<PAGE>
As filed with the Securities and Exchange Commission on April 28 1995
Registration No. 33-__________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form S-4
REGISTRATION STATEMENT
Under
The Securities Act of 1933
--------------
STORAGE EQUITIES, INC.
(Exact name of registrant as specified in its charter)
California
(State or other jurisdiction of incorporation or organization)
95-3551121 6798
(I.R.S. Employer Identification No.) (Primary Standard Industrial
Classification Code Number)
` 600 North Brand Boulevard HUGH W. HORNE
Glendale, California 91203-1241 Storage Equities, Inc.
(818) 244-8080 600 North Brand Boulevard
(Address, including zip code, and Glendale, California 91203-1241
telephone number, including area code, (818) 244-8080
of registrant's principal executive offices) (Name, address, including zip
code, and telephone number,
including area code, of agent
for service)______________
Copies to:
DAVID GOLDBERG, ESQ.
Storage Equities, Inc.
600 North Brand Boulevard, Suite 300
Glendale, California 91203-1241
--------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this
Registration Statement.
--------------
If the only securities being registered on this Form are being offered in
connection with the formation of a holding company, check the following box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed Proposed
Maximum Maximum
Amount Offering Aggregate Amount of
to be Price Per Offering Registration
Title of Each Class of Securities to be Registered Registered Share Price Fee
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.10 par value per share (1) (1) (1) $23,955 (1)(2)
<FN>
(1) This Registration Statement relates to the proposed merger of Public
Storage Properties VII, Inc. ("PSP7") into the Registrant and the
conversion of shares of common stock of PSP7 into either cash (as to up to
20% of the outstanding shares of common stock of PSP7) or common stock of
the Registrant. At the merger, there will be a maximum of 3,806,491 shares
of common stock of PSP7 outstanding. The closing price of such securities
on the American Stock Exchange on April 25, 1995 was $18.25 per share. The
number of shares of common stock of the Registrant to be issued in the
merger cannot be determined at this time.
(2) Calculated in accordance with rule 457(f)(1) under the Securities Act of
1933. $14,427 of the registration fee was previously paid in connection
with PSP7's preliminary proxy materials.
</TABLE>
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
STORAGE EQUITIES, INC.
Cross Reference Sheet Showing Location in Prospectus
of Information Required by Form S-4
<TABLE>
<CAPTION>
Registration Statement Item Location in Prospectus
----------------------------- ------------------------
<S> <C>
A. Information About the Transaction
1. Forepart of Registration Statement and Outside Front Cover Page of
Prospectus Front Cover Page
2. Inside Front and Outside Back Cover Pages of Prospectus See page 1 and pages (iii)-(iv)
3. Risk Factors, Ratio of Earnings to Fixed Charges and Risk Factors and Material Considerations
Other Information
4. Terms of the Transaction Summary and The Merger
5. Pro Forma Financial Information Pro Forma Financial Statements
6. Material Contacts with the Company Being Acquired Risk Factors and Material Considerations,
Conflicts of Interest and The Merger
7. Additional Information Required for Reoffering by Persons *
and Parties Deemed to be Underwriters
8. Interests of Named Experts and Counsel Legal Opinions
9. Disclosure of Commission Position on Indemnification The Merger - Comparison of Ownership of Shares
for Securities Act Liabilities of PSP7 and SEI - Management and Duties
B. Information About the Registrant
10. Information with Respect to S-3 Registrants Incorporation of Certain Documents by Reference
11. Incorporation of Certain Information By
Reference Incorporation of Certain Documents by Reference
12. Information with Respect to S-2 or S-3
Registrants Incorporation of Certain Documents by Reference
13. Incorporation of Certain Information By
Reference Incorporation of Certain Documents by Reference
14. Information with Respect to Registrants Other
than S-2 or S-3 Registrants Incorporation of Certain Documents by Reference
_________________
* Omitted as Inapplicable.
<PAGE>
C. Information About the Company Being Acquired
15. Information with Respect to S-3 Companies Incorporation of Certain Documents by Reference
16. Information with Respect to S-2 or S-3 Companies Incorporation of Certain Documents by Reference
17. Information with Respect to Companies Other than Incorporation of Certain Documents by Reference
S-2 or S-3 Companies
D. Voting and Management Information
18. Information if Proxies, Consents or Authorizations Incorporation of Certain Documents by Reference
are to be Solicited
19. Information if Proxies, Consents or Authorizations Incorporation of Certain Documents by Reference
are not to be Solicited or in an Exchange Offer
_________________
* Omitted as Inapplicable.
</TABLE>
<PAGE>
PUBLIC STORAGE PROPERTIES VII, INC.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
__________ __, 1995
A special meeting of shareholders of Public Storage Properties VII,
Inc., a California corporation ("PSP7"), will be held at PSP7's offices at 600
North Brand Boulevard, Suite 300, Glendale, California on __________ __, 1995,
at the hour of __:__ a.m. for the following purposes:
1. To consider and vote upon an Agreement and Plan of
Reorganization between PSP7 and Storage Equities, Inc. ("SEI")
described in the accompanying Joint Proxy Statement and
Prospectus pursuant to which PSP7 would be merged with and into
SEI (the "Merger"). Upon the Merger, each outstanding share of
PSP7 Common Stock Series A ("PSP7 Common Stock") (other than
shares held by shareholders of PSP7 who have properly exercised
dissenters' rights under California law ("Dissenting Shares"))
would be converted into the right to receive cash, SEI Common
Stock or a combination of the two, as follows: (i) with respect
to a certain number of shares of PSP7 Common Stock (not to
exceed 20% of the outstanding PSP7 Common Stock, or 761,298
shares, less any Dissenting Shares), upon a shareholder's
election, $18.95 in cash, subject to reduction as described
below (the "Cash Election") or (ii) that number (subject to
rounding) of shares of SEI Common Stock determined by dividing
$18.95, subject to reduction as described below, by the average
of the per share closing prices on the New York Stock Exchange
of SEI Common Stock during the 20 consecutive trading days
ending on the fifth trading day prior to the special meeting of
the shareholders of PSP7. If a shareholder does not make a Cash
Election, all of his or her PSP7 Common Stock would be converted
into SEI Common Stock in the Merger. The consideration paid by
SEI in the Merger will be reduced on a pro rata basis by the
amount of cash distributions required to be paid by PSP7 to its
shareholders prior to completion of the Merger in order to
satisfy PSP7's REIT distribution requirements ("Required REIT
Distributions"). The consideration received by the shareholders
of PSP7 in the Merger, however, along with any Required REIT
Distributions, will not be less than $18.95 per share of PSP7
Common Stock, which amount represents the market value of PSP7's
real estate assets at December 31, 1994 appraisal) and the
estimated net asset value of its other assets at May 31, 1995.
Additional pre-Merger cash distributions would be made to the
shareholders of PSP7 to cause PSP7's estimated net asset value
as of the date of the Merger to be substantially equivalent to
its estimated net asset value as of May 31, 1995. Prior to, and
conditioned upon, the Merger, PSP7 intends to redeem for an
aggregate of $2,757,000 in cash all outstanding shares of its
Common Stock Series D. The Common Stock Series D was issued to
the original shareholders of PSP7.
2. To consider and vote upon a related amendment to PSP7's bylaws
to authorize the Merger in the form of Appendix F to the
accompanying Joint Proxy Statement and Prospectus.
The Board of Directors has determined that holders of record of Common
Stock Series A and Common Stock Series D at the close of business on __________
__, 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 enclosed 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
OBREN B. GERICH, Secretary
Glendale, California
__________ __, 1995
<PAGE>
STORAGE EQUITIES, INC.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
__________ __, 1995
A special meeting of shareholders of Storage Equities, Inc., a
California corporation ("SEI"), will be held at SEI's offices at 600 North Brand
Boulevard, Suite 300, Glendale, California on __________ __, 1995, at the hour
of __:__ a.m. The purpose of the meeting will be to consider and vote upon an
Agreement and Plan of Reorganization between Public Storage Properties VII, Inc.
("PSP7") and SEI described in the accompanying Joint Proxy Statement and
Prospectus pursuant to which PSP7 would be merged with and into SEI (the
"Merger"). Upon the Merger, each outstanding share of PSP7 Common Stock Series A
("PSP7 Common Stock") (other than shares held by shareholders of PSP7 who have
properly exercised dissenters' rights under California law ("Dissenting
Shares")) would be converted into the right to receive cash, SEI Common Stock or
a combination of the two, as follows: (i) with respect to a certain number of
shares of PSP7 Common Stock (not to exceed 20% of the outstanding PSP7 Common
Stock, or 761,298 shares, less any Dissenting Shares), upon a shareholder of
PSP7's election, $18.95 in cash, subject to reduction as described below (the
"Cash Election") or (ii) that number (subject to rounding) of shares of SEI
Common Stock determined by dividing $18.95, subject to reduction as described
below, by the average of the per share closing prices on the New York Stock
Exchange of SEI Common Stock during the 20 consecutive trading days ending on
the fifth trading day prior to the special meeting of the shareholders of PSP7.
If a shareholder of PSP7 does not make a Cash Election, all of his or her PSP7
Common Stock would be converted into SEI Common Stock in the Merger. The
consideration paid by SEI in the Merger will be reduced on a pro rata basis by
the amount of cash distributions required to be paid by PSP7 to its shareholders
prior to completion of the Merger in order to satisfy PSP7's REIT distribution
requirements ("Required REIT Distributions"). The consideration received by
shareholders of PSP7 in the Merger, however, along with any Required REIT
Distributions, will not be less than $18.95 per share of PSP7 Common Stock,
which amount represents the market value of PSP7's real estate assets at
December 31, 1994 (based on an independent appraisal) and the estimated net
asset value of its other assets at May 31, 1995. Additional pre-Merger cash
distributions would be made to the shareholders of PSP7 to cause PSP7's
estimated net asset value as of the date of the Merger to be substantially
equivalent to its estimated net asset value as of May 31, 1995.
The Board of Directors has determined that only holders of record of
Common Stock at the close of business on __________ __, 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
__________ __, 1995
<PAGE>
STORAGE EQUITIES, INC.
PUBLIC STORAGE PROPERTIES VII, INC.
JOINT PROXY STATEMENT and PROSPECTUS
SPECIAL MEETING OF SHAREHOLDERS
__________ __, 1995
This Joint Proxy Statement and Prospectus is being furnished to holders
of shares of Common Stock, par value $.10 per share (the "SEI Common Stock") of
Storage Equities, Inc. ("SEI") and holders of shares of Common Stock Series A,
par value $.01 per share (the "PSP7 Common Stock") and of shares of Common Stock
Series D, par value $.01 per share (the "Series D Shares") of Public Storage
Properties VII, Inc. ("PSP7") and relates to meetings of shareholders of SEI and
PSP7 called to approve the proposed merger of PSP7 with and into SEI (the
"Merger") pursuant to the Agreement and Plan of Reorganization attached as
Appendix A to this Joint Proxy Statement and Prospectus (the "Merger
Agreement"). Holders of SEI Common Stock and PSP7 Common Stock are referred to
hereafter as the "SEI Shareholders" and the "PSP7 Shareholders," respectively.
Public Storage, Inc. ("PSI") and its affiliates have significant
relationships with both SEI and PSP7 and own approximately 28% and 26% of the
PSP7 Common Stock and SEI Common Stock, respectively. See "Summary
- -Relationships." PSI and its affiliates have informed PSP7 and SEI that they
intend to vote their shares for the Merger. The Boards of Directors of SEI and
PSP7, based on recommendations of special committees composed of independent
directors, recommend that SEI Shareholders and PSP7 Shareholders, respectively,
vote for the Merger. PSP7 has imposed as an additional condition to the Merger
that it be approved by a majority of the shares of PSP7 Common Stock voting at
the meeting of PSP7 Shareholders not held by PSI and its affiliates.
The Merger involves certain factors that should be considered by all
shareholders, particularly PSP7 Shareholders, including the following:
* The Merger has not been negotiated at arms' length, and no unaffiliated
representatives were appointed to negotiate the terms of the Merger on
behalf of either SEI or PSP7.
* The nature of the investment of PSP7 Shareholders who receive SEI
Common Stock is being changed from holding an interest in a specified
portfolio of properties for a finite period to holding an investment in
an ongoing real estate company, whose portfolio of properties is
changed from time to time without approval of shareholders, and which
does not plan to liquidate its assets within a fixed period of time.
* Based on the current price of SEI Common Stock, the level of
distributions to PSP7 Shareholders who receive SEI Common Stock in the
Merger would be lower after the Merger than before.
* PSP7's properties may continue to appreciate in value and might be
able to be liquidated at a later date for more consideration than
receivable in the Merger.
* Under California law, PSP7 Shareholders will be entitled to dissenters'
rights of appraisal in connection with the Merger only if demands for
payments are filed with respect to 5% or more of the outstanding shares
of PSP7 Common Stock.
* PSI and its affiliates have conflicts of interest in connection with
the Merger.
* The Merger is expected to increase the compensation payable to an
affiliate of PSI because its fee is a function of SEI's capitalization,
as well as SEI's results of operations.
* SEI has acquired, and intends to continue to acquire, interests in real
estate assets from affiliates of PSI.
(Continued on following page)
--------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON, OR
ENDORSED THE MERITS OF, THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
<PAGE>
* In making real estate investments, SEI, unlike PSP7, has incurred, and
may continue to incur, debt.
* The interest of SEI Shareholders can be diluted through the issuance of
additional securities. SEI has outstanding, and intends to issue
additional, securities with priority over SEI Common Stock.
* The market price of SEI Common Stock may fluctuate following
establishment of the number of shares to be issued to PSP7 Shareholders
in the Merger and prior to issuance and could decrease as a result of
increased selling activity following issuance of shares in the Merger
and other factors.
* The consideration to be received by PSP7 Shareholders in the Merger is
based on third party appraisals. However, appraisals are opinions as of
the date specified, are subject to certain assumptions and may not
represent the true worth or realizable value of PSP7's properties.
* PSP7 Shareholders who receive any cash in connection with the Merger
may have a taxable gain.
See "Risk Factors and Material Considerations."
The SEI Common Stock is traded on the New York Stock Exchange ("NYSE")
under the symbol "SEQ." On __________ __, 1995, the closing price of the SEI
Common Stock on the NYSE was $____. The PSP7 Common Stock is traded on the
American Stock Exchange ("AMEX") under the symbol "PSF." On __________ __, 1995,
the closing price of the PSP7 Common Stock on the AMEX was $____.
This Joint Proxy Statement and Prospectus is first being mailed on or
about __________ __, 1995 to SEI and PSP7 Shareholders of record at the close of
business on __________ __, 1995.
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 OR PSP7.
THIS JOINT PROXY STATEMENT AND PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES, OR AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE REGISTERED
SECURITIES TO WHICH THIS JOINT PROXY STATEMENT AND PROSPECTUS RELATES TO OR BY
ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED
OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO
SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
<PAGE>
TABLE OF CONTENTS
Page
Available Information 1
Incorporation of Certain Documents by Reference 1
Summary 2
Overview of Merger 2
Meetings and Vote Requirements of Shareholders 3
SEI 3
PSP7 3
Recent Developments 4
Risk Factors and Material Considerations 5
Background and Reasons for the Merger 6
Potential Advantages of the Merger 8
Rights of Dissenting Shareholders 8
Determination of Payments to be Received by PSP7 Shareholders
in Connection with the Merger 9
Federal Income Tax Matters 9
Recommendations; Opinions of Financial Advisors 9
Comparison of Ownership of Shares in PSP7 and SEI and
Comparison of Fees and Compensation 11
Series D Shares 13
Roll-Up Transactions 14
Summary Financial Information 14
Relationships 18
Risk Factors and Material Considerations 21
No Arms' Length Negotiation or Unaffiliated Representatives 21
Change from Finite Life to Infinite Life 21
Uncertainty Regarding Market Price of SEI Common Stock 21
Potential Loss of Future Appreciation 21
Limitation on Dissenters' Rights of Appraisal 21
Lower Level of Distributions 21
Financing Risks 22
Merger Consideration Based on Appraisals Instead
of Arms' Length Negotiation 22
Tax to PSP7 Shareholders 22
Operating Risks 22
Conflicts of Interest, Increase of Adviser's Compensation and
Transactions with Affiliates 23
Consequences of Loss of Qualification as a REIT 24
Conflicts of Interest 24
Conflicts of Interest in the Merger 24
Allocation of Services and Costs 25
Allocation of Investment Opportunities 25
Competition with Affiliates 25
Transactions with Affiliates 26
Comparison of Fees and Compensation 27
Fees Payable With Respect to Combined Operations of SEI and PSP7 27
Fees Payable With Respect to PSP7 Operations 29
Distributions Payable by PSP7 29
The Merger 30
General 30
Background 30
Reasons for the Merger and Timing 36
Alternatives to Merger 36
No Solicitation of Other Proposals 38
Determination of Payments to be Received by PSP7 Shareholders
in Connection with the Merger 39
Potential Advantages of the Merger 40
<PAGE>
Page
Recommendation to PSP7 Shareholders and Fairness Analysis 41
Comparison of Consideration to be Received in the Merger
to Other Alternatives 43
Recommendation to SEI Shareholders and Fairness Analysis 46
Real Estate Portfolio Appraisal by Wilson 47
Fairness Opinion from Stanger 50
Fairness Opinion from Houlihan Lokey 54
The Merger Agreement 58
Cash Election Procedure 59
Consequences to PSP7 if the Merger is Not Completed 60
Costs of the Merger 60
Accounting Treatment 61
Regulatory Requirements 61
Comparison of Ownership of Shares in PSP7 and SEI 61
Amendment to PSP7 Bylaws 66
Redemption of Series D Shares 67
Approval of the Merger and Bylaw Amendment 68
General 68
PSP7 68
SEI 68
Security Ownership of Certain Beneficial Owners and Management 69
Solicitation of Proxies 73
Description of PSP7's Properties 74
Description of SEI's Properties 78
Distributions and Price Range of SEI Common Stock 79
Distributions and Price Range of PSP7 Common Stock 80
Description of SEI Capital Stock 81
Common Stock 81
Preferred Stock 81
Effects of Issuance of Capital Stock 82
Dissenting Shareholders' Rights of Appraisal 83
PSP7 83
SEI 84
Certain Federal Income Tax Matters 85
The Merger 85
General Tax Treatment of SEI 86
Taxation of SEI Shareholders 88
Tax Consequences to SEI of Joint Investments with PSP Partnerships 90
State and Local Taxes 90
Legal Opinions 90
Experts 91
Independent Auditors 91
Shareholder Proposals 91
Glossary 91
Pro Forma Financial Statements PF-1
Appendix A - Agreement and Plan of Reorganization between SEI and PSP7 dated
as of February 2, 1995
Appendix B - Real Estate Appraisal Report by Charles R. Wilson & Associates,
Inc. dated January 31, 1995
Appendix C - Opinion of Robert A. Stanger & Co., Inc. dated April 27, 1995
Appendix D - Opinion of Houlihan, Lokey, Howard & Zukin, Inc. dated
April 27, 1995
Appendix E - Chapter 13 of the California General Corporation Law Concerning
Dissenters' Rights
Appendix F - Proposed Amendment to PSP7's Bylaws
Appendix G - Notice of Redemption of Series D Shares
Appendix H - Financial Statements of PSP7
Appendix I - Management's Discussion and Analysis of Financial Condition and
Results of Operations of PSP7
<PAGE>
AVAILABLE INFORMATION
Both SEI and PSP7 are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, file reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such material can be
inspected and copied at the public reference facilities maintained by the
Commission in Washington, D.C. and at the Regional Offices of the Commission at
75 Park Place, 14th Floor, New York, New York 10007; and Northwestern Atrium
Center, Suite 1400, 500 West Madison Street, Chicago, Illinois 60661. Copies of
such material can be obtained at prescribed rates from the Public Reference Room
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Such
material can also be inspected, in the case of SEI, at the NYSE, 20 Broad
Street, New York, New York 10005 and, in the case of PSP7, at the AMEX, 86
Trinity Place, New York, New York 10006.
SEI has filed with the Commission a registration statement on Form S-4
(herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"). This Joint Proxy Statement and Prospectus does not contain
all the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. For further information, reference is hereby made to the
Registration Statement.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, filed by SEI with the Commission pursuant to
Section 13 of 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, as amended by Form 10-K/As dated April 4, 1995 and April 21, 1995 and (ii)
the Current Report on Form 8-K dated January 24, 1995.
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 Joint Proxy Statement
and Prospectus and prior to the date of the special meetings of the Shareholders
of SEI and PSP7 shall be deemed to be incorporated by reference herein from the
date of filing such documents.
The following documents filed by PSP7 with the Commission pursuant to
Section 13 of the Exchange Act (File No. 1-10840) are incorporated herein by
reference: (i) the Annual Report on Form 10-K for the year ended December 31,
1994, as amended by Form 10-K/As dated March 29, 1995 and April 26, 1995 and
(ii) the Current Report on Form 8-K dated February 2, 1995.
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 Joint Proxy Statement and Prospectus 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
Joint Proxy Statement and Prospectus.
Also incorporated by reference herein is the Merger Agreement, which is
attached as Appendix A to this Joint Proxy Statement and Prospectus.
THIS JOINT PROXY STATEMENT AND PROSPECTUS INCORPORATES DOCUMENTS BY
REFERENCE WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS
(INCLUDING DOCUMENTS FILED SUBSEQUENT TO THE DATE HEREOF), EXCEPT THE EXHIBITS
TO SUCH DOCUMENTS (UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY
REFERENCE IN SUCH DOCUMENTS), SHALL BE DELIVERED TO ANY PERSON TO WHOM THIS
JOINT PROXY STATEMENT AND PROSPECTUS IS DELIVERED, UPON WRITTEN OR ORAL REQUEST
OF SUCH PERSON AND BY FIRST CLASS MAIL WITHIN ONE BUSINESS DAY OF RECEIPT OF
SUCH 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 __________ __, 1995.
<PAGE>
SUMMARY
The following summary is qualified in its entirety by the detailed
information appearing elsewhere in this Joint Proxy Statement and Prospectus.
See "Glossary" for definitions of certain terms used in this Joint Proxy
Statement and Prospectus.
Overview of Merger
Upon consummation of the Merger, PSP7 will be merged with and into SEI,
which will be the surviving corporation. Each share of PSP7 Common Stock
outstanding immediately prior to the consummation of the Merger (other than
shares held by PSP7 Shareholders who have properly exercised dissenter's rights
under California law ("Dissenting Shares")) will be converted into the right to
receive cash, SEI Common Stock or a combination of the two, as follows: (i) with
respect to a certain number of shares of PSP7 Common Stock (not to exceed 20% of
the outstanding PSP7 Common Stock, or 761,298 shares, less any Dissenting
Shares), upon a PSP7 Shareholder's election (the "Cash Election"), $18.95 in
cash, subject to reduction as described below, or (ii) that number of shares of
SEI Common Stock (subject to rounding) determined by dividing $18.95, subject to
reduction as described below, by the average of the per share closing prices on
the NYSE of SEI Common Stock during the 20 consecutive trading days ending on
the fifth trading day prior to the special meeting of the PSP7 Shareholders. If
a PSP7 Shareholder does not make a Cash Election, all of his or her PSP7 Common
Stock would be converted into SEI Common Stock. The consideration paid by SEI in
the Merger will be reduced on a pro rata basis by the amount of cash
distributions required to be paid by PSP7 to its shareholders prior to
completion of the Merger (estimated at up to $.60 per share) in order to satisfy
PSP7's REIT distribution requirements ("Required REIT Distributions"). The
consideration received by the shareholders of PSP7 in the Merger, however, along
with any Required REIT Distributions, will not be less than $18.95 per share of
PSP7 Common Stock, which amount represents the market value of PSP7's real
estate assets at December 31, 1994 (based on an independent appraisal) and the
estimated net asset value of its other assets at May 31, 1995. PSP7 Shareholders
would receive the Required REIT Distributions upon any liquidation of PSP7,
regardless of the Merger. Additional pre-Merger cash distributions would be made
to the PSP7 Shareholders to cause PSP7's estimated net asset value as of the
date of the Merger to be substantially equivalent to its estimated net asset
value as of May 31, 1995. Prior to, and conditioned upon, the Merger, PSP7
intends to redeem for an aggregate of $2,757,000 in cash all of the outstanding
Series D Shares. The Series D Shares were issued to the original PSP7
Shareholders. See "The Merger -- Determination of Payments to be Received by
PSP7 Shareholders in Connection with the Merger" and "Redemption of Series D
Shares." For a description of the terms of the Merger, see "The Merger -- The
Merger Agreement."
The SEI and PSP7 Common Stock are listed on the NYSE and the AMEX,
respectively. On February 1, 1995, the last full trading day prior to the first
announcement of the proposed Merger, the reported closing sales prices per share
of SEI Common Stock and PSP7 Common Stock on the NYSE and AMEX, respectively,
were $14 and $16-7/8, respectively. On __________ __, 1995, the last full
trading day prior to the date of this Joint Proxy Statement and Prospectus, the
reported closing sales prices per share of SEI Common Stock and PSP7 Common
Stock on the NYSE and AMEX, respectively, were $____ and $____, respectively.
<PAGE>
Meetings and Vote Requirements of Shareholders
<TABLE>
<CAPTION>
<S> <C> <C>
SEI PSP7
Meeting Date __________ __, 1995 at __:__ a.m. __________ __, 1995 at __:__ a.m.
Record Date __________ __, 1995 __________ __, 1995
Purpose To Approve the Merger To Approve the Merger and
Proposed Bylaw Amendment
Shares of Common 32,838,310 3,806,491 Series A Shares
Stock Outstanding* 2,757 Series D Shares
Vote Required Majority of Shares of SEI Majority of Shares of Outstanding
Common Stock Voting PSP7 Common Stock and
Series D Shares
Entitled to Vote**
Percentage Ownership by
Executive Officers
and Directors 28%*** 28%
Shareholder Lists Available upon written demand Available upon written demand
- ---------------
<FN>
* Includes shares owned by PSI and its affiliates.
** PSI and its affiliates own 1,068,167 of the outstanding Series A Shares
(approximately 28%) and 27.6 of the outstanding Series D Shares (1%).
PSP7 has imposed as an additional condition to the Merger that it be
approved by a majority of the shares of PSP7 Common Stock voting at the
meeting of PSP7 Shareholders not held by PSI and its affiliates.
*** Includes SEI Common Stock owned by members of the family of executive
officers of SEI, as well as 2.4% of SEI Common Stock owned by the
independent directors of SEI. See "-- Relationships."
</TABLE>
SEI
SEI is a real estate investment trust ("REIT"), organized as a
corporation under the laws of California, that has invested primarily in
existing mini-warehouses. SEI believes that it is one of the largest owners of
mini-warehouse facilities in the United States. SEI has also invested to a much
smaller extent in existing business parks containing commercial and industrial
rental space. At December 31, 1994, SEI had equity interests (through direct
ownership, as well as general and limited partnership interests) in 402
properties located in 37 states, consisting of 368 mini-warehouse facilities, 16
business parks and 18 combination mini-warehouse/business park facilities. All
of these facilities are operated under the "Public Storage" name. See
"Description of SEI's Properties." The SEI Common Stock (symbol "SEQ") and six
series of preferred stock of SEI are traded on the NYSE.
SEI's operations are managed by its investment adviser, Public Storage
Advisers, Inc. (the "Adviser"), by its mini-warehouse property operator, Public
Storage Management, Inc. ("PSMI"), and by its commercial property operator,
Public Storage Commercial Properties Group, Inc. ("PSCP"). SEI's operations are
under the general supervision of its eight-member board of directors, consisting
of two executive officers of PSI, one former executive officer of PSI and five
other directors. Of SEI's investments, 212 were made jointly with seven of a
group of eight public limited partnerships affiliated with PSI (the "PSP
Partnerships"); SEI is a co-general partner of the PSP Partnerships. See "Recent
Developments - Proposed Restructuring" for the status of a proposed major
restructuring of SEI.
PSP7
PSP7 is a REIT organized as a California corporation that was formed to
succeed to the business of Public Storage Properties VII, Ltd., a California
limited partnership (the "Partnership"), in a reorganization transaction
completed on July 31, 1991. PSI was the sponsor of the Partnership. PSP7 owns 38
properties located in 11 states, including 34 mini-warehouses, three business
parks and one combination mini-warehouse/business park facility. All of these
facilities are operated under the "Public Storage" name. See "Description of
PSP7's Properties." The PSP7 Common Stock is traded on the AMEX under the symbol
"PSH."
<PAGE>
PSP7's properties are managed by PSMI and PSCP. PSP7's operations are
under the general supervision of its three-member board of directors, consisting
of an executive officer of PSI and two other directors. See "-- Relationships."
The principal executive offices of both SEI and PSP7 are located at 600
North Brand Boulevard, Glendale, California 91203-1241. Their telephone number
is (818) 244-8080.
Recent Developments
Proposed Restructuring. SEI has formed a special committee of
independent directors to consider a transaction in which SEI would be combined
with substantially all of the United States real estate operations of PSI, and
SEI would become self-advised and self-managed. The special committee selected
Robertson Stephens & Company, L.P., as financial adviser in March 1995 to render
advice in connection with the restructuring. Although no terms have been
established, it is expected that SEI would issue shares of its common stock in
the transaction. There is no agreement between SEI and PSI and no assurance that
an agreement can be reached or that a transaction can be completed. Any such
transaction would be subject, among other things, to prior approval of the SEI
Shareholders and a fairness opinion from Robertson Stephens & Company, L.P.
PSI is engaged, directly and through subsidiaries, in the acquisition,
development and construction of mini-warehouses and, to a lesser extent, other
commercial properties in the United States and Canada. PSMI, PSCP and the
Adviser are subsidiaries of PSI. PSMI and PSCP operate approximately 1,150
facilities in the United States, including SEI's approximately 430 facilities,
and PSI has direct or indirect ownership interests in approximately 1,060
facilities in the United States, including SEI's facilities.
Acquisition of Properties. During 1995 (through March 31), SEI acquired
32 mini-warehouses for an aggregate purchase price of approximately $86,503,000
(including properties acquired in the February 1995 merger described below).
Affiliates of PSI owned 25 of these properties, including 23 acquired from PSP
VI.
Issuances of Capital Stock. During 1995 (through March 31), SEI issued
3,947,600 shares of Common Stock for an aggregate price of $54,312,000 and
2,195,000 shares of preferred stock for an aggregate gross price of
approximately $54,875,000. As of March 31, 1995, SEI's officers, directors and
their affiliates beneficially owned approximately 9,358,024 shares or 28% of
SEI's Common Stock. The shares of Common Stock issued in 1995 were issued in the
February 1995 merger described below and to PSI in connection with the
acquisition of participation interests in 19 mini-warehouses. See "--
Relationships."
Mergers with Related Corporations. In February 1995, SEI completed a
merger with Public Storage Properties VI, Inc. ("PSP VI"). PSP VI, like PSP7 and
Public Storage Properties VIII, Inc., which merged into SEI in 1994, is a REIT
that succeeded to a PSI-sponsored partnership in a reorganization transaction.
PSI and its affiliates owned approximately 28% of PSP VI's common stock. In the
merger, PSP VI was merged with and into SEI, and the outstanding PSP VI common
stock (2,716,223 shares) was converted into an aggregate of approximately (i)
approximately 3,148,000 shares of SEI Common Stock (at the rate of 1.724 shares
of SEI Common Stock for each share of PSP VI common stock) and (ii)
approximately $21,428,000 in cash (at the rate of $24.05 per share of PSP VI
common stock) (excluding, in each case, a liquidating cash distribution of $.72
per share). PSI and its affiliates received approximately 1,293,000 shares of
SEI Common Stock in respect of their interest in PSP VI.
Tender Offers. There are a total of eight PSP Partnerships. During the
first quarter of 1995, the Company acquired, in cash tender offers, limited
partnership interests in two PSP Partnerships (PS Partners I and VIII),
representing approximately 24% and 13% of these limited partnership interests,
respectively, for an aggregate purchase price of approximately $8,079,000.
During 1994, the Company acquired limited partnership interests in five other
PSP Partnerships (PS Partners II, III, IV, V and VII). As a result, the Company
owns approximately 33% to 66% of the outstanding limited partnership interests
of each of the seven PSP Partnerships. The Company currently owns approximately
34% of the limited partnership interests in the eighth and final PSP Partnership
(PSP Partners VI) and intends to make a cash tender offer for up to 45% of the
limited partnership interests in that partnership.
Risk Factors and Material Considerations
The Merger involves certain factors that should be considered by all
shareholders, particularly PSP7 Shareholders, including the following:
* No Arms' Length Negotiation or Unaffiliated Representatives. The
Merger has not been negotiated at arms' length, and no
unaffiliated representatives were appointed to negotiate the
terms of the Merger on behalf of either SEI or PSP7. If such
persons had been engaged, the terms of the Merger may have been
more favorable to the shareholders of either SEI or PSP7.
<PAGE>
* Change from Finite Life to Infinite Life. The nature of the
investment of PSP7 Shareholders who receive SEI Common Stock is
being changed from holding an interest in a specified portfolio
of properties for a finite period to holding an investment in an
ongoing real estate company, whose portfolio of properties is
changed from time to time without approval of shareholders, and
which does not plan to liquidate its assets within a fixed
period of time. PSP7 Shareholders who receive SEI Common Stock
in the Merger will be able to liquidate their investment only by
selling their shares in the market.
* Lower Level of Distributions After the Merger. Depending on the
market price of the SEI Common Stock during the period in which
the number of shares to be issued in the Merger is established,
the level of distributions to PSP7 Shareholders who receive SEI
Common Stock in the Merger may be lower after the Merger than
before. Based on a market price of SEI Common Stock of $16.75
and the current regular quarterly distribution rate for SEI
($.22 per share) and PSP7 ($.28 per share), PSP7 Shareholders
would receive approximately $.03 (11%) less in regular quarterly
distributions per share of PSP7 Common Stock after the Merger
from SEI than before the Merger from PSP7 and approximately $.01
less per share in regular quarterly distributions for each $.70
(4%) increase in the market price of SEI Common Stock above
$16.75.
* Potential Loss of Future Appreciation. PSP7's properties may
continue to appreciate in value and might be able to be
liquidated at a later date for more consideration than
receivable in the Merger.
* Limitation on Dissenters' Rights of Appraisal. Under California
law, PSP7 Shareholders will be entitled to dissenters' rights of
appraisal in connection with the Merger ("Dissenters' Rights")
only if demands for payment are filed with respect to 5% or more
of the outstanding shares of PSP7 Common Stock.
* Conflicts of Interest. PSI and its affiliates, which are
affiliated with both SEI and PSP7, have conflicts of interest in
connection with the Merger and the operation of properties.
* Increase in Adviser Compensation. The Merger is expected to
increase the compensation payable to the Adviser (approximately
$373,000 on a pro forma basis for 1994 assuming the Merger is
completed with no Cash Elections), which is affiliated with both
SEI and PSP7, because the Adviser's fee is a function of SEI's
capitalization, as well as its results of operations.
* Transactions with Affiliates. SEI has acquired, and intends to
continue to acquire, interests in real estate assets from
affiliates of PSI through direct purchases, mergers, tender
offers or other transactions. These transactions present the
risk that their terms may not be as favorable to SEI as could be
obtained in transactions with unaffiliated parties, although it
is SEI's policy that these affiliated transactions receive
approval by a majority of SEI's independent directors after
review of independent valuations.
* Financing Risks. In making real estate investments, SEI, unlike
PSP7, has incurred, and may continue to incur, debt. The
incurrence of debt increases the risk of loss of investment.
* Possible Future Dilution. The interest of SEI shareholders can
be diluted through the issuance of additional securities by SEI.
SEI has outstanding, and intends to issue additional, securities
with priority over SEI Common Stock.
* Uncertainty Regarding Market Price of SEI Common Stock. The
market price of SEI Common Stock may fluctuate following
establishment of the number of shares to be issued to PSP7
Shareholders in the Merger and prior to issuance and could
decrease as a result of increased selling activity following
issuance of shares in the Merger and other factors.
* Merger Consideration Based on Appraisals Instead of Arms' Length
Negotiations. The consideration to be paid to the PSP7
Shareholders is based on third party appraisals of PSP7's
properties. However, appraisals are opinions as of the date
specified and are subject to certain assumptions and may not
represent the true worth or realizable value of PSP7's
properties. There can be no assurance that if PSP7's properties
were sold, they would be sold at the appraised values; the sales
price might be higher or lower.
<PAGE>
* Tax to PSP7 Shareholders Upon Receipt of Cash. PSP7 Shareholders
who receive any cash in connection with the Merger may recognize
a taxable gain. In addition, the Required REIT Distributions
will be taxable to all PSP7 Shareholders as ordinary income.
Background and Reasons for the Merger
The Merger has been initiated and structured by individuals who are
executive officers of SEI and PSP7 and are also affiliated with PSI. Special
committees composed of independent directors of SEI and PSP7 (the "SEI Special
Committee" and "PSP7 Special Committee", respectively) have reviewed the terms
of the Merger, and the Boards of Directors of SEI and PSP7, based on
recommendations of these special committees which the Boards of Directors have
adopted, and on the opinions of financial advisors in which they concur, believe
that the Merger is fair to the public shareholders of SEI and PSP7,
respectively, and recommend that SEI Shareholders and PSP7 Shareholders,
respectively, vote for the Merger.
PSP7 was organized to succeed to the business of the Partnership in a
reorganization transaction completed on July 31, 1991. In response to changes in
the reorganization requested by the unaffiliated dealer manager of the
Partnership's original offering of limited partnership interests, PSP7 added a
provision to its bylaws to the effect that by 1995 PSP7 Shareholders would be
presented with a proposal to sell all or substantially all of the properties,
distribute the proceeds from such sale and liquidate PSP7. Later, in settlement
of litigation arising from the reorganization, this bylaw provision was amended
to expand the terms of the proposal to include a possible financing of the
properties. See "The Merger -- Background."
The proposed Merger satisfies PSP7's obligation to present a proposal
to PSP7 Shareholders for the sale or financing of its properties.
The PSP7 Special Committee and the PSP7 Board of Directors believe that
the proposed Merger is consistent with this bylaw provision. In the Merger, PSP7
would be disposing of its properties to SEI for value, i.e., SEI Common Stock
and cash (if Cash Elections are made), and PSP7's corporate existence would
cease. Furthermore, the consideration to be received in the Merger is based on
the appraised value of its assets, and PSP7 Shareholders have the right, with
respect to up to 20% of the outstanding PSP7 Common Stock (less any Dissenting
Shares), to receive cash in the Merger. PSP7's bylaws do not (i) define the
terms "sale," "liquidation" or "financing," (ii) specify what types of
transactions would satisfy the requirement imposed by PSP7's bylaws or (iii)
preclude sales of PSP7's properties to entities related to PSI, such as SEI.
SEI, which was organized in 1980, has from time to time taken actions
to increase its asset and capital base and increase diversification. Beginning
in March 1993, the SEI Board of Directors commenced discussions of a possible
merger with PSP VIII and PSP7 and in August 1994 commenced discussion of a
merger with PSP VI. The mergers with PSP VIII and PSP VI were completed in
September 1994 and February 1995, respectively.
In January 1995, the SEI Board of Directors appointed the SEI Special
Committee to consider and make a recommendation to the SEI Board of Directors
and the SEI Shareholders regarding a possible merger with PSP7. In February
1995, following approval by the shareholders of SEI of the merger of SEI and PSP
VI, the SEI Board of Directors, based on recommendations of the SEI Special
Committee, approved the Merger and determined to recommend that SEI Shareholders
vote for the Merger.
In August 1993 and August 1994, the boards of directors of PSP VIII and
PSP VI, respectively, which have the same directors as PSP7, commenced
discussions of mergers with SEI. The mergers of PSP VIII and PSP VI with SEI
were completed in September 1994 and February 1995, respectively.
In January 1995, the PSP7 Board of Directors appointed the PSP7 Special
Committee to consider and make a recommendation to the PSP7 Board of Directors
and the PSP7 Shareholders regarding a possible merger with SEI. In February
1995, following approval by the shareholders of PSP VI of the merger of PSP VI
and SEI, the PSP7 Board of Directors based on recommendations of the PSP7
Special Committee, which were adopted by the PSP7 Board of Directors, approved
the Merger and determined to recommend that PSP7 Shareholders vote for the
Merger.
The PSP7 Board of Directors and the PSP7 Special Committee believe that
the consideration being offered in the Merger compares favorably with the
trading price of the PSP7 Common Stock immediately prior to the first
announcement of the Merger and during other periods, a range of estimated going
concern values per share of PSP7 Common Stock, an estimated liquidation value
per share of PSP7 Common stock and the book value per share of PSP7 Common
Stock. The PSP7 Board of Directors and the PSP7 Special Committee recognize that
this comparison is subject to significant assumptions, qualifications and
limitations. See "The Merger -- Comparison of Consideration to be Received in
the Merger to Other Alternatives."
<PAGE>
Prior to concluding that the Merger should be proposed to PSP7
Shareholders, the PSP7 Board of Directors and the PSP7 Special Committee
considered several alternatives to the Merger, including liquidation of PSP7,
continued operation of PSP7 and an amendment to PSP7's organizational documents.
In order to determine whether the Merger or one of its alternatives would be
more advantageous to PSP7 Shareholders, the PSP7 Board of Directors and the PSP7
Special Committee compared the potential benefits and detriments of the Merger
with the potential benefits and detriments of other alternatives. Based upon a
comparison of the potential benefits and detriments of the Merger with its
alternatives, the PSP7 Board of Directors and the PSP7 Special Committee have
concluded that the Merger is more attractive to PSP7 Shareholders than any of
the alternatives considered. The PSP7 Board of Directors did not solicit any
other proposal for the acquisition of PSP7 or its properties. See "The Merger --
No Solicitation of Other Proposals."
In comparing the Merger to other alternatives, the PSP7 Board of
Directors and the PSP7 Special Committee noted the following:
Liquidation. The PSP7 Board of Directors and the PSP7 Special Committee
do not believe this is an opportune time to sell PSP7's properties because
mini-warehouses may continue to appreciate in value. The Merger provides PSP7
Shareholders with the opportunity either to convert their investment in PSP7
into an investment in SEI, which like PSP7 primarily owns mini-warehouses, on a
tax-free basis or to receive cash based on the appraised value of PSP7's
properties as to a portion of their investment. However, if PSP7 liquidated its
assets through asset sales to unaffiliated third parties, PSP7 Shareholders
would not need to rely upon real estate portfolio appraisals to estimate the
fair market value of PSP7's properties.
Continued Operation. Nothing requires the liquidation or merger of PSP7
at this time. PSP7 is operating profitably. Continued operation should provide
PSP7 Shareholders with continued distributions of net operating cash flow and
participation in future appreciation of PSP7's properties, as well as avoiding
many of the risks described under "Risk Factors and Material Considerations."
However, continued operation would fail to secure the potential benefits of the
Merger described under "The Merger -- Potential Advantages of the Merger."
Amendment of PSP7's Bylaws. An amendment to PSP7's bylaws to remove the
restrictions on investment of cash flow and issuance of securities by PSP7 would
permit PSP7 to take advantage of investment opportunities and to grow as new
investments are made. However, the PSP7 Board of Directors and the PSP7 Special
Committee believe that SEI's larger capital base and greater liquidity and
diversification better enable SEI to take advantage of investment opportunities
and to raise investment capital.
Potential Advantages of the Merger
The Merger would provide SEI with a larger asset and capital base. The
principal potential benefits to PSP7 Shareholders who receive SEI Common Stock
are:
* Acquisition of Additional Properties. Following the Merger, PSP7
Shareholders will be investors in an entity with a larger asset
base and market capitalization than PSP7. SEI has grown and is
expected to continue to grow, as new investments are made.
* Increased Liquidity. PSP7 has 3,806,491 shares of PSP7 Common
Stock listed on the AMEX with an average daily trading volume
during the 12 months ended December 31, 1994 of 1,394 shares. In
comparison, SEI has approximately 33,000,000 shares of Common
Stock listed on the NYSE with an average daily trading volume
during the 12 months ended December 31, 1994 of 39,106 shares
(24,421 shares if February and November 1994, during which SEI
was engaged in public offerings of Common Stock, are excluded).
Given SEI's greater market capitalization and trading volume
than PSP7's, PSP7 Shareholders who receive SEI Common Stock in
exchange for their PSP7 Common Stock are likely to enjoy a more
active trading market and increased liquidity for their shares.
* Tax-Free Treatment if Only SEI Common Stock is Received. The
Merger is intended to qualify as a tax-free reorganization.
Assuming such qualification, no taxable gain or loss will be
recognized in connection with the Merger by PSP7 Shareholders
who exchange their PSP7 Common Stock solely for SEI Common
Stock. However, the Required REIT Distributons will be taxable
to all PSP7 Shareholders as ordinary income. PSI and its
affiliates, who have little tax basis in their PSP7 Common
Stock, have advised SEI and PSP7 that they intend to exchange
their PSP7 Common Stock solely for SEI Common Stock. See
"Certain Federal Income Tax Matters -- The Merger."
<PAGE>
Rights of Dissenting Shareholders
PSP7. Pursuant to Chapter 13 of the Corporations Code of the State of
California (the "California Code"), PSP7 Shareholders will be entitled to obtain
appraisal of the fair value of their shares ("Dissenters' Rights") if demands
for payment are filed with respect to 5% or more of the outstanding shares of
PSP7 Common Stock.
A dissenting shareholder who wishes to require PSP7 to purchase his or
her shares of PSP7 Common Stock must:
(1) vote against the Merger any or all of the shares of PSP7
Common Stock entitled to be voted (shares of PSP7 Common Stock not
voted are not considered to be voted against the Merger and will not be
counted toward the 5% minimum for Dissenters' Rights to exist);
provided that if a PSP7 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 PSP7 or its transfer agent, which is
received not later than the date of the meeting of PSP7 Shareholders,
setting forth the number of shares of PSP7 Common Stock demanded to be
purchased by PSP7 and a statement as to claimed fair market value of
such shares at February 1, 1995; and
(3) submit for endorsement, within 30 days after the date on which
the notice of approval of the Merger by PSP7 Shareholders is mailed to
such shareholders, to PSP7 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. PSP7
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 E. See "Dissenting Shareholders' Rights of
Appraisal."
SEI. SEI Shareholders are not entitled to dissenters' rights in
connection with the Merger.
Determination of Payments to be Received by PSP7 Shareholders in
Connection with the Merger
In connection with the Merger PSP7 Shareholders will receive the net
asset value or $18.95 per share of PSP7 Common Stock. PSP7's net asset value is
the sum of (a) the appraised value of PSP7's real estate assets determined by
Wilson, as of December 31, 1994, plus (b) the estimated book values of PSP7's
non-real estate assets as of May 31, 1995, less (c) PSP7's estimated liabilities
as of May 31, 1995. Pre-Merger cash distributions would be made to PSP7
Shareholders to cause PSP7's estimated net asset value as of the date of the
Merger to be substantially equivalent to its estimated net asset value as of May
31, 1995. The consideration paid by SEI in the Merger will be reduced on a pro
rata basis by the amount of the Required REIT Distributions paid by PSP7 to its
shareholders prior to completion of the Merger. See "The Merger -- Determination
of Payments to be Received by PSP7 Shareholders in Connection with the Merger."
However, the consideration received by PSP7 Shareholders in the Merger along
with the Required REIT Distributions (which will be paid in cash) will not be
less than $18.95.
<PAGE>
Federal Income Tax Matters
The Merger is intended to qualify as a tax-free reorganization under
Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as amended (the
"Code"), in which case generally (i) no gain or loss would be recognized by PSP7
Shareholders who receive solely SEI Common Stock in exchange for their PSP7
Common Stock; (ii) gain or loss would be recognized by PSP7 Shareholders who
receive solely cash in exchange for their PSP7 Common Stock in an amount equal
to the difference between their adjusted basis in their PSP7 Common Stock and
the amount of cash received in exchange therefor; and (iii) gain or loss would
be recognized by PSP7 Shareholders who receive a combination of SEI Common Stock
and cash in exchange for their PSP7 Common Stock in an amount equal to the
difference between their adjusted basis in their PSP7 Common Stock and the sum
of (a) the fair market value of the SEI Common Stock received and (b) the amount
of cash received, but only to the extent of the amount of cash received. The
Required REIT Distributions would not be treated as cash paid in exchange for
the PSP7 Common Stock, but rather as a dividend taxable to all recipients as
ordinary income. See "Certain Federal Income Tax Matters -The Merger."
Recommendations; Opinions of Financial Advisors
Recommendation of PSP7 Board of Directors to PSP7 Shareholders. Based
upon an analysis of the Merger, the PSP7 Special Committee and the PSP7 Board of
Directors have concluded that (i) the terms of the Merger are fair to public
shareholders of PSP7, (ii) after comparing the potential benefits and detriments
of the Merger with those of several alternatives, the Merger is more
advantageous to PSP7 Shareholders than such alternatives and (iii) PSP7
Shareholders should vote for the Merger.
The PSP7 Special Committee and the PSP7 Board of Directors based their
conclusion on the following factors: (i) PSP7's bylaws require a proposal for
the sale or financing of PSP7's properties in 1995; (ii) the consideration to be
paid to PSP7 Shareholders in the Merger and the division of the consideration
between PSI and the public shareholders of PSP7 is fair and reasonable; (iii)
the Merger provides PSP7 Shareholders with a choice of converting their
investment in PSP7 into an investment in SEI or, with respect to up to 20% of
the outstanding PSP7 Common Stock (less any Dissenting Shares), receiving cash
for their investment; (iv) PSP7's properties have been appraised by an
independent appraiser and PSP7 has received a fairness opinion from Robert A.
Stanger & Co. Inc. ("Stanger") relating to the consideration to be received in
the Merger; (v) the Merger is required to be approved by PSP7 Shareholders and,
subject to certain limitations, PSP7 Shareholders will have the right to
exercise Dissenters' Rights; and (vi) based on certain significant assumptions,
qualifications and limitations, the consideration being offered in the Merger
compares favorably with other alternatives.
Recommendation of SEI Board of Directors to SEI Shareholders. Based on
an analysis of the Merger, the SEI Special Committee and the SEI Board of
Directors have concluded that (i) the terms of the Merger are fair to public
shareholders of SEI and (ii) SEI Shareholders should vote for the Merger.
The SEI Special Committee and the SEI Board of Directors have based
their conclusions on the following factors: (i) the consideration to be paid to
PSP7 in the Merger is fair and reasonable; (ii) PSP7's properties have been
appraised by an independent appraiser and SEI has received a fairness opinion
from Houlihan, Lokey, Howard & Zukin, Inc. ("Houlihan Lokey"); (iii) the Merger
is required to be approved by a majority of the shares of SEI Common Stock
voting, although PSI and its affiliates own approximately 25% of the outstanding
SEI Common Stock; (iv) the Merger involves certain potential benefits and risks
to SEI; and (v) SEI is paying a premium over the trading price of the PSP7
Common Stock, although the average capitalization rate used in the real estate
portfolio appraisals is believed to be reasonable.
Absence of Arms' Length Negotiation and Benefits to PSI. The terms of
the Merger are not the result of arms' length negotiation and the Merger affords
certain benefits to PSI and its affiliates, including receipt of approximately
28% of the consideration paid in the Merger in exchange for shares of PSP7 held
by PSI and its affiliates and an increase in the Advisory Fee and the
Disposition Fee. The SEI Board of Directors and the PSP7 Board of Directors do
not believe that the benefits to PSI and its affiliates in the Merger and the
absence of independent representatives to negotiate the Merger undermine the
fairness of the Merger because the consideration to be received by PSI and its
affiliates in the Merger is in proportion to their share interest in PSP7 and
the increase in the Advisory Fee and the Disposition Fee is in accordance with
the terms of the existing Advisory Contract (the "Advisory Contract"). The
Merger has been reviewed and approved by the SEI Special Committee (one of whose
members owns PSP7 Common Stock) and the PSP7 Special Committee, comprised of
independent directors of SEI and PSP7, respectively.
<PAGE>
Fairness Opinion from Stanger. Stanger was engaged by PSP7 through the
PSP7 Special Committee to deliver a written summary of its determination as to
the fairness of the consideration to be received in the Merger, from a financial
point of view, to the public shareholders of PSP7. The full text of the opinion
is set forth in Appendix C to this Joint Proxy Statement and Prospectus. Subject
to the assumptions, qualifications and limitations contained therein, the
fairness opinion concludes that, as of the date of the fairness opinion, the
consideration to be received in the Merger is fair to the public shareholders of
PSP7, from a financial point of view. In arriving at its opinion, Stanger
considered, among other things, the independent appraised value of PSP7's
portfolio of properties, the estimated liquidation value of PSP7 prepared by
PSP7 based upon liquidation of the portfolio on a property-by-property basis,
financial analyses and projections prepared by PSP7 concerning the going-concern
value from continuing operation of PSP7 as a stand-alone entity, and a
comparison of the historical market prices of PSP7 Common Stock with the
consideration offered in the Merger. Stanger was not requested to, and therefore
did not: (i) select the method of determining the consideration offered in the
Merger; (ii) make any recommendation to the PSP7 or SEI Shareholders with
respect to whether to approve or reject the Merger or whether to select the cash
or Common Stock option in the Merger; or (iii) express any opinion as to the
business decision to effect the Merger or alternatives to the Merger. Stanger's
opinion is based on business, economic, real estate and securities markets, and
other conditions as of the date of its analysis. See "The Merger -- Fairness
Opinion from Stanger."
Fairness Opinion from Houlihan Lokey. Houlihan Lokey was engaged by SEI
through the SEI Special Committee to render an opinion as to the fairness, from
a financial point of view, to the public shareholders of SEI of the
consideration to be paid in the Merger. The full text of the opinion is set
forth in Appendix D to this Joint Proxy Statement and Prospectus. Subject to the
assumptions, qualifications and limitations contained therein, the fairness
opinion concludes that, as of the date of the fairness opinion, the
consideration to be paid by SEI in the Merger is fair, from a financial point of
view, to the public shareholders of SEI. In arriving at its opinion, Houlihan
Lokey considered, among other things, the pricing and trading volume of SEI's
and PSP7's Common Stock, a comparison of SEI's and PSP7's dividend yields, funds
from operations yields and market capitalization multiples to a group of
publicly traded PSI-related REITs and a group of publicly traded unaffiliated
REITs deemed comparable, a comparison of the capitalization rates applied in
Wilson's portfolio appraisal to other properties acquired by SEI over the last
two years, and the implied dividend yield, funds from operation yield, and
market capitalization multiples implied by the $18.95 per share being offered to
PSP7 Shareholders. Houlihan Lokey's opinion is based on business, economic,
market and other conditions as they existed and could be evaluated by Houlihan
Lokey on the date of its opinion. See "The Merger -- Fairness Opinion from
Houlihan Lokey."
Comparison of Ownership of Shares in PSP7 and SEI and Comparison
of Fees and Compensation
The information below summarizes certain principal differences in the
ownership of shares of SEI and PSP7 Common Stock and the effect of the Merger on
PSP7 Shareholders who receive SEI Common Stock in the Merger (set forth in
italics below each caption). For an expanded discussion of these and other
comparisons and effects, see "The Merger -- Comparison of Ownership of Shares in
PSP7 and SEI."
PSP7 SEI
Investment Objectives and Policies
To provide (i) quarterly cash To maximize funds from operations
distributions from operations and ("FFO") allocable to holders of SEI
(ii) long-term capital gains Common Stock and to increase
through appreciation in the value shareholder value through internal
of properties. growth and acquisitions. FFO is a
supplemental performance measure for
equity REITs used by industry
analysts. FFO does not take into
consideration principal payments on
debt, capital improvements,
distributions and other obligations
of SEI. Accordingly, FFO is not a
substitute for SEI's net cash
provided by operating activities or
net income as a measure of SEI's
liquidity or operating performance.
An increase in SEI's FFO will not
necessarily correspond with an
increase in distributions to holders
of SEI Common Stock. See "--
Liquidity, Marketability and
Distributions."
<PAGE>
PSP7 Shareholders who receive SEI Common Stock in the Merger will be
changing their investment from "finite-life" to "infinite life," and they will
be able to realize the value of their investment only by selling the SEI Common
Stock. The interest of SEI Shareholders can be diluted through the issuance of
additional securities, including securities that would have priority over SEI
Common Stock as to cash flow, distributions and liquidation proceeds. SEI has an
effective registration statement for preferred stock, common stock and warrants
and intends to issue additional offerings of securities under this registration
statement, including a recently completed $57,500,000 offering of preferred
stock. There is no assurance that any such securities will be issued. See "Risk
Factors and Material Considerations -- Uncertainty Regarding Market Price of
Common Stock" and "-- Financing Risks -- Dilution and Subordination."
PSP7 SEI
Borrowing Policies
Not permitted to incur borrowings Permitted to borrow in furtherance
in acquisition of properties. of its investment objectives,
subject to certain limitations.
SEI, unlike PSP7, incurs debt in the ordinary course of business and
reinvests proceeds from borrowings. The incurrence of debt increases the risk of
loss of investment.
Transactions with Affiliates
Restricted from entering into a Restricted from acquiring properties
variety of business transactions from PSI and its affiliates or from
with PSI and its affiliates without selling properties to them unless
approval of a majority of PSP7 the transaction is approved by a
Shareholders. See "Amendment to majority of SEI's independent
PSP7's Bylaws." directors and is fair to SEI based
on an independent appraisal.
It is easier for SEI to enter into transactions with PSI and its
affiliates than in the case of PSP7 because shareholder approval is not
required.
Properties
38 wholly-owned properties in 12 Equity interests in 402 properties
states (as of December 31, 1994). in 37 states (as of December 31,
1994).
Because SEI owns substantially more property interests in more states
than does PSP7, SEI's results of operations are less affected by the operations
of a single property than are those of PSP7, and it would be more difficult to
liquidate SEI than PSP7 within a reasonable period of time.
Liquidity, Marketability and Distributions
PSP7 Common Stock is traded on the SEI Common Stock is traded on the
AMEX. During the 12 months ended NYSE. During the 12 months ended
December 31, 1994, the average December 31, 1994, the average daily
daily trading volume of PSP7 Common trading volume of SEI Common Stock
Stock was 1,394 shares. PSP7 may was 39,106 shares (24,421 shares if
not issue securities having February and November 1994, during
priority over PSP7 Common Stock which SEI was engaged in public
(other than the Series D Shares offerings of Common Stock, are
issued in connection with the excluded). SEI has issued, and may
organization of PSP7). in the future issue, securities that
have priority over SEI Common Stock
as to cash flow, distributions and
liquidation proceeds.
<PAGE>
PSP7 SEI
Distributions may be declared by the Boards of Directors of both PSP7
and SEI out of any funds legally available for that purpose. PSP7 and SEI are
required to distribute at least 95% of their ordinary REIT taxable income in
order to maintain their qualification as REITs. SEI distributes less than its
cash available for distribution (recently distributing amounts approximately
equal to its taxable income), permitting it to retain funds for additional
investment and debt reduction.
A PSP7 Shareholder who receives SEI Common Stock in the Merger should
have an investment for which the market is broader and more active than the
market for PSP7 Common Stock. Distributions on SEI Common Stock are subject,
however, to priority of preferred stock.
Compensation of Affiliates
Advisory Fees
As a result of the Merger, the Advisory Fee payable to the Adviser for
services to SEI is expected to increase since the Advisory Fee is a function of
SEI's capitalization and results of operations. On a pro forma basis the fee
would have increased approximately $373,000 in 1994 (assuming the Merger had
been completed with no Cash Elections). PSP7 does not have an advisory
relationship similar to SEI's with the Adviser and pays no advisory fee. PSP7
Shareholders who receive SEI Common Stock in the Merger will, as holders of SEI
Common Stock, bear their proportionate share of the Advisory Fee. The Adviser
could receive a Disposition Fee in a subsequent sale or liquidation of the
properties of PSP7 acquired by SEI in the Merger. See "Comparison of Fees and
Compensation -- Fees Payable With Respect to Combined Operations of SEI and PSP7
- -- Adviser's Fee."
Property Operation
The properties of PSP7 and SEI are operated by PSMI and PSCP under
agreements for monthly fees of 6% and 5%, respectively, of gross revenues from
operations for operating mini-warehouse space (in the case of PSMI) and business
park space (in the case of PSCP). The fees paid to PSMI and PSCP will not change
as a result of the Merger.
As a result of the Merger, the Advisory Fee payable to the Adviser is
expected to increase.
Additional Issuances of Securities and Anti-Takeover Provisions
PSP7 Shareholders must approve all Subject to the rules of the NYSE and
additional issuances of capital applicable provisions of California
stock by PSP7. law, SEI has issued and intends to
continue to issue authorized common
and preferred stock without
shareholder approval.
Given its greater flexibility to issue capital stock, including senior
securities with special voting rights and priority over common stock, SEI should
be in a better position to deter attempts to obtain control in transactions not
approved by its Board of Directors than PSP7 and shareholders of SEI could be
less likely to benefit from a takeover not approved by its Board of Directors
than would shareholders of PSP7 in a similar circumstance.
Series D Shares
Holders of the Series D Shares are entitled to vote on the Merger. The
Series D Shares were issued to the original PSP7 Shareholders, who were limited
partners in the Partnership, based on their respective dates of admission to the
Partnership.
The Series D Shares are entitled to the first $2,757,000 of
distributions attributable to sale or financing proceeds. The Series D Shares
are not entitled to participate in any other distributions. The Series D Shares
have a liquidation preference of $2,757,000 ($1,000 per Series D Share) less the
amount of any prior distributions with respect to the Series D Shares. The
Series D Shares (i) are automatically redeemed for no consideration when the
Company has distributed $2,757,000 with respect to the Series D Shares and (ii)
are redeemable at the option of the Company at any time at an aggregate price of
$2,757,000 less the amount of any prior distributions with respect to the Series
D Shares. No distributions have been made with respect to the Series D Shares.
PSP7 is redeeming all outstanding Series D Shares, conditional upon
effectiveness of the Merger.
<PAGE>
In evaluating the Merger, holders of the Series D Shares should
consider the following:
* The Merger provides holders of the Series D Shares the
opportunity to receive the amount to which they are entitled in
redemption of their shares (an aggregate of $2,757,000).
* If PSP7 were liquidated, holders of the Series D Shares would
receive the same amounts they are receiving in connection with the
Merger.
* If PSP7 continued its operations, the holders of the Series D
Shares would not receive any distributions until PSP7 were liquidated
or its properties were sold or financed.
* Holders of the Series D Shares will have a taxable gain upon the
redemption of their shares.
See "The Merger -- Determination of Payments to be Received by PSP7
Shareholders in Connection with the Merger," "Redemption of Series D Shares" and
"Certain Federal Income Tax Matters -- Series D Shares."
Roll-Up Transactions
The Merger will be exempt from the Commission's rules on "roll-up
transactions," provided that less than 20% of the outstanding SEI Common Stock
is issued in the Merger. Although the number of shares of SEI Common Stock is
not fixed, SEI and PSP7 believe that less than 20% of the outstanding SEI Common
Stock will be issued in the Merger. There are currently approximately 33,000,000
outstanding shares of SEI Common Stock. If the number of shares of SEI Common
Stock to be issued in the Merger is more than 20% of the SEI Common Stock
outstanding at the time of the Merger, SEI will file a post-effective amendment
with the Commission complying with the Commission's rules on roll-up
transactions and resolicit the vote of the shareholders of PSP7. See "The Merger
- -- General."
<PAGE>
Summary Financial Information
The financial data in this section should be read in conjunction with
the "Pro Forma Consolidated Financial Statements" and the financial statements
incorporated herein by reference.
SEI - Historical
<TABLE>
<CAPTION>
Years Ended December 31,
1990 1991 1992 1993 1994
($ In thousands, except per share data)
<S> ` <C> <C> <C> <C> <C>
Operating Data:
Total revenues $ 93,570 $ 93,528 $ 97,448 $114,680 $147,196
Depreciation and amortization 21,099 21,773 22,405 24,998 28,274
Interest expense 10,920 10,621 9,834 6,079 6,893
Minority interest in income 9,154 6,693 6,895 7,291 9,481
Net income 11,994 11,954 15,123 28,036 42,118
Other Data:
Net cash provided by operating
activities $ 41,101 $ 40,419 $ 44,025 $ 59,477 $ 79,180
Ratio of earnings to combined
fixed charges and preferred
stock dividends(1) 2.79x 2.71x 2.89x 2.40x 2.22x
Balance Sheet Data (at end of period):
Total cash and cash equivalents $ 9,225 $ 6,439 $ 8,384 $ 10,532 $20,151
Total assets 572,247 548,220 537,724 666,133 820,309
Total debt 105,285 104,244 69,478 84,076 77,235
Shareholders' equity 175,585 188,113 253,669 376,066 587,786
Per Share of Common Stock:
Net income $ 1.04 $ .81 $ .90 $ .98 $ 1.05
Distributions(2) .65(3) .82 .84 .84 .85
Book value (at end of period) 15.16 12.75 12.02 11.93 12.66
Weighted average shares of
Common Stock 11,583 14,751 15,981 17,558 24,077
</TABLE>
<PAGE>
PSP7 - Historical
<TABLE>
<CAPTION>
Years Ended December 31,
1990(4) 1991 1992 1993 1994
($ In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Operating Data:
Total revenues $11,694 $11,808 $12,055 $12,741 $13,285
Depreciation and amortization 1,714 1,784 1,868 1,838 1,912
Reorganization costs(5) 94 314 -- -- --
Interest expense -- -- 45 217 146
Net income 4,751 4,233 4,348 4,943 5,139(12)
Other Data:
Net cash provided by operating
activities $ 6,370 $ 6,282 $ 5,993 $ 6,830 $ 6,848
Ratio of earnings to fixed charges N/A N/A 97.6x 23.8x 34.8x
Balance Sheet Data (at end of period):
Total cash and cash equivalents $ 1,951 $ 2,358 $ 535 $ 1,809 $ 1,724
Total assets 45,687 45,452 42,269 42,157 40,700
Total debt -- -- 1,300 3,033 917
Shareholders' equity 44,449 42,661 38,301 36,555 37,235
Per Share of Common Stock:
Net income:
Primary $ 1.34 $ 1.19 $ 1.32 $ 1.43 $ 1.35
Fully-diluted 1.10 0.99 1.07 1.28 1.35
Distributions(6):
Series A $ 1.55 $ 1.44 1.44 $ 1.36 $ 1.12
Series B(7) 1.55 1.44 1.44 .72 --
Series C -- -- -- -- --
Book value (at end of period)(8) $10.31 $10.08 $ 9.70 $ 9.57 $ 9.78
Weighted average shares of common stock:
Primary 3,232 3,213 2,981 3,330 3,811
Fully-diluted 4,310 4,291 4,058 3,869 3,811
</TABLE>
<PAGE>
SEI and PSP7 - Pro Forma Combined(9)
Year Ended December 31, 1994
($ In thousands, except per share data)
Operating Data:
No Cash Maximum
Elections Cash Elections (20%)
Total revenues $190,652 $190,652
Depreciation and amortization 35,867 35,867
Advisory fee 6,769 6,687
Interest expense 7,312 8,682
Minority interest in income 8,060 8,060
Net income 59,976(12) 58,688(12)
Other Data:
Net cash provided by operating activities $103,261 $101,973
Ratio of earnings to combined fixed charges 2.13x 2.05x
and preferred stock dividends(1)
Balance Sheet Data (at end of period):
Total assets $972,038 $972,038
Total debt 61,954 76,380
Shareholders' equity 754,275 739,849
Per Share of Common Stock:
SEI and PSP7 - Pro Forma Combined(10)
Net income $ 0.95 $ 0.94
Distributions paid on Common Stock 0.85 0.85
Book value (at end of period) 13.14 13.05
PSP7 - Pro Forma Equivalent(11)
Net income $ 1.08 $ 1.06
Distributions 0.96 0.96
Book value (at end of period) 14.87 14.76
- ---------------
(1) For purposes of these computations, earnings consist 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
preferred stock.
(2) For federal income tax purposes (a) distributions for 1990 consist of
$.50 of ordinary income and $.15 return of capital and (b) distributions
for 1991, 1992, 1993 and 1994 are from ordinary income. The distributions
for generally accepted accounting principles ("GAAP"), include a return
of capital for 1991 of $.01. All distributions for 1990, 1992, 1993 and
1994 were from investment income. The difference between the components
of distributions for GAAP purposes and tax purposes results primarily
from the methods used to compute depreciation expense.
(3) When SEI was organized in 1980, it intended to distribute all net cash
flow from operations less reserves. SEI's distributions per share of
Common Stock were reduced from $.35 per quarter to $.05 for the first
quarter of 1990 and $.20 for each subsequent quarter of 1990.
Distributions had been reduced because distributions had exceeded cash
available for distributions and because capital expenditures had been
required for maintenance of properties. Commencing in 1990 SEI changed
its distribution policy and distributes less than its cash available for
distributions, permitting it to retain funds for additional investment
and debt reduction.
<PAGE>
(4) PSP7 was reorganized from the Partnership on July 31, 1991 (the
"Reorganization"). The Reorganization has been reflected by retroactively
restating the information for prior years; the only impact relates to the
classification of certain equity accounts.
(5) Reorganization costs, which consist primarily of legal fees, accounting
fees, transfer taxes, registration and solicitation fees, represent the
costs incurred in the Reorganization.
(6) For federal income tax purposes, distributions for 1990, 1992 and 1993
are from ordinary income. Distributions on Series A Shares for 1991
consist of $1.19 of ordinary income and $.25 return of capital.
Distributions on Series A Shares for 1994 consist of $1.08 of ordinary
income and $.04 of capital gain. Distributions through 1992 exceeded net
income computed in accordance with GAAP. The distributions for GAAP
purposes include a return of capital for 1989 of $.37, for 1990 of $.21,
for 1991 of $.25 and for 1992 of $.12. All distributions for 1993 and
1994 were from investment income. Distributions for each year include
distributions declared during the fourth quarter and paid in January. The
difference between the components of distributions for GAAP purposes and
tax purposes results primarily from the methods used to compute
depreciation expense.
(7) In the Reorganization, PSP7 issued shares of Common Stock Series A,
Series B, Series C and Series D. In connection with PSP7's distribution
with respect to the third quarter of 1993, the Series B and Series C
shares converted to Series A shares on a share for share basis in
accordance with PSP7's articles of incorporation. Therefore, commencing
with the distribution with respect to the fourth quarter of 1993, no
distributions have been paid on the Series B shares.
(8) Book value per share computed based on the number of Series A, Series B
and Series C shares outstanding at period end.
(9) For the December 31, 1994 Pro Forma Combined financial data, assumes that
the transactions which occurred during 1994 as described in the Notes to
Pro Forma Financial Statements occurred at the beginning of 1994.
(10) Presents combined pro forma per share amounts based on the number of
shares of SEI Common Stock assumed to be outstanding at December 31,
1994, after giving effect to the issuance of shares of SEI Common Stock
in January 1995 to PSI in connection with the acquisition of
participation interests in mini-warehouses, in the merger with PSP VI and
in the Merger. The per share information assumes 4,306,000 shares of SEI
Common Stock are issued in connection with the Merger (assumed issue
price of $16.75) assuming no Cash Elections and 3,444,919 shares of SEI
Common Stock are issued in connection with the Merger (assumed issue
price of $16.75) assuming maximum Cash Elections.
(11) Presents combined pro forma amounts per share of PSP7 Common Stock based
on the number of shares of PSP7 Common Stock assumed to be outstanding
immediately prior to the effective time of the Merger (the "Effective
Time"). Income and book value data are calculated by multiplying the
combined pro forma amounts by an assumed exchange ratio (based on assumed
issue price of SEI stock of $16.75). The distribution amounts are
calculated by multiplying the SEI historical distribution by the assumed
exchange ratio.
(12) In December 1994, PSP7 sold a portion of its Houston, Texas property to
the State of Texas under a condemnation proceeding, recognizing a gain of
$203,000 on the sale. The gain is included in PSP7's 1994 net income and
in the pro forma combined net income for 1994.
Relationships
The following charts show the relationships among SEI, PSP7, PSI and
certain of their affiliates both before and after the Merger. SEI's operations
are managed by the Adviser, PSMI and PSCP, all under the supervision of SEI's
Board of Directors. PSP7's properties are managed by PSMI and PSCP under the
supervision of PSP7's Board of Directors. The Adviser, PSMI and PSCP are
affiliated with PSI, which is controlled by B. Wayne Hughes, the Chairman of the
Board and Chief Executive Officer of both SEI and PSP7.
<PAGE>
Before the Merger
[CHART OMITTED HERE]
Description of Graphic
Chart illustrating the affiliated relationships among SEI, PSP7, PSI and certain
affiliates before the Merger: Public shareholders own 72% of PSP7 and PSI owns
28%; PSI is a wholly owned subsidiary of PSIH, which is controlled by BWH by
virtue of his 86% ownership; KQV also owns 14% of PSIH; PSMI, the property
manager to both PSP7 and SEI, is a wholly owned subsidiary of PSI; The Adviser
and PSCP, the property manager to SEI, are both wholly owned subsidiaries of
PSI. PSI owns 26% of SEI. The remaining 74% of SEI is owned publicly.
<PAGE>
After the Merger
[CHART OMITTED HERE]
Description of Graphic
Chart illustrating the affiliated relationships among SEI, PSI and certain
affiliates following the Merger: Public shareholders own 73% of SEI; PSI owns
27% of SEI; PSMI, the property manager to SEI, the Adviser, and PSCP, a second
property manager to SEI, are all wholly owned subsidiaries of PSI; PSI is a
wholly owned subsidiary of PSIH, 86% of which is owned by BWH and 14% of which
is owned by KQV.
Solid lines indicate ownership interests and shaded lines indicate other
relationships.
BWH B. Wayne Hughes. Mr. Hughes is the Chairman of the Board and Chief
Executive Officer of both SEI and PSP7. PSIH is owned 86% by B. Wayne
Hughes and by his adult daughter, Tamara L. Hughes, (who has an option
(exercisable under certain circumstances) to acquire Mr. Volk's
interest in PSIH and has an irrevocable proxy to vote Mr. Volk's
shares in PSIH).
KQV Kenneth Q. Volk, Jr.
PSIH PSI Holdings, Inc.
PSI Public Storage, Inc. Percentages of Common Stock ownership of PSP7 and
SEI represent percentage of outstanding shares deemed beneficially
owned (under Commission rules), as of March 31, 1995, by PSI and its
affiliates, including Mr. Hughes (and members of his family) and other
executive officers of PSI. Ownership "After the Merger" assumes
maximum Cash Elections (and an assumed issue price of the SEI Common
Stock of $16.75). After the Merger, the ownership of SEI Common Stock
by PSI and its affiliates would be approximately 26.4% assuming no
Cash Elections (and an assumed issue price of the SEI Common Stock of
$16.75). The other directors of SEI and PSP7 own an additional 2% and
0.07% of their respective corporation's Common Stock (before the
Merger); the balance of the Common Stock is owned by public
shareholders.
PSMI Public Storage Management, Inc.
PSCP Public Storage Commercial Properties Group, Inc.
Adviser Public Storage Advisers, Inc.
PSP7 Public Storage Properties VII, Inc.
SEI Storage Equities, Inc.
<PAGE>
RISK FACTORS AND MATERIAL CONSIDERATIONS
The Merger involves the following factors which should be considered by
all shareholders, particularly PSP7 Shareholders, including the following:
No Arms' Length Negotiation or Unaffiliated Representatives
The Merger has not been negotiated at arm's length, and PSI and its
affiliates have significant relationships with both SEI and PSP7. No
unaffiliated representatives were appointed to negotiate the terms of the Merger
on behalf of either SEI or PSP7. If such persons had been engaged, the terms of
the Merger might have been more favorable to the shareholders of either SEI or
PSP7.
