be traded, provided, however, that if the Board of Directors determines in
-------- -------
good faith that a lower price is appropriate, then the Market Price shall be
such lower price as determined in good faith by the Board of Directors, or if
such class of Stock is not then traded over any exchange or quotation system,
the Market Price shall be the price determined in good faith by the Board of
Directors of this corporation as the fair market value of shares of such class
of Stock on the relevant date.
NYSE. The term "NYSE" shall mean the New York Stock Exchange.
----
Ownership Limit. The term "Ownership Limit" shall mean the maximum amount
---------------
of Common Stock and/or Preferred Stock that may be Beneficially Owned by a
Person under subparagraph (a)(i) of this Article IV, determined without regard
to any exception or waiver that may be granted under subparagraph (c) of this
Article IV (but taking into account the last sentence of subparagraph (a)(i) of
this Article IV).
Person. The term "Person" shall mean an individual, corporation,
------
partnership, estate, trust (including a trust qualified under Section 401(a) or
501(c)(17) of the Code), a portion of a trust permanently set aside for or to be
used exclusively for the purposes described in Section 642(c) of the Code,
association, private foundation within the meaning of Section 509(a) of the
Code, joint stock company or other entity; but does not include an underwriter
which participates in a public offering of Stock provided that the ownership of
Stock by such underwriter would not result in this corporation being "closely
held" within the meaning of Section 856(h) of the Code and would not otherwise
result in this corporation failing to qualify as a REIT.
Purported Beneficial Transferee. The term "Purported Beneficial
-------------------------------
Transferee" shall mean, with respect to any purported Transfer which would
result in a violation of the limitations in subparagraph (a) of this Article IV,
the Purported Beneficial Transferee or owner for whom the Purported Record
4
<PAGE>
Transferee would have acquired or owned shares of Stock if such Transfer had
been valid under subparagraph (a) of this Article IV.
Purported Record Transferee. The term "Purported Record Transferee" shall
---------------------------
mean with respect to any Purported Transfer which would result in a violation of
the limitations in subparagraph (a) of this Article IV, the record holder of the
Stock if such Transfer had been valid under subparagraph (a) of this Article IV.
REIT. The term "REIT" shall mean a Real Estate Investment Trust under
----
Section 856 of the Code.
Stock. The term "Stock" shall mean shares of stock of this corporation
-----
that are either Common Stock or Preferred Stock.
Transfer. The term "Transfer" shall mean any sale, transfer, gift,
--------
assignment, devise or other disposition of Stock, including (i) the granting of
any option or entering into any agreement or the sale, transfer or other
disposition of Stock or (ii) the sale, transfer, assignment or other disposition
of any securities (or rights convertible into exchangeable Stock), whether
voluntarily or involuntarily, whether of record or beneficially or Beneficially
(including, but not limited to, transfers of interests in other entities which
result in changes in Beneficial Ownership of Stock), and whether by operation of
law or otherwise.
Trust. The term "Trust" shall mean the trust created pursuant to
-----
subparagraph (i)(i) of this Article IV.
Trustee. The term "Trustee" shall mean the Person unaffiliated with this
-------
corporation, or the Purported Beneficial Transferee, or the Purported Record
Transferee, that is appointed by this corporation to serve as trustee of the
Trust.
(e) NOTICE OF RESTRICTED TRANSFER
-----------------------------
Any Person who Acquires or attempts to Acquire Stock or other securities in
violation of subparagraph (a) of this Article IV or any Person who is a
transferee in a Transfer or is otherwise affected by an event other than a
Transfer that results in a violation of subparagraph (a) of this Article IV,
shall immediately give written notice to this corporation of such Acquisition,
Transfer or other event and shall provide to this corporation such other
information as this corporation may request in order to determine the effect, if
any, of such Acquisition, Transfer or other event on this corporation's status
as a REIT.
(f) OWNERS REQUIRED TO PROVIDE INFORMATION
--------------------------------------
From and after the Effective Date, each Person who is a beneficial owner or
Beneficial Owner of Stock and each Person (including the stockholder of record)
who is holding Stock for a Beneficial Owner shall provide to this corporation
such information as this corporation may request, in good faith, in order to
determine this corporation's status as a REIT.
(g) AMBIGUITY
---------
In the case of an ambiguity in the application of any of the provisions of
this Article IV, including any definition contained in subparagraph (d) of this
Article IV, the Board of Directors shall
5
<PAGE>
have the power to determine the application of the provisions of this Article IV
with respect to any situation based on the facts known to it.