Change from Finite Life to Infinite Life
PSP7 is a REIT organized to hold an interest in a specified portfolio
of properties for a finite period. PSP7's bylaws require PSP7 to propose
liquidation to its shareholders in 1995, although PSP7 could continue in
existence for a longer period. In contrast, SEI intends to operate for an
indefinite period. As a consequence of this difference, following the Merger,
PSP7 Shareholders receiving SEI Common Stock will be able to liquidate their
investment only by selling their shares on the NYSE or in private transactions.
Uncertainty Regarding Market Price of SEI Common Stock
The number of shares of SEI Common Stock that would be received by PSP7
Shareholders is based on the average market price of SEI Common Stock for the 20
consecutive trading days ending on the fifth trading day prior to the meeting of
PSP7 Shareholders. Since the market price of SEI Common Stock fluctuates, the
market value of SEI Common Stock that holders of PSP7 Common Stock may receive
in the Merger may decrease following establishment of the number of shares. In
addition, because of increased selling activity following issuance of shares in
the Merger and other factors, the market value of SEI Common Stock that PSP7
Shareholders may receive in the Merger may decrease following the Merger.
Potential Loss of Future Appreciation
PSP7's properties may continue to appreciate in value and might be able
to be liquidated at a later date for more consideration than receivable in the
Merger.
Limitation on Dissenters' Rights of Appraisal
Under California law, PSP7 Shareholders will be entitled to Dissenters'
Rights in connection with the Merger only if demands for payment are filed with
respect to 5% or more of the outstanding shares of PSP7 Common Stock. See
"Dissenting Shareholders Rights of Appraisal -- PSP7."
Lower Level of Distributions
Depending on the market price of the SEI Common Stock during the period
in which the number of shares to be issued in the Merger is established, the
level of distributions to PSP7 Shareholders who receive SEI Common Stock in the
Merger may be lower after the Merger than before. Based on a market price of SEI
Common Stock of $16.75 and the current regular quarterly distribution rate for
SEI ($.22 per share) and PSP7 ($.28 per share), PSP7 Shareholders would receive
approximately $.03 (11%) less in regular quarterly distributions per share of
PSP7 Common Stock after the Merger from SEI than before the Merger from PSP7 and
approximately $.01 less per share in regular quarterly distributions for each
$.70 (4%) increase in the market price of SEI Common Stock above $16.75.
Financing Risks
Dilution and Subordination. The interest of SEI Shareholders, including
persons who receive shares in the Merger, can be diluted through the issuance of
additional securities. From January 1, 1994 to March 31, 1995, the number of
shares of SEI Common Stock increased by approximately 81%.
<PAGE>
Since October 1992, SEI has issued shares of preferred stock in public
offerings and intends to issue additional such shares. These issuances could
involve certain risks to holders of shares of SEI Common Stock, including shares
of SEI Common Stock to be issued in the Merger. In the event of a liquidation of
SEI, the holders of the preferred stock will be entitled to receive, before any
distribution of assets to holders of SEI Common Stock, liquidating distributions
(an aggregate of $277,650,000 in respect of preferred stock issued to date),
plus any accrued and unpaid dividends. Holders of preferred stock are entitled
to receive, when declared by the SEI Board of Directors, cash dividends (an
aggregate of $22,357,000 per year in respect of preferred stock issued to date
(up to $23, 064,000 at the maximum dividend rate on shares of adjustable rate
preferred stock)), in preference to holders of SEI Common Stock. As a REIT, SEI
must distribute at least 95% of its taxable income to its shareholders (which
include not only holders of SEI Common Stock but also holders of preferred
stock). Failure to pay full dividends on the preferred stock could jeopardize
SEI's qualification as a REIT. See "Certain Federal Income Tax Matters."
Certain of these securities have been issued under a currently
effective registration statement of SEI for preferred stock, common stock and
warrants. SEI intends to issue additional securities under this registration
statement, including a recently completed $57,500,000 offering of preferred
stock. There is no assurance that any such securities will be issued.
Risk of Leverage. In making real estate investments, SEI, unlike PSP7,
has incurred, and may continue to incur, debt, subject to certain limitations.
The incurrence of debt increases the risk of loss of the investment. At December
31, 1994, SEI's debt as a percentage of its total capitalization was
approximately 12%.
Merger Consideration Based on Appraisals Instead of Arms' Length Negotiation
The consideration to be received by PSP7 Shareholders is based on third
party appraisals of PSP7's properties appraising the properties at $74,300,000.
However, appraisals are opinions as of the date specified and are subject to
certain assumptions and may not represent the true worth or realizable value of
PSP7's properties. There can be no assurance that if PSP7's properties were
sold, they would be sold at the appraisal values; the sales price might be
higher or lower.
Tax to PSP7 Shareholders
PSP7 Shareholders who receive cash in connection with the Merger in
exchange for their PSP7 Common Stock will recognize taxable gain to the extent
that the amount of cash received exceeds the adjusted basis of such Shareholder
in his or her PSP7 Common Stock. A PSP7 Shareholder receiving a combination of
cash and SEI Common Stock in the Merger in exchange for his or her PSP7 Common
Stock will recognize taxable gain equal to the lesser of the amount of the cash
received or the difference between his or her adjusted basis in his or her PSP7
Common Stock and the sum of (1) the fair market value of the SEI Common Stock
received and (2) the amount of cash received. The Required REIT Distributions
will be taxable to all PSP7 Shareholders as ordinary income.
Operating Risks
General Risks of Real Estate Ownership. Like PSP7, SEI is subject to
the risks generally incident to the ownership of real estate-related assets,
including lack of demand for rental spaces in a locale, changes in general
economic or local conditions, changes in supply of or demand for similar or
competing facilities in an area, the impact of environmental protection laws,
changes in interest rates and availability of permanent mortgage funds which may
render the sale or financing of a property difficult or unattractive and changes
in tax, real estate and zoning laws.
Significant Competition Among Mini-Warehouses. Like PSP7, most of SEI's
properties are mini-warehouses. Competition in the market areas in which many of
their properties are located is significant and has affected the occupancy
levels, rental rates and operating expenses of certain of their properties.
Possible Liability Relating to Environmental Matters. Under various
federal, state and local laws, ordinances and regulations, an owner or operator
of real property may become liable for the costs of removal or remediation of
certain hazardous substances released on or in its property. Such laws often
impose liability without regard to whether the owner or operator knew of, or was
responsible for, the release of such hazardous substances. The presence of
hazardous substances may adversely affect the owner's ability to sell such real
estate or to borrow using such real estate as collateral.
Substantially all of the properties of SEI and PSP7 were acquired prior
to the time that it was customary to conduct extensive environmental
investigations in connection with property acquisitions. SEI's current practice
is to conduct environmental investigations in connection with property
acquisitions (other than acquisitions of additional interests in properties in
which SEI has an existing interest). Such assessments generally consist of an
investigation of environmental conditions at the subject property (not including
soil or groundwater sampling or analysis), as well as a review of available
information regarding the site and publicly available data regarding conditions
at other sites in the vicinity. In connection with its operations and during the
course of environmental investigations in connection with property acquisitions,
SEI has become aware that prior operations or activities at certain facilities
or from nearby locations have or may have resulted in contamination to the soil
and/or groundwater at such facilities. Although there can be no assurance, SEI
believes it has funds available to cover any liability from such environmental
contamination or potential contamination and SEI is not aware of any
environmental contamination of its facilities material to its liquidity, results
of operations or overall business or financial condition.
In connection with the Merger, environmental investigations were
conducted with respect to PSP7's properties. Based on such investigations, a
firm of engineering consultants estimated the cost of environmental remediation
at one of PSP7's properties at $250,000 and this amount was taken into account
in the appraisal of PSP7's properties. See "The Merger -- Background -- SEI
Board Actions" and "-- Real Estate Portfolio Appraisal by Wilson."
Conflicts of Interest, Increase of Adviser's Compensation
and Transactions with Affiliates
Conflicts of Interest. The Adviser, PSMI, PSCP and the executive
officers and certain directors of SEI and PSP7 have conflicts of interest
arising out of their relationship with entities that own and operate
mini-warehouses and other facilities. See "Conflicts of Interest."
Allocation of Services and Costs Among Competing Entities.
Conflicts of interests include the method by which executive officers
and directors of SEI allocate their time between SEI and other
activities, including activities involving mini-warehouses and other
facilities owned by affiliates of PSMI or PSCP.
Affiliates' Interest in Competing Entities. Directors and
executive officers of SEI and their affiliates may, subject to certain
limitations, invest in other businesses, including business activities
of the type conducted by or in competition with SEI.
Competition With Other PSMI Managed Properties. Conflicts of
interest exist to the extent SEI's mini-warehouses compete with other
PSMI-managed mini-warehouses.
Increase in Adviser Compensation. The Merger is expected to increase
the compensation payable by SEI to the Adviser (approximately $373,000 on a pro
forma basis for 1994 assuming the Merger is completed with no Cash Elections)
because the Adviser's fee is a function of SEI's capitalization, as well as its
results of operations. The Adviser could receive a Disposition Fee in a
subsequent sale or liquidation of the properties of PSP7 acquired by SEI in the
Merger. PSP7 has no adviser and pays no acquisition or disposition fees. See
"Comparison of Fees and Compensation -- Fees Payable to the Adviser and the
Property Manager -- Adviser's Fee" and "Conflicts of Interest -Conflicts Created
by Adviser's Compensation."
Transactions with Affiliates. SEI has acquired, and intends to continue
to acquire, interests in real estate assets from affiliates of PSI through
direct purchases, mergers, tender offers or other transactions. These
transactions present the risk that their terms may not be as favorable to SEI as
could be obtained in transactions with unaffiliated parties, although it is
SEI's policy that these affiliated transactions receive approval by a majority
of SEI's independent directors after review of independent valuations. See
"Conflicts of Interest -Transactions with Affiliates."
Consequences of Loss of Qualification as a REIT
Like PSP7, SEI has elected to be taxed as a REIT under the Code. In
order for SEI to continue to qualify as a REIT under the Code, certain detailed
technical requirements must be met (including certain income tests, certain
limitations on types of assets SEI can own, certain operational limitations, and
certain stock ownership tests). Although SEI intends to operate so that it will
continue to qualify as a REIT, 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 preclude any assurance that SEI will
so qualify in any year. If SEI fails to qualify as a REIT in any tax year, it
will be taxed as a regular domestic corporation, and distributions to its
shareholders would not be deductible for tax purposes. This would result in a
significant corporate tax liability for SEI and a material reduction in the
after-tax cash that would be available for distribution to its shareholders.
Furthermore, unless certain relief provisions apply, SEI would not be eligible
to elect REIT status again until the fifth taxable year that begins after the
first year for which SEI fails to qualify.
<PAGE>
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 REIT
Taxable Income is so distributed. REIT Taxable Income is generally equivalent to
net taxable ordinary income. Under certain circumstances SEI can rectify a
failure to meet the 95% distribution test by making distributions after the
close of a particular taxable year and attributing those distributions to the
prior year's taxable income. SEI has satisfied the REIT distribution requirement
for 1990, 1991, 1992, 1993 and 1994 by attributing distributions in 1991, 1992,
1993, 1994 and 1995 to each respective 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 are 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 SEI's Board of Directors. Reliance on subsequent year
distributions could cause SEI to be subject to certain penalty taxes. In that
regard, if SEI were to distribute during any year less than 85% of SEI's REIT
Taxable Income (not taking into account distributions made in subsequent years
but attributed to such year) a 4% non-deductible excise tax would apply to the
excess of the required 85% distribution (plus any distribution shortfall from
the preceding year) over the amount actually distributed during the year. SEI
intends to monitor its compliance with this 85% distribution requirement in an
effort to minimize any excise tax. See "Certain Federal Income Tax Matters --
General Tax Treatment of SEI."
CONFLICTS OF INTEREST
PSI and its affiliates have conflicts of interest in connection with
the Merger, and SEI, the Adviser, PSMI, PSCP and the executive officers and
certain directors of SEI and PSP7 have conflicts of interest arising out of
their relationship with entities that own and operate mini-warehouses and
business parks. PSI and its affiliates have a significant ownership interest in
both SEI and PSP7, owning approximately 26% of the SEI Common Stock and 28% of
the PSP7 Common Stock. See "Summary -- Relationships."
Conflicts of Interest in the Merger
No Arms'-Length Negotiation. The Merger has been initiated and
structured by individuals who are executive officers of SEI and PSP7 and are
also affiliated with PSI, and the Merger has not been negotiated at arms'
length. No independent representatives have been retained to negotiate the terms
of the Merger on behalf of either SEI or PSP7. If such representatives had been
retained, the terms of the Merger might have been more favorable to the
shareholders of either SEI or PSP7. Although independent representatives were
not retained by SEI or PSP7, each of SEI and PSP7 has created a special
committee comprised of independent directors, and each committee has engaged an
independent financial advisor, to evaluate the Merger. Each of these special
committees has reviewed the terms of the Merger and recommends that the
shareholders of its respective corporation vote for the Merger. Based upon the
use of an independent appraisal firm to determine the value of consideration to
be paid to PSP7 Shareholders, the fairness opinions and the participation of the
special committees of SEI and PSP7, the Boards of Directors of SEI and PSP7
considered that the engagement of independent representatives to negotiate the
terms of the Merger was not necessary or cost effective.
Conflicts Created by Adviser's Compensation. The Adviser, an affiliate
of PSI, may have an incentive to recommend actions that would increase SEI's
capitalization because the Adviser's compensation is a function of SEI's
capitalization, as well as its results of operations.
Increase in Ownership of SEI Stock. After the Merger, the ownership of
SEI Common Stock by PSI and its affiliates would increase from approximately 26%
to approximately 27% (assuming maximum Cash Elections) or to approximately 26.4%
(assuming no Cash Elections). See "Summary -- Relationships."
<PAGE>
Allocation of Services and Costs
As a result of participation in other activities, including activities
involving mini-warehouses, the Adviser and the executive officers, certain of
whom are also executive officers (and a director) of PSP7, and certain directors
of SEI may have conflicts of interest in allocating their time between SEI and
other activities. Each of the directors and executive officers has, and will
continue to have, a principal occupation and principal source of income other
than as a director or executive officer of SEI. They intend to devote to SEI's
affairs only such time as they deem reasonably necessary for the selection of
investments and for the general supervision of SEI's affairs. Moreover, PSMI and
PSCP may have comparable conflicts allocating their time and services and
allocating the services of persons employed or otherwise engaged part time for
SEI and part time by or for other owners of PSMI- or PSCP-operated properties.
Some of these other owners will be affiliates of PSMI or PSCP. One such conflict
may exist in the employment of certain personnel who may have supervisory
responsibility for mini-warehouses and other properties operated by PSMI or PSCP
for SEI and for other owners. Similar conflicts may exist with respect to the
purchasing of other services, such as advertising, to the extent that PSMI or
PSCP attempts to achieve economies by combining the resources of the various
properties that it operates. The cost of engaging these personnel or purchasing
these services will be allocated among the various properties on a basis that is
as equitable as reasonably possible.
Currently, the Adviser administers SEI exclusively. However, it may
engage in other activities, including the rendering of advice to other investors
and the management of other investments in the future.
Allocation of Investment Opportunities
The directors and executive officers of SEI and their affiliates may,
subject to certain limitations, invest in businesses, including business
activities of the type conducted by or in competition with SEI. It is expected
that the directors and executive officers of SEI and their affiliates will
continue to invest in mini-warehouses and other types of properties for their
own account and for entities other than SEI. These affiliates include other
REITs organized by PSI whose objectives may be comparable to those of SEI.
Competition with Affiliates
Conflicts of interest exist to the extent that SEI's mini-warehouses or
commercial properties compete, or are in a position to compete, with other
PSMI-operated mini-warehouses or PSCP-operated commercial properties. As a
result of these conflicts, decisions may be made that are not fully reflective
of SEI's best interests.
There are generally no restrictions on the distance between current and
future mini-warehouses developed or purchased by PSI or its affiliates and
mini-warehouses in which SEI may invest, or between any mini-warehouses operated
by PSMI for SEI and any operated by PSMI for other persons. In addition, there
will be no restrictions on the number or size of the mini-warehouses that may be
developed or acquired in a particular geographic area. Similar conflicts may
exist with respect to commercial properties acquired by SEI and operated by
PSCP, especially if SEI increases its investments in these properties. Although
no specific method for resolving these conflicts has been developed, PSMI will
attempt to reduce conflicts between competing properties by referring
prospective tenants to the geographically closest property.
<PAGE>
Further conflicts of interest may exist if and to the extent that other
entities whose properties are operated by PSMI and PSCP seek to finance or sell
mini-warehouses or commercial properties at the same time as SEI. Although no
specific method for resolving these conflicts has been developed, PSI and its
affiliates will seek to reduce any such conflicts by making prospective
purchasers aware of all mini-warehouses or commercial properties available for
sale or financing which are owned by PSI or its affiliated partnerships or in
partnerships in which SEI has invested.
Transactions with Affiliates
Unlike PSP7, SEI may acquire property interests from PSI or its
affiliates or the officers or directors of SEI. SEI will enter into such a
transaction only upon the favorable vote of a majority of the independent
directors and upon a determination by the independent directors that the
transaction is fair to SEI based on an independent appraisal.
PSMI, PSCP and the Adviser are affiliates of the executive officers of
both SEI and PSP7 and are entitled to receive substantial fees for the services
rendered pursuant to the terms of the Management Agreement between PSMI and PSCP
and each of SEI and PSP7 (the "Management Agreements") and the Advisory Contract
between SEI and the Adviser.
SEI has agreed to indemnify, in certain circumstances, the Adviser
under the Advisory Contract and both SEI and PSP7 have agreed, in certain
circumstances, to indemnify PSMI and PSCP under their respective property
Management Agreements. These agreements also limit the circumstances under which
PSMI, PSCP and the Adviser may be held liable to SEI or PSP7. As a result of
these provisions, SEI and PSP7 may have more limited rights of action against
PSMI, PSCP and the Adviser (and their affiliates) than SEI and PSP7 would have
in the absence of these provisions.
A subsidiary of PSI reinsures policies insuring against losses to goods
stored by tenants in SEI's and PSP7's mini-warehouses. PSI believes that the
availability of insurance reduces the potential liability of these entities to
tenants for losses to their goods from theft or destruction. The PSI subsidiary
receives the premiums and bears the risks associated with the insurance. PSI
sells locks and boxes to tenants to be used in securing their spaces. PSI
believes that the availability of locks and boxes for sale promotes the rental
of spaces. PSI receives the benefit and bears the expense of these sales.
<PAGE>
COMPARISON OF FEES AND COMPENSATION
The following tables and related material set forth certain information
with respect to the fees payable with respect to SEI and PSP7 operations and
distributions by PSP7 to PSI and its affiliates.
Fees Payable With Respect to Combined Operations of SEI and PSP7
SEI's day-to-day investment operations are administered, and after the
Merger will continue to be administered, by the Adviser, and its properties are
operated, and after the Merger will continue to be operated, by PSMI and PSCP.
PSP7's properties are managed by PSMI and PSCP. As a result of the Merger, fees
paid to the Adviser for services to SEI are expected to increase. Fees to PSMI
and PSCP for operating the properties held by SEI and PSP7 before the Merger
will be the same with respect to those properties on a combined basis after the
Merger. The following table sets forth the total fees payable to the Adviser,
PSMI and PSCP with respect to the combined operations of SEI and PSP7 for each
of the last three fiscal years on an historical basis and on a pro forma basis
with and without the completion of the Merger (assuming no Cash Elections).
[CAPTION]
<TABLE>
Years ended December 31,
1992 1993 1994
<S> <C> <C> <C>
Fees to Adviser, PSMI and PSCP - historical(1) $ 8,202,000 $10,030,000 $13,338,000
Fees to Adviser, PSMI and PSCP - pro forma
without Merger(2) 14,576,000 15,343,000 16,588,000
Fees to Adviser, PSMI and PSCP - pro forma
with Merger(3)(4) 15,602,000 16,453,000 17,743,000
- -----------
<FN>
(1) As a result of a September 30, 1991 modification to the Advisory
Contract with the Adviser (as defined below), the fee paid to the
Adviser was less in 1992 than in 1991. For a breakdown of this increase,
see table below under "-Adviser's Fee."
(2) The Adviser's fees pro forma without Merger assume the issuance and
investment of the proceeds of the following securities occurred as of
January 1, 1992: $45,625,000 (1,825,000 shares) of 10% cumulative
preferred stock - Series A in 1992, $57,500,000 (2,300,000 shares) of
9.2% cumulative preferred stock Series B and $57,500,000 (2,300,000
shares) of 8.25% convertible preferred stock in 1993, $30,000,000
(1,200,000 shares) of adjustable rate cumulative preferred stock and
$30,000,000 (1,200,000 shares) of 9.5% cumulative preferred stock -
Series D in 1994 and $35,956,000 (2,325,600 shares) of common stock in
1992, $9,699,000 (741,200 shares) of common stock in 1993, $80,889,000
(5,484,000 shares) of common stock in February 1994, $38,504,000
(2,593,910 shares) of common stock in connection with the merger of PSP
VIII in September 1994, $33,750,000 (2,500,000 shares) of common stock
in November 1994, $7,239,700 (515,739 shares) of common stock in January
1995, $54,875,000 (2,195,000 shares) of 10% cumulative preferred stock
Series E in February 1995 and $42,865,000 (3,148,000 shares) in
connection with the merger of PSP VI in February 1995. The Adviser's fee
pro forma without Merger assumes the Advisory Contract currently in
effect was in effect for all periods presented.
(3) The Adviser's fees pro forma with Merger assume the transactions listed
in footnote (2) above and no Cash Elections.
(4) Includes increase in fee payable to the Adviser by SEI as a result of
the Merger. PSP7 has no advisory contract. See "-- Fees Payable With
Respect to PSP7 Operations."
</TABLE>
Additional information regarding the fees of the Adviser, PSMI and PSCP is set
forth below.
Adviser's Fee. As a result of the Merger, fees payable under the
Amended and Restated Advisory Contract between SEI and the Adviser dated as of
September 30, 1991 (the "Advisory Contract") are expected to increase. These
fees have two components: a monthly advisory fee (the "Advisory Fee") and a fee
based on sale of property interests (the "Disposition Fee"). In addition, upon
termination of the Advisory Contract, other than in certain specific
circumstances, the Adviser is entitled to substantial payments, including a
portion of SEI's unrealized gains.
<PAGE>
The Advisory Fee is calculated as follows: (i) 12.75% of SEI's Adjusted
Income per Share (as defined), multiplied by the number of shares of SEI Common
Stock outstanding at September 30, 1991 plus (ii) 6% of SEI's Adjusted Income
per Share multiplied by the average number of shares of SEI Common Stock
outstanding during the period in excess of the number of shares outstanding at
September 30, 1991 plus (iii) 6% of the dividends paid with respect to SEI's
preferred stock. As a result of the Merger, the Advisory Fee is expected to
increase because there will be more shares of SEI Common Stock outstanding after
the Merger. The Advisory Fee is a function of SEI's capitalization and results
of operations.
The Disposition Fee is 20% of the Total Realized Gain (generally the
sum of the gains realized by SEI from the sale (reduced by accumulated
depreciation) less the sum of the losses from the sale of assets). Under the
Advisory Contract, the Adviser is to receive Disposition Fees from the sale or
liquidation of SEI's property interests, which would include sale or liquidation
of the properties of PSP7 acquired in the Merger. The Adviser has not earned any
Disposition Fee during the last three years, other than $108,000 earned in 1992
in connection with the partial condemnation of a property. Because there is no
present intention to sell or liquidate any of the properties of PSP7 acquired in
the Merger, it is assumed that there will be no Disposition Fee as a result of
the Merger. Upon sale of these properties, the Adviser will be entitled to 20%
of the gain that would be recognized by SEI, i.e., the excess of the proceeds
realized from a sale over the acquisition cost of the properties in the Merger.
The following table sets forth the fees payable to the Adviser for the
periods indicated under the Advisory Contract (i) historical, (ii) pro forma
assuming the transactions described in footnote (2) to the preceding table
without Merger and (iii) pro forma assuming such transactions with Merger (with
no Cash Elections).
<TABLE>
<CAPTION>
Years ended December 31,
1992 1993 1994
<S> <C> <C> <C>
Fees to Adviser - historical(1) $2,612,000 $3,619,000 $4,983,000
Fees to Adviser - pro forma without Merger(2) 5,620,000 5,916,000 6,396,000
Fees to Adviser- pro forma with Merger(3) 5,936,000 6,275,000 6,769,000
- ---------------
<FN>
(1) See footnote (1) to preceding table.
(2) See footnote (2) to preceding table.
(3) See footnote (3) to preceding table.
</TABLE>
Fees to PSMI and PSCP. PSMI and PSCP operate all the properties in
which SEI and PSP7 have invested on terms that are identical for both entities,
i.e., 6% of gross revenues from operations of mini-warehouses and 5% of gross
revenues from operations of commercial properties. After the Merger, the fees of
PSMI and PSCP will be based on the same formula as before the Merger, and,
therefore, in the aggregate these fees will not be affected by the Merger.
<PAGE>
Fees Payable With Respect to PSP7 Operations
PSP7's properties are operated by PSMI and PSCP based on the same
compensation formula as is applicable to the fees paid by SEI to PSMI and PSCP,
i.e., 6% of gross revenues from operations of mini-warehouses and 5% of gross
revenues from operations of commercial properties. PSP7 does not have an overall
advisory relationship similar to SEI's with the Adviser. The following table
sets forth for each of the last three years (i) fees to PSMI and PSCP by PSP7
(which are the same with or without the Merger), (ii) the pro forma incremental
fees payable to the Adviser with respect to PSP7 operations (see "-- Fees
Payable With Respect to Combined Operations of SEI and PSP7") and (iii) the
total fees payable with respect to PSP7 operations after the Merger.
Years ended December 31,
1992 1993 1994
Fees to PSMI and PSCP - historical $ 710,000 $ 751,000 $ 782,000
Pro forma fees payable to Adviser
with respect to PSP7 operations(1) 316,000 359,000 373,000
----------- ----------- -----------
Total fees payable with respect to
PSP7 operations with Merger $ 1,026,000 $ 1,110,000 $ 1,155,000
=========== =========== ===========
- -----------
(1) PSP7 has no advisory contract. Amount represents approximate pro forma
increase in fees payable to the Adviser by SEI as a result of the
Merger. See "-- Fees Payable With Respect to Combined Operations of SEI
and PSP7 -- Adviser's Fee."
Distributions Payable by PSP7
PSI and its affiliates have received distributions from PSP7 in respect
of their ownership interest in PSP7 as set forth in the following table. In the
Merger, PSI and its affiliates will receive shares of SEI Common Stock and,
following the Merger, will receive distributions from SEI in respect of such
shares. See "The Merger -Determination of Consideration to be Paid for PSP7."
Years ended December 31,
1992 1993 1994
PSP7 distributions to PSI and affiliates(1) $390,000 $852,000 $1,190,000
- ----------
(1) In accordance with PSP7's articles of incorporation, the number of
shares held by PSI receiving distributions increased in connection with
PSP7's distribution with respect to the third quarter of 1993. Footnote
(7) to "Summary -- Summary Financial Information."
<PAGE>
THE MERGER
General
As a result of the Merger, the separate existence of PSP7 would cease.
Upon the Merger, each outstanding share of PSP7's Common Stock (other than
Dissenting Shares) would be converted into the right to receive cash, SEI Common
Stock or a combination of the two, as follows: (i) with respect to a certain
number of shares of PSP7 Common Stock (not to exceed 20% of the outstanding PSP7
Common Stock, or 761,298 shares, less any Dissenting Shares), upon a Cash
Election, $18.95 in cash, subject to reduction as described below, or (ii) that
number of shares of SEI Common Stock (subject to rounding) determined by
dividing $18.95, subject to reduction as described below, by the average of the
per share closing prices on the NYSE of SEI Common Stock during the 20
consecutive trading days ending on the fifth trading day prior to the special
meeting of the PSP7 Shareholders. If a PSP7 Shareholder does not make a Cash
Election, all of his or her PSP7 Common Stock would be converted into SEI Common
Stock in the Merger. The consideration paid by SEI in the Merger will be reduced
on a pro rata basis by the Required REIT Distributions (estimated at up to $.60
per share). The consideration received by the shareholders of PSP7 in the
Merger, however, along with any Required REIT Distributions, will not be less
than $18.95 per share of PSP7 Common Stock, which amount represents the market
value of PSP7's real estate assets at December 31, 1994 (based on an independent
appraisal) and the estimated net asset value of its other assets at May 31,
1995. PSP7 Shareholders would receive the Required REIT Distributions upon any
liquidation of PSP7, regardless of the Merger. Additional pre-Merger cash
distributions would be made to the PSP7 Shareholders to cause PSP7's estimated
net asset value as of the date of the Merger to be substantially equivalent to
its estimated net asset value as of May 31, 1995. Prior to, and conditioned
upon, the Merger, PSP7 intends to redeem for an aggregate of $2,757,000 in cash
all of the outstanding Series D Shares. The Series D Shares were issued to the
original PSP7 Shareholders. See "Summary -- Series D Shares" and "Redemption of
Series D Shares."
It is estimated that the aggregate consideration (cash and Common
Stock) to be paid by SEI to purchase all of the PSP7 Common Stock in the Merger
and to pay related costs and expenses would be $72,128,000 (assuming no Required
REIT Distributions) and that the total amount of cash that would be required by
SEI to purchase the PSP7 Common Stock from PSP7 Shareholders making Cash
Elections and to pay the costs and expenses of the Merger would be $19,699,000
(assuming maximum Cash Elections). See "-- Determination of Payments to be
Received by PSP7 Shareholders in Connection with the Merger" and "-- Costs of
the Merger." These amounts would be reduced to the extent PSP7 must pay a
Required REIT Distribution.
PSP7's Board of Directors is also proposing that PSP7's Bylaws be
amended to authorize the Merger. See "Amendment to PSP7's Bylaws."
Background
General. The Merger has been initiated and structured by individuals
who are executive officers of SEI and PSP7 and are also affiliated with PSI.
Special committees composed of independent directors of SEI and PSP7 have
reviewed the terms of the Merger, and the Boards of Directors of SEI and PSP7,
based on recommendations of these special committees, which the Boards of
Directors have adopted, and on the opinions of financial advisors in which they
concur, believe that the Merger is fair to the public shareholders of SEI and
PSP7, respectively, and recommend that SEI Shareholders and PSP7 Shareholders,
respectively, vote for the Merger.
PSP7 was organized to succeed, on July 31, 1991, to the business of
Public Storage Properties VII, Ltd., a California limited partnership (the
"Partnership"). The Partnership raised $64,000,000 in a public offering in 1981
primarily to develop and operate mini-warehouses. All of the proceeds from the
offering have been invested. PSI was the sponsor of the Partnership.
The Partnership originally anticipated selling or financing its
properties from seven to ten years after completion of their development, i.e.,
between 1990 and 1993. By 1990, significant changes had taken place in the
financial and real estate markets affecting the timing of any proposed sale or
financing, including: (i) the increased construction of mini-warehouses from
1984 to 1988, which had increased competition, (ii) the general deterioration of
the real estate market (resulting from a variety of factors, including the 1986
changes in tax laws), which had significantly affected property values and
decreased real estate sales activities, (iii) the reduced sources of real estate
financing (resulting from a variety of factors, including adverse developments
in the savings and loan industry) and (iv) the glut in the real estate market
caused by overbuilding and sales of properties acquired by financial
institutions.
<PAGE>
In view of the events affecting the timing of the sale or financing of
the Partnership's properties, PSI, the sponsor of the Partnership, concluded
that the limited partners of the Partnership, as well as the limited partners of
other partnerships sponsored by PSI, should be provided with a more efficient
method of realizing the value of their investment than the secondary market for
limited partnership interests and that some of the disadvantages of operating in
partnership form should be avoided. Accordingly, in 1990, PSI commenced planning
the reorganization of the Partnership and other public limited partnerships
sponsored by PSI into individual corporations taxed as REITs, and, between
December 1990 and November 1991, PSI completed such reorganization of the
Partnership and 17 other public partnerships.
The reorganizations were implemented primarily to provide liquidity to
investors, to avoid the effects of legislation designed to require limited
partnerships to withhold state income taxes from distributions and to simplify
partnership administration. The reorganizations were not designed to alter the
business of the partnerships, but merely the form in which the partnerships were
operated and were not intended to have any material impact on the timing of the
sale or financing of the partnerships' properties.
In response to changes requested by the unaffiliated dealer manager of
the Partnership's original offering of limited partnership interests, PSP7 added
a provision to its bylaws to the effect that by 1995 PSP7 Shareholders would be
presented with a proposal to sell all or substantially all of the properties,
distribute the proceeds from such sale and liquidate PSP7. Later, in settlement
of litigation arising from the reorganizations, this bylaw provision was amended
to expand the terms of the proposal to include a possible financing of the
properties.
The proposed Merger satisfies PSP7's obligation to present a proposal
to PSP7 Shareholders for the sale or financing of its properties.
The PSP7 Special Committee and the PSP7 Board of Directors believe that
the Merger is consistent with this bylaw provision. In the Merger, PSP7 would be
disposing of its properties to SEI for consideration, i.e., SEI Common Stock and
cash (if Cash Elections are made), and PSP7's corporate existence would cease.
Furthermore, the consideration to be received by PSP7 Shareholders in the Merger
is based on the appraised value of PSP7's assets and PSP7 Shareholders have the
right, with respect to up to 20% of the outstanding PSP7 Common Stock (less any
Dissenting Shares), to receive cash in the Merger. PSP7's bylaws do not (i)
define the terms "sale," "liquidation" or "financing," (ii) specify what types
of transactions would satisfy the requirement imposed by PSP7's bylaws or (iii)
preclude sales of PSP7's properties to entities related to PSI, such as SEI.
As described under "Summary -- Recent Developments," the merger between
PSP VIII and PSP VI with SEI have recently been completed. In addition, another
REIT that succeeded to a PSI sponsored partnership in a reorganization has a
similar bylaw provision requiring that its shareholders be presented with a
proposal for the sale or financing of properties. The executive officers of this
REIT (who are executive officers of SEI and are affiliated with PSI), with the
assistance of Wilson and an environmental consultant, are currently evaluating
the feasibility of merging this REIT with SEI.
SEI Board Actions. SEI, which was organized in 1980, has from time to
time taken actions to increase its asset and capital base and increase
diversification. In a regularly scheduled meeting of SEI's Board of Directors in
March 1993 attended by officers of SEI and PSMI and in-house counsel, SEI's
officers (who are affiliated with PSP7 and PSI) reported on the results of a
recently completed public offering of non-convertible preferred stock. The Board
discussed alternatives for raising additional junior equity to facilitate future
offerings of non-convertible preferred stock, including a public offering of
convertible preferred stock and the issuance of SEI Common Stock in a possible
merger with PSP VIII or PSP7 and in August 1994 commenced discussions of a
merger with PSP VI. The mergers with PSP VIII and PSP VI were completed in
September 1994 and February 1995, respectively.
In May 1993, SEI engaged the law firm of Orrick, Herrington & Sutcliffe
for advice regarding the applicability of California legislation relating to
"roll-up transactions" to a proposed merger of SEI and PSP VIII. The law firm
advised that it did not believe the legislation applied to mergers of REITs and
suggested that SEI and PSP VIII seek confirmation from the California Department
of Corporations. In June 1993 the law firm requested such confirmation and in
July 1993 the California Department of Corporations advised that, in its view,
the proposed merger of SEI and PSP VIII did not involve a "roll-up transaction"
within the meaning of the California legislation.
At a telephonic meeting of SEI's Board of Directors which included
officers of SEI and PSMI and in-house counsel, on January 12, 1995, the SEI
Board of Directors appointed a special committee of independent directors,
consisting of Berry Holmes, William C. Baker and Robert J. Abernethy to consider
and make a recommendation to the Board of Directors regarding a proposed merger
with PSP7. Messrs. Holmes and Baker were members of the special committee that
considered the mergers of SEI with PSP VIII and PSP VI. The Board also
authorized payments to Messrs. Holmes, Baker and Harkham of $3,000, $1,500 and
$1,500, respectively, in connection with services as members of the special
committee of PSP VI. The Board discussed the preliminary results of the
environmental investigation of PSP7's properties and the structural condition of
one of PSP7's properties. Following the January 12 board meeting, the SEI
Special Committee held an organizational meeting by telephone, which included
officers of SEI and PSMI and in-house counsel, appointed Mr. Holmes as chairman,
approved Wilson jointly with PSP7 to appraise PSP7's properties, determined to
engage Kindel & Anderson as special counsel to represent and advise the SEI
Special Committee as to its legal obligations in making a recommendation
regarding the proposed merger with PSP7 and approved the engagement of Houlihan
Lokey to render an opinion as to the fairness of the consideration to be paid by
SEI in the Merger to SEI Shareholders, subject to review of the Houlihan Lokey
engagement letter. Wilson, Kindel & Anderson and Houlihan Lokey had acted in
similar capacities in connection with the mergers of SEI with PSP VIII and PSP
VI.
On January 25, 1995, the SEI Special Committee met with representatives
of Wilson, Houlihan Lokey and Kindel & Anderson. Also present at the meeting was
PSI's controller and officers of SEI (who are also affiliated with PSP7 and
PSI). The representative of Wilson delivered the appraisal report and a binder
containing financial information and photographs of the PSP7 properties. He
commented on the methodology used in appraising the PSP7 properties, being both
the income and sales comparison approaches with greater emphasis on the income
approach. The representative stated that Wilson visited all of PSP7's
properties, collected income and expense data on all properties, normalized the
income and expense data, compiled rental rates and occupancy levels of competing
facilities and reviewed comparable sales of self-storage facilities to determine
current market acquisition parameters. The SEI Special Committee and the
representatives of Houlihan Lokey inquired as to the composition of the sales
comparisons, the adjustments made to normalize income and expense and the basis
for the assumptions used in the analysis. The representative of Wilson indicated
that the sales comparisons represented 62 separate self-storage transactions,
some of which involved PSI affiliates. The SEI Special Committee inquired as to
whether SEI, PSP7 or any other party had placed restrictions on Wilson in the
appraisal process. The representative confirmed that no party had imposed any
restriction on Wilson. The officers of SEI reported on the status of the
environmental investigation of PSP7's properties and the structural condition of
one of PSP7's properties.
On January 31, 1995, the SEI Special Committee met with representatives
of Houlihan Lokey and Kindel & Anderson. Also present during portions of the
meeting were a representative of Financial Research Group, and officers of SEI
(who are also affiliated with PSP7 and PSI), in-house counsel, and the
controller of PSI. A considerable amount of time at the beginning of the meeting
was devoted to consideration of environmental and structural matters affecting
the PSP7 properties. Letters from an independent environmental engineering firm,
ENSR Consulting and Engineering ("ENSR"), dated January 31, 1995, were
distributed. ENSR had conducted Phase 1 environmental assessments of all PSP7's
properties, and after follow up activities an environmental uncertainty remained
as to one of its properties, a high-rise, self-storage building. The findings
from a survey of the asbestos-containing materials in both the public and
private areas of the building had been evaluated by ENSR. ENSR estimated that
the remediation cost in the public areas would be between $100,000 and $110,000
and about $60,000 in the private areas. (The cost of replacing the materials
removed was separately estimated at $75,600.) During the meeting, the SEI
Special Committee contacted SEI's environmental counsel with respect to the
suggested remediation. The SEI Special Committee then discussed the potential
effect of seismic retrofitting on the value of the same building. A
representative of John A. Martin & Associates, Inc., structural engineers, was
contacted during the meeting. He commented on the results of his inspection of
the building and the additional work that would be undertaken to assess the
extent of retrofitting that might be required. A representative of Financial
Research Group presented to the SEI Special Committee its analysis of the
<PAGE>
potential impact of the structural condition, which took into account potential
outcomes, estimated costs, probabilities and computation of a net present value.
The result of its analysis was a net present value of the cost of retrofitting
of $988,294. Letters from Financial Research Group dated January 31, 1995 and
John A. Martin Associates, Inc. dated January 31, 1995 were reviewed by the SEI
Special Committee. The SEI Committee, based on the discussion and the current
level of occupancy, determined that the disruption from retrofitting should not
have a material effect on revenues. The representatives of Houlihan Lokey then
advised the SEI Special Committee that they had reviewed the Wilson appraisal,
and expressed the conclusion that the appraisal seemed reasonable. They reviewed
with the SEI Special Committee the SEI stock price and suggested that a floor at
about 7 1/2% below the current market price be considered to minimize the risk
to SEI from fluctuations in the stock price over the next several months. The
SEI Special Committee was advised that Houlihan Lokey was prepared to render its
fairness opinion. A schedule showing the pro forma impact of the Merger was
distributed and the SEI Special Committee considered the dilution of funds from
operations (approximately $1,000,000 or $.025 per share of SEI Common Stock at a
price of SEI Common Stock of $14.00 per share). Consideration was given to
adding a floor to the SEI stock price, and it was determined that a floor of $13
should be used with a ceiling of $16 if required. The terms and conditions of
the proposed Merger were reviewed, including the method for determining the
consideration to be paid and the adjustments to be made to the net asset value.
The SEI Special Committee reviewed a schedule showing the computation of the net
asset value at December 31, 1994, with the adjustments to reach an estimated net
asset value at May 31, 1995. Special counsel commented on the permitted
pre-Merger distributions, including the regular quarterly dividends for PSP7, a
distribution of any excess of the estimated net asset value as of the date of
the Merger over the estimated net asset value at May 31, 1995 and a distribution
to satisfy any REIT requirements. He also commented on the conditions to the
Merger. The SEI Special Committee discussed a 20% limitation for cash elections
by PSP7 Shareholders, in order to preserve SEI's cash for l the acquisition of
interests in other properties and in view of the difficulty and expense of
raising cash in public offerings. At the conclusion of this review and
discussion, the SEI Special Committee voted to recommend to the SEI Board that
the Merger be approved, expressed the belief that the Merger is fair to, and in
the best interests of, the public shareholders of SEI and determined to
recommend that SEI Shareholders vote for the Merger.
On February 1, 1995, following approval of the merger of SEI and PSP VI
by the shareholders of SEI, SEI's Board of Directors met. The meeting was also
attended by officers of SEI and PSMI and in-house counsel. At the beginning of
the meeting, the SEI officers described the terms and conditions of the proposed
Merger, including the method for determining the consideration to be paid, the
method for determining the value of the SEI Common Stock to be issued, and the
redemption of Common Stock Series D. The SEI officers also described certain
environmental remediation requirements and the structural condition of one of
PSP7's properties, the anticipated costs of which were taken into account in the
appraisal. The SEI officers noted that the principal differences in the
structure of the Merger and the structure of the mergers between SEI and PSP
VIII and PSP VI are the limitation of Cash Elections to 20% (instead of 50%) of
the outstanding SEI Common Stock in order to preserve SEI's cash for other
business opportunities and the provisions in the proposed Merger Agreement that
permit SEI and PSP7 to terminate the Merger based on fluctuations in the price
of SEI Common Stock during the measurement period. Mr. Holmes then reported to
the Board the process followed by the SEI Special Committee, including its
meetings with representatives of Houlihan Lokey, Wilson and a financial
<PAGE>
structural consultant and telephone conferences with SEI's environmental counsel
and structural engineer. He noted that during its discussion the SEI Special
Committee focused on several aspects of the proposed Merger, including the
effect of the previously discussed anticipated costs on Wilson's appraisal and
the Merger's dilutive effect on SEI. He noted that the committee believes that
the estimate of these costs, which were taken into account in the appraisal,
were reasonable. The Board discussed that, since the SEI Common Stock was
trading at a multiple of FFO of only approximately nine, at the trading price at
the time of the meeting ($14.00 per share), the Merger would be dilutive to SEI
Shareholders and the Merger would reduce SEI's FFO per share in the short-term.
However, the Merger is consistent with SEI's objectives and is reasonably
designed to enhance long-term shareholder value. The Board discussed the
differences in the structure of the Merger and the structure of the mergers
between SEI and PSP VIII and PSP VI referenced above and whether SEI should
consider the disposition of the property referenced above after the Merger. Mr.
Holmes then reported the SEI 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 of SEI and (iii) determination to
recommend that SEI Shareholders vote for the Merger. Based on the foregoing
recommendations of the SEI Special Committee, the SEI Board of Directors
expressed the belief that the Merger is fair to, and in the best interests of,
the public shareholders of SEI, approved the Merger on the terms set forth in
the Merger Agreement and determined to recommend that SEI Shareholders vote for
the Merger.
At a regularly scheduled meeting of the SEI Board of Directors attended
by officers of SEI and in-house counsel on April 13, 1995, the timing of the
Merger was discussed.
PSP7 Board Actions. In August 1993 and August 1994, the boards of
directors of PSP VIII and PSP VI, respectively, which have the same directors as
PSP7, commenced discussions of mergers with SEI. The mergers of PSP VIII and PSP
VI with SEI were completed in September 1994 and February 1995, respectively.
At a regularly scheduled meeting of PSP7's Board of Directors on May
10, 1994, attended by officers of PSP7 (who are affiliated with SEI and PSI) and
PSMI and in-house counsel, the officers of PSP7 reported that, with the
assistance of Wilson and an environmental consultant, they were currently
evaluating the feasibility of merging PSP7 (and PSP VI) with SEI.
At a telephonic meeting of PSP7's Board of Directors which included
officers of PSP7 and in-house counsel on January 11, 1995, the PSP7 Board of
Directors appointed a special committee of independent directors, consisting of
Vern O. Curtis and Jack D. Steele, to consider and make a recommendation to the
Board of Directors regarding a proposed merger with SEI. Mr. Curtis and Mr.
Steele were the members of the special committee that considered the mergers of
PSP VIII and PSP VI with SEI. The Board discussed a proposed limitation on Cash
Elections, SEI's leverage, the preliminary results of the environmental
investigation of PSP7's properties and the structural condition of one of PSP7's
properties. Following the board meeting, the PSP7 Special Committee held an
organizational meeting by telephone, which included officers of SEI and PSMI and
in-house counsel, approved Wilson, on behalf of both PSP7 and SEI, to appraise
PSP7's properties, determined to engage Hogan & Hartson L.L.P. as special
counsel to represent and advise the PSP7 Special Committee as to its legal
obligations in making a recommendation regarding the proposed merger with PSP7
and approved the engagement of Stanger to render an opinion as to the fairness,
from a financial point of view, of the consideration to be received by PSP7
Shareholders in the Merger. Wilson, Hogan & Hartson L.L.P. and Stanger had acted
in similar capacities in connection with the mergers of PSP VIII and PSP VI with
SEI.
<PAGE>
On February 1, 1995, the PSP7 Special Committee held a meeting, which
included officers of PSP7, in-house counsel and a representative of Wilson with
representatives of Stanger participating by telephone. First, the officers of
PSP7 described the mechanics of arriving at the value per share of PSP7 Common
Stock, including the treatment of the Series D Shares, by referencing a
valuation analysis, and described a pending litigation. Next Wilson and the
officers of PSP7 described the adjustments taken into account in the appraisal
resulting from environmental remediation requirements and the structural
condition of one of PSP7's properties, including the history of the property,
the status of pending litigation, the methodology used in computing the
adjustment, the experience of the consultants engaged to assist in determining
the adjustment, the extent of required environmental remediation and the
difficulty of selling this property alone. The officers of PSP7 noted the
receipt of four letters dated January 31, 1995 -- one from John A. Martin &
Associates, structural engineers, one from Financial Research Group, financial
consultants, and two from ENSR Consulting and Engineering, environmental
consultants. The Stanger representatives presented Stanger's analysis, which
included the following items: (1) they briefly reviewed Stanger's recent
experience relating to mini-warehouses; (2) they noted that Stanger had
performed a similar analysis in connection with the mergers of PSP VIII and PSP
VI with SEI, including a review of the portfolio appraisals prepared by Wilson;
(3) they noted that Stanger reviewed the appraisal methodologies utilized; (4)
they noted that Stanger reviewed the capitalization rates utilized in the
portfolio appraisals, which were approximately 10.0% based on net operating
income generated for the 12 months prior to the appraisal date before taking
into account the structural and environmental costs and approximately 10.2%
after taking into account such costs; (5) they noted that Stanger reviewed the
capitalization rates on SEI transactions during the prior 12 months, which
capitalization rates averaged 10.2%, and reviewed capitalization rates currently
cited by industry sources for mini-warehouse transactions, and concluded that
the capitalization rates used in Wilson's appraisal were consistent with
transactions in the market; (6) they noted that Stanger reviewed a liquidation
analysis, including assumptions (liquidation of PSP7's properties on a
property-by-property basis) prepared by PSP7 based on certain information
provided by Wilson and that the projected consideration per share resulting from
liquidation under that analysis was less than the consideration offered in the
Merger; (7) they indicated that Stanger noted Wilson's assumption that no
premium is appropriate for the bulk acquisition of an assembled portfolio, that
Stanger reviewed information on recent bulk purchases by SEI or PSI or
affiliates in which the capitalization rates averaged 10.3%, and discussed bulk
transactions with industry sources, and, based upon that review, Stanger
concluded that Wilson's assumption was consistent with transactions in the
market; (8) they noted that Stanger reviewed a going concern analysis, based on
analyses and five-year and 10-year projections provided by PSP7, under scenarios
in which the PSP7 Common Stock would be liquidated into the securities markets
or PSP7's properties would be liquidated after 10 years at their residual value
(from Wilson's appraisal), that Stanger reviewed the FFO multiples used in the
various scenarios regarding the sale of the PSP7 Common Stock, and they noted
that, under the lower multiple, the estimated value per share on a going concern
basis was approximately 10% lower than the consideration offered in the Merger
and that, under the higher multiple, the estimated value per share on a going
concern basis was approximately 1% higher; (9) they noted that Stanger had
reviewed the historical market prices of PSP7's Common Stock and compared them
with the consideration offered in the Merger, and they noted that the
consideration offered in the Merger, reduced by estimated retained earnings
between the date of the appraisal and May 31, 1995, represents an approximately
10.9% premium over the then current price of the PSP7 Common Stock and a 15.6%,
18.5%, 15.4% and 16.6% premium over its average closing price for the prior 20
days, 60 days, 180 days and 360 days, respectively; and (10) they indicated
that, subject to receipt of certain documents, Stanger was prepared to render
its opinion that the consideration to be received in the Merger is fair to the
public shareholders of PSP7 from a financial point of view. The Wilson
representative reported that representatives of Wilson had visited all of PSP7's
38 properties and that the methodology used in appraising PSP7's properties was
the same as that used in appraising the properties of PSP VIII and PSP VI, and
confirmed that no party had imposed restrictions on Wilson. The officers of PSP7
<PAGE>
discussed alternatives to the Merger by referencing a comparative analysis. A
financing of the properties is not a feasible alternative because REITs, like
PSP7, are required to distribute substantially all taxable income and, as a
result of the age of PSP7's properties, within the next several years, PSP7 will
have no depreciation deductions available to reduce PSP7's taxable income.
Therefore, if it were to refinance its properties, PSP7 would not have
sufficient funds available to meet the REIT distribution requirements after
making principal amortization payments. The PSP7 Special Committee discussed the
limitation on Cash Elections to 20% of the outstanding PSP7 Common Stock. The
PSP7 Special Committee discussed the liquidity of the SEI Common Stock to be
received by PSP7 Shareholders in the Merger, although it was noted that the
market price of the SEI Common Stock may fluctuate and could decrease following
issuance to the PSP7 Shareholders. In response to a question from the PSP7
Special Committee, the representatives of Stanger noted that the limitation on
Cash Elections would not detract from Stanger's evaluation that the
consideration to be received in the Merger is fair to the public shareholders of
PSP7 from a financial point of view. Following the discussion, the PSP7 Special
Committee expressed the belief that the Merger is fair to, and in the best
interests of, public shareholders of PSP7 and determined to recommend to the
Board that the Merger be approved and to recommend that PSP7 Shareholders vote
for the Merger. See "-- Comparison of Consideration to be Received in the Merger
to Other Alternatives."
On February 1, 1995, following approval of the merger of PSP VI and SEI
by the shareholders of PSP VI, the PSP7 Board of Directors held a meeting
attended by officers of PSP7 and in-house counsel. At the meeting the board
discussed the provisions in the proposed Merger Agreement that permit SEI and
PSP7 to terminate the Merger based on fluctuations in the price of SEI Common
Stock during the measurement period. The PSP7 Special Committee recommended to
the Board that the Merger be approved, expressed the belief that the Merger is
fair to, and in the best interests of, public shareholders of PSP7 and
determined to recommend that PSP7 Shareholders vote for the Merger. Based on the
foregoing recommendations of the PSP7 Special Committee, which were adopted by
the PSP7 Board of Directors, the PSP7 Board of Directors expressed the belief
that the Merger is fair to, and in the best interests of, public shareholders of
PSP7, approved the Merger on the terms set forth in the Merger Agreement,
determined to recommend that PSP7 Shareholders vote for the Merger and approved
the filing with the Commission of preliminary proxy materials. The Board of
Directors of PSP VI (which is the same as the PSP7 Board of Directors)
authorized payments of $3,000 to each of Mr. Curtis and Mr. Steele in connection
with services as members of the special committee of PSP VI.
On March 22, 1995, the PSP7 Board of Directors held a telephonic
meeting attended by officers of PSP7 and in-house counsel. The officers of PSP7
reminded the Board that PSP7 had the right to terminate the Merger Agreement if
the price of SEI Common Stock during the valuation period exceeds $16.00 per
share. The officers of PSP7 noted that, following SEI's mid-March 1995 public
announcement of the proposed transaction described under "Summary -Recent
Developments -- Proposed Restructuring," the price of SEI Common Stock exceeds
$16.00 per share. It was noted that the proposed transaction would be expected
to change the public's perception of SEI. It was also noted that the Merger was
designed to provide PSP7 Shareholders with the opportunity to receive SEI Common
Stock with a market value equal to PSP7's net assets. After discussion, in view
of the foregoing, the PSP7 Board of Directors determined to waive its right to
terminate the Merger Agreement if the price of SEI Common Stock during the
valuation period exceeds $16.00 per share and to proceed with the Merger upon
satisfaction of the other conditions to the Merger Agreement.
<PAGE>
Public Announcement of Merger and Commission Filings. On February 2,
1995, SEI and PSP7 signed the Merger Agreement and publicly announced the
general terms of the Merger.
On February 15, 1995, PSP7 filed preliminary proxy materials with the
Commission. On March 28, 1995, PSP7 received comments from the Commission staff
on the preliminary proxy materials, and on April 5, 1995, PSP7 filed amended
proxy materials with the Commission. On April 18, 1995, PSP7 received comments
from the Commission staff on the amended preliminary proxy materials.
On April 27, 1995, SEI filed a registration statement with the
Commission, which was declared effective on ______, 1995.
Reasons for the Merger and Timing
The reasons for the decision of the PSP7 Special Committee and the PSP7
Board of Directors to recommend the Merger include:
* PSP7's bylaws include a provision that by 1995 PSP7 Shareholders
be presented with a proposal to sell all of PSP7's properties,
distribute the proceeds from such sale and liquidate PSP7. The proposed
Merger satisfies this obligation. See "-- Background."
* The Merger provides PSP7 Shareholders with the choice of either
(A) converting their investment in PSP7 into an investment in SEI,
which generally owns the same type of properties as PSP7, on a tax-free
basis (assuming the Merger is a tax-free reorganization) and which has,
and intends to continue, to acquire additional properties or (B) with
respect to up to 20% of the outstanding PSP7 Common Stock (less any
Dissenting Shares), receiving in cash the amounts they would receive if
PSP7's properties were sold at their appraised values and PSP7 were
liquidated (without any reduction for real estate commissions and other
sales expenses). In view of PSI's intention to receive SEI Common Stock
in the Merger, if all other PSP7 Shareholders made Cash Elections, a
PSP7 Shareholder who made a Cash Election would receive approximately
28% of his or her consideration in the form of cash. See "--
Recommendation to PSP7 Shareholders and Fairness Analysis."
* The PSP7 Special Committee and the PSP7 Board of Directors
believe that the Merger is more advantageous to PSP7 Shareholders than
any of the alternatives. See "-- Alternatives to Merger" and "--
Recommendation to PSP7 Shareholders and Fairness Analysis."
* SEI has agreed to merge with PSP7 at this time, subject to
approval by SEI Shareholders and PSP7 Shareholders and certain other
conditions. See "-- The Merger Agreement -- Conditions to Consummation
of the Merger."
<PAGE>
Alternatives to Merger
The following is a brief discussion of the benefits and disadvantages
of alternatives to the Merger that could have been pursued by the PSP7 Board of
Directors.
Liquidation
Benefits of Liquidation. An alternative to the Merger would be to
liquidate PSP7's assets, distribute the net liquidation proceeds to PSP7
Shareholders in proportion to their share ownership and thereafter dissolve
PSP7. Through such liquidation, PSP7 would provide for a final wrapping up of
PSP7 Shareholders' interest in PSP7. PSP7 Shareholders would receive cash
liquidation proceeds (as they will as to a portion of their investment if they
make a Cash Election). Liquidating PSP7 would be consistent with PSP7's bylaws
that provide that PSP7 Shareholders be presented, during 1995, with a proposal
for the sale or financing of its properties, and, in the case of a sale, the
liquidation of PSP7. If PSP7 liquidated its assets through asset sales to
unaffiliated third parties, PSP7 Shareholders would not need to rely upon real
estate portfolio appraisals of the fair market value of PSP7's real estate
assets. Such assets would be valued through arms' length negotiations between
PSP7 and prospective purchasers.
Disadvantages of Liquidation. Since PSP7's predecessor, the
Partnership, was organized, significant changes have taken place in the
financial and real estate markets that have had a materially adverse impact upon
the value of commercial real estate. These changes have included, among others,
the following: (i) the increased construction of mini-warehouses from 1984 to
1988, which has increased competition, (ii) the general e deterioration of the
real estate market (resulting from a variety of factors, including the 1986
changes in tax e laws), which has significantly affected property values and
decreased real estate sales activities, (iii) the e reduced sources of real
estate financing (resulting from a variety of factors, including adverse
developments in the savings and loan industry) and (iv) the glut in the real
estate market caused by overbuilding and sales of properties acquired by
financial institutions. Although conditions have recently been improving, these
developments have resulted in a reduced market for the sale and financing of
commercial real estate, making this, in the view of the PSP7 Board of Directors
and the PSP7 Special Committee, a less than optimal time to liquidate PSP7's
real estate assets. For many PSP7 Shareholders, the proceeds available for
reinvestment after liquidation would be significantly reduced as a result of
federal and state income taxes (as they would be in the case of a Cash Election)
and real estate commissions and other sales expenses (estimated at $3,685,000 or
$.97 per share of PSP7 Common Stock).
PSP7 Shareholders should recognize that appraisals are opinions as of
the date specified and are subject to certain assumptions and may not represent
the true worth or realizable value of PSP7's properties. There can be no
assurance that if PSP7's properties were sold, they would be sold at the
appraised values; the sales prices might be higher or lower than the appraised
values.
Liquidation Procedures. Like a merger, a liquidation of PSP7 would
require approval by the holders of a majority of the PSP7 Common Stock. Upon the
dissolution of PSP7, PSP7's properties would be sold and any funds remaining
after payment of PSP7's debts and liabilities would be distributed to PSP7
Shareholders in respect of their shares. As holders of approximately 28% of the
shares of PSP7 Common Stock, PSI and its affiliates would receive approximately
28% of the available funds in the liquidation. The process for liquidating
PSP7's assets would in large measure be within the control of PSP7's Board of
Directors. Liquidation may be accomplished through a series of separate
transactions with different purchasers or as a part of a multi-property
transaction.
The PSP7 Board of Directors may engage real estate brokers, investment
bankers, financial consultants and others to assist with the disposition of
PSP7's assets. These persons may assist with the identification of prospective
purchasers, arrangements for asset financing, and assistance with the structure
of the transaction. The PSP7 Board of Directors, as fiduciaries to PSP7
Shareholders, remain responsible for determining the terms and conditions of the
transaction. One of the more significant considerations for the PSP7 Board of
Directors would be the decision whether to insist upon payment in full upon sale
of a property or to accept a portion of the sale price at closing and the
balance through installment payments. Acceptance of a sale proposal providing
for deferred payments would extend the life of PSP7 until receipt of those
amounts by PSP7 and their distribution to PSP7 Shareholders. Such arrangements
would also expose PSP7 to the risk that deferred payments might not be collected
in full and that PSP7 might be forced to foreclose on any collateral given to
secure payment of the deferred obligations. It is not possible to predict the
time period that would be required to liquidate PSP7 because it would depend on
market conditions at the time of liquidation.
<PAGE>
Continued Operation of PSP7
Benefits of Continuation. Another alternative to the Merger would be to
continue PSP7 in accordance with its existing business plan, with PSP7 remaining
as a separate legal entity and with its own assets and liabilities. Nothing
requires the liquidation or merger of PSP7 at this time, and PSP7 is operating
profitably and does not need to liquidate or reorganize to satisfy debt
obligations or other current liabilities or to avert defaults, foreclosures or
other adverse business developments.
There are indications of improvement in the mini-warehouse markets. As
the pace of new mini-warehouse development has slowed, there has been a
corresponding improvement in the financial performance of existing properties.
This improvement is evidenced by the performance of PSP7's mini-warehouses. For
example, from 1992 to 1994, occupancy per square foot increased from an average
of 87% to 89%, and realized monthly rents from an average of $.56 per square
foot to $.61 per square foot. Assuming that there is no substantial new
development of mini-warehouses in the foreseeable future, the PSP7 Board of
Directors anticipates that the financial performance from existing facilities
will continue to improve. Should such improvements continue, the value of PSP7's
properties would be expected to increase. See "Description of PSP7's
Properties."
A number of advantages are expected to arise from the continued
operation of PSP7. PSP7 Shareholders should continue to receive regular
quarterly distributions of net cash flow arising from operations and the sale or
refinancing of PSP7's assets. Given the currently improving market conditions,
the PSP7 Board of Directors and the PSP7 Special Committee believe that the
level of these distributions may improve. Continuing PSP7 affords PSP7
Shareholders with the opportunity to participate in any future appreciation in
PSP7's properties and allows the PSP7 Board of Directors to select the most
opportune time for disposing of PSP7's assets. In addition, the decision to
continue PSP7, if selected, means that there would be no change in the nature of
PSP7 Shareholders' investment. This option avoids whatever disadvantages might
be deemed inherent in the Merger. See "Risk Factors and Material Considerations"
for discussion of various risks associated with the Merger.
Disadvantages of Continuation. The primary disadvantage with continuing
PSP7 is the failure of that strategy to secure the benefits that the PSP7 Board
of Directors expects to result from the Merger. These benefits are highlighted
under "-- Potential Advantages of the Merger." The Merger affords PSP7
Shareholders increased liquidity. In addition, because PSP7 is not authorized to
issue new securities or to reinvest sale or financing proceeds, PSP7 is less
able to take advantage of new real estate investment opportunities. In contrast,
SEI has a substantially larger, more diversified, investment portfolio that
reduces the risks associated with any particular assets or group of assets and
increases SEI's ability to access capital markets for new capital investments.
Amendment of PSP7's Bylaws
Benefits of Bylaw Amendment. Another alternative to the Merger would be
an amendment to PSP7's bylaws to remove the restrictions on investment of cash
flow and on the issuance of securities by PSP7. If approved, such action would
provide some of the advantages of the Merger. PSP7 could take advantage of new
real estate opportunities through the reinvestment of cash flow and the
investment of proceeds from the issuance of securities.
Disadvantages of Bylaw Amendment. The PSP7 Board of Directors and the
PSP7 Special Committee believe that such an amendment has disadvantages. It is
believed that PSP7 Shareholders could better take advantage through SEI than
through PSP7 of the current market for REIT securities for the following
reasons. First, SEI has a larger capital base. At December 31, 1994, PSP7 had
total shareholders' equity of $37,235,000 compared with SEI's total
shareholders' equity of $587,786,000 (including preferred stock) and
$365,011,000 (without preferred stock). Second, the market for SEI Common Stock
should be more liquid than the market for PSP7 Common Stock. PSP7 has 3,806,491
shares of Common Stock traded on the AMEX and, during the 12 months ended
December 31, 1994, the average daily trading volume of PSP7 Common Stock was
1,394 shares. In comparison, SEI has approximately 32,000,000 shares of Common
Stock traded on the NYSE and, during the 12 months ended December 31, 1994, the
average daily trading volume of SEI Common Stock was 39,106 shares (24,421
shares if February and November 1994, during which SEI was engaged in public
offerings of Common Stock, are excluded). Third, SEI has broader geographic
diversification than PSP7. At December 31, 1994, PSP7 owned 38 properties in 12
states and SEI owned equity interests (directly, as well as through general and
limited partnership interests) in 402 properties in 37 states. For additional
information on the properties owned by PSP7 and SEI, see "-- Comparison of
Ownership of Shares in PSP7 and SEI -- Properties," "Description of PSP7's
Properties" and "Description of SEI's Properties."
<PAGE>
No Solicitation of Other Proposals
Neither the PSP7 Board of Directors nor the PSP7 Special Committee
solicited any other proposal for the acquisition of PSP7 or its properties. The
PSP7 Board of Directors agreed to the Merger Agreement, which includes a
provision against soliciting other officers to buy, because it believes that the
potential advantages to PSP7 Shareholders described under "-- Potential
Advantages of the Merger" are more likely to be achieved through the Merger than
in a transaction with another party. In particular, assuming the Merger
qualifies as a tax-free reorganization, no taxable gain or loss will be
recognized by PSP7 Shareholders who exchange their PSP7 Common Stock solely for
SEI Common Stock. PSP7's final REIT distribution generally will be taxable to
all PSP7 Shareholders as ordinary income to the extent of PSP7's earnings and
profits. PSI has little, and many other PSP7 Shareholders have relatively low
(approximately $12.90 for most original PSP7 Shareholders), tax basis in their
PSP7 Common Stock. Accordingly, for many PSP7 Shareholders, the proceeds
available for reinvestment after liquidation would be significantly reduced as a
result of federal and state income taxes (as they would be in the case of a Cash
Election) and real estate commissions and other sales expenses (estimated at
$3,685,000 or $.97 per share of PSP7 Common Stock). However, another proposal
could have been for a higher price and possibly also structured as a merger
qualifying as a tax-free reorganization. Under California law, most acquisitions
of PSP7 or its properties would require approval by the PSP7 Shareholders. PSI
and its affiliates own approximately 28% of the PSP7 Common Stock.
Determination of Payments to be Received by PSP7 Shareholders
in Connection with the Merger
In connection with the Merger PSP7 Shareholders will receive a value of
$18.95 (less the amount of any Required REIT Distributions) per share of PSP7
Common Stock in cash, SEI Common Stock, or a combination of the two, calculated
as follows:
1. The market value (not book value) of PSP7's real estate assets has
been determined by Wilson, showing such values as of December 31, 1994. In
valuing PSP7's real estate assets, Wilson considered the applicability of all
three commonly recognized approaches to valuation: the cost approach, the income
approach and the sales comparison approach. Wilson did not consider the cost
approach to be applicable to PSP7's properties. Wilson reconciled the values
indicated from the sales comparison and income approaches to arrive at a final
valuation conclusion. Wilson gave primary emphasis to the income approach. The
resulting effective implied capitalization rate for PSP7's portfolio of real
estate assets based on property operations (before non-recurring charges) for
the 12 months ended December 31, 1994 averaged 10% before taking into account
the structural and environmental costs described under "-- Real Estate Appraisal
by Wilson" and 10.2% after taking into account such costs. Wilson's valuation is
as of December 31, 1994 in the context of the information available on that
date. See "-- Real Estate Portfolio Appraisal by Wilson."
2. PSP7's net asset value has been computed as (a) the market value of
PSP7's real estate assets as of December 31, 1994 ($74,300,000) plus (b) the
estimated book value of PSP7's non-real estate assets as of May 31, 1995 (a
total of $2,983,000) less (c) PSP7's estimated liabilities as of May 31, 1995 (a
total of $2,398,000).
3. PSP7's net asset value per share of PSP7 Common Stock was calculated
at $18.95 by reducing PSP7's net asset value (as computed in 1 and 2 above,
$74,885,000) by amounts paid in redemption of the Series D Shares 's
($2,757,000) and dividing the difference ($72,128,000) by the number of
outstanding shares of PSP7 Common Stock (3,806,491).
4. Upon completion of the Merger, each share of PSP7 Common Stock
(other than shares held by PSP7 Shareholders who have properly exercised
Dissenters' Rights) would be converted into the right to receive $18.95 in cash
(with respect to up to 20% of the outstanding PSP7 Common Stock, less any
Dissenting Shares), subject to reduction as described below, or that number of
shares of SEI Common Stock determined by dividing $18.95, subject to reduction
as described below, by the average of the closing prices on the NYSE of SEI
Common Stock during the 20 consecutive trading days ending on the fifth trading
day prior to the meeting of PSP7 Shareholders. Pre-Merger cash distributions
would be made to PSP7 Shareholders to cause PSP7's estimated net asset value as
of the date of the Merger to be substantially equivalent to its estimated net
asset value as of May 31, 1995. The consideration paid by SEI in the Merger will
be reduced on a pro rata basis by the amount of any Required REIT Distributions.
However, the consideration received by PSP7 Shareholders in the Merger along
with the Required REIT Distributions (which will be paid in cash) will not be
less than $18.95.
<PAGE>
The following tables set forth the calculation of the payments to be
paid to PSP7 Shareholders and the allocation of SEI shares in the Merger between
PSI (and its affiliates) and the other PSP7 Shareholders.
Computation of Payments
<TABLE>
<CAPTION>
Net book Appraised Book value PSP7's Redemption PSP7's net Payments
value of market of PSP7's net asset of asset value received in
PSP7's real value of other net value(1) Series D per share connection with
estate PSP7's assets(1) Shares(3) of PSP7 Merger per
portfolio(1) real estate Common original $1,000
portfolio(2) Stock investment in the
(1) Partnership(4)(5)
<S> <C> <C> <C> <C> <C> <C>
$38,556,000 $74,300,000 $585,000 $74,885,000 $(2,757,000) $18.95 $991
- ---------------
<FN>
(1) Estimated as of May 31, 1995. Does not reflect the effect of Required
REIT Distributions, estimated at up to $.60 per share or $2,280,000 in
the aggregate. PSP7 Shareholders would receive the Required REIT
Distributions upon any liquidation of PSP7, regardless of the Merger.
(2) As of December 31, 1994.
(3) Under PSP7's articles of incorporation, holders of shares of the Series
D Shares are entitled to a liquidation preference in the aggregate
amount of $2,757,000. See "Summary -- Series D Shares" and "Redemption
of Series D Shares."
(4) Does not include quarterly cash distributions to PSP7 Shareholders or to
limited partners of the Partnership. PSP7 was organized to succeed, on
July 31, 1991, to the business of the Partnership, which completed its
offering of limited partnership interests in 1981. PSP7's capital
structure was designed to reflect the economic rights of the limited and
general partners in the Partnership. The market price of SEI Common
Stock may fluctuate following establishment of the number of shares to
be issued to PSP7 Shareholders in the Merger and prior to issuance and
could decrease as a result of increased selling activity following
issuance of shares in the Merger and other factors.
(5) Includes amounts paid in redemption of the Series D Shares. The Series D
Shares were issued to the original PSP7 Shareholders, who were limited
partners in the Partnership, based on their respective dates of
admission to the Partnership.
</TABLE>
Allocation of Shares
<TABLE>
<CAPTION>
Maximum Percentage Number of Percentage of Maximum
Number of of PSP7 SEI Shares PSP7 Shares Number of
SEI Shares Common Stock to be issued owned by SEI Shares
to be currently to PSI and other to be
issued in the owned by affiliates Shareholders(1) issued to
Merger(1)(2) PSI and in the other PSP7
affiliates(1)(3) Merger(1)(2) Shareholders(1)(2)(4)
<S> <C> <C> <C> <C>
4,306,149 28.1% 1,208,380 71.9% 3,097,769
- ---------------
<FN>
(1) Assumes no Cash Elections and no Required REIT Distributions.
(2) Assumes issue price of the SEI Common Stock of $16.75 per share.
(3) Represents the percentage of shares deemed beneficially owned by PSI and
its affiliates. The interests of PSI and its affiliates in the
Partnership were converted into an interest in PSP7 in the
Reorganization. See "-- Background."
(4) Assumes that none of the PSP7 Shareholders make Cash Elections. PSI and
its affiliates, who have little tax basis in their PSP7 Common Stock,
have informed SEI that they do not intend to make Cash Elections. If the
maximum Cash Elections are made, 2,236,539 shares of SEI Common Stock
would be issued to the other PSP7 Shareholders and 1,208,380 shares of
SEI Common Stock would be issued to PSI and affiliates, representing
approximately 65% and 35%, respectively, of the shares of SEI Common
Stock that would be issued in the Merger.
<PAGE>
Potential Advantages of the Merger
The Merger would provide SEI with a larger asset and capital base. The
principal potential benefits to PSP7 Shareholders who receive SEI Common Stock
include the following:
Acquisition of Additional Properties. The primary business activity of
PSP7 is operating the properties originally developed by its predecessor. PSP7
has not raised additional capital, and PSP7's articles of incorporation and
bylaws restrict PSP7's ability to reinvest cash flow in new properties. SEI, on
the other hand, has expanded, and is expected to continue to expand, its asset
and capital base. SEI is also permitted to borrow money to fund new
acquisitions. Accordingly, PSP7 Shareholders who receive SEI Common Stock in the
Merger will be investors in an entity that has grown, and is expected to
continue to grow, as new investments are made.
Increased Liquidity. PSP7 has 3,806,491 shares of Common Stock traded
on the AMEX and, during the 12 months ended December 31, 1994, the average daily
trading volume of PSP7 Common Stock was 1,394 shares. In comparison, SEI has
approximately 33,000,000 shares of Common Stock traded on the NYSE and, during
the 12 months ended December 31, 1994, the average daily trading volume of SEI
Common Stock was 39,106 shares (24,421 shares if February and November 1994,
during which SEI was engaged in public offerings of Common Stock, are excluded).
Accordingly, the investment in SEI of PSP7 Shareholders who receive SEI Common
Stock in the Merger should have greater liquidity than the current investment in
PSP7 of these same shareholders of PSP7.
Possible Tax-Free Treatment. The Merger is intended to qualify as a
tax-free reorganization. Assuming such qualification, no taxable gain or loss
will be recognized in connection with the Merger by PSP7 Shareholders who
exchange their PSP7 Common Stock solely for SEI Common Stock. However, the
Required REIT Distributions will be taxable to all PSP7 Shareholders as ordinary
income. PSI and its affiliates, who have little tax basis in their PSP7 Common
Stock, have advised SEI and PSP7 that they intend to exchange their PSP7 Common
Stock solely for SEI Common Stock. See "Certain Federal Income Tax Matters --
The Merger."
Recommendation to PSP7 Shareholders and Fairness Analysis
Conclusions. Based upon an analysis of the Merger, the PSP7 Special
Committee and the PSP7 Board of Directors have concluded (i) that the terms of
the Merger are fair to PSP7 Shareholders, (ii) after comparing the potential
benefits and detriments of the Merger with alternatives, that the Merger is more
advantageous to PSP7 Shareholders than such alternatives and (iii) that PSP7
Shareholders should vote for the Merger.
Although the PSP7 Board of Directors and the PSP7 Special Committee
reasonably believe the terms of the Merger are fair to PSP7 Shareholders and
recommend that PSP7 Shareholders vote for the Merger, affiliates of PSI are
members of the Boards of Directors of both PSP7 and SEI, and PSI has other
significant relationships with both PSP7 and SEI and conflicts of interest with
respect to the Merger. The Merger has been initiated and structured by
individuals who are executive officers of SEI and PSP7 and who are also
affiliated with PSI. The PSP7 Special Committee, composed of independent
directors, has reviewed the terms of the Merger. See "Summary -- Relationships"
and "Conflicts of Interest."
Material Factors Underlying Conclusions of PSP7 Special Committee and
PSP7 Board of Directors. The following is a discussion of the material factors
underlying the conclusions of the PSP7 Special Committee and the PSP7 Board of
Directors. The PSP7 Board of Directors and the PSP7 Special Committee have not
quantified the relative importance of these factors.
1. PSP7 Bylaw Provision. PSP7's bylaws require a proposal for the sale
or financing of PSP7's properties by 1995. As discussed under "-- Background,"
the PSP7 Special Committee and the PSP7 Board of Directors believe that the
proposed Merger satisfies this requirement and that, as discussed in paragraph 2
below, the form and amount of consideration offered to PSP7 Shareholders
constitute fair value in respect of their shares of PSP7 Common Stock. The PSP7
Special Committee and the PSP7 Board of Directors recognize that if PSP7 were
liquidated through asset sales to third parties PSP7 Shareholders would not need
to rely upon real estate portfolio appraisals to estimate the fair market value
of PSP7's real estate assets. Such assets would be valued through arms' length
negotiations between PSP7 and the prospective purchasers.
2. Consideration Offered. The PSP7 Board of Directors and the PSP7
Special Committee believe that (i) the proposal that the consideration to be
paid to PSP7 Shareholders in the Merger be based on the value of PSP7's assets
is reasonable and consistent with PSP7's bylaws, (ii) the net asset value of
PSP7 represents a fair estimate of the value of its assets, net of liabilities,
and constitutes a reasonable basis for determining the consideration to be
received by PSP7 Shareholders, and (iii) the division of the consideration to be
<PAGE>
received by PSP7 Shareholders between PSI and its affiliates and the public
shareholders of PSP7 is fair because it is based on their proportionate
respective share ownerships of PSP7. There was no negotiation regarding the
basis for determining the consideration to be paid to PSP7 Shareholders in the
Merger or the division of the consideration between PSI and its affiliates and
the public shareholders of PSP7. See "-- Background."
3. Choice as to Form of Consideration. The Merger provides PSP7
Shareholders with the choice of either (A) converting their investment in PSP7
into an investment in SEI, which generally owns the same type of properties as
PSP7, on a tax-free basis (assuming the Merger is a tax-free reorganization and
except that the Required REIT Distributions will be taxable as ordinary income)
and which has acquired, and is expected to continue to acquire, additional
properties or (B) with respect to up to 20% of the outstanding PSP7 Common Stock
(less any Dissenting Shares), receiving in cash the amounts they would receive
if PSP7's properties were sold at their appraised values and PSP7 were
liquidated (without any reduction for real estate commissions and other sales
expenses). Although Cash Elections may not be made with respect to more than 20%
of the outstanding PSP7 Common Stock, PSI and its affiliates have informed PSP7
that they intend to receive SEI Common Stock in the Merger. Accordingly, Cash
Elections may be made with respect to approximately 28% of the outstanding PSP7
Common Stock held by the public shareholders of PSP7.
4. Independent Portfolio Appraisals and Fairness Opinion. The
conclusions of the PSP7 Special Committee and the PSP7 Board of Directors are
partially based upon the portfolio appraisals prepared by Wilson and Stanger's
fairness opinion. The PSP7 Special Committee and the PSP7 Board of Directors
attributed significant weight to these items, which they believe support their
position, and do not know of any factors that are reasonably likely to detract
from the conclusions in Wilson's portfolio appraisals and Stanger's fairness
opinion. The PSP7 Special Committee and the PSP7 Board of Directors believe that
the engagement of Wilson and Stanger to provide the portfolio appraisals and the
fairness opinion, respectively, assisted the PSP7 Special Committee and the PSP7
Board of Directors in the fulfillment of their duties to PSP7 Shareholders,
notwithstanding that each of these parties has received fees in connection with
their engagements and may receive fees in the future. See "-- Real Estate
Portfolio Appraisal by Wilson" and "-- Fairness Opinion from Stanger."
5. Voting Procedures and Dissenters' Rights. The PSP7 Special Committee
and the PSP7 Board of Directors believe that the voting process and the rights
of dissenting shareholders of PSP7 support their conclusions as to the Merger.
The Merger is required to be approved by a majority of the outstanding shares of
PSP7 Common Stock, as well as by a majority of the shares of PSP7 Common Stock
voting at the meeting of PSP7 Shareholders not held by PSI and its affiliates.
PSP7 Shareholders will have the right to exercise Dissenters' Rights, although
the PSP7 Special Committee and the PSP7 Board of Directors recognize that these
rights may be exercised only if demands for payment are filed with respect to 5%
or more of the outstanding shares of PSP7 Common Stock.
6. Comparison of Payments to be Received at the Time of the Merger to
Other Alternatives. The payments to be received at the time of the Merger of
$18.95 per share of PSP7 Common Stock compares favorably with (A) the trading
price of the PSP7 Common Stock immediately prior to the first announcement of
the Merger ($16.88) and during other periods, (B) a range of estimated going
concern value per share of PSP7 Common Stock ($16.66 to $19.09), (C) an
estimated liquidation value per share of PSP7 Common Stock ($17.98) and (D) the
book value per share of PSP7 Common Stock ($9.78). The PSP7 Board of Directors
and the PSP7 Special Committee recognize that this comparison is subject to
significant assumptions, qualifications and limitations. See "-- Comparison of
Consideration to be Received in the Merger to Other Alternatives."
7. Lower Level of Distributions After the Merger. Depending on the
market price of the SEI Common Stock during the period in which the number of
shares to be issued in the Merger is established, the level of distributions to
PSP7 Shareholders who receive SEI Common Stock in the Merger may be lower after
the Merger than before. Based on a market price of SEI Common Stock of $16.75
and the current regular quarterly distribution rate for SEI ($.22 per share) and
PSP7 ($.28 per share), PSP7 Shareholders would receive approximately $.03 (11%)
less in regular quarterly distributions per share of PSP7 Common Stock after the
Merger than before and approximately $.01 less per share in regular quarterly
distributions for each $.70 (4%) increase in the market price of SEI Common
Stock above $16.75.
8. Benefits to PSI. The Merger has been initiated and structured by
individuals who are executive officers of SEI and PSP7 and who are also
affiliated with PSI. Independent representatives were not engaged to negotiate
these arrangements on behalf of the public shareholders of PSP7, and the terms
of the Merger are not the result of arms' length negotiations. The Merger
affords certain benefits to PSI and its affiliates, including receipt of
approximately 28% of the consideration paid in the Merger and an increase in the
Advisory Fee.
<PAGE>
The PSP7 Special Committee and the PSP7 Board of Directors do not
believe that the benefits to PSI and its affiliates in the Merger and the
absence of independent representatives to negotiate the Merger undermine the
fairness of the Merger because the consideration to be received by PSI and its
affiliates in the Merger is in proportion to their ownership interest in PSP7
and the increase in the Advisory Fee is in accordance with the terms of the
existing Advisory Contract. The Merger has been reviewed and approved by the
PSP7 Special Committee, comprised of independent directors of PSP7. Based upon
the use of an independent appraisal firm, the Stanger fairness opinion and the
participation of the PSP7 Special Committee, the PSP7 Board of Directors and the
PSP7 Special Committee considered that the engagement of such independent
representatives was not necessary or cost effective.
Comparison of Benefits and Detriments. Prior to concluding that the
Merger should be proposed to PSP7 Shareholders, the PSP7 Board of Directors and
the PSP7 Special Committee considered several alternatives to the Merger. The
alternatives considered by the PSP7 Board of Directors and the PSP7 Special
Committee were liquidation of PSP7, continuation of PSP7 and an amendment to
PSP7's organizational documents. In order to determine whether the Merger or one
of its alternatives would be more advantageous to PSP7 Shareholders, the PSP7
Board of Directors and the PSP7 Special Committee compared the potential
benefits and detriments of the Merger with the potential benefits and detriments
of the alternatives. See "-- Alternatives to Merger" for a discussion of the
potential benefits and detriments of each of these alternatives. Each of the
Merger and its alternatives offers potential benefits and suffers from potential
detriments not possessed by the other alternatives. Set forth below are the
conclusions of PSP7 Board of Directors and the PSP7 Special Committee regarding
the comparison of the Merger to its alternatives.
(i) The PSP7 Board of Directors and the PSP7 Special Committee favor
the Merger over liquidation of PSP7 because they believe that (A) the
Merger permits PSP7 Shareholders to take advantage of the current
markets for REIT securities which more fully reflect the underlying net
asset value of many REITs that grow, like SEI, (B) PSP7 should not be
liquidated at this time (other than through the Merger that provides
PSP7 Shareholders who receive SEI Common Stock with greater liquidity
and increased geographic diversification, while retaining an interest
in a similar type of properties which may increase in value) and (C)
the Merger provides PSP7 Shareholders, with respect to up to 20% of the
outstanding PSP7 Common Stock (less any Dissenting Shares), with the
opportunity, if they so elect, to receive in cash the amounts they
would receive if PSP7's properties were sold at their appraised values
and PSP7 were liquidated (without any reduction for real estate
commissions and other sales expenses).
(ii) The PSP7 Board of Directors and the PSP7 Special Committee have
concluded that the continued operation of PSP7 is not as attractive an
alternative as the Merger because the Merger affords PSP7 Shareholders
increased liquidity and the opportunity to participate in SEI, an
entity that, unlike PSP7, has grown, and is expected to continue to
grow, as new investments are made. However, the PSP7 Board of Directors
and the PSP7 Special Committee recognize that the level of
distributions to PSP7 Shareholders who receive SEI Common Stock may be
reduced. See "- Recommendation to PSP7 Shareholders - 7.Lower Level of
Distributions After the Merger."
(iii) The PSP7 Board of Directors and the PSP7 Special Committee
believe that PSP7 Shareholders would have better opportunities to
participate in the current markets for equity securities of REITs
through SEI than through PSP7, even if PSP7's bylaws were amended to
remove restrictions on reinvestment of cash flow and on the issuance of
securities by PSP7, because of SEI's larger capital base, greater
liquidity and broader geographic diversification.
Based upon this comparison of the potential benefits and detriments of
the Merger with its alternatives, the PSP7 Board of Directors and the PSP7
Special Committee have concluded that the Merger is more attractive to PSP7
Shareholders than any of the alternatives.
Comparison of Consideration to be Received in the Merger to Other Alternatives
General. To assist PSP7 Shareholders in evaluating the Merger, the PSP7
Board of Directors and the PSP7 Special Committee compared the consideration to
be received in the Merger, i.e., a value of $18.95 per share (less the amount of
any Required REIT Distributions) of PSP7 Common Stock against: (i) the trading
price of the PSP7 Common Stock on the AMEX; (ii) estimates of the value of PSP7
on a liquidation basis assuming that its assets were sold at their appraised
fair market value and the net proceeds distributed to the PSP7 Shareholders in
accordance with their share ownership in PSP7; and (iii) estimates of the value
of PSP7 on a going-concern basis assuming that PSP7 were to continue as a
stand-alone entity and its securities sold at the end of either a five-year or
ten-year holding period or its assets sold at the end of a ten-year holding
period. Due to the uncertainty in establishing these values, the PSP7 Board of
Directors and the PSP7 Special Committee have established a range of estimated
values for certain of the alternatives, representing a high and low estimated
value for the potential consideration. Since the value of the consideration for
alternatives to the Merger are dependent upon varying market conditions, no
assurance can be given that the range of estimated values indicated establishes
the highest or lowest possible values. However, the PSP7 Board of Directors and
the PSP7 Special Committee believe that analyzing the alternatives in terms of
ranges of estimated value, based on currently available market data and, where
appropriate, reasonable assumptions made in good faith, establishes a reasonable
framework for comparing alternatives.
The results of this comparative analysis are summarized in the
following table. PSP7 Shareholders should bear in mind that the estimated values
assigned to the alternate forms of consideration are based on a variety of
assumptions that have been made by PSP7. These assumptions relate, among other
things, to: projections as to PSP7's future income, expenses, cash flow and
other significant financial matters; the capitalization rates that will be used
by prospective buyers when PSP7's assets are liquidated; and, appropriate
discount rates to apply to expected cash flows in computing the present value of
the cash flows that may be received with respect to shares of PSP7 Common Stock.
In addition, these estimates are based upon certain information available to
PSP7 at the time the estimates were computed, and no assurance can be given that
the same conditions analyzed by PSP7 in arriving at the estimates of value would
exist at the time of the Merger. The assumptions used have been determined by
the PSP7 Board of Directors in good faith, and, where appropriate, are based
upon current and historical information regarding PSP7 and current real estate
markets, and have been highlighted below to the extent critical to the
conclusions of the PSP7 Board of Directors and the PSP7 Special Committee. While
PSP7 believes it has a reasonable basis for the assumptions selected, the
assumptions employed by PSP7 as to future events may not reflect the actual
experience of PSP7. The estimated values of alternate forms of consideration
would have been different had PSP7 made different assumptions, and such
differences could be material.
No assurance can be given that such consideration would be realized
through any of the designated alternatives, and PSP7 Shareholders should
carefully consider the following discussions to understand the assumptions,
qualifications and limitations inherent in the presented valuations.
</TABLE>
<TABLE>
<CAPTION>
Estimated Liquidation Value
Payments in Merger per Share Estimated Going Concern per Share of PSP7 Common
of PSP7 Common Stock Trading Prices of PSP7 Value per Share of PSP7 Stock at Appraised Value (4)
Common Stock (2) Common Stock (3)
<S> <C> <C> <C> <C> <C>
$18.95(1) $15.00 $16.88 $16.66 $19.09 $17.98
- ---------------
<FN>
(1) Based on PSP7's net asset value consisting of the independently
appraised market value of PSP7's real estate portfolio as of December
31, 1994 and estimated book value of PSP7's other net assets as of May
31, 1995 and assuming no Required REIT Distributions. See "--
Determination of Payments to be Received by PSP7 Shareholders in
Connection with the Merger."
(2) High and low sales prices on the AMEX composite tape for the fourth
quarter of 1994, the last full calendar quarter prior to the
announcement of the Merger. On February 1, 1995, the closing price was
$16.88. See "-- Trading Prices of PSP7 Common Stock."
(3) High and low of three methods of estimating going concern value. Based
upon a number of assumptions regarding the future net operating income
and distributions of PSP7 and the date of PSP7's liquidation. See "--
Going-Concern Value."
(4) Based upon Wilson's real estate appraisal, less estimated expenses of
liquidation. See "-- Liquidation Values."
</TABLE>
Trading Prices of PSP7 Common Stock. The data in the table on the
trading price of PSP7 Common Stock shows the high and low sales prices on the
AMEX composite tape for the fourth quarter of 1994 (the last full calendar
quarter prior to February 1, 1995, the last trading day prior to first public
announcement of the terms of the Merger): $16.88 and $15.00, respectively.
<PAGE>
The PSP7 Board of Directors and the PSP7 Special Committee also
considered that the trading price for PSP7 Common Stock averaged $16.20, $15.80,
$16.23 and $16.07 for the respective 20-day, 60-day, 180-day and 360-day periods
preceding the announcement of the proposed Merger, that the closing price for
PSP7 Common Stock on the last trading day prior to the first announcement of the
proposed Merger was $16.88, and that the highest closing price for PSP7 Common
Stock preceding the announcement of the proposed Merger was $17.88. The PSP7
Board of Directors also considered that the consideration offered in the Merger
adjusted for interim earnings of approximately $.22 per share (which amount
represents increases in current net assets projected to be generated and
retained between the date of the Appraisal and May 31, 1995) represents a
premium of 15.6%, 18.5%, 15.4%, 16.6%, 11% and 7% over the 20-day, 60-day,
180-day and 360-day average closing prices and the closing price on the last
trading day prior to the announcement of the proposed Merger and the highest
closing price recorded for PSP7 Common Stock, respectively.
Going-Concern Value. The PSP7 Board of Directors and the PSP7 Special
Committee have estimated the going-concern value of PSP7 by analyzing projected
cash flows and distributions assuming that PSP7 were operated as an independent
stand-alone entity and its securities or assets sold at the end of the holding
period under three scenarios: Scenario #1 -- a five-year holding period, with
shares of PSP7 liquidated in securities markets at an FFO multiple ranging from
8.5 to 10.5; Scenario #2 -- a 10-year holding period, with shares of PSP7
liquidated in securities markets at an FFO multiple ranging from 8.5 to 10.5;
and Scenario #3 -- a 10-year holding period with the property portfolio of PSP7
liquidated in private real estate markets at the terminal value projected by the
appraiser in the portfolio appraisal and the net proceeds resulting from the
liquidation of the properties and other remaining assets of PSP7 used to redeem
the Series D Shares and paid out to PSP7 Shareholders in a liquidation
distribution. Dividends and sale proceeds per share of PSP7 Common Stock were
discounted in the projections at a rate of 13%.
Scenario #3 of the going-concern analysis assumes all of PSP7's
properties are sold in a single transaction after a 10-year holding period.
Should the assets be liquidated over time, even at prices equal to those
projected, distributions to PSP7 Shareholders out of PSP7's cash flow from
operations might be reduced because PSP7's relatively fixed costs, such as
general and administrative expenses, are not proportionately reduced with the
liquidation of assets. However, for simplification purposes, the sales are
assumed to occur concurrently.
The estimated value of PSP7 on a going-concern basis is not intended to
reflect the distributions payable to PSP7 Shareholders if PSP7's assets were to
be sold at their current fair market values.
Liquidation Values. Since one of the alternatives available to the PSP7
Board of Directors is to proceed with a liquidation of PSP7, and the
corresponding distribution of the net liquidation proceeds to PSP7 Shareholders,
the PSP7 Board of Directors and the PSP7 Special Committee have estimated the
liquidation value of PSP7 assuming that its real estate portfolio were sold at
its fair market value, based upon the Wilson real estate portfolio appraisals
(excluding for these purposes any pre-Merger distributions that might be made to
PSP7 Shareholders). This alternative assumes non-real estate assets are sold at
their book value (such assets, excluding cash, representing less than 1% of the
value of PSP7), PSP7 incurs selling costs at the time of liquidation of
$3,684,000 (state and local transfer taxes, real estate commissions and legal
and other closing costs), redemption of the Series D Shares, and the remaining
net liquidation proceeds are distributed among PSP7 Shareholders in proportion
to their share ownership.
The liquidation analysis assumes all of PSP7's portfolio is sold in a
single transaction at its portfolio appraised value. Should the assets be
liquidated over time, even at prices equal to those projected, distributions to
PSP7 Shareholders out of PSP7's cash flow from operations might be reduced
because PSP7's relatively fixed costs, such as general and administrative
expenses, are not proportionately reduced with the liquidation of assets.
However, for simplification purposes, the sales are assumed to occur
concurrently.
Applying these procedures, the PSP7 Board of Directors and the PSP7
Special Committee arrived at the liquidation value set forth in the table. The
real estate portfolio appraisals set forth, subject to the specified
assumptions, limitations and qualifications, Wilson's professional opinion as to
the market value of PSP7's real estate portfolios as of December 31, 1994. While
the portfolio appraisals are not necessarily indicative of the price at which
the assets would sell, market value generally seeks to estimate the prices at
which the real estate assets would sell if disposed of in an arms' length
transaction between a willing buyer and a willing seller, each having access to
relevant information regarding the historical revenues and expenses of the
properties. The real estate portfolio appraisals assume that PSP7's assets are
disposed of in an orderly manner and are not sold in forced or distressed sales
where sellers might be expected to dispose of their interests at substantial
discounts to their actual fair market value. See "-- Real Estate Appraisal by
Wilson."
<PAGE>
Distribution Comparison. The PSP7 Board of Directors and the PSP7
Special Committee have considered the potential impact of the Merger upon
distributions that would be made to PSP7 Shareholders who exchange their PSP7
Common Stock for SEI Common Stock. Based on a market price of SEI Common Stock
of $16.75 per share and the current regular quarterly distribution rate for SEI
($.22 per share) and PSP7 ($.28 per share), PSP7 Shareholders would receive
approximately $.03 (11%) less in regular quarterly distributions per share of
PSP7 Common Stock after the Merger than before and approximately $.01 less per
share in regular quarterly distributions for each $.70 (4%) increase in the
market price of SEI Common Stock above $16.75. This estimate is based upon the
actual distributions made by PSP7 and SEI (not upon the amounts that might have
been distributed by them based upon their cash flow from operations).
In evaluating this estimate, PSP7 Shareholders should bear in mind that
a number of factors affect the level of distributions. These factors include the
distributable income generated by operations, the principal and interest
payments on debt, if any, capital expenditure levels (in excess of normal
expenditures for ongoing maintenance and repairs), and the corporate policy with
respect to cash distributions. Generally, both SEI and PSP7 are currently
distributing less than their current cash flow from operations. A comparison of
the current distribution levels of SEI and PSP7 does not show how the Merger
might affect a PSP7 Shareholder's distribution level over a number of years.
Recommendation to SEI Shareholders and Fairness Analysis
Conclusions. Based upon an analysis of the Merger, the SEI Special
Committee and the SEI Board of Directors have concluded (i) that the terms of
the Merger, when considered as a whole, are fair to SEI Shareholders and (ii)
that SEI Shareholders should vote for the Merger.
Although the SEI Board of Directors and the SEI Special Committee
recommend that SEI Shareholders vote for the Merger, affiliates of PSI are
members of the Boards of Directors of both PSP7 and SEI and PSI has other
significant relationships with both PSP7 and SEI and conflicts of interest with
respect to the Merger. The Merger has been initiated and structured by
individuals who are executive officers of SEI and PSP7 and who are affiliated
with PSI. The SEI Special Committee composed of independent directors has
reviewed the terms of the Merger. See "Summary -- Relationships" and "Conflicts
of Interest."
Material Factors Underlying Conclusions of SEI Special Committee and
SEI Board of Directors. The following is a discussion of the material factors
underlying the conclusions of the SEI Special Committee and the SEI Board of
Directors. The SEI Board of Directors and the SEI Special Committee are unable
to quantify the relative importance of these factors.
1. Consideration Offered. The SEI Board of Directors and the SEI
Special Committee believe that (i) the proposal that the consideration to be
paid to PSP7 in the Merger be based on the appraised value of PSP7's real estate
assets is reasonable and (ii) the net asset value of PSP7 represents a fair
estimate of the value of its assets, net of liabilities, and constitutes a
reasonable basis for determining the consideration to be paid to PSP7
Shareholders. There was no negotiation regarding the basis for determining the
consideration to be paid to PSP7 Shareholders in the Merger. See "--
Background."
2. Independent Portfolio Appraisals and Fairness Opinion. The
conclusions of the SEI Special Committee and the SEI Board of Directors are
partially based upon the portfolio appraisals prepared by Wilson and Houlihan
Lokey's fairness opinion. The SEI Special Committee and the SEI Board of
Directors attributed significant weight to these items, which they believe
support their position, and do not know of any factors that are reasonably
likely to detract from the conclusions in Wilson's portfolio appraisals and
Houlihan Lokey's fairness opinion. The SEI Special Committee and the SEI Board
of Directors believe that the engagement of Wilson and Houlihan Lokey to provide
the portfolio appraisals and the fairness opinion, respectively, assisted the
SEI Special Committee and the SEI Board of Directors in the fulfillment of their
duties to SEI Shareholders, notwithstanding that each of these parties has
received fees in connection with their engagements and may receive fees in the
future. See "-- Real Estate Appraisal by Wilson" and "-- Fairness Opinion from
Houlihan Lokey."
3. Voting Procedures. The Merger is required to be approved by a
majority of the shares of SEI Common Stock voting, although the SEI Board of
Directors and the SEI Special Committee recognize that PSI and its affiliates
own approximately 25% of the outstanding SEI Common Stock.
4. Benefits of the Merger. The SEI Board of Directors and the SEI
Special Committee considered the following benefits of the Merger: (i) the
acquisition of PSP7's properties and the issuance of SEI Common Stock in the
Merger will provide SEI with a larger asset and capital base, which should
enhance SEI's access to capital by facilitating the issuance of additional
senior securities and Common Stock, (ii) PSP7's properties represent a large
portfolio of high quality mature mini-warehouses similar to those being acquired
by SEI in other transactions and the transaction will increase the number of
SEI's wholly owned properties (as of December 31, 1994) from 147 to 185, (iii)
since PSP7's properties were developed by PSI and are currently operated by PSMI
and PSCP, the Adviser is knowledgeable about them, and (iv) the Merger provides
an efficient mechanism for the issuance of capital stock because there is no
delay between the issuance and the investment of the proceeds therefrom and the
expenses of the Merger are expected to be less than the expenses that would be
incurred in the issuance of securities by SEI and the investment of the proceeds
therefrom.
5. Risks of the Merger. The SEI Board of Directors and SEI Special
Committee recognized the following business risks of the Merger: (i) a potential
decline in value of PSP7's properties after the date of the portfolio appraisal
and (ii) potential environmental liabilities related to the properties.
6. Premium Over Market Price of PSP7 Common Stock. SEI is paying a
premium over the trading price of the PSP7 Common Stock, but the SEI Board of
Directors and the SEI Special Committee believe that the average capitalization
rate used in the real estate portfolio appraisal appears reasonable and,
accordingly, they do not believe that SEI is paying a premium over the fair
market value of PSP7's properties. For a comparison of the consideration to be
paid in the Merger with the trading price of the PSP7 Common Stock, see "--
Comparison of Consideration to be Received in the Merger to Other Alternatives
- -- Trading Prices of PSP7 Common Stock."
7. Benefits to PSI. The Merger has been initiated and structured by
individuals who are executive officers of SEI and PSP7 and who are also
affiliated with PSI. Independent representatives were not engaged to negotiate
these arrangements on behalf of the public shareholders of SEI, and the terms of
the Merger are not the result of arms' length negotiations. The Merger affords
certain benefits to PSI and its affiliates, including receipt of approximately
28% of the consideration paid in the Merger and an increase in the Advisory Fee
and Disposition Fee.
The SEI Special Committee and the SEI Board of Directors do not believe
that the benefits to PSI and its affiliates in the Merger and the absence of
independent representatives to negotiate the Merger undermine the fairness of
the Merger because the consideration to be received by PSI and its affiliates in
the Merger is in proportion to their share ownership in PSP7 and the increase in
the Advisory Fee is in accordance with the terms of the existing Advisory
Contract. The Merger has been reviewed and approved by the SEI Special
Committee, comprised of independent directors of SEI. Based upon the use of an
independent appraisal firm, the Houlihan Lokey fairness opinion and the
participation of the SEI Special Committee, the SEI Board of Directors and the
SEI Special Committee considered that the engagement of such independent
representatives was not necessary or cost effective.
Real Estate Portfolio Appraisal by Wilson
Wilson was engaged by PSP7 and SEI to appraise the real estate
portfolio of PSP7 and has delivered a written report of its analysis, based upon
the review, analysis, scope and limitations described therein, as to the fair
market value of PSP7's portfolio of properties as of December 31, 1994 (the
"Appraisal"). PSP7 and SEI selected Wilson to provide the Appraisal because of
its experience and reputation in connection with appraising mini-warehouses, its
familiarity with PSP7's properties and its appraisal of the properties of PSP
VIII and PSP VI in connection with their mergers with SEI. The consideration to
be paid by SEI to PSP7 Shareholders in the Merger is based on the Appraisal. The
Appraisal, which contains a description of the assumptions and qualifications
made, matters considered and limitations on the review and analysis, is set
forth as Appendix B and should be read in its entirety. Certain of the material
assumptions, qualifications and limitations to the Appraisal are described
below.
Experience of Wilson. Wilson was founded by Charles R. Wilson in 1976,
who has specialized in the appraisal of mini-warehouses since 1972. Wilson has
conducted real estate appraisals on a variety of property types and uses
throughout the United States for owners, banks and thrift organizations,
insurance companies and other financial institutions. Wilson appraised over 100
mini-warehouses in 1994.
Mr. Wilson founded Self Storage Data Services, Inc. ("SSDS") in 1993
for the purpose of tracking and publishing income and expense trends in the
mini-warehouse industry. The SSDS data base now contains over 23,600 facilities
nationwide. Mr. Wilson, recognized as a leading authority on mini-warehouses,
has spoken extensively and has written several articles on the subject of
mini-warehouses.
<PAGE>
Summary of Methodology. At the request of PSP7 and SEI, Wilson
evaluated PSP7's portfolio of real estate. In valuing the properties, Wilson
considered the applicability of all three commonly recognized approaches to
value: the cost approach, the income approach and the sales comparison approach.
The type and age of a property, market conditions and the quantity and quality
of data affect the applicability of each approach in a specific appraisal
situation. Wilson did not consider the cost approach to be applicable to PSP7's
properties.
The income approach estimates a property's capacity to produce income
through an analysis of the rental market, operating expenses and net income. Net
income may then be processed into a value estimate through either (or a
combination) of two methods: direct capitalization or yield capitalization,
i.e., a discounted cash flow analysis.
The sales comparison approach is based upon the principle of
substitution, i.e., that an informed purchaser would pay no more for a property
than the cost of acquiring an existing property with the same utility. The sales
comparison approach establishes what typical investors in the marketplace are
willing to pay for comparable properties.
The cost approach is based on the estimated market value of the site as
if vacant plus the depreciated replacement cost of the existing improvements.
The cost approach was not considered appropriate since (a) today's investors do
not rely upon the cost approach in making investment decisions, and (b) the
necessity of estimating total accrued depreciation in buildings the age of
PSP7's properties diminishes the validity of this approach.
While the Appraisal was prepared for PSP7's entire portfolio, Wilson
analyzed the individual properties by (a) reviewing each property's previous
four years' operating statements, (b) reviewing information submitted to the
appraiser by on-site managers which included competitive rental and occupancy
surveys, subject facility descriptions, area trends and other factors, which
were verified by Wilson through telephone calls and other sources; (c)
developing information from a variety of sources about market conditions for
each individual property that included population, employment and housing trends
within the neighborhood; and (d) considering published data on median income and
expense benchmarks on comparable facilities.
To determine any significant differences in quality among the various
properties, Wilson considered such variables as property income growth patterns
and potential, quality of location and construction, tenant appeal, property
appearance, security and potential competition.
Wilson also interviewed management personnel responsible for PSP7's
properties to discuss competitive conditions, area economic trends affecting the
properties, historical operating revenues and expenses, and occupancy rates in
competitive facilities. These interviews included ascertaining information on
items of deferred maintenance, planned capital improvements and other factors
affecting the physical condition of the properties. Wilson also reviewed surveys
of local self storage markets conducted by management. Representatives of Wilson
performed site inspections on all 38 properties during May to July, 1994. Most
of the properties had been appraised by Wilson previously.
Wilson then determined the value of each property in the portfolio
relying heavily upon a discounted cash flow analysis in the income approach. The
results were verified using a direct capitalization technique applying overall
capitalization rates derived directly from the marketplace. To define the
occupancy and rental rates and expense escalators to be used in developing cash
flow projections, Wilson reviewed the acquisition criteria and projection
parameters in use in the marketplace by major mini-warehouse investors, owners
and operators, appraisers and financing sources. In addition, Wilson reviewed
other published information concerning acquisition criteria in use by property
investors during the fourth quarter of 1994. Further, Wilson interviewed various
sources in local markets to identify sales of mini-warehouses within the past 24
months in order to derive certain valuation indicators. Sources for data
concerning such transactions included local appraisers, property owners, real
estate brokers, and others. Wilson also reviewed information compiled by PSI
identifying sales and acquisitions of mini-warehouses in local markets.
In applying a discounted cash flow analysis, projections of cash flow
from each property (assuming no indebtedness) were developed for a ten-year
period ending July 31, 2004. The first year's scheduled gross income was
estimated taking into consideration each property's current rent structure and
the rental rates in competitive facilities. Also included in the income estimate
were trends in ancillary income from late fees and rental concessions. Wilson
then made an analysis of each subject's occupancy history, took into
consideration the occupancy level of competitive facilities and estimated an
occupancy level for each property in the portfolio.
Estimated expenses were based upon each property's actual operating
history as well as the actual experience of several other mini-warehouses within
each given market from the SSDS data base. Expenses were deducted from effective
gross income to derive a net operating income for each property. Consideration
was given to and adjustment made to reflect capital expenditures and replacement
reserves.
<PAGE>
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
2.6% to 4.0% depending upon property and local market conditions. Wilson then
used terminal capitalization rates that ranged from 10.5% to 10.75% to
capitalize each property's eleventh year net income into a residual value at the
end of the holding period, assuming normal cost of disposing of the properties.
The ten yearly cash flows were then discounted to present worth using discount
rates ranging from 11.5% to 13.5%, again depending upon local market and
property conditions. Properties having retail/office space were discounted using
rates at the lower end of the indicated range to reflect market parameters. The
indicated value based upon the income approach is $75,970,000 (before taking
into account the costs described below).
In applying the sales comparison approach, Wilson analyzed over 100
mini-warehouses which were sold during the past 24 months. Using a regression
analysis, a statistically significant correlation was derived between each
property's net income and its sales price per square foot. Based upon the
portfolio's net income per square foot, using the regression analysis, the
indicated value by the sales comparison approach ranged between $66,000,000 to
$84,000,000 (before taking into account the costs described below).
Structural and Environmental Costs. In arriving at a market value
estimate of PSP7's portfolio of properties, Wilson took into account the
anticipated cost of seismic related structural retrofitting and asbestos
abatement to be completed at one of PSP7's properties. Based upon interviews
with investors, institutional advisors and others, Wilson concluded that the
portfolio valuation should take into account the uncertainty of expected future
costs associated with this property because this property could not readily be
marketed without an adjustment to price to take into account these anticipated
costs.
Seismic Structural Retrofitting - Based on the analysis and
recommendations of John A. Martin & Associates, structural engineers, and
Financial Research Group ("FRG"), financial consultants, which were engaged by
PSP7 and SEI, the future cost of seismic structural retrofitting was estimated.
It was assumed that the retrofitting would be performed in 1998 and that the
estimated cost of the retrofitting in 1998 would be $1,625,000. In estimating
this cost, FRG applied a probability analysis that took into account the
likelihood of certain work being performed. This amount was discounted back to
approximately $990,000 in present dollars. Wilson consulted with certain
institutional investors as to the methodology used in measuring the risk of
uncertain events such as anticipated structural retrofitting and found this
methodology to be commonly accepted.
Asbestos Abatement - ENSR Consulting and Engineering ("ENSR"),
engineering consultants, was engaged by PSP7 and SEI to conduct environmental
assessments of PSP7's properties. ENSR located asbestos at one of PSP7's
properties and estimated the cost of asbestos abatement at approximately
$250,000.
Based on the foregoing, Wilson estimated the aggregate cost (on a
present value basis) of the anticipated seismic related retrofitting and the
asbestos abatement at approximately $1,240,000. Wilson's estimate of the market
value of PSP7's properties takes into account these anticipated costs.
Conclusions as to Value. Wilson reconciled the values indicated from
the direct sales comparison and income approaches to arrive at a final valuation
conclusion. Wilson gave primary emphasis to the income approach, an emphasis
deemed appropriate based on acquisition criteria currently employed in the
mini-warehouse market. The resulting effective implied capitalization rate
averaged approximately 10.0% (before taking into account the costs described
above) and 10.2% (after taking into account such costs) for the portfolio based
on reported property operations (before non-recurring expenses) during the 12
months ended December 31, 1994.
Based on the valuation methodology described above, after taking into
account the costs described above, Wilson assigned a market value of $74,300,000
to PSP7's portfolio of real property assets.
Assumptions, Limitations and Qualifications of the Appraisal. The
Appraisal reflects Wilson's valuation of PSP7's real estate portfolio as of
December 31, 1994 in the context of the information available on such date.
Events occurring after December 31, 1994 and before the closing of the Merger
could affect the properties or assumptions used in preparing the Appraisal.
Wilson has no obligation to update the Appraisal on the basis of subsequent
events; however, Wilson has informed PSP7 and SEI that, as of the date of this
Joint Proxy Statement and Prospectus, Wilson is not aware of any event or change
in conditions, since December 31, 1994, that may have caused a material change
in the value of PSP7's portfolio of real estate since that date.
<PAGE>
The Appraisal is subject to certain general and specific assumptions
and limiting conditions and is in conformity with the Departure Provision of
Uniform Standards of Professional Appraisal Practice. Among other limitations,
the Appraisal (i) did not consider the effect of easements, restrictions and
other similar items on the value of PSP7's properties, (ii) assumed that PSP7's
properties comply with local building codes and zoning ordinances, (iii) did not
involve the physical inspections of competing properties and (iv) did not
involve a comparison of PSP7's properties' commercial leases with other
properties' commercial leases. See Appendix B for a discussion of the specific
assumptions, limitations and qualifications of the Appraisal.
Compensation and Material Relationships. Wilson is being paid a fee of
$87,750 for preparation of the Appraisal, which fee will include reimbursement
for all of Wilson's related out-of-pocket expenses. Wilson is also entitled to
indemnification against certain liabilities. The fee was negotiated with Wilson
and 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 PSI and its affiliates, including
appraisals of the properties of PSP VIII and PSP VI in connection with their
mergers with SEI, and is expected to continue to prepare appraisals for them.
Fairness Opinion from Stanger
Stanger was engaged by PSP7 through the PSP7 Special Committee to
deliver a written summary of its determination as to the fairness of the
consideration to be received in the Merger, from a financial point of view, to
the public shareholders of PSP7. The full text of the opinion, which contains a
description of the assumptions and qualifications made, matters considered and
limitations on the review and opinion, is set forth in Appendix C to this Joint
Proxy Statement and Prospectus and should be read in its entirety. Certain of
the material assumptions, qualifications and limitations to the fairness opinion
are set forth below. The summary set forth below does not purport to be a
complete description of the analyses to be used by Stanger in rendering the
fairness opinion. Arriving at a fairness opinion is a complex analytical process
not necessarily susceptible to partial analysis or amenable to summary
description.
Except for certain assumptions, described more fully below, which PSP7
advised Stanger that it would be reasonable to make, PSP7 imposed no conditions
or limitations on the scope of Stanger's investigation or with respect to the
methods and procedures to be followed in rendering the fairness opinion. PSP7
has agreed to indemnify Stanger against certain liabilities arising out of its
engagement to prepare and deliver the fairness opinion.
Experience of Stanger. Stanger, founded in 1978, has provided
information, research, investment banking and consulting services to clients
throughout the United States, including major New York Stock Exchange firms and
insurance companies and over 70 companies engaged in the management and
operation of partnerships and real estate investment trusts. The investment
banking activities of Stanger include financial advisory services, asset and
securities valuations, industry and company research and analysis, litigation
support and expert witness services, and due diligence investigations in
connection with both publicly registered and privately placed securities
transactions.
Stanger, as part of its investment banking business, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers, acquisitions, reorganizations and for estate, tax, corporate and other
purposes. In particular, Stanger's valuation practice principally involves
partnerships, partnership securities and the assets typically owned through
partnerships including, but not limited to, oil and gas reserves, real estate,
cable television systems and equipment leasing assets. Stanger was selected
because of its experience and national reputation in connection with real estate
investment trusts, partnerships and real estate assets and its services in
connection with the mergers of PSP VIII and PSP VI with SEI.
Summary of Materials Considered. In the course of Stanger's analysis to
render its opinion regarding the Merger, Stanger: (i) reviewed this Joint Proxy
Statement and Prospectus; (ii) reviewed PSP7's and SEI's annual reports on Form
10-K for the four fiscal years ending December 31, 1991, 1992, 1993 and 1994,
and the pro forma financial statements contained in this Joint Proxy Statement
and Prospectus; (iii) reviewed the Appraisal and discussed with management of
PSP7 and Wilson the methodologies and procedures employed in preparing the
Appraisal; (iv) reviewed information regarding purchases and sales of
self-storage properties by SEI or any affiliated entities over the past two
years, and other information available relating to acquisition criteria for
self-storage properties; (v) reviewed estimates prepared by PSP7, and based in
part on the Appraisal, of the current net liquidation value per common share of
PSP7's assets and projections of cash flow from operations, dividend
distributions and going-concern values for PSP7; (vi) discussed with certain
members of management of PSP7 and SEI conditions in self-storage property
markets, conditions in the market for sales/acquisitions of properties similar
to those owned by PSP7, current and projected operations and performance, and
the financial condition and future prospects of PSP7 and SEI; (vii) reviewed
historical market prices, trading volume and dividends for PSP7 and SEI Common
Stock; and (viii) conducted other studies, analyses, inquiries and
investigations as Stanger deemed appropriate.
<PAGE>
Summary of Analysis. The following is a summary of certain financial
and comparative analyses reviewed by Stanger in connection with and in support
of its fairness opinion. The summary of the opinion and analysis of Stanger set
forth in this Joint Proxy and Prospectus is qualified in its entirety by
reference to the full text of such opinion.
Review of Appraisal. In preparing its opinion, Stanger relied upon the
Appraisal of PSP7's portfolio of properties which was prepared as of December
31, 1994 by Wilson, an independent appraiser. Stanger reviewed the Appraisal
rendered by Wilson, reviewed a sample of supporting documentation for the
Appraisal and discussed with Wilson its experience and qualifications and the
appraisal methodologies utilized.
Stanger observed that the Appraisal was certified by a Member of the
Appraisal Institute and was conducted utilizing the income approach to
valuation, applying the discounted cash flow methods to establish a value for
each individual property and the sales comparison approach. In addition, Stanger
observed that in the course of conducting the Appraisal, Wilson confirmed
certain parameters utilized based upon interviews conducted by Wilson of major
buyers, owners and managers of self-storage properties, and data collected by
Wilson relating to capitalization rates, effective gross income multiples, and
net operating income per square foot for actual sales transactions in the
marketplace for mini-warehouse properties which occurred during the 24 months
preceding the date of the Appraisal.
Stanger observed that the effective capitalization rate utilized in the
Appraisal for the properties in the Portfolio was approximately 10.0% based on
net operating income (before non-recurring expenses) generated for the 12 months
prior to the Appraisal date before taking into account certain structural and
environmental costs associated with one of the properties in the portfolio and
10.2% after taking into account such costs. Stanger further observed that among
48 properties acquired by SEI or affiliated entities from third-parties between
March 1992 and December 1994, capitalization rates for such purchases averaged
approximately 10.2%. In addition, capitalization rates among transactions
involving self-storage properties tracked by Self Storage Data Services, Inc.,
an affiliate of Wilson, averaged approximately 10.4%. Lower capitalization rates
generally reflect higher sales prices for income-producing properties.
Review of Liquidation Analysis. Stanger reviewed an analysis prepared
by management of PSP7 of the estimated value of PSP7 based upon liquidation of
PSP7's portfolio on a property-by-property basis utilizing estimates prepared by
PSP7 and information provided by Wilson.
The property-by-property liquidation analysis assumed each property
could be sold within an estimated marketing period of six months at the
appraised value as reported in the Appraisal, to an independent third-party
buyer. Costs of such property sales to independent third-parties were estimated
by PSP7 to total approximately $3,684,000 and were comprised of estimates of
$341,000 in state and local transfer taxes, $2,229,000 in commissions and
$1,114,000 in legal and other closing costs. Such amounts were based on
prevailing transfer tax rates in the locale of each property and on estimates of
PSP7 based on its knowledge of real estate transactions. Stanger observed that
the estimated net proceeds from such liquidation, the associated dissolution of
PSP7 and distribution of all remaining assets assuming no Required REIT
Distributions, and the simultaneous payment of amounts due on redemption of
Series D Shares was $17.98 per share, versus the consideration offered in the
Merger of $18.95 cash per share of PSP7 Common Stock, assuming no Required REIT
Distributions, or the equivalent of $18.95 of SEI Common Stock per share of PSP7
Common Stock, assuming no Required REIT Distributions, based on the average
closing price of SEI Common Stock on the NYSE during the 20 consecutive trading
days ending on the fifth trading day prior to the meeting of PSP7 Shareholders.
Stanger also observed that Wilson concluded that no premium or discount
is appropriate for the bulk acquisition of an assembled portfolio in
self-storage property markets today. Stanger reviewed information on bulk
purchases and sales of self-storage properties transacted by SEI, PSI or
affiliates during 1993 through December 1994 and reviewed available information
concerning bulk purchases of self-storage properties by independent third
parties.
Stanger observed that SEI, PSI or affiliated entities have transacted
seven bulk purchases of property portfolios during the period reviewed excluding
the properties associated with the mergers of PSP VIII and PSP VI with SEI.
These transactions involved affiliated entities and a total of 33 properties
with an aggregate value of approximately $75 million. Specifically, the
transactions included the sale of: (1) a three-property portfolio by a private
limited partnership affiliated with PSI in November 1993 (at a capitalization
rate of approximately 10.2%); (2) a twelve-property portfolio in which PSI has
an interest by an unaffiliated party in December 1993 (at a capitalization rate
of approximately 10.5% for the owner's interest); (3) a three-property portfolio
in which PSI has an interest by an unaffiliated party in December 1993 (at a
capitalization rate of approximately 10.5% for the owner's interest); (4) a
two-property portfolio by a private limited partnership affiliated with PSI in
October 1993 (at a capitalization rate of approximately 10.7%); (5) a
seven-property portfolio by a private limited partnership affiliated with PSI in
June 1994 (at a capitalization rate of approximately 10.7%); (6) a
three-property portfolio by a private limited partnership affiliated with PSI in
June 1994 (at a capitalization rate of approximately 10.1%); and (7) a
three-property portfolio by a private limited partnership affiliated with PSI in
December 1994 (at a capitalization rate of approximately 10.0%). Among these
transactions, capitalization rates averaged approximately 10.4%. Stanger also
observed that capitalization rates currently cited by market participants for
bulk property sales transactions generally range from 10% to 11%, a range
consistent with capitalization rates for individual property purchases.
Based upon the review cited above, Stanger concluded that Wilson's
opinion that assembled portfolios do not command a premium to underlying
individual property values in the current market for self-storage property
acquisitions appears to be supported by available data.
Review of Going Concern Analysis. Stanger reviewed financial analyses
and projections prepared by the management of PSP7 concerning estimated cash
flows and dividend distributions from continued operation of PSP7 as an
independent stand-alone entity and estimated sales proceeds from the liquidation
of the shares of PSP7 or the portfolio of properties owned by PSP7. The analyses
incorporated estimates of revenues and operating expenses for each of the
properties, capital expenditures, entity-level general and administrative costs,
anticipated structural and environmental costs associated with one of the
properties and cash flow distributions and proceeds from sale of either the
securities of PSP7 or the properties owned by PSP7 during projection periods of
up to 10 years. The analyses and projections assumed, among other things, that
(i) net operating income for PSP7 would grow at a compound annual rate of
approximately 3.6% over the 10-year projection period; (ii) anticipated
structural and environmental costs associated with PSP7's properties of
$1,240,000 (on a present value basis) are expended; (iii) general and
administrative expenses would increase at an average rate of 3.0% per annum over
the projection period; and (iv) in the scenario involving sale of the properties
in private real estate markets (as described below), such sales would occur at
the terminal value projected by the appraiser in the independent Appraisal.
The projections evaluated the going-concern value of PSP7 under three
scenarios: Scenario #1 -- a five-year holding period, with shares of PSP7 Common
Stock liquidated in securities markets at an FFO multiple ranging from 8.5 to
10.5; Scenario #2 -- a 10-year holding period, with shares of PSP7 Common Stock
liquidated in securities markets at an FFO multiple ranging from 8.5 to 10.5;
and Scenario #3 -- a 10-year holding period with the property portfolio of PSP7
liquidated in private real estate markets at the terminal value projected by the
appraiser in the Appraisal and the net proceeds resulting from the liquidation
of the properties and other remaining assets of PSP7 and the redemption of PSP7
Series D Shares paid out to shareholders in a liquidating distribution.
Dividends and sale proceeds per share of PSP7 Common Stock were discounted in
the projections at a rate of 13%.
Stanger observed that the FFO multiples utilized by management in the
projections were consistent with current FFO multiples among publicly traded
REITs investing in self-storage facilities and with market capitalization and
leverage levels reasonably comparable to those of PSP7. This group of publicly
traded REITs are all affiliated with PSI and SEI, and include Storage
Properties, Partners Preferred Yield I, II and III, and Public Storage
Properties IX, X, XI, XII, XIV, XV, XVI, XVII, XVIII, XIX, and XX. Stanger
further observed that the discount rates applied to dividends and sale proceeds
were consistent with the historic rates of return produced by equity REITs.
Stanger further observed that the estimated values per share of PSP7
Common Stock on a going-concern basis resulting from the above analysis were as
follows for each scenario: Scenario #1 -- $16.66 to $19.09; Scenario #2 --
$17.47 to $19.03; and Scenario #3 -- $17.98, compared with the consideration
offered in the Merger of $18.95 per share of PSP7 Common Stock.
The estimated values assigned to the alternative forms of consideration
are based on a variety of assumptions that have been made by PSP7. While PSP7
has advised Stanger that it has a reasonable basis for the assumptions employed
by PSP7, these assumptions may not reflect the actual experience of PSP7 and
such differences could be material. See "-- Comparison of Consideration to be
Received in the Merger to Other Alternatives."
Review of Market Value. Stanger reviewed historical market prices,
trading volume and dividend distributions for PSP7 Common Stock. In the course
of this review, Stanger compared the historical market prices of PSP7 Common
Stock with amounts to be received at the time of the Merger. Stanger observed
that the trading price for PSP7 Common Stock averaged $16.20, $15.80, $16.23 and
$16.07 for the respective 20-day, 60-day, 180-day, and 360-day periods preceding
the announcement of the proposed Merger, that the closing price for PSP7 Common
Stock on the last trading day prior to the first announcement of the proposed
Merger was $16.88, and that the highest closing price for PSP7 Common Stock
preceding the announcement of the proposed Merger was $17.88. Stanger further
observed that the consideration offered in the Merger, reduced by $840,000, or
approximately $.22 per share (which amount represents increases in current net
assets projected by management to be generated and retained between the date of
the Appraisal and May 31, 1995) represents a premium of 15.6%, 18.5%, 15.4%,
16.6%, 11% and 7% over the 20-day, 60-day, 180-day, 360-day average closing
prices and the closing price on the last trading day prior to the announcement
of the proposed Merger and the highest closing price recorded for PSP7 Common
Stock, respectively.
<PAGE>
In addition, Stanger observed that the consideration per share of PSP7
Common Stock offered in the Merger in the form of shares of SEI Common Stock
will reflect a value established in public securities trading markets equivalent
to the cash offer per share of PSP7 Common Stock. Such value will be based on
the average closing prices on the NYSE of SEI Common Stock during the twenty
consecutive trading days ending on the fifth trading day prior to the special
meeting of PSP7 shareholders.
Distribution/FFO Analysis. Stanger reviewed distributions per share and
FFO per share for PSP7 Shareholders pro forma the Merger. Stanger noted that
based on financial results pro forma the Merger for 1994, a closing price of
$16.75 for SEI Common Stock and the resulting exchange ratio of PSP7 Common
Stock for SEI Common Stock, regular quarterly distributions per share would
decrease by approximately $.03 (11%) for PSP7 Shareholders receiving SEI Common
Stock. Stanger observed that, at the $16.75 closing price for SEI Common Stock,
FFO per share earned by PSP7 Shareholders would range from an increase of
approximately $.04 (2%) to a decrease of approximately $.02 (1%) based on the
proportion of cash paid and stock issued in the Merger and on financial results
pro forma the Merger for 1994.
Conclusions. Based on the foregoing, Stanger concluded that, based upon
its analysis and assumptions, and as of the date of the fairness opinion, the
consideration to be received in the Merger is fair to the public shareholders of
PSP7, from a financial point of view.
Assumptions. In evaluating the Merger, Stanger relied upon and assumed,
without independent verification, the accuracy and completeness of all financial
and other information contained in the Joint Proxy Statement and Prospectus or
that was furnished or otherwise communicated to Stanger. Stanger did not perform
an independent appraisal of the assets and liabilities of PSP7 or SEI and relied
upon and assumed the accuracy of the Appraisal. Stanger also relied on the
assurances of PSP7 and SEI that any pro forma financial statements, projections,
budgets, or value estimates contained in the Joint Proxy Statement and
Prospectus or otherwise provided to Stanger, including projected estimates of
structural and environmental costs, were reasonably prepared on bases consistent
with actual historical experience and reflecting the best currently available
estimates and good faith judgments; that no material changes have occurred in
the appraised value of the portfolio or the information reviewed between the
date of the Appraisal or the date of the other information provided and the date
of the opinion; and that PSP7 and SEI are not aware of any information or facts
that would cause the information supplied to Stanger to be incomplete or
misleading in any material respect.
In connection with preparing the fairness opinion, Stanger was not
engaged to, and consequently did not, prepare any written report or compendium
of its analysis for internal or external use beyond the analysis set forth in
Appendix C. Stanger does not intend to deliver any additional written summary of
the analysis.
Compensation and Material Relationships. For preparing the fairness
opinion and related services in connection with the Merger, Stanger is being
paid a fee of $60,000. In addition, Stanger will be reimbursed for certain
out-of-pocket expenses, including legal fees, up to a maximum of $9,000 and will
be indemnified against certain liabilities, including certain liabilities under
the federal securities laws. The fee was negotiated with Stanger. Payment of the
fee to Stanger is not dependent upon completion of the Merger. During the past
two years (1993 to present), Stanger has rendered consulting and related
services and provided products to SEI and to PSI and its affiliates, including a
fairness opinion to the public shareholders of PSP VIII and PSP VI in connection
with the mergers of PSP VIII and PSP VI with SEI and an analysis used in a 1992
exchange offer involving SEI and three partnerships affiliated with PSI, and may
be engaged in the future. Stanger has received compensation aggregating
approximately $125,000 in connection with these services and products during the
past two years (exclusive of amounts received in connection with the Merger).
Limitations and Qualifications. Stanger was not requested to, and
therefore did not: (i) select the method of determining the consideration
offered in the Merger; (ii) make any recommendation to the PSP7 or SEI
Shareholders with respect to whether to approve or reject the Merger or whether
to select the cash or Common Stock option in the Merger; or (iii) express any
opinion as to the business decision to effect the Merger or alternatives to the
Merger. Stanger's opinion is based on business, economic, real estate and
securities markets, and other conditions as of the date of its analysis.
<PAGE>
Among the factors considered in the selection of Stanger were Stanger's
experience in connection with the mergers of PSP VIII and PSP VI with SEI, its
expertise in real estate transactions and the fee quoted by Stanger. No party
other than Stanger was contacted to render an opinion as to the fairness of the
Merger to PSP7 Shareholders, and PSP7 has neither requested nor received any
views, preliminary or otherwise, from any party other than Stanger regarding the
fairness of the Merger to PSP7 Shareholders.
Fairness Opinion from Houlihan Lokey
Houlihan Lokey was engaged by SEI through the SEI Special Committee to
render an opinion as to the fairness, from a financial point of view, to the
public shareholders of SEI of the consideration to be paid in the Merger. The
full text of the opinion, which contains a detailed description of the
assumptions and qualifications made, matters considered and limitations on the
review and opinion, is set forth in Appendix D and should be read in its
entirety. Certain of the material assumptions, qualifications and limitations to
the fairness opinion are set forth below. The summary set forth below does not
purport to be a complete description of the analyses to be used by Houlihan
Lokey in rendering the fairness opinion. Arriving at a fairness opinion is a
complex analytical process not necessarily susceptible to partial analysis or
amenable to summary description.
Except for certain assumptions, described more fully below, which SEI
advised Houlihan Lokey that it would be reasonable to make, SEI imposed no
conditions or limitations on the scope of Houlihan Lokey's investigation or with
respect to the methods and procedures to be followed in rendering the fairness
opinion.
Experience of Houlihan Lokey. Houlihan Lokey is engaged in the
investment banking business, providing a broad range of investment banking and
other financial services to clients located throughout the United States. The
business activities of Houlihan Lokey include: financial opinions, investment
banking, financial restructuring and fixed income asset management. Houlihan
Lokey was retained to render an opinion in part because of its experience in
valuation and financial analysis, its knowledge of SEI and PSP7 from prior
engagements and its services in connection with the merger of PSP VIII and SEI.
Summary of Materials Considered. In connection with its analysis,
Houlihan Lokey (i) reviewed SEI's audited financial statements in its annual
reports on Form 10-K for the five fiscal years ended December 31, 1994; (ii)
reviewed PSP7's audited financial statements in its annual reports on Form 10-K
for the five fiscal years ended December 31, 1994; (iii) reviewed this Joint
Proxy Statement and Prospectus; (iv) reviewed the pro forma financial statements
included in this Joint Proxy Statement and Prospectus; (v) reviewed the
Appraisal and met with Wilson to discuss the Appraisal; (vi) met with certain
members of the senior management of SEI and PSP7 to discuss the operations,
financial condition, future prospects and projected operations and performance
of SEI and PSP7; (vii) examined information provided by PSP7 and SEI concerning
the composition of the property portfolios of PSP7, including summaries of the
number and original cost broken down by property type (mini-warehouse versus
business park) and state in which the property is located, and reviewed
information provided by management concerning net operating income, occupancy,
rental revenues and capital expenditures for 1991, 1992, 1993 and through June
30, 1994 for the properties of PSP7; (viii) visited the business offices of SEI
and PSP7; (ix) discussed with management the operations, business plans, current
conditions in the mini-warehouse/business park industry, historical financial
statements, future prospects of PSP7 and SEI, including market conditions for
sales/acquisitions of properties of the type owned by PSP7 and SEI, the impact
of general economic and financial conditions on each portfolio; and the expected
financial performance and capital expenditures of the portfolios of PSP7 and
SEI; (x) reviewed the historical market prices and trading volume for SEI's and
PSP7's publicly traded securities; (xi) reviewed certain other publicly
available financial and market data for certain companies that Houlihan Lokey
deemed comparable to SEI and PSP7; (xii) reviewed information provided by
management of transactions by SEI involving the acquisition of properties from
unaffiliated parties during the period January 1994 to January 1995; (xiii)
reviewed the Merger Agreement and drafts of certain documents to be delivered at
the closing of the Merger; (xiv) reviewed two letters from ENSR Consulting and
Engineering, environmental consultants, each dated January 31, 1995, summarizing
the environmental assessment of PSP7's properties and describing the asbestos
condition at one of PSP7's properties; (xv) letters from John A. Martin &
Associates, structural engineers, and Financial Research Group, financial
consultants, each dated January 31, 1995; and (xvi) conducted such other
studies, analyses, inquiries and investigations as Houlihan Lokey deemed
appropriate.
<PAGE>
Summary of Methodology and Analysis. Houlihan Lokey was engaged by SEI
through the SEI Special Committee to render an opinion as to the fairness, from
a financial point of view, to the public shareholders of SEI of the
consideration to be paid by SEI in the Merger. In connection with its
engagement, the following analysis, among others, was undertaken by Houlihan
Lokey: (a) an analysis of the pricing and trading volume of SEI's and PSP7's
Common Stock; (b) a comparison of SEI's and PSP7's dividend yields, FFO yields
and market capitalization multiples to a group of publicly traded PSI-related
REITs and a group of publicly traded unaffiliated REITs deemed comparable; (c) a
comparison of the capitalization rates applied in the Appraisal to other
properties acquired by SEI over the last two years; and (d) an analysis of
implied dividend yield, funds from operation yield, and market capitalization
multiples implied by the $18.95 per share (assuming no Required REIT
Distributions) being offered to PSP7 Shareholders.
The pricing and trading volume of SEI's and PSP7's Common Stock were
analyzed over a variety of time periods preceding and subsequent to the
announcement of the Merger. This analysis was performed to, among others,
determine the consideration being paid by SEI in the Merger and to determine the
premium, if any, being paid for PSP7's Common Stock. The amounts to be received
in connection with the Merger represent a premium of 17.8% (or 15.6% after being
reduced by $840,000 ($.22 per share), management's estimate of increases in
current net assets generated and retained between the date of the Appraisal and
May 31, 1995) and 12.3% (11% after such reduction) over the 20-day average
closing prices and the closing price on the last trading day prior to the
announcement of the Merger, respectively.
Investors typically analyze REITs based on: (1) their dividend yield;
(2) their yield based on FFO; and (3) traditional market capitalization
multiples such as price to earnings, price to cash flow, and price to book value
ratios. Houlihan Lokey compared the dividend yield, FFO yield and appropriate
market capitalization multiples of SEI and PSP7 to 11 REITs affiliated with PSI
and a group of 11 REITs with no affiliation with PSI and deemed by Houlihan
Lokey to be comparable. The following table summarizes the yields and multiples
for SEI, PSP7, the 11 affiliated REITs and the 11 unaffiliated REITs.
<TABLE>
<CAPTION>
Dividend FFO Price to Price to
yield yield earnings FFO
<S> <C> <C> <C> <C>
PSP 7 (based on the $18.95 price) 5.91% 9.25% 14.13x 10.82x
SEI 5.33% 9.85% 16.66x 10.15x
Affiliated REITs (group median) 7.67% 8.97% 15.51x 11.15x
Unaffiliated REITs (group median) 6.96% 10.72% 14.53x 9.33x
</TABLE>
The 11 affiliated REITs are all publicly traded REITs engaged in the
mini-warehouse business under the Public Storage trade name in a variety of
locations. The unaffiliated REITs include other companies competing in the
mini-warehouse industry and other equity REITs commonly compared to SEI and the
affiliated REITs by securities and mini-warehouse industry analysts.
Houlihan Lokey compared the implied capitalization rates of the
Appraisal to 33 properties acquired by SEI, an active purchaser of
mini-warehouses, from January 1994 through January 1995. The 33 properties
included only those in which SEI purchased 100 percent ownership. The
capitalization rates for the 33 properties purchased by SEI from January 1994 to
January 1995 ranged from 7.72% to 11.77%, with an average capitalization rate of
9.98%. The capitalization rate averaged 10% (before taking into account the
costs described under "- Real Estate Appraisal by Wilson") and 10.2% (after
taking into account such costs) for the portfolio based on reported property
operations (before non-recurring expenses) during the 12 months ended December
31, 1994.
Houlihan Lokey further evaluated PSP7's yields and market
capitalization multiples implied by the $18.95 offer. Houlihan Lokey compared
these implied yields and capitalization multiples to the dividend yield, FFO
yield and capitalization multiples of the 11 affiliated REITs and 11
unaffiliated REITs referred to above. PSP7's yields and multiples at the
transaction price compared to the 11 affiliated REITs are as follows:
<TABLE>
<CAPTION>
Affiliated
Group
PSP7 Median Comparison
<S> <C> <C> <C>
Dividend yield 5.91% 7.67% Lower
FFO yield 9.25% 8.97% Similar
Price to earnings 14.1x 15.5x Lower
Price to FFO 10.8x 11.2x Similar
</TABLE>
<PAGE>
PSP7's yields and multiples at the transaction price compared to the 11
unaffiliated REITs are as follows:
<TABLE>
<CAPTION>
Affiliated
Group
PSP7 Median Comparison
<S> <C> <C> <C>
Dividend yield 5.91% 6.96% Lower
FFO yield 9.25% 10.72% Lower
Price to earnings 14.1x 14.5x Similar
Price to FFO 10.8x 9.3x Higher
</TABLE>
Conclusions. Based on the foregoing, Houlihan Lokey concluded that,
based upon its analysis and assumptions, and as of the date of its opinion, the
consideration to be paid by SEI in the Merger is fair, from a financial point of
view, to the public shareholders of SEI.
Assumptions. In rendering its opinion, Houlihan Lokey has relied on and
assumed the accuracy of, without independent verification, data, material and
other information (including, without limitation, financial forecasts and
projections), with respect to SEI and PSP7 furnished to Houlihan Lokey. Houlihan
Lokey has not made an independent evaluation or appraisal of the assets of PSP7
or SEI; nor has Houlihan Lokey been furnished with any such evaluations or
appraisals other than the Appraisal prepared by Wilson. Houlihan Lokey has
relied on the Appraisal in its analysis and has assumed its accuracy. It has
also relied and assumed, without independent verification, that the financial
forecasts and projections furnished to it have been reasonably prepared and
reflect the best currently available estimates of the future financial results
and condition of SEI and PSP7.
Limitations and Qualifications. Houlihan Lokey is not a real estate
appraisal firm and SEI did not provide it with any property appraisals other
than the Appraisal prepared by Wilson. Houlihan Lokey did not make any physical
inspection or independent appraisal of any of the properties or assets of PSP7
or SEI.
Houlihan Lokey's opinion is based on business, economic, market and
other conditions as they existed and could be evaluated by Houlihan Lokey on the
date of its opinion. Events occurring after that date may materially affect the
assumptions used in preparing the opinion. Houlihan Lokey will not render any
additional fairness opinions concerning the Merger on the effective date of the
Merger.
Compensation and Material Relationships. As compensation for its
services, Houlihan Lokey is being paid a fee of $45,000. In addition, Houlihan
Lokey will be reimbursed for out-of-pocket expenses, reasonably incurred, not to
exceed $2,500 without SEI's consent and will be indemnified against certain
liabilities, including certain liabilities under the federal securities laws.
The fee was negotiated with Houlihan Lokey. Payment of the fee to Houlihan Lokey
is not dependent upon completion of the Merger. During the past two years (1993
to present), Houlihan Lokey has rendered consulting and related services to SEI
and to PSI and its affiliates, including a fairness opinion to the public
shareholders of SEI in connection with the mergers of SEI with PSP VIII and PSP
VI, and may be engaged in the future. During this period, Houlihan Lokey has
received compensation aggregating approximately $235,000 in connection with
these services (exclusive of amounts received in connection with the Merger). In
1991, Houlihan Lokey rendered opinions to PSP7 (and to 17 other REITs sponsored
by PSI) as to the fairness of the reorganizations of those REITs and as to
certain other matters. For such services, Houlihan Lokey received aggregate
compensation of $102,500 and was reimbursed $7,000 for out-of-pocket expenses.
Among the factors considered in the selection of Houlihan Lokey were
Houlihan Lokey's experience in connection with the merger between SEI and PSP
VIII, its experience in valuation and financial analysis, its knowledge of SEI
from prior engagements and the fee quoted by Houlihan Lokey. No party other than
Houlihan Lokey was contacted or engaged to render an opinion as to the fairness
of the Merger to the public shareholders of SEI, and SEI has neither requested
nor received any views, preliminary or otherwise, from any party other than
Houlihan Lokey regarding the fairness to the public shareholders of SEI.
The Merger Agreement
If the Merger is approved by PSP7 and SEI Shareholders and the other
applicable conditions to the Merger are satisfied or waived, the Merger will be
consummated pursuant to the Merger Agreement which is set forth in Appendix A
to, and is incorporated by reference into, this Joint Proxy Statement and
Prospectus. As a result of the Merger, all of the assets now held by PSP7 will
be held by SEI upon completion of the Merger. The Merger Agreement contains
representations and warranties of PSP7 and SEI and certain other provisions
relating to the Merger. The representations and warranties are extinguished by,
and do not survive, the Merger.
<PAGE>
Conditions to Consummation of the Merger. Consummation of the Merger is
contingent upon standard conditions, including the following: (i) the
Registration Statement shall have been declared effective by the Commission and
SEI shall have received all other authorizations necessary to issue SEI Common
Stock in exchange for PSP7 Common Stock and to consummate the Merger; (ii) the
Merger Agreement and the Merger shall have been approved and adopted by the
requisite vote of the shareholders of PSP7 and SEI, including a majority of the
shares of PSP7 Common Stock voting at the meeting of PSP7 Shareholders which are
not owned by PSI and its affiliates; (iii) receipt by PSP7 of a legal opinion of
Hogan & Hartson L.L.P. that the Merger will qualify as a reorganization under
Section 368(a) of the Code (which opinion has been received and is described
under "Certain Federal Income Tax Matters"); (iv) the SEI Shares issued to PSP7
Shareholders shall be listed on the NYSE; (v) the Board of Directors of PSP7
shall have received a fairness opinion from Stanger (which opinion has been
received); (vi) the Board of Directors of SEI shall have received a fairness
opinion from Houlihan Lokey (which opinion has been received); (vii) the
redemption by PSP7 of all of the Series D Shares prior to the Merger; (viii) in
the case of SEI, the average of the per share closing prices on the NYSE of the
SEI Common Stock during the 20 consecutive trading days ending on the fifth
trading day prior to the special meeting of the shareholders of PSP7 (the
"Average SEI Share Price") is not less than $13; (ix) in the case of PSP7, the
Average SEI Share Price is not more than $16; and (x) demands for payment by
holders of Dissenting Shares are filed with respect to less than 5% of the
outstanding shares of PSP7 Common Stock. The obligations of SEI to effect the
Merger are also subject to it, in its sole discretion, being satisfied as to
title to, and the results of an environmental audit of, each property of PSP7.
Any of these conditions (other than the conditions of approval by the SEI and
PSP7 Shareholders) may be waived by the board of directors of the corporation
benefiting from such condition, and the PSP7 Board of Directors has waived the
condition relating to the Average SEI Share Price. See "- Background - PSP7
Board Actions."
Amendment or Termination. The Merger Agreement provides for amendment
or modification thereof by written agreement authorized by the Boards of
Directors of SEI and PSP7 either before or after shareholder approval, provided
that any such amendment or modification made after shareholder approval does not
change any of the principal terms of the Merger or the Merger Agreement. The
Merger may be abandoned at any time before or after shareholder approval by
mutual written consent and may be abandoned by the action of the board of
directors of either party if, among other things, the closing of the Merger
shall not have occurred on or before December 31, 1995.
Consummation. It is contemplated that the Merger will be consummated by
filing the Agreement of Merger (attached as Exhibit A to the Merger Agreement)
with the California Secretary of State as soon as practicable after its approval
by SEI and PSP7 Shareholders and the satisfaction or waiver of various
conditions contained in the Merger Agreement. It is currently contemplated that
the Merger will be consummated during the first quarter of 1995.
Exchange of Certificates. After the Merger, holders of certificates
that evidenced outstanding shares of PSP7 Common Stock that were converted into
shares of SEI Common Stock, upon surrender of the certificates to The First
National Bank of Boston (the "Exchange Agent"), shall be entitled to receive
certificates representing the number of whole shares of SEI Common Stock into
which the shares of PSP7 Common Stock shall have been converted and cash payment
in lieu of fractional share interests, if applicable. As soon as practicable
after the Merger, the Exchange Agent will send a notice and a transmittal form
to each holder of record whose PSP7 Common Stock shall have been converted into
shares of SEI Common Stock, advising of the effectiveness of the Merger and the
procedure for surrendering to the Exchange Agent certificates evidencing PSP7
Common Stock in exchange for certificates evidencing SEI Common Stock. HOLDERS
OF PSP7 COMMON STOCK WHO INTEND TO RECEIVE SEI COMMON STOCK IN THE MERGER SHOULD
NOT SUBMIT THEIR STOCK CERTIFICATES FOR EXCHANGE UNTIL THEY HAVE RECEIVED THE
LETTER OF TRANSMITTAL AND INSTRUCTIONS FROM THE EXCHANGE AGENT WHICH WILL BE
MAILED AFTER CONSUMMATION OF THE MERGER.
Until surrendered, each outstanding certificate which represents shares
of PSP7 Common Stock that were converted into shares of SEI Common Stock will be
deemed for all corporate purposes to evidence ownership of the number of whole
shares of SEI Common Stock into which the PSP7 Common Stock evidenced thereby
were converted. However, until the certificates formerly evidencing PSP7 Common
Stock are surrendered, no dividend payable to holders of record of the SEI
Common Stock shall be paid to the holders of such certificates, but upon
surrender of the certificates by the holders they will be entitled to receive
the dividends (without interest) previously paid with respect to such SEI Common
Stock as of any record date on or subsequent to the effectiveness of the Merger.
After the Merger, there will be no further registration of transfers of PSP7
Common Stock on the records of PSP7 and, if certificates formerly evidencing
such shares are presented, they will be cancelled and exchanged for certificates
evidencing SEI Common Stock.
<PAGE>
Fractional Shares. No fractional shares of SEI Common Stock will be
issued in the Merger. In lieu of any fractional share interests, each holder of
PSP7 Common Stock who would otherwise be entitled to a fractional share of SEI
Common Stock will, upon surrender of the certificate representing such PSP7
Common Stock, receive a whole share of SEI Common Stock if such fractional share
to which such holder would otherwise have been entitled is .5 of a share or
more, and such fractional share shall be disregarded if it represents less than
.5 of a share; provided that such fractional share shall not be disregarded if
it represents .5 of 1% or more of the total number of shares of SEI Common Stock
such holder is entitled to receive in the Merger. In such event, the holder will
be paid an amount in cash (without interest), rounded to the nearest $.01,
determined by multiplying (i) the per share closing price on the NYSE of the SEI
Common Stock at the time of effectiveness of the Merger, by (ii) the fractional
interest.
Restrictions on Other Acquisitions. PSP7 has agreed not to initiate,
solicit or encourage, directly or indirectly, any inquiries or the making of any
proposal with respect to a merger, consolidation, share exchange or similar
transaction involving PSP7, or any purchase of all or any significant portion of
the assets of PSP7, or any equity interest in PSP7, other than the transactions
contemplated by the Merger Agreement, or engage in any negotiations concerning,
or provide any confidential information or data to, or have discussions with,
any person relating to such a proposal, provided that the Board of Directors on
behalf of PSP7 may furnish or cause to be furnished information and may
participate in such discussions and negotiations through its representatives
with persons who have sought the same if the failure to provide such information
or participation in the negotiations and discussions might cause the members of
the Board of Directors to breach their fiduciary duty to PSP7's Shareholders
under applicable law as advised by counsel. PSP7 has agreed to notify SEI
immediately if inquiries or proposals are received by, any such information is
requested from, or negotiations or discussions are sought to be initiated or
continued with PSP7, and to keep SEI informed of the status and terms of any
such proposals and any such negotiations or discussions.
Distributions. Pending the Merger, PSP7 is precluded from declaring or
paying any dividend on its Common Stock or making any other distribution to its
shareholders other than (i) regular dividends at a quarterly rate not in excess
of $.28 per share, (ii) a dividend to shareholders of record immediately prior
to the effectiveness of the Merger equal to the amount by which PSP7's estimated
net asset value at such date exceeds the estimated net asset value at May 31,
1995 and (iii) Required REIT Distributions. Pending the Merger, SEI is
precluding from declaring or paying any dividend on its Common Stock or making
any other distribution to its shareholders other than regular quarterly
dividends. See "Determination of Payments to be Received by PSP7 Shareholders in
Connection with the Merger."
Cash Election Procedure
Each holder of record of PSP7 Common Stock may make a Cash Election and
have its shares of PSP7 Common Stock converted into the right to receive cash in
the Merger. If the aggregate number of shares of PSP7 Common Stock as to which
Cash Elections are made, together with shares of PSP7 Common Stock owned by
Dissenting Shareholders (see "Dissenting Shareholders' Rights of Appraisal"), is
20% or less than the number of shares of PSP7 Common Stock outstanding as of the
record date for the meeting of PSP7 Shareholders, all such shares as to which
Cash Elections are made shall be converted into the right to receive cash in the
Merger. If the aggregate number of such shares (together with any Dissenting
Shares) is more than 20%, such shares shall be converted into the right to
receive cash in the Merger on a pro rata basis, and the balance of such shares
shall be converted into SEI Common Stock. For a discussion of the federal income
tax consequences to a PSP7 Shareholder receiving both cash and SEI Common Stock
in connection with the Merger, see "Certain Federal Income Tax Matters -- The
Merger -- PSP7 Shareholders Receiving Cash and SEI Common Stock."