(h) LEGEND
------
Each certificate for shares of any class of Stock shall bear the following
legend: "The shares of Stock represented by this certificate are subject to
restrictions on ownership and transfer for the purpose of this corporation's
maintenance of its status as a Real Estate Investment Trust under the Internal
Revenue Code of 1986, as amended. Except as set forth in Article IV of this
corporation's Articles of Incorporation, no person may Beneficially Own (i) more
than 2.0% of the outstanding shares of Common Stock of this corporation, or (ii)
more than 9.9% of the outstanding shares of any series of Preferred Stock of
this corporation, with certain further restrictions and exceptions as are set
forth in this corporation's Articles of Incorporation. Any Person who attempts
to own or Beneficially Own Stock in excess of the above limitations must
immediately notify this corporation. All capitalized terms in this legend have
the meanings defined in this corporation's Articles of Incorporation. If any of
the restrictions on transfer or ownership set forth in Article IV of the
Articles of Incorporation are violated, the Stock represented hereby will be
automatically transferred to the Trustee of a Trust for the benefit of a
Charitable Beneficiary pursuant to the terms of Article IV of the Articles of
Incorporation. In addition, attempted transfers of Stock in violation of the
limitations described above (as modified or expanded upon in Article IV of this
corporation's Articles of Incorporation), may be void ab initio. This
-- ------
Corporation will furnish to the holder hereof, upon request and without charge,
a complete written statement of the terms and conditions of Article IV of the
Articles of Incorporation. Requests for such documents may be directed to the
corporate secretary."
(i) TRANSFER OF STOCK IN TRUST
---------------------------
(i) Ownership in Trust; Status of Shares Held in Trust. Upon any purported
--------------------------------------------------
Transfer (whether or not such Transfer is the result of a transaction
engaged in through the facilities of the NYSE), Acquisition or other event
that results in the transfer of Stock to a Trust pursuant to subparagraph
(b) of this Article IV, such shares of Stock shall be deemed to have been
transferred to the Trustee in its capacity as Trustee for the exclusive
benefit one or more Charitable Beneficiaries. The Trustee shall be
appointed by this corporation and shall be a Person unaffiliated with this
corporation, any Purported Beneficial Transferee or Purported Record
Transferee. Each Charitable Beneficiary shall be designated by this
corporation as provided in subparagraph (k) of this Article IV. Shares of
Stock so held in Trust shall be issued and outstanding stock of this
corporation. The Purported Beneficial Transferee or Purported Record
Transferee shall not benefit economically from ownership of any shares of
Stock held in Trust by the Trustee, shall have no rights to dividends and
shall not possess any rights to vote or other rights attributable to the
shares held in Trust. The Purported Record Transferee and the Purported
Beneficial Transferee of shares of Stock in violation of subparagraph (a)
of this Article IV shall have no claim, cause of action, or any other
recourse whatsoever against the purported transferor of such shares.
(ii) Dividend Rights. The Trustee shall have all rights to dividends with
---------------
respect to shares of Stock held in the Trust, which rights shall be
exercised for the exclusive benefit of the Charitable Beneficiary. Any
dividend or distribution paid prior to the discovery by this corporation
that the shares of Stock have been transferred to the Trustee with respect
to such shares shall be paid over to the Trustee by the recipient thereof
upon demand, and any dividend declared but unpaid shall be paid when due to
the Trustee. Any dividends or distributions so paid over to the Trustee
shall be held in trust for the Charitable Beneficiary.
6
<PAGE>
(iii) Rights upon Liquidation. In the event of any voluntary or
-----------------------
involuntary liquidation, dissolution or winding up of or any distribution
of the assets of this corporation, the Trustee shall be entitled to
receive, ratably with each other holder of Stock of the class of Stock that
is held in the Trust, that portion of the assets of this corporation
available for distribution to the holders of such class (determined based
upon the ratio that the number of shares of such class of Stock held by the
Trustee bears to the total number of shares of such class of Stock then
outstanding ). The Trustee shall distribute any such assets received in
respect of the Stock held in the Trust in any liquidation, dissolution or
winding up of, or distribution of the assets of the Corporation in
accordance with subparagraph (i)(iv) of this Article IV.