All Cash Elections are to be made on a cash election form (a "Cash
Election Form"). Holders of record of shares of PSP7 Common Stock who hold such
shares as nominees, trustees or in other representative capacities (a
"Representative") may submit multiple Cash Election Forms, provided that such
Representative certifies that each such Cash Election Form covers all the shares
of PSP7 Common Stock held by such Representative for a particular beneficial
owner. Any Cash Election Form may be revoked by written notice received by
American Stock Transfer & Trust Company (The "Depositary") prior to 5:00 p.m.,
New York time, on the last business day before the day of the meeting of
shareholders. In addition, all Cash Election Forms will automatically be revoked
if the Depositary is notified in writing by SEI and PSP7 that the Merger has
been abandoned.
<PAGE>
If a PSP7 Shareholder does not properly complete and return the Cash
Election Form, he or she will receive SEI Common Stock in the Merger. A PSP7
Shareholder may not make a Cash Election as to less than all of the shares of
PSP7 Common Stock owned by such shareholder. A Cash Election Form is being sent
to PSP7 Shareholders of record on __________ __, 1995. To be effective, a Cash
Election Form must be properly completed and signed and must be received by the
Depositary accompanied by all stock certificates representing shares of PSP7
Common Stock held by the person submitting such Cash Election Form to which the
Cash Election Form relates (or by a guarantee of delivery of such certificates
in the form and on the terms set forth in the Cash Election Form (a "Guaranteed
Delivery")) no later than 5:00 p.m. New York City Time on __________ __, 1995.
If a Cash Election Form is properly revoked, the certificate or certificates (or
any guarantee of delivery) in respect of the PSP7 Common Stock to which the Cash
Election Form relates will be promptly returned by the Depositary. The
Depositary may determine whether or not elections to receive cash have been
properly made or revoked, and any such determination shall be conclusive and
binding.
HOLDERS OF SHARES OF PSP7 COMMON STOCK THAT WISH TO SUBMIT A CASH
ELECTION FORM SHOULD DELIVER THEIR STOCK CERTIFICATES WITH SUCH CASH ELECTION
FORM OR PROVIDE FOR, AND COMPLY WITH THE REQUIREMENTS OF, GUARANTEED DELIVERY.
ANY HOLDER OF PSP7 COMMON STOCK WHO DOES NOT SUBMIT A PROPERLY
COMPLETED AND SIGNED CASH ELECTION FORM ACCOMPANIED BY THE APPLICABLE STOCK
CERTIFICATES (OR PROVIDE FOR, AND COMPLY WITH THE REQUIREMENTS OF, GUARANTEED
DELIVERY) WHICH IS RECEIVED BY THE DEPOSITARY PRIOR TO 5:00 P.M., NEW YORK CITY
TIME, ON __________ __, 1995 WILL RECEIVE SEI COMMON STOCK IN THE MERGER. IF SEI
OR THE DEPOSITARY DETERMINES THAT ANY PURPORTED CASH ELECTION WAS NOT PROPERLY
MADE, SUCH PURPORTED CASH ELECTION WILL BE DEEMED TO BE OF NO FORCE AND EFFECT
AND THE HOLDERS OF PSP7 COMMON STOCK MAKING SUCH PURPORTED CASH ELECTION WILL,
FOR PURPOSES HEREOF, RECEIVE SEI COMMON STOCK IN THE MERGER. NEITHER SEI, PSP7
NOR THE DEPOSITARY WILL BE UNDER ANY OBLIGATION TO NOTIFY ANY PERSON OF ANY
DEFECT IN A CASH ELECTION FORM.
The tax consequences of receiving cash and/or SEI Common Stock are
different. See "Certain Federal Income Tax Matters -- The Merger."
Consequences to PSP7 if the Merger is Not Completed
If the Merger is not completed, PSP7 will remain as a separate legal
entity and will continue to operate its properties.
Costs of the Merger
It is estimated that the total consideration (cash and Common Stock) to
be paid by SEI to purchase all of the PSP7 Common Stock in the Merger and to pay
related costs and expenses would be $72,128,000 (less the amount of any Required
REIT Distributions) and that the total amount of funds that would be required by
SEI to purchase the PSP7 Common Stock from PSP7 Shareholders making Cash
Elections and to pay the cost and expenses of the Merger would be $19,699,000
(assuming maximum Cash Elections and no Required REIT Distributions). These
amounts would be paid with funds borrowed under credit facilities with a group
of banks for which Wells Fargo Bank, National Association acts as agent. These
credit facilities aggregate $115,000,000 and bear interest at LIBOR plus 1.25%.
SEI intends to repay amounts borrowed under these facilities from the public or
private placement of securities or from SEI's undistributed cash flow.
If the Merger is not completed, all costs incurred in connection with
the Merger will be paid by the party incurring such costs, except that SEI and
PSP7 will each pay one-half of the cost of any expenses incurred in connection
with the printing of this Joint Proxy Statement and Prospectus and related
registration statement, the real estate appraisals, environmental and structural
audits and preparation for real estate closings and filing fees. PSP7's share of
such costs would be paid from its working capital. If the Merger is completed,
all costs incurred in connection with the Merger will be paid by SEI.
<PAGE>
The following is a statement of certain fees and expenses estimated to
be incurred in connection with the Merger (exclusive of amounts paid as a result
of Cash Elections).
<TABLE>
<S> <C>
Preclosing Transaction Costs
Printing and Mailing $ 320,000
Proxy Solicitation 45,000
Legal 100,000
Real Estate Valuations and Fairness Opinions 202,000
Registration, Listing and Filing Fees 200,000
Accounting 50,000
Other 18,000
--------
Subtotal 935,000
Closing Transaction Costs
Transfer Fees 220,000
Legal 20,000
Title endorsements and escrow 265,000
Other 10,000
---------
Subtotal 515,000*
---------
TOTAL $1,450,000
<FN>
- ---------------
* Would not be incurred if Merger is not approved.
</TABLE>
Accounting Treatment
The Merger will be treated as a purchase. Accordingly, the assets and
liabilities of PSP7 in the pro forma financial statements have been accounted
for at fair market value based upon independent appraisals and estimates.
See "Pro Forma Financial Statements."
Regulatory Requirements
The Merger is subject to compliance with federal and state securities
law requirements.
Comparison of Ownership of Shares in PSP7 and SEI
The information below compares certain attributes of the ownership of
shares of SEI and PSP7 Common Stock. The effect of the Merger on PSP7
Shareholders who receive SEI Common Stock in the Merger is set forth in italics
below each caption.
<PAGE>
PSP7 SEI
Investment Objectives and Policies
The principal investment objectives The investment objectives of SEI are
of PSP7 are to provide (i) to maximize FFO allocable of holders
quarterly cash distributions from to maximize FFO allocable of holders
its operations and (ii) long-term of SEI Common Stock and to increase
capital gains through appreciation shareholder value through internal
in the value of PSP7's properties. growth and acquisitions. FFO is a
supplemental performance measure for
Under PSP7's organizational equity REITs used by industry
documents, PSP7 is not permitted to analysts. FFO does not take into
raise new capital or to reinvest consideration principal payments on
operating cash flow or sale or debt, capital improvements,
financing proceeds. PSP7 will distributions and other obligations
terminate on December 31, 2038, of SEI. Accordingly, FFO is not a
unless earlier dissolved. PSP7's substitute for SEI's net cash
predecessor anticipated selling or provided by operating activities or
financing its properties within net income as a measure of SEI's
seven to ten years after completion liquidity or operating performance.
of development (i.e., between 1990 An increase in SEI's FFO will not
and 1993). necessarily correspond with an
increase in distributions to holders
of SEI Common Stock. See "--
Liquidity, Marketability and
Distributions."
SEI intends to continue its
operations for an indefinite period
of time and is not precluded from
raising new capital, including
senior securities that would have
priority over its Common Stock
(including Common Stock issued in
the Merger) as to cash flow,
distributions and liquidation
proceeds, or from reinvesting cash
flow or sale or financing proceeds
in new properties, except to the
extent such reinvestment precludes
SEI from satisfying the REIT
distribution requirements.
Therefore, SEI Shareholders should
expect to be able to liquidate their
investment only by selling their
shares in the market, and the market
value of the Common Stock may not
necessarily equal or exceed the
market value of SEI's assets or the
net proceeds which might be
available for distribution upon
liquidation if SEI were to
liquidate. SEI has grown, and
intends to continue to grow, as new
investments are made.
After the Merger, PSP7 Shareholders who receive SEI Common Stock in the
Merger will be changing their investment from "finite-life" to "infinite-life";
they will be able to realize the value of their investment only by selling the
SEI Common Stock. The interest of SEI Shareholders can be diluted through the
issuance of additional securities, including securities that would have priority
over SEI Common Stock as to cash flow, distributions and liquidation proceeds.
SEI has an effective registration statement for preferred stock, common stock
and warrants and intends to issue additional securities under this registration
statement, including a recently completed $57,500,000 offering of preferred
stock. There is no assurance that any such securities will be issued. See "Risk
Factors and Material Considerations -Uncertainty Regarding Market Price of
Common Stock" and "-- Financing Risks -- Dilution and Subordination."
SEI has no plans with respect to a sale or financing of any of PSP7's
properties. SEI intends to continue to acquire properties from other parties.
<PAGE>
PSP7 SEI
Borrowing Policies
PSP7 is not permitted to borrow in Subject to certain limitations in
connection with the acquisition of SEI's Bylaws, SEI has broad powers
its properties. PSP7 is fully to borrow in furtherance of its
invested and would distribute the investment objectives. SEI has
proceeds from a financing of its incurred in the past, and may incur
properties. PSP7 does not generally in the future, both short-term and
incur borrowings in the ordinary long-term debt to increase its funds
course of business. available for investment in real
estate, capital expenditures and
distributions. As of December 31,
1994, SEI's ratio of "Debt"
(liabilities other than "accrued and
other liabilities" and "minority
interest" that should, in accordance
with GAAP, be reflected on SEI's
balance sheet) to "Assets" (SEI's
total assets that should, in
accordance with GAAP, be reflected
on SEI's balance sheet) was
approximately 12%.
SEI, unlike PSP7, incurs debt in the ordinary course of business and
reinvests proceeds from borrowings. The incurrence of debt increases the risk of
loss of investment.
Transactions with Affiliates
PSP7's Bylaws restrict PSP7 from SEI's Bylaws restrict SEI from
entering into a variety of business acquiring properties from PSI and
transactions with PSI and its its affiliates or from selling
affiliates. PSP7's Bylaws may be properties to them unless the
amended by a majority vote of PSP7 transaction (i) is approved by a
Shareholders. See "Amendment to majority of SEI's independent
PSP7's Bylaws." directors and (ii) is fair to SEI
based on an independent appraisal.
It is easier for SEI to enter into transactions with PSI and its
affiliates than in the case of PSP7 because shareholder approval is not
required.
Properties
PSP7 owns 38 wholly-owned At December 31, 1994, SEI owned
properties in 11 states. For the equity interests (directly, as well
year ended December 31, 1994, the as through general and limited
weighted average occupancy level partnership interests) in 402
and realized monthly rent per properties in 37 states, consisting
square foot of PSP7's of 147 wholly owned properties and
mini-warehouses were 89% and $.61, 246 properties in which SEI's
respectively. See "Description of effective interest ranged from 33%
PSP7's Properties." to 66% and nine properties in which
SEI's effective interest was less
than 20%. For the year ended
December 31, 1994, the weighted
average occupancy level and realized
monthly rent per square foot of
SEI's same-store mini-warehouses
(those mini-warehouses owned by SEI
since 1989) were 90% and $.59,
respectively. See "Description of
SEI Properties."
Because SEI owns substantially more property interests in more states
than does PSP7, SEI's results of operations are less affected by the
profitability or lack of profitability of a single property than are those of
PSP7 and it would be more difficult to liquidate SEI than PSP7 within a
reasonable period of time. On an overall basis, the rents of PSP7's
mini-warehouses are higher than those of SEI.
<PAGE>
Liquidity, Marketability and Distributions
PSP7 Common Stock is traded on the SEI Common Stock is traded on the
AMEX. During the 12 months ended NYSE. During the 12 months ended
December 31, 1994, the average December 31, 1994, the average daily
daily trading volume of PSP7 Common trading volume of SEI Common Stock
Stock was 1,394 shares. PSP7 has was 39,106 shares (24,421 shares if
not issued any securities that have February and November 1994, during
priority over PSP7 Common Stock which SEI was engaged in public
(other than the Series D Shares offerings of Common Stock, are
issued in connection with the excluded). SEI has issued, and may
organization of PSP7). in the future issue, securities that
have priority over SEI Common Stock
as to cash flow, distributions and
liquidation proceeds.
PSP7 and SEI Shareholders receive distributions when, as and if
declared by their respective Boards of Directors out of any funds legally
available for that purpose. PSP7 and SEI, as REITs, are required to distribute
at least 95% of their ordinary REIT taxable income in order to maintain their
qualification as REITs, but, subject to certain limitations and penalties, PSP7
and SEI can take into account subsequent year distributions for purposes of
satisfying this requirement. SEI distributes less than its cash available for
distribution (recently distributing amounts approximately equal to its taxable
income), permitting it to retain funds for additional investment and debt
reduction.
A PSP7 Shareholder who receives SEI Common Stock in the Merger should
have an investment for which the market is broader and more active than the
market for PSP7 Common Stock. Distributions of SEI Common Stock are subject,
however, to priority of preferred stock. See "Risk Factors and Material
Considerations -- Consequences of Loss of Qualification as a REIT,"
"Distributions and Price Range of SEI Common Stock" and "Distributions and Price
Range of PSP7 Common Stock" for information on trading prices of the PSP7 and
SEI Common Stock.
Taxation
PSP7 and SEI were organized to qualify for taxation as REITs and intend
to continue to so qualify. As REITs, they generally are permitted to deduct
distributions to their shareholders, which effectively eliminates 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. Distributions received by PSP7 and SEI Shareholders generally
constitute portfolio income, which cannot offset "passive" income and loss from
other investments.
Voting Rights
Both PSP7 and SEI hold annual meetings, with each such meeting on a
date within 15 months of the prior annual meeting, at which the shareholders
elect the directors, with each shareholder entitled to cast as many votes as
there are directors to be elected, multiplied by the number of shares registered
in his or her name. Under California law, a majority vote of shareholders is
required for (i) the removal of directors, (ii) the dissolution of the company,
(iii) the amendment of certain provisions of the organizational documents and
(iv) the sale of all or substantially all of the company's assets.
<PAGE>
Compensation of Affiliates
Executive Compensation and Advisory Contract
During 1994, the aggregate Under the Advisory Contract between
compensation paid to executive SEI and the Adviser, the Adviser is
officers of PSP7 (who are also paid an Advisory Fee of (i) 12.75%
executive officers of PSI) was of SEI's Adjusted Income per Share
$16,000. Affiliates of PSI received (as defined) multiplied by the
distributions on the PSP7 Common number of shares of Common Stock
Stock owned by them. outstanding as of September 30, 1991
plus (ii) 6% of the Company's
Adjusted Income per Share multiplied
by the number of shares of Common
Stock issued after October 1, 1991,
such as the SEI Common Stock to be
issued in the Merger plus (iii) 6%
of the dividends paid with respect
to SEI's preferred stock. In
addition to the Advisory Fee, the
Adviser is paid a disposition fee of
20% of Total Realized Gain
(generally, the sum of the gains
realized by SEI from the sale
(reduced by the accumulated
depreciation) less the sum of the
losses from the sale of assets) on
dispositions of equity interests in
real property. Upon termination of
the Advisory Contract, the Adviser
is entitled to receive certain
payments, including a portion of
SEI's unrealized gains.
As a result of the Merger, the Advisory Fee is expected to increase
because there will be more shares of SEI Common Stock outstanding after the
Merger. The Advisory Fee is a function of SEI's capitalization and results of
operations. On a pro forma basis the increase in Advisory Fee for 1994 is
estimated to be approximately $373,000 assuming the Merger is completed with no
Cash Elections. PSP7 does not have an advisory relationship similar to SEI's
with the Adviser and pays no advisory fee. PSP7 Shareholders who receive SEI
Common Stock in the Merger will, as holders of SEI Common Stock, bear their
proportionate share of the Advisory Fee.
Property Operation
The properties of PSP7 and SEI are operated by PSMI and PSCP under
agreements for monthly fees of 6% and 5%, respectively, of gross revenues from
operations for operating mini-warehouse space (in the case of PSMI) and business
park space (in the case of PSCP). The fees of PSMI and PSCP will not change as a
result of the Merger. See "Comparison of Fees and Compensation" for information
on the amount of fees paid during the last three years.
Expenses
PSP7 pays all of its expenses, Under the Advisory Contract, SEI
including office space and pays all of its expenses, except
equipment and compensation to that the Adviser provides office
executive officers. space and equipment (except
accounting and computing equipment),
executive officers and their
secretarial support personnel.
As a result of the Merger, the Advisory Fee payable to the Adviser is
expected to increase.
Management and Duties
PSP7 is managed by its board of Subject to the general supervision
directors and executive officers. of the board of directors, the
Two of the directors are not Adviser advises SEI with respect to
affiliated with PSI and one, who is its investments and administers its
also the principal executive operations. A majority of the
officer of PSP7 and SEI, is an directors of SEI are not affiliated
affiliate of PSI. with PSI. Two of the directors, who
are also the principal officers of
SEI and PSP7, are affiliates of PSI
and one is a former executive
officer of PSI.
<PAGE>
Under California law, directors are accountable to a corporation and
its shareholders as fiduciaries and are required to perform their duties in good
faith, in a manner believed to be in the best interests of a corporation and its
shareholders and with such care, including reasonable inquiry, as an ordinarily
prudent person in a like position would use under similar circumstances. The
liability of the directors of both PSP7 and SEI is limited pursuant to the
provisions of California law and their organizational documents, which limit a
director's liability for monetary damages to the respective corporation or its
shareholders for breach of the director's duty of care, where a director fails
to exercise sufficient care in carrying out the responsibilities of office.
Those provisions would not protect a director who knowingly did something wrong,
or otherwise acted in bad faith, nor would they foreclose any other remedy which
might be available to the respective corporation or its shareholders, such as
the availability of non-monetary relief. In addition, the organizational
documents provide both PSP7 and SEI with the authority to indemnify its "agents"
under certain circumstances for expenses or liability incurred as a result of
litigation. Under California law, "agents" are defined to include directors,
officers and certain other individuals acting on a corporation's behalf. Both
PSP7 and SEI have taken advantage of those provisions and have entered into
agreements with the respective corporation's directors and executive officers,
indemnifying them to the fullest extent permitted by California law. To the
extent that the foregoing provisions concerning indemnification apply to actions
arising under the Securities Act, both PSP7 and SEI have been advised that, in
the opinion of the Commission, such provisions are contrary to public policy and
therefore are not enforceable.
Restrictions on Transfer and Anti-Takeover Provisions
For PSP7 to be taxed as a REIT, For SEI to be taxed as a REIT, SEI
PSP7 Common Stock must be widely Common Stock must be widely held. To
held. To aid PSP7 in meeting this aid SEI in meeting this requirement,
requirement, its board of directors its board of directors is given the
is given the power to restrict the power to prohibit the transfer of
transfer of shares of PSP7 Common shares of SEI Common Stock if the
Stock if the transfer could produce transfer could produce a violation
a violation of this requirement. of this requirement. SEI is
Subject to the rules of the AMEX authorized to issue 60,000,000
and applicable provisions of shares of SEI Common Stock, of which
California law, PSP7 can issue approximately 33,000,000 shares are
authorized common and preferred currently outstanding, and
stock without shareholder approval. 50,000,000 shares of preferred
stock, of which approximately
11,000,000 shares are currently
outstanding. Subject to the rules of
the NYSE and applicable provisions
of California law, SEI can issue
authorized common and preferred
stock without shareholder approval.
See "Description of SEI Capital
Stock -- Effects of Issuance of
Capital Stock" and "Certain Federal
Income Tax Matters -- General Tax
Treatment of SEI."
Through the issuance of capital stock, including senior securities with
special voting rights and priority over common stock, SEI is positioned to deter
attempts to obtain control in transactions not approved by its Board of
Directors, which could potentially deprive shareholders of SEI of the benefits
of a takeover not approved by its Board of Directors.
Limited Liability of Investors
Under California law, shareholders are not generally liable for
corporate debts or obligations. Both PSP7 and SEI Common Stock are
nonassessable.
Review of Shareholder Lists
Under applicable law, a shareholder is entitled, upon written demand,
to inspect and copy the record of shareholders, at any time during usual
business hours, for a purpose reasonably related to his or her interest as a
shareholder.
<PAGE>
AMENDMENT TO PSP7 BYLAWS
A provision of PSP7's Bylaws prohibits the sale of property to PSI or
its affiliates. Because this would arguably apply to the Merger, PSP7 is
proposing an amendment to its Bylaws that expressly authorizes a merger with SEI
provided any such merger is approved by the majority of outstanding shares of
PSP7 Common Stock. The proposed amendment has been approved by PSP7's Board of
Directors who recommend that PSP7 Shareholders vote FOR the proposal. Appendix F
contains a complete text of the proposed amendment.
REDEMPTION OF SERIES D SHARES
PSP7's articles of incorporation provide that holders of the Series D
Shares are entitled to a liquidation preference in the amount of $2,757,000 and
that PSP7 may redeem the Series D Shares at any time for $2,757,000. PSP7 is
redeeming all outstanding Series D Shares, conditional upon effectiveness of the
Merger. Appendix G contains the notice of redemption. See "Summary -- Series D
Shares."
<PAGE>
APPROVAL OF THE MERGER AND BYLAW AMENDMENT
General
This Joint Proxy Statement and Prospectus and the enclosed proxy are
first being mailed on or about __________ __, 1995 to the shareholders of PSP7
and SEI in connection with the solicitation by their boards of directors for use
at the special meetings of their shareholders (and at any adjournment) to
consider and vote upon the Merger and, in the case of PSP7, the Bylaw amendment.
If a proxy in the accompanying form is properly executed and returned
before the voting, the shares represented thereby will be voted in the manner
specified on the proxy. If no specification is made, the shares will be voted in
favor of the Merger and the Bylaw amendment. A proxy is revocable by delivering
a subsequently signed and dated proxy or other written notice to the Secretary
of PSP7 or SEI, as the case may be, at any time before its exercise. A proxy may
also be revoked if the person executing the proxy is present at the meeting and
chooses to vote in person.
PSP7
Holders of record at the close of business on __________ __, 1995 of
the PSP7 Common Stock and the Series D Shares will be entitled to receive notice
of and to vote at the meeting. On such date, there were _________ shares of PSP7
Common Stock and 2,757 shares of Series D Shares outstanding, and each share is
entitled to one vote on the Merger and the Bylaw amendment. Presence, in person
or by proxy, of a majority of the shares of PSP7 Common Stock and Series D
Shares, counted together as a single class, constitutes a quorum. As of the
record date, the directors and executive officers of PSP7 (and members of their
immediate family) and their affiliates beneficially owned approximately
1,069,567 shares (approximately 28.1%) of PSP7 Common Stock and 27.57 shares
(1%) of the Series D Shares. Such parties intend to vote their shares of PSP7
Common Stock and Series D Shares for the Merger and the Bylaw amendment.
The affirmative vote of a majority of the shares of PSP7 Common Stock
and Series D Shares outstanding and entitled to vote on the record date, voting
together as a single class, is required under California law to approve the
Merger and the Bylaw amendment. Accordingly, for these purposes, an abstention
or a broker non-vote will have the same effect as a vote against the Merger and
the Bylaw amendment. PSP7 has voluntarily imposed the additional condition that
the Merger be approved by a majority of the shares of PSP7 Common Stock voting
at the meeting of PSP7 Shareholders not held by PSI and its affiliates. For
these purposes, an abstention or broker non-vote will not be counted as a share
voting.
SEI
SEI Shareholders of record at the close of business on __________ __,
1995 will be entitled to receive notice of and to vote at the meeting. On such
date, there were __________ shares of SEI Common Stock outstanding, and each
share is entitled to one vote on the Merger. Presence, in person or by proxy, of
a majority of the shares entitled to vote constitutes a quorum. As of the record
date, the directors and executive officers of SEI (and members of their
immediate family) and their affiliates beneficially owned approximately
9,358,024 shares (approximately 28.4%) of SEI Common Stock. Such parties intend
to vote their shares of SEI Common Stock for the Merger.
Although not required by California law, SEI shareholder approval (by
holders of a majority of the shares of SEI Common Stock voting, provided that
the total votes cast represent a majority of all shares of SEI Common Stock
entitled to vote) is required by the NYSE rules, on which the SEI Common Stock
is listed. For these purposes, an abstention or broker non-vote will not be
counted as a share voting.
Security Ownership of Certain Beneficial Owners and Management
PSP7. Information regarding beneficial ownership of shares of PSP7
Common Stock by B. Wayne Hughes (a beneficial owner of more than 5% of the
shares of PSP7 Common Stock) is set forth in the table below concerning the
security ownership of management.
<PAGE>
The following table sets forth information as of March 31, 1995
concerning the security ownership of each director of PSP7 (including B. Wayne
Hughes, the chief executive officer) and of all directors and executive officers
of PSP7 as a group:
Shares of PSP7 Common Stock
Beneficially Owned(1)
Number
Name of Shares Percent
---- --------- -------
B. Wayne Hughes 1,062,407(2) 27.9%
Vern O. Curtis 500 (3)
Jack D. Steele 900 (3)
All Directors and Executive Officers
as a Group (seven persons) 1,069,567(2) 28.1%
----
(1) 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 the
shares.
(2) Includes (i) 215,488 shares of PSP7 Common Stock owned by B. Wayne
Hughes as trustee of the B.W. Hughes Living Trust, and (ii) 846,919
shares of PSP7 Common Stock owned by PSI. PSI Holdings, Inc. ("PSH") is
the sole shareholder of PSI. The stock of PSH is owned 49% by B. Wayne
Hughes, as trustee of the B.W. Hughes Living Trust, 37% by Tamara L.
Hughes, an adult daughter of B. Wayne Hughes, and 14% by Kenneth Q.
Volk, Jr., as co-trustee with his wife, of the K. & B. Volk Living Trust
(the "Volk Trust"). The Volk Trust has granted to Tamara L. Hughes an
irrevocable proxy to vote the Volk Trust's shares in PSH and Tamara L.
Hughes has an option (exercisable under certain circumstances) to
acquire the Volk Trust's interest in PSH. Pursuant to a resolution of
the Board of Directors of PSH, B. Wayne Hughes, the president, chief
executive officer and a director of PSH, has the sole right to vote and
dispose of the shares of PSP7 Common Stock held by PSH directly or
indirectly through its wholly-owned subsidiaries.
(3) Less than 0.1%.
As of March 31, 1995, B. Wayne Hughes also beneficially owned 27.57 (or
1%) of the Series D Shares (approximately 27.02 of these shares are held of
record by PSI). To the knowledge of PSP7, no other executive officer or director
of PSP7 owns any Series D Shares and there is no beneficial owner of more than
5% of the Series D Shares.
<PAGE>
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 SEI Common Stock:
Shares of SEI Common Stock
Beneficially Owned
Number
Name and Address of Shares Percent
Public Storage Partners, Ltd., 7,603,394 23.2%
a California limited partnership,
Public Storage Partners II, Ltd.,
a California limited partnership,
Public Storage Properties, Ltd., a California
limited partnership,
Public Storage Properties IV, Ltd., a
California limited partnership,
Public Storage Properties V, Ltd., a
California limited partnership,
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
PS Insurance Company, Ltd., a
Bermuda corporation ("PSIC")
41 Cedar Avenue
Hamilton, Bermuda (1)
FMR Corp. 2,423,500 7.4%
82 Devonshire Street
Boston, Massachusetts 02109 (2)
- --------
(1) This information is as of March 31, 1995 and is based on a joint
Schedule 13D, amended as of February 28, 1995, and subsequent reports on
Form 4 filed by the reporting persons listed above (the "SEI Reporting
Persons"). The number of shares of SEI Common Stock owned by the SEI
Reporting Persons at March 31, 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. PSI is
the general partner of Public Storage Partners, Ltd. and Public Storage
Partners II, Ltd., PSI and B. Wayne Hughes are the general partners of
Public Storage Properties, Ltd., Public Storage Properties IV, Ltd. and
Public Storage Properties V, Ltd., and PSI is the sole shareholder of
PSIC and PSMI. PSIH is the sole shareholder of PSI, and the stock
ownership of PSIH is described above. Pursuant to a resolution of the
Board of Directors of PSIH, B. Wayne Hughes, the President, Chief
Executive Officer and a director of PSIH, has the sole right to vote and
dispose of the shares of SEI held by PSIH directly or indirectly through
its wholly-owned subsidiaries. Each of the SEI Reporting Persons
disclaims the existence of a group within the meaning of Section
13(d)(3) of the Exchange Act. B. 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 924,357 shares or
approximately 2.8% as of March 31, 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 December 31, 1994 and is based on a Schedule
13G (Amendment No. 1) filed by FMR Corp. (except that the percent shown
in the table is based on the outstanding shares of SEI Common Stock at
March 31, 1995). As of December 31, 1994, FMR Corp. beneficially owned
2,423,500 shares of SEI Common Stock. This number includes 2,423,500
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 serves as investment adviser to certain other funds which are
generally offered to limited groups of investors. FMR Corp. does not
have sole voting power with respect to any shares and has sole
dispositive power with respect to 2,423,500 shares.
<PAGE>
The following tables set forth information as of March 31, 1995
concerning the security ownership of each director of SEI (including B. Wayne
Hughes, the chief executive officer) and of all directors and executive officers
of SEI as a group:
<TABLE>
<CAPTION>
Shares of Common Stock:
Beneficially Owned(1)
Shares Subject to Options(2) Shares of 8.25% Convertible Shares of 10% Cumulative
Shares Issuable Upon Conversion Preferred Stock, Preferred Stock,
of Convertible Preferred Stock (3) Beneficially Owned(1) Series A 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 6,679,037 (1)(4) 20.3% -- -- -- --
Harvey Lenkin 582,290 (1)(5) 1.8% 2,400 (1)(13) 0.1% -- --
4,040 (3) (12)
----- ----
586,330 1.8%
Robert J. Abernethy 65,591 (1) 0.2% -- -- -- --
18,333 (2) (12)
------ ----
83,924 0.3%
Dann V. Angeloff 77,333 (1)(6) 0.2% -- -- -- --
William C. Baker 10,000 (1) (12) -- -- -- --
18,333 (2) (12)
------ ----
28,333 (12)
Uri P. Harkham 474,746 (1)(7) 1.4% -- -- -- --
10,000 (2) (12)
------ ----
484,746 1.5%
Berry Holmes 100 (1)(8) (12) -- -- -- --
18,333 (2) (12)
------ ----
18,433 (12)
Michael M. Sachs 39,838 (1)(9) 0.1% -- -- 1,000 (1)(14) (12)
All Directors and
Executive 8,265,428 (1)(4)(5)(6)(7) 25.2% 39,250(1)(10)(11) 1.7% 12,460 (1)(10)(11) 0.7%
Officers as a Group (8)(9)(10)(11) (14)
(12 persons) (10) 102,164 (2) 0.3%
66,075 (3) 0.2%
------ ----
8,433,667 25.6%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Shares of 9.20% Cumulative Shares of Adjustable Rate Shares of 10% Cumulative
Preferred Stock, Cumulative Preferred Stock, Preferred Stock,
Series B Beneficially Owned(1) Series C Beneficially Owned(1) Series
------------------------------ --------------------------- --------------------------
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)(15) 3.3% -- --
Robert J. Abernethy -- -- -- -- -- --
Dann V. Angeloff -- -- -- -- -- --
William C. Baker -- -- -- -- -- --
Uri P. Harkham -- -- -- -- -- --
Berry Holmes -- -- -- -- -- --
Michael M. Sachs -- -- -- -- 1,000(1)(14) (12)
All Directors and Executive 16,240(1)(10)(11) 0.7% 40,000(1)(15) 3.3% 1,000(1)(14) (12)
Officers as a Group
(12 persons)(10)
- ---------------
<FN>
(1) Shares of SEI Common Stock or 8.25% Convertible Preferred Stock or 10%
Cumulative Preferred Stock, Series A or 9.20% Cumulative Preferred
Stock, Series B or Adjustable Rate Cumulative Preferred Stock, Series C
or 10% Cumulative Preferred Stock, Series E, as applicable, beneficially
owned as of March 31, 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 March 31, 1995, and portion of which
will be vested within 60 days of March 31, 1995, of shares of SEI Common
Stock subject to options granted to the named individuals or the group
pursuant to SEI's 1990 Stock Option Plan.
(3) Represents shares of SEI Common Stock which can be acquired upon
conversion of the shares of 8.25% Convertible Preferred Stock which are
beneficially owned as of March 31, 1995 by the named individuals or the
group.
(4) Includes 1,298,876 shares held of record by the B.W. Hughes Living Trust
as to which Mr. Hughes has voting and investment power, 1,341 and 1,336
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 dtd 3/7/91.
Also includes (i) 3,797,836 shares held of record by PSI, (ii) 512,639
shares held of record by PSMI, (iii) 250,000 shares held of record by
PSIC, (iv) 45,000 shares held of record by Public Storage Partners,
Ltd., (v) 5,000 shares held of record by Public Storage Partners II,
Ltd., (vi) 39,911 shares held of record by Public Storage Properties,
Ltd., (vii) 274,675 shares held of record by Public Storage Properties
IV, Ltd. and (viii) 418,128 shares held of record by Public Storage
Properties V, Ltd.
(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 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 68,333 shares held by Mr. Angeloff as trustee of Angeloff
Family Trust.
<PAGE>
(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 320 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 9,300 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 Kenneth Q. Volk, Jr., Chairman Emeritus of SEI.
(11) 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.
(12) Less than 0.1%.
(13) Includes 100 shares held by Mrs. Lenkin and 300 shares held by Mrs.
Lenkin as custodian for a son.
(14) Shares held of record by Michael M. Sachs Professional Corporation
Defined Benefit Pension Trust as to which Mr. Sachs has voting and
investment power.
(15) 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.
</TABLE>
As of March 31, 1995, the directors and executive officers of SEI did
not own any shares of SEI's 9.50% Cumulative Preferred Stock, Series D.
Solicitation of Proxies
SEI and PSP7 will pay its respective cost of soliciting proxies. In
addition to solicitation by mail, certain directors, officers and regular
employees of SEI, PSP7 and their affiliates may solicit the return of proxies by
telephone, telegraph, personal interview or otherwise. SEI and PSP7 may also
reimburse brokerage firms and other persons representing the beneficial owners
of their Common Stock for reasonable expenses in forwarding proxy solicitation
materials to such beneficial owners. Shareholder Communications Corporation may
be retained to assist SEI and PSP7 in solicitation of proxies at an estimated
cost of $30,000.
<PAGE>
DESCRIPTION OF PSP7'S PROPERTIES
PSP7 owns a total of 38 properties: 34 mini-warehouses, three business
parks and one property that combines mini-warehouse and business park space. The
following table contains information as of December 31, 1994 about PSP7's
properties. Pursuant to the Merger, these properties would be acquired by SEI.
<TABLE>
<CAPTION>
Net
Size of Number Rentable
Parcel of Square Date
Location (Acres) Spaces Feet Opened
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
California
Cerritos (1)
Artesia Boulevard 2.60 26 31,000 April 1983
Los Angeles
Beverly Boulevard 1.05 1,206 80,000 November 1982
Richmond
Carlson Boulevard 2.65 570 65,000 November 1982
Florida
Altamonte Springs
Altamonte Road 2.96 444 48,000 May 1982
Jacksonville
Blanding Boulevard 2.40 356 41,000 January 1982
Lauderhill
State Road 7 3.00 475 51,000 April 1982
Miami
Miami Gardens 3.40 572 65,000 December 1981
Orlando
Oak Ridge 4.30 657 74,000 April 1982
St. Petersburg
34th Street South 2.36 372 38,000 September 1981
St. Petersburg
Joe's Creek 5.18 636 62,000 April 1982
Illinois
E. Hazelcrest
Halsted 3.79 590 70,000 February 1983
Elmhurst
Lake Street 3.30 456 53,000 February 1983
Joliet
Route 52 Illinois 1.91 304 37,000 December 1981
Markham
159th Place 4.06 356 42,000 April 1982
<PAGE>
<CAPTION>
Net
Size of Number Rentable
Parcel of Square Date
Location (Acres) Spaces Feet Opened
- -------------------------------------------------------------------------------------------------------------
Missouri
Bridgeton
Pennridge Drive 2.56 316 38,000 February 1982
Independence
Noland Road 5.12 496 57,000 February 1982
St. Louis
Page 2.51 356 41,000 May 1982
New Jersey
Cherry Hill
Interstate 295 5.58 505 60,000 March 1982
Edgewater Park
Route 130 4.00 476 50,000 January 1982
Lawrence Township
Allegheny Street 3.94 357 40,000 October 1982
New York
Liverpool
Route 57 3.89 436 55,000 November 1982
Rochester
East Avenue 1.80 582 57,000 March 1983
Oregon
Beaverton
110th Street 2.37 424 45,000 February 1982
Milwaukee (1)
Edison Street 2.30 27 40,000 July 1982
Portland
Gantenbein 1.25 303 35,000 March 1982
Portland
N.E. Prescott Street 3.27 427 53,000 June 1982
Portland
S.E. Flavel Street 1.78 362 40,000 June 1982
Pennsylvania
Upper Chichester
Market Street 3.94 428 49,000 June 1982
Texas
Dallas (2)
LBJ Freeway 3.72 445 101,000 October 1982
Fort Worth
Highway 80-180 3.09 456 55,000 May 1982
Grand Prairie
19th Street 3.46 484 64,000 November 1981
Houston
Guhn Road 3.00 510 57,000 May 1982
Houston
S.W. Freeway 3.25 472 49,000 August 1982
Pasadena
E. Belt Drive 4.19 684 81,000 February 1983
Washington
Renton (1)
Ranier 2.12 24 28,000 January 1983
Seattle
Del Ridge 1.83 355 38,000 July 1982
Wisconsin
Greenfield
W. Layton 3.89 589 70,000 May 1982
Milwaukee
Brown Deer 2.78 458 54,000 December 1981
- ---------------
<FN>
(1) Business park facility.
(2) Combination mini-warehouse and business park facility.
</TABLE>
As of the date of this Joint Proxy Statement and Prospectus, each of
these properties is generating sufficient revenues to cover its operating
expenses.
No single property has a book value of at least 10% of the total assets
of PSP7 or has accounted for at least 10% of its aggregate gross revenues.
None of the properties is subject to any material mortgage, lien, or
any encumbrance other than liens for taxes and assessments not yet due or
payable, utility easements or other immaterial liens or encumbrances. Each of
the properties will continue to be used for its current purpose. PSP7 believes
each property is adequately covered by insurance.
<PAGE>
As reflected in the table below, PSP7 has experienced overall improved
property operations:
<TABLE>
<CAPTION>
Years ended December 31,
1992 1993 1994
<S> <C> <C> <C>
Weighted average occupancy level (1) 87% 90% 89%
Realized monthly rent per occupied square foot (1)(2) $ .56 $ .57 $ .61
- ---------------
<FN>
(1) Mini-warehouses only.
(2) Realized monthly rent per occupied square foot represents the actual
revenue earned per occupied square foot. PSP7 believes this is a more
relevant measure than the posted rental rates, since posted rates can be
discounted through the use of promotions.
</TABLE>
At December 31, 1994, PSP7 had 10% or more of its portfolio of
properties (based on original acquisition and construction cost) in the
following states:
<TABLE>
<CAPTION>
Weighted average Realized monthly
Percentage of occupancy level rent per occupied
Portfolio at for the twelve square foot for
December 31, 1994 months ended the year ended
Number of Based on Original December 31, December 31,
Properties Cost 1994(1) 1994(1)
<S> <C> <C> <C> <C>
Texas 6 22% 88.8% $0.53
Florida 7 16 91.2 .56
California 3 13 80.8 .82
Oregon 5 11 91.0 .65
Illinois 4 10 89.3 .59
Other 13 28 90.6 .61
-- --- ---- -----
38 100% 88.6% $ .61
== === ==== =====
- ---------------
<FN>
(1) Mini-warehouses only.
</TABLE>
<PAGE>
DESCRIPTION OF SEI'S PROPERTIES
At December 31, 1994, SEI had equity interests (through direct
ownership, as well as general and limited partnership interests) in 402
facilities (147 of which were wholly-owned) located in 37 states: Alabama (14),
Arizona (5), California (95), Colorado (14), Connecticut (3), Delaware (3),
Florida (32), Georgia (9), Hawaii (1), Illinois (5), Indiana (8), Kansas (13),
Kentucky (2), Louisiana (3), Maryland (9), Massachusetts (1), Michigan (2),
Minnesota (1), Missouri (9), Nebraska (1), Nevada (8), New Hampshire (2), New
Jersey (13), New York (4), North Carolina (6), Ohio (20), Oklahoma (5), Oregon
(11), Pennsylvania (7), Rhode Island (2), South Carolina (1), Tennessee (6),
Texas (61), Utah (5), Virginia (12), Washington (7), and Wisconsin (2). These
facilities consist of 368 mini-warehouses, 16 business parks and 18 combination
mini-warehouse/business park facilities. For additional information on SEI's
properties, see "The Merger -- Comparison of Ownership of Shares in PSP7 and SEI
- -Properties." At December 31, 1994, SEI also held mortgage loans secured by 12
other mini-warehouses owned by eight private limited partnerships whose general
partners are affiliates of the Adviser. None of SEI's current investments
involves 10% or more of SEI's total assets or gross revenues. In the opinion of
management of SEI, the facilities in which SEI has invested are adequately
insured.
As reflected in the table below, SEI has experienced overall improved
property operations:
<TABLE>
<CAPTION>
Years ended December 31,
1992 1993 1994
<S> <C> <C> <C>
Weighted average occupancy level (1) 86.1% 89.5% 90.3%
Realized monthly rent per occupied square foot (1)(2) $ .55 $ .56 $ .59
- -----
<FN>
(1) Mini-warehouses owned throughout the periods.
(2) Realized monthly rent per occupied square foot represents the actual
revenue earned per occupied square foot. SEI believes this is a more
relevant measure than the posted rental rates, since posted rates can be
discounted through the use of promotions.
</TABLE>
At December 31, 1994, SEI had 10% more of its portfolio of properties
(based on origial acquisition cost) in the following states:
<TABLE>
<CAPTION>
Realized monthly rent
Percentage of Weighted average per occupied square
Portfolio at December occupancy level for foot for the year
31, 1994 Based on the twelve months ended December 31,
Number of Properties Original Cost ended December 31, 1994(1)
1994(1)
<S> <C> <C> <C> <C>
California 95 22% 88% $.82
Texas 61 14% 87% .50
Other 246 64% 90% .58
--- --- -- ----
402 100% 88% $.63
=== === == ====
- --------------------
<FN>
(1) Mini-warehouses only.
</TABLE>
<PAGE>
DISTRIBUTIONS AND PRICE RANGE OF SEI COMMON STOCK
The SEI Common Stock has been listed on the NYSE since October 19,
1984. The following table sets forth the distributions paid per share on the SEI
Common Stock in the periods indicated below and the reported high and low sales
prices on the NYSE composite tape for the applicable periods.
<TABLE>
<CAPTION>
Distributions
Calendar Periods High Low Paid (1)
---------------- ---- --- --------
<S> <C> <C> <C>
1993:
First quarter $12 $ 8 7/8 $.21
Second quarter 12 1/4 11 .21
Third quarter 14 1/2 11 5/8 .21
Fourth quarter 15 13 3/4 .21
1994:
First quarter 16 13 1/2 .21
Second quarter 16 3/4 13 3/8 .21
Third quarter 15 3/4 14 1/4 .21
Fourth quarter 15 13 .22
1995:
First Quarter 17 1/8 13 1/2 .22
- -----------
<FN>
(1) For GAAP purposes, all distributions were from investment income.
</TABLE>
As of February 28, 1995, there were approximately 11,960 record holders
of SEI Common Stock. On February 1, 1995, the last full trading day prior to the
first public announcement of the proposed Merger, the closing price of the
Common Stock of SEI was $14. On __________ __, 1995, the last full trading day
prior to the date of this Joint Proxy Statement and Prospectus, the closing
price was $_____.
Holders of SEI Common Stock are entitled to receive distributions when,
as and if declared by the Board of Directors out of any funds legally available
for that purpose. SEI, as a REIT, is required to distribute annually at least
95% of its "real estate investment trust taxable income," which, as defined by
the relevant tax statutes and regulations, is generally equivalent to net
taxable ordinary income. Under certain circumstances, SEI can rectify a failure
to meet this distribution requirement by paying dividends after the close of a
particular taxable year. See "Certain Federal Income Tax Matters -- General Tax
Treatment of SEI."
SEI's revolving credit facility with a commercial bank restricts SEI's
ability to pay distributions in excess of "Funds from Operations" for the prior
four fiscal quarters less scheduled principal payments and less capital
expenditures. Funds from Operations is defined in the loan agreement generally
as net income before gain on sale of real estate, extraordinary loss on early
retirement of debt and deductions for depreciation, amortization and non-cash
charges. Also, unless full dividends on SEI's preferred stock have been paid for
all past dividend periods, no dividends may be paid on SEI Common Stock, except
in certain instances.
<PAGE>
DISTRIBUTIONS AND PRICE RANGE OF PSP7 COMMON STOCK
The PSP7 Common Stock has been listed on the AMEX since September 1991.
The following table sets forth the distributions paid per share on PSP7 Common
Stock with respect to the periods indicated below and the reported high and low
sales prices on the AMEX composite tape for the applicable periods.
<TABLE>
<CAPTION>
Distributions
Calendar Periods High Low Paid (1)
---------------- ---- --- --------
<S> <C> <C> <C>
1993:
First quarter $15 1/2 12 $.36
Second quarter 16 14 .36
Third quarter 17 14 1/4 .36
Fourth quarter 17 1/2 15 3/4 .28
1994:
First quarter 17 15 1/4 .28
Second quarter 16 14 .28
Third quarter 17 15 .28
Fourth quarter 16 15 .28
1995:
First quarter 18 3/8 15 1/4 .28
- ---------------
<FN>
(1) Distributions paid per share of PSP7 Common Stock with respect to the
applicable periods. Actual payment was made 15 days after end of quarter.
For GAAP purposes, in 1993 and 1995, all distributions were from
investment income and, in 1994, distributions consisted of $1.08 of
ordinary income and $.04 of capital gain.
</TABLE>
As of December 31, 1994, there were approximately 4,709 record holders
of PSP7's Common Stock. On February 1, 1995, the last full trading day prior to
the first public announcement of the proposed Merger, the closing price of PSP7
Common Stock was $16-7/8. On __________ __, 1995, the last full trading day
prior to the date of this Joint Proxy Statement and Prospectus, the closing
price was $_____.
Holders of PSP7 Common Stock are entitled to receive distributions
when, as and if declared by its Board of Directors out of any funds legally
available for that purpose. PSP7 as a REIT, is required to distribute annually
at least 95% of its "real estate investment trust taxable income," which, as
defined by the relevant tax statutes and regulations, is generally equivalent to
net taxable ordinary income. Under certain circumstances, PSP7 can rectify a
failure to meet this distribution requirement by paying dividends after the
close of a particular taxable year.
There have been no distributions paid on the Series D Shares.
<PAGE>
DESCRIPTION OF SEI CAPITAL STOCK
Common Stock
SEI is authorized to issue 60,000,000 shares of common stock, $.10 par
value per share. SEI has outstanding approximately 32,000,000 shares of SEI
Common Stock and approximately 500,000 shares of SEI Common Stock which are
subject to options under SEI's 1990 and 1994 Stock Option Plans and 3,872,054
shares which are issuable upon conversion or redemption of SEI's Convertible
Preferred Stock.
The following description of SEI Common Stock sets forth certain
general terms and provisions of SEI Common Stock. The statements below
describing SEI Common Stock are in all respects subject to and qualified in
their entirety by reference to the applicable provisions of the SEI's Restated
Articles of Incorporation and Bylaws.
SEI Shareholders will be entitled to receive dividends when, as and if
declared by the Board of Directors, out of funds legally available therefor.
Payment and declaration of dividends on SEI Common Stock and purchases of shares
thereof by SEI will be subject to certain restrictions if SEI fails to pay
dividends on outstanding preferred stock. See "-- Preferred Stock." Upon any
liquidation, dissolution or winding up of SEI, holders of SEI Common Stock will
be entitled to share equally and ratably in any assets available for
distribution to them, 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 SEI Common Stock have no preemptive
rights, which means they 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 SEI Common Stock entitles the holder to one
vote on all matters presented to shareholders for a vote, with the exception
that shareholders 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. SEI Shareholders have no preemptive or other rights to
subscribe for or purchase additional shares of SEI Common Stock. All outstanding
shares of SEI Common Stock are fully paid and nonassessable. Under California
law, if SEI is liquidated, subject to the rights of any holders of preferred
stock, each outstanding share is entitled to participate pro rata in the assets
remaining after payment of, or adequate provision for, all known debts and
liabilities of SEI.
The Board of Directors may prohibit the transfer, or effect redemptions
of, the SEI Common Stock to aid SEI in maintaining its qualification as a REIT.
See "Certain Federal Income Tax Matters -- General Tax Treatment of SEI."
Preferred Stock
SEI is authorized to issue 50,000,000 shares of preferred stock, $.01
par value per share. SEI's Articles of Incorporation provide that the preferred
stock may be issued from time to time in one or more series and give the Board
of Directors broad authority to fix the dividend and distribution rights,
conversion and voting rights, if any, redemption provisions and liquidation
preferences of each series of preferred stock.
SEI has six series of preferred stock outstanding: 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 and 2,195,000
shares of Series E Preferred Stock. In all respects, the Series A Preferred
Stock, the Series B Preferred Stock, the Adjustable Rate Preferred Stock and the
Series D Preferred Stock and the Series E Preferred Stock rank on a parity with
each other and are senior to the Convertible Preferred Stock. Each of the Series
A Preferred Stock, the Series B Preferred Stock, the Adjustable Rate Preferred
Stock, the Series D Preferred Stock and the Series E Preferred Stock (i) has a
stated value of $25.00 per share, (ii) in preference to the holders of shares of
SEI Common Stock and any other capital stock ranking junior to the Series A
Preferred Stock, the Series B Preferred Stock, the Adjustable Rate Preferred
Stock, the Series D Preferred Stock and the Series E Preferred Stock as to
payment of dividends (including the Convertible Preferred Stock), provides for
cumulative quarterly dividends calculated as a percentage of the stated value
(10% in the case of the Series A Preferred Stock, 9.20% in the case of the
Series B Preferred Stock, 9.50% in the case of the Series D Preferred Stock, 10%
in the case of the Series E Preferred Stock and a rate adjustable quarterly
ranging from 6.75% to 10.75% in the case of the Adjustable Rate Preferred Stock
(currently 8.668%)) and (iii) is subject to redemption, in whole or in part, at
the option of SEI at a cash redemption price of $25.00 per share, plus accrued
and unpaid dividends (on and after September 30, 2002 in the case of the Series
A Preferred Stock, on and after June 30, 2003 in the case of the Series B
Preferred Stock, on and after June 30, 1999 in the case of the Adjustable Rate
Preferred Stock, on and after September 30, 2004 in the case of the Series D
Preferred Stock and on or after January 31, 2005 in the case of the Series E
Preferred Stock).
<PAGE>
In the event of any voluntary or involuntary liquidation, dissolution
or winding up of SEI, the holders of the Series A Preferred Stock, the Series B
Preferred Stock, the Adjustable Rate Preferred Stock, the Series D Preferred
Stock and the Series E Preferred Stock will be entitled to receive out of SEI's
assets available for distribution to stockholders, before any distribution of
assets is made to holders of SEI Common Stock or any other shares of capital
stock ranking as to such distributions junior to the Series A Preferred Stock,
the Series B Preferred Stock, the Adjustable Rate Preferred Stock, the Series D
Preferred Stock and the Series E Preferred Stock (including the Convertible
Preferred Stock) liquidating distributions in the amount of $25.00 per share,
plus all accrued and unpaid dividends. Except as expressly required by law and
in certain other limited circumstances, the holders of the Series A Preferred
Stock, the Series B Preferred Stock, the Adjustable Rate Preferred Stock, the
Series D Preferred Stock and the Series E Preferred Stock are not entitled to
vote.
The Convertible Preferred Stock (i) has a stated value of $25.00 per
share, (ii) in preference to the holders of shares of the Common Stock and any
other capital stock ranking junior to the Convertible Preferred Stock as to
payment of dividends, provides for cumulative quarterly dividends at an annual
rate of 8.25% of the stated value thereof, (iii) is convertible at the option of
the holder at any time into SEI Common Stock at a conversion price of 1.6835
shares of SEI Common Stock for each share of Convertible Preferred Stock
(subject to adjustment in certain circumstances) and (iv) after July 1, 1998,
under certain circumstances is redeemable for SEI Common Stock at the option of
SEI, in whole or in part, at a redemption price of 1.6835 shares of SEI Common
Stock for each share of Convertible Preferred Stock (subject to adjustment in
certain circumstances).
In the event of any voluntary or involuntary liquidation, dissolution
or winding up of SEI, the holders of the Convertible Preferred Stock will be
entitled to receive out of SEI's assets available for distribution to
stockholders, before any distribution of assets is made to holders of SEI Common
Stock or any other shares of capital stock ranking as to such distributions
junior to the Convertible Preferred Stock, liquidating distributions in the
amount of $25.00 per share, plus all accrued and unpaid dividends. Except as
expressly required by law and in certain other limited circumstances, the
holders of the Convertible Preferred Stock are not entitled to vote.
Effects of Issuance of Capital Stock
The issuance of SEI Common Stock and the issuance of preferred stock
with special voting rights could be used to deter attempts by a single
shareholder or group of shareholders to obtain control of SEI in transactions
not approved by the Board of Directors. SEI has no intention to issue SEI Common
Stock or the preferred stock for such purposes.
<PAGE>
DISSENTING SHAREHOLDERS' RIGHTS OF APPRAISAL
PSP7
Pursuant to Chapter 13 of the California General Corporation Law
("Chapter 13"), a holder of shares of PSP7 Common Stock may, in some instances,
be entitled to require PSP7 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.
The general terms of the Merger were first announced on February 2, 1995. The
following is a brief summary of the procedures to be followed by a PSP7
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 Joint Proxy Statement and Prospectus as Appendix E, 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.
Shares of PSP7 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 PSP7 Common Stock. This 5% requirement is applicable because PSP7
Common Stock is listed on the AMEX, a national securities exchange certified by
the California Commissioner of Corporations, as provided in Section 1300(b)(1)
of Chapter 13.
A Dissenting Shareholder who wishes to require PSP7 to purchase his or
her shares of PSP7 Common Stock must:
(1) vote against the Merger any or all of the shares of PSP7
Common Stock entitled to be voted (shares of PSP7 Common Stock not
voted are not considered to be voted against the Merger and will not be
counted toward the 5% minimum for Dissenters' Rights to exist);
provided that if a PSP7 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 PSP7 or its transfer agent at the
addresses listed below, which is received not later than the date of
the meeting of PSP7 Shareholders, setting forth the number of shares of
PSP7 Common Stock demanded to be purchased by PSP7 and a statement as
to claimed fair market value of such shares at February 1, 1995; and
(3) submit for endorsement, within 30 days after the date on
which the notice of approval of the Merger by PSP7 Shareholders
described below is mailed to such shareholders, to PSP7 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.
If the holders of 5% or more of the outstanding shares of PSP7 Common
Stock have made demands for payment on or prior to the date of the PSP7
Shareholder meeting to approve the Merger, and have voted against the Merger at
the meeting, within 10 days after the date of the approval of the Merger, PSP7
will mail to each Dissenting Shareholder who holds PSP7 Common Stock a notice of
such approval together with a statement of the price determined by PSP7 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 PSP7 to purchase at the price stated therein any
Dissenting Shares.
<PAGE>
If PSP7 and the Dissenting Shareholder agree that any shares of PSP7
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 PSP7 denies that the shares are
Dissenting Shares or if PSP7 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 PSP7 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 PSP7 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 PSP7 to the shareholder upon the surrender of the certificates
representing such shares to PSP7. The costs of the proceeding shall be
apportioned as the court considers equitable, but if the appraisal exceeds the
price offered by PSP7, PSP7 shall pay the costs, and if the appraisal is more
than 125% of the price offered by PSP7, PSP7 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 PSP7's consent. Written demands for payment and
submissions for endorsement with respect to PSP7 Common Stock must be addressed
to Public Storage Properties VII, Inc., 600 North Brand Boulevard, Suite 300,
Glendale, California 91203-1241, attention: Investor Services Department or to
PSP7's transfer agent, American Stock Transfer & Trust Company, 40 Wall Street,
New York, New York 10005.
Any reference to "Dissenting Shareholder" in this section "Dissenting
Shareholders' Rights of Appraisal" means the recordholder of Dissenting Shares
and includes a transferee of record.
A PSP7 Shareholder receiving cash upon the exercise of rights of
appraisal may recognize gain or loss for income tax purposes. See "Certain
Federal Income Tax Matters."
PSP7 Shareholders are entitled, upon written demand, to inspect and
copy the record of PSP7 Shareholders at any time during usual business hours to
communicate with other PSP7 Shareholders with respect to the Merger.
SEI
SEI Shareholders are not entitled to dissenters' rights in connection
with the Merger.
<PAGE>
CERTAIN FEDERAL INCOME TAX MATTERS
The following discussion summarizes the material federal income tax
considerations of the Merger and the subsequent ownership and disposition of
shares of SEI Common Stock that are generally applicable to a PSP7 Shareholder.
Neither PSP7 nor SEI plan to obtain any rulings from the Internal Revenue
Service ("IRS") concerning tax issues with respect to the Merger or the
qualification of PSP7 or SEI as a REIT. Thus, no assurance can be provided that
the statements set forth herein (which do not bind the IRS or the courts) will
not be challenged by the IRS or will be sustained if so challenged. Hogan &
Hartson L.L.P., counsel to PSP7, has reviewed the following discussion and is of
the opinion that this discussion fairly summarizes the material federal income
tax considerations to a PSP7 Shareholder as a result of the Merger and the
subsequent ownership of SEI Common Stock. This discussion and such opinion are
based on the Code, applicable Treasury Regulations, judicial decisions, and IRS
rulings, certain factual assumptions related to the ownership and operation of
PSP7 and SEI and certain representations made by PSP7, SEI, and certain
shareholders of PSP7. 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 PSP7 and SEI that
would affect this discussion. BECAUSE THIS DISCUSSION DOES NOT DEAL WITH ALL
ASPECTS OF FEDERAL TAXATION, AND THE TAX CONSEQUENCES WILL NOT BE THE SAME FOR
ALL PSP7 SHAREHOLDERS, PSP7 SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS
WITH SPECIFIC REFERENCE TO THEIR OWN TAX SITUATIONS, INCLUDING THE APPLICATION
AND EFFECT OF STATE, LOCAL, AND FOREIGN TAX LAWS.
The Merger
The Merger is intended to be a "reorganization" for federal income tax
purposes, and accordingly: (i) no gain or loss will be recognized by either PSP7
or SEI in connection with the Merger; and (ii) no gain or loss will be
recognized by PSP7 Shareholders who receive solely SEI Common Stock in exchange
for their PSP7 Common Stock in the Merger (but all PSP7 Shareholders will
recognize ordinary income in the amount of any Required REIT Distributions made
to them). No rulings have been or will be requested from the IRS regarding the
Merger or any other aspect of the matters discussed in this Joint Proxy
Statement and Prospectus. Hogan & Hartson L.L.P., counsel to PSP7, has rendered
an opinion that the Merger will constitute a reorganization under Section 368(a)
of the Code, based on certain factual assumptions and representations made by
PSP7, SEI and certain PSP7 Shareholders. Of particular importance are certain
assumptions and representations relating to the "continuity of interest"
requirement discussed below.
Continuity of Interest Assumption. To qualify as a reorganization,
among other requirements, the Merger must satisfy a "continuity of interest"
test, under which the historic PSP7 Shareholders (shareholders who purchase
shares of PSP7 in anticipation of the Merger may not be included for this
purpose) must continue to retain a meaningful ownership interest in SEI after
the Merger. Generally, this test will be considered satisfied if historic PSP7
Shareholders exchange at least 50% of PSP7's Common Stock for SEI Common Stock
in the Merger, and those shareholders do not at the time of the Merger plan to
dispose of that SEI Common Stock. Management of PSP7 and SEI have represented
that they are not aware of any plan on the part of PSP7 Shareholders that would
cause this test not to be satisfied. Based upon this representation and similar
representations from B. Wayne Hughes and PSI, Hogan & Hartson has assumed, for
purposes of its opinion, that the Merger will constitute a reorganization, and
that the continuity of interest test will be satisfied in the Merger.
Reorganization Consequences to PSP7 and SEI. As a result of
reorganization treatment, neither PSP7 nor SEI will recognize gain or loss
because of the Merger. SEI will also succeed to the assets, liabilities, and tax
attributes of PSP7. Accordingly, following the Merger, SEI will hold PSP7's
properties with a carryover tax basis, determined by reference to the relatively
low, historic basis of those assets in the hands of PSP7. The tax basis will not
be increased by any cash expended by SEI pursuant to the Cash Elections or to
satisfy dissenter's rights, or by the amount of any gain reportable by those
PSP7 Shareholders who may be taxable as a result of the transaction.
Exchange of PSP7 Common Stock Solely for SEI Common Stock. As a result
of reorganization treatment (i) no gain or loss will be recognized by PSP7
Shareholders who exchange their PSP7 Common Stock solely for SEI Common Stock
pursuant to the Merger (but see "Required REIT Distributions" below"), and (ii)
such a shareholder's aggregate tax basis in the SEI Common Stock received will
be the same as the aggregate tax basis of the shares of PSP7 Common Stock
surrendered, and (iii) provided such PSP7 Common Stock is held as a capital
asset at the Effective Time, the holding period of the SEI Common Stock will
include the holding period of the surrendered PSP7 Common Stock.
<PAGE>
PSP7 Shareholders Receiving Only Cash. A PSP7 Shareholder who exchanges
PSP7 Common Stock only for cash (whether pursuant to and subject to the
conditions of the Cash Election, or as a result of the exercise of dissenters'
rights) will be taxed on the difference between such shareholder's adjusted
basis in his or her PSP7 Common Stock and the amount of cash received. This
generally would produce capital gain or loss, depending on the relationship
between the cash received and the tax basis of the shares surrendered (it is
possible that dividend treatment might apply in some circumstances if the
shareholder is actually or constructively related to continuing shareholders of
SEI).
PSP7 Shareholders Receiving Cash and SEI Common Stock. As a result of
reorganization treatment (i) a PSP7 Shareholder who, pursuant to the Merger and
subject to the conditions of the Cash Election, exchanges PSP7 Common Stock for
a combination of SEI Common Stock and cash will not recognize any loss realized
on such exchange, and (ii) such shareholder will recognize gain only to the
extent of the lesser of the amount of cash received or the excess of the fair
market value of the SEI Common Stock and cash received over such shareholder's
tax basis in the PSP7 Common Stock surrendered. The recognized gain will be
treated as capital gain (provided the PSP7 Common Stock is held as a capital
asset at the Effective Time). The aggregate tax basis of the SEI Common Stock
received will be the same as the aggregate tax basis of the PSP7 Common Stock
surrendered for the SEI Common Stock, reduced by the amount of cash received and
increased by the amount of gain recognized, if any. The holding period of the
SEI Common Stock will include the holding period of the PSP7 Common Stock
surrendered for the SEI Common Stock, provided that the PSP7 Common Stock is
held as a capital asset at the Effective Time.
Required REIT Distributions. The Required REIT Distributions would not
be treated as cash paid in exchange for the PSP7 Common Stock, but rather as a
dividend taxable to all recipients as ordinary income.
Cash Received in Lieu of Fractional Shares of SEI Common Stock. PSP7
Shareholders that receive cash in lieu of a fractional share of SEI Common Stock
pursuant to the Merger will recognize capital gain or loss equal to the
difference between the tax basis allocable to the fractional share and the cash
paid for it, provided that the PSP7 Common Stock is held as a capital asset as
the Effective Time.
Failure to Qualify for Reorganization Treatment. In the event that the
Merger does not qualify as a reorganization, the Merger likely would be treated
as a taxable sale by PSP7 of its assets and a contemporaneous liquidation. PSP7
presumably would not incur a federal income tax liability as a result of this
deemed sale because of the contemporaneous deemed liquidating distribution. PSP7
Shareholders would recognize income or loss equal to the difference between the
tax basis of their PSP7 Common Stock and the sum of the fair market value of the
SEI Common Stock and the cash received in exchange for their PSP7 Common Stock,
but some of the income could be ordinary income. PSP7 Shareholders receiving SEI
Common Stock would have a tax basis in those shares equal to the fair market
value of the shares at the time of the Merger, and the holding period would not
include the period during which the PSP7 Common Stock was held. SEI would
receive a basis in the properties acquired from PSP7 equal to their fair market
value.
Series D Shares. As described more fully in "Summary -- Series D
Shares," prior to, and conditioned upon, the Merger, PSP7 intends to redeem all
of the outstanding Series D Shares. In the case of a redemption of the Series D
Shares from holders who do not own shares of SEI Common Stock or receive shares
of SEI Common Stock in the Merger, such holders generally will recognize capital
gain in the amount that the cash received for the Series D Shares exceeds the
adjusted tax basis in the Series D Shares redeemed. In the case of a redemption
of Series D Shares from holders who own shares of SEI Common Stock or receive
shares of SEI Common Stock in the Merger, PSP7 and SEI intend also to treat
those holders as recognizing capital gain in the amount that the cash received
for the Series D Shares exceeds the adjusted tax basis in the Series D Shares
redeemed. Such treatment, however, is not free from doubt. The IRS may contend
that some or all of the amount paid to redeem the Series D Shares from holders
who receive shares of SEI Common Stock, is taxable as a dividend to the Series D
holder (and thus taxable at ordinary income rates).
Opinion of Counsel
Hogan & Hartson L.L.P., counsel to PSP7, has rendered an opinion to
PSP7 to the effect that (i) for federal income tax purposes, the Merger will
constitute a reorganization under Section 368(a) of the Code, (ii) SEI has
qualified as a REIT during each of the five years ended December 31, 1994 and as
of April ___, 1995, and (iii) the discussion under the heading "Certain Federal
Income Tax Matters" fairly summarizes the federal income tax considerations that
are material to PSP7 Shareholders as a result of the Merger and the subsequent
ownership of SEI Common Stock (the "Opinion of Counsel"). The Opinion of Counsel
is based upon certain extensive and detailed representations as to factual and
legal matters made by SEI and PSP7 that relate both to the qualification of SEI
as a REIT and to the qualification of the Merger as a reorganization, and
specific representations from B. Wayne Hughes and PSI regarding the expected
continued ownership of SEI Common Stock to be received in the Merger. In
addition, as discussed above, the Opinion of Counsel expressly assumes, based
upon certain representations of the management of SEI and PSP7, that the
"continuity of interest" requirement necessary for the Merger to qualify as a
reorganization will be satisfied. See "The Merger -- Continuity of Interest
Assumption" and "The Merger -- Failure to Qualify for Reorganization Treatment."
The Opinion of Counsel also makes certain customary assumptions regarding the
accuracy and completeness of documents reviewed by counsel and representations
relied upon by counsel and as to the consummation of the Merger in accordance
with the terms of the Merger Agreement. The Opinion of Counsel states that the
conclusions set forth therein could be adversely affected if any of these
representations or assumptions is incorrect or incomplete at the time the Merger
is consummated. The Opinion of Counsel only represents counsel's best judgment,
based upon the underlying representations and assumptions, regarding the
application of relevant provisions of the Code and interpretations thereof, as
set forth in existing judicial decisions, administrative regulations and
published rulings and procedures of the Internal Revenue Service. The Opinion of
Counsel is not binding upon the Internal Revenue Service or the courts, and
there can be no assurance that the Internal Revenue Service would not seek to
assert a contrary position. Also, there cannot be any assurance that future
legislative, judicial or administrative changes (which could be retroactive in
effect) will not adversely affect the conclusions reached in the Opinion of
Counsel. Finally, the Opinion of Counsel is expressly limited to the specific
conclusions described in the first sentence of this section and does not purport
to address any other federal, state, local or foreign tax consequences that may
result from the Merger or any other transaction (including the tax consequences
of the Merger as applied to specific shareholders of PSP7 (or classes of
shareholders of PSP7, including the holders of the Series D Shares); the tax
consequences of the Merger to PSP7 or SEI (including whether either entity will
recognize any gain in the Merger and SEI's adjusted tax basis in the assets of
PSP7 acquired in the Merger); the application of the "golden parachute"
provisions, the alternative minimum tax provisions, and any other provisions of
the Code (other than Section 368(a) of the Code) to the Merger and/or
participants therein; and whether shareholders of PSP7 who have provided or will
provide services to either PSP7 or SEI will recognize compensation income,
either as a result of the Merger or otherwise).
<PAGE>
General Tax Treatment of SEI
If certain detailed conditions imposed by the Code and the related
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 elected to be taxed as a REIT 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 past five
fiscal years, and currently qualifies, as a REIT. Based upon the description in
this Joint Proxy Statement and Prospectus of SEI's current and contemplated
method of operation and upon certain representations made by officers of SEI
concerning SEI's satisfaction of the factual elements of the REIT tests, Hogan &
Hartson L.L.P. is of the opinion that SEI has qualified as a REIT during each of
the five years in the period ended December 31, 1994 and as of __________ __,
1995, the date of the opinion. This opinion is based on various assumptions
relating to the organization and operation of SEI and is conditioned upon
certain representations made by SEI as to certain relevant factual matters.
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.
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:
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). To aid in meeting
these requirements, the Bylaws give the Board of Directors the power to prohibit
the transfer, or effect the redemption, of shares of capital stock if the
transfer would result in SEI not meeting these requirements or if the ownership
of capital stock would otherwise prevent SEI from so complying.
<PAGE>
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;
(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.
3. Generally, 75% by value of SEI's investments must be in real
estate, mortgages secured by real estate, cash, or government securities.
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.
SEI in years prior to 1990 made distributions in excess of its REIT
Taxable Income. During 1990, SEI reduced its distributions 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
were to distribute during any year less than 85% of SEI's REIT Taxable Income
(not taking into account distributions made in subsequent years but attributed
to such year), then a 4% non-deductible excise tax would apply to the excess of
the required 85% distribution (plus any distribution shortfall from the
preceding year) over the amount actually distributed during the year. SEI
intends to comply with this 85% distribution requirement in an effort to
minimize any excise tax.
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.
For years in which SEI qualifies as a REIT, SEI generally will be
taxable only on its undistributed income. Certain penalty taxes can apply if SEI
delays distributions until after the close of a taxable year. Moreover, a
confiscatory tax of 100% can apply to income derived by SEI from sales of
"dealer" property. If SEI fails to meet either the 75% or 95% source of income
tests described above, but still qualifies for REIT status under the reasonable
cause exception to those tests, a 100% tax is imposed equal to the amount
obtained by multiplying (i) the greater of the amount, if any, by which it
failed either the 75% or the 95% income tests, times (ii) the fraction that its
REIT Taxable Income represents of SEI's gross income (excluding capital gain and
certain other items). It should be noted that SEI is not required to distribute
its net capital gain. However, to the extent that SEI does not declare a capital
gain dividend, that gain will be taxable to SEI at normal corporate rates, and
SEI will be subject to a 4% non-deductible excise tax to the extent that it does
not distribute 95% of its capital gain. SEI also will be subject to the minimum
tax on tax preference items (excluding items specifically allocable to its
shareholders).
For any taxable year that SEI fails to qualify as a REIT, it would be
taxed at the usual 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. 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, unless certain relief
provisions are available.
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 it 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.) 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.
Taxation of SEI Shareholders
Distributions generally will be taxable to SEI Shareholders as ordinary
income to the extent of SEI's earnings and profits. For this purpose, earnings
and profits of SEI first will be allocated to distributions paid on preferred
stock until an amount equal to such distributions has been allocated thereto. As
a result, it is likely that any distributions paid on the preferred stock will
be taxable in full as dividends to the holders of the preferred stock. Dividends
declared during the last quarter of a calendar year and actually paid during
January of the immediately following calendar year generally are treated as if
received by the shareholders on December 31 of the calendar year during which
they were declared. Distributions paid to shareholders will not constitute
passive activity income and as a result, generally cannot be offset by losses
from passive activities of shareholders subject to the passive activity rules.
Distributions designated by SEI as capital gain dividends generally will be
taxed as long-term capital gain to shareholders, to the extent that the
distributions do not exceed SEI's actual net capital gain for the taxable year.
Corporate shareholders may be required to treat up to 20% of any such capital
gain dividends as ordinary income. Distributions by SEI, whether characterized
as ordinary income or as capital gain, are not eligible for the 70% dividends
received deduction for corporations. If SEI should realize a loss, shareholders
will not be permitted to deduct any share of that loss. Future regulations may
require that the shareholders take into account, for purposes of computing their
individual alternative minimum tax liability, certain tax preference items of
SEI.
SEI may distribute cash in excess of its net taxable income. Upon
distribution of such cash by SEI to shareholders (other than as a capital gain
dividend), if all of SEI's current and accumulated earnings and profits have
been distributed, the excess cash will be deemed to be a non-taxable return of
capital to each shareholder to the extent of the adjusted tax basis of the
shareholder's capital stock. Distributions in excess of the adjusted tax basis
will be treated as gain from the sale or exchange of the capital stock. A
shareholder who has received a distribution in excess of current and accumulated
earnings and profits of SEI may, upon the sale of the capital stock, realize a
higher taxable gain or a smaller loss because the basis of SEI Common Stock as
reduced will be used for purposes of computing the amount of the gain or loss.
Generally, gain or loss realized by a shareholder upon the sale of capital stock
will be reportable as capital gain or loss. If a shareholder receives a
long-term capital gain dividend from SEI and has held the capital stock for six
months or less, any loss incurred on the sale or exchange of the capital stock
is treated as a long-term capital loss, to the extent of the corresponding
long-term capital gain dividend received.
<PAGE>
If a shareholder is subject to "backup withholding," SEI will be
required to deduct and withhold from any dividends payable to the shareholder a
tax of 31%. These rules may apply when a shareholder fails to supply a correct
taxpayer identification number, or when the IRS notifies SEI that the
shareholder is subject to the rules or has furnished an incorrect taxpayer
identification number.
SEI is required to demand annual written statements from the record
holders of designated percentages of its capital stock disclosing the actual
owners of the capital stock and to maintain permanent records showing the
information it has received as to the actual ownership of such capital stock and
a list of those persons failing or refusing to comply with such demand.
In any year in which SEI does not qualify as a REIT, distributions by
SEI to shareholders will be taxable in the same manner discussed above, except
that no distributions can be designated as capital gain dividends, distributions
will be eligible for the corporate dividends received deduction, and
shareholders will not receive any share of SEI's tax preference items.
Tax Exempt Investors. In general, a tax exempt entity that is a
shareholder is not subject to tax on distributions from SEI or gain realized on
the sale of capital stock, provided that the tax exempt entity has not financed
the acquisition of its capital stock with "acquisition indebtedness" within the
meaning of the Code. Special rules apply to organizations exempt under Code
Sections 501(c)(7), (c)(9), (c)(17) and (c)(20), and such prospective investors
should consult their own tax advisors concerning the applicable "set aside" and
reserve requirements.
Foreign Investors. The rules governing United States income, gift and
estate taxation of foreign entities and individuals who are neither citizens nor
residents of the United States are complex. They depend not only upon United
States federal and state income, gift and estate tax principles, but also upon
the treaties, if any, between the United States and the country of the
nonresident investor. Therefore, any prospective foreign investor is urged to
consult its own tax advisor with respect to both the United States and foreign
tax consequences of owning stock of SEI. The following discussion sets forth
several points that may be relevant to particular foreign investors. It assumes
that any such investor holds the stock of SEI as an investment and not in
connection with the conduct of a U.S. trade or business. Ordinary dividends
generally will be subject to withholding at the source, at a 30% rate (which may
be reduced under applicable treaties if the shareholder satisfies all pertinent
requirements). Capital gain dividends may be subject to such withholding at a
35% rate if they relate to dispositions of U.S. real property interests
(including the sale or disposition prior to maturity of loans where interest is
based upon a "participation" in the income or appreciation from real property).
Such dispositions would generally include the sale (but not the retirement) of
profit-sharing loans relating to U.S. real property. In addition, such capital
gain dividends (net of the amount of regular income tax) may be subject to a 30%
branch tax in the hands of any foreign corporate recipients. Such tax may be
reduced or eliminated in the case of a corporation that is a resident of a
country with which the U.S. has a tax treaty, provided that a majority of such
corporation's ultimate shareholders are residents of the country in question and
that various filing requirements are satisfied. Investors may be able to obtain
a partial refund of taxes withheld in respect of capital gain distributions by
filing a nonresident U.S. tax return. Because only a minority of SEI
Shareholders are expected to be foreign taxpayers, SEI should qualify as a
"domestically-controlled REIT." Accordingly, a foreign taxpayer will not be
subject to U.S. tax from gains recognized upon disposition of capital stock
(unless the shareholder was present in the U.S. for more than 183 days in the
year of sale and certain other requirements are met). Upon the death of a
foreign individual shareholder, the investor's stock in SEI will be treated as
part of the investor's U.S. estate for purposes of the U.S. estate tax, except
as may be otherwise provided in an applicable estate tax treaty.
Tax Consequences to SEI of Joint Investments with PSP Partnerships
SEI entered into arrangements with a series of public partnerships
affiliated with PSI under which SEI participated in the acquisition of existing
mini-warehouses and business park properties.
<PAGE>
Under the arrangements with the seven PSP Partnerships, SEI would
acquire an undivided interest in property that was to be owned jointly with a
PSP Partnership and then would transfer its interest in the property to a joint
venture that was formed with the PSP Partnership in exchange for a partnership
interest in that joint venture. These transactions have been treated as
nontaxable events under Section 721 of the Code, and SEI generally has received
a carryover basis in that joint venture interest equal to SEI's basis in the
property conveyed to the joint venture. SEI obtained opinions of counsel that
the actual tax consequences arising from the formation of SEI's joint
investments with PSP Partnerships were consistent with the foregoing. It is
possible, however, that the IRS might attempt to restructure the transactions by
taking the position that SEI and the PSP Partnership should be treated for tax
purposes as having transferred their respective consideration to the joint
venture, with the joint venture (rather than SEI and the PSP Partnership)
acquiring the real property from the seller. In the event that a court would
agree with the IRS, the joint venture would recognize a short-term capital gain
in an amount equal to the fair market value of the consideration supplied by SEI
that consisted of SEI's securities or notes. Under the joint venture agreements,
any such gain would be allocated to SEI.
All of the joint ventures with the PSP Partnerships provide for a
special allocation of initial cost recovery deductions to the PSP Partnerships.
After that initial allocation, subsequent cost recovery deductions are then
allocated to SEI, to the extent required to balance out the initial allocation
to the PSP Partnerships. Assuming that these allocations are respected for tax
purposes, these provisions initially have the effect of delaying the cost
recovery deductions otherwise allocable to SEI, reducing the amount of SEI's
distributions during that period that would be considered a return of capital,
if distributions to shareholders otherwise exceeded SEI's current or accumulated
earnings and profits. These effects reverse at such time as the depreciation of
the joint ventures begins to be allocated to SEI.
State and Local Taxes
The tax treatment of SEI, and SEI and PSP7 Shareholders, in states
having taxing jurisdiction over them may differ from the federal income tax
treatment. Accordingly, no discussion of state taxation of SEI, and SEI and PSP7
Shareholders, is provided nor is any representation made as to the tax status of
SEI in such states. All investors should consult their own tax advisors as to
the treatment of SEI under the respective state tax laws applicable to them.
<PAGE>
LEGAL OPINIONS
David Goldberg, Glendale, California, counsel to SEI and to PSI and its
affiliates, will deliver an opinion to the effect that the shares of Common
Stock of SEI to be issued in the Merger will be validly issued, fully paid and
nonassessable. Mr. Goldberg owns 20,877 shares of SEI Common Stock, 1,000 shares
of SEI Convertible Preferred Stock, 500 shares of SEI Adjustable Rate Preferred
Stock and 5,500 shares of PSP7 Common Stock, has options to acquire an
additional 47,500 shares of SEI Common Stock and has invested in entities
affiliated with PSI. Hogan & Hartson L.L.P., Washington, D.C., has rendered an
opinion to the effect that the discussion under "Certain Federal Income Tax
Matters" fairly summarizes the material federal income tax considerations to a
PSP7 Shareholder as a result of the Merger and the subsequent ownership of SEI
Common Stock, as well as to the effect that the Merger will constitute a
reorganization under Section 368(a) of the Code (based on certain factual
assumptions and representations made by PSP7, SEI and certain PSP7
Shareholders). Hogan & Hartson L.L.P. has performed certain legal services on
behalf of SEI and PSI and its affiliates, including the representation of SEI in
the transaction described under "Recent Developments - Proposed Restructuring."
EXPERTS
The consolidated financial statements and related schedules of SEI for
the year ended December 31, 1994 appearing in SEI's Annual Report on Form 10-K,
as amended by a Form 10-K/A (Amendment No. 2) dated April __, 1995 have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
reports included in SEI's Annual Report on Form 10-K and incorporated herein by
reference. Such consolidated financial statements are incorporated herein by
reference in reliance upon such reports given upon the authority of such firm as
experts in accounting and auditing.
The financial statements of PSP7 for the year ended December 31, 1994
appearing herein and in PSP7's Annual Report on Form 10-K have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report included
herein. Such financial statements are included herein in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
INDEPENDENT AUDITORS
It is anticipated that representatives of Ernst & Young LLP, which has
acted as the independent auditors of both SEI and PSP7 since their respective
organization, will be in attendance at the special meetings of SEI and PSP7
Shareholders with the opportunity to make a statement if they desire to do so
and to respond to any appropriate inquiries of shareholders or their
representatives.
SHAREHOLDER PROPOSALS
Any proposal that a PSP7 or SEI Shareholder wishes to submit for
consideration for inclusion in the proxy statement for the 1995 annual meetings
of shareholders must be received by the respective corporation no later than
__________ __, 1995. Shareholder proposals should be addressed to: 600 North
Brand Boulevard, Suite 300, Glendale, California 91203-1241.
GLOSSARY
The following are definitions of certain terms used in this Joint Proxy
Statement and Prospectus:
"Adjusted Income." SEI's net income before inclusion of (i)
depreciation expense, (ii) gains and losses from sales of investments, (iii)
extraordinary items, (iv) the Advisory Fee, the Disposition Fee and any amount
payable upon termination of the Advisory Contract with respect to the Total
Unrealized Gain, and (v) provision for unrealized losses on real estate
investments. Adjusted Income is reduced by dividends on preferred stock and by
SEI's capital expenditures without regard to whether or not the amount of the
capital expenditures is expensed or capitalized.
"Adjusted Income per Share." SEI's Adjusted Income divided by the
weighted average number of shares of Common Stock of SEI outstanding for the
period of time for which a computation is made.
"Adviser." Public Storage Advisers, Inc., a California corporation.
"Advisory Contract." The Amended and Restated Advisory Contract between
the Company and the Adviser dated as of September 30, 1991.
"Advisory Fee." That portion of the Adviser's compensation payable
under the Advisory Contract which is based upon Adjusted Income.
"Disposition Fee." That portion of Total Realized Gain which is payable
to the Adviser under the Advisory Contract.
"Initial Shares." Shares of SEI Common Stock sold in SEI's initial
public offering that terminated in November 1980.
"Management Agreement." The Management Agreement between SEI and PSMI
dated as of November 18, 1980, as amended. The term "Management Agreement"
includes the related Assignment of Interest in Management Agreement, dated
September 1, 1987, between PSMI and PSCP.
"Merger." The merger of PSP7 with and into SEI.
"Partnership." Public Storage Properties VII, Ltd., a California
limited partnership, the predecessor to PSP7.
"PSCP." Public Storage Commercial Properties Group, Inc., a California
corporation.
"PSI." Public Storage, Inc., a California corporation.
"PSH." PSI Holdings, Inc., a California corporation.
"PSMI." Public Storage Management, Inc., a California corporation.
"PSP7." Public Storage Properties VII, Inc., a REIT organized as a
California corporation.
"PSP7 Common Stock." Shares of Common Stock Series A, par value $.01
per share, of PSP7.
"PSP7 Shareholder." A holder of shares of PSP7 Common Stock.
"Realized Gain (Loss)" (under the Advisory Contract). The gain (loss)
recognized by SEI from the sale or other disposition of any interest in real
property minus any previously allowed depreciation allocable to the interest. In
computing Realized Gain (Loss) (i) the gain (loss) will be reduced (increased)
by actual or estimated, as the case may be, expenses in connection with any sale
or other disposition, including without limitation legal fees, broker fees and
closing costs and (ii) the gain (loss) will be increased (reduced) by (A)
capital expenditures, (B) payments made by the sellers of properties to SEI
under rental guaranties and (C) the portion of contingent notes delivered to SEI
by the sellers of properties not paid.
"REIT." A real estate investment trust.
"SEI." Storage Equities, Inc., a REIT organized as a California
corporation.
"SEI Common Stock." Shares of Common Stock, par value $.10 per share,
of SEI.
"SEI Shareholder." A holder of shares of Common Stock of SEI.
"Series D Shares." Shares of Common Stock Series D, par value $.01 per
share, of PSP7.
"Total Realized Gain (Loss)." At any point in time, the sum of all
prior Realized Gains minus the sum of all prior Realized Losses.
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated financial statements were
prepared to reflect the purchase by SEI of the outstanding Public Storage
Properties VII, Inc. ("PSP7") Common Stock pursuant to the Merger. In the
Merger, PSP7 would be merged with and into SEI, and each outstanding share of
PSP7 Common Stock would be converted, at the election of the shareholders of
PSP7, into either shares of SEI or, with respect to up to 20% of the PSP7 Common
Stock, $18.95 in cash per share. The consideration paid by SEI in the Merger
will be reduced by the amount of aggregate cash distributions required to be
paid by PSP7 to its shareholders prior to completion of the Merger in order to
satisfy PSP7's Required REIT Distributions. The consideration received by PSP7
Shareholders in the Merger, however, along with any Required REIT Distributions,
will not be less than $18.95 per share of PSP7 Common Stock. The Merger is
structured such that the total consideration is not predictable and is dependent
on the percentage of PSP7's stock electing cash and the amount of aggregate cash
distributions required to be paid by PSP7 to its shareholders. Accordingly, two
separate scenarios of pro forma consolidated financial statements have been
presented which give effect to the range of possible results: (1) the
consummation of the Merger through the issuance of SEI Common Stock
(representing 80% of the purchase cost) and cash (representing 20% of the
purchase cost) and (2) the consummation of the Merger solely through the
issuance of SEI Common Stock. The amount of cash distributions required to be
paid by PSP7 prior to the Merger is not determinable and is currently estimated
to be from $.00 to $.60 per PSP7 Common Share. Accordingly, each of the
scenarios have been prepared assuming that PSP7 will not be required to make
cash distributions prior to the completion of the Merger in order to satisfy
PSP7's REIT requirements. This presentation results in higher purchase cost and
number of pro forma SEI Common Shares issued in the Merger, and a lower pro
forma book value per SEI Common Share and earnings per SEI Common Share.
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:
o 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.
o 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) was used to retire bank borrowings (borrowings which were
used primarily to acquire real estate facilities and minority
interests in real estate partnerships).
o 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) was
used to acquire real estate facilities and minority interests in real
estate partnerships.
o On November 25, 1994, SEI issued 2,500,000 shares of Common Stock
pursuant to a public offering. The offering provided gross 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).
o 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).
<PAGE>
Mergers:
o On September 30, 1994, SEI completed a merger transaction with 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 2,593,910 shares of SEI Common Stock and $17,341,000 in
cash.
o On February 28, 1995, SEI completed a merger transaction with 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 3,148,000 shares of SEI Common Stock and $21,428,000 in cash.
The pro forma consolidated balance sheet at December 31, 1994 has been prepared
to reflect (i) the proposed Merger, (ii) the issuance of 2,195,000 shares of
Series E Preferred Stock and the utilization of the proceeds therefrom, and
(iii) the merger with PSP VI.
The pro forma consolidated statement of income for the year ended December 31,
1994 has been prepared assuming (i) the proposed Merger, (ii) the issuance of
the Preferred and Common Stock and the utilization of the proceeds therefrom,
and (iii) the merger transactions with PSP VIII and PSP VI, as if such
transactions were completed at the beginning of the period presented. Pro forma
adjustments have been made to reflect increased rental income, cost of
operations, depreciation of the real estate facilities, interest income for the
acquired mortgage notes receivable, advisory fees and decreased interest expense
as a result of the repayment of debt. 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 consolidated statement of cash flows for the year ended December
31, 1994 has been prepared on the same basis as the pro forma consolidated
statement of income for the same period. Pro forma adjustments have been made to
the pro forma consolidated statement of cash flows, as if such transactions were
completed on January 1, 1994.
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.
<PAGE>
Index to Pro Forma Financial Information
(Scenario 1) the consummation of the Merger through the issuance of SEI Common
Stock (representing 80% of the purchase cost) and cash (representing 20% of the
purchase cost):
<TABLE>
<S> <C>
o Pro forma consolidated balance sheet at December 31, 1994 .......... PF-4
o Pro forma consolidated statements of income:
For the year ended December 31, 1994............................... PF-11
o Pro forma consolidated statements of cash flows:
For the year ended December 31, 1994 .............................. PF-21
(Scenario 2) the consummation of the Merger solely through the issuance of SEI Common Stock:
o Pro forma consolidated balance sheet at December 31, 1994............ PF-28
o Pro forma consolidated statements of income:
For the year ended December 31, 1994 .............................. PF-31
o Pro forma consolidated statements of cash flows:
For the year ended December 31, 1994 .............................. PF-34
</TABLE>
<PAGE>
STORAGE EQUITIES, INC.
CONSOLIDATED PRO FORMA BALANCE SHEET
(Scenario 1: Consummation of Merger through the
issuance of SEI Common Stock (80%) and Cash (20%))
December 31, 1994
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma Adjustments
----------------------------------
Issuance
SEI Of Series E PSP VI SEI
ASSETS (Historical) Preferred Stock Merger(2) (Pro Forma)
-------- -------------- --------------- --------------- -------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $20,151,000 $ 851,000 $ (15,000,000) $6,002,000
Investments in real estate entities 8,858,000 8,858,000
Real estate facilities, net of accumulated
depreciatiion 764,973,000 24,948,000 66,475,000 856,396,000
Mortgage loans receivable, primarily from
affiliated 23,062,000 - 23,062,000
Unallocated purchase cost - 1,026,000 1,062,000
Other assets 3,265,000 - 352,000 3,617,000
Total assets $820,309,000 $25,799,000 $52,853,000 $898,961,000
LIABILITIES AND SHAREHOLDERS' EQUITY
Note payable to bank $ 25,447,000 $ (25,447,000) $ 9,249,000 $ 9,249,000
Mortgage notes payable 51,788,000 - - 51,788,000
Total debt 77,235,000 (25,447,000) 9,249,000 61,037,000
Accrued and other liabilities 14,061,000 - 739,000 14,800,000
Minority interest 141,227,000 (1,700,000) - 139,527,000
Shareholder's equity
Preferred Stock, $0.1 par value, 50,000,000
shares authorized:
10% cumulative preferred stock, Series A, $25
stated value 1,825,000 shares issued
and outstanding 45,625,000 - - 45,625,000
9.2% cumulative preferred stock, Series B,
$25 stated value 2,386,000 shares
issued and outstanding 59,650,000 - - 59,650,000
Adjustable Rate Cumulative Preferred Stock,
Series C, $25 stated value, 1,200,000 shares
issued and outstanding 30,000,000 - - 30,000,000
8.25% Convertible Preferred Stock, $25
stated value, 2,3000,000 shares issued
and outstanding 57,500,000 - - 57,500,000
9.50% cumulative preferred Stock, Series D,
$25 stated value, 1,200,000 shares issued
and outstanding 30,000,000 - - 30,000,000
10% cumulative preferred Stock, Series D,
$25 stated value, 1,200,000 shares issued
and outstanding - 54,875,000 - 54,875,000
Common stock , $.10 par value, 60,000,000 shares
authorized 28,826,707 shares issued and
outstanding (37,160,642 pro forma shares
issued and outstanding) 2,883,000 - 315,000 3,198,000
Series B. Common Stock
Paid-in capital 372,361,000 (1,929,000) 42,550,000 412,982,000
Cumulative net income 172,485,000 - - 172,485,000
Cumulative distribution paid (182,718,000) - - (182,718,000)
Total shareholders' equity 587,786,000 52,946,000 42,865,000 683,597,000
Total liabilities and shareholders equity $ 820,309,000 $ 25,799,000 $ 52,853,000 $ 898,961,000
Book Value per Common Share $ 12.66 $ 12.70
</TABLE>
<PAGE>
(TABLE CONTINUED)
<TABLE>
<CAPTION>
PSP 7 SEI
ASSETS (Historical) Purchase Valuation Pro Forma
-------- --------------- -------------- ---------------- -------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $1,724,000 $ (5,273,000) $ - $2,453,000
Investments in real estate entities 8,858,000
Real estate facilities, net of accumulated
depreciatiion 38,556,000 35,744,000 930,696,000
Mortgage loans receivable, primarily from
affiliated 23,062,000
Unallocated purchase cost 72,128,000 70,222,000 2,932,000
Other assets 420,000 4,037,000
Total assets $40,700,000 $66,855,000 $(34,478,000) $972,038,000
LIABILITIES AND SHAREHOLDERS' EQUITY
Note payable to bank $ 917,000 $ 14,426,000 $ - $ 24,592,000
Mortgage notes payable - 51,788,000
Total debt 917,000 14,426,000 - 76,380,000
Accrued and other liabilities 2,548,000 (1,066,000) - 16,282,000
Minority interest - - 139,527,000
Shareholder's equity
Preferred Stock, $0.1 par value, 50,000,000
shares authorized:
10% cumulative preferred stock, Series A, $25
stated value 1,825,000 shares issued
and outstanding - - 45,625,000
9.2% cumulative preferred stock, Series B,
$25 stated value 2,386,000 shares
issued and outstanding 59,650,000
Adjustable Rate Cumulative Preferred Stock,
Series C, $25 stated value, 1,200,000 shares
issued and outstanding 30,000,000 30,000,000
8.25% Convertible Preferred Stock, $25
stated value, 2,3000,000 shares issued
and outstanding 57,500,000
9.50% cumulative preferred Stock, Series D,
$25 stated value, 1,200,000 shares issued
and outstanding 30,000,000
10% cumulative preferred Stock, Series D,
$25 stated value, 1,200,000 shares issued
and outstanding - - 54,875,000
Common stock , $.10 par value, 60,000,000 shares
authorized 28,826,707 shares issued and
outstanding (37,160,642 pro forma shares
issued and outstanding) 38,000 344,000 (38,000) 3,542,000
Series B. Common Stock
Paid-in capital 49,827,000 53,151,000 (47,070,000) 468,890,000
Cumulative net income 54,276,000 - (54,276,000) 172,485,000
Cumulative distribution paid (66,906,000) - 66,906,000 (182,718,000)
Total shareholders' equity 37,235,000 53,495,000 (34,478,000) 739,849,000
Total liabilities and shareholders equity $ 40,700,000 $ 66,855,000 $(34,478,000) $972,038,000
Book Value per Common Share $ 13.05
</TABLE>
See Accompanying Notes to Pro Forma Consolidated Balance Sheet (Scenario 1).
<PAGE>
1. On February 1, 1995, SEI completed a public offering of 2,195,000
shares of Series E Preferred Stock, receiving net offering proceeds of
approximately $52,946,000 (after reduction for offering costs and
expenses). The net offering proceeds were used to (i) acquire real
estate facilities, (ii) acquire minority interests and (iii) repay bank
borrowings (borrowings which were used to acquire additional real
estate facilities and minority interests) as follows:
<TABLE>
<CAPTION>
<S> <C>
o Acquire additional real estate facilities $ 24,948,000
o Acquire minority interests 1,700,000
o Repay bank borrowings 25,447,000
o Increase in cash and cash equivalents 851,000
-------
Total uses of net offering proceeds $ 52,946,000
==========
Pro forma adjustments have been made to reflect the above
acquisitions as if such acquisitions were completed on
December 31, 1994:
o Cash and cash equivalents has been increased to $ 851,000
reflect net offering proceeds in excess of total uses =======
o Real estate facilities, net of accumulated depreciation has be $ 24,948,000
increased to reflect the acquisition cost of the ==========
additional real estate facilities acquired
o Note payable to bank has been reduced to reflect the repayment $ (25,447,000)
of bank borrowings from the net offering proceeds ===========
o Minority interest has been reduced to reflect the acquisition $ (1,700,000)
of such interest ==========
o Series E Preferred Stock and Paid-in capital have been
adjusted to reflect the issuance of 2,195,000 shares
as follows:
Series E Preferred Stock (2,195,000 shares $ 54,875,000
at stated value)
Paid in Capital (offering costs) (1,929,000)
----------
Net offering proceeds $ 52,946,000
===========
</TABLE>
<PAGE>
2. On February 28, 1995, the merger between SEI and PSP VI was completed.
In the merger, PSP VI was merged with and into SEI, and the outstanding
PSP VI common stock (2,713,723 shares) was converted into an aggregate
of approximately (i) 3,148,000 shares of SEI Common Stock (at the rate
of 1.724 shares of SEI Common Stock for each share of PSP VI common
stock) and (ii) $21,428,000 in cash (at the rate of $24.05 per share of
PSP VI common stock) (excluding, in each case, a liquidating cash
distribution of $.72 per share). Concurrent with the merger, PSP VI's
outstanding stock options were repurchased and retired. In addition,
liquidating distributions totaling $1,791,000 were paid to former
shareholders of PSP VI.
The Merger has been accounted for using the purchase method of
accounting and the total purchase cost has been allocated to the
acquired net assets; first to the tangible and identifiable intangible
assets and liabilities of PSP VI based upon their respective fair
values, as illustrated below:
<TABLE>
<CAPTION>
Pro forma
PSP VI PSP VI
Historical Pro forma adjustments to reflect Merger
12/31/94 Purchase (a) Merger (b) Adjustments
-------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $2,650,000 $(17,650,000) $ - $(15,000,000)
Investment in real estate entities - 65,343,000 (65,343,000) -
Real estate facilities, at cost: 26,835,000 - 39,640,000 66,475,000
Unallocated excess purchase cost
over net assets acquired - - 1,026,000 1,026,000
Other assets 352,000 - - 352,000
---------- ----------- ----------- ----------
Total assets $29,837,000 $47,693,000 $(24,677,000) $52,853,000
========== =========== =========== ==========
Note payable to bank $ - $ 9,249,000 $ - $ 9,249,000
Accrued and other liabilities 1,960,000 (1,221,000) - 739,000
Shareholders' equity:
Common stock 27,000 315,000 (27,000) 315,000
Paid-in capital 34,939,000 39,350,000 (31,739,000) 42,550,000
Cumulative net income 56,133,000 - (56,133,000) -
Cumulative distributions paid (63,222,000) - 63,222,000 -
------------ ------------ ----------- -----------
Total shareholders' equity 27,877,000 39,665,000 (24,677,000) 42,865,000
----------- ----------- ------------ ----------
Total liabilities and
shareholders' equity $29,837,000 $47,693,000 $(24,677,000) $52,853,000
=========== =========== ============ ==========
<FN>
Note: (a)
Purchase cost, including related fees (see related adjustments below):
Acquisition of 2,713,723 shares of PSP VI Common Stock:
Fair value of real estate facilities acquired $ 66,475,000
Fair value of other assets at December 31, 1994 352,000
Cash balance at December 31, 1994 2,650,000
Fair value of liabilities at December 31, 1994 (1,960,000)
----------
67,517,000
1,642,000
Add: Exercise price of PSP VI's stock options
(827,000)
Less: Repurchase and retirement of PSP VI's Series D common stock
1,026,000
Add : Estimated net increase in PSP VI's net current assets projected as of
February 28, 1995
69,358,000
1,221,000
<PAGE>
Add: adjustment to reflect the payment of distributions to former
shareholders of PSP VI which were included in "Accrued and other liabilities"
at December 31, 1994
(1,221,000)
Less: adjustment to PSP VI's historical cash balance at December 31, 1994 to
reflect the payment of the above accrued distributions
Less : Aggregate value paid to holders of PSP VI's stock options (2,224,000)
Less : liquidating distributions to be paid to former shareholders of PSP VI (1,791,000)
----------
Total purchase cost $ 65,343,000
==========
The purchase cost has been paid as follows:
Cash portion of purchase cost:
From cash reserves $13,229,000
From bank borrowings 9,249,000
----------
Total cash 22,478,000
Common Stock (issuance of approximately 3,148,000 shares of Common
Stock, par value of $.10 per share at $13.95 per share) 315,000
Paid in capital (as adjusted for estimated costs of $1,050,000) 42,550,000
Equity portion of purchase cost 42,865,000
----------
Total purchase cost $65,343,000
==========
The following pro forma adjustments have been made to reflect the above
purchase:
o Cash and cash equivalents has been decreased for the following:
To reflect the aggregate exercise price of PSP VI's stock options $1,642,000
To reflect the payment to retire PSP VI's outstanding stock options (2,224,000)
To reflect the repurchase and retirement of PSP VI's Series D common stock (827,000)
To reflect the payment of accrued distributions at December 31, 1994 (1,221,000)
The payment of liquidating distributions to former shareholders of PSP VI (1,791,000)
Cash portion of acquisition cost (13,229,000)
-------------
$(17,650,000)
=============
o Note payable to bank has been increased to reflect estimated
bank borrowings to fund the cash portion of the merger $ 9,249,000
=============
o Accrued and other liabilities has been adjusted to reflect to
payment of accrued distributions of at December 31, 1994 $ (1,221,000)
=============
===========
o Shareholders' Equity has been adjusted as follows to reflect the
pro forma issuance of common stock in the merger:
Common Stock (issuance of approximately 3,148,000 shares of
Common Stock, par value of $.10 per share) $ 315,000
Paid-in capital 39,350,000
-------------
Equity portion of purchase cost $39,665,000
=============
Note (b):
Preliminary allocation of purchase cost:
Net assets acquired at historical amounts $27,877,000
Aggregate cash to be received upon the assumed exercise of
PSP VI's existing stock options 1,642,000
Aggregate cash to be paid to retire the existing options (2,224,000)
Repurchase and retirement of PSP VI's Series D common stock (827,000)
Liquidating distributions to be paid to former shareholders of
PSP VI (1,791,000)
-------------
Adjusted net assets acquired at historical amounts 24,677,000
Adjustments to reflect the fair value of the real estate
facilities acquired 39,640,000
Unallocated excess purchase cost over net assets acquired 1,026,000
-------------
Total acquisition cost $65,343,000
=============
</TABLE>
<PAGE>
3. 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 of PSP7 based upon their respective fair values,
and the remainder, if any, will be allocated to excess of purchase cost
over book value of assets acquired. The aggregate purchase cost to be
paid to the shareholders of PSP7 has been determined to be the sum of
(1) the fair market value of PSP7's real estate assets, (2) the
estimated book value of PSP7's non-real estate assets as of December
31, 1994 less (3) PSP7's estimated liabilities as of December 31, 1994,
including an estimated adjustment for potential environmental matters.
In addition, concurrent with the Merger, PSP7's outstanding Series D
common stock is assumed to be repurchased and retired. The aggregate
purchase cost and its preliminary allocation to the historical assets
and liabilities is as follows:
Purchase cost, including related fees (see related adjustments
below):
Acquisition of 3,806,491 shares of PSP7 Common Stock:
<TABLE>
<S> <C>
Fair value of real estate facilities acquired $ 74,300,000
Estimated fair value of other assets at December 31, 1994 420,000
Cash balance at December 31, 1994 1,724,000
Estimated fair value of liabilities at December 31, 1994 (3,465,000)
-----------
72,979,000
Less: Repurchase and retirement of PSP7's Series D common stock (2,757,000)
Add : Estimated net increase in PSP7's net current assets
projected as of May 31, 1995 1,906,000
------------
$ 72,128,000
============
Preliminary allocation of purchase cost:
Net assets acquired at historical amounts $37,235,000
Repurchase and retirement of PSP7's Series D common stock (2,757,000)
------------
Adjusted net assets acquired at historical amounts 34,478,000
Adjustments to reflect the fair value of the real estate
facilities acquired 35,744,000
Unallocated excess purchase cost over net assets acquired 1,906,000
------------
$ 72,128,000
============
</TABLE>
Under Scenario 1, the purchase cost will consist of the payment of cash
($14,426,000) and the issuance of SEI Common Stock ($57,702,000, as
determined using a closing price of $16.75 per share of SEI Common
Stock). The unallocated excess purchase cost over the net assets
acquired will ultimately be allocated to the fair value of PSP7's
current assets and liabilities at the completion of the Merger.
<PAGE>
The following pro forma purchase adjustments have been made assuming
the Merger is consummated as of December 31, 1994:
<TABLE>
<S> <C>
o Cash and cash equivalents has been decreased to reflect:
The cash portion of the purchase price $(14,426,000)
Fees and expense expected to be incurred by SEI (1,450,000)
Repurchase and retirement of PSP7's Series D common
stock (2,757,000)
Payment of accrued distributions as of December 31,1994 (1,066,000)
-------------
(19,699,000)
Add back: pro forma amount funded through borrowings on
bank lines of credit 14,426,000
-------------
Net reduction to cash and cash equivalents $ ( 5,273,000)
============
o Accrued and other liabilities has been reduced to reflect the
pro forma payment of PSP7's distributions which were accrued
as of December 31, 1994 $ (1,066,000)
o Shareholders' equity has been increased to reflect the
issuance of Common Stock in connection with the Merger:
Common Stock (issuance of approximately 3,444,919 shares
of SEI Common Stock, par value of $.10 per share) $ 344,000
Paid in capital 57,358,000
-------------
Equity portion of purchase cost 57,702,000
Additional adjustment to "Paid in capital" to reflect:
Repurchase and retirement of PSP7's Series D common
stock (2,757,000)
Estimated fees and expenses of issuing Common Stock (1,450,000)
-------------
Total adjustment to shareholders' equity $53,495,000
=============
</TABLE>
<PAGE>
STORAGE EQUITIES, INC.
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
(Scenario 1: Consummation of Merger Solely through the issuance
of SEI Common Stock)
For the Year Ended December 31, 1994
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma Adjustments
----------------------------
Issuance
SEI Of Preferred & PSP VIII PSP VI SEI
(Historical) Common Stock Merger(2) Merger(3) (ProForma)
-------------- -------------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
Revenues
Rental Income $141,845,000 $13,765,000 $6,858,000 $10,557,000 $173,025,000
Management Fees - Minis
Management Fees - BP
Equity in earnings of real estate entities
Interest and Other Income 5,351,000 (1,199,000) 139,000 51,000 4,342,000
147,196,000 12,566,000 6,997,000 10,608,000 177,367,000
Expenses
Cost of Operations 52,816,000 4,877,000 2,515,000 3,591,000 63,799,000
Depreciation and Amortization 28,274,000 2,696,000 1,120,000 1,769,000 33,859,000
General and Administrative 2,631,000 -- 67,000 138,000 2,836,000
Advisory Fee 4,983,000 902,000 152,000 359,000 6,396,000
Interest Expenses 6,893,000 (2,078,000) 1,472,000 879,000 7,166,000
95,597,000 6,397,000 5,326,000 6,736,000 114,056,000
Income before minority interest in income and 51,599,000 6,169,000 1,671,000 3,872,000 63,311,000
gain on disposition of real estate
Minority interest in income (9,481,000) 1,421,000 -- -- (8,060,000)
42,118,000 7,590,000 1,671,000 3,872,000 55,251,000
Gain on disposition of real estate -- -- -- -- --
Net Income 42,118,000 7,590,000 1,671,000 3,872,000 55,251,000
Net income allocable to preferred shareholders $16,846,000 $8,606,000 $ $ $25,452,000
Net income allocable to Class B Shareholders
Net income allocable to common shareholders 25,272,000 (1,016,000) 1,671,000 3,872,000 29,799,000
Net Income $42,118,000 $7,590,000 $1,671,000 $ 3,872,000 $55,251,000
Per Common Share:
Net Income $ 1.05 $ 0.93(4)
Weighted Average Shares 24,077,055 32,046,269(4)
Ratio of earnings to combined fixed charges 2.22 1.99
and preferred stock dividends (7)
</TABLE>
<PAGE>
(TABLE CONTINUED)
<TABLE>
<CAPTION>
Pro forma
PSP 7 Offer & Merger SEI
(Historical) Adjustments(5) (ProForma)
------------- ------------ -------------
<S> <C> <C> <C>
Revenues
Rental Income $13,257,000 $ -- $ 186,282,000
Management Fees - Minis
Management Fees - BP
Equity in earnings of real estate entities
Interest and Other Income 28,000 4,370,000
13,285,000 -- 190,652,000
Expenses
Cost of Operations 6,008,000 -- 69,807,000
Depreciation and Amortization 1,912,000 96,000 35,867,000
General and Administrative 283,000 (55,000) 3,064,000
Advisory Fee -- 291,000 6,687,000
Interest Expenses 146,000 1,370,000 8,682,000
8,349,000 1,702,000 124,107,000
Income before minority interest in income and 4,936,000 (1,702,000) 66,545,000
gain on disposition of real estate
Minority interest in income -- -- (8,060,000)
4,936,000 (1,702,000) 58,485,000
Gain on disposition of real estate 203,000 -- 203,000
Net Income 5,139,000 (1,702,000) 58,688,000
Net income allocable to preferred shareholders $ $ $25,452,000
Net income allocable to Class B Shareholders
Net income allocable to common shareholders 5,139,000 (1,702,000) 33,236,000
Net Income $5,139,000 $(1,702,000) $58,688,000
Per Common Share:
Net Income $ 1.35 $ 0.94(6)
Weighted Average Shares 3,810,908 35,491,188(6)
Ratio of earnings to combined fixed charges 2.05
and preferred stock dividends (7)
</TABLE>
See Accompanying Notes to Pro Forma Consolidated Balance Sheet (Scenario 1).
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF INCOME
(Scenario 1: Consummation of Merger through the issuance of SEI Common Stock
(80%) and Cash (20%)) For the Year Ended December 31, 1994
(Unaudited)
1. During 1994 and 1995, SEI issued shares of both its Preferred and Common
Stock as follows:
o 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 of which approximately $37.8
million has been used to repay debt, to acquire real estate
facilities, to acquire mortgage notes receivable and to
acquire additional minority interests.
o 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) was used to retire bank
borrowings (borrowings which were used primarily to acquire
real estate facilities and minority interests in real estate
partnerships).
o On September 1, 1994, SEI issued 1,200,000 shares of 9.5%
Cumulative Preferred Stock, Series D (the "Series D
Preferred Stock"). The aggregate net offering proceeds
($29.0 million) was used to acquire real estate facilities
and minority interests in real estate partnerships.
o On November 25, 1994, SEI issued 2,500,000 shares of Common
Stock pursuant to a public offering. The offering provided
gross 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 Note 2 below).
o 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
the ($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.
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 at the beginning of the year ended December 31, 1994:
<TABLE>
<CAPTION>
Year
Ended
December 31, 1994
------------------
<S> <C>
o 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 $13,765,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year
Ended
December 31, 1994
------------------
<S> <C>
o Interest and other income has been decreased to reflect the
following:
o In connection with the acquisition of the above
properties, SEI canceled mortgage notes receivable 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 $254,000) $ (1,199,000)
------------
o 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 $ 4,877,000
------------
o 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 $ 2,696,000
------------
o Interest expense has been decreased to reflect the
following:
o 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 $ (1,117,000)
o 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. 511,000
o In October, 1994, SEI borrowed on its bank credit
facilities to finance the cash portion of the merger with
PSP VIII. Accordingly, in Note 2 below a pro forma
adjustment was made to interest expense to reflect the
related outstanding borrowings for the entire period
presented. The net offering proceeds of the November 25,
1994 Common Stock offering were used to retire the bank
borrowings of the PSP VIII merger, accordingly, a pro
forma adjustment has been made offset the pro forma
interest expense adjustment made in Note 2 below. (1,472,000)
------------
Net decrease in interest expense $ (2,078,000)
============
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
Year
Ended
December 31, 1994
--------------------
<S> <C>
o Minority interest in income has been decreased due to the
acquisition of such minority interests by SEI $ 1,421,000
===========
o Advisory fees have been increased to reflect the effect of
the above adjustments $ 902,000
============
2. On September 30, 1994, SEI completed the merger transaction with PSP
VIII. The following pro forma adjustments have been made assuming the
merger transaction with PSP VIII was completed at the beginning of the
year ended December 31, 1994:
</TABLE>
<TABLE>
<CAPTION>
Year
Ended
December 31, 1994
--------------------
<S> <C>
o A pro forma adjustment has been made to reflect PSP VIII's
historical rental income $ 6,858,000
===========
o A pro forma adjustment has been made to reflect PSP VIII's
historical interest and other income $ 139,000
===========
o A pro forma adjustment has been made to reflect PSP VIII's
historical cost of operations $ 2,515,000
===========
o Depreciation and amortization was adjusted as follows:
o A pro forma adjustment has been made to reflect PSP VIII's
historical depreciation $ 825,000
o A pro forma adjustment has been made to increase the
historical depreciation of the acquired PSP VIII real
estate facilities to an amount which is based on the
purchase cost of the buildings (straight-line over 25
years) 295,000
-----------
$ 1,120,000
===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year
Ended
December 31, 1994
--------------------
<S> <C>
o General and administrative expense was adjusted as follows:
o A pro forma adjustment has been made to reflect PSP VIII's
historical general and administrative expenses $ 157,000
o 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 merger.
Such expenses include the elimination of PSP VIII's board
of directors fees, PSP VIII's stock exchange listing fees,
audit and tax fees and certain administrative expenses
which will no longer be applicable. (90,000)
----------
$ 67,000
==========
o Interest expense has been increased for the pro forma
borrowings ($32,389,500) on SEI's bank lines of credit to
consummate the merger. The pro forma interest expense was
determined based on an interest rate of 9.50%. $1,472,000
==========
o A pro forma adjustment has been made to the advisory fee to
reflect the above adjustments combined with the effects of
the operations of PSP VIII and the issuance of additional
shares of SEI's Common Stock $ 152,000
==========
</TABLE>
3. On February 28, 1995, SEI completed the merger transaction with PSP VI
(see Note 2 to the pro forma consolidated balance sheet). The following
pro forma adjustments have been made assuming the merger transaction
with PSP VI was completed at the beginning of the year ended December
31, 1994:
<TABLE>
<CAPTION>
Year
Ended
December 31, 1994
--------------------
<S> <C>
o A pro forma adjustment has been made to reflect PSP VI's
historical rental income $ 10,557,000
==========
o A pro forma adjustment has been made to reflect PSP VI's
historical interest and other income $ 51,000
==========
o A pro forma adjustment has been made to reflect PSP VI's
historical cost of operations $ 3,591,000
===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year
Ended
December 31, 1994
--------------------
<S> <C>
o Depreciation and amortization was adjusted as follows:
o A pro forma adjustment has been made to reflect PSP VI's
historical depreciation $ 1,223,000
o A pro forma adjustment has been made to increase the
historical depreciation of the acquired PSP VI real estate
facilities to an amount which is based on the preliminary
purchase cost allocation to the buildings (straight-line
over 25 years) 505,000
o A pro forma adjustment has been made to reflect the
amortization (straight-line over 25 years) of the
unallocated purchase cost of $960,000 (see Note 2 to Pro
Forma Consolidated Balance Sheet) 41,000
-----------
$ 1,769,000
===========
o General and administrative expense was adjusted as follows:
o A pro forma adjustment has been made to reflect PSP VI's
historical general and administrative expenses $ 193,000
o 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 merger.
Such expenses include the elimination of PSP VI's board of
director fees, PSP VI's stock exchange listing fees, audit
and tax fees and certain administrative expenses which
will no longer be applicable. (55,000)
-----------
$ 138,000
===========
o Interest expense has been made to increase interest expense
for the pro forma borrowings ($8,710,000) on SEI's bank
lines of credit to consummate the merger (See Note 2 to Pro
Forma Consolidated Balance Sheet). The pro forma interest
expense was determined based on an interest rate of 9.50%. $ 879,000
==========
o A pro forma adjustment has been made to the advisory fee to
reflect the above adjustments combined with the effects of
the operations of PSP VI and the issuance of additional
shares of SEI's Common Stock $ 359,000
==========
</TABLE>
<PAGE>
4. Net income per Common Share has been computed as follows:
<TABLE>
<CAPTION>
Year
Ended
December 31, 1994
-----------------------
<S> <C>
Historical net income $ 42,118,000
Less: Historical preferred stock dividends (16,846,000)
-----------
Income applicable to common shareholders $ 25,272,000
===========
Historical weighted average common shares 24,077,055
===========
Historical net income per common share $ 1.05
================
Pro forma net income $ 55,251,000
Less: Pro forma preferred stock dividends (1) (25,452,000)
-----------
Income applicable to common shareholders $ 29,799,000
===========
Pro forma weighted average common shares (2) 32,046,269
==========
Pro forma net income per common share $ .93
===============
</TABLE>
(1) As adjusted to give effect to the issuance of the Series C,
Series D, Series E and Convertible 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 $780,000 higher for the year
ended December 31, 1994. Accordingly, income applicable to
common shareholders would have been reduced by a like amount
or approximately $.03 per common for the year ended December
31, 1994.
(2) As adjusted to give effect to the issuance of additional
shares of SEI's Common Stock in connection with the
acquisition of additional investments in real estate entities,
the public offering of Common Stock during 1994, and the PSP
VIII and PSP VI mergers.
<PAGE>
5. Pro forma Merger adjustments (with respect to PSP7), assuming that the
Merger is consummated through the issuance of SEI Common Stock (80% of
the purchase cost) and cash (20% of the purchase cost) have been made
to reflect the following:
<TABLE>
<CAPTION>
Year
Ended
December 31, 1994
--------------------
<S> <C>
Pro forma adjustments have been made to depreciation and amortization
to reflect the following:
o A pro forma adjustment has been made to increase the
historical depreciation of the acquired PSP7 real estate
facilities to an amount which is based on the preliminary
purchase cost allocation to the buildings (straight-line
over 25 years) $ 20,000
o A pro forma adjustment has been made to reflect the
amortization (straight-line over 25 years) of the
unallocated purchase cost of $1,906,000 (see Note 3 to Pro
Forma Consolidated Balance Sheet) 76,000
-----------
$ 96,000
===========
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 Merger. Such expenses include the elimination of
PSP7's board of directors fees, PSP7's stock exchange listing fees,
audit and tax fees and certain administrative expenses which will no
longer be applicable. $ (55,000)
===========
A pro forma adjustment has been made to increase interest expense for
the pro forma borrowings ($14,426,000) on SEI's bank lines of credit
to consummate the Merger (See Note 3 to Pro Forma Consolidated
Balance Sheet). The pro forma interest expense was determined based
on an interest rate of 9.50%. $ 1,370,000
===========
If the assumed interest rate was 9.75%, pro forma interest
expense would be $1,407,000 for the year ended December 31,
1994, resulting in pro forma net income of $58,717,000
($33,265,000 allocable to common shareholders or $.92 per
common share) for the year ended December 31, 1994 after
giving effect to reduced advisory fees as a result of
increased interest expense.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year
Ended
December 31, 1994
--------------------
<S> <C>
A pro forma adjustment has been made to the advisory fee to reflect
the above adjustments combined with the effects of the operations of
PSP7 and the issuance of additional shares of SEI's Common Stock $ 291,000
============
6. Pro forma net income per Common Share has been computed as follows:
Pro forma net income $58,688,000
Less: Pro forma preferred stock dividends (25,452,000)
------------
Income applicable to common shareholders $33,236,000
============
Pro forma weighted average common shares (1) 35,491,188
============
Pro forma net income per common share $ .94
============
<FN>
(1) As adjusted to give effect to the issuance of 3,444,919 additional
shares of Common Stock in connection with the Merger.
</TABLE>
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 and Convertible
Preferred Stock.
8. The number of shares to be issued in the Merger under this scenario is
dependent upon the market price of SEI Stock. For purposes of these pro
forma financial statements it was assumed that the SEI Stock price
would be approximately $16.75 per share of Common Stock. This share
price resulted in the pro forma issuance of approximately 3,444,919
shares of Common Stock.
The following illustrates the effect of a $.25 per share market price
fluctuation on the above pro forma financial information:
<TABLE>
<CAPTION>
Number of shares Pro forma Pro forma Net Pro forma Book
Market Price issued in the Merger Net Income Income per Share Value per share
------------- ----------------------- ------------- ------------------- -------------------
<S> <C> <C> <C> <C>
$16.50 3,497,115 $58,690,000 $0.94 $13.03
$17.00 3,394,259 $58,686,000 $0.94 $13.07
</TABLE>
<PAGE>
PSP7 - Pro Forma Equivalent Per Share Amounts (a):
<TABLE>
<CAPTION>
Book Value at
Market Price Net Income Distributions December 31, 1994
<S> <C> <C> <C>
$16.50 $1.08 $0.98 $14.96
$17.00 $1.05 $0.95 $14.57
</TABLE>
(a) Presents combined pro forma amounts per share of PSP7 Common Stock based on
the number of shares of PSP7 Common Stock assumed to be outstanding immediately
prior to the effective time of the Merger. Income and book value data are
calculated by multiplying the combined pro forma amounts by an assumed ratio
(based on assumed issue price of SEI stock of $16.75). The distribution amounts
are calculated by multiplying the SEI historical distribution ($.85 per SEI
Common Share) by the assumed exchange ratio. The pro forma distributions per SEI
Common Share for purposes of these pro forma financial statements were assumed
to be $.85 per SEI Common Share for fiscal 1994.
<PAGE>
STORAGE EQUITIES, INC.
PRO FORMA CONSOLIDATED STATEMENT OF CASH FLOW
(Scenario 1: Consummation of Merger through the issuance of SEI
Common Stock (80%) and Cash (20%)) For the Year Ended December 31, 1994
(Unaudited)
<TABLE>
<CAPTION>
Issuance
SEI Of Preferred & PSP VIII PSP VI SEI
(Historical) Common Stock(1) Merger(2) Merger(3) (ProForma)
-------------- -------------- -------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net Income $ 42,118,000 $ 7,590,000 $ 1,671,000 $ 3,872,000 $ 55,251,000
Depreciation and amortization 27,581,000 2,950,000 1,120,000 1,769,000 33,420,000
Minority Interest in income 9,481,000 (1,421,000) 0 0 8,060,000
Less: Equity in earnings of real estate 0 0 0 0 0
entities
Distribution from real estate entities
Gain on disposition of real estate 0 0 0 0 0
Total adjustments 37,062,000 1,529,000 1,120,000 1,769,000 41,480,000
Cash provided by operating activities 79,180,000 9,119,000 2,791,000 5,641,000 96,731,000
Cash flows from investing activities:
Principal payments on mortgage notes 6,785,000 (557,000) -- -- 6,228,000
receivable
Investment in real estate partnerships (78,000) -- -- -- (78,000)
Acquisition of mortgage notes receivable (4,020,000) -- -- -- (4,020,000)
Acquisition of minority interest (51,711,000) (1,700,000) -- -- (53,411,000)
Acquisition of real estate facilities (93,026,000) (24,948,000) -- -- (117,974,000)
Proceeds form insurance settlement 1,666,000 -- 425,000 -- 2,091,000
Purchase cost of the mergers (20,972,000) -- -- (22,478,000) (43,450,000)
Capital expenditures (8,312,000) (473,000) (1,507,000) (360,000) (10,652,000)
Cash provided by (used in) investing (169,668,000) (27,678,000) (1,082,000) (22,838,000) (221,266,000)
activities
Cash flows from financing activities:
Principal payments on bank debt
Proceeds from the issuance of Common Stock (10,323,000) (25,447,000) -- 9,249,000 (26,521,000)
Proceeds from the issuance of Preferred Stock 110,280,000 -- -- -- 110,280,000
Principal payments on mortgage debt 57,899,000 52,946,000 -- -- 110,845,000
Distribution s to shareholders (8,233,000) (457,000) -- -- (8,690,000)
Distribution to minority interest (38,095,000) (10,026,000) (1,634,000) (2,676,000) (52,431,000)
Reinvestment by minority interest (23,037,000) 3,670,000 -- -- (19,367,000)
Other 7,962,000 (2,111,000) -- -- 5,851,000
Cash provided by (used in) financing 3,654,000 -- (276,000) (336,000) 3,042,000
activities
100,107,000 18,575,000 (1,910,000) 6,237,000 123,009,000
Net increase (decrease) in cash and cash 9,619,000 16,000 (210,000) (10,960,000) (1,526,000)
equivalents
Cash and cash equivalents at the beginning 10,532,000 0 1,470,000 1,408,000 13,410,000
of the year
Cash and cash equivalents at the end of the $ 20,151,000 $ 16,000 $ 1,269,000 $ (9,552,000) $ 11,884,000
year
Funds from Operations $ 56,143,000 $ 77,364,000
</TABLE>
<PAGE>
(TABLE CONTINED)
<TABLE>
<CAPTION>
Offer and
PSP 7 Merger SEI
(Historical) Adjustments(4) (ProForma)
-------------- ---------------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net Income $ 5,139,000 $ (1,702,000) $ 58,688,000
Depreciation and amortization 1,912,000 96,000 35,428,000
Minority Interest in income 0 0 8,060,000
Less: Equity in earnings of real estate 0 0 0
entities
Distribution from real estate entities
Gain on disposition of real estate (203,000) 0 (203,000)
Total adjustments 1,709,000 96,000 43,285,000
Cash provided by operating activities 6,848,000 (1,606,000) 101,973,000
Cash flows from investing activities:
Principal payments on mortgage notes -- -- 6,228,000
receivable
Investment in real estate partnerships -- -- (78,000)
Acquisition of mortgage notes receivable -- -- (4,020,000)
Acquisition of minority interest -- -- (53,411,000)
Acquisition of real estate facilities -- -- (117,974,000)
Proceeds form insurance settlement 375,000 -- 2,466,000
Purchase cost of the mergers -- (15,876,000) (59,326,000)
Capital expenditures (464,000) -- (11,116,000)
Cash provided by (used in) investing (89,000) (15,876,000) (237,231,000)
activities
Cash flows from financing activities:
Principal payments on bank debt
Proceeds from the issuance of Common Stock (2,116,000) 14,426,000 (14,211,000)
Proceeds from the issuance of Preferred Stock -- -- 110,280,000
Principal payments on mortgage debt -- -- 110,845,000
Distribution s to shareholders -- -- (8,690,000)
Distribution to minority interest (4,271,000) 1,343,000 (55,359,000)
Reinvestment by minority interest -- -- (19,367,000)
Other -- -- 5,851,000
Cash provided by (used in) financing (457,000) -- 2,585,000
activities
(6,844,000) 15,769,000 131,934,000
Net increase (decrease) in cash and cash (85,000) (1,713,000) (3,324,000)
equivalents
Cash and cash equivalents at the beginning 1,809,000 0 15,219,000
of the year
Cash and cash equivalents at the end of the $ 1,724,000 $ (1,713,000) $11,895,000
year
Funds from Operations $ 82,606,000
</TABLE>
See Accompanying Notes to Pro Forma Consolidated Statement of Cash Flows
(Scenario 1).
<PAGE>
1. During 1994 and 1995, SEI issued shares of both its Preferred and
Common Stock as follows:
o 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.
o 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 ($28.9 million) was
used to retire bank borrowings (borrowings which were used
primarily to acquire real estate facilities and minority
interests in real estate partnerships).
o On September 1, 1994, SEI issued 1,200,000 shares of 9.5%
Cumulative Preferred Stock, Series D (the "Series D Preferred
Stock"). The aggregate net offering proceeds ($29.0 million) was
used to acquire real estate facilities and minority interests in
real estate partnerships.
o On November 25, 1994, SEI issued 2,500,000 shares of Common
Stock pursuant to a public offering. The offering provided gross
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 Note 3 below).
o 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).
Pro forma adjustments have been made to the pro forma consolidated
statements of income to reflect the uses of the proceeds as if the
transactions were completed at the beginning of the year ended December
31, 1994. Similarly, the following pro forma adjustments were made to
reflect the effect on net cash provided by operating activities:
<TABLE>
<CAPTION>
Year
Ended
December 31, 1994
-----------------
<S> <C>
"Net income" was adjusted to reflect the overall effect of the above
offerings and the use of the net proceeds therefrom on the pro
forma consolidated net income $ 7,590,000
===========
"Depreciation and amortization" has been increased to reflect the
incremental difference between the actual depreciation expense
included in the historical statements of operations and the pro
forma depreciation expense as if the facilities were in operation
for a full period (including a pro forma adjustment for the
amortization of mortgage note receivable discounts totaling
$254,000 - See Note 1 to the Pro Forma Consolidated Statement of
Income) $ 2,950,000
===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year
Ended
December 31, 1994
-----------------
<S> <C>
"Minority interest in income" has been adjusted to reflect similar
adjustments to the pro forma consolidated statements of income $ (1,421,000)
=============
The following pro forma adjustments have been made to cash flows from
investing and financing activities:
"Principal payments on mortgage notes receivable" was decreased to
reflect the elimination of historical payments relating to the
canceled mortgage notes (which were canceled in connection with
the acquisition of real estate facilities) $ (557,000)
=============
"Acquisitions of minority interests in real estate partnerships" was
increased to reflect the acquisitions of such interests, which
occurred subsequent to the period $ (1,700,000)
=============
"Acquisitions of real estate facilities" was increased to reflect the
acquisitions of real estate facilities, which occurred subsequent
to the period $ (24,948,000)
=============
"Capital improvements to real estate facilities" was increased to
reflect the estimated additional capital improvements which would
have been incurred during the period for the acquired real estate
facilities $ (473,000)
=============
"Net proceeds (pay downs) from note payable to bank" has been
adjusted to reflect the pro forma use of the offering proceeds to
pay down the historical borrowings on SEI's credit facilities
during the year ended December 31, 1994 $ (25,447,000)
=============
"Net proceeds from the issuance of preferred stock" was increased to
reflect the net proceeds from the issuance of Series E Preferred
Stock, which occurred subsequent to the period $ 52,946,000
=============
"Principal payments on mortgage notes payable" was increased to
reflect the payments which would have been made during the period
with respect to the mortgage notes payable which were assumed in
connection with the acquisition of real estate facilities $ (457,000)
=============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year
Ended
December 31, 1994
-----------------
<S> <C>
"Distributions paid to shareholders" has been increased to reflect
the additional distributions which would have been paid to the
holders of the Common Stock, Series C, Series D, Series E issued
during 1994 and 1995, as if the common and preferred stock was
outstanding for the entire period $(10,026,000)
===========
"Distributions from operations to minority interest in real estate
partnerships" has been adjusted to reflect the reduction in
distributions to minority interests which would have resulted in
connection with the acquisition of minority interests by SEI,
assuming SEI had completed such acquisitions at the beginning of
the period $ 3,670,000
===========
"Reinvestment by minority interests into real estate partnerships"
has been adjusted to reflect the reduction which would have
resulted in connection with the acquisition of minority interests
by SEI, assuming SEI had completed such acquisitions at the
beginning of the period $ (2,111,000)
===========
</TABLE>
2. Effective September 30, 1994, SEI completed the merger transaction with
PSP VIII. The following pro forma adjustments have been made assuming
the merger transaction with PSP VIII was completed at the beginning of
the year ended December 31, 1994:
<TABLE>
<CAPTION>
Year
Ended
December 31, 1994
-----------------
<S> <C>
An adjustment has been made to reflect the pro forma increase in
net income as a result of the PSP VIII merger transaction
$ 1,671,000
===========
An adjustment has been made to reflect the pro forma increase in
depreciation as a result of the PSP VIII merger transaction
$ 1,120,000
===========
A pro forma adjustment has been made to reflect PSP VIII's
historical proceeds from an insurance settlement $ 425,000
===========
A pro forma adjustment has been made to reflect PSP VIII's
historical capital improvements $(1,507,000)
===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year
Ended
December 31, 1994
-----------------
<S> <C>
Distributions paid to shareholders has been increased to reflect
the additional distributions which would have been paid (from
January 1, 1994 through September 30, 1994) as a result of the
issuance of 2,593,910 additional shares of Common Stock
(assuming the historical distribution rate of $.21 per share per
quarter) $(1,634,000)
===========
A pro forma adjustment has been made to reflect PSP VIII's
historical net change in other assets and liabilities during the
period $ (276,000)
===========
</TABLE>
3. On February 28, 1995, SEI completed the merger transaction with PSP VI
(see Note 3 to the pro forma consolidated balance sheet). The following
pro forma adjustments have been made assuming the merger transaction
with PSP VI was completed at the beginning of the year ended December
31, 1994: Similarly, the following pro forma adjustments were made to
reflect the effect on net cash provided by operating activities:
<TABLE>
<CAPTION>
Year
Ended
December 31, 1994
-----------------
<S> <C>
An adjustment has been made to reflect the pro forma increase in
net income as a result of the PSP VI merger transaction $ 3,872,000
===========
An adjustment has been made to reflect the pro forma increase in
depreciation as a result of the PSP VI merger transaction $ 1,769,000
===========
A pro forma adjustment has been made to reflect PSP VI's
historical capital improvements $ (360,000)
===========
Distributions paid to shareholders has been increased to reflect
the distributions which would have been paid as a result of the
issuance of 3,148,000 additional shares of Common Stock
(assuming the historical distribution rate of $.85 per share for
the year ended December 31, 1994) $(2,676,000)
===========
A pro forma adjustment has been made to reflect PSP VIII's
historical net change in other assets and liabilities during the
period $ (336,000)
===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year
Ended
December 31, 1994
-----------------
<S> <C>
In addition, pro forma adjustments were made to cash flows from
investing and financing activities as follows:
"Purchase cost of the Merger" has been adjusted to reflect:
o the cash portion of the purchase price $(21,428,000)
o fees and expenses expected to be incurred by SEI (1,050,000)
------------
$(22,478,000)
============
"Net proceeds (pay downs) from note payable to bank has been
adjusted to reflect additional borrowings to fund the purchase
cost of the Merger $ 9,249,000
============
</TABLE>
4. Pro forma Merger adjustments, assuming that the Merger is consummated
through the issuance of SEI Common Stock (80% of the purchase cost) and
cash (20% of the purchase cost) have been made to the pro forma
consolidated statements of income to reflect the Merger. Similarly, the
following pro forma adjustments were made to reflect the effect on net
cash provided by operating activities:
<TABLE>
<CAPTION>
Year
Ended
December 31, 1994
-----------------
<S> <C>
"Net income" was adjusted to reflect the overall effect of the
Merger $ (1,702,000)
============
Pro forma adjustments have been made to depreciation and
amortization expense to reflect the Merger $ 96,000
============
In addition, pro forma adjustments were made to cash flows from
investing and financing activities as follows:
"Purchase cost of the Merger" has been adjusted to reflect:
o the cash portion of the purchase price $(14,426,000)
o fees and expenses expected to be incurred by SEI (1,450,000)
------------
$(15,876,000)
============
"Net proceeds (pay downs) from note payable to bank has been
adjusted to reflect additional borrowings to fund the purchase
cost of the Merger $ 14,426,000
============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year
Ended
December 31, 1994
-----------------
<S> <C>
"Distributions paid to shareholders" has been decreased as following:
o to eliminate PSP7 historical distributions $4,271,000
o to reflect the additional distributions which would have
been paid as a result of the issuance of 3,444,919
additional shares of Common Stock (assuming the historical
distribution rate of $.85 per share for the year ended
December 31, 1994) (2,928,000)
----------
$ 1,343,000
==========
</TABLE>
<PAGE>
STORAGE EQUITIES, INC.
CONSOLIDATED PRO FORMA BALANCE SHEET
(Scenario 2: Consummation of Merger through the issuance of SEI Common Stock)
December 31, 1994
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma Adjustments
----------------------------
Issuance
SEI Of Series E PSP VI SEI PSP 7
ASSETS (Historical) Preferred Stock Merger(2) (Pro Forma) (Historical)
------ ------------- --------------- ----------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 20,151,000 $ 851,000 $ (15,000,000) $6,002,000 $1,724,000
Investments in real estate entities 8,858,000 8,858,000
Real estate facilities, net of accumulated 764,973,000 24,948,000 66,475,000 856,396,000 38,556,000
depreciation
Mortgage loans receivable, primarily from 23,062,000 - 23,062,000
affiliates
Unallocated purchase cost - 1,026,000 1,062,000
Other assets 3,265,000 - 352,000 3,617,000 420,000
Total assets $820,309,000 $ 25,799,000 $52,853,000 $898,961,000 $40,700,000
LIABILITIES AND SHAREHOLDERS' EQUITY
Note payable to bank $ 25,447,000 $ (25,447,000) $ 9,249,000 $ 9,249,000 $ 917,000
Mortgage notes payable 51,788,000 - - $ 51,788,000
Total debt 77,235,000 (25,447,000) 9,249,000 61,037,000 917,000
Accrued and other liabilities 14,061,000 - 739,000 14,800,000 2,548,000
Minority interest 141,227,000 (1,700,000) - 139,527,000 -
Shareholders' equity:
Preferred Stock, $0.1 par value, 50,000,000
shares authorized:
10% cumulative preferred stock, Series A, $25 45,625,000 - - 45,625,000 -
stated value, 1,825,000 shares issued and
outstanding
9.20% cumulative preferred stock, Series B, 59,650,000 - - 59,650,000
$25 stated value 2,386,000 shares
issued and outstanding
Adjustable Rate Cumulative Preferred Stock, 30,000,000 - - 30,000,000
Series C, $25 stated value, 1,200,000 shares
issued and outstanding
8.25% Convertible Preferred Stock, $25 stated 57,500,000 - - 57,500,000
value, 2,3000,000 shares issued and
outstanding
9.50% cumulative preferred Stock, Series D, 30,000,000 - - 30,000,000
$25 stated value, 1,200,000 shares
issued and outstanding
10% cumulative preferred Stock, Series E, - 54,875,000 - 54,875,000 -
$25 stated value, 2,195,000 shares
issued and outstanding
Common stock , $.10 par value, 60,000,000 shares
authorized, 28,826,707 shares issued and
outstanding (37,160,642 pro forma shares 2,883,000 - 315,000 3,198,000 38,000
issued and outstanding)
Series B. Common Stock
Paid-in capital 372,361,000 (1,929,000) 42,550,000 412,982,000 49,827,000
Cumulative net income 172,485,000 - - 172,485,000 54,276,000
Cumulative distribution paid (182,718,000) - - (182,718,000) (66,906,000)
------------- ------------- ------------- ------------- -------------
Total shareholders' equity 587,786,000 52,946,000 42,865,000 683,597,000 37,235,000
------------- ------------- ------------- ------------- -------------
Total liabilities and shareholders equity $ 820,309,000 $ 25,799,000 $ 52,853,000 $ 898,961,000 $ 40,700,000
============= ============= ============= ============= =============
Book Value per Common Share $ 12.66 $ 12.70
============= =============
</TABLE>
<PAGE>
(TABLE CONTINUED)
<TABLE>
<CAPTION>
Pro forma Offer and
Merger Adjustments
----------------------------
SEI
ASSETS Purchase (3) Valuation(3) Pro Forma
------ ------------- ------------- -------------
<S> <C> <C> <C>
Cash and cash equivalents $ (5,273,000) $ - $2,453,000
Investments in real estate entities 8,858,000
Real estate facilities, net of accumulated 35,744,000 930,696,000
depreciation
Mortgage loans receivable, primarily from 23,062,000
affiliates
Unallocated purchase cost 72,128,000 70,222,000 2,932,000
Other assets 4,037,000
Total assets $66,855,000 (34,478,000) $972,038,000
LIABILITIES AND SHAREHOLDERS' EQUITY
Note payable to bank $ - $ - $ 10,166,000
Mortgage notes payable - 51,788,000
Total debt - - 61,954,000
Accrued and other liabilities (1,066,000) - 16,282,000
Minority interest - 139,527,000
Shareholders' equity:
Preferred Stock, $0.1 par value, 50,000,000
shares authorized:
10% cumulative preferred stock, Series A, $25 - 45,625,000
stated value, 1,825,000 shares issued and
outstanding
9.20% cumulative preferred stock, Series B, $25 59,650,000
stated value 2,386,000 shares issued and
outstanding
Adjustable Rate Cumulative Preferred Stock, 30,000,000
Series C, $25 stated value, 1,200,000 shares
issued and outstanding
8.25% Convertible Preferred Stock, $25 stated 57,500,000
value, 2,3000,000 shares issued and
outstanding
9.50% cumulative preferred Stock, Series D, $25 30,000,000
stated value, 1,200,000 shares issued and
outstanding
10% cumulative preferred Stock, Series E, $25 - 54,875,000
stated value, 2,195,000 shares issued and
outstanding
Common stock , $.10 par value, 60,000,000 shares
authorized, 28,826,707 shares issued and
outstanding (37,160,642 pro forma shares 431,000 (38,000) 3,629,000
issued and outstanding)
Series B. Common Stock
Paid-in capital 67,490,000 (47,070,000) 468,229,000
Cumulative net income - (54,276,000) 172,485,000
Cumulative distribution paid - 66,906,000 (182,718,000)
------------ ------------- -------------
Total shareholders' equity 67,921 (34,478,000) 754,275,000
------------ ------------- -------------
Total liabilities and shareholders equity $ 66,855,000 $(34,478,000) $972,038,000
============ ============= =============
Book Value per Common Share $ 13.05
=============
</TABLE>
See Accompanying Notes to Pro Forma Consolidated Balance Sheet (Scenario 2).
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
(Scenario 2: Consummation of Merger solely through the issuance of
SEI Common Stock)
December 31, 1994
(Unaudited)
1. See Note 1 to Pro Forma Consolidated Balance Sheet (Scenario 1).
2. See Note 2 to Pro Forma Consolidated Balance Sheet (Scenario 1).
3. 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 of PSP7 based upon their respective fair values,
and the remainder, if any, will be allocated to excess of purchase cost
over book value of assets acquired. The aggregate purchase cost to be
paid to the shareholders of PSP6 has been determined to be the sum of
(1) the fair market value of PSP7's real estate assets, (2) the
estimated book value of PSP7's non-real estate assets as of December
31, 1994 less (3) PSP7's estimated liabilities as of December 31, 1994,
including an estimated adjustment for potential environmental matters.
In addition, concurrent with the Merger, PSP7's outstanding Series D
common stock is assumed to be repurchased and retired. The aggregate
purchase cost and its preliminary allocation to the historical assets
and liabilities is as follows:
<TABLE>
<S> <C>
Purchase cost, including related fees (see related adjustments
below):
Acquisition of 3,806,491 shares of PSP7 Common Stock:
Fair value of real estate facilities acquired $ 74,300,000
Estimated fair value of other assets at December 31, 1994 420,000
Cash balance at December 31, 1994 1,724,000
Estimated fair value of liabilities at December 31, 1994 (3,465,000)
-----------
72,979,000
Less: Repurchase and retirement of PSP7's Series D common
stock (2,757,000)
Add : Estimated net increase in PSP7's net current assets
projected as of May 31, 1995 1,906,000
------------
$ 72,128,000
============
Preliminary allocation of purchase cost:
Net assets acquired at historical amounts $37,235,000
Repurchase and retirement of PSP7's Series D common stock (2,757,000)
------------
Adjusted net assets acquired at historical amounts 34,478,000
Adjustments to reflect the fair value of the real estate
facilities acquired 35,744,000
Unallocated excess purchase cost over net assets acquired 1,906,000
------------
$ 72,128,000
============
</TABLE>
Under Scenario 2, the purchase cost will consist of the issuance of SEI
Common ($72,128,000, as determined using a closing price of $16.75 per
share of SEI Common Stock). The unallocated excess purchase cost over
the net assets acquired will ultimately be allocated to fair value of
PSP7's current assets and liabilities at the completion of the Merger.
<PAGE>
The following pro forma purchase adjustments have been made assuming
the Merger is consummated as of December 31, 1994:
<TABLE>
<S> <C>
o Cash and cash equivalents has been decreased to reflect:
Fees and expense expected to be incurred by SEI $ (1,450,000)
Repurchase and retirement of PSP7's Series D common
stock (2,757,000)
Payment of accrued distributions as of December 31,1994 (1,066,000)
-------------
Net reduction to cash and cash equivalents $ ( 5,273,000)
============
o Accrued and other liabilities has been reduced to reflect the
pro forma payment of PSP7's distributions which were accrued
as of December 31, 1994 $ (1,066,000)
o Shareholders' equity has been increased to reflect the
issuance of Common Stock in connection with the Merger:
Common Stock (issuance of approximately 4,306,149 shares of SEI
Common Stock, par value of $.10 per share) $ 431,000
Paid in capital 71,697,000
-------------
Equity portion of purchase cost 72,128,000
Additional adjustments to "Paid-in capital" to reflect:
Repurchase and retirement of PSP7's Series D common
stock (2,757,000)
Estimated fees and expenses of issuing Common Stock (1,450,000)
-----------
Total adjustment to shareholders' equity $ 67,921,000
============
</TABLE>
<PAGE>
STORAGE EQUITIES, INC.
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
(Scenario 2: Consummation of
Merger Solely through the Issuance of SEI Common Stock)
For the Year Ended December 31, 1994
(Unaudited)
<TABLE>
<CAPTION>
Issuance
SEI Of Preferred & PSP VIII PSP VI SEI
(Historical) Common Stock(1) Merger(2) Merger(3) (ProForma)
------------- --------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues
Rental Income $ 141,845,000 $ 13,765,000 $ 6,858,000 $ 10,557,000 $ 173,025,000
Management Fees - Minis
Management Fees - BP
Equity in earnings of real estate entities
Interest and Other Income 5,351,000 (1,199,000) 139,000 51,000 4,342,000
------------- --------------- -------------- ------------ -------------
147,196,000 12,566,000 6,997,000 10,608,000 177,367,000
------------- --------------- -------------- ------------ -------------
Expenses
Cost of Operations 52,816,000 4,877,000 2,515,000 3,591,000 63,799,000
Depreciation and Amortization 28,274,000 2,696,000 1,120,000 1,769,000 33,859,000
General and Administrative 2,631,000 -- 67,000 138,000 2,836,000
Advisory Fee 4,983,000 902,000 152,000 359,000 6,396,000
Interest Expenses 6,893,000 (2,078,000) 1,472,000 879,000 7,166,000
------------- --------------- -------------- ------------ -------------
95,597,000 6,397,000 5,326,000 6,736,000 114,056,000
------------- --------------- -------------- ------------ -------------
Income before minority interest in income and 51,599,000 6,169,000 1,671,000 3,872,000 63,311,000
gain on disposition of real estate
Minority interest in income (9,481,000) 1,421,000 -- -- (8,060,000)
------------- --------------- -------------- ------------ -------------
42,118,000 7,590,000 1,671,000 3,872,000 55,251,000
------------- --------------- -------------- ------------ -------------
Gain on disposition of real estate -- -- -- -- --
Net Income $ 42,118,000 $ 7,590,000 $ 1,671,000 $ 3,872,000 $ 55,251,000
============= =============== ============== ============ =============
Net income allocable to preferred shareholders $ 16,846,000 $ 8,606,000 $ $ $ 25,452,000
Net income allocable to Class B Shareholders
Net income allocable to common shareholders 25,272,000 (1,016,000) 1,671,000 3,872,000 29,799,000
------------- --------------- -------------- ------------ -------------
Net Income $ 42,118,000 $ 7,590,000 $ 1,671,000 $ 3,872,000 $ 55,251,000
============= =============== ============== ============ =============
Per Common Share:
============= =============== ============== ============ =============
Net Income $ 1.05 $ 0.93(4)
============= =============== ============== ============ =============
Weighted Average Shares 24,077,055 32,046,269(4)
============= =============== ============== ============ =============
Ration of earnings to combined fixed charges 2.22 1.99
and preferred stock dividends (7)
============= =============== ============== ============ =============
</TABLE>
<PAGE>
(TABLE CONTINUED)
<TABLE>
<CAPTION>
Pro forma
PSP 7 Offer & Merger SEI
(Historical) Adjustments (5) (ProForma)
------------ -------------- ------------
<S> <C> <C> <C>
Revenues
Rental Income $ 13,257,000 $ $ 186,282,000
Management Fees - Minis
Management Fees - BP
Equity in earnings of real estate entities
Interest and Other Income 28,000 4,370,000
------------ -------------- --------------
13,285,000 -- 190,652,000
------------ -------------- --------------
Expenses
Cost of Operations 6,008,000 -- 69,807,000
Depreciation and Amortization 1,912,000 96,000 35,867,000
General and Administrative 283,000 (55,000) 3,064,000
Advisory Fee -- 373,000 6,769,000
Interest Expenses 146,000 0 7,312,000
------------ -------------- --------------
8,349,000 414,000 122,819,000
------------ -------------- --------------
Income before minority interest in income and 4,936,000 (414,000) 67,833,000
gain on disposition of real estate
Minority interest in income -- -- (8,060,000)
------------ -------------- --------------
4,936,000 (414,000) 59,773,000
------------ -------------- --------------
Gain on disposition of real estate 203,000 -- 203,000
Net Income $ 5,139,000 $ (414,000) $ 59,976,000
============ ============== ==============
Net income allocable to preferred shareholders $ $ $ 25,452,000
Net income allocable to Class B Shareholders
Net income allocable to common shareholders 5,139,000 (414,000) 34,524,000
------------ -------------- --------------
Net Income $ 5,139,000 $ (414,000) $ 59,976,000
============ ============== ==============
Per Common Share:
============ ============== ==============
Net Income $ 1.35 $ 0.95(6)
============ ============== =============
Weighted Average Shares 3,810,908 36,352,418(6)
============ ============== ==============
Ration of earnings to combined fixed charges 2.13
and preferred stock dividends (7)
============ ============== ==============
</TABLE>
See Accompanying Notes to Pro Forma Consolidated Balance Sheet (Scenario 2).