(iv) Sale of Shares by Trustee. Within twenty days of receiving notice
-------------------------
from this corporation that shares of Stock have been transferred to the
Trust, the Trustee of the Trust shall sell the shares held in Trust to a
Person, designated by the Trustee, whose ownership of the shares of Stock
held in the Trust would not violate the ownership limitations set forth in
subparagraph (a) of this Article IV. Upon such sale, the interest of the
Charitable Beneficiary in the shares sold shall terminate and the Trustee
shall distribute the net proceeds of the sale to the Purported Record
Transferee and to the Charitable Beneficiary as provided in this
subparagraph (i)(iv). The Purported Record Transferee shall receive the
lesser of (1) (x) the price per share such Purported Record Transferee paid
for the Stock in the purported Transfer that resulted in the transfer of
shares of Stock to the Trust, or (y) if the Transfer or other event that
resulted in the transfer of shares of Stock to the Trust was not a
transaction in which the Purported Record Transferee gave full value for
such shares of Stock, a price per share equal to the Market Price on the
date of the purported Transfer or other event that resulted in the transfer
of such shares of Stock to the Trust and (2) the price per share received
by the Trustee from the sale or other disposition of the shares held in the
Trust. Any net sales proceeds in excess of the amount payable to the
Purported Record Transferee shall be immediately paid to the Charitable
Beneficiary. If, prior to the discovery by this corporation that shares of
Stock have been transferred to the Trustee, such shares are sold by the
Purported Record Transferee, then (i) such shares shall be deemed to have
been sold on behalf of the Trust and (ii) to the extent that the Purported
Record Transferee received an amount for such shares that exceeds the
amount such Purported Record Transferee was entitled to receive pursuant to
this subparagraph (i)(iv), such excess shall be paid to the Trustee upon
demand. The Trustee should have the right and power (but not the
obligation) to offer any share of Stock held in the Trust for sale to this
corporation on such terms and conditions as the Trustee shall determine
appropriate.
(v) Voting and Notice Rights. The Trustee shall have all voting rights and
------------------------
rights to receive any notice of any meetings, which rights shall be
exercised for the exclusive benefit of the Charitable Beneficiary. The
Purported Record Transferee shall have no voting rights with respect to
shares held in Trust.
(j) SETTLEMENT
----------
Nothing in this Article IV shall preclude the settlement of any transaction
entered into through the facilities of the NYSE (but the fact that settlement of
a transaction is permitted shall not negate the effect of any other provision of
this Article IV and all of the provisions of this Article IV shall apply to the
purported transferee of the shares of Stock in such transaction).
7
<PAGE>
(k) DESIGNATION OF CHARITABLE BENEFICIARY
-------------------------------------
By written notice to the Trustee, this corporation shall designate one or
more nonproift organizations to be the Charitable Beneficiary of the interest in
the Trust such that (i) the shares of Stock held in the Trust would not violate
the restrictions set forth in subparagraph (a) of this Article IV in the hands
of such Charitable Beneficiary and (ii) each Charitable Beneficiary is an
organization described in Sections 170(b)(1)(A), 170(c)(2) and 501(c)(3) of the
Code.
8
<PAGE>
P R O X Y
STORAGE EQUITIES, INC.
600 NORTH BRAND BOULEVARD
GLENDALE, CALIFORNIA 91203-1241
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints B. Wayne Hughes and Harvey Lenkin, or
either of them, with power of substitution, as Proxies, to appear and vote, as
designated below, all the shares of Common Stock of Storage Equities, Inc.
("SEI") held of record by the undersigned on October 4, 1995, at the Special
Meeting of Shareholders to be held on November 13, 1995, and any adjournments
thereof.
In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED IN THE MANNER DIRECTED.
IN THE ABSENCE OF ANY DIRECTION, THE SHARES WILL BE VOTED FOR ALL OF THE
PROPOSALS. THE APPROVAL OF THE MERGER IS A CONDITION TO THE ADOPTION OF EACH OF
THE AMENDMENTS AND THE APPROVAL OF ALL OF THE AMENDMENTS IS A CONDITION TO
APPROVAL OF THE MERGER.
-----------
SEE REVERSE
CONTINUED AND TO BE SIGNED ON REVERSE SIDE SIDE
-----------
<PAGE>
[X] Please mark
votes as in
this example
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD IN THE ENCLOSED ENVELOPE TO
THE FIRST NATIONAL BANK OF BOSTON, SHAREHOLDER SERVICES DIVISION, P.O. BOX 1439,
BOSTON, MA 02105-1439.