<PAGE>
STORAGE EQUITIES, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
(Scenario 2: Consummation of Merger Solely through the issuance of
SEI Common Stock)
(Unaudited)
1. See Note 1 to Pro Forma Consolidated Statements of Income (Scenario 1).
2. See Note 2 to Pro Forma Consolidated Statements of Income (Scenario 1).
3. See Note 3 to Pro Forma Consolidated Statements of Income (Scenario 1).
4. See Note 4 to Pro Forma Consolidated Statements of Income (Scenario 1).
5. Pro forma Merger adjustments, assuming that the Merger is consummated
solely through the issuance of SEI Common Stock have been made to
reflect the following:
<TABLE>
<CAPTION>
Year
Ended
December 31, 1994
-----------------
<S> <C>
Pro forma adjustments have been made to depreciation and amortization
expense to reflect the following:
o A pro forma adjustment has been made to increase the
historical depreciation of the acquired PSP7 real estate
facilities to an amount which is based on the preliminary
purchase cost allocation to the buildings (straight-line
over 25 years) $ 20,000
o A pro forma adjustment has been made to reflect the
amortization of the unallocated purchase cost (straight-line
over 25 years) 76,000
--------
$ 96,000
========
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 Merger. Such expenses include the
elimination of PSP7's board of directors fees, PSP7's stock
exchange listing fees, audit and tax fees and certain
administrative expenses which will no longer be applicable. $ (55,000)
--------
A pro forma adjustment has been made to the advisory fee to
reflect the above adjustments combined with the effects of the
operations of PSP7 and the issuance of additional shares of
SEI's Common Stock $ 373,000
========
</TABLE>
6. Pro forma net income per Common Share has been computed as follows:
<PAGE>
<TABLE>
<CAPTION>
Year
Ended
December 31, 1994
-----------------
<S> <C>
Pro Forma net income $59,976,000
Less: Pro Forma Preferred Stock dividends (25,452,000)
-----------
Income applicable to common shareholders $34,524,000
==========
Pro forma weighted average common shares (1) 36,352,418
==========
Pro forma Net income per common share $ .95
===========
<FN>
(1) As adjusted to give effect to the issuance of 4,306,149
additional shares of Common Stock in connection with the
Merger.
</TABLE>
7. For purposes of these computations, earnings consist 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, and Convertible
Preferred Stock.
8. The number of shares to be issued in the Merger under this scenario is
dependent upon the market price of SEI Stock. For purposes of these pro
forma financial statements it was assumed that the SEI Stock price
would be approximately $16.75 per share of Common Stock. This share
price resulted in the pro forma issuance of approximately 4,306,149
shares of Common Stock.
The following illustrates the effect of a $.25 per share market price
fluctuation on the above pro forma financial information:
<TABLE>
<CAPTION>
Number of shares Pro forma Pro forma Net Pro forma Book
Market Price issued in the Merger Net Income Income per Share Value per share
------------ -------------------- ------------- ---------------- ----------------
<S> <C> <C> <C> <C>
$16.50 4,371,394 $59,979,000 $0.95 $13.11
$17.00 4,242,824 $59,973,000 $0.95 $13.16
</TABLE>
<PAGE>
PSP7 - Pro Forma Equivalent Per Share Amounts (a):
<TABLE>
<CAPTION>
Book Value at
Market Price Net Income Distributions December 31, 1994
------------ ----------- -------------- --------------------
<S> <C> <C> <C>
$16.50 $1.09 $0.98 $15.06
$17.00 $1.06 $0.95 $14.67
<FN>
(a) Presents combined pro forma amounts per share of PSP7 Common Stock based on
the number of shares of PSP7 Common Stock assumed to be outstanding immediately
prior to the effective time of the Merger. Income and book value data are
calculated by multiplying the combined pro forma amounts by an assumed ratio
(based on assumed issue price of SEI stock of $16.75). The distribution amounts
are calculated by multiplying the SEI historical distribution ($.85 per SEI
Common Share) by the assumed exchange ratio. The pro forma distributions per SEI
Common Share for purposes of these pro forma financial statements were assumed
to be $.85 per SEI Common Share for fiscal 1994.
</TABLE>
<PAGE>
STORAGE EQUITIES, INC.
PRO FORMA CONSOLIDATED STATEMENT OF CASH FLOW
(Scenario 2: Consummation of Merger through the Issuance of SEI Common Stock)
For the Year Ended December 31, 1994
(Unaudited)
<TABLE>
<CAPTION>
Issuance
SEI Of Preferred & PSP VIII PSP VI SEI
(Historical) Common Stock(1) Merger(2) Merger(3) (ProForma)
------------ ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net Income $ 42,118,000 $ 7,590,000 $ 1,671,000 $ 3,872,000 $ 55,251,000
Depreciation and amortization 27,581,000 2,950,000 1,120,000 1,769,000 33,420,000
Minority Interest in income 9,481,000 (1,421,000) 0 0 8,060,000
Less: Equity in earnings of real estate 0 0 0 0 0
entities
Distribution from real estate entities
Gain on disposition of real estate 0 0 0 0 0
Total adjustments 37,062,000 1,529,000 1,120,000 1,769,000 41,480,000
------------ ------------ ------------ ----------- -------------
Cash provided by operating activities 79,180,000 9,119,000 2,791,000 5,641,000 96,731,000
------------ ------------ ------------ ----------- -------------
Cash flows from investing activities:
Principal payments on mortgage notes 6,785,000 (557,000) -- -- 6,228,000
receivable
Investment in real estate partnerships (78,000) -- -- -- (78,000)
Acquisition of mortgage notes receivable (4,020,000) -- -- -- (4,020,000)
Acquisition of minority interest (51,711,000) (1,700,000) -- -- (53,411,000)
Acquisition of real estate facilities (93,026,000) (24,948,000) -- -- (117,974,000)
Proceeds form insurance settlement 1,666,000 -- 425,000 -- 2,091,000
Purchase cost of the mergers (20,972,000) -- -- (22,478,000) (43,450,000)
Capital expenditures (8,312,000) (473,000) (1,507,000) (360,000) (10,652,000)
------------ ------------ ------------ ----------- -------------
Cash provided by (used in) investing (169,668,000) (27,678,000) (1,082,000) (22,838,000) (221,266,000)
activities ------------ ------------ ------------ ----------- -------------
Cash flows from financing activities:
Principal payments on bank debt
Proceeds from the issuance of Common Stock (10,323,000) (25,447,000) -- 9,249,000 (26,521,000)
Proceeds from the issuance of Preferred Stock 110,280,000 -- -- -- 110,280,000
Principal payments on mortgage debt 57,899,000 52,946,000 -- -- 110,845,000
Distribution s to shareholders (8,233,000) (457,000) -- -- (8,690,000)
Distribution to minority interest (38,095,000) (10,026,000) (1,634,000) (2,676,000) (52,431,000)
Reinvestment by minority interest (23,037,000) 3,670,000 -- -- (19,367,000)
Other 7,962,000 (2,111,000) -- -- 5,851,000
Cash provided by (used in) financing 3,654,000 -- (276,000) (336,000) 3,042,000
activities ------------ ------------ ------------ ----------- -------------
100,107,000 18,575,000 (1,910,000) 6,237,000 123,009,000
------------ ------------ ------------ ----------- -------------
Net increase (decrease) in cash and cash 9,619,000 16,000 (210,000) (10,960,000) (1,526,000)
equivalents
Cash and cash equivalents at the beginning 10,532,000 0 1,470,000 1,408,000 13,410,000
of the year ------------ ------------ ------------ ----------- -------------
Cash and cash equivalents at the end of the $ 20,151,000 $ 16,000 $ 1,269,000 $(9,552,000) $11,884,000
year ============ ============ ============ =========== =============
Funds from Operations $ 56,143,000 $ 77,364,000
============ ============
</TABLE>
<PAGE>
(TABLE CONTINUED)
<TABLE>
<CAPTION>
Offer and
PSP 7 Merger SEI
(Historical) Adjustments(4) (ProForma)
------------ ------------ -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net Income $ 5,139,000 $ (414,000) $ 59,976,000
Depreciation and amortization 1,912,000 96,000 35,428,000
Minority Interest in income 0 0 8,060,000
Less: Equity in earnings of real estate 0 0 0
entities
Distribution from real estate entities
Gain on disposition of real estate (203,000) 0 (203,000)
Total adjustments 1,709,000 96,000 43,285,000
----------- ----------- ------------
Cash provided by operating activities 6,848,000 (318,000) 103,261,000
----------- ----------- ------------
Cash flows from investing activities:
Principal payments on mortgage notes -- -- 6,228,000
receivable
Investment in real estate partnerships -- -- (78,000)
Acquisition of mortgage notes receivable -- -- (4,020,000)
Acquisition of minority interest -- -- (53,411,000)
Acquisition of real estate facilities -- -- (117,974,000)
Proceeds form insurance settlement 375,000 -- 2,466,000
Purchase cost of the mergers -- (14,450,000) (44,900,000)
Capital expenditures (464,000) -- (11,116,000)
----------- ----------- ------------
Cash provided by (used in) investing (89,000) (14,450,000) (222,805,000)
activities ----------- ----------- ------------
Cash flows from financing activities:
Principal payments on bank debt
Proceeds from the issuance of Common Stock (2,116,000) -- (28,637,000)
Proceeds from the issuance of Preferred Stock -- -- 110,280,000
Principal payments on mortgage debt -- -- 110,845,000
Distribution s to shareholders -- -- (8,690,000)
Distribution to minority interest (4,271,000) 611,000 (56,091,000)
Reinvestment by minority interest -- -- (19,367,000)
Other -- -- 5,851,000
Cash provided by (used in) financing (457,000) -- 2,585,000
activities ----------- ----------- ------------
(6,844,000) 611,000 116,776,000
----------- ----------- ------------
Net increase (decrease) in cash and cash (85,000) (1,157,000) (2,768,000)
equivalents
Cash and cash equivalents at the beginning 1,809,000 0 15,219,000
of the year ----------- ----------- ------------
Cash and cash equivalents at the end of the $ 1,724,000 $(1,157,000) $12,451,000
year =========== =========== ============
Funds from Operations $83,894,000
</TABLE>
See Accompanying Notes to Pro Forma Consolidated
Statement of Cash Flows (Scenario 2).
<PAGE>
1. See Note 1 to Pro Forma Consolidated Statements of Cash Flows
(Scenario 1).
2. See Note 2 to Pro Forma Consolidated Statements of Cash Flows
(Scenario 1).
3. See Note 3 to Pro Forma Consolidated Statements of Cash Flows
(Scenario 1).
4. Pro forma Merger adjustments, assuming that the Merger is consummated
solely through the issuance of SEI Common Stock have been made to the pro
forma consolidated statements of income to reflect the Merger. Similarly,
the following pro forma adjustments were made to reflect the effect on
net cash provided by operating activities:
<TABLE>
<CAPTION>
Year
Ended
December 31, 1994
-------------------
<S> <C>
"Net income" was adjusted to reflect the overall effect of the Merger $ (414,000)
============
Pro forma adjustments have been made to depreciation and amortization
expense to reflect the Merger $ 96,000
============
In addition, pro forma adjustments were made to cash flows from
investing and financing activities as follows:
"Purchase cost of the Merger" has been adjusted to reflect the fees and
expenses expected to be incurred by SEI $ (1,450,000)
============
"Distributions paid to shareholders" has been decreased as followings:
o to eliminate PSP7 historical distributions $4,271,000
o to reflect the additional distributions which would have
been paid as a result of the issuance of 4,306,149
additional shares of Common Stock (assuming the historical
distribution rates of $.85 per share for the year ended
December 31, 1994) (3,660,000)
------------
$ 611,000
============
</TABLE>
<PAGE>
Appendix A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION ("Agreement") is entered into
as of this 2nd day of February, 1995, by and between STORAGE EQUITIES, INC., a
California corporation ("SEI"), and PUBLIC STORAGE PROPERTIES VII, INC., a
California corporation ("PSP7").
A. The parties intend that this Agreement shall constitute a Plan of
Reorganization for purposes of Section 368(a)(1)(A) of the Internal Revenue Code
of 1986, as amended. The Plan of Reorganization provides for the merger of PSP7
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 ("Merger Agreement").
B. The Boards of Directors of SEI and PSP7 believe that it is in the
best interests of such corporations and their respective shareholders to enter
into and complete this Agreement and they have approved this Agreement and the
transactions contemplated hereby.
NOW, THEREFORE, the parties agree as follows:
1. Adoption of Plan. The parties hereby adopt the Plan of
Reorganization hereinafter set forth.
2. The Merger.
2.1 Completion of the Merger. At the Effective Time (as defined
below), PSP7 will be merged with and into SEI (the "Merger") in accordance with
the terms, conditions and provisions of this Agreement and the Merger Agreement.
The Merger shall become effective at the time at which the Merger Agreement,
together with the requisite Officers' Certificates of SEI and PSP7, are filed
with the California Secretary of State in accordance with the GCLC (the
"Effective Time"). SEI and PSP7 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."
2.2 Effect of the Merger. At the Effective Time:
2.2.1 Constituent Corporations. The separate corporate
existence of PSP7 shall cease and the Surviving Corporation shall thereupon
succeed, without other transfer, to all the rights and property of PSP7 and
shall be subject to all the debts and liabilities of PSP7 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 PSP7 shall be
limited to the property affected thereby immediately prior to the Effective
Time; and any action or proceeding pending by or against PSP7 may be prosecuted
to judgment, which shall bind the Surviving Corporation, or the Surviving
Corporation may be proceeded against or substituted in its place.
2.2.2. Articles and Bylaws. The Articles of Incorporation and
the Bylaws of SEI, as then amended, shall continue to be the Articles of
Incorporation and the Bylaws of the Surviving Corporation until changed as
provided by law and their respective provisions.
2.2.3 Officers and Directors. The officers and directors of
SEI shall continue as officers and directors of the Surviving Corporation until
their successors are elected and qualified as provided by law and in accordance
with the Articles of Incorporation and Bylaws of the Surviving Corporation.
2.3 Conversion of PSP7 Shares. The manner of converting the
outstanding shares of Common Stock Series A ($.01 par value) of PSP7 (the "PSP7
Shares") into cash and/or shares of Common Stock ($.10 par value) of SEI (the
"SEI Shares") shall be as follows:
2.3.1 Cash Election. At the Effective Time, subject to
Sections 2.6 and 6.8 hereof, each PSP7 Share as to which a cash election has
been made in accordance with the provisions of Section 2.5 hereof and has not
been revoked, relinquished or lost pursuant to Section 2.5 hereof (the "Cash
Election Shares") shall be converted into and shall represent the right to
receive $18.95 in cash (the "Cash Election Price"). As soon as practicable after
the Effective Time, the registered holders of Cash Election Shares shall be paid
the cash to which they are entitled hereunder in respect of such Cash Election
Shares.
<PAGE>
2.3.2 Share Exchange. At the Effective Time, subject to
Sections 2.4, 2.5, 2.7 and 6.8 hereof, each PSP7 Share (other than Cash Election
Shares) shall be converted into that number of SEI Shares equal to, rounded to
the nearest thousandth, the quotient (the "Conversion Number") derived by
dividing $18.95 by the average of the per share closing prices on the New York
Stock Exchange, Inc. (the "NYSE") of SEI Shares during the 20 consecutive
trading days ending on the fifth trading day prior to the meeting of
shareholders of PSP7 provided for in Section 6.2 hereof. If, prior to the
Effective Time, SEI should split or combine the SEI Shares, or pay a stock
dividend, the Conversion Number will be appropriately adjusted to reflect such
action.
2.4 No Fractional Shares. Notwithstanding any other term or
provision of this Agreement, no fractional SEI Shares and no certificates or
script therefor, or other evidence of ownership thereof, will be issued in the
Merger. In lieu of any such fractional share interests, each holder of PSP7
Shares who would otherwise be entitled to such fractional share will, upon
surrender of the certificate representing such PSP7 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; provided, however,
that, such fractional share shall not be disregarded if such fractional share to
which such holder would otherwise have been entitled represents .5 of 1% or more
of the total number of SEI Shares such holder is entitled to receive in the
Merger. In such event, such holder shall be paid an amount in cash (without
interest), rounded to the nearest $.01, determined by multiplying (i) the per
share closing price on the NYSE of the SEI Shares at the Effective Time by (ii)
the factional interest.
2.5 Procedure for Cash Election. At the time of the mailing of the
Joint Proxy Statement and Prospectus provided for in Section 6.5 hereof, SEI
will send to each holder of record of PSP7 Shares at the record date for PSP7
meeting of shareholders referred to in Section 6.2 hereof a cash election form
(the "Form of Election") providing such holder with the option to elect to
receive the Cash Election Price with respect to all or any portion of such
holder's PSP7 Shares. Any such election to receive the cash payment contemplated
by Section 2.3.1 hereof shall have been properly made only if The First National
Bank of Boston (the "Exchange Agent") shall have received at its designated
office, by 5:00 p.m., New York time, on the last business day preceding the day
of such meeting of shareholders, a Form of Election properly completed and
accompanied by certificates for the shares to which such Form of Election
relates (or an appropriate guarantee of delivery in a form and on terms
satisfactory to SEI), as set forth in such Form of Election. Any Form of
Election may be revoked by the person submitting the same to the Exchange Agent
only by written notice received by the Exchange Agent prior to 5:00 p.m., New
York time, on the last business day before the day of the meeting of
shareholders referred to in Section 6.2 hereof. In addition, all Forms of
Election shall automatically be revoked if the Exchange Agent is notified in
writing by the parties hereto that the Merger has been abandoned. If a Form of
Election is revoked pursuant to this Section 2.5, the certificate or
certificates or any guarantee of delivery in respect of the PSP7 Shares to which
such Form of Election relates shall be promptly returned to the person
submitting the same to the Exchange Agent. The Exchange Agent may determine
whether or not elections to receive cash have been properly made or revoked
pursuant to this Section 2.5, and any such determination shall be conclusive and
binding. If the Exchange Agent determines that any election to receive cash was
not properly or timely made, the PSP7 Shares covered thereby shall not be
treated as Cash Election Shares, and shall be converted in the Merger as
provided in Section 2.3.2 hereof. The Exchange Agent may, with the mutual
agreement of SEI and PSP7, establish such procedures, not inconsistent with this
Section 2.5, as may be necessary or desirable to implement this Section 2.5.
2.6 Procedure for Proration.
2.6.1 No Proration. If the aggregate number of Cash Election
Shares and Dissenting Shares (as defined below) is 20% or less than the number
of PSP7 Shares outstanding as of the record date for the meeting of shareholders
of PSP7 referred to in Section 6.2, then each Cash Election Share shall be
converted in the Merger into the right to receive the Cash Election Price.
2.6.2 Proration. If the aggregate number of Cash Election
Shares and Dissenting Shares exceeds 20%, then each Cash Election Share shall be
converted in the Merger into the right to receive cash or into SEI Shares as
follows: the number of Cash Election Shares owned by a holder of PSP7 Shares
that shall be converted into the right to receive the Cash Election Price shall
equal the number obtained by multiplying (i) (A) 20% of outstanding PSP7 Shares
less (B) the number of Dissenting Shares (as hereinafter defined), if any, by
(ii) a fraction of which the numerator shall be the number of Cash Election
Shares owned by such holder and the denominator shall be the aggregate number of
Cash Election Shares. The balance of such Cash Election Shares shall be
converted into SEI Shares in accordance with the provisions of Section 2.3.2
hereof. Notwithstanding the foregoing, SEI, in its sole discretion, may allow
Cash Election Shares to receive the Cash Election Price even if the aggregate
number of Cash Election Shares and Dissenting Shares exceeds 20% (but not 50%)
of the number of PSP7 Shares outstanding as of the record date for the meeting
of shareholders of PSP7 referred to in Section 6.2.
<PAGE>
2.7 Dissenting Shares. PSP7 Shares held by a holder who has demanded
and perfected his right to an appraisal of such shares in accordance with
Section 1300 et seq. of the GCLC and who has not effectively withdrawn or lost
his right to appraisal ("Dissenting Shares") shall not be converted into or
represent the right to receive cash and/or SEI Shares, but the holder thereof
shall be entitled only to such rights as are granted by Section 1300 et seq. of
the GCLC. Each holder of Dissenting Shares who becomes entitled to payment for
PSP7 Shares pursuant to these provisions of the GCLC shall receive payment
therefor from the Surviving Corporation in accordance therewith. If any holder
of PSP7 Shares who demands appraisal in accordance with Section 1300 et seq. of
the GCLC shall effectively withdraw with the consent of the Surviving
Corporation or lose (through failure to perfect or otherwise) his right to
appraisal with respect to PSP7 Shares, such PSP7 Shares shall automatically be
converted into the right to receive SEI Shares pursuant to Section 2.3.2 hereof.
2.8 SEI Shares Unaffected. The Merger shall effect no change in any
of the outstanding SEI Shares and no outstanding SEI shares shall be converted
or exchanged as a result of the Merger, and no cash shall be exchangeable, and
no securities shall be issuable, with respect thereto.
2.9 Cancellation of Shares Held or Owned by Parties. At the
Effective Time, any PSP7 Shares owned by SEI shall be cancelled and retired and
no shares shall be issuable, and no cash shall be exchangeable, with respect
thereto.
2.10 Exchange of Certificates. After the Effective Time, each holder
of a certificate theretofore evidencing outstanding PSP7 Shares which were
converted into SEI Shares pursuant hereto, upon surrender of such certificate to
the Exchange Agent or such other agent or agents as shall be appointed by the
Surviving Corporation, shall be entitled to receive a certificate representing
the number of whole SEI Shares into which the PSP7 Shares theretofore
represented by the certificate so surrendered shall have been converted as
provided in Section 2.3.2 hereof and cash payment in lieu of fractional share
interests, if any, as provided in Section 2.4 hereof. As soon as practicable
after the Effective Time, the Exchange Agent will send a notice and a
transmittal form to each holder of PSP7 Shares of record at the Effective Time
whose stock shall have been converted into SEI Shares, advising such holder of
the effectiveness of the Merger and the procedure for surrendering to the
Exchange Agent certificates evidencing PSP7 Shares in exchange for certificates
evidencing SEI Shares.
2.11 Status Until Surrendered. Until surrendered as provided in
Section 2.10 hereof, each outstanding certificate which, prior to the Effective
Time, represented PSP7 Shares (other than Cash Election Shares and Dissenting
Shares, if any) will be deemed for all corporate purposes to evidence ownership
of the number of whole SEI Shares into which the PSP7 Shares evidenced thereby
were converted. However, until such outstanding certificates formerly evidencing
PSP7 Shares are so surrendered, no dividend payable to holders of record of SEI
Shares shall be paid to the holders of such outstanding certificates in respect
of PSP7 Shares, but upon surrender of such certificates by such holders there
shall be paid to such holders the amount of any dividends (without interest)
theretofore paid with respect to such whole SEI Shares as of any record date on
or subsequent to the Effective Time and the amount of any cash (without
interest) payable to such holder in lieu of fractional share interests pursuant
to Section 2.4 hereof.
2.12 Transfer of Shares. After the Effective Time, there shall be no
further registration of transfers of PSP7 Shares on the records of PSP7 and, if
certificates formerly evidencing such shares are presented to the Surviving
Corporation, they shall be cancelled and exchanged for certificates evidencing
SEI Shares and cash in lieu of fractional share interests as herein provided.
3. Closing.
3.1 Time and Place of Closing. If this Agreement is approved by the
shareholders of SEI and PSP7, a meeting (the "Closing") shall take place as
promptly as practicable thereafter at which the parties will exchange
certificates and other documents as required by this Agreement. Such Closing
shall take place at such time and place as SEI may designate. The date of the
Closing shall be referred to as the "Closing Date."
<PAGE>
3.2 Execution and Filing of Merger Agreement. At or before the
Closing and after shareholder approval, SEI and PSP7 shall execute and deliver
the Merger Agreement, together with the requisite Officers' Certificates, for
filing with the California Secretary of State. The Merger Agreement, together
with the requisite Officers' Certificates, shall be duly filed with the
California Secretary of State in accordance with the GCLC as soon as practicable
following the Closing.
4. Representations, Warranties and Agreements of PSP7. PSP7 represents,
warrants and agrees with SEI that:
4.1 Authorization. Subject to approval of this Agreement by the
shareholders of PSP7, (i) the execution, delivery and performance of this
Agreement by PSP7 has been duly authorized and approved by all necessary
corporate action of PSP7, and (ii) PSP7 has necessary corporate power and
authority to enter into this Agreement, to perform its obligations hereunder and
to complete the transactions contemplated hereby.
4.2 Organization and Related Matters. PSP7 is a corporation duly
organized, existing and in good standing under the laws of the State of
California with all requisite corporate power and authority to own, lease and
operate its properties and to carry on its business as and where now owned,
leased, operated or carried on, as the case may be; and is duly qualified to do
business as a foreign corporation and is in good standing in each jurisdiction
in which the property owned, leased or operated by it or the nature of the
business carried on by it requires such qualification and where the failure to
so qualify would have a material adverse effect on the business, properties,
results of operations or financial condition of PSP7. PSP7 has no direct or
indirect equitable or beneficial interest in any other corporation.
4.3 Capital Stock. The authorized capital stock of PSP7 consists
solely of (i) 4,312,521 shares of Common Stock Series A ($.01 par value),
3,806,491 of which were issued and outstanding as of December 31, 1994 and (ii)
2,757 shares of Common Stock Series D ($.01 par value), all of which were issued
and outstanding as of December 31, 1994. All of the issued and outstanding
shares of Common Stock Series A and Common Stock Series D of PSP7 have been duly
and validly authorized and issued, and are fully paid and nonassessable. There
are no options or agreements to which PSP7 is a party or by which it is bound
calling for or requiring the issuance of any of PSP7's capital stock. PSP7's
Common Stock Series B and C have been fully converted and are no longer
authorized or outstanding.
4.4 Consents and Approvals; No Violation. Assuming approval of the
Merger and of this Agreement by the shareholders of PSP7, neither the execution
and delivery of this Agreement nor the consummation by PSP7 of the transactions
contemplated hereby will: (i) conflict with or result in any breach of any
provision of its Articles of Incorporation or Bylaws; (ii) require any consent,
waiver, approval, authorization or permit of, or filing with or notification to,
any governmental or regulatory authority, except (A) in connection with the
applicable requirements, if any, of the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended (the "HSR Act"), (B) pursuant to the applicable
requirements of the federal securities laws and the rules and regulations
promulgated thereunder, (C) the filing of the Merger Agreement and Officers'
Certificates pursuant to the GCLC and appropriate documents with the relevant
authorities of other states in which PSP7 is authorized to do business, (D) in
connection with any state or local tax which is attributable to the beneficial
ownership of PSP7's real property, (E) as may be required by any applicable
state securities or takeover laws, or (F) where the failure to obtain such
consent, approval, authorization or permit, or to make such filing or
notification, would not in the aggregate have a material adverse effect on PSP7
or adversely affect the ability of PSP7 to consummate the transactions
contemplated hereby; (iii) result in a violation or breach of, or constitute a
default (or give rise to any right of termination, cancellation or acceleration)
under any of the terms, conditions or provisions of any note, license, mortgage,
agreement or other instrument or obligation to which PSP7 is a party or any of
its properties or assets may be bound, except for such violations, breaches and
defaults which, in the aggregate, would not have a material adverse effect on
PSP7 or adversely affect the ability of PSP7 to consummate the transactions
contemplated hereby; or (iv) assuming the consents, approvals, authorizations or
permits and filings or notifications referred to in this Section 4.4 are duly
and timely obtained or made, violate any order, writ, injunction, decree,
statute, rule or regulation applicable to PSP7 or its properties or assets,
except for violations which would not in the aggregate have a material adverse
effect on PSP7 or adversely affect the ability of PSP7 to consummate the
transactions contemplated hereby.
4.5 Litigation. There is no litigation, proceeding or governmental
investigation which, individually or in the aggregate, is or may be material and
adverse, pending or, to the knowledge of PSP7, threatened against PSP7 or
involving any of its properties or assets.
<PAGE>
4.6 SEC Reports. Since January 1, 1992, PSP7 has filed all forms,
reports and documents with the Securities and Exchange Commission ("SEC")
required to be filed by it pursuant to the federal securities laws and the rules
and regulations promulgated by the SEC thereunder, all of which complied in all
material respects with all applicable requirements of the federal securities
laws and such rules and regulations (collectively, the "PSP7 SEC Reports"). None
of the PSP7 SEC Reports, including without limitation any financial statements
or schedules included therein, at the time filed contained any untrue statement
of a material fact or omitted to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
4.7 Financial Statements. The financial statements included in the
PSP7 SEC Reports complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with generally accepted
accounting principles applied on a basis consistent with prior periods (except
as otherwise noted therein), and present fairly the financial position of PSP7
as of their respective dates, and the results of operations of PSP7 for the
periods presented therein (subject, in the case of the unaudited interim
financial statements, to normal year-end adjustments).
4.8 Absence of Certain Changes or Events. Since January 1, 1994, the
business of PSP7 has been carried on only in the ordinary and usual course and
there has not been any material adverse change in its business, results of
operations or financial condition, or any damage or destruction in the nature of
a casualty loss, whether covered by insurance or not, that would materially and
adversely affect its properties, business or results of operations.
4.9 S-4 Registration Statement and Joint Proxy Statement and
Prospectus. None of the information supplied or to be supplied by PSP7 for
inclusion or incorporation by reference in the S-4 Registration Statement or the
Joint Proxy Statement and Prospectus (as such terms are defined in Section 6.5
hereof) will (i) in the case of the S-4 Registration Statement, at the time it
becomes effective and at the Effective Time, 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 not misleading, or (ii) in
the case of the Joint Proxy Statement and Prospectus, at the time of the mailing
of the Joint Proxy Statement and Prospectus and at the time of the meetings of
the shareholders of SEI and PSP7, 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.
4.10 Insurance. All material insurance of PSP7 is currently in full
force and effect and PSP7 has reported all claims and occurrences to the extent
required by such insurance.
4.11 Disclosure. The representations and warranties by PSP7 in this
Agreement and any certificate or document delivered by it pursuant hereto do not
and will not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements contained herein or therein not
misleading.
5. Representations, Warranties and Agreements of SEI. SEI hereby
represents, warrants and agrees with PSP7 that:
5.1 Authorization. Subject to approval of this Agreement by the
shareholders of SEI, (i) the execution, delivery and performance of this
Agreement by SEI has been duly authorized and approved by all necessary
corporate action of SEI, and (ii) SEI has all necessary corporate power and
authority to enter into this Agreement, to perform its obligations hereunder and
to complete the transactions contemplated hereby.
5.2 Organization and Related Matters. SEI is a corporation duly
organized, existing and in good standing under the laws of the State of
California, with all requisite corporate power and authority to own, lease and
operate its properties and to carry on its business as and where now owned,
leased, operated or carried on, as the case may be; and is duly qualified to do
business as a foreign corporation and is in good standing in each jurisdiction
in which the property owned, leased or operated by it or the nature of the
business carried on by it requires such qualification and where the failure to
so qualify would have a material adverse effect on the business, properties,
results of operations or financial condition of SEI. SEI has no direct or
indirect equitable or beneficial interest in any other corporation, except that
it owns all of the capital stock of (i) SEI Arlington Acquisition Corporation, a
corporation duly organized, existing and in good standing under the laws of the
Commonwealth of Virginia and (ii) SEI Hypoluxo Acquisition Corporation, a
corporation duly organized, existing and in good standing under the laws of the
State of Florida.
<PAGE>
5.3 Capital Stock. The authorized capital stock of SEI consists
solely of (i) 60,000,000 shares of Common Stock ($.10 par value), approximately
28,800,000 of which were issued and outstanding as of December 31, 1994 (and
approximately 1,550,000 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), 8,911,000 of which were issued and
outstanding as of December 31, 1994, 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 and 1,200,000 shares of Adjustable Rate Preferred
Stock and 1,200,000 shares of Series D Preferred Stock. In January 1995, SEI
issued 524,072 shares of Common Stock. In February 1995, SEI issued 2,195,000
shares of Series E 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. Other than options under SEI's
employee stock option plan 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 and
validly authorized and, when issued and delivered as provided in this Agreement,
the SEI Shares will be duly and validly issued, fully paid and nonassessable;
and the shareholders of SEI have no preemptive rights with respect to any shares
of capital stock of SEI.
5.4 Consents and Approvals; No Violation. Assuming the approval of
the Merger and this Agreement by the shareholders of SEI, neither the execution
and delivery of this Agreement nor the consummation by SEI of the transactions
contemplated hereby will: (i) conflict with or result in any breach of any
provision of its Articles of Incorporation or Bylaws; (ii) require any consent,
waiver, approval, authorization or permit of, or filing with or notification to,
any governmental or regulatory authority, except (A) in connection with the
applicable requirements, if any, of the HSR Act, (B) pursuant to the applicable
requirements of the federal securities laws and the rules and regulations
promulgated thereunder, (C) the filing of the Merger Agreement and Officers'
Certificates pursuant to the GCLC and appropriate documents with the relevant
authorities of other states in which SEI is authorized to do business, (D) in
connection with any state or local tax which is attributable to the beneficial
ownership of PSP7's real property, (E) as may be required by any applicable
state securities or takeover laws, or (F) where the failure to obtain such
consent, approval, authorization or permit, or to make such filing or
notification, would not in the aggregate have a material adverse effect on SEI
or adversely affect the ability of SEI to consummate the transactions
contemplated hereby; (iii) result in a violation or breach of, or constitute a
default (or give rise to any right of termination, cancellation or acceleration)
under any of the terms, conditions or provisions of any note, license, mortgage,
agreement or other instrument or obligation to which SEI is a party or any of
its properties or assets may be bound, except for such violations, breaches and
defaults which, in the aggregate, would not have a material adverse effect on
SEI or adversely affect the ability of SEI to consummate the transactions
contemplated hereby; or (iv) assuming the consents, approvals, authorizations or
permits and filings or notifications referred to in this Section 5.4 are duly
and timely obtained or made, violate any order, writ, injunction, decree,
statute, rule or regulation applicable to SEI or its properties or assets,
except for violations which would not in the aggregate have a material adverse
effect on SEI or adversely affect the ability of SEI to consummate the
transactions contemplated hereby.
5.5 Litigation. There is no litigation, proceeding or governmental
investigation which, individually or in the aggregate, is or may be material and
adverse, pending or, to the knowledge of SEI, threatened against SEI or
involving any of its properties or assets.
5.6 SEC Reports. Since January 1, 1992, SEI has filed all forms,
reports and documents with the SEC required to be filed by it pursuant to the
federal securities laws and the rules and regulations promulgated by the SEC
thereunder, all of which complied in all material respects with all applicable
requirements of the federal securities laws and such rules and regulations
(collectively, the "SEI SEC Reports"). None of the SEI SEC Reports, including
without limitation any financial statements or schedules included therein, at
the time filed contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
5.7 Financial Statements. The financial statements included in SEI's
SEC Reports complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with generally accepted
accounting principles applied on a basis consistent with prior periods (except
as otherwise noted therein), and present fairly the financial position of SEI as
of their respective dates, and the results of operations of SEI for the periods
presented therein (subject, in the case of the unaudited interim financial
statements, to normal year-end adjustments).
<PAGE>
5.8 Absence of Certain Changes or Events. Since January 1, 1994, the
business of SEI has been carried on only in the ordinary and usual course and
there has not been any material adverse change in its business, results of
operations or financial condition, or any damage or destruction in the nature of
a casualty loss, whether covered by insurance or not, that would materially and
adversely affect its properties, business or results of operations.
5.9 S-4 Registration Statement and Joint Proxy Statement and
Prospectus. None of the information supplied or to be supplied by SEI for
inclusion or incorporation by reference in the S-4 Registration Statement or the
Joint Proxy Statement and Prospectus (as those terms are defined in Section 6.5
hereof) will (i) in the case of the S-4 Registration Statement, at the time it
becomes effective and at the Effective Time, 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 not misleading, or (ii) in
the case of the Joint Proxy Statement and Prospectus, at the time of the mailing
of the Joint Proxy Statement and Prospectus and at the time of the meetings of
the shareholders of SEI and PSP7, 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.
5.10 Insurance. All material insurance of SEI is currently in full
force and effect and SEI has reported all claims and occurrences to the extent
required by such insurance.
5.11 Disclosure. The representations and warranties by SEI in this
Agreement and any certificate or document delivered by it pursuant hereto do not
and will not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements contained herein or therein not
misleading.
6. Covenants and Agreements.
6.1 Ordinary Course. Except as contemplated by this Agreement,
during the period from the date of this Agreement to the Effective Time, each of
SEI and PSP7 will carry on its business in the ordinary course in substantially
the same manner as heretofore conducted and use all reasonable efforts to: (a)
preserve intact its present business, organization and goodwill, (b) maintain
all permits, licenses and authorizations required by applicable laws, and (c)
keep available the services of its present employees and preserve its
relationships with customers, suppliers, lenders, lessors, governmental entities
and others having business or regulatory dealings with it. PSP7 will not issue
any capital stock or debt securities convertible into capital stock, except for
shares of Common Stock Series A issued upon exercise of outstanding employer
stock options. Each of SEI and PSP7 will promptly notify the other of any event
or occurrence not in the ordinary and usual course of business or which may have
a material adverse effect on the properties or financial condition of such
party.
6.2 Meetings of Shareholders. Each of SEI and PSP7 will take all
action necessary in accordance with applicable law to convene a meeting of its
shareholders as promptly as practicable to consider and vote upon approval of
this Agreement, it being understood that the principal terms of the Agreement
must be approved by the affirmative vote of (i)(A) a majority of the outstanding
PSP7 Shares entitled to vote at the PSP7 shareholders meeting and (B) a majority
of the PSP7 Shares voting at the meeting of PSP7 shareholders not held by Public
Storage, Inc. and its affiliates, and (ii) a majority of the SEI Shares voting
thereon at the SEI shareholders meeting, provided, however, that the total votes
cast represent over 50% of the SEI Shares entitled to vote thereon.
6.3 Tax Reporting. Each of SEI and PSP7 agrees to report the Merger
for federal and state income tax purposes, as a reorganization of the type
described in Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as
amended.
6.4 Acquisition Proposals. PSP7 will not initiate, solicit or
encourage, directly or indirectly, any inquiries or the making of any proposal
with respect to a merger, consolidation, share exchange or similar transaction
involving PSP7, or any purchase of all or any significant portion of the assets
of PSP7, or any equity interest in PSP7, other than the transactions
contemplated hereby (an "Acquisition Proposal"), or engage in any negotiations
concerning, or provide any confidential information or data to, or have any
discussions with, any person relating to an Acquisition Proposal; provided,
however, that the Board of Directors on behalf of PSP7 may furnish or cause to
be furnished information and may participate in such discussions and
negotiations through its representatives with persons who have sought the same
if the failure to provide such information or participate in such negotiations
and discussions might cause the members of the Board of Directors to breach
their fiduciary duty to PSP7's shareholders under applicable law as advised by
counsel. PSP7 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 PSP7, and will keep SEI
informed of the status and terms of any such proposals and any such negotiations
or discussions.
<PAGE>
6.5 Registration and Proxy Statements. SEI and PSP7 will promptly
prepare and file with the SEC a joint preliminary proxy statement in connection
with the vote of shareholders of SEI and PSP7 with respect to the Merger. SEI
will, as promptly as practicable, prepare and file with the SEC a registration
statement on Form S-4 (the "S-4 Registration Statement"), containing a joint
proxy statement/prospectus, in connection with the registration under the
Securities Act of 1933, as amended (the "Securities Act") of the SEI Shares to
be issued to holders of PSP7 Shares in the Merger (such joint proxy
statement/prospectus, together with any amendments thereof or supplements
thereto, in each case in the form or forms to be mailed to the shareholders of
SEI and PSP7, being herein called the "Joint Proxy Statement and Prospectus").
SEI and PSP7 will each use its best efforts to have or cause the S-4
Registration Statement to be declared effective as promptly as practicable, and
also will take any other action required to be taken under federal or state
securities laws, and SEI and PSP7 will each use its best efforts to cause the
Joint Proxy Statement and Prospectus to be mailed to its respective shareholders
at the earliest practicable date. PSP7 agrees that if at any time prior to the
Effective Time any event with respect to PSP7 should occur which is required to
be described in an amendment of, or a supplement to, the Joint Proxy Statement
and Prospectus or the S-4 Registration Statement, such event shall be so
described, and such amendment or supplement shall be promptly filed with the SEC
and, as required by law, disseminated to the shareholders of SEI and PSP7 and
(ii) the Joint Proxy Statement and Prospectus will (with respect to PSP7) comply
as to form in all material respects with the requirements of the federal
securities laws. SEI agrees that (i) if at any time prior to the Effective Time
any event with respect to SEI should occur which is required to be described in
an amendment of, or a supplement to, the Joint Proxy Statement and Prospectus or
the S-4 Registration Statement, such event shall be so described, and such
amendment or supplement shall be promptly filed with the SEC and, as required by
law, disseminated to the shareholders of SEI and PSP7 and (ii) the Joint Proxy
Statement and Prospectus will (with respect to SEI) comply as to form in all
material respects with the requirements of the federal securities laws.
6.6 Best Efforts. Each of SEI and PSP7 shall: (i) promptly make its
respective filings and thereafter make any other required submissions under all
applicable laws with respect to the Merger and the other transactions
contemplated hereby; and (ii) use its best 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 consummate and make effective the
transactions contemplated by this Agreement as soon as practicable.
6.7 Registration and Listing of SEI Shares. SEI will use its best
efforts to register the SEI Shares under the applicable provisions of the
Securities Act and to cause the SEI Shares to be listed for trading on the NYSE
upon official notice of issuance.
6.8 Distributions. PSP7 will not, at any time prior to the Effective
Time, declare or pay any cash distribution on its capital stock or make any
other distribution of assets to its shareholders, except (i) regular quarterly
dividends on its Common Stock at a quarterly rate not in excess of $.28 per
share, (ii) pre-Merger cash distributions to shareholders of record immediately
prior to the Effective Time in an aggregate amount equal to the amount by which
the estimated Net Asset Value of PSP7 (as defined below) as of the Effective
Time exceeds the estimated Net Asset Value of PSP7 as of May 31, 1995, (iii)
additional pre-Merger cash distributions required to satisfy PSP7's REIT
distribution requirements (the number of SEI Shares issued in the Merger and the
amount receivable upon Cash Elections would be reduced on a pro rata basis in an
aggregate amount equal to such additional distributions) and (iv) as provided in
Section 6.9 hereof. For this purpose, the Net Asset Value of PSP7 is the sum of
(a) the fair market value of PSP7's real estate assets as determined by
appraisal by Charles R. Wilson & Associates, Inc. as of December 31, 1994, and
(b) the book value of PSP7's non-real estate assets as of the date of
determination, less (c) PSP7's liabilities as of the date of determination and
(d) an amount estimated for environmental remediation. The determination of book
value and liabilities shall be from PSP7's financial statements prepared in
accordance with generally accepted accounting principles on a basis consistent
with prior periods. SEI shall not, at any time prior to the Effective Time,
declare, set aside or make payment of any cash distributions or distribution of
assets to its shareholders except for regular quarterly dividends.
6.9 Redemption of Series D Shares. PSP7 agrees to redeem prior to
the Merger all outstanding shares of Common Stock Series D for an aggregate
redemption price of $2,757,000.
7. Conditions.
<PAGE>
7.1 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 of each of
the following conditions, any or all of which may be waived in whole or in part,
to the extent permitted by applicable law:
7.1.1 Shareholder Approval. This Agreement and the
transactions contemplated hereby shall have been duly approved by the
shareholders of SEI and PSP7 as contemplated by Section 6.2.
7.1.2 Governmental and Regulatory Consents. All filings
required to be made prior to the Effective Time with, and all consents,
approvals, permits and authorizations required to be obtained prior to the
Effective Time from, governmental and regulatory authorities 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, except where the failure to obtain such
consents, approvals, permits and authorizations could not reasonably be expected
to have a material adverse effect on either SEI or PSP7.
7.1.3 Litigation. No court or governmental or regulatory
authority of competent jurisdiction shall have enacted, issued, promulgated,
enforced or entered any statute, rule, regulation, judgment, decree, injunction
or other order (whether temporary, preliminary or permanent) or taken any action
which prohibits the consummation of the transactions contemplated by this
Agreement; provided, however, that the party invoking this condition shall use
its best efforts to have any such judgment, decree, injunction or other order
vacated.
7.1.4 Registration Statement. The S-4 Registration Statement
shall have been declared effective and no stop order suspending effectiveness
shall have been issued, no action, suit, proceeding or investigation by the SEC
to suspend the effectiveness thereof shall have been initiated and be
continuing, and all necessary approvals under federal and state securities laws
relating to the issuance or trading of the SEI Shares shall have been received.
7.1.5 Listing of SEI Shares on NYSE. The SEI Shares shall have
been approved for listing on the NYSE upon official notice of issuance.
7.1.6 PSP7 Fairness Opinion. The Board of Directors of PSP7
shall have received the opinion of Robert A. Stanger & Co., Inc. in form and
substance satisfactory to it to the effect that the consideration to be received
by the shareholders of PSP7 in the Merger is fair to such shareholders from a
financial point of view, and such opinion shall not have been withdrawn or
revoked.
7.1.7 SEI Fairness Opinion. The Board of Directors of SEI
shall have received the opinion of Houlihan, Lokey, Howard & Zukin, Inc. in form
and substance satisfactory to it to the effect that the consideration to be paid
by SEI in the Merger is fair to the shareholders of SEI from a financial point
of view, and such opinion shall not have been withdrawn or revoked.
7.1.8 Tax Opinion. The Board of Directors of SEI and PSP7
shall have received a legal opinion of Hogan & Hartson that the Merger will
qualify as a tax-free reorganization under Section 368(a) of the Internal
Revenue Code of 1986, as amended.
7.2 Conditions to Obligations of SEI. The obligations of SEI to
consummate the transactions contemplated by this Agreement are subject to the
fulfillment at or prior to the Closing of the following conditions, which may be
waived in whole or in part by SEI to the extent permitted by applicable law:
7.2.1 Accuracy of Representations; Performance of Agreements.
Each of the representations and warranties of PSP7 contained in this Agreement
shall be true and correct in all material respects at and as of the Closing Date
as if made at and as of the Closing Date (except to the extent they relate to a
particular date) and PSP7 shall have performed or complied with all agreements
and covenants required by this Agreement to be performed or complied with by it
at or prior to the Closing.
7.2.2 Certificate of Officers. SEI shall have received such
certificates of officers of PSP7 as SEI may reasonably request in connection
with the Closing, including a certificate satisfactory to it of the Chief
Executive Officer and the Chief Financial Officer of PSP7, to the effect that,
to the best of their knowledge, all representations and warranties of PSP7
contained in this Agreement are true and correct in all material respects at and
as of the Closing Date as if made at and as of the Closing Date, and PSP7 has
performed or complied with all agreements and covenants required by this
Agreement to be performed or complied with by it at or prior to the Closing.
<PAGE>
7.2.3 Title to Properties; Environmental Audits. SEI in its
sole discretion shall be satisfied as to the status of title to (including the
existence and effect of liens and encumbrances), and the results of an
environmental audit of, each of the real properties owned by PSP7.
7.2.4 Redemption of Common Stock Series D. PSP7 shall have
redeemed all outstanding shares of Common Stock Series D.
7.2.5 Trading Price of SEI Shares. The average of the per
share closing prices of the SEI Shares on the NYSE during the 20 consecutive
trading days ending on the fifth trading day prior to the meeting of
shareholders of PSP7 provided for in Section 6.2 hereof (the "Average SEI Share
Price") shall be not less than $13.
7.2.6 Dissenting Shares. The number of Dissenting Shares shall
be less than 5% of the outstanding PSP7 Shares.
7.3 Conditions to Obligations of PSP7. The obligations of PSP7 to
consummate the transactions contemplated by this Agreement are subject to the
fulfillment at or prior to the Closing of the following conditions, which may be
waived in whole or in part by PSP7 to the extent permitted by applicable law.
7.3.1 Accuracy of Representations; Performance of Agreements.
Each of the representations and warranties of SEI contained in this Agreement
shall be true and correct in all material respects at and as of the Closing Date
as if made at and as of the Closing Date (except to the extent they relate to a
particular date) and SEI shall have performed or complied in all material
respects with all agreements and covenants required by this Agreement to be
performed or complied with by it at or prior to the Closing.
7.3.2 Certificate of Officers. PSP7 shall have received such
certificates of officers of SEI as PSP7 may reasonably request in connection
with the Closing, including a certificate satisfactory to it of the Chief
Executive Officer and the Chief Financial Officer of SEI, to the effect that, to
the best of their knowledge, all representations and warranties of SEI contained
in this Agreement are true and correct in all material respects at and as of the
Closing Date as if made at and as of the Closing Date, and SEI has performed or
complied with all agreements and covenants required by this Agreement to be
performed or complied with by it at or prior to the Closing.
7.3.3 The Average SEI Share Price shall be not more than $16.
8. Termination.
8.1 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 shareholder approval, by the mutual written consent of SEI and PSP7.
8.2 Termination by Either SEI or PSP7. This Agreement may be
terminated and the Merger may be abandoned by action of the Board of Directors
of either SEI or PSP7 if (i) the Merger shall not have been consummated by
December 31, 1995 (provided that the right to terminate this Agreement under
this Section 8.2(i) shall not be available to any party whose failure to fulfill
any obligation under this Agreement has been the cause of or resulted in the
failure of the Merger to occur on or before such date); (ii) any court of
competent jurisdiction in the United States or some other governmental body or
regulatory authority shall have issued an order, decree or ruling or taken any
other action permanently restraining, enjoining or otherwise prohibiting the
Merger and such order, decree, ruling or other action shall have become final
and nonappealable; or (iii) the shareholders of either SEI and PSP7 shall have
failed to approve this Agreement and the transactions contemplated hereby at
their respective meetings of shareholders.
<PAGE>
8.3 Termination by SEI. This Agreement may be terminated by SEI and
the Merger may be abandoned at any time prior to the Effective Time, before or
after shareholder approval, if (i) PSP7 shall have failed to comply in any
material respect with any of the covenants, conditions or agreements contained
in this Agreement to be complied with or performed by PSP7 at or prior to such
date of termination, which failure to comply has not been cured within five
business days following notice to PSP7 of such failure to comply, or (ii) any
representation or warranty of PSP7 contained in this Agreement shall not be true
in all material respects when made, which inaccuracy or breach (if capable of
cure) has not been cured within five business days following notice to PSP7 of
the inaccuracy or breach, or on and as of the Closing as if made on and as of
the Closing Date.
8.4 Termination by PSP7. This Agreement may be terminated by PSP7
and the Merger may be abandoned at any time prior to the Effective Time, before
or after shareholder approval, if (i) SEI shall have failed to comply in any
material respect with any of the covenants, conditions or agreements contained
in this Agreement to be complied with or performed by SEI at or prior to such
date of termination, which failure to comply has not been cured within five
business days following notice to SEI of such failure to comply, or (ii) any
representation or warranty of SEI contained in this Agreement shall not be true
in all material respects when made, which inaccuracy or beach (if capable of
cure) has not been cured within five business days following notice to SEI of
the inaccuracy or breach, or on and as of the Closing as if made on and as of
the Closing Date.
8.5 Effect of Termination and Abandonment. In the event of
termination of this Agreement and abandonment of the Merger pursuant to this
Section 8, no party (or any directors, officers, employees, agents or
representatives of any party) shall have any liability or further obligation to
any other party or any person who controls a party within the meaning of the
Securities Act, except as provided in Section 9.1 and except that nothing herein
will relieve any party from liability for any breach of this Agreement.
9. Miscellaneous.
9.1 Payment of Expenses. If the Merger is consummated, the Surviving
Corporation shall pay all the expenses incident to preparing for, entering into
and carrying out this Agreement and the consummation of the transactions
contemplated hereby. If the Merger is not consummated, each of SEI and PSP7
shall pay its own expenses, except that they shall each pay 50% of any expenses
incurred in connection with the printing of the S-4 Registration Statement and
the Joint Proxy Statement and Prospectus, the real estate appraisals and
environmental audits of PSP7's properties and preparation for real estate
closings, and any filing fees under the HSR Act, the Securities Act and the
Securities Exchange Act of 1934, as amended.
9.2 Survival of Representations, Warranties and Covenants. The
respective representations and warranties of SEI and PSP7 contained herein or in
any certificate or document delivered pursuant hereto shall expire with and be
terminated and extinguished by the effectiveness of the Merger and shall not
survive the Effective Time. The sole right and remedy arising from a
misrepresentation or breach of warranty, or from the failure of any of the
conditions to be met, shall be the termination of this Agreement by the other
party. This Section 9.2 shall not limit any covenant or agreement of the
parties, which by its terms contemplates performance after the Effective Time.
9.3 Modification or Amendment. The parties may modify or amend this
Agreement by written agreement authorized by the 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 a party, no
amendment shall be made which changes any of the principal terms of the Merger
or this Agreement, without the approval of such shareholders.
9.4 Waiver of Conditions. The conditions to each of the parties'
obligations to consummate the Merger are for the sole benefit of such party and
may be waived by such party in whole or in part to the extent permitted by
applicable law.
9.5 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.
9.6 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 in the Section in
which such meaning is set forth. 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."
<PAGE>
9.7 Headings. The descriptive headings contained in the Sections and
subsections of this Agreement are for convenience of reference only and shall
not affect in any way the meaning or interpretation of this Agreement.
9.8 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, and shall
confer no right, benefit or interest upon any other person, including
shareholders of the respective parties.
9.9 Notices. All notices or other communications required or
permitted under this Agreement shall be in writing and shall be delivered
personally or sent by U.S. mail, postage prepaid, addressed as follows or such
other address as the party to be notified has furnished in writing by a notice
given in accordance with this Section 9.9:
If to SEI:
Storage Equities, Inc.
600 North Brand Boulevard
Glendale, California 91203-1241
Attention: Harvey Lenkin
President
If to PSP7:
Public Storage Properties VII, Inc.
600 North Brand Boulevard
Glendale, California 91203-1241
Attention: B. Wayne Hughes
Chief Executive Officer
Any such notice or communication shall be deemed given as of the date of
delivery, if delivered personally, or on the second day after deposit with the
U.S. Postal Service, if sent by U.S. mail.
9.10 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.
9.11 Assignment. No rights, interests or obligations of either party
under this Agreement may be assigned or delegated without the prior written
consent of the other party.
9.12 Entire Agreement. This Agreement, including the Merger
Agreement, embodies the entire agreement and understanding between the parties
pertaining to the subject matter hereof, and supersedes all prior agreements,
understandings, negotiations, representations and discussions, whether written
or oral.
9.13 Severable Provisions. If any of the provisions of this
Agreement may be determined to be illegal or otherwise unenforceable, in whole
or in part, the remaining provisions, and any partially enforceable provisions
to the extent enforceable, shall nevertheless be binding and enforceable.
9.14 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 PSP7, the officers of either Constituent Corporation are fully
authorized in the name of PSP7 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.
<PAGE>
IN WITNESS WHEREOF, the parties have entered into this Agreement as of
the date first above written.
STORAGE EQUITIES, INC.
By: /s/ HARVEY LENKIN
----------------------------------
Harvey Lenkin
President
PUBLIC STORAGE PROPERTIES VII, INC.
By: /s/ B. WAYNE HUGHES
----------------------------------
B. Wayne Hughes
Chief Executive Officer
<PAGE>
Exhibit A to
Appendix 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 PROPERTIES VII, INC., a California
corporation ("PSP7"), 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 60,000,000 shares of
Common Stock, $.10 par value (the "SEI Shares"), ___________ of which are issued
and outstanding, and 50,000,000 shares of Preferred Stock ($.01 par value),
__________ of which are issued and outstanding.
B. PSP7 was incorporated in 1990 under the laws of California, and on
the date hereof its authorized capital stock consists of ____________ shares of
Common Stock Series A, $.01 per value (the "PSP7 Shares"), ______________ of
which are issued and outstanding. PSP7's Common Stock, Series B and C, has been
fully converted and is no longer authorized or outstanding and PSP7's Common
Stock Series D has been fully redeemed and is no longer authorized or
outstanding.
C. SEI and PSP7 have entered into an Agreement and Plan of
Reorganization dated as of February __, 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 PSP7 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), PSP7 will
be merged with and into SEI (the "Merger") and SEI shall be the surviving
corporation. SEI and PSP7 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 PSP7, are filed with the California Secretary of State (the "Effective
Time").
1.3 Effect of the Merger. At the Effective Time:
(a) The separate corporate existence of PSP7 shall cease and
the Surviving Corporation shall thereupon succeed, without other transfer, to
all the rights and property of PSP7 and shall be subject to all the debts and
liabilities of PSP7 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 PSP7 shall be limited to the property affected
thereby immediately prior to the Effective Time; and any action or proceeding
pending by or against PSP7 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 and the Bylaws of SEI, as
then amended, shall continue to be the Articles of Incorporation and the Bylaws
of the Surviving Corporation until changed as provided by law and their
respective provisions.
<PAGE>
(c) The officers and directors of SEI shall continue as
officers and directors of the Surviving Corporation until their successors are
elected and qualified as provided by law and in accordance with the Articles of
Incorporation and Bylaws of the Surviving Corporation.
ARTICLE II
2.1 Conversion of PSP7 Shares. The manner of converting the
outstanding PSP7 Shares into cash and/or SEI Shares shall be as follows:
(a) At the Effective Time, subject to Section 2.6 of the Plan,
each PSP7 Share as to which a cash election has been made in accordance with the
provisions of Section 2.5 of the Plan and has not been revoked, relinquished or
lost pursuant to Section 2.5 of the Plan (the "Cash Election Shares") shall be
converted into and shall represent the right to receive $_______ in cash (the
"Cash Election Price"). As soon as practicable after the Effective Time, the
registered holders of Cash Election Shares shall be paid the cash to which they
are entitled hereunder in respect of such Cash Election Shares.
(b) At the Effective Time, subject to Sections 2.4, 2.5 and
2.7 of the Plan, each PSP7 Share (other than Cash Election Shares) shall be
converted into __________ SEI Shares.
2.2 No Fractional Shares. Notwithstanding any other term or
provision of this Agreement or the Plan, no fractional SEI Shares and no
certificates or script therefor, or other evidence of ownership thereof, will be
issued in the Merger. In lieu of any such fractional share interests, each
holder of PSP7 Shares who would otherwise be entitled to such fractional share
will, upon surrender of the certificate representing such PSP7 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; provided,
however, that, such fractional share shall not be disregarded if such fractional
share to which such holder would otherwise have been entitled represents .5 of
1% or more of the total number of SEI Shares such holder is entitled to receive
in the Merger. In such event, such holder shall be paid an amount in cash
(without interest), rounded to the nearest $.01, determined by multiplying (i)
the per share closing price on the New York Stock Exchange, Inc. of the SEI
Shares at the Effective Time by (ii) the fractional interest.
2.3 Dissenting Shares. PSP7 Shares held by a holder who has demanded
and perfected his right to an appraisal of such shares in accordance with
Section 1300 et seq. of the General Corporation Law of California (the "GCLC")
and who has not effectively withdrawn or lost his right to appraisal
("Dissenting Shares") shall not be converted into or represent the right to
receive cash and/or SEI Shares, but the holder thereof shall be entitled only to
such rights as are granted by Section 1300 et seq. of the GCLC. Each holder of
Dissenting Shares who becomes entitled to payment for PSP7 Shares pursuant to
these provisions of the GCLC shall receive payment therefor from the Surviving
Corporation in accordance therewith. If any holder of PSP7 Shares who demands
appraisal in accordance with Section 1300 et seq. of the GCLC shall effectively
withdraw with the consent of the Surviving Corporation or lose (through failure
to perfect or otherwise) his right to appraisal with respect to PSP7 Shares,
such PSP7 Shares shall automatically be converted into the right to receive SEI
Shares pursuant to Section 2.1(b) hereof.
2.4 SEI Shares Unaffected. The Merger shall effect no change in any
of the SEI Shares and no outstanding SEI shares shall be converted or exchanged
as a result of the Merger, and no cash shall be exchangeable and no securities
shall be issuable, with respect thereto.
2.5 Cancellation of Shares Held or Owned by Parties. At the
Effective Time, any PSP7 Shares owned by SEI shall be cancelled and retired and
no shares shall be issuable, and no cash shall be exchangeable, with respect
thereto.
2.6 Exchange of Certificates. After the Effective Time, each holder
of a certificate theretofore evidencing outstanding PSP7 Shares which were
converted into SEI Shares pursuant hereto, upon surrender of such certificate to
First National Bank of Boston (the "Exchange Agent") or such other agent or
agents as shall be appointed by the Surviving Corporation, shall be entitled to
receive a certificate representing the number of whole SEI Shares into which the
PSP7 Shares theretofore represented by the certificate so surrendered shall have
been converted and cash payment in lieu of fractional share interests, if any.
As soon as practicable after the Effective Time, the Exchange Agent will send a
notice and a transmittal form to each holder of PSP7 Shares of record at the
Effective Time whose stock shall have been converted into SEI Shares, advising
such holder of the effectiveness of the Merger and the procedure for
surrendering to the Exchange Agent certificates evidencing PSP7 Shares in
exchange for certificates evidencing SEI Shares.
2.7 Status Until Surrendered. Until surrendered as provided in
Section 2.6 hereof, each outstanding certificate which, prior to the Effective
Time, represented PSP7 Shares (other than Cash Election Shares and Dissenting
Shares, if any) will be deemed for all corporate purposes to evidence ownership
of the number of whole SEI Shares into which the PSP7 Shares evidenced thereby
were converted. However, until such outstanding certificates formerly evidencing
PSP7 Shares are so surrendered, no dividend payable to holders of record of SEI
Shares shall be paid to the holders of such outstanding certificates in respect
of PSP7 Shares, but upon surrender of such certificates by such holders there
shall be paid to such holders the amount of any dividends (without interest)
theretofore paid with respect to such whole SEI Shares as of any record date on
or subsequent to the Effective Time and the amount of any cash (without
interest) payable to such holder in lieu of fractional share interests.
2.8 Transfer of Shares. After the Effective Time, there shall be no
further registration of transfers of PSP7 Shares on the records of PSP7 and, if
certificates formerly evidencing such shares are presented to the Surviving
Corporation, they shall be cancelled and exchanged for certificates evidencing
SEI Shares and cash in lieu of fractional share interests as herein provided.
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, and shall
confer no right, benefit or interest upon any other person, including
shareholders of the respective parties.
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 PSP7, the officers of either Constituent Corporation are fully
authorized in the name of PSP7 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.
<PAGE>
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.
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: _____________________________
Obren B. Gerich
Assistant Secretary
PUBLIC STORAGE PROPERTIES VII, INC.
By: ______________________________
B. Wayne Hughes
Chairman of the Board of
Directors and Chief
Executive Officer
By: _____________________________
Obren B. Gerich
Secretary
<PAGE>
Appendix B
APPRAISAL OF
PUBLIC STORAGE
PROPERTIES VII, INC.
A 38 PROPERTY PORTFOLIO
PREPARED FOR
PUBLIC STORAGE PROPERTIES VII, INC.
STORAGE EQUITIES, INC.
600 NORTH BRAND BOULEVARD
3RD FLOOR
GLENDALE, CALIFORNIA
PREPARED BY
CHARLES R. WILSON & ASSOCIATES, INC.
595 EAST COLORADO BOULEVARD
SUITE -518-
PASADENA, CALIFORNIA 91101
JANUARY 31, 1995
<PAGE>
TABLE OF CONTENTS
Letter of Transmittal...................................................... 1
Nature of the Assignment................................................... 3
Property Identification and Classification............................... 3
Purpose, Function and Scope of the Appraisal............................. 4
Property Rights Appraised................................................ 5
Market Value Definition.................................................. 5
Valuation Methodology.................................................... 6
Market Value Adjustments................................................. 9
Market Overview............................................................ 11
General Assumptions and Limiting Conditions................................ 13
Specific Assumptions and Limiting Conditions............................... 15
Certification.............................................................. 17
<PAGE>
January 31, 1995
PUBLIC STORAGE PROPERTIES VII, INC.
STORAGE EQUITIES, INC.
600 N. Brand Boulevard, 3rd Floor
Glendale, CA 91221
Re: Market Value Appraisal
Public Storage Properties VII, Inc.
38 Property Portfolio
Gentlemen:
According to your request and authorization, we have prepared a limited
appraisal of the above-referenced portfolio of properties described in the
attached document, entitled Property Identification and Classification, and
formed an opinion of their Fee Simple Market Value. The accompanying appraisal
report, of which this letter is a part, briefly describes each property and
method of appraisal.
This report is presented in a restricted format and cannot be fully understood
without additional information supporting the appraisal, which has been retained
in the working files of the appraiser.
PURPOSE OF APPRAISAL
The purpose of the appraisal is to estimate the aggregate market value of the 38
property portfolio in connection with a proposed merger of Public Storage
Properties VII, Inc. (PSP7) into Storage Equities, Inc. (SEI).
This report, presented in a restricted format, is intended for use only by the
clients or their advisors. It may be included in proxy and registration
statement materials filed with the Securities and Exchange Commission and
distributed to the shareholders of PSP7 and SEI in connection with the proposed
merger.
SCOPE OF ASSIGNMENT
The accompanying report describes the appraisal process undertaken. In
accordance with our agreement, the scope of this assignment has been limited, as
described herein, but is in conformity with the Departure Provision of Uniform
Standards of Professional Appraisal Practice (USPAP). The client must consider
the value may be impacted to the degree there is a departure from specific USPAP
Guidelines.
<PAGE>
Market Value Appraisal
Public Storage Properties VII, Inc.
38 Property Portfolio
Page -2-
This valuation analysis has utilized the two most appropriate approaches to
value. We did not consider the Cost Approach to be applicable to PSP7's
properties. Based upon our contact with knowledgeable self storage investors,
owners and managers, little reliance is placed upon the Cost Approach,
particularly as to properties the age and type of those included in the
portfolio. Therefore, we have employed both the Income and Sales Comparison
Approaches. We have relied most heavily on the Income Approach which is
supported by actual market data found in the Sales Comparison Approach.
Your attention is directed to the Assumptions and Limiting Conditions and
description of the appraisal process set forth on the accompanying pages which
are an integral part our report. Only the summary conclusions are presented in
this report.
VALUE CONCLUSIONS
Aggregate Market Value
The market value estimate set forth herein is a gross value estimate and does
not include either a premium or a discount a potential buyer may assign to a
portfolio of properties as a result of its size. Based on our experience with
buyers and sellers of properties of the type included in the portfolio, it would
be inappropriate to assign either a premium or discount. Furthermore, the market
value estimate herein assumes that the properties would be disposed of in an
orderly manner, allowing sufficient time for exposure of each property on the
open market.
Based upon the analysis made, it is our opinion that the Fee Simple Market Value
of the Portfolio of subject properties, as of December 31, 1994, is:
SEVENTY FOUR MILLION THREE HUNDRED THOUSAND DOLLARS
$74,300,000
Sincerely
CHARLES R. WILSON & ASSOCIATES, INC.
Charles R. Wilson, MAI, CRE
State of California
Certification #AG002172
Job File #940067
<PAGE>
Appraisal: Public Storage Properties VII, Inc.
NATURE OF ASSIGNMENT AND DEFINITIONS
This report sets forth a summary of the analysis and valuation conclusions. In
accordance with our agreement, the Limited Appraisal presented in a restricted
report format represents a departure from a full narrative appraisal but has
been prepared in conformity with the Departure Provision of the Uniform
Standards of Professional Appraisal Practice Guidelines.
Property Identification and Classification
The subject properties are located in 38 different locations in ten states and
are specifically identified with the street address as follows:
<TABLE>
<CAPTION>
Net No.
PSI No. Location Rentable SF Units
- ------- --------- ------------- -------
<S> <C> <C> <C>
00701 13515 NE Prescott Ct., Portland, OR................................. 52,700 426
00702 1400 34th St., So., St. Petersburg, FL.............................. 38,400 372
00703/726* 11020 Audelia Rd., Dallas, TX (M/W)................................. 37,760 398
* 11020 Audelia Rd., Dallas, TX (BP).................................. 57,880
00704 18450 NE 5th Avenue, Miami, FL...................................... 63,125 566
00705 1408 NW 19th St., Grand Prairie, TX................................. 64,400 485
00706 2626 W Jefferson St., Joliet, IL.................................... 36,500 303
00707 3760 Pennridge Dr., Bridgeton, MO................................... 38,050 319
00708 7402 SE 92nd Ave., Portland, OR..................................... 40,000 362
00709 11770 SW Freeway, Houston, TX....................................... 50,400 488
00710 8824 W. Brown Deer Rd., Milwaukee, WI............................... 53,650 458
00711 1801 W. Oak Ridge Rd., Orlando, FL.................................. 73,735 657
00712 1500 North State Road 7, Lauderhill, FL............................. 51,375 475
00713 217 Blanding Boulevard, Orange Park, FL............................. 40,625 356
00714 4500 34th St., North, St. Petersburg, FL............................ 61,900 636
00715 11580 Page Service Road, St. Louis, MO.............................. 41,300 356
00716 13620 East 42nd St., Independence, MO............................... 57,100 496
00717 6 Dobbs Lane, Cherry Hill, NJ....................................... 60,150 506
00718 2130 Route 130, Edgewater Park, NJ.................................. 49,300 474
00719 6500 SW 110th Court, Beaverton, OR.................................. 44,875 423
00720 3835 W. 159th Place, Markham, IL.................................... 42,150 356
00721 14050 NW Freeway, Houston, TX....................................... 57,450 511
00722 1921 North Gantenbein Ave., Portland, OR............................ 35,160 304
00723 4021 Market St., Aston, PA.......................................... 48,950 428
00724 8400 West Highway -80-, Fort Worth, TX.............................. 54,775 455
00725 4750 South 180th St., Greenfield, WI................................ 70,300 587
00727** 17316-17326 Edwards Rd., Cerritos, CA............................... 31,270 N/A
00728** 4040 SE International Way, Milwaukie, OR............................ 40,176 N/A
00729 1080 E Altamonte Springs, FL........................................ 48,250 444
00730 17204 South Halsted St., East Hazel Crest, IL....................... 70,250 590
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Net No.
PSI No. Location Rentable SF Units
- ------- --------- ------------- -------
<S> <C> <C> <C>
00731 7133 Delridge Way SW, Seattle, WA........................................ 37,625 354
00732 297 W. Lake Frontage Rd., Elmhurst, IL................................... 53,350 456
00733 3636 Beverly Bl., Los Angeles, CA........................................ 79,895 1,203
00734 2629 Brunswick Ave., Lawrenceville, NJ................................... 39,675 357
00735** 901 Rainier Ave., North, Renton, WA...................................... 27,912 N/A
00736 398 Carlson Bl., Richmond, CA............................................ 64,790 569
00737 7345 Oswego Road, Liverpool, NY.......................................... 54,650 436
00738 1693 East Avenue, Rochester, NY.......................................... 56,940 582
00739 1507 East Beltway 8, Pasadena, TX........................................ 81,350 684
PORTFOLIO TOTAL............................................................................. 2,008,151
<FN>
* Combination Mini-Whse/Business Park
** Business Parks
</TABLE>
Purpose, Function and Scope of the Appraisal
The purpose of this appraisal is to estimate the Fee Simple Market Value of the
portfolio and to present a summary of conclusions.
The function of this appraisal is for use only by our clients, Public Storage
Properties VII, Inc. and Storage Equities, Inc., and their advisors in
connection with the proposed merger of Public Storage Properties VII, Inc.
into Storage Equities, Inc.
The scope of this assignment is in accordance with an agreement between Charles
R. Wilson & Associates, Inc. and Public Storage Properties VII, Inc. and Storage
Equities, Inc. In connection with this portfolio valuation, the following
actions have been taken as described more fully in the section entitled
Valuation Methodology.
* Inspections were conducted by Charles R. Wilson, MAI/CRE or a
representative of Charles R. Wilson & Associates, Inc.
* Physical descriptive information was provided by the subject's on-site
managers and from previous appraisals of the subject properties performed
by Charles R. Wilson & Associates, Inc.
* No current interviews with city and county officials were conducted.
* Demographic information including population trends, household income,
employment, average housing prices and rental rates was obtained from Urban
Decision Systems Inc.
* A rental survey of competitive facilities was provided by on-site managers
of the subject facilities. The information was verified by phone calls and
other sources.
<PAGE>
* Self Storage Data Services, Inc. (SSDS), an affiliate company of Charles R.
Wilson & Associates, Inc., provided operating income and expense
information on facilities nationwide from its database of over 23,600 self
storage facilities.
* Historical income and expense information on each of the subject properties
was provided by Public Storage Management Inc. (PSMI) and compared to the
operating information found in the SSDS database.
* In the cash flow analysis, the actual operating history of each of the
subject properties was evaluated based on the experience of Charles R.
Wilson & Associates, Inc., which have appraised over 200 self storage
facilities during 1993 and 1994.
* Discount rates, capitalization rates, and growth rates for income and
expenses were derived from data on actual sales of similar properties, a
survey of 50 of the largest self storage operators/investors throughout the
United States conducted during December 1994, and our market experience
over the past twenty years. Surveying self storage investor's criteria is
an ongoing function of Charles R. Wilson & Associates, Inc.
* The Sales Comparison Approach is based on 62 sales of self storage
properties which have occurred since January 1994.
* Four of the subject properties contain office or retail/showroom type
space. Rental income and expense information for these facilities were
derived in the same manner as the self storage data, including lease
summaries. The capitalization and yield rates reflect these improvements.
Property Rights Appraised
The property rights appraised consist of the Fee Simple Estate. Due to the
short-term, month-to-month tenancies in the facilities, and the fact that rents
are at market levels, a Fee Simple Interest is appropriate. According to the
Appraisal Institute, Dictionary of Real Estate Appraisal, 2nd Edition, 1989, p.
123, "Fee Simple Estate" is defined as:
"Absolute ownership unencumbered by any other interest or estate; subject
only to the limitations of eminent domain, escheat, police power, and
taxation."
Market Value Definition
The following Market Value definition is based on Uniform Standards of
Professional Appraisal Practice regulations and standards.
"Market Value" means the most probable price which a property should bring in a
competitive and open market under all conditions requisite to a fair sale, the
buyer and seller each acting prudently and knowledgeably, and assuming the price
is not affected by undue stimulus. Implicit in this definition is the
consummation of a sale as of a specified date and the passing of title from
seller to buyer under conditions whereby:
<PAGE>
1. Buyer and seller are typically motivated;
2. Buyer and seller are well informed or well advised, and acting in what they
consider their own best interest;
3. A reasonable time is allowed for exposure on the open market;
4. Payment is made in cash in U.S. dollars or in terms of financial
arrangements comparable thereto; and
5. The price represents the normal consideration for the property sold
unaffected by special or creative financing or sales concessions granted by
anyone associated with the sale.
(Source: Office of the Comptroller of the Currency under 12 CRF, part 34,
Subpart C-Appraisals, 34.43 Definitions [f].)
Valuation Methodology
Analysis and Valuation of the subject properties involved determining the
highest and best use of the sites, estimating the value of the subjects by
current appraisal theory, and reconciling to a final estimate of value.
The term "highest and best use," as used in this report, is defined as follows:
"The reasonably probable and legal use of vacant land or an improved
property, which is physically possible, appropriately supported,
financially feasible, and that results in the highest value."
SOURCE: Appraisal Institute, The Appraisal of Real Estate, 10th Edition, 1992,
p. 275.
In considering the highest and best use of the properties in this portfolio, we
believe that each facility is producing net operating income in excess of a
reasonable land value. Therefore, we have concluded that the Highest and Best
Use of each property, as improved and as if vacant, is its existing use as a
self storage facility. No other use would warrant their removal or alteration
from their current and intended use.
This valuation analysis has considered all appropriate approaches to value,
namely: the Cost, Income and Sales Comparison Approach.