1. PROPOSED MERGER. To consider and vote upon an FOR AGAINST ABSTAIN
Agreement and Plan of Reorganization by and among [_] [_] [_]
Public Storage, Inc., Public Storage Management, Inc.
and SEI described in the accompanying Proxy Statement.
2. PROPOSED AMENDMENT TO ARTICLES OF INCORPORATION - FOR AGAINST ABSTAIN
RECAPITALIZATION. To consider and vote upon a related [_] [_] [_]
amendment to Article III of SEI's articles of
incorporation in the form of Appendix E-1 to the
accompanying Proxy Statement to authorize additional
shares of common stock and a new Class B Common
Stock.
3. PROPOSED AMENDMENT TO ARTICLES OF INCORPORATION - FOR AGAINST ABSTAIN
OWNERSHIP LIMITATION. To consider and vote upon an [_] [_] [_]
amendment adding Article IV to SEI's articles of
incorporation in the form of Appendix E-2 to the
accompanying Proxy Statement to create certain
ownership limitations with respect to all classes
of SEI's capital stock.
4. PROPOSED POSTPONEMENT OR ADJOURNMENT OF SPECIAL FOR AGAINST ABSTAIN
MEETING. To consider and vote upon a postponement [_] [_] [_]
or adjournment of the Special Meeting if necessary
to permit further solicitation of proxies if there
are not sufficient votes at the time of the Special
Meeting to approve the Merger.
5. Other matters. In their discretion, the Proxies are authorized to vote upon
such other business as may properly come before the meeting.
The undersigned acknowledges receipt of the Notice of Special Meeting of
Shareholders and Proxy Statement dated October 11, 1995.
NOTE: Please sign exactly as your name appears. Joint owners should each sign.
Trustees and others acting in a representative capacity should indicate the
capacity in which they sign.
Signature:________________________________________ Date_________________________
Signature:________________________________________ Date_________________________
<PAGE>
[The following are the accountant's reports that were previously filed with the
documents listed under "Incorporation of Certain Documents by Reference" in the
Proxy Statement.]
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Storage Equities, Inc.
We have audited the accompanying consolidated balance sheets of Storage
Equities, Inc. as of December 31, 1994 and 1993, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 1994. Our audits also included the
financial statement schedules listed in the Index at Item 14 (a). These
financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedules 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Storage Equities, Inc. at December 31, 1994 and 1993, and the consolidated
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. Also, in our opinion, the related financial statement schedules,
when considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Los Angeles, California
February 7, 1995,
except for Note 13 for which
the date is March 13, 1995.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Storage Equities, Inc.
We have audited the accompanying combined summaries of historical information
relating to operating revenues and specified expenses -certain properties (the
"Combined Summaries") for the properties indicated in Note 1 for the years ended
December 31, 1993, 1992 and 1991. The Combined Summaries are the responsibility
of the Company's 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 the rules and regulations of the Securities and Exchange Commission and
exclude certain material expenses described in Note 2.
In our opinion, the Combined Summaries present fairly the operating revenues and
specified expenses, exclusive of expenses described in Note 2, for the
properties identified in Note 1 for the years ended December 31, 1993, 1992 and
1991, in conformity with generally accepted accounting principles and the
applicable accounting rules and regulations of the Securities and Exchange
Commission.
ERNST & YOUNG LLP
Los Angeles, California
June 6, 1994
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Storage Equities, Inc.
We have audited the accompanying combined summaries of historical information
relating to operating revenues and specified expenses -certain properties (the
"Combined Summaries") for the properties indicated in Note 1 for the years ended
December 31, 1993, 1992 and 1991. The Combined Summaries are the responsibility
of the Company's 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 rules and regulations of the Securities and Exchange Commission and exclude
certain material expenses described in Note 2.
In our opinion, the Combined Summaries present fairly the operating revenues and
specified expenses, exclusive of expenses described in Note 2, for the
properties identified in Note 1 for the years ended December 31, 1993, 1992 and
1991, in conformity with generally accepted accounting principles and the
applicable accounting rules and regulations of the Securities and Exchange
Commission.
ERNST & YOUNG LLP
Los Angeles, California
October 26, 1994
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Public Storage Properties VII, Inc.
We have audited the accompanying balance sheets of Public Storage Properties
VII, Inc. as of December 31, 1994 and 1993, and the related statements of
income, shareholders' equity, and cash flow for each of the three years in the
period ended December 31, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Public Storage Properties VII,
Inc. 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
February 24, 1995