The Cost Approach is based upon the proposition that the informed purchaser
would pay no more than the cost of producing a substitute property with the same
utility as the subject property. The Cost Approach is particularly applicable
when the property being appraised involves relatively new improvements which
represent the highest and best use of the land and when relatively unique or
specialized improvements are located on the site and for which there exists no
comparable properties in the marketplace.
<PAGE>
The Income Capitalization Approach is a procedure in appraisal analysis which
converts the anticipated benefits (dollar income or amenities) to be derived
from the ownership of property into a value estimate. The Income Capitalization
Approach is widely applied in appraising income producing properties.
Anticipated future income and/or reversions are discounted to a present worth
figure through the capitalization process.
The Sales Comparison Approach is based upon the principle that an informed
purchaser would pay no more for a property than the cost of acquiring an
existing property with the same utility. This approach is applicable when an
active market provides sufficient quantities of reliable data which can be
verified from authoritative sources. The Sales Comparison Approach is relatively
unreliable in an inactive market or in estimating the value of properties for
which no real comparable sales data is available.
In all instances, we considered the Income and Sales Comparison Approaches to be
most applicable for the subject properties. Based on our contact with property
buyers and sellers and others knowledgeable of recent transactions, today's
investors do not rely on the Cost Approach, particularly as to properties the
age and type of those included in the portfolio. Therefore, we have employed
both the Income and Sales Comparison Approaches to value all properties.
Inspections were made of each property and interviews with PSMI personnel were
conducted to learn of any deferred maintenance items that needed correcting, any
known environmental conditions, as well as, general information on the overall
condition of the property. Questionnaires were completed by each on-site manager
concerning performance of the subject property and market competitors.
Demographic information on each market was reviewed to gain insight about local
economic trends. Consideration has been given to significant variations in
quality among the various portfolio of properties including: property income
potential, quality of location and construction, tenant appeal, access,
viability and potential competition.
The Income Approach utilized both direct and yield capitalization. In both
instances, the analysis was premised upon a survey of competitive properties in
order to determine market rental rates, occupancy and expense levels. In
addition, we reviewed each property's previous four year's operating statement.
Ancillary income included: late fees, administrative fees, etc. Rental
concessions if any were analyzed and taken into consideration. Utilizing the
SSDS database of operating statistics, the actual operating experience of
hundreds of self storage facilities were compared to the subjects' actual
expenses to determine the reasonableness of each item of expense. Stabilized
levels of income and expenses were determined.
<PAGE>
Using direct capitalization, the net operating income was capitalized into a
value estimate using overall capitalization rates derived directly from the
market (see Sales Comparison Approach below). Overall capitalization rates
generally ranged from 10% to 11%.
In applying yield capitalization, we studied acquisition criteria of investors
in self storage, and analyzed recent sales for valuation indicators such as
overall capitalization rates, effective gross rent multipliers and prices being
paid per square foot. We also consulted published sources of investment criteria
for other types of real estate.
A ten-year discounted cash flow analysis of each of the self storage facilities,
ending on December 31, 2004 was prepared. Using the investment criteria
discussed above, the income and expenses were increased between 3% and 4%
annually depending upon local market conditions. For California properties, real
estate taxes were adjusted to reflect projected taxes after a re-evaluation
transaction and subsequently escalated at 2% per annum. The residual value of
each property was determined by capitalizing the eleventh year income at a
terminal capitalization rate of 10.5% and then deducting 3% to 4% for sales
costs. The yearly cash flows and the properties' residual value were discounted
to present worth using a discount rates ranging from 13% to 13.25%. The
indicated value based upon the Income Approach (before value adjustments
described below) is $69,030,000.
A ten-year discounted cash flow analysis each of the four business parks, ending
on December 31, 2004 was also prepared. Using the investment criteria discussed
above, the income was increased between 1.0% and 3%; and, expenses were
increased between 3% and 4% annually depending upon local market conditions. For
California properties, real estate taxes were adjusted to reflect projected
taxes after a re-evaluation transaction and subsequently escalated at two
percent per annum. The residual value of each property was determined by
capitalizing the eleventh year income at a terminal capitalization rate of
10.75% and then deducting 4% for sales costs. The yearly cash flows and the
properties' residual values were discounted to present worth using a discount
rate of 11.5%. The indicated value based upon the Income Approach is $5,740,000.
In the Sales Comparison Approach, we relied upon an analysis of 62 sales of self
storage facilities which occurred during the past 12 months. The sales were
analyzed on the basis of effective gross rent multipliers, overall
capitalization rates and sales price per square foot of net rentable area. A
regression analysis of the relationship between net operating income and sales
price per square foot was prepared. The value conclusion derived in the Income
Approach was compared to the conclusions derived from the Sales Comparison
Approach to determine the reasonableness of the value conclusion by the Income
Approach. Differences in time of sale, location, and physical characteristics
between the sale comparables and each subject property were taken into
consideration. Based upon the portfolio's net income per square foot, using the
regression analysis, the indicated value (before value adjustments) ranged
between $66,000,000 to $84,000,000.
<PAGE>
Market Value Adjustments
Adjustments to our market value estimate were made to reflect the anticipated
cost of seismic-related structural retrofitting and asbestos abatement work to
be completed at one property. Based upon interviews with investors,
institutional advisors and others, it became apparent that the market valuation
of the portfolio must be adjusted to reflect the uncertainty of expected future
costs associated with this building. While we cannot say with absolute certainty
that all of the following costs will be incurred by the investor, we are
convinced without such adjustment, this property's marketability would be
questionable.
Seismic-Related Structural Retrofitting - Based on the analysis by John A.
Martin & Associates, Inc. (Martin), structural engineers, retained by PSP7, and
an analysis and recommendations of Financial Research Group (FRG), a consulting
firm retained by PSP7 and SEI, the expected future cost of seismic-related
structural retrofitting was estimated.
The analysis assumes that the work will be completed in 1998 at an expected then
cost of approximately $1,625,000. This amount has been utilized in the fourth
year of our discounted cash flow which is then discounted back to present
dollars equivalent to approximately $990,000. FRG's estimate of cost and timing
is based in part on the study conducted by Martin and upon Martin's and FRG's
experience in dealing with other properties with similar problems. FRG's method
of measuring the diminution in value expected as the result of meeting future
structural code requirements was premised upon probability theory. Using a
probability matrix and assigning varying probabilities to possible scenarios,
the most probable outcome i.e., cost, was derived. We have consulted with other
institutional investors as to the methodology of measuring the risk of uncertain
events similar to those described above an found this method to be commonly
accepted.
Asbestos Abatement - The firm of ENSR Consulting & Engineering (ENSR) was
retained for the purpose of determining the extent of any asbestos abatement
which might be required. Their analysis indicated that limited amounts of
asbestos is present in the public areas, around piping and in the flooring
material. Based on information provided by ENSR, it is estimated that the cost
for asbestos abatement and related work will be approximately $250,000.
Thus, total present value of the expected cost for seismic-related structural
retrofitting and asbestos abatement is approximately $1,240,000.
Conclusions to Value
Considering that the departure provision has been invoked, it is our opinion
that we have performed actions necessary to develop an opinion as to the market
value of the portfolio.
The value conclusion from both approaches, (the Income and Sales Comparison
Approach) was then reconciled into our final value conclusion of $74,300,000.
Most weight was given the Income Approach, as this is the methodology employed
by today's investors in self storage.
<PAGE>
MARKET OVERVIEW
An overall analysis of the self storage marketplace is important, as supply and
demand for space play a key role in determining a property's value. The
following summarizes factors that apply to the subject's property type and
analyzes the trends in supply and demand.
Our analysis of over 250 sales over eight years shows that capitalization rates
have not changed significantly over time. A recent survey of self storage
investors confirms that capitalization rates are still in the 10.0% to 11.0%
range. Values have changed due to increases in collected income and decreases in
expenses, but the perceived risk on the part of major investors has not changed
significantly. This is particularly true when comparing capitalization rates for
self storage facilities to capitalization rates for multi-tenanted industrial
buildings.
During the past twelve months, physical as well as economic occupancies reached
ninety percent level in most markets across the United States. This is due to
the overall lack of construction during the past three years and to improving
economic conditions.
Based upon the appraisal of over 150 facilities during the past 12 months, and
upon the information from the SSDS database of actual operating histories, we
can draw the following conclusions about today's national self storage market:
* Economic occupancy has continued to increase over the past 18 months and is
currently at or near 90% in most markets.
* Collected income nationwide has increased over 8% during the past 12 months
as a result of continued increasing demand and lack of new construction.
Rental concessions have declined or have ceased altogether in most markets.
* The RTC and REO inventory of distressed self storage properties has been
eliminated.
* Capitalization rates of well located, properly designed and managed,
stabilized facilities are generally in the 10.0% to 10.5% range. However,
some sales are being recorded at less than 10.0% on trailing net operating
income.
* Self storage investors are coming back into the market which is being
recapitalized with new sources of capital. While this should put downward
pressure on overall capitalization rates, we have not seen it reflected in
the sales data. Property values are up, not because of lower capitalization
rate, but due to increased net incomes.
* The investment market for self storage facilities has been improving faster
than other property types which are still recovering from the overbuilding
that occurred in the 1980s.
In short, the self storage market is strong and should remain so in the
foreseeable future. The lack or cost of construction money should prevent
massive overbuilding similar to what occurred in the late 80's. Increasing
rental rates should start to meet with market resistance during the next 12 to
18 months, thus stabilizing the recent major rent increases we have witnessed in
some markets.
<PAGE>
GENERAL ASSUMPTIONS & LIMITING CONDITIONS
Standards Rule ("S.R.") 2-1 of the "Standards of Professional Practice" of the
Appraisal Institute requires the appraiser to "clearly and accurately disclose
any extraordinary assumption or limiting condition that directly affects an
appraisal analysis, opinion, or conclusion." In compliance with S.R. 2-1, and to
assist the reader in interpreting this report, such assumptions and limiting
conditions are set forth as follows:
1. The date of value to which the conclusions and opinions expressed in this
report apply is set forth in the letter of transmittal. Further, the
dollar amount of any value opinion rendered in this report is based upon
the purchasing power of the American dollar existing on that date.
2. The appraiser assumes no responsibility for economic or physical factors
which may affect the opinions in the report which occur after the date of
the letter transmitting the report.
3. Forecasts of anticipated revenue and expenses were based on our analysis
of market trends, economic conditions, and historical operating results of
the property. Such forecasts are dependent on assumptions as to future
economic, social and political conditions, as well as market related
activity. They represent our opinion of current investor attributes and
motivations applicable to the class of property appraised, and no warranty
or representation that these forecasts will materialize is implied.
4. The information furnished by others is believed to be reliable. However,
no warranty is given for its accuracy.
5. No opinion as to title is rendered. Data related to ownership and legal
description was obtained from public records and is considered reliable.
Title is assumed to be marketable and free and clear of all liens,
encumbrances, easements and restrictions except those specifically
discussed in the report. The properties are appraised assuming they will
be under responsible ownership and competent management, and available for
their highest and best use.
6. The appraiser reserves the right to make such adjustments to the analyses,
opinions and conclusions set forth in this report as may be required by
consideration of additional data or more reliable data that may become
available.
7. The appraiser assumes no responsibility for hidden or unapparent
conditions of the properties, subsoil, or structures that render them more
or less valuable. No responsibility is assumed for arranging for
engineering studies that may be required to discover them.
8. The properties are appraised assuming that all applicable zoning and use
regulations and restrictions have been complied with, unless otherwise
stated.
9. The properties are appraised assuming 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 be, obtained or renewed
for any use on which the value estimate contained in this report is based,
unless otherwise stated.
10. No engineering survey has been made by the appraiser. Except as
specifically stated, data relative to size and area was taken from sources
considered reliable, and no encroachment of real property improvements is
considered to exist.
<PAGE>
11. Environmental assessments were completed by ENSR Consulting & Engineering
(ENSR), environmental consultants hired by the clients. ENSR's reports,
dated January 31, 1995, identified one property which requires asbestos
abatement. ENSR's esitmated cost to remediate has been considered in this
appraisal as discussed in the preceding section. Based on ENSR's reports,
the appraiser is informed that the other 37 properties in the portfolio do
not present the potential for significant environmental liabilities.
12. Unless specifically stated, this appraisal does not take into
consideration the possibility of the existence of asbestos, PCB
transformers, or other toxic, hazardous, or contaminated substances and/or
underground storage tanks (hazardous material), or the cost of
encapsulation or removing thereof.
13. No opinion is expressed as to the value of subsurface oil, gas or mineral
rights or whether the properties are subject to surface entry for the
exploration or removal of such materials except as is expressly stated.
14. Maps, plats and exhibits included in this report are for illustration only
as an aid in visualizing matters discussed within the report. They should
not be considered as surveys or relied upon for any other purpose, nor
should they be removed from, reproduced, or used apart from this report.
15. No opinion is intended to be expressed for matters which require legal
expertise or specialized investigation or knowledge beyond that
customarily employed by real estate appraisers.
16. Except as consented to in the letter of transmittal, possession of this
report, or a copy of it, does not carry with it the right of publication.
It may not be used for any purpose by any person other than the party to
whom it is addressed without the written consent of the appraiser, and in
any event only with proper written qualification and only in its entirety.
17. Testimony or attendance in court or at any other hearing is not required
by reason of rendering this appraisal, unless such arrangements are made a
reasonable time in advance relative to such additional employment.
18. Disclosure of the contents of this appraisal report is governed by the
By-Laws and Regulations of the Appraisal Institute.
19. Except as consented to in the letter of transmittal, neither all nor any
part of the contents of this report (especially any conclusions as to
value, the identity of the appraisers, or any reference to the Appraisal
Institute, or the MAI or SRA designation) shall be disseminated to the
public through advertising media, public relations media, news media,
sales media, or any other public means of communication without the prior
written consent and approval of the author.
<PAGE>
SPECIFIC ASSUMPTIONS AND LIMITING CONDITIONS
1. The physical description and current condition of each subject property
was based upon a combination of previous appraisals, inspections by
representatives of Charles R. Wilson & Associates, Inc., and information
provided by PSP7 and its property manager PSMI. Charles R. Wilson &
Associates, Inc. assumes no responsibility for the soundness of
structural members nor for the condition of mechanical equipment,
plumbing or electrical components. (Referenve Item 8)
2. Pursuant to the Engagement Agreement, the content of the appraisal report
has been limited as presented herein. This report is not intended to meet
the requirements of Title XI of the Federal Financial Institutions
Reform, Recovery and Enforcement Act of 1989. Therefore, federally
regulated institutions should not rely on this report for financing
purposes.
3. The portfolio valuation reported herein does not reflect any premium or
discount a potential buyer may assign to the portfolio of properties as a
result of its size. Neither a premium nor a discount is appropriate based
on our experience with buyers and sellers of self storage facilities.
4. This valuation analysis assumes that capitalization and discount rates
used in the market for valuing individual properties are appropriate to
apply to a portfolio's cash flow for the purpose of estimating the
portfolio's fair market value.
5. This valuation covers only the real properties described herein and only
to the valuation problems as stated and does not include consideration of
mineral rights or related right of entry, nor personal property or the
removal thereof. Values reported herein are not intended to be valid in
any other context, nor are any conclusions as to unit values applicable
to any other property or utilization than that specifically identified
herein. No value has been assigned to any personal property, fixtures or
intangible items that are not real property, except for that equipment
and personal property considered usual and incidental to the operation of
the facilities such as golf carts, office supplies, computer systems,
etc.
6. This report invokes the Departure Provision as follows:
Standard Rule 1-2 (c), states that the appraiser must, "consider
easements, restrictions, encumbrances, leases, reservations, covenants,
contracts, declarations, special assessments, ordinances, or other items
of a similar nature". The effect of any easements, encumbrances, leases,
and similar items were not taken into consideration in this valuation
analysis. We were not provided copies of title reports, deed restrictions
or similar items nor are we aware of any restrictions or similar items
existing that could have an impact on our valuation of the portfolio. At
the request of the clients, this valuation analysis does not consider any
such restrictions.
<PAGE>
Standard Rule 1-3 (a), states that the appraiser must "consider the
effect on use and value of the following factors: existing land use
regulations, reasonably probable modification of such land use
regulations, economic demand, the physical adaptability of the property,
neighborhood trends, and the highest and best use of the property". City
and county officials were not interviewed and thus it is assumed that
each property complies with city and county building codes and zoning
ordinances.
Standard Rule 1-4 (a) states the appraiser must "collect, verify, analyze
and reconcile: ...(iv) such comparable rental data, adequately identified
and described, as are available to estimate the market rental of the
property being appraised;..." Each on-site manager provided the appraiser
with competition surveys. The rental rates were verified and used to
determine market rent, however, no physical inspections were made of
competing facilities.
Standard Rule 1-4 (d), states that the appraiser must, "when estimating
the value of a leased fee estate or leasehold estate, consider and
analyze the effect on value if any, of the items and conditions of the
lease". The appraisers were provided summaries of commercial leases which
are assumed not to include any atypical market conditions.
7. For properties located in California, real estate taxes used in the
Income Approach are adjusted to reflect a fair sale as is standard
practice in California in compliance with Proposition 13.
8. As mentioned in this report, the market value for one of the properties,
has been adjusted to reflect the expected cost seismic-related structural
retrofitting and asbestos abatement work as described herein.
<PAGE>
CERTIFICATION
The appraiser certifies, to the best of his knowledge and belief, that:
- - The statements of fact contained in this report are true and correct.
- - The reported analyses, opinions and conclusions are limited only by the
reported assumptions and limiting conditions and are the appraisers'
personal, unbiased professional analyses, opinions and conclusions.
- - The appraiser has no present or prospective interest in the property
that is the subject of this report and no personal interest or bias
with respect to the parties involved.
- - The appraiser's compensation is not contingent upon an action or event
resulting from the analyses, opinions or conclusions in or the use of
this report.
- - Receipt of the appraisal assignment was not based upon a requested
minimum value, a specific value or approval of a loan.
- - The appraiser's analyses, opinions and conclusions were developed and
this report has been prepared in conformity with the agreement between
Charles R. Wilson & Associates, Inc. and PSP7 and SEI. The appraisers
have relied upon the departure provisions of Uniform Standards of
Professional Appraisal Practice (USPAP).
- - The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
- - As of the effective date of this report, January 31, 1995, Charles R.
Wilson, MAI/CRE has completed the requirements of the continuing
education program of the Appraisal Institute.
- - Inspections of the properties in this portfolio were made by Charles R.
Wilson, MAI, CRE or a representative of Charles R. Wilson & Associates,
Inc., between May 15, 1994 and July 15, 1994.
- - Our firm's analyses, opinions and conclusions were not developed nor is
this report is intended to comply with the appraisal related mandates
within Title XI of the Federal Financial Institution's Reform, Recovery
and Enforcement Act of 1989 (FIRREA).
- - The date of this report, January 31, 1995, indicates the perspective of
the appraisers on the market conditions as of the effective date of the
appraisal.
<PAGE>
- - The appraiser's estimate of aggregate As Is Market Value for the
portfolio as of December 31, 1994 in Fee Simple estate is: $74,300,000.
- - The appraiser has extensive experience in appraising properties similar
to the portfolio.
Respectfully submitted,
CHARLES R. WILSON & ASSOCIATES, INC.
______________________________
Charles Ray Wilson, MAI, CRE
State of California
Certification No. AG002172
<PAGE>
Appendix C
The Special Committee of
The Board of Directors of
Public Storage Properties VI, Inc.
600 North Brand Boulevard
Glendale, CA 91203
Gentlemen:
We have been advised that Public Storage Properties VII, Inc. ("PSP7")
is entering into a transaction (the "Transaction") in which PSP7 will be merged
with Storage Equities, Inc. ("SEI"), an affiliated, publicly traded real estate
investment trust. In the Transaction, the shareholders of PSP7 will be asked to
approve the merger of PSP7 into SEI and the conversion of outstanding shares of
PSP7 Common Stock Series A (other than shares held by shareholders of PSP7 who
have properly exercised dissenters rights under California law ("Dissenting
Shares")) into newly issued shares of SEI common stock or, at the option of the
PSP7 shareholders with respect to up to 20% of the outstanding common stock, or
761,298 shares of PSP7 less any Dissenting Shares, cash (collectively, the
"Consideration"). We have been further advised that each share of PSP7 common
stock, other than Dissenting Shares held by PSP7 shareholders, will be converted
into $18.95 (the net asset value per share of PSP7 Common Stock based on an
independent appraisal of PSP7's properties) in cash or shares of SEI common
stock with an equivalent market value based on average closing prices on the New
York Stock Exchange of SEI common stock during the twenty consecutive trading
days ending on the fifth trading day prior to the special meeting of the
shareholders of PSP7. We also have been advised that (i) cash distributions will
be made to the shareholders of PSP7 prior to the consummation of the Transaction
to the extent required to cause PSP7's net asset value as of the date of the
Transaction to be substantially equivalent to the estimate of PSP7's net asset
value as of May 31, 1995 contained in the Joint Proxy Statement and Prospectus
filed with the Securities and Exchange Commission dated April 27, 1995, and (ii)
if additional cash distributions are required to satisfy PSP7's REIT
distribution requirements for 1994 and are paid to PSP7 shareholders prior to
the consummation of the Transaction, the Consideration would be reduced to
reflect such additional cash distributions.
PSP7 has formed a Special Committee of the Board of Directors to
consider certain matters relating to the Transaction, and the Special Committee
has requested that Robert A. Stanger & Co., Inc. ("Stanger") provide its opinion
as to the fairness to the public shareholders of PSP7, from a financial point of
view, of the Consideration to be received in the Transaction.
In the course of our review to render this opinion, we have, among
other things:
* Reviewed the Joint Proxy Statement and Prospectus related to
the Transaction and filed with the Securities and Exchange
Commission on April 27, 1995;
<PAGE>
* Reviewed PSP7's and SEI's annual reports to shareholders filed
with the SEC on Form 10-K for the four fiscal years ending
December 31, 1991, 1992, 1993, and 1994, which reports PSP7's
management and SEI's management have indicated to be the most
current financial statements available;
* Reviewed the pro forma financial statements contained in the
Joint Proxy Statement and Prospectus, and pro forma schedules
prepared by PSP7's management and SEI's management;
* Reviewed the MAI-certified portfolio appraisal of the
thirty-eight properties owned by PSP7 dated December 31, 1994
performed by Charles R. Wilson & Associates, Inc. (the
"Appraisal"), and discussed with management of PSP7 and the
appraiser the methodologies and procedures employed in
preparing the Appraisal;
* Reviewed information regarding purchases and sales of
self-storage properties by SEI or any affiliated entities
during the period from March 1993 through December 1994, and
other information available relating to acquisition criteria
for self-storage properties;
* Reviewed internal financial analyses and forecasts prepared by
PSP7, and based in part on the Appraisal, of the current net
liquidation value per common share of PSP7's assets and
projections of cash flow from operations, dividend
distributions and going-concern values for PSP7;
* Discussed with members of senior management of PSP7 and SEI
conditions in self-storage property markets, conditions in the
market for sales/acquisitions of properties similar to those
owned by PSP7, current and projected operations and
performance, financial condition and future prospects of PSP7
and SEI;
* Reviewed historical market prices, trading volume and
dividends for PSP7 and SEI common stock; and
* Conducted other studies, analyses, inquiries and
investigations as we deemed appropriate.
<PAGE>
In rendering this fairness opinion, we have relied upon and assumed,
without independent verification, the accuracy and completeness of all financial
and other information contained in the Joint Proxy Statement and Prospectus or
that was furnished or otherwise communicated to us by PSP7 and SEI. We have not
performed an independent appraisal of the assets and liabilities of PSP7 or SEI
and have relied upon and assumed the accuracy of the appraisals performed by
Charles R. Wilson & Associates, the estimate of potential environmental
liability provided by ENSR Consulting and Engineering, and the estimates of
expected costs of seismic structural upgrades or retrofitting provided by John
A. Martin & Associates, Inc. and Financial Research Group. We have also relied
on the assurance of PSP7 and SEI that any pro forma financial statements,
projections, budgets, or value estimates contained in the Joint Proxy Statement
and Prospectus or otherwise provided to us, and estimates of environmental
liability and expected seismic structural upgrade or retrofitting costs relating
to the self-storage property owned by PSP7 and located in Los Angeles,
California (the Beverly building), were reasonably prepared on bases consistent
with actual historical experience and reflecting the best currently available
estimates and good faith judgments; that no material changes have occurred in
the appraised value of the portfolio or the information reviewed between the
date of the Appraisal or the date of the other information provided and the date
of this letter; and that PSP7 and SEI are not aware of any information or facts
that would cause the information supplied to us to be incomplete or misleading
in any material respect.
We have not been requested to, and therefore did not: (i) select the
method of determining the Consideration offered in the Transaction; (ii) make
any recommendation to the shareholders of PSP7 or SEI with respect to whether to
approve or reject the Transaction or whether to select the cash or common stock
option in the Transaction; or (iii) express any opinion as to the business
decision to effect the Transaction or alternatives to the Transaction. Our
opinion is based on business, economic, real estate and securities markets, and
other conditions as of the date of our analysis and addresses the Transaction in
the context of information available as of the date of our analysis. Events
occurring after that date may materially affect the assumptions used in
preparing the opinion.
Based upon and subject to the foregoing, and in reliance thereon, it is
our opinion that as of the date of this letter the Consideration to be received
in the Transaction is fair to the public shareholders of PSP7, from a financial
point of view.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. We have
advised the Board of Directors of PSP7 that our entire analysis must be
considered as a whole and that selecting portions of our analysis and the
factors considered by us, without considering all analyses and facts, could
create an incomplete view of the evaluation process underlying this opinion.
Yours truly,
ROBERT A. STANGER & CO., INC.
Robert A. Stanger & Co., Inc.
Shrewsbury, NJ
April 27, 1995
<PAGE>
Appendix D
April 27, 1995
To the Board of Directors and the
Special Committee of the Board of Directors of
Storage Equities, Inc.
600 North Brand Boulevard, Suite 300
Glendale, CA 91221-5050
Gentlemen:
We understand that Storage Equities, Inc. ("SEI") has entered into an Agreement
and Plan of Reorganization (the "Merger Agreement") with Public Storage
Properties VII, Inc. ("PSP7"), whereby PSP7 will be merged with and into SEI
(the "Merger"). The Merger Agreement provides that each outstanding share of
PSP7 Common Stock (other than shares held by shareholders of PSP7 who have
properly exercised dissenters' rights under California law) is to be converted
into the right to receive cash or SEI Common Stock as follows: (i) with respect
to a certain number of shares of PSP7 Common Stock (not to exceed 20% of the
outstanding PSP7 Common Stock), upon the shareholder's election, $18.95 in cash
(the "Cash Election") or (ii) a number of shares of SEI Common Stock determined
by dividing $18.95 by the average closing price of the SEI Common Stock during a
specific period prior to closing. Pre-Merger cash distributions are to be made
to the shareholders of PSP7 to cause PSP7's net asset value (as defined) as of
the date of the Merger to be substantially equivalent to its estimated net asset
value as of May 31, 1995. If additional cash distributions are required in order
to satisfy PSP7's REIT distribution requirements, such additional cash
distributions would reduce on a pro rata basis the number of shares of SEI
Common Stock to be issued in the Merger and the amount received upon Cash
Election. The Merger and all related transactions are referred to collectively
herein as the "Transaction" and the amount of cash to be paid by SEI and number
of shares of SEI Common Stock to be issued are referred to in the aggregate
herein as the "Consideration." It is our understanding that the SEI Board of
Directors has formed a Special Committee to consider certain matters relating to
the Transaction.
You have requested our opinion (the "Opinion") as to the matters set forth
below. The Opinion does not address SEI's underlying business decision to effect
the Transaction.
<PAGE>
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. reviewed SEI's audited financial statements in its annual reports on
Form 10-K for the five fiscal years ended December 31, 1994, which
SEI's management has identified as being the most current financial
statements available;
2. reviewed PSP7's audited financial statements in its annual reports on
Form 10-K for the five fiscal years ended December 31, 1994, which
PSP7's management has identified as being the most current financial
statements available;
3. reviewed the Joint Proxy Statement and Prospectus;
4. reviewed the pro forma financial statements included in the Joint
Proxy Statement and Prospectus;
5. reviewed the portfolio appraisal of PSP7's 38 properties as of
December 31, 1994 prepared by Charles R. Wilson & Associates, Inc.
("Wilson"), and met with Wilson to discuss the portfolio appraisal;
6. met with certain members of the senior management of SEI and PSP7 to
discuss the operations, financial condition, future prospects and
projected operations and performance of SEI and PSP7;
7. examined information provided by PSP7 and SEI concerning the
composition of the property portfolios of PSP7, including summaries
of the number and original cost broken down by property type
(mini-warehouse versus business park) and state in which the property
is located, and reviewed information provided by management
concerning net operating income, occupancy, rental revenues and
capital expenditures for 1991, 1992, 1993 and 1994 for the properties
of PSP7;
<PAGE>
8. visited the business offices of SEI and PSP7;
9. discussed with management the operations, business plans, current
conditions in the miniwarehouse/business park industry, historical
financial statements, future prospects of PSP7 and SEI, including
market conditions for sales/ acquisitions of properties of the type
owned by PSP7 and SEI, the impact of general economic and financial
conditions on each portfolio; and the expected financial performance
and capital expenditures of the portfolios of PSP7 and SEI;
10. reviewed the historical market prices and trading volume for SEI's
and PSP7's publicly traded securities;
11. reviewed certain other publicly available financial and market data
for certain companies that we deem comparable to SEI and PSP7;
12. reviewed information provided by management of transactions by SEI
involving the acquisition of unaffiliated properties during the
period January 3, 1994 to January 13, 1995;
13. reviewed the Merger Agreement and drafts of certain documents to be
delivered at the closing of the Transaction;
14. reviewed the representation letters from ENSR Consulting and
Engineering, dated January 31, 1995, regarding the potential
environmental liability of PSP7's properties;
15. reviewed the representation letters from Financial Research Group and
John A. Martin & Associates, dated January 31, 1995, regarding the
structural condition and necessary retrofitting for PSP7's
properties; and
16. conducted such other studies, analyses, inquiries and investigations
as we have deemed appropriate.
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably prepared
and reflect the best currently available estimates of the future financial
results and condition of SEI and PSP7. We have also relied upon the appraisal of
PSP7's properties performed by Charles R. Wilson & Associates, Inc. in our
analysis and have assumed its accuracy.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to SEI and PSP7 and do not assume any
responsibility with respect to it. We have not made any physical inspection or
independent appraisal of any of the properties or assets of SEI and PSP7. Our
Opinion is necessarily based on business, economic, market and other conditions
as they exist and can be evaluated by us at the date of this letter.
Based upon the foregoing, and in reliance thereon, it is our opinion that the
Consideration to be paid by SEI in connection with the Transaction is fair to
the public stockholders of SEI from a financial point of view.
HOULIHAN, LOKEY, HOWARD & ZUKIN, INC.
<PAGE>
Appendix E
GENERAL CORPORATION LAW OF CALIFORNIA
CHAPTER 13
DISSENTERS' RIGHTS
* 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 (e) 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
recordholder of dissenting shares and includes a transferee of record.
<PAGE>
* 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 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.
* 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 therefor shall bear a
like statement, together with the name of the original dissenting holder of the
shares.
* 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.
* 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 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.
* 1305. Appraisers' Report -- Payment Costs.
(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).
* 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.
* 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.
* 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.
* 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:
<PAGE>
(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.
* 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.
* 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.
* 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 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 F
Proposed Amendment to PSP7's Bylaws
Add a new subsection (f) to Article IX, Section 8 of the Bylaws of PSP7
so that Section 8 would read in its entirety as follows:
Section 8. Restrictions on Transactions with Affiliates.
(a) The corporation shall not purchase or lease property in
which PSI or any of its affiliates have an interest. The provisions of this
Section 8(a) notwithstanding, PSI or its affiliates may purchase property
in their own name and temporarily hold title thereto for the purpose of
facilitating the acquisition of such property, for the corporation,
provided that such property is purchased by the corporation for a price no
greater than the cost of such property to PSI or its affiliates, including
development costs actually incurred by PSI or its affiliates.
(b) The corporation shall not sell or lease property to PSI or
its affiliates, except that the corporation may lease space to PSI or its
affiliates for their use, provided that (i) the terms of any such lease are
competitive with those contained in leases with persons who are not
affiliated with PSI or its affiliates, (ii) the aggregate amount of space
rented pursuant to such leases does not exceed 2% of the aggregate net
rentable area of the corporation's properties and (iii) neither PSI nor its
affiliates receive any property management fees in connection with such
leases.
(c) No loans may be made by the corporation to PSI or any of its
affiliates.
(d) Except as permitted by Section 8(a) of this Article IX, the
corporation shall not acquire property from any of the following persons or
entities in which PSI or any of its affiliates has an interest: a limited
or general partnership, joint venture, unincorporated association or
similar organization other than a corporation formed and operated for the
primary purpose of investment in and the operation of or gain from an
interest or interests in real property.
(e) The compensation paid to the General Partners or their
affiliates for insurance services, property management services and real
estate brokerage services shall be competitive in price and terms with
persons who are not affiliated with the General Partners or their
affiliates rendering comparable services which could reasonably be made
available to the corporation.
(f) Notwithstanding anything in the Bylaws to the contrary, the
corporation may merge with Storage Equities, Inc. or a subsidiary, provided
that such merger is approved by the vote or written consent of holders of a
majority of the outstanding shares of the corporation entitled to vote.
<PAGE>
Appendix G
Notice of Redemption
To: Holders of shares of Common Stock Series D, par value $.01 per share of
Public Storage Properties VII, Inc.
Notice is hereby given that the board of directors of Public Storage Properties
VII, Inc. ("PSP7") has called for redemption of all of the outstanding shares of
PSP7's Common Stock Series D, par value $.01 per share (the "Series D Shares")
and that all of the Series D Shares are included within this call. Redemption
will take place on __________ __, 1995 and the redemption price will be $1,000
per share of Series D Shares.
Redemption of the Series D Shares is conditioned upon completion of the merger
of PSP7 with and into Storage Equities, Inc.
Dated: __________ __, 1995
Public Storage Properties VII, Inc.
By: /S/ HARVEY LENKIN
--------------------------------
Harvey Lenkin
President
<PAGE>
Appendix H
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 flows for each of the three years in the
period ended December 31, 1994. Our audits also included the 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 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. 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
February 24, 1995
<PAGE>
See accompanying notes.
PUBLIC STORAGE PROPERTIES VII, INC.
BALANCE SHEETS
December 31, 1994 and 1993
<TABLE>
<CAPTION>
1994 1993
---------------- ------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 1,724,000 $ 1,809,000
Rent and other receivables 128,000 64,000
Prepaid expenses 292,000 184,000
Real estate facilities at cost:
Building, land improvements and equipment 44,871,000 44,525,000
Land 14,784,000 14,820,000
----------- -----------
59,655,000 59,345,000
Less accumulated depreciation (21,099,000) (19,245,000)
----------- -----------
38,556,000 40,100,000
----------- ----------
Total assets $40,700,000 $42,157,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 1,022,000 $ 971,000
Dividends payable 1,066,000 1,069,000
Advance payments from renters 460,000 529,000
Note payable 917,000 3,033,000
Commitments and contingencies
Shareholders' equity:
Series A common, $.01 par value,
4,312,521 shares authorized,
3,806,491 shares issued and
outstanding (3,817,866 shares
issued and outstanding in 1993) 38,000 39,000
Series D common, $.01 par
value, 2,757 shares authorized,
issued and outstanding - -
Paid-in-capital 49,827,000 50,017,000
Cumulative income 54,276,000 49,137,000
Cumulative distributions (66,906,000) (62,638,000)
----------- -----------
Total shareholders' equity 37,235,000 36,555,000
----------- -----------
Total liabilities and shareholders' equity $40,700,000 $42,157,000
=========== ===========
</TABLE>
<PAGE>
PUBLIC STORAGE PROPERTIES VII, INC.
STATEMENTS OF INCOME
For each of the three years in the
period ended December 31, 1994
<TABLE>
<CAPTION>
1994 1993 1992
---------------- ---------------- ----------------
REVENUES:
<S> <C> <C> <C>
Rental income $13,257,000 $12,703,000 $12,008,000
Interest and other income 28,000 38,000 47,000
-------------- -------------- --------------
13,285,000 12,741,000 12,055,000
----------- ----------- -----------
COSTS AND EXPENSES:
Cost of operations 5,226,000 4,673,000 4,669,000
Management fees paid to affiliates 782,000 751,000 710,000
Depreciation and amortization 1,912,000 1,838,000 1,868,000
Administrative 283,000 319,000 415,000
Interest expense 146,000 217,000 45,000
------------- ------------- --------------
8,349,000 7,798,000 7,707,000
------------ ------------ ------------
Income before gain on sale of real estate 4,936,000 4,943,000 4,348,000
Gain on sale of real estate 203,000 - -
------------- ------------------ ------------
NET INCOME $ 5,139,000 $ 4,943,000 $ 4,348,000
=========== =========== ===========
Primary earnings per share-Series A
Income before gain on sale of real estate $ 1.30 $ 1.43 $ 1.32
Gain on sale of real estate 0.05 - -
------- --------- --------
Net income $ 1.35 $ 1.43 $ 1.32
====== ====== ======
Fully diluted earnings per share-Series A
Income before gain on sale of real estate $ 1.30 $ 1.28 $ 1.07
Gain on sale of real estate 0.05 - -
------- --------- -------
Net income $ 1.35 $ 1.28 $ 1.07
====== ====== ======
Dividends declared per share:
Series A $ 1.12 $1.36 $ 1.44
====== ===== ======
Series B - $ .72 $ 1.44
========= ====== ======
Weighted average Common shares outstanding:
Primary- Series A 3,810,908 3,330,154 2,980,531
========= ========= =========
Fully diluted- Series A 3,810,908 3,868,874 4,057,972
========= ========= =========
</TABLE>
<PAGE>
PUBLIC STORAGE PROPERTIES VII, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
For each of the three years in the period ended
December 31, 1994
<TABLE>
<CAPTION>
Convertible Convertible
Series A Series B Series C Series D
Shares Amount Shares Amount Shares Amount Shares Amount
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December, 1991 3,155,323 $32,000 281,072 $3,000 796,369 $8,000 2,757 -
Net Income
Repurchase of shares (282,298) (3,000)
Cash distribution declared:
$1.44 per share - Series A
$1.44 per share - Series B
Balances at December, 1992 2,873,025 29,000 261,072 3,000 796,369 8,000 2,757 -
Net Income
Repurchase of shares (132,600) (1,000)
Conversion of B & C shares 1,077,441 11,000 (281,072) (3,000) (796,369) (8,000)
Cash distribution declared:
$1.36 per share - Series A
$ .72 per share - Series B
Balances at December, 1993 3,817,866 39,000 - - - - 2,757 -
Net Income
Repurchase of shares (11,375) (1,000)
Cash distribution declared:
$1.12 per share - Series A
Balances at December, 1994 3,806,491 $38,000 - - - - 2,757 -
</TABLE>
THE PREVIOUS TABLE CONTINUED HERE
==================================
<TABLE>
<CAPTION>
Cumulative Total
Paid-in net Cumulative shareholders'
Capital income distributions equity
<S> <C> <C> <C> <C>
Balances at December, 1991 $56,096,000 $39,846,000 ($53,324,000) $42,661,000
Net Income
Repurchase of shares 4,348,000 4,348,000
(4,050,000) (4,053,000)
Cash distribution declared:
$1.44 per share - Series A (4,249,000) (4,249,000)
$1.44 per share - Series B (406,000) (406,000)
Balances at December, 1992 52,046,000 44,194,000 (57,979,000) 38,301,000
Net Income 4,943,000 4,943,000
Repurchase of shares (2,029,000) (2,030,000)
Conversion of B & C shares
Cash distribution declared:
$1.36 per share - Series A (4,457,000) (4,457,000)
$ .72 per share - Series B (202,000) (202,000)
Balances at December, 1993 50,017,000 49,137,000 (62,638,000) 36,555,000
Net Income 5,139,000 5,139,000
Repurchase of shares (190,000) (191,000)
Cash distribution declared:
$1.12 per share - Series A (4,268,000) (4,268,000)
Balances at December, 1994 $49,827,000 $54,276,000 ($66,906,000) $37,235,000
</TABLE>
See accompanying notes.
<PAGE>
PUBLIC STORAGE PROPERTIES VII, INC.
STATEMENTS OF CASH FLOWS
For each of the three years in the
period ended December 31, 1994
<TABLE>
<CAPTION>
1994 1993 1992
---------------- ---------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $5,139,000 $4,943,000 $4,348,000
Adjustments to reconcile net income to net cash provided by operating
activities:
Gain on sale of real estate facility (203,000) - -
Depreciation and amortization 1,912,000 1,838,000 1,868,000
(Increase) decrease in rent and
other receivables (11,000) 214,000 (104,000)
Increase in prepaid expenses (194,000) (133,000) (98,000)
Increase (decrease) in accounts payable 8,000 (3,000) (71,000)
(Decrease) increase in advance
payments from renters (69,000) (29,000) 50,000
---------- ----------- -----------
Total adjustments 1,443,000 1,887,000 1,645,000
---------- ---------- ----------
Net cash provided
by operating activities 6,582,000 6,830,000 5,993,000
---------- ---------- ----------
Cash flows from investing activities:
Proceeds from sale of real estate facility 375,000 - -
Additions to real estate facilities (464,000) (533,000) (306,000)
----------- ----------- -----------
Net cash used in
investing activities (89,000) (533,000) (306,000)
------------ ----------- -------------
Cash flows from financing activities:
Distributions paid to shareholders (4,271,000) (4,726,000) (4,757,000)
Proceeds from note payable to Bank - 2,700,000 1,300,000
Payments on note payable to Bank (2,116,000) (967,000) -
Purchase of Company Series A
common stock (191,000) (2,030,000) (4,053,000)
------------ ---------- -----------
Net cash used in
financing activities (6,578,000) (5,023,000) (7,510,000)
---------- ---------- ----------
Net (decrease) increase in
cash and cash equivalents (85,000) 1,274,000 (1,823,000)
Cash and cash equivalents at
the beginning of the year 1,809,000 535,000 2,358,000
----------- ------------ ----------
Cash and cash equivalents at
the end of the year $1,724,000 $ 1,809,000 $ 535,000
========== =========== ==========
</TABLE>
<PAGE>
PUBLIC STORAGE PROPERTIES VII, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1994
1. Description of Business
Public Storage Properties VII, Inc. (the "Company") is a
California corporation which has elected to qualify as a real estate
investment trust ("REIT") for Federal income tax purposes. The Company
succeeded to the business of Public Storage Properties VII, Ltd. (the
"Partnership") in a reorganization transaction which was effective July
31, 1991 (the "Reorganization").
The Company owns and operates primarily self-storage facilities
and, to a lesser extent, business park facilities containing commercial
or industrial spaces.
The term of the Company is until all properties have been sold
and, in any event, not later than December 31, 2038. The bylaws of the
Company provide that, during 1995, unless shareholders have previously
approved such a proposal, the shareholders will be presented with a
proposal to approve or disapprove (a) the sale or financing of all or
substantially all of the properties and (b) the distribution of the
proceeds from such transaction and, in the case of a sale, the
liquidation of the Company.
2. Summary of Significant Accounting Policies
Income Taxes:
The Company has and intends to continue to qualify as a REIT, as
defined in Section 856 of the Internal Revenue Code (the Code). As a
REIT, the Company is not taxed on that portion of its taxable income
which is distributed to its shareholders provided that the Company meets
the requirements of the Code. The Company believes it is in compliance
with these requirements and, accordingly, no provision for income taxes
has been made.
Statements of Cash Flows:
For purposes of financial statement presentation, the Company
considers all highly liquid debt instruments purchased with a maturity
of three months or less to be cash equivalents.
The Company paid $146,000 and $180,000 in interest costs during
1994 and 1993, respectively.
Real Estate Facilities:
Cost of land includes appraisal and legal fees related to
acquisition and closing costs. Buildings, land improvements and
equipment reflect costs incurred through December 31, 1994 and 1993 to
develop primarily mini-warehouse facilities and to a lesser extent,
business park facilities. The mini-warehouse facilities provide
self-service storage spaces for lease, usually on a month-to-month
basis, to the general public. The buildings and equipment are
depreciated on the straight-line basis over estimated useful lives of 25
and 5 years, respectively. The real estate facilities are carried at the
lower of depreciated cost or net realizable value. Included in
depreciation and amortization is amortization of tenant improvements on
the Company's business park facilities of $4,000, $16,000, and $27,000
in 1994, 1993 and 1992, respectively.
In December 1994, the Company sold a portion of one of its
Houston, Texas properties to the State of Texas under a condemnation
proceeding for $428,000. The Company recognized a gain of $203,000 on
the sale.
<PAGE>
2. Summary of Significant Accounting Policies (continued)
At December 31, 1994, the basis of real estate facilities
(excluding land) for Federal income tax purposes (after adjustment for
accumulated depreciation of $32,716,000) is $9,778,000.
Revenue Recognition:
Property rents are recognized as earned.
Net Income Per Share:
Net income per share has been computed based on the weighted
average number of shares outstanding during the period. Series D shares
have no rights to distributions of income and, therefore, are not
included in the earnings per share calculation.
3. Related Party Transactions
The Company has Management Agreements with Public Storage
Management, Inc. (PSMI) and Public Storage Commercial Properties Group,
Inc. (PSCPG), subsidiaries of Public Storage, Inc. (PSI), a wholly-owned
subsidiary of PSI Holdings, Inc. (PSIH). Under the terms of the
agreements, PSMI operates the mini-warehouse facilities and PSCPG
operates the business park facilities for fees equal to 6% and 5%,
respectively, of the facilities' monthly gross revenue (as defined).
The Management Agreement provides that the agreement will expire
in February 2002 provided that in February of each year commencing
February 21, 1996 it shall be automatically extended for one year
(thereby maintaining a seven-year term) unless either party notifies the
other that the Management Agreement is not being extended, in which case
it expires, on the first anniversary of its then scheduled expiration
date. The Management Agreement may also be terminated by either party
for cause, but if terminated for cause by the Company, the Company
retains the rights 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.
4. Shareholders' Equity
Series A shares are entitled to all distributions of cash from
sale or refinancing (subject to the Series D shares' distribution and
liquidation preference) and participate ratably with the Convertible
Series B shares in distributions of cash flow from operations. The
Convertible Series C shares (prior to conversion into Series A shares)
did not participate in any distributions. The Series D shares have a
liquidation preference of $2,757,000 ($1,000 per Series D share) less
the amount of any prior distributions with respect to the Series D
shares. The Series D shares will be automatically redeemed for no
consideration when the Company has distributed $2,757,000 with respect
to the Series D shares.
The Convertible Series B shares and Convertible Series C shares
were outstanding through August 1993 when, according to their terms,
they were converted into Series A shares on a share-for-share basis.
<PAGE>
The Company's Board of Directors has authorized the Company to
purchase up to 550,000 shares of the Company's Series A common stock. As
of December 31, 1994, the Company had purchased and retired 503,273
shares of Series A common stock, of which 11,375 and 132,600 were
purchased and retired in 1994 and 1993, respectively.
For Federal income tax purposes, distributions declared by the Board
of Directors in 1994, 1993 and 1992 were as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------------ ------------ -------------
<S> <C> <C> <C>
Ordinary income $4,154,000 $4,659,000 $4,655,000
Capital gains 114,000 - -
----------------------------- -----------------
Total $4,268,000 $4,659,000 $4,655,000
========== ========== ==========
</TABLE>
5. Note Payable to Bank
In November 1992, the Company obtained an unsecured revolving credit
facility from a commercial bank for borrowings up to $4,000,000 for
working capital purposes, which was guaranteed by an affiliate of the
Company. The credit facility, which bears interest at the bank's prime
rate plus 1%, converted to a term loan on April 30, 1993 and was payable
in eleven quarterly principal installments plus interest beginning July
1, 1993.
In September 1994, the Company obtained a new term loan with a bank for
$1,000,000 which was used to repay in full the November 1992 credit
facility. Outstanding borrowings on the loan which bear interest at the
bank's prime rate plus .625% (9.125% at December 31, 1994), will be
payable in twelve monthly principal and interest payments beginning
January 1, 1995. On December 1, 1995, the remaining unpaid principal and
interest is due and payable. At December 31, 1994, the outstanding
balance on the loan was $917,000.
Under covenants of the credit facility , the Company is (1)
required to maintain a ratio of debt to net worth (as defined) of not
more than .5 to 1.0, (2) required to maintain a REIT cash flow coverage
ratio (as defined) measured on a year-to-date basis for each fiscal
quarter of not less than 1.2 to 1.0 and (3) required to maintain a
dividend cash flow coverage ratio (as defined) measured on a year-
to-date basis for each fiscal quarter of not less than 1.0 to 1.0. At
December 31, 1994, the Company was in compliance with the covenants of
the credit facility.
6. Hurricane Andrew
In August 1992, the Company's Miami, Florida facility sustained
minor damage from Hurricane Andrew. Damage to the facility was covered
by the Company's property insurance. While the facility was being
repaired, the facility sustained loss of rents on rental units that were
idle. The Company had loss of rents insurance to cover loss of rental
income on these idle units. Benefits from this loss of rents insurance
in the amounts of $19,000 and $30,000 have been included in Other Income
in the Statement of Income for the years ended December 31, 1993 and
1992. The property was fully operational during 1994.
<PAGE>
7. Commitments and Contingencies
Environmental:
In connection with the Company's proposed merger with SEI (as described
below), the Company completed environmental assessments of each of its
properties. Based on such investigations, a firm of environmental
engineering consultants estimated the cost of environmental remediation
at one property to be $250,000. Currently there is no requirement to
remediate this condition. The appraised value of the property for
purposes of the proposed merger reflects the estimated cost of this
remediation, as well as the estimated cost of certain structural
remediation. To date, the Company has not been informed by governmental
agencies that it is a potentially responsible party for the
contamination on the property (or any other property), nor has it been
informed by any governmental agency that the contamination will need to
be addressed and, accordingly, no amounts have been provided for this
matter.
8. Subsequent Event
On February 2, 1995, the Company and Storage Equities, Inc.
("SEI") agreed, subject to certain conditions, to merge. SEI is a New
York Stock Exchange listed real estate investment trust whose investment
advisor is an affiliate of PSI. In the merger, the Company would be
merged with and into SEI, and each outstanding share of the Company's
Common Stock Series A (3,806,491 shares) would be converted, at the
election of the shareholders of the Company, into either shares of SEI
common stock or with respect to up to 20% of the Company's Common Stock
Series A, $18.95 in cash. This dollar amount has been based on the
Company's estimated net asset value (the appraised value of the Company's
real estate assets as of December 31, 1994 and the estimated book value
of the Company's other net assets as of May 31, 1995) and reduced by
$2,757,000 paid in redemption of the Series D shares. The number of
shares of SEI common stock will be based on dividing this same dollar
amount by the average of the per share closing prices on the New York
Stock Exchange for a specified period prior to the effective date
determined at the Company's shareholders' meeting. In the event of the
merger, pre-merger cash distributions would be made to shareholders of
the Company to cause the Company's net asset value as of the effective
date of the merger to be substantially equivalent to its estimated net
asset value as of May 31, 1995. If additional cash distributions are
required in order to satisfy the Company's REIT distribution
requirements, the number of shares of SEI common stock issued in the
merger and the amount receivable upon a cash election would be reduced on
a pro rata basis in an aggregate amount equal to such additional
distributions. The merger is conditioned on, among other requirements,
receipt of satisfactory fairness opinions by the Company and SEI and
approval by the shareholders of both the Company and SEI. Prior to, and
conditioned upon, the merger, the Company intends to redeem for an
aggregate of $2,757,000 in cash all outstanding shares of its Common
Stock Series D. It is expected that any merger would close during the
second quarter of 1995. PSI and its affiliates have significant
relationships with both SEI and the Company and have informed SEI and the
Company that they would expect to elect to receive SEI common stock in
any merger.
<PAGE>
9. Quarterly results (unaudited)
The following is a summary of unaudited quarterly results of
operations:
<TABLE>
<CAPTION>
Three months ended
March 1994 June 1994 Sept 1994 Dec. 1994
----------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $3,216,000 $3,310,000 $3,410,000 $3,552,000
---------- ---------- ---------- ----------
Expenses 2,001,000 2,007,000 2,004,000 2,337,000
---------- ---------- ---------- ----------
Net income $1,215,000 $1,303,000 $1,406,000 $1,215,000
========== ========== ========== ==========
Primary earnings per share- Series A $0.32 $0.34 $0.37 $0.32
===== ===== ===== =====
Fully diluted earnings per share- Series A $0.32 $0.34 $0.37 $0.32
===== ===== ===== =====
Three months ended
March 1993 June 1993 Sept 1993 Dec. 1993
----------- ---------- --------- ---------
Revenues $3,064,000 $3,140,000 $3,313,000 $3,224,000
---------- ---------- ---------- ----------
Expenses 1,966,000 1,904,000 1,972,000 1,956,000
---------- ---------- ---------- ----------
Net income $1,098,000 $1,236,000 $1,341,000 $1,268,000
========== ========== ========== ==========
Primary earnings per share- Series A $0.35 $0.40 $0.35 $0.33
===== ===== ===== =====
Fully diluted earnings per share- Series A $0.28 $0.32 $0.35 $0.33
===== ===== ===== =====
</TABLE>
<PAGE>
Appendix I
Management's Discussion and Analysis
of Financial Condition and Results of Operations.
Results of Operations.
Year ended December 31, 1994 compared to year ended December 31, 1993.
Net income in 1994 was $5,139,000 compared to $4,943,000 in 1993, representing
an increase of $196,000. Net income per fully diluted Series A share was $1.35
in 1994 compared to $1.28 in 1993, representing an increase of $.07 or 5% per
share. The increase was primarily the result a $203,000 gain recognized on the
sale of a portion of the Company's Houston, S.W. Freeway property to the State
of Texas in a condemnation proceeding in December 1994. Net income in 1993 was
impacted by the loss of rents at one facility in Florida damaged by Hurricane
Andrew. The Company had loss of rents insurance to cover the rental income lost
which is included in "other income". Net income per share in 1994 also benefited
by the reduction in the number of Series A shares outstanding due to the
Company's repurchase of Series A shares.
During 1994, property net operating income (rental income less cost of
operations, management fees paid to affiliates and depreciation expense)
decreased $104,000 from $5,441,000 in 1993 to $5,337,000 in 1994. This decrease
is attributable to an increase in cost of operations at the Company's
mini-warehouse operations and an increase in depreciation expense of $74,000 or
4% from $1,838,000 in 1993 to $1,912,000 in 1994.
Rental income of the mini-warehouse operations increased $573,000 or 5%
from $11,442,000 in 1993 to $12,015,000 in 1994. Cost of operations (including
management fees paid to an affiliate of the Company) increased $635,000 or 13%
from $4,722,000 in 1993 to $5,357,000 in 1994. The results of these changes was
a net decrease in property net operating income before depreciation expense of
$62,000 or 1% from $6,720,000 in 1993 to $6,658,000 in 1994. The increase in
rental income is primarily due to an increase in occupancy levels at the
Company's mini-warehouse properties in Oregon and Missouri. The increase in cost
of operations is primarily due to increases in payroll, repairs and maintenance
and legal expense offset by a decrease in advertising expense. Repairs and
maintenance increased $196,000 due to major repairs incurred at a majority of
the Company's facilities for such items as painting and roof repairs. Legal
expense increased $260,000 due to legal costs incurred on a lawsuit brought by a
former property manager. Advertising expense decreased due to relatively high
occupancy levels and the reduced need for promotional incentives to maintain
those occupancies.
Property net operating income before depreciation expense with respect
to the Company's business park operations increased by $31,000 or 5.5% from
$560,000 in 1993 to $591,000 in 1994. This increase is primarily due to a
decrease in cost of operations offset by a slight decrease in rental revenues.
The decrease in cost of operations is due to decreases in property taxes and
utilities offset by an increase in repairs and maintenance. The increase in
repairs and maintenance was primarily for painting cost.
Weighted average occupancy levels were 89% for the mini-warehouse
facilities and 94% for the business park facilities in 1994 compared to 90% for
the mini-warehouse facilities and 93% for the business park facilities in 1993.
Interest expense decreased from $217,000 in 1993 to $146,000 in 1994
for a net decrease of $71,000. The decrease in interest expense is attributable
to a reduction in the average debt outstanding as the term note was reduced by
$2,116,000 in 1994. The average interest rate was 7% in 1993 compared to 8% in
1994. During September 1994, the Company refinanced the outstanding balance with
a commercial bank reducing the interest rate from prime plus 1% to prime plus
.625%. All other terms are comparable. The loan is scheduled to payoff, pursuant
to its terms, in December 1995.
Year ended December 31, 1993 compared to year ended December 31, 1992.
Net income in 1993 was $4,943,000 compared to $4,348,000 in 1992, representing
an increase of $595,000. Net income per fully diluted Series A share was $1.28
in 1993 compared to $1.07 in 1992, representing an increase of $.21 or 20% per
share. The increase was primarily the result of improved property operations at
the Company's mini-warehouse facilities. Net income in 1993 was impacted by the
loss of rents at one facility in Florida damaged by Hurricane Andrew. The
Company had loss of rents insurance to cover the rental income lost which is
included in "other income". Net income per share in 1993 also benefited by the
reduction in the number of Series A shares outstanding due to the Company's
repurchase of Series A shares.
During 1993, property net operating income (rental income less cost of
operations, management fees paid to affiliates and depreciation expense)
increased $680,000 from $4,761,000 in 1992 to $5,441,000 in 1993. This increase
is attributable to the Company's mini-warehouse operations and a decrease in
depreciation expense of $30,000 or 2% from $1,868,000 in 1992 to $1,838,000 in
1993.
Rental income of the mini-warehouse operations increased $680,000 or 6%
from $10,762,000 in 1992 to $11,442,000 in 1993. Cost of operations (including
management fees paid to an affiliate of the Company) increased $13,000 from
$4,709,000 in 1992 to $4,722,000 in 1993. The results of these changes was a net
increase in property net operating income before depreciation expense of
$667,000 or 11% from $6,053,000 in 1992 to $6,720,000 in 1993. The increase in
rental income is primarily due to an increase in rental rates. The increase in
cost of operations is due to increases in payroll and management fees paid to an
affiliate (as a result of increased revenue) offset by decreases in advertising
and office expense. Advertising expense decreased due to relatively high
occupancy levels and the reduced need for promotional incentives to maintain
those occupancies.
Property net operating income before depreciation expense with respect
to the Company's business park operations decreased by $17,000 or 3% from
$577,000 in 1992 to $560,000 in 1993. This decrease is due to an increase in
cost of operations, mainly in payroll, utilities and repairs and maintenance.
Weighted average occupancy levels were 90% for the mini-warehouse
facilities and 93% for the business park facilities in 1993 compared to 87% for
the mini-warehouse facilities and 91% for the business park facilities in 1992.
Interest expense increased from $45,000 in 1992 to $217,000 in 1993 for
a net increase of $172,000. This increase is due to a higher outstanding loan
balance in 1993 over 1992. During 1993 and 1992, the Company had average loan
balances of $3,200,000 and $1,300,000, respectively.
Mini-warehouse Operating Trends.
The following table illustrates the operating trends for the Company's
35 mini-warehouses:
<TABLE>
<CAPTION>
For the year ended December 31,
1994 1993 1992
-------- ------ ------
<S> <C> <C> <C>
Weighted average occupancy level 89% 90% 87%
Realized monthly rent per occupied
square foot (1) $.61 $.57 $.56
Operating margin: (2)
After reduction for depreciation expense 42% 45% 41%
Before reduction for depreciation expense 55% 59% 56%
- --------------------
<FN>
(1) Realized rent per square 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. Includes administrative and late fees.
(2) Operating margin (after reduction for depreciation expense) is computed by
dividing rental income less cost of operations and depreciation by rental
income. Operating margin (before reduction for depreciation expense) is
computed by dividing rental income less cost of operations by rental
income.
</TABLE>
The decrease in operating margins from 1993 to 1994 is due to costs
incurred on a lawsuit brought by a former property manager and an increase in
repairs and maintenance cost.
Management believes that the trends in property operations are due to:
Increasing occupancy levels resulting from decreased levels of new
supply in the industry and promotion of the Company's facilities by
PSMI.
Increasing realized rents per square foot of mini-warehouse space
resulting from increased demand for space and fewer promotional
discounts of scheduled rents required to maintain relatively high
occupancies.
Increasing revenues due to increasing realized rents and occupancy
levels offset in part by an increase in expenses (approximately 13% for
1994 (as compared to 1993) and .3% in 1993.
Liquidity and Capital Resources.
Capital structure. The Company's financial profile is characterized by
a low level of debt to total capitalization, increasing net income, increasing
cash provided by operating activities and increasing funds from operations
("FFO").
The Company repaid $2,116,000 of its outstanding debt in 1994. The
remaining outstanding balance of $917,000 matures in 1995. The Company believes
it will have sufficient cash flow after payment of operating expenses and
scheduled distributions to repay the outstanding balance in full in 1995.
Net Cash Provided by Operating Activities and Funds from Operations.
The Company believes that important measures of its performance as well as
liquidity are net cash provided by operating activities and FFO.
Net cash provided by operating activities computed in accordance with
generally accepted accounting principles (net income plus depreciation and
amortization and changes in working capital components) reflects the cash
generated from the Company's business before distributions to shareholders,
capital expenditures and principal payments on debt. Net cash provided by
operating activities has increased over the past years from $5,993,000 in 1992
to $6,582,000 in 1994.
The Company's FFO is defined generally by the National Association of
Real Estate Investment Trusts (NAREIT) as net income before loss on early
extinguishment of debt and gain on disposition of real estate, plus depreciation
and amortization. FFO for the years ended December 31, 1994 and 1993 was
$7,051,000 and $6,781,000, respectively. NAREIT has recently adopted revisions
to the definition of funds from operations which will become effective in 1996.
The most material impact of the new guidelines will be (i) amortization of
deferred financing costs will be treated as an expense - i.e., it will no longer
be treated as an add-back to net income and (ii) certain gains on sales of land
will be included in funds from operations if deemed to be recurring. These
changes will have no impact on the way the Company currently computes its funds
from operations. FFO is a supplemental performance measure for equity REITs used
by industry analysts. FFO does not take into consideration principal payments on
debt, capital improvements, distributions and other obligations of the Company.
The only depreciation or amortization that is added to income to derive FFO is
depreciation and amortization directly related to physical real estate. All
depreciation and amortization reported by the Company relates to physical real
estate and does not include any depreciation or amortization related to
goodwill, deferred financing costs or other intangibles. FFO is not a substitute
for the Company's net cash provided by operating activities or net income, as a
measure of liquidity or operating performance.
In September 1994, the Company obtained a new term loan with a bank for
$1,000,000 to repay in full the outstanding balance of a prior credit facility.
The new loan's interest rate of prime plus .625% is lower than the prior credit
facility's interest rate of prime plus 1%. Outstanding borrowings on the loan
will be payable in twelve monthly principal and interest payments beginning
January 1, 1995. On December 1, 1995, the remaining unpaid principal and
interest is due and payable.
At December 31, 1994, the outstanding balance on the loan was $917,000.
The loan may be prepaid at any time without penalty.
The following table summarizes the Company's ability to make capital
improvements to maintain its facilities and make scheduled principal payments on
its outstanding debt through the use of cash provided by operating activities.
The remaining cash flow is available to the Company to make optional principal
payments on its debt, pay distributions to shareholders and repurchase its
stock.
<TABLE>
<CAPTION>
Years ended December 31,
1994 1993 1992
---- ---- -----
<S> <C> <C> <C>
Net income $5,139,000 $4,943,000 $4,348,000
Depreciation and amortization 1,912,000 1,838,000 1,868,000
---------- ---------- ----------
Funds from operations
(Net cash provided by operating activities
before changes in working capital components) 7,051,000 6,781,000 6,216,000
Capital improvements to maintain facilities (464,000) (533,000) (306,000)
Scheduled principal payments on outstanding debt (1,333,000) (667,000) -
----------- --------- -------
Excess funds available for optional principal
payments on debt, distributions to shareholders
and repurchase of stock 5,254,000 5,581,000 5,910,000
Cash distributions to shareholders (4,271,000) (4,726,000)) (4,757,000)
---------- ---------- ----------
Excess funds available for optional principal
payments on debt and repurchase of stock $ 983,000 $ 855,000 $1,153,000
========== ========== ==========
</TABLE>
The Company believes that its rental revenues and interest and other
income will be sufficient over at least the next twelve months to meet the
Company's operating expenses, capital improvements, debt service requirements
and distributions to shareholders. For 1995, the Company anticipates
approximately $557,000 in capital improvements. In addition, $917,000 of
scheduled principal payments (representing the entire outstanding debt balance)
is due in 1995.
The Company believes its geographically diverse portfolio has resulted
in a relatively stable and predictable investment portfolio.
Distributions
The Company has established a conservative distribution policy. The
aggregate amount of dividends paid or accrued to the shareholders in each year
since inception of the Company were as follows:
<TABLE>
<CAPTION>
Series A Series B Total
<S> <C> <C> <C>
1981 $3,599,000 $ 313,000 $ 3,912,000
1982 1,293,000 112,000 1,405,000
1983 3,071,000 267,000 3,338,000
1984 4,849,000 422,000 5,271,000
1985 5,496,000 479,000 5,975,000
1986 5,819,000 507,000 6,326,000
1987 5,819,000 507,000 6,326,000
1988 4,242,000 369,000 4,611,000
1989 5,212,000 453,000 5,665,000
1990 5,010,000 435,000 5,445,000
1991 4,644,000 406,000 5,050,000
1992 4,249,000 406,000 4,655,000
1993 4,457,000 202,000 4,659,000
1994 4,268,000 - 4,268,000
------------- ------------------ ------------
Total $62,028,000 $4,878,000 $66,906,000
=========== ========== ===========
</TABLE>
REIT Distribution Requirement
As a REIT, the Company is not taxed on that portion of its taxable
income which is distributed to its shareholders provided that at least 95% of
its taxable income is so distributed. Under certain circumstances, the Company
can rectify a failure to meet the 95% distribution test by making distributions
after the close of a particular taxable year and attributing those distributions
to the prior year's taxable income. The Company has satisfied the REIT
distribution requirement for 1992, 1993 and 1994 by attributing distributions in
1993, 1994 and 1995 to the prior year's taxable income. The extent to which the
Company will be required to attribute distributions to the prior year will
depend on the Company's operating results (taxable income) and the level of
distributions as determined by the Board of Directors.
The Company's Board of Directors has authorized the Company to purchase
up to 550,000 Series A common stock. The Company has repurchased 503,273 shares
of Series A common stock.
Proposed Merger with Storage Equities, Inc.
On February 2, 1995, the Company and Storage Equities, Inc. ("SEI")
agreed, subject to certain conditions, to merge. SEI is a New York Stock
Exchange listed real estate investment trust whose investment advisor is an
affiliate of PSI. In the merger, the Company would be merged with and into SEI,
and each outstanding share of the Company's Common Stock Series A (3,806,491
shares) would be converted, at the election of the shareholders of the Company,
into either shares of SEI common stock or with respect to up to 20% of the
Company's Common Stock Series A, $18.95 in cash. This dollar amount has been
based on the Company's estimated net asset value (the appraised value of the
Company's real estate assets as of December 31, 1994 and the estimated book
value of the Company's other net assets as of May 31, 1995) and reduced by
$2,757,000 paid in redemption of the Series D shares. The number of shares of
SEI common stock will be based on dividing this same dollar amount by the
average of the per share closing prices on the New York Stock Exchange for a
specified period prior to the effective date determined at the Company's
shareholders' meeting. In the event of the merger, pre-merger cash distributions
would be made to shareholders of the Company to cause the Company's net asset
value as of the effective date of the merger to be substantially equivalent to
its estimated net asset value as of May 31, 1995. If additional cash
distributions are required in order to satisfy the Company's REIT distribution
requirements, the number of shares of SEI common stock issued in the merger and
the amount receivable upon a cash election would be reduced on a pro rata basis
in an aggregate amount equal to such additional distributions. The merger is
conditioned on, among other requirements, receipt of satisfactory fairness
opinions by the Company and SEI and approval by the shareholders of both the
Company and SEI. Prior to, and conditioned upon, the merger, the Company intends
to redeem for an aggregate of $2,757,000 in cash all outstanding shares of its
Common Stock Series D. It is expected that any merger would close during the
second quarter of 1995. PSI and its affiliates have significant relationships
with both SEI and the Company and have informed SEI and the Company that they
would expect to elect to receive SEI common stock in any merger.
Environmental Issues.
Under various federal, state and local laws, regulations and ordinances
(collectively, "Environmental Laws"), an owner or operator of real estate
interests may be liable for the costs of cleaning up, as well as certain damages
resulting from past or present spills, disposals or other releases of hazardous
or toxic substances or wastes on, in or from a property. Certain Environmental
Laws impose such liability without regard to whether the owner knew of, or was
responsible for, the presence of hazardous or toxic substances or wastes at or
from a property. An owner or operator of real estate or real estate interests
also may be liable under certain Environmental Laws that govern activities or
operations at a property having adverse environmental effects, such as
discharges to air and water as well as handling and disposal practices for solid
and hazardous or toxic wastes. In some cases, liability may not be limited to
the value of the property. The presence of such substances or wastes, or the
failure to properly remediate any resulting contamination, also may adversely
affect the owner's or operator's ability to sell, lease or operate its property
or to borrow using its property as collateral.
Substantially all of the Company's facilities were acquired prior to
the time that it was customary to conduct extensive environmental investigations
in connection with the property acquisitions.
In connection with the Company's proposed merger with SEI, the Company
completed environmental assessments of each of its properties. Those assessments
indicate that the subject property sites do not have significant environmental
issues except with respect to one property that indicated the presence of
asbestos. Based on such investigations, a firm of environmental engineering
consultants estimated the cost of environmental remediation at the property to
be $250,000. Currently there is no requirement to remediate this condition. No
amounts have been provided as reserves for this remediation. The appraised value
of this property for purposes of the proposed merger reflects the estimated cost
of this remediation, as well as the estimated cost of certain structural
remediation.
To date, the Company has not been informed by governmental agencies
that it is a potentially responsible party for the contamination on the property
(or any other property), nor has it been informed by any governmental agency
that the contamination will need to be addressed.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. Indemnification of Directors, Officers and Agents.
In August 1988, the Company's Articles of Incorporation were amended (as
approved by the shareholders in August 1988) to provide that the Company may
indemnify the agents of the Company to the maximum extent permitted under
California law. See the description in Section IV of the Restated Articles of
Incorporation (Exhibit 3.1) and the description in Article VII of the By-Laws
(Exhibit 3.6) which are incorporated herein by this reference. In October 1988,
the Company also entered into indemnity agreements (in the form approved by the
shareholders in August 1988) with its management and non-management directors
and executive officers. The agreements permit the Company to indemnify directors
and executive officers to the maximum extent permitted under California law and
prohibit the Company from terminating its indemnification obligations as to acts
or omissions of any director or executive officer occurring before the
termination. The indemnification and limitations on liability permitted by the
amendment to the Articles of Incorporation and the agreements are subject to the
limitations set forth by California law. The Company believes the
indemnification agreements will assist it in attracting and retaining qualified
individuals to serve as directors and executive officers of the Company.
ITEM 21. Exhibits and Financial Statement Schedules.
(a) Exhibits: See Exhibit Index contained herein.
(b) Financial Statement Schedules:
See Index to Financial Statement Schedules in registrant's Annual
Report on Form 10-K for the year ended December 31, 1993 and incorporated herein
by reference.
All other financial statement schedules are omitted since the
required information is not present or not present in amounts sufficient to
require submission of the schedule, or because the information required is
included in the consolidated financial statements or the notes thereto.
ITEM 22. Undertakings.
The undersigned Registrant hereby undertakes as follows:
1. To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this form,
within one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.
2. Except as permitted by General Instruction H to Form S-4 (in a
transaction not covered by General Instruction I), to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
3. To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement.
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the
most recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the registration statement. (iii) To
include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
<PAGE>
Provided, however, that paragraphs 3.(i) and 3.(ii) do not apply if the
registration statement is on Form S-3 or Form S-8, and the information required
to be included in a post-effective amendment by those paragraphs is contained in
periodic reports filed by the registrant pursuant to Section 13 or Section 15(d)
of the Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
4. That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the registrant's annual report pursuant to section
13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report pursuant to
section 15(d) of the Securities Exchange Act of 1934) that is incorporated by
reference in the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
5. To deliver or cause to be delivered with the prospectus, to each
person to whom the prospectus is sent or given, the latest annual report to
security holders that is incorporated by reference in the prospectus and
furnished pursuant to and meeting the requirements of Rule 14a-3 or Rule 14c-3
under the Securities Exchange Act of 1934; and, where interim financial
information required to be presented by Article 3 of Regulations S-X are not set
forth in the prospectus, to deliver, or cause to be delivered to each person to
whom the prospectus is sent or given, the latest quarterly report that is
specifically incorporated by reference in the prospectus to provide such interim
financial information.
6. (a) That prior to any public reoffering of the securities
registered hereunder through use of a prospectus which is a part
of this registration statement, by any person or party who is
deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters,
in addition to the information called for by the other Items of
the applicable form.
(b) That every prospectus (i) that is filed pursuant to paragraph
(1) immediately preceding, or (ii) that purports to meet the
requirements of section 10(a)(3) of the Act and is used in
connection with an offering of securities subject to Rule 415,
will be filed as a part of an amendment to the registration
statement and will not be used until such amendment is effective,
and that, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
7. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions described under Item 20
above, or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Glendale,
State of California, on the 27th day of April, 1995.
STORAGE EQUITIES, INC.
By: B. WAYNE HUGHES
---------------------------------------
B. Wayne Hughes, Chairman of the Board
Each person whose signature appears below hereby authorizes B. Wayne
Hughes and Harvey Lenkin, and each of them, as attorney-in-fact, to sign on his
behalf, individually and in each capacity stated below, any amendment, including
post-effective amendments to this Registration Statement, and to file the same,
with all exhibits thereto, and all documents in connection therewith, with the
Securities and Exchange Commission.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
B. WAYNE HUGHES Chairman of the Board, Chief Executive Officer April 27, 1995
------------------------- and Director (principal executive officer)
B. Wayne Hughes
HARVEY LENKIN President and Director April 27, 1995
-------------------------
Harvey Lenkin
RONALD L. HAVNER, JR. Vice President and Chief Financial Officer April 27, 1995
------------------------- (principal financial officer and principal
Ronald L. Havner, Jr. accounting officer)
ROBERT J. ABERNETHY Director April 27, 1995
-------------------------
Robert J. Abernethy
DANN V. ANGELOFF Director April 27, 1995
-------------------------
Dann V. Angeloff
WILLIAM C. BAKER Director April 27, 1995
-------------------------
William C. Baker
BERRY HOLMES Director April 27, 1995
-------------------------
Berry Holmes
MICHAEL M. SACHS Director April 27, 1995
-------------------------
Michael M. Sachs
URI P. HARKHAM Director April 27, 1995
-------------------------
Uri P. Harkham
</TABLE>
<PAGE>
EXHIBIT INDEX
2.1 Agreement and Plan of Reorganization between Registrant and Public
Storage Properties VII, Inc. dated as of February 2, 1995 (filed
as Appendix A to the Joint Proxy Statement and Prospectus).
3.1 Restated Articles of Incorporation. Filed with Registrant's
Registration Statement No. 33-54557 and incorporated herein by
reference.
3.2 Certificate of Determination for the Series A Preferred Stock.
Filed with Registrant's Registration Statement No. 33-54557 and
incorporated herein by reference.
3.3 Certificate of Determination for the Series B Preferred Stock.
Filed with Registrant's Registration Statement No. 33-54557 and
incorporated herein by reference.
3.4 Amendment to Certificate of Determination for the Series B
Preferred Stock. Filed with Registrant's Registration Statement
No. 33-59625 and incorporated herein by reference.
3.5 Certificate of Determination for the Convertible Preferred Stock.
Filed with Registrant's Registration Statement No. 33-54557 and
incorporated herein by reference.
3.6 Certificate of Determination for the Adjustable Rate Preferred
Stock. Filed with Registrant's Registration Statement No. 33-54557
and incorporated herein by reference.
3.7 Certificate of Determination for the Series D Preferred Stock.
Filed with Registrant's Form 8-A/A Registration Statement relating
to the Series D Preferred Stock and incorporated herein by
reference.
3.8 Certificate of Determination for the Series E Preferred Stock.
Filed with Registrant's Form 8-A/A Registration Statement relating
to the Series E Preferred Stock and incorporated herein by
reference.
3.9 Revised Bylaws. Filed with Registrant's Registration Statement No.
33-30340 and incorporated herein by reference.
5.1 Opinion on legality. Filed herewith.
8.1 Opinion on tax matters. Filed herewith.
10.1 Amended and Restated Advisory Contract between Registrant and
Public Storage Advisers, Inc. dated as of September 30, 1991.
Filed with Registrant's Current Report on Form 8-K dated October
2, 1991 and incorporated herein by reference.
10.2 First Amendment to Amended and Restated Advisory Contract between
Registrant and Public Storage Advisers, Inc. dated as of October
1, 1991. Filed with Registrant's Registration Statement No.
33-43750 and incorporated herein by reference.
10.3 Second Amendment to Amended and Restated Advisory Contract between
Registrant and Public Storage Advisers, Inc. dated as of May 14,
1992. Filed with Registrant's Current Report on Form 8-K dated May
14, 1992 and incorporated herein by reference.
10.4 Third Amendment to Amended and Restated Advisory Contract between
Registrant and Public Storage Advisers, Inc. dated as of February
25, 1993. Filed with the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1992 and incorporated herein by
reference.
<PAGE>
10.5 Fourth Amendment to Amended and Restated Advisory Contract between
Registrant and Public Storage Advisers, Inc. dated as of June 7,
1994. Filed with Registrant's Current Report on Form 8-K dated
June 23, 1994 and incorporated herein by reference.
10.6 Fifth Amendment to Amended and Restated Advisory Contract between
Registrant and Public Storage Advisers, Inc. dated as of August 9,
1994. Filed with Registrant's Current Report on Form 8-K dated
August 24, 1994 and incorporated herein by reference.
10.7 Sixth Amendment to Amended and Restated Advisory Contract between
Registrant and Public Storage Advisers, Inc. dated as of January
12, 1995. Filed with Registrant's Current Report on Form 8-K dated
January 24, 1995 and incorporated herein reference.
10.8 Amended Management Agreement between Registrant and Public Storage
Management, Inc. dated as of February 21, 1995. Filed with
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1994 and incorporated herein by reference.
10.9 Amended Management Agreement between Registrant and Public Storage
Commercial Properties Group, Inc. dated as of February 21, 1995.
Filed with Registrant's Annual Report on Form 10-K for the year
ended December 31, 1994 and incorporated herein by reference.
10.10 Agreement on Investment Opportunities dated as of November 18,
1980 and Amendment to Agreement on Investment Opportunities dated
as of September 12, 1986, each among Registrant, Public Storage,
Inc., B. Wayne Hughes and Kenneth Q. Volk, Jr. Filed with
Registrant's Registration Statement No. 33-30340 and incorporated
herein by reference.
10.11 Amendment No. 2 to Agreement on Investment Opportunities among
Registrant, Public Storage, Inc., B. Wayne Hughes and Kenneth Q.
Volk, Jr., dated as of May 14, 1992. Filed with Registrant's
Current Report on Form 8-K dated May 14, 1992 and incorporated
herein by reference.
10.12 Participation Agreement, dated as of September 14, 1982, among
Registrant, PS Partners, Ltd., Public Storage, Inc., B. Wayne
Hughes and Kenneth Q. Volk, Jr. Filed with Registrant's Current
Report on Form 8-K dated September 14, 1982 and incorporated
herein by reference.
10.13 Participation Agreement dated as of November 9, 1983, among
Registrant, PS Partners II, Ltd., Public Storage, Inc., B. Wayne
Hughes and Kenneth Q. Volk, Jr. Filed with Registrant's Current
Report on Form 8-K dated December 9, 1983 and incorporated herein
by reference.
10.14 Participation Agreement dated as of May 11, 1984, among
Registrant, PS Partners III, Ltd., Public Storage, Inc., B. Wayne
Hughes and Kenneth Q. Volk, Jr. Filed with Registrant's Annual
Report on Form 10-K for the year ended December 31, 1984 and
incorporated herein by reference.
10.15 Participation Agreement dated as of December 26, 1984, among
Registrant, PS Partners IV, Ltd., Public Storage, Inc., B. Wayne
Hughes and Kenneth Q. Volk, Jr. Filed with Registrant's Annual
Report on Form 10-K for the year ended December 31, 1984 and
incorporated herein by reference.
10.16 Participation Agreement dated as of June 20, 1985, among
Registrant, PS Partners V, Ltd., a California Limited Partnership,
Public Storage, Inc., B. Wayne Hughes and Kenneth Q. Volk, Jr.
Filed with Registrant's Current Report on Form 8-K dated April 18,
1985 and incorporated herein by reference.
10.17 Participation Agreement dated as of October 18, 1985, among
Registrant, PS Partners VI, Ltd., a California Limited
Partnership, Public Storage, Inc., B. Wayne Hughes and Kenneth Q.
Volk, Jr. Filed with Registrant's Current Report on Form 8-K dated
November 30, 1985 and incorporated herein by reference.
<PAGE>
10.18 Participation Agreement dated as of April 2, 1986, among
Registrant, PS Partners VII, Ltd., a California Limited
Partnership, Public Storage, Inc., B. Wayne Hughes and Kenneth Q.
Volk, Jr. Filed with Registrant's Current Report on Form 8-K dated
August 20, 1986 and incorporated herein by reference.
10.19 Loan Agreement between Registrant and Aetna Life Insurance Company
dated as of July 11, 1988. Filed with Registrant's Current Report
on Form 8-K dated July 14, 1988 and incorporated herein by
reference.
10.20 Amendment to Loan Agreement between Registrant and Aetna Life
Insurance Company dated as of September 1, 1993. Filed with
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1993 and incorporated herein by reference.
10.21 Credit Agreement by and among Registrant, Wells Fargo Bank,
National Association, as agent, and the financial institutions
party thereto dated as of September 2, 1994 (the "Credit
Agreement"). Filed with Registrant's Quarterly Report on Form 10-Q
for the period ended September 30, 1994 and incorporated herein by
reference.
10.22 First Amendment to Credit Agreement dated as of December 22, 1994.
Filed with Registrant's Annual Report on Form 10-K for the year
ended December 31, 1994 and incorporated herein by reference.
* 10.23 Registrant's 1990 Stock Option Plan. Filed with Registrant's
Annual Report on Form 10-K for the year ended December 31, 1994
and incorporated herein by reference.
* 10.24 Registrant's 1994 Stock Option Plan. Filed with Registrant's
Annual Report on Form 10-K for the year ended December 31, 1994
and incorporated herein by reference.
23.1 Consent of Independent Auditors. Filed herewith.
23.2 Consent of David Goldberg (included in Exhibit 5.1).
23.3 Consent of Hogan & Hartson L.L.P. (included in Exhibit 8.1).
23.4 Consent of Charles R. Wilson & Associates, Inc. Filed herewith.
23.5 Consent of ENSR Consulting and Engineering. Filed herewith.
23.6 Consent of Financial Research Group. Filed herewith.
23.7 Consent of John A. Martin & Associates, Inc. Filed herewith.
99.1 Proxy card for Registrant. Filed herewith.
99.2 Proxy card for Public Storage Properties VII, Inc. Filed herewith.
99.3 Cash Election Form. Filed herewith.
99.4 Real Estate Appraisal Report by Charles R. Wilson & Associates,
Inc. dated as of January 31, 1995 (filed as Appendix B to the
Joint Proxy Statement and Prospectus).
99.5 Opinion of Robert A. Stanger & Co., Inc. dated April 27, 1995
(filed as Appendix C to the Joint Proxy Statement and Prospectus).
99.6 Opinion of Houlihan, Lokey, Howard & Zukin, Inc. dated April 27,
1995 (filed as Appendix D to the Joint Proxy Statement and
Prospectus). 99.7 Notice of Redemption of the Series D Shares of
Public Storage Properties VII, Inc. (filed as Appendix G to the
Joint Proxy Statement and Prospectus).
<PAGE>
99.7 Notice of Redemption of the Series D Shares of Public Storage
Properties VII, Inc. (filed as Appendix G to the Joint Proxy
Statement and Prospectus).
99.8 Letter from ENSR Consulting and Engineering dated January 31,
1995.
99.9 Letter from ENSR Consulting and Engineering dated January 31,
1995.
99.10 Letter from Financial Research Group dated January 31, 1995.
99.11 Letter from John A. Martin & Associates, Inc. dated January 31,
1995.
- ---------------
*Compensatory benefit plan.
<PAGE>
DAVID GOLDBERG
600 North Brand Boulevard, Suite 300
Glendale, California 91203-1241
April 27, 1995
Storage Equities, Inc.
600 North Brand Boulevard
Glendale, California 91203-1241
Gentlemen:
As counsel to Storage Equities, Inc. (the "Company"), I have examined
the Registration Statement on Form S-4, which is expected to be filed by the
Company with the Securities and Exchange Commission on or about the date of
delivery of this opinion (the "Registration Statement"), which relates to the
offer and sale of the Company's common stock, par value $.10 per share (the
"Shares").
I am familiar with the proceedings taken or to be taken by the Company
relating to the authorization and issuance of the Shares in the manner set forth
in the Registration Statement. I have also examined the Company's Restated
Articles of Incorporation and Revised Bylaws and have made such other
investigation as I have deemed necessary in order to express the opinions
contained herein.
It is my opinion that:
1. The Company is a corporation duly organized and validly existing in
good standing under the laws of the State of California.
2. The Shares, when issued and delivered in the manner and on the terms
described in the Registration Statement, will be legally issued, fully paid and
nonassessable.
I hereby consent to the reference to me under the caption "Legal
Opinions" in the Registration Statement and to the filing of this opinion as an
exhibit to the Registration Statement or amendments thereto.
Very truly yours,
DAVID GOLDBERG
Exhibit 5.1
<PAGE>
Exhibit 8.1
April 27, 1995
Public Storage Properties VII, Inc.
600 N. Brand Blvd.
Glendale, California 91203-1241
Ladies and Gentlemen:
This opinion is being delivered to you in accordance with Section 7.1.8
of the Agreement and Plan of Merger by and among Storage Equities, Inc., a
California corporation ("SEI") and Public Storage Properties VII, a California
corporation ("PSP7"). Pursuant to the Agreement and Plan of Reorganization dated
February 2, 1995 (the "Merger Agreement"), PSP7 will merge with and into SEI
(the "Merger").
Except as otherwise provided, capitalized terms referred to herein have
the meanings set forth in the Merger Agreement and in the Joint Proxy Statement
and Prospectus included in the Registration Statement filed on or about the date
of the delivery of this opinion (the "Prospectus"). All section references,
unless otherwise indicated, are to the Internal Revenue Code of 1986, as amended
(the "Code").
We have acted as legal counsel to PSP7 in connection with the Merger.
As such, and for the purpose of rendering this opinion, we have examined and are
relying upon (without any independent investigation or review thereof) the truth
and accuracy, at all relevant times, of the statements, covenants,
representations and warranties contained in the following documents (including
all exhibits and schedules thereto):
1. The Merger Agreement;
2. Representations made to us by SEI (including, without limitation,
representations related both to the Merger and the organization and past and
expected operations of SEI);
3. Representations made to us by PSP7 (including, without limitation,
representations related both to the Merger and the organization and operations
of PSP7);
4. The Prospectus;
<PAGE>
Public Storage Properties VII, Inc.
April 27, 1995
Page 1
5. The Shareholder's Representations provided to us by B. Wayne Hughes
and Public Storage, Inc.; and
6. Such other instruments and documents related to the formation,
organization and operation of SEI and PSP7 or to the consummation of the Merger
and the transactions contemplated thereby as we have deemed necessary or
appropriate.
In connection with rendering this opinion, we have assumed or obtained
representations (and are relying thereon, without any independent investigation
or review thereof) that:
1. Original documents (including signatures) are authentic, documents
submitted to us as copies conform to the original documents, and there has been
(or will be by the Effective Time of the Merger) due execution and delivery of
all documents where due execution and delivery are prerequisites to
effectiveness thereof.
2. The Merger will be effective under the applicable state law.
3. The continuity of interest requirement as specified in Treas. Reg.
ss. 1.368-1(b) and as interpreted in certain Internal Revenue Service rulings
and federal judicial decisions will be satisfied.
4. No outstanding indebtedness of PSP7 or SEI has or will represent
equity for tax purposes; no outstanding equity of PSP7 or SEI has represented or
will represent indebtedness for tax purposes.
Based on our examination of the foregoing items and subject to the
assumptions, exceptions, limitations and qualifications set forth herein, we are
of the opinion (1) that for federal income tax purposes, the Merger will
constitute a "reorganization" as defined in Section 368(a) of the Code, (2) that
SEI has qualified as a REIT during each of the five years in the period ended
December 31, 1994 and as of April 27, 1995, the date of this opinion, and (3)
that the discussion under the heading "Certain Federal Income Tax Matters" in
the Prospectus fairly summarizes the federal income tax considerations that are
material to a PSP7 Shareholder as a result of the Merger and the subsequent
ownership of SEI common stock.
In addition to the assumptions set forth above, this opinion is subject
to the exceptions, limitations and qualifications set forth below:
<PAGE>
1. This opinion represents and is based upon our best judgment
regarding the application of relevant current provisions of the Code and
interpretations of the foregoing as expressed in existing judicial decisions,
administrative regulations and published rulings and procedures. Our opinion is
not binding upon the Internal Revenue Service or the courts, and the Internal
Revenue Service is not precluded from asserting a contrary position.
Furthermore, no assurance can be given that future legislative, judicial or
administrative changes, on either a prospective or retroactive basis, would not
adversely affect the accuracy of the opinion expressed herein. Nevertheless, we
undertake no responsibility to advise you of any new developments in the
application or interpretation of the federal income tax laws.
2. This opinion addresses only the specific tax opinion set forth
above, and does not address any other federal, state, local or foreign tax
consequences that may result from the Merger or any other transaction (including
any transaction undertaken in connection with the Merger). In particular, we
express no opinion regarding, among other things:
(i) the tax consequences of the redemption of the Series D Shares to
the holders of Series D Shares and/or PSP7 or SEI;
(ii) whether and the extent to which any PSP7 Shareholder who has
provided or will provide services to PSP7 or SEI will have compensation income
under any provision of the Code and the effects of such compensation income,
including but not limited to the effect upon the basis and holding period of the
SEI Common Stock received by any such shareholder in the Merger;
(iii) the potential application of the "golden parachute" provisions
(Sections 280G, 3121(v)(2) and 4999) of the Code, the alternative minimum tax
provisions (Sections 55, 56 and 57) of the Code or Sections 305, 306, 357, and
708 of the Code, or the regulations promulgated thereunder;
(iv) the tax consequences of the Merger to PSP7 or SEI, including
without limitation the recognition of any gain after application of any
provision of the Code, as well as the regulations promulgated thereunder and
judicial interpretations thereof;
(v) the basis of any equity interest in PSP7 acquired by SEI in the
Merger; and
(vi) the tax consequences of the Merger (including the opinion set
forth above) as applied to specific stockholders of PSP7 and/or holders of
options or warrants for PSP7 stock or that may be relevant to particular classes
of PSP7 Shareholders and/or holders of options or warrants for PSP7 stock,
including but not limited to dealers in securities, corporate shareholders
subject to the alternative minimum tax, foreign persons, and holders of shares
acquired upon exercise of stock options or in other compensatory transactions.
<PAGE>
3. No opinion is expressed as to any transaction other than the Merger
as described in the Merger Agreement or to any transaction whatsoever, including
the Merger, if all the transactions described in the Merger Agreement are not
consummated in accordance with the terms of such Merger Agreement and without
waiver or breach of any material provision thereof or if all of the
representations, warranties, statements and assumptions upon which we relied are
not true and accurate at all relevant times. In the event any one of the
statements, representations, warranties or assumptions upon which we have relied
to issue this opinion is incorrect, our opinion might be adversely affected and
may not be relied upon.
4. This opinion is intended solely for the purposes set forth in
Section 7.1.8 of the Merger Agreement; it may not be relied upon for any other
purpose or by any other person or entity, and may not be made available to any
other person or entity without our prior written consent. Notwithstanding the
immediately preceding sentence, shareholders of the Company may rely upon this
opinion subject to the various assumptions, exceptions, limitations, and
qualifications set forth herein. In addition, insofar as the conclusions in this
opinion specifically relate to SEI, shareholders of SEI may rely upon this
opinion subject to the various assumptions, exceptions, limitations, and
qualifications set forth herein.
We hereby consent to the filing of this opinion letter as Exhibit 8.1
to the Registration Statement and to the reference to this firm under the
captions "Legal Opinions" and "Certain Federal Income Tax Matters" in the
Prospectus. In giving the consent, we do not thereby admit that we are an
"expert" within the meaning of the Securities Act of 1933, as amended.
Very truly yours,
HOGAN & HARTSON L.L.P.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement on Form S-4 (No. ) with respect to Storage Equities,
Inc.'s registration of common stock and in the related Joint Proxy Statement and
Prospectus of Storage Equities, Inc. and Public Storage Properties VII, Inc. and
to the incorporation by reference therein of our report dated February 7, 1995,
except for Note 13, for which the date is March 13, 1995 with respect to the
consolidated financial statements and schedules of Storage Equities, Inc. in its
Annual Report on Form 10-K, as amended by a Form 10-K/A (Amendment No. 2) dated
April 21, 1995 for the year ended December 31, 1994 filed with the Securities
and Exchange Commission, and to the use of our report dated February 24, 1995
with respect to the financial statements and schedules of Public Storage
Properties VII, Inc. included in the Registration Statement and Joint Proxy
Statement and Prospectus.
ERNST & YOUNG LLP
Los Angeles, California
April 27, 1995
<PAGE>
Exhibit 23.4
Consent of Charles R. Wilson & Associates, Inc.
We hereby consent to the references to our firm under "The Merger --
Real Estate Portfolio Appraisal by Wilson" in the Joint Proxy Statement and
Prospectus which is a part of this Registration Statement and to the other
references to our firm therein.
Charles R. Wilson & Associates, Inc.
April 27, 1995
Pasadena, California
<PAGE>
Exhibit 23.5
Consent of ENSR Consulting and Engineering
We hereby consent to the references to our firm under "The Merger --
Real Estate Portfolio Appraisal by Wilson" in the Joint Proxy Statement and
Prospectus which is a part of this Registration Statement and to the other
references to our firm therein.
ENSR Consulting and Engineering
April 27, 1995
Camarillo, California
<PAGE>
Exhibit 23.6
Consent of Financial Research Group
We hereby consent to the references to our firm under "The Merger --
Real Estate Portfolio Appraisal by Wilson" in the Joint Proxy Statement and
Prospectus which is a part of this Registration Statement and to the other
references to our firm therein.
Financial Research Group
April 27, 1995
Los Angeles, California
<PAGE>
Exhibit 23.7
Consent of John A. Martin & Associates, Inc.
We hereby consent to the references to our firm under "The Merger --
Real Estate Portfolio Appraisal by Wilson" in the Joint Proxy Statement and
Prospectus which is a part of this Registration Statement, which references are
included on pages 32, 33, 49 and 50 of such Joint Proxy Statement and
Prospectus.
JOHN A. MARTIN & ASSOCIATES, INC.
April 27, 1995
Los Angeles, California
<PAGE>
STORAGE EQUITIES, INC.
600 North Brand Boulevard, Suite 300
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 _______________, 1995, at the
Special Meeting of Shareholders to be held on _______________, 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 THE
PROPOSED MERGER.
[x] Please mark votes as in this example.
1. PROPOSED MERGER. To consider and vote upon an Agreement and Plan of
Reorganization between SEI and Public Storage Properties VII, Inc.
described in the accompanying Joint Proxy Statement and Prospectus.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. 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 Joint Proxy Statement and Prospectus dated _______________,
1995.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD IN THE ENCLOSED ENVELOPE TO
THE FIRST NATIONAL BANK OF BOSTON, SHAREHOLDER SERVICES, MAIL STOP 45-02-16, 150
ROYALL STREET, CANTON, MASSACHUSETTS 02021.
Dated: ____________________, 1995
-------------------------------------
Signature
-------------------------------------
Signature if held jointly
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.
Exhibit 99.1
<PAGE>
PUBLIC STORAGE PROPERTIES VII, INC.
600 North Brand Boulevard, Suite 300
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 Series A and Common Stock
Series D of Public Storage Properties VII, Inc. ("PSP7") held of record by the
undersigned on _______________, 1995, at the Special Meeting of Shareholders to
be held on _______________, 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 THE
PROPOSED MERGER AND THE PROPOSED AMENDMENT TO BYLAWS.
[x] Please mark votes as in this example.
1. PROPOSED MERGER. To consider and vote upon an Agreement and Plan of
Reorganization between PSP7 and Storage Equities, Inc. described in the
accompanying Joint Proxy Statement and Prospectus.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. PROPOSED AMENDMENT TO BYLAWS. To consider and vote upon a related
amendment to PSP7's bylaws to authorize the Merger in the form of
Appendix F to the accompanying Joint Proxy Statement and Prospectus.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
3. 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 Joint Proxy Statement and Prospectus dated _______________,
1995.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD IN THE ENCLOSED ENVELOPE TO
AMERICAN STOCK TRANSFER & TRUST COMPANY, 40 WALL STREET, 46TH FLOOR, NEW YORK,
NEW YORK 10005.
Dated: ____________________, 1995
-------------------------------------
Signature
-------------------------------------
Signature if held jointly
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.
Exhibit 99.2
<PAGE>
Exhibit 99.3
CASH ELECTION FORM
TO ACCOMPANY CERTIFICATES
REPRESENTING SHARES OF COMMON
STOCK OF PUBLIC STORAGE
PROPERTIES VII, INC.
Please read and follow carefully the instructions set forth below,
which set forth the requirements that need to be complied with in order to make
an effective election. Nominees, trustees or other persons who hold shares of
Public Storage Properties VII, Inc. ("PSP7") Common Stock Series A, par value
$.01 per share ("PSP7 Common Stock"), in a representative capacity are directed
to Instruction F(4).
TO BE EFFECTIVE, THIS CASH ELECTION FORM, PROPERLY COMPLETED AND
SIGNED IN ACCORDANCE WITH THE ACCOMPANYING INSTRUCTIONS, TOGETHER WITH
CERTIFICATES FOR THE PSP7 COMMON STOCK COVERED HEREBY (UNLESS DELIVERY IS
GUARANTEED IN BOX E BELOW IN ACCORDANCE WITH INSTRUCTION A), MUST BE RECEIVED BY
THE AMERICAN STOCK TRANSFER & TRUST COMPANY (THE "DEPOSITARY") NAMED BELOW, AT
THE APPROPRIATE ADDRESS SET FORTH BELOW, NO LATER THAN THE ELECTION DEADLINE (AS
DEFINED IN INSTRUCTION A). DELIVERIES MADE TO ADDRESSES OTHER THAN THE ADDRESS
FOR THE DEPOSITARY SET FORTH BELOW DO NOT CONSTITUTE VALID DELIVERIES AND THE
DEPOSITARY WILL NOT BE RESPONSIBLE THEREFOR.
HOLDERS OF PSP7 COMMON STOCK WHO INTEND TO RECEIVE STORAGE EQUITIES,
INC. ("SEI") COMMON STOCK IN THE MERGER SHOULD NOT SUBMIT THIS CASH ELECTION
FORM AND SHOULD NOT SUBMIT THEIR STOCK CERTIFICATES FOR EXCHANGE UNTIL THEY HAVE
RECEIVED THE LETTER OF TRANSMITTAL AND INSTRUCTIONS FROM THE FIRST NATIONAL BANK
OF BOSTON (THE "EXCHANGE AGENT") WHICH WILL BE MAILED AFTER THE CONSUMMATION OF
THE MERGER.
This Cash Election Form is to be executed and returned to the
Depositary at the following address:
By Mail, Hand or Overnight Courier or
for Duplicate Copies of Material For Information
American Stock Transfer & Trust Company Shareholder Communications Corporation
Attn: Reorganization Department (800) 733-8481, extension 421
40 Wall Street, 46th Floor
New York, NY 10005
(800) 937-5449
Delivery of this instrument to an address other than as set forth above will not
constitute a valid delivery. The accompanying instructions should be read
carefully before this Cash Election Form is completed.
PLEASE READ CAREFULLY THE ACCOMPANYING INSTRUCTIONS
Ladies and Gentlemen:
This Cash Election Form is being delivered in connection with the
merger (the "Merger") of PSP7 with and into Storage Equities, Inc. ("SEI"),
pursuant to the Agreement and Plan of Reorganization dated as of _____________,
1995 (the "Merger Agreement").
The undersigned, subject to the Election and Allocation Procedures
(as defined below) and the other terms and conditions set forth in this Cash
Election Form, including the documents incorporated herein by reference, hereby
(a) surrenders the certificate(s) (the "Certificates") representing the shares
of PSP7 Common Stock listed in Box A (Certificate Information) and (b) elects
(an "Election"), as indicated below, upon consummation of the Merger to have
each of the shares of PSP7 Common Stock represented by the Certificates
converted into the right to receive $______ in cash (subject to adjustment as
described in the Merger Agreement), without interest (a "Cash Election").
If the Depositary has not received your properly completed Cash
Election Form, accompanied by your stock Certificates, by the Election Deadline
(as defined in Instruction A) (unless Box E (Guaranty of Delivery) has been
properly completed and such Certificates are received by the Depositary by the
Guaranteed Delivery Deadline), you will receive SEI Common Stock in the Merger.
The undersigned hereby certifies that this Election covers all of the
shares of PSP7 Common Stock registered in the name of the undersigned and either
(i) beneficially owned by the undersigned, or (ii) owned by the undersigned in a
representative or fiduciary capacity for a particular beneficial owner or for
one or more beneficial owners, except as otherwise permitted pursuant to
Instruction F(4). A PSP7 Shareholder may not make a cash election as to less
than all of the shares of PSP7 Common Stock beneficially owned by such
shareholder.
This Election is subject to the terms and conditions set forth in the
Merger Agreement and the Joint Proxy Statement and Prospectus, dated
____________, 1995 (the "Joint Proxy Statement and Prospectus"), furnished to
shareholders of PSP7, in connection with the Merger, all of which are
incorporated herein by reference. Receipt of the Joint Proxy Statement and
Prospectus, including the Merger Agreement attached as Appendix A thereto, is
hereby acknowledged. Copies of the Joint Proxy Statement and Prospectus are
available from the Depositary upon request (see Instruction G(10)).
It is understood that because pursuant to the Merger Agreement the
number of shares of PSP7 Common Stock to be converted into the right to receive
cash in the Merger are subject to limitations, no assurance can be given that an
Election by any given shareholder, including this Election by the undersigned,
can be accommodated. Rather, the Election by each holder of PSP7 Common Stock,
including this Election by the undersigned, will be subject to the results of
the election and allocation procedures set forth in the Merger Agreement and
described in the Joint Proxy Statement and Prospectus (the "Election and
Allocation Procedures").
<PAGE>
INSTRUCTIONS
The Execution Section of this Cash Election Form should be properly
filled in, dated and signed, torn off and delivered, together with all stock
Certificates representing PSP7 Common Stock currently held by you (unless
delivery is guaranteed in Box E in accordance with Instruction A), to the
Depositary at the appropriate address set forth on the front of this Cash
Election Form. Please read and follow carefully the instructions regarding
completion of this Cash Election Form set forth below. If you have any questions
concerning this Cash Election Form or require any information or assistance, see
Instruction G(1).
HOLDERS OF PSP7 COMMON STOCK WHO INTEND TO RECEIVE SEI COMMON STOCK
IN THE MERGER SHOULD NOT SUBMIT THIS CASH ELECTION FORM AND SHOULD NOT SUBMIT
THEIR STOCK CERTIFICATES FOR EXCHANGE UNTIL THEY HAVE RECEIVED THE LETTER OF
TRANSMITTAL AND INSTRUCTIONS FROM THE EXCHANGE AGENT WHICH WILL BE MAILED AFTER
THE CONSUMMATION OF THE MERGER.
A. TIME IN WHICH TO ELECT
In order for an Election to be effective, the Depositary must receive
a properly completed Cash Election Form, accompanied by all stock Certificates
representing PSP7 Common Stock currently held by you, NO LATER THAN 5:00 P.M.,
NEW YORK CITY TIME, ON THE LAST BUSINESS DAY BEFORE THE DAY OF THE MEETING OF
SHAREHOLDERS OF PSP7 (the "Election Deadline"). If all other conditions set
forth in the Merger Agreement have been met or, if permissible, waived, the
effective time of the Merger (the "Effective Time") could occur on the same day
approval of the Merger by shareholders of PSP7 is obtained. THUS, SHAREHOLDERS
ARE URGED TO DELIVER A PROPERLY COMPLETED CASH ELECTION FORM, ACCOMPANIED BY
STOCK CERTIFICATES (OR A PROPER GUARANTY OF DELIVERY, AS DESCRIBED BELOW), NO
LATER THAN 5:00 P.M., NEW YORK CITY TIME, ON ____________, 1995, IN ORDER TO
ASSURE THAT THEIR CASH ELECTION FORM WILL BE RECEIVED BY THE ELECTION DEADLINE.
As soon as the date on which the effective time of the Merger is anticipated to
occur is determined, PSP7 and SEI will publicly announce such date, although no
assurance can be given that the Effective Time will occur on such date. Persons
whose stock Certificates are not immediately available may also make an Election
by completing this Cash Election Form and having Box E (Guaranty of Delivery)
properly completed and duly executed by a member of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.
or a commercial bank or trust company having an office or correspondent in the
United States (subject to the condition that the Certificates, the delivery of
which is thereby guaranteed, are in fact delivered to the Depositary no later
than 5:00 p.m., New York City Time, on the fifth business day after the Election
Deadline (the "Guaranteed Delivery Deadline")).
IF THE DEPOSITARY HAS NOT RECEIVED YOUR PROPERLY COMPLETED CASH
ELECTION FORM, ACCOMPANIED BY YOUR STOCK CERTIFICATES, BY THE ELECTION DEADLINE
(UNLESS BOX E (GUARANTY OF DELIVERY) HAS BEEN PROPERLY COMPLETED AND SUCH
CERTIFICATES ARE RECEIVED BY THE DEPOSITARY BY THE GUARANTEED DELIVERY
DEADLINE), YOU WILL RECEIVE SEI COMMON STOCK IN THE MERGER.
For instructions regarding changes or revocations of Elections and
the time in which such changes or revocations can be made, see Instructions F(1)
and F(2) below.
B. ELECTIONS
This Cash Election Form provides for your Election, subject to the
Election and Allocation Procedures and the other terms and conditions set forth
hereunder and in the documents incorporated herein by reference, upon
consummation of the Merger to have each of the shares of PSP7 Common Stock
covered by this Cash Election Form converted into the right to receive $_____ in
cash (subject to adjustment as described in the Merger Agreement), without
interest (a "Cash Election").
You should understand that your Election is subject to certain terms
and conditions that are set forth in the Merger Agreement and described in the
Joint Proxy Statement and Prospectus. The Merger Agreement is included as
Appendix A to the Joint Proxy Statement and Prospectus. Copies of the Joint
Proxy Statement and Prospectus may be requested from the Depositary at the
address and telephone number set forth on the first page of this Cash Election
Form (see Instruction G(10)). The delivery of this Cash Election Form to the
Depositary constitutes acknowledgement of the receipt of the Joint Proxy
Statement and Prospectus. EACH HOLDER OF PSP7 COMMON STOCK IS STRONGLY
ENCOURAGED TO READ THE JOINT PROXY STATEMENT AND PROSPECTUS IN ITS ENTIRETY AND
TO DISCUSS THE CONTENTS THEREOF, THE MERGER AND THIS CASH ELECTION FORM WITH HIS
OR HER PERSONAL FINANCIAL AND TAX ADVISORS PRIOR TO DECIDING WHETHER TO ELECT
CASH. THE TAX CONSEQUENCES TO A HOLDER OF PSP7 COMMON STOCK WILL VARY DEPENDING
UPON A NUMBER OF FACTORS. FOR CERTAIN INFORMATION REGARDING THE FEDERAL INCOME
TAX CONSEQUENCES OF AN ELECTION, SEE "CERTAIN FEDERAL INCOME TAX MATTERS 3/4 THE
MERGER" IN THE JOINT PROXY STATEMENT AND PROSPECTUS.
C. CASH ELECTION
By completing and submitting the Cash Election Form, you are
electing, subject to the Election and Allocation Procedures and the other terms
and conditions set forth in this Cash Election Form, including the documents
incorporated herein by reference, to receive cash for all of the shares of PSP7
Common Stock covered by this Cash Election Form.
D. RECEIPT OF SEI COMMON STOCK
HOLDERS OF PSP7 COMMON STOCK WHO INTEND TO RECEIVE SEI COMMON STOCK
IN THE MERGER SHOULD NOT SUBMIT THIS CASH ELECTION FORM AND SHOULD NOT SUBMIT
THEIR STOCK CERTIFICATES FOR EXCHANGE UNTIL THEY HAVE RECEIVED THE LETTER OF
TRANSMITTAL AND INSTRUCTIONS FROM THE EXCHANGE AGENT WHICH WILL BE MAILED AFTER
THE CONSUMMATION OF THE MERGER.
E. FAILURE TO MAKE EFFECTIVE CASH ELECTION
If you have failed to make an effective Cash Election, or if your
Election is deemed by the Depositary or SEI to be defective in any way, or if
your Cash Election Form is not accompanied by your Certificates (unless Box E
(Guaranty of Delivery) has been properly completed and such Certificates are
received by the Depositary by the Guaranteed Delivery Deadline), you will
receive SEI Common Stock in the Merger.
F. SPECIAL CONDITIONS
(1) Revocation of Election. An election may be revoked by the person or
persons making such election by a written notice signed and dated by such person
or persons and received by the Depositary prior to the Election Deadline,
identifying the name of the registered holder of the PSP7 Common Stock subject
to such Election and the serial numbers shown on the Certificates representing
such PSP7 Common Stock. Any person or persons who have effectively revoked an
Election may, by a signed and dated written notice to the Depositary, request
the return of the stock Certificates submitted to the Depositary and such
Certificates will be returned to such person or persons (at the shareholder's
risk) within five business days of receipt of such request.
(2) Nullification of Election. All Cash Election Forms will be void and of
no effect if the Merger is not consummated, and Certificates submitted therewith
shall be promptly returned to the persons submitting the same.
(3) Elections Subject to Allocation. All Elections are subject to the
Election and Allocation Procedures set forth in the Merger Agreement and
described in the Joint Proxy Statement and Prospectus under the caption "The
Merger 3/4 General" and to the other terms and conditions set forth thereunder
and hereunder, including the documents incorporated herein by reference.
(4) Shares Held by Nominees, Trustees or other Representatives. Holders of
record of shares of PSP7 Common Stock who hold such shares as nominees, trustees
or in other representative or fiduciary capacities (a "Representative") may
submit one or more Cash Election Forms covering the aggregate number of shares
of PSP7 Common Stock held by such Representative for the beneficial owners for
whom the Representative is making an Election, provided, that such
Representative certifies that each such Cash Election Form covers all the shares
of PSP7 Common Stock held by such Representative for a particular beneficial
owner. Any Representative who makes an Election or a Non-Election may be
required to provide the Depositary with such documents and/or additional
certifications, if requested, in order to satisfy the Depositary that such
Representative holds such shares of PSP7 Common Stock for a particular
beneficial owner of such shares. If any shares held by a Representative are not
covered by an effective Cash Election Form, they will be exchanged for SEI
Common Stock.
G. GENERAL
(1) Execution and Delivery. In order to make an effective Election, you must
correctly fill in the Execution Section of this Cash Election Form. After dating
and signing it, you are responsible for its delivery, accompanied by all stock
Certificates representing PSP7 Common Stock currently held by you or a proper
Guaranty of Delivery of such stock Certificates pursuant to Instruction A, to
the Depositary at the address set forth on the front of this Cash Election Form
by the Election Deadline. YOU MAY CHOOSE ANY METHOD TO DELIVER THIS CASH
ELECTION FORM; HOWEVER, YOU ASSUME ALL RISK OF NON-DELIVERY. IF YOU CHOOSE TO
USE THE MAIL, WE RECOMMEND THAT YOU USE REGISTERED MAIL, RETURN RECEIPT
REQUESTED, AND THAT YOU PROPERLY INSURE ALL STOCK CERTIFICATES. DELIVERY OF
STOCK CERTIFICATES WILL BE DEEMED EFFECTIVE AND RISK OF LOSS WITH RESPECT TO
SUCH CERTIFICATES SHALL PASS ONLY WHEN SUCH CERTIFICATES ARE ACTUALLY RECEIVED
BY THE DEPOSITARY.
(2) Signatures. Except as otherwise permitted below, you must sign this Cash
Election Form exactly the way your name appears on the face of your
Certificates. If the shares are owned by two or more persons, each must sign
exactly as his or her name appears on the face of the Certificates. If shares of
PSP7 Common Stock have been assigned by the registered owner, this Cash Election
Form should be signed in exactly the same way as the name of the assignee
appearing on the Certificates or transfer documents. See Instructions G(5)(a)
and G(5)(b).
(3) Notice of Defects; Resolution of Disputes. None of PSP7, SEI and the
Depositary will be under any obligation to notify you or anyone else that the
Depositary has not received a properly completed Cash Election Form or that any
Cash Election Form submitted is defective in any way.
Any and all disputes with respect to Cash Election Forms or to
Elections made in respect of PSP7 Common Stock (including but not limited to
matters relating to the Election Deadline, time limits, defects or
irregularities in the surrender of any stock Certificate, effectiveness of any
Elections and computations of allocations) will be resolved by SEI and its
decision will be conclusive and binding on all concerned. SEI may delegate this
function to the Depositary in whole or in part. SEI or the Depositary shall have
the absolute right in its sole discretion to reject any and all Cash Election
Forms and surrenders of stock Certificates which are deemed by either of them to
be not in proper form or to waive any immaterial irregularities in any Cash
Election Form or in the surrender of any stock Certificate. Surrenders of stock
Certificates will not be deemed to have been made until all defects or
irregularities that have not been waived have been cured.
(4) Issuance of Payment Check(s). If the Payment Check(s) are to be issued
in the name of the registered holder(s) as inscribed on the surrendered
Certificate(s), no guarantee of the signature on the Cash Election Form is
required. For corrections in name and change in name not involving changes in
ownership, see Instruction G(5)(c).
(5) Issuance of Payment Check(s) in Different Names. If the Payment Check(s)
are to be issued in the name of someone other than the registered holder(s) of
the surrendered Certificate(s), you must follow the guidelines below. Note that
in each circumstance listed below, shareholder(s) must have signature(s)
guaranteed in Box C and complete Box F.
(a) Endorsement and Guarantee. The Certificate(s) surrendered must be
properly endorsed (or accompanied by appropriate stock powers properly
executed) by the registered holder(s) of such Certificate(s) to the
person who is to receive the Payment Check(s). The signature(s) of the
registered holder(s) on the endorsement or stock powers must correspond
with the name(s) written upon the face of the Certificate(s) in every
particular and must be medallion guaranteed by an eligible guarantor
institution as defined below.
DEFINITION OF ELIGIBLE GUARANTOR INSTITUTION
Generally an eligible guarantor institution, as defined in Rule
17Ad-15 of the regulations of the Securities and Exchange Commission, means:
(i)Banks (as that term is defined in Section 3(a) of the Federal
Deposit Insurance Act);
(ii)Brokers, dealers, municipal securities dealers, municipal
securities brokers, government securities dealers, and government
securities brokers, as those terms are defined under the Securities
Exchange Act of 1934;
(iii)Credit unions (as that term is defined in Section 19(b)(1)(A)
of the Federal Reserve Act);
(iv)National securities exchanges, registered securities
associations, clearing agencies, as those terms are used under the Securities
Exchange Act of 1934; and
(v)Savings associations (as that term is defined in Section 3(b) of
the Federal Deposit Insurance Act).
(b) Transferee's Signature. The Cash Election Form must be signed by the
transferee or assignee or his or her agent, and should not be signed by
the transferor or assignor. See Box B (Sign Here). The signature of such
transferee or assignee must be medallion guaranteed by an eligible
guarantor institution as provided in Instruction G(5)(a).
(c) Correction of or Change in Name. For a correction of name or for a
change in name which does not involve a change in ownership, proceed as
follows. For a change in name by marriage, etc., the Cash Election Form
should be signed, e.g., "Mary Doe, now by marriage Mary Jones." For a
correction in name, the Cash Election Form should be signed, e.g., "James
E. Brown, incorrectly inscribed as J.E. Brown." The signature in each
case should be guaranteed in the manner described in Instruction G(5)(a)
above and Box F should be completed.
You should consult your own tax advisor as to any possible tax
consequences resulting from the issuance of Payment Check(s) in a name
different from that of the registered holder(s) of the surrendered
Certificate(s).
(6) Supporting Evidence. In case any Cash Election Form, certificate
endorsement or stock power is executed by an agent, attorney, administrator,
executor, guardian, trustee or any person in any other fiduciary or
representative capacity, or by an officer of a corporation on behalf of the
corporation, there must be submitted (with the Cash Election Form, surrendered
Certificate(s), and/or stock powers) documentary evidence of appointment and
authority to act in such capacity (including court orders and corporate
resolutions when necessary), as well as evidence of the authority of the person
making such execution to assign, sell or transfer the Certificate(s). Such
documentary evidence of authority must be in form satisfactory to the
Depositary.
(7) Special Mailing Instructions. The Payment Check(s) will be mailed to the
address of the registered holder(s) as indicated in Box A (Certificate
Information), unless instructions to the contrary are given in Box G (Special
Mailing Instructions).
(8) Lost Certificates. If you are not able to locate your Certificate(s)
representing PSP7 Common Stock, you should contact American Stock Transfer &
Trust Company, PSP7's transfer agent, at (800) 937-5449. In such event, the
transfer agent will forward additional documentation which the shareholder must
complete in order to effectively surrender such lost or destroyed
Certificate(s). There will be a cost to replace lost Certificates.
(9) Federal Income Tax Withholding. Under Federal income tax law, the
Depositary is required to file a report with the Internal Revenue Service
disclosing any payments of cash being made to each holder of Certificates
formerly representing shares of PSP7 Common Stock pursuant to the Merger
Agreement. In order to avoid backup withholding of Federal income tax on any
cash received upon the surrender of Certificate(s), a holder thereof must,
unless an exemption applies, provide the Depositary with his or her correct
taxpayer identification number ("TIN") on Substitute Form W-9, which is part of
this Cash Election Form (Box D), and certify, under penalties of perjury, that
such number is correct and that such holder is not otherwise subject to backup
withholding. If the correct TIN and certifications are not provided, a $50
penalty may be imposed by the Internal Revenue Service and payments made for
surrender of Certificate(s) may be subject to backup withholding of 31%. In
addition, if a holder makes a false statement that results in no imposition of
backup withholding, and there was no reasonable basis for making such a
statement, a $500 penalty may also be imposed by the Internal Revenue Service.
Backup withholding is not an additional Federal income tax. Rather,
the Federal income tax liability of a person subject to backup withholding will
be reduced by the amount of such tax withheld. If backup withholding results in
an overpayment of income taxes, a refund may be obtained from the Internal
Revenue Service.
The TIN that must be provided on the Substitute Form W-9 is that of
the registered holder(s) of the Certificate(s) at the effective time of the
Merger. The TIN for an individual is his or her social security number. The box
in Part II of the Substitute Form W-9 may be checked if the person surrendering
the Certificates has not been issued a TIN and has applied for a TIN or intends
to apply for a TIN in the near future. If the box in Part II has been checked,
the person surrendering the Certificate(s) must also complete the Certificate of
Awaiting Taxpayer Identification Number below in order to avoid backup
withholding. Notwithstanding that the box in Part II is checked (and the
Certificate of Awaiting Taxpayer Identification Number is completed), the
Depositary will withhold 31% on all cash payments with respect to surrendered
Certificate(s) made prior to the time it is provided with a properly certified
TIN.
Exempt persons (including, among others, corporations) are not
subject to backup withholding. A foreign individual may qualify as an exempt
person by submitting Form W-8 or a substitute Form W-8, signed under penalties
of perjury, certifying to such person's exempt status. A form of such statement
can be obtained from the Depositary. A Certificate holder should consult his or
her tax advisor as to such holder's qualification for an exemption from backup
withholding and the procedure for obtaining such exemption.
The signature and date provided on the Substitute Form W-9 will serve
to certify that the TIN and withholding information provided in this Cash
Election Form are true, correct and complete.
(10) Questions and Requests for Information or Assistance. If you have any
questions or need assistance to complete this Cash Election Form, please contact
Shareholder Communications Corporation at (800) 733-8481, extension 421
(individual holders), or (212) 805-7000 (banks and brokers). You may also obtain
additional copies of the Cash Election Form and the Joint Proxy Statement and
Prospectus from the Depositary at the addresses and telephone number set forth
on the first page of this Cash Election Form.
H. DELIVERY OF PAYMENT CHECKS
As soon as practicable after the Merger becomes effective, the
Depositary will make the allocations of cash to be received by holders of PSP7
Common Stock or their designees in accordance with the Election and Allocation
Procedures. The Depositary will thereafter issue and mail to you a check for any
cash to which you are entitled, provided you have delivered the required
Certificates for your PSP7 Common Stock in accordance with the terms and
conditions hereof, including the documents incorporated herein by reference.
If you do not submit an effective Cash Election Form, the Exchange
Agent will forward to you, as soon as practicable after the Merger becomes
effective, a Letter of Transmittal for you to use to send in your stock
Certificates for shares of PSP7 Common Stock, containing appropriate
instructions for surrendering such Certificates at that time. After the Exchange
Agent receives your stock Certificates with a properly completed Letter of
Transmittal, it will issue and mail to you a certificate or certificates for SEI
Common Stock to which you are entitled (and, if applicable, a check in lieu of a
fractional share), provided you have delivered the required Certificates for
your PSP7 Common Stock in accordance with the terms and conditions of the Letter
of Transmittal, including the documents incorporated therein by reference.
DO NOT ENCLOSE YOUR PROXY CARD RELATING TO THE SPECIAL MEETING WITH
THIS CASH ELECTION FORM, YOUR PROXY CARD SHOULD BE RETURNED IN THE POSTAGE-PAID
ENVELOPE ENCLOSED WITH THE JOINT PROXY STATEMENT AND PROSPECTUS FOR THAT
PURPOSE.
<PAGE>
CASH ELECTION FORM
EXECUTION SECTION
BOX A
CERTIFICATE INFORMATION
List below the certificates to which this Cash Election Form relates. (Attach
additional sheets if necessary.)
Name and Address of Registered Holder(s) Number of Shares
as Shown on the Share Records Represented by
(Fill in, if Blank) Certificate Number Each Certificate
- --------------------------------------- ------------------ ----------------
================== ================
================== ================
================== ================
================== ================
Total Shares:
===============
CERTIFICATE HOLDER(S) SIGN HERE
The undersigned hereby represents and warrants that the undersigned has full
power and authority to complete and deliver this Cash Election Form and to
deliver for surrender and cancellation the above-described Certificate(s)
delivered herewith and that the rights represented by the Certificate(s) are
free and clear of all liens, restrictions, charges and encumbrances and are not
subject to any adverse claim. The undersigned will, upon request, execute any
additional documents necessary or desirable to complete the surrender of the
Certificate(s) surrendered herewith. All authority herein conferred shall
survive the death or incapacity of the undersigned and all obligations of the
undersigned hereunder shall be binding upon the heirs, personal representatives,
successors and assigns of the undersigned. Delivery of the Certificate(s) for
surrender and cancellation may be revoked only in accordance with Instruction
F(2).
BOX B
SIGN HERE
To be completed by all person(s) surrendering certificates and executing this
Cash Election Form.
Signature(s): ___________________________________________________________
-----------------------------------------------------------
Date: ________________________ Telephone Number: ______________
Must be signed by registered holder(s) exactly as name(s) appear(s) on stock
Certificate(s) or by person(s) authorized to become registered holders by
documents transmitted herewith. If signature is by a trustee, executor,
administrator, guardian, attorney-in-fact, officer of a corporation or in any
other fiduciary or representative capacity, please provide the following
information. (See Instruction G(6)).
Name(s): ___________________________________________________________
-----------------------------------------------------------
Capacity (Full Title):
- -------------------------------------------------------------------------------
Address: ___________________________________________________________
-----------------------------------------------------------
BOX C
SIGNATURE GUARANTEE
To be completed only if required by Instruction G(5). Your signature
must be MEDALLION GUARANTEED by an eligible financial institution. Note: a
notarization by a notary public is not acceptable.
FOR USE BY FINANCIAL INSTITUTION ONLY. PLACE MEDALLION GUARANTEE IN SPACE BELOW.
<PAGE>
CASH ELECTION FORM
EXECUTION SECTION (CONTINUED)
IMPORTANT TAX INFORMATION
PLEASE PROVIDE YOUR SOCIAL SECURITY OR OTHER TAXPAYER IDENTIFICATION NUMBER ON
THIS SUBSTITUTE FORM W-9 AND CERTIFY THAT YOU ARE NOT SUBJECT TO BACKUP
WITHHOLDING. FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP
WITHHOLDING OF 31% OF ANY CASH PAYMENTS MADE TO YOU PURSUANT TO THE MERGER. IF
THE BOX IN PART 3 OF THE SUBSTITUTE FORM W-9 IS CHECKED, THE "CERTIFICATE OF
AWAITING TAXPAYER IDENTIFICATION NUMBER" BELOW MUST BE COMPLETED. NOTE: The
following table contains two check boxes that are positioned with advance codes.
If you revise the text, make sure the check boxes are positioned correctly.
BOX D
<TABLE>
<S> <C> <C>
Part 1 - PLEASE PROVIDE YOUR TIN IN THE Social Security Number or
SUBSTITUTE BOX AT RIGHT AND CERTIFY BY SIGNING AND Employer Identification Number
DATING BELOW. _______________________________
Form W-9
Department of the Treasury
Internal Revenue Service
Part 2 - Check the box if you are not
subject to backup withholding because (1)
you have not been notified that you are
subject to backup withholding as a result
of failure to report all interest or
dividends or (2) the Internal Revenue
Service has notified you that you are no
longer subject to backup withholding. |_|
Payer's Request for Taxpayer Certification - Under penalties of perjury, I
certify that the Part 3 Identification Number (TIN) information provided on this
form is true, correct and complete.
Awaiting TIN
|_|
</TABLE>
Signature:_________________________ Date:____________
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number has
not been issued to me, and either (a) I have mailed or delivered an application
to receive a taxpayer identification number to the appropriate Internal Revenue
Service Center or Social Security Administration Office or (b) I intend to mail
or deliver an application in the near future. I understand that if I do not
provide a taxpayer identification number by the time of payment, 31% of any cash
payment made to me will be withheld, but that such amount will be refunded to me
if I then provide a Taxpayer Identification Number within sixty (60) days.
Signature:_________________________ Date:____________
BOX E
GUARANTY OF DELIVERY
To be used only if Certificates are not surrendered herewith. (See instruction
A.) The undersigned (check appropriate boxes below) guarantees to deliver to the
Depositary at the appropriate address set forth above the Certificates for
shares of PSP7 Common Stock submitted with this Cash Election Form no later than
5:00 p.m., New York City Time, on the fifth business day after the Election
Deadline (as defined in Instruction A).
|_| A member of a registered national Firm:____________________________
securities exchange
Authorized Signature:_______________________________________________________
|_| A member of the National Association Address:_________________________
of Securities Dealers, Inc.
-------------------------------------------------------
|_| A commercial bank or trust company Telephone Number:_________________
in the United States
SPECIAL PAYMENT AND MAILING INSTRUCTIONS
The undersigned understands that the check issued as payment in cash (such
checks being referred to herein as "Payment Checks") with respect to the PSP7
Common Stock surrendered will be issued in the same name(s) as the
Certificate(s) surrendered and will be mailed to the address of the registered
holder(s) indicated above, unless otherwise indicated in Box F or Box G below.
If Box F is completed, the signature of the undersigned must be guaranteed as
set forth in Instruction G(5).
BOX F
SPECIAL PAYMENT INSTRUCTIONS
To be completed only if the Payment Check(s) is (are) to be issued in the
name(s) of someone other than the registered holder(s) set forth above.
Signature must be guaranteed. (See Instruction G(5).)
Name: _________________________________________________________________________
Address: ______________________________________________________________________
- -------------------------------------------------------------------------------
Social Security Number or
Employer Identification Number: _______________________________________________
BOX G
SPECIAL MAILING INSTRUCTIONS
To be completed only if the Payment Check(s) is (are) to be issued to the
registered holder(s) and mailed to an address other than that of the registered
holder(s) set forth above. (See Instruction G(7).)
Address: _____________________________________________________________________
---------------------------------------------------------------------
<PAGE>
Exhibit 99.8
January 31, 1995
Public Storage Properties VII, Inc. Storage Equities, Inc.
600 N. Brand Boulevard, Suite 300 600 N. Brand Boulevard, Suite 300
P.O. Box 25050 P.O. Box 25050
Glendale, CA 91203-5050 Glendale, CA 91203-5050
Re: 5555-180
Subject: Environmental Assessments of the 38 Properties Owned by Public
Storage Properties VII, Inc.
Dear Gentlemen:
ENSR Consulting and Engineering recently conducted environmental assessments of
38 properties owned by Public Storage Properties VII, Inc. The Phase I
assessments and associated Phase II or environmental follow-up activities have
been completed at all properties except for two in which work is in progress.
These two sites are 3636 Beverly Boulevard, Los Angeles, California (00733), and
14050 N.W. Freeway, Houston, Texas (00721). The Beverly, Los Angeles property
will be addressed in a separate letter and the work at the Houston site should
be completed within the next two weeks. The preliminary results are that no
further work will be recommended at the Houston site. ENSR's analysis identified
no potentially significant environmental liabilities at the remaining 38
properties. The reader is referred to the Phase I assessments and associated
Phase II investigations prepared by ENSR for background information,
descriptions of the sites, and study limitations (ENSR Project Nos. 5555-180 and
5555-185).
It should be noted that at four of the 38 properties, offsite contamination
sources of potential concern were identified. In all cases, the responsible
parties appear to be addressing the contamination issues with the regulatory
agencies. Public Storage is recommended to periodically monitor remedial
progress at these sites. Provided that these sites are remediated by the
responsible parties, these offsite sources of contamination are not expected to
pose an environmental liability to Public Storage.
Based upon the information obtained to date on the 37 PSP VII properties
(Beverly, Los Angeles 00733 excluded), ENSR is of the opinion that the
properties do not present the potential for significant environmental
liabilities.
ENSR appreciates the opportunity to be of service to you. If you have any
questions, please feel free to contact me at (805) 388-3775.
Sincerely,
Diane Henry
Environmental Analyst
cc: Bruce Howard, Latham & Watkins
<PAGE>
Exhibit 99.9
January 31, 1995
Mr. Hugh Horne
Public Storage, Inc.
600 N. Brand Boulevard, Suite 300
P.O. Box 25050
Glendale, CA 91203-5050
Re: 5555-192
Subject: Asbestos Survey, 3636 Beverly Boulevard, Los Angeles, California
Public Storage Project No. 00733
Dear Hugh:
ENSR Consulting and Engineering is pleased to present this letter describing the
current status of our Phase I type non-demolition asbestos survey (ENSR Proposal
dated January 26, 1995) and recommendations regarding the asbestos containing
materials present at the above-referenced property. It should be noted that the
cost estimates provided below are based on our current knowledge of the site and
are provided for your planning purposes.
On Friday, January 27, 1995, an asbestos survey was performed at the Public
Storage facility located at 3636 Beverly Boulevard, Los Angeles, California. The
findings of the asbestos survey are documented in a draft letter report prepared
by Forensic Analytical Specialties, Inc. dated January 30, 1995. The asbestos
survey of the "public" areas revealed the presence of asbestos-containing vinyl
floor tile, mastic, piping insulation, and vibration flex joint. The
asbestos-containing materials were present in the public areas throughout the
facility. The condition of the materials varied with the majority of materials
being slightly damaged to damaged.
Based upon the results of the asbestos survey, measures should be taken to
prevent exposure to building occupants to airborne asbestos. Removal of
asbestos-containing materials in the public areas would reduce the potential
exposure of occupants to airborne asbestos. Based upon a cost estimate provided
by an asbestos-abatement contractor that inspected the subject site, removal of
asbestos-containing floor tile, piping insulation and vibration flex joint
material in the public areas of the facility is estimated to cost between
$100,000 and $115,000. This cost estimate assumes limited contractor oversight
will be required. This cost is based upon the removal of the vinyl floor tile
and associated mastic and assumes that new floor covering will not be placed on
the concrete floor and wood floors beneath the tile. This cost estimate does not
include removal of asbestos-containing materials in the tenant spaces.
<PAGE>
January 31, 1995
Mr. Hugh Horne
Page 1
ENSR recommends that as tenant spaces become available, potential
asbestos-containing materials in each space be addressed. The asbestos survey
results suggest that there is approximately 64,000 square feet of asbestos
containing floor tile within the private storage units. It is likely that the
floor tile in the storage units is in better condition than the tile in the
public areas due to the reduced traffic in the private units. If the floor tile
in the storage units is in good condition and non-friable, the material does not
present a hazard. Assuming that 50 percent of the units have floor tile that is
in good condition and is non-friable, an additional 32,000 square feet of floor
tile within the units may require abatement in the future. Abatement options for
these units include removal or encapsulation by covering the damaged tile with
new non-asbestos-containing flooring. In addition, there may be piping
insulation present in the storage units that was not identified during the
asbestos survey. Given the relatively limited amount of piping insulation
throughout the public areas (1,000 linear feet of which about half was in the
basement), piping insulation is not expected to be encountered in a significant
quantity of the storage units. The total anticipated expenditure is based on the
presumed site conditions as described above. It must be recognized that access
to individual storage units was not obtained and actual site conditions may
differ from presumed conditions.
ENSR Consulting and Engineering is pleased to be of service to you. If you have
any questions, please call me at (805) 388-3775.
Sincerely,
Diane Henry
Environmental Analyst
<PAGE>
Exhibit 99.10
January 31,1995
PUBLIC STORAGE STORAGE EQUITIES, INC.
PROPERTIES VII, INC. Suite 300
Suite 300 600 North Brand Boulevard
600 North Brand Boulevard Glendale, California 91203
Glendale, California 91203
Re: 3636 Beverly Boulevard, Los Angeles
Gentlemen;
The purpose of this letter is to summarize our review of the potential
impact of the structural condition of the building at 3636 Beverly Boulevard on
its current market value.
Based on what has been, by necessity, a brief analysis and review of
the issues involved, it is our opinion that the appropriate adjustment to the
market value of the project to reflect the age of the structure is $990,000. The
text that follows describes the assumptions, methodology and limitations used in
reaching this conclusion.
In the process of purchasing, developing, managing and disposing
complex real estate projects, we constantly deal with a mixture of facts and
assumptions. Far too often we neglect to clearly separate the two, allowing
commonly held assumptions enter the decision process disguised as facts. We
mention all of this as a preface to the discussion that follows concerning the
seismic issues affecting your property.
The focus of our work was to sift through the available information,
develop an analytical format, and provide a suggested adjustment to the value of
the property to reflect the current condition of the structure and the potential
for future remedial work that may be required by codes or ownership. Undertaking
this task, we have approached it from two separate directions. The first
approach is a transaction-oriented review, looking at the change in cap rate
(yield) necessary to attract a buyer to a property that may require structural
remediation at a future date. The second approach involved the traditional
analysis of expected levels of mitigation required and the projected costs of
mitigation. We have assigned probabilities to the scope and cost of mitigation
required, if any.
While reviewing the analysis and conclusions presented on the following
pages, you need to keep in mind the following:
Portions of the work relate to expectations of potential
issuance of regulations by various governmental bodies whose
actions represent a compromise between perceived public safety
issues and public/private economic issues.
Plans for the original building were not available to Chuck
Whitaker of John A. Martin & Associates. Therefore, his input
was based on a walk-through of the building and his extensive
experience with similar buildings in the Los Angeles area.
Plans have been requested from the City of Los Angeles on an
expedited basis. The time available for the analysis has been
limited. This has affected the scope of our work and that of
John A. Martin & Associates.
We were assisted in this work by Chuck Whitaker of John A.
Martin & Associates. We recommended the Martin firm to Public
Storage based on their extensive experience with concrete
buildings in Los Angeles and the quality of their analytical
and design work. Chuck Whitaker of the Martin firm has
summarized his findings in a separate letter dated January 30,
1995. We have incorporated some the data from his letter into
our report. In some cases, we have modified his estimates
based on our assessment of the building. You should also be
aware that our estimates of the probabilities of each event
contain a significant level of uncertainty.
Building codes change frequently. However, with limited
exceptions, the code requirements are generally not
retroactive. Thus, a building constructed under the codes in
effect when the permit was issued is not, with certain
important exceptions, expected to comply with every subsequent
code change. The important exceptions are codes that are
specifically retroactive or in the event of a major renovation
where the building is required to be brought up to current
codes.
The City of Los Angeles utilizes the Uniform Building Code
with extensive modifications. Other federal and state codes
and regulations also apply, such as ADA, Title XXIV, and a
host of other requirements.
The universe of buildings can be segregated into three broad
groups with respect to building codes: (1) those that comply
with all codes; (2) those that comply with those codes
applicable to the building at the time it was constructed and
applicable, retroactive requirements; and (3) those buildings
that do not comply with retroactive changes or that never
complied with the codes.
Chuck Whitaker states in his letter, "As discussed, we are not
aware of any building code requirements to upgrade or retrofit
the subject building if the permitted use is not revised or
major revisions are not made to the building. However, the
building code requirements could change in the future and
require the subject building to be seismically upgraded or
retrofitted." Mr. Whitaker goes on to note that the State
Architect is reviewing seismic retrofit guidelines and
standards for concrete or reinforced masonry buildings
constructed prior to 1973, with the anticipated issuance of
retrofit guidelines and standards by July 1997. A copy of the
regulations published to implement SB 597 (enacted in 1992) is
attached.
The 3636 Beverly Boulevard building is somewhat unique in that
its occupant density is extremely low, even when compared with
other structures devoted to storage uses. It is unlikely that
the occupant density exceeds one per 5,000 square feet during
business hours, while the occupancy of an office use is
probably twenty times higher. Residential users have both high
occupancy and extended hours of occupancy. Thus, life safety
risk associated with a building such as yours is very low
compared with other users in similar structures.
Section 8894 of the California Code implementing SB 597,
provides that, "the State Architect in consultation with (A
LIST OF APPROXIMATELY 20 ORGANIZATIONS FOLLOWS FOLLOWS) shall
develop seismic retrofit guidelines and standards for
buildings enclosing more than 20,000 square feet of floor area
with concrete or reinforced column or wall construction by
January 1, 1996." The code anticipates that the standards will
be effective on or before July 1, 1997, and that they will be
submitted to the ICBO for incorporation into the UBC shortly
thereafter. Although the legislation focused on the risk posed
by buildings constructed before 1973, the regulation does not
exclude newer buildings. We think it is significant that the
scope of buildings affected will include many older
residential and office structures where the cost of any
substantial, mandated retrofit and related costs may result in
the owner deciding to vacate or abandon the facility rather
than incur the expense of retrofit. This is likely to create
significant pressure for an extended period for compliance.
The first analysis of the property that we did was based on a
relatively primitive estimate of how the market would respond to the potential
requirement for structural upgrades sometime after 1997. Over the past five
years, a number of buildings have sold where there was an existing or likely
need for future changes to comply with retroactive code requirements concerning:
o structural upgrades to unreinforced masonry buildings
o sprinkler installation in high-rise office buildings
o handicap requirements mandated by State and local codes
o ADA requirements
o building lobby enclosure requirements of the LAFD
o stairwell enclosure and venting requirements
o structural upgrade requirements for tilt-up buildings
o inspection, repair and strengthening of steel frame buildings
We used what we believe is a conservative assumption with respect to
implementation of any required upgrades. We assumed that the State Architect
meets the July 1997 deadline for the final rule and that any required work is
done in 1999. While we expect that the time period for implementation will be
longer, we chose to use the more conservative approach to cover the alternative
that ownership elects to implement upgrades prior to the regulatory deadline.
The property market is similar to the stock and bond markets in that
there is equity available for less than "investment grade" properties. The
market compensates for "risk" through added yield.
Based on our experience, we estimate that the potential for the
requirement to upgrade the structure of the building would be expected to
increase the market cap rate applied to the building by 1.5% to 3.0% from that
applied to a building that is not subject to a similar potential requirement for
structural upgrades. At a yield (cap rate) of 12.5% to 13.5%, we believe there
are investors who would willingly accept the risk of future code changes.
Based on the information that was supplied to us concerning the
property's net operating income and the capitalization rates typically applied
in the market, this would indicate a value adjustment of $.9 to $1.0 million.
It is important to note that 3636 Beverly Boulevard appears to comply
with existing applicable codes and that this adjustment is to reflect potential
future requirements.
The second method that we used to look at the building was to use some
of the information generated by Chuck Whitaker and apply a variety of potential
scenarios to the building.
Initially, we assumed three possible outcomes with respect the
applicability of codes and the decisions of ownership and assigned the following
probabilities to each:
(1) .8 that the State Architect would implement a mandatory upgrade or
study or an equivalent requirement was generated through local
legislation.
(2) .1 that the owner of the building would voluntarily undertake a
study of seismic upgrades in the absence of a requirement to do
so and that the owner would comply with the engineer's
recommendations.
(3) .1 that there would be no required or voluntary study of upgrading
the building.
Subsequently, we assumed that if the building were studied, that there
was a probability of:
(A) .2 that major upgrades would be required;
(B) .4 that intermediate upgrades would be indicated;
(C) .2 that minimum upgrades would be required; and
(D) .2 that no upgrades would be required.
For discussion purposes, it is probably best to focus on the combined
probability of a requirement for intermediate or major upgrades of .6. Thus, we
assumed that if a required or voluntary study were undertaken, that there was a
60% chance that major or intermediate level of upgrades would be required.
For purposes of estimating the cost of the structural work, we used
$12.50 per square foot for major upgrades, $10.50 per square foot for
intermediate upgrades, and $7.50 for minimum upgrades. To each of these amounts,
we added 30% for other items such as non-structural work, fees, design, et
cetera. These amounts are based on the typical level of expenditures for other
concrete buildings, adjusted for the ease of working within this building. One
of the unique characteristics of your building is that there are no high-value
tenant improvements and no tenants to disturb.
In a typical office building, the cost would be affected by the need to
relocate tenants, work around tenants on other floors, often performing noisy or
obnoxious work after regular business hours. Also, due to the use of your
building, the very limited mechanical and electrical systems are not likely to
be impacted by the work. Seemingly small items, like the availability of a
large, heavy duty freight elevator, provide additional assistance in lowering
the costs.
The cost of any asbestos abatement is not included because we
understand that a separate adjustment to the value will be made for the presence
of any ACM.
As Table 1 shows, we multiplied the probability of new code
requirements or a voluntary study by the assigned probability for the cost of
each level of retrofit work (if required) to establish an overall probability
for each event. This was then multiplied by the projected cost for each event to
determine an Expected Cost. These are totaled for the universe of potential
outcomes to determine the Expected Cost of seismic compliance. Using the
assumptions previously described, the Expected Cost is $ l ,389,650.
The Expected Cost derived in Table 1 assumes that the work is performed
immediately. However, we have anticipated that the work, if any, would be
completed in 1999. Therefore, it is necessary to adjust the Expected Cost for
inflation and present value. This is done in Table 2.
The Expected Cost is inflated at 4% per year for four years,
representing the expected rate of inflation for construction costs over the
period. The projected 1999 cost of $1,625,694 was then discounted using a rate
of 13.25% to determine the present value of the Expected Cost. We selected the
13.25% discount rate after consultation with Ray Wilson who did the appraisal on
the property. It is the discount rate applied to other cash flows to determine
the value of the property.
The resulting number, $988,294, represents our estimate of the present
value of the Expected Cost of required or voluntary seismic retrofit, utilizing
the assumptions previously described. We have rounded the amounts shown to the
nearest dollar. However, this should not be interpreted in any way as a
reflection of the precision of these estimates. A more appropriate
interpretation would be that the net present value of the Expected Cost is
within 10% of this amount and that the value of the property should be adjusted
somewhere between $900,000 and $ l,100,000 to reflect the unknown conditions
with respect to the structure of the property and the potential for a
requirement after July 1997 to upgrade the structure of the facility.
Once the original plans are located, we recommend that you consider
having John A. Martin & Associates prepare a study of the seismic
characteristics of the building. The recommended study will take a number of
months. Unless the study indicates a pressing need for immediate structural
upgrades, our tentative recommendation would be to defer construction of any
upgrades until after the draft State standards are issued in 1996. Timing of the
work, assuming there is not an urgent need for the upgrade, would then be
determined by an assessment of the regulatory requirements and any life safety
implications.
We appreciate the opportunity to perform this work on behalf of Public
Storage Properties VII, Inc. and Storage Equities, Inc. Please do not hesitate
to call if you have any questions or comments.
Very truly yours,
Stephen H. Dietrich
President
SHD/dll
Enclosures
<PAGE>
<TABLE>
<CAPTION>
Table 1
PUBLIC STORAGE PROPERTIES VII, INC
POTENTIAL COST OF SEISMIC RETROFIT WORK UNDER VARIOUS ALTERNATIVES
3636 BEVERLY BOULEVARD, LOS ANGELES
ESTIMATED ESTIMATED PROJECTED EXPECTED
EVENT PROBABILITY EVENT PROBABILITY COST PROB COST
----- ----------- ----- ----------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Major Upgrades Required 0.2 $2,343,750 0.16 $375,000
A NEW STATE OR LOCAL LAW 0.8
APPLIES TO BLDG Intermediate Upgrades 0.4 $1,968,750 0.32 630,000
Required
Minimum Upgrades 0.2 $1,406,250 0.16 225,000
Study Only 0.2 $30,000 0.16 4,800
B NEW STATE OR LOCAL LAW Major Upgrades Recommended 0.2 $2,343,750 0.02 46,875
APPLIES TO BLDG
Intermediate 0.4 $1,968,750 0.04 78,750
0.1 Upgrades
OWNER DECIDES TO CONSIDER Minor Upgrades Recommended 0.2 $1,406,250 0.02 28,125
UPGRADE
Study Only No Upgrades 0.2 $30,000 0.02 600
C NO LAW APPLIES, NO STUDY 0.1 Conceptual Study Only 1 $5,000 0.10 500
UNDERTAKEN
TOTAL EXPECTED COST 1.00 $1,389,650
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Table 2
PUBLIC STORAGE PROPERTIES VII, INC
NET PRESENT VALUE OF EXPECTED COST OF SEISMIC RETROFIT WORK UNDER VARIOUS ALTERNATIVES
3636 BEVERLY BOULEVARD, LOS ANGELES
<S> <C>
EXPECTED COST FROM TABLE 1 $1,389,650
INFLATION FACTOR FOR CONSTRUCTION COSTS
Periods (1995 - 1999) 4
Inflation Rate for Construction Costs 4.00%
Adjustment Factor
Inflation Adjusted Expected Cost $1,625,694
DISCOUNT TO PRESENT VALUE
Periods (1999 - 1995) 4
Discount Rate 13.25%
Factor 0.6079
NET PRESENT VALUE OF EXPECTED COST $988,294
</TABLE>
<PAGE>
Exhibit 99.11
January 31, 1995
PUBLIC STORAGE PROPERTIES VII, INC.
600 N. Brand Boulevard, Suite 300
P.O. Box 25050
Glendale, CA 91203-5050
Attention: Mr. Hugh W. Horne
Subject: 3636 Beverly Boulevard
Los Angeles, California
Gentlemen:
In accordance with your request, Charles G. Whitaker of John A. Martin &
Associates, Inc., met with you and Stephen Dietrich of Financial Research Group
on January 20, 1995, at the subject project to discuss the structural
requirements of the structure.
As requested, we have contacted the City of Los Angeles to attempt to obtain the
original structural drawings for the thirteen story reinforced concrete shear
wall structure constructed in 1927 and the one story reinforced brick shear wall
structure constructed in 1949. When we receive the drawings we will advise you
and discuss what type of structural analysis you will require our firm to
perform.
As discussed, we are not aware of any building code requirements to upgrade or
retrofit the subject building if the permitted use is not revised or major
revisions are not made to the building. However, the building code requirements
could change in the future and require the subject building to be seismically
upgraded or retrofitted. At the present time, the State Architect, in
consultation with various commissions and associations, is in the process of
developing seismic retrofit guidelines and standards for buildings enclosing
more than 20,000 square feet of floor area with concrete or reinforced masonry
column or wall construction which were built prior to 1973. The development of
the seismic retrofit guidelines and standards are anticipated to be completed
sometime in 1996 or 1997.
We are available to analyze the expected performance of the subject project for
a seismic event which would produce the seismic forces specified by the present
building code. Our analysis could also include recommendations for seismic
retrofit, if required, to improve the performance of the structure for
life/safety but not necessarily to meet all the detailing requirements of the
present building code.
<PAGE>
Page 2
Although we have not had the opportunity to review the structural drawings for
the subject project we have visited the subject and determined the lateral
resistant system consists of reinforced concrete shear walls. Some of the shear
walls above the seventh floor do not continue below the seventh floor to the
foundation but are transferred to other shear walls below the seventh floor.
Buildings with this type of construction usually are seismically retrofitted b
adding reinforced concrete shear walls and foundations to provide continuity of
the discontinuous shear walls to the foundation and by thickening some
reinforced concrete shear walls by adding reinforced concrete which is anchored
to the existing walls. In addition, modifications to the slabs may be required
to transfer lateral forces to the added and/or thickened concrete walls.
Based on the limited information available and experience with the retrofit of
concrete buildings, the order of magnitude estimate could be expected to be in
the range of $10 to $15 per square foot for a structural retrofit. We understand
the total gross area of the thirteen story and one story structures is
approximately 150,800 square feet. Therefore, the total order of magnitude
estimate could be expected to be in range of $1,508,000.00 to $2,262,000.00 for
the structural retrofit work. While the above noted costs are limited to the
structural retrofit, including non-structural items such as finishwork, roofing
and other work necessitated by and associated with the structural retrofit,
could be double the above noted structural retrofit costs, especially if
hazardous materials are encountered and a large of amount of finishwork is
affected. However, if hazardous materials are not encountered or are not to be
included in the estimate and if the finishwork is minimal, as in the subject
project, the additional cost associated with non-structural items is expected to
be much less than the cost noted above.
If you have any further questions regarding this or any other matter, please do
not hesitate to contact our office.
Very truly yours,
JOHN A. MARTIN & ASSOCIATES, INC.
Charles G. Whitaker
<PAGE>
